When we make an investment decision at Flybridge, it is typically because of the intersection of two forces: (1) a top-down thesis about a compelling market opportunity; and (2) a bottoms-up discovery of a compelling team that is pursuing something that rhymes with our top-down thesis. We are not unique here, but we try to apply a fair amount of rigor to the process so that when we interact with entrepreneurs in our target market sectors, we can demonstrate to them that we understand their businesses and have insight into the opportunities they're pursuing.
Last week, we closed a new investment in an online education company, our second new investment in this space in a month. Since these investments were the result of a few years of analyzing the market and working with a few other portfolio companies in online education, we decided we would “open source” our thinking in the spirit of “hacking education.” Or perhaps more appropriately, “fracking education” in order to shake it up to release the energy needed to transform this ossified system.
Many others have observed that the $1 trillion education market is undergoing massive disruption. Paying $500,000 for a four year college experience that does not prepare students for the job market is no longer a winning proposition. Most K-12 schools are stuck in a silo mentality, implementing a rote learning model on a schedule that was designed for an agrarian society. And flaws in vocational training and workforce development have led to a massive jobs mismatch – there are millions of unemployed yet also millions of unfilled, open jobs. Many exciting initiatives are being created by entrepreneurs to address these issues – Khan Academy and EdX stand out in particular – but we are still very early in the process of the education revolution.
All the energy and enthusiasm for ed tech is translating into dollars. CB Insights recently reported that early stage edtech investing has grown substantially from a few years ago. As an investor, you never like to see a sector get overfunded. But this one is so large, and has so much room for further disruption, that we feel as if there still remain many exciting new opportunities.
Jeff’s first foray in the education space was as an entrepreneur cofounding Upromise, a company dedicated to helping millions of families save money for college. At Upromise, Jeff saw firsthand how the spiraling cost of college was harming the middle class. Our investment in SimpleTuition (aka ValoreBooks) in 2006 was a derivation of this insight – to help millions of students engage in ways to save money by accessing less expensive textbooks and loans. The company now works with over half of all college students in America and growing rapidly. In 2010, we invested in Open English, a direct to consumer online English language learning service targeting the growing middle class of Latin and South America. The company has built an enduring brand in the region and serves tens of thousands of students, providing access to a rigorous academic program and live instruction all from the comfort of home.
In the last few years, hundreds of entrepreneurs and startups have emerged to create companies to take advantage of all cracks and fissures in the market. As part of our analysis of the space, we systematically mapped the sector (tracking 100’s of startups) and created a hierarchy to help categorize the various facets of the industry and hone in on what areas we find most exciting.
In the Prezi below, you’ll find an outline of our Ed Technology Market Map, broken into digestible chunks. Here is what the high-level framework looks like:
We found we could categorize various companies in the broader edtech theme based on two dimensions: who the customers are (consumers/students, teachers or schools/enterprises) and what age segment they sell into (K12, higher ed, adult + lifestyle and professional). In each cell you will see examples of the types of companies that fit the segment - these are broken out in much more detail with extensive competitive mapping in the Prezi.
You will notice that four of the cells above are shaded light blue. This wasn’t by accident: these are the areas that we, at Flybridge, believe represent interesting investment opportunities. That’s not to say great companies won’t be built in the grey-shaded cells, it’s just that, in our analysis, these sectors tend to be more difficult or more played out than those in the blue.
This thesis and map is not intended to be the be-all-end-all of edtech investing. Part of our goal in publishing this is to solicit feedback and help further refine our view of the landscape - something that we, as investors, must constantly do. We welcome feedback, thoughts and criticism of all sorts. Most important, let’s figure out a way to hack – and frack – this broken system.
Apologies to readers of my blog who care only about my writings on technology and entrepreneurship, but I was compelled to write a more personal post in honor of the 50th anniversary of LBJ's signing of the historic Civil Rights Act (a law some argue was "the single most important US law in the 20th century").
In celebration of the anniversary, we took the opportunity this week to take a family trip to Alabama, Mississippi and Tennessee to expose our kids to this poignant history. The things we saw, the people we met, the conversations we had as a family inspired me tremendously. I am sharing a few highlights in the event that anyone else is interested in exploring this part of the country and this influential chapter in American history. By the way, if you haven't seen it yet, I highly recommend All the Way, the powerful play starring Bryan Cranston about LBJ's first year in office and his amazing efforts to pass the Civil Rights Act.
After flying into New Orleans (and, yes, having some fun there), we started our trip at Beauvoir in Biloxi, Mississippi - the retirement home of Jefferson Davis after the end of the Civil War. It was a fitting place to start: the Union won the war and the slaves were declared free, but the impact from centuries of discrimination and segregation remained. Below is one of the t-shirts they sell at the gift shop there, which spurred a vigorous discussion with my kids about why the Confederate flag is indeed so offensive and why there is such powerful controversy surrounding it.
We then drove to Montgomery, Alabama where MLK did so much of his good work. Montgomery is a pretty barren city, but the sites are amazing and many are quite new. The Rosa Parks Museum, located precisely at the bus stop where she got on and sat in the middle "white section", is an absolute gem. The kids were mesmerized by the exhibits that provided a visual reinactment of her quiet courage in standing up to years of injustice. It was particularly powerful to stand in front of the state house where Governor George Wallace was sworn in (102 years after Jefferson Davis was sworn in as President of the Confederate States at the very same spot) and declared in 1963 "segregation now, segregation tomorrow, segregation forever". Right across the street is the Dexter Avenue Baptist church where MLK pastored for seven years. Around the corner is the Southern Povery Law Center, which had a beautiful exhibit about fighting for social justice, culminating in one of my favorite Eli Wiesel quotes, which my son captured below. In reward for its good work, the SPLC staff shared with us that they have received 30 bomb threats in the last 20 years.
From Montgomery, we drove to Selma to walk across the Edmund Pettus Bridge, where MLK and other leaders crossed to kick off a 5-day, 54 mile march from Selma to Montgomery. The march occurred in March 1965 - nearly a year after the passing of the Civil Rights Act but at a time when voting discrimination remained rampant. The march resulted in LBJ submitting (and eventually passing through Congress) the Voting Right Act only a few days later. Here is a moving excerpt from his speech to a joint Congress:
Even if we pass this bill, the battle will not be over. What happened in Selma is part of a far larger movement which reaches into every section and state of America. It is the effort of American Negroes to secure for themselves the full blessings of American life. Their cause must be our cause, too, because it is not just Negroes but really it is all of us who must overcome the crippling legacy of bigotry and injustice. And we shall overcome.
After Selma, we drove to Birmingham, Alabama and had the privilege of attending the Sunday Easter service at the famous 16th Street Baptist Church. Over 200 parishoners were there to celebrate the holiday and we enjoyed meeting many of them and participating in the service. One 81 year old man shared with us his personal connection the four young girls who were killed in the 1963 bombing at the Church. This bombing contributed to the national outrage that led to the passing of the Civil Rights Act.
We then drove to Oxford, Mississippi to visit Ole Miss. Ole Miss was finally integrated in 1962, thanks to the courage of James Meredith and with the support of 500 US Marshalls that JFK had to send to force the issue with the intransigent Mississippi governor. There is a statue of Meredith on the campus and a beautiful tribute to him. Shockingly, his statue was found just a few months ago with a noose around it and wrapped in a Conferederate battle flag.
Finally, we drove to Memphis and visited the Lorraine Hotel where MLK was tragically assassinated. The hotel has been converted into a comprehensive, newly renovated National Civil Rights Museum, with exhibits that track the history of slavery through emancipation through the 1960s all the way up to today's civil rights issues. I was particularly pleased to see the focus on some of the modern civil rights causes, such as immigration reform. I was also touched by a video about a non-profit called Black Girls Code, which I'm looking forward to learning more about.
The trip was overwhelming and moving. It prompted conversations with our kids about the modern issues of income inequality. For example, my 17 year old daughter asked me at one point: "Why do certain jobs pay more than others?" which led to a rich discussion about income, justice and the free market. It raised conversations about bigotry in our community in our time, not just historical acts of bigotry, and it expanded their horizons in a way I had not anticipated.
If anyone wants to get advice about taking a trip like this, let me know. One of our favorite non-profits, Facing History and Ourselves, was a great resource for us as they led a similar trip for their board in 2001. We loved being exposed to Southern Hospitality (everyone we met was very kind and welcoming), learning about our history, celebrating how far we have come in 50 short years and recognizing that we have more work to do in the years ahead.
As a venture capitalist, I spend my time thinking about talent. Who are the best people in the world to invest in? How do I help them attract the best people in the world to team with them to build their companies into massive successes from scratch?
That is why I have been so frustrated with our country's backward immigration system. For me, as the son of an immigrant entrepreneur, it is a combination of a social justice issue and an economic pragmatism that has led me to be so passionate and engaged in reforming our broken system.
In the last few months, as I watched Washington DC fumble around with a comprehensive immigration reform bill (passed in the Senate, floudering in the House), I began to wonder if something might be done on a local, state level to address this issue. Massachusetts has a pro-business Governor and Legislature, an Innovation-heavy economy, and a history of successful public-private partnerships. Surely we could figure something out while we wait for the Washington politicians to go through their machinations?
Thanks to the help of a few talented immigration lawyers - Jeff Goldman and Susan Cohen - and a dedicated group of public servants - led by Greg Bialecki and Pamela Goldberg - an idea emerged to address this issue head on in an innovative way that is consistent with the federal rules and regulations, but allows the state to attract and retain international entrepreneurs.
The idea is a simple one: create a private-public partnership to allow international entrepreneurs to come to Boston and be exempt from the restrictive H-1B visa cap. How is it possible to do this? The US Citizenship and Immigration Services Department (USCIS) has a provision that allows universities to have an exemption to the H-1B visa cap. Governor Deval Patrick announced today that the Commonwealth of Massachusetts will work in partnership with UMass to sponsor international entrepreneurs to be exempt from that cap, funding the program with state money to kick start what we anticipate will be a wave of private sector support.
This innovative program has tremendous potential. For Massachusetts, it means we are sending a message to entrepreneurs around the globe that we want them to come here to start and scale companies. For other states, it is a model that can be replicated if local leaders from the private and public sector can come together and cooperate to work out the details to launch and operate this program, as we have done over the last few months.
This year will be a pilot year (with a nod to the Lean Start Up!) and I'm sure we will learn a lot along the way, but I am super excited about the potential that this program presents for the state and the country as a whole.
For the last few years, many leaders in the Massachusetts innovation community have been arguing that non-compete agreements should be eliminated. Article after article has been written in support of putting this policy forward to increase the dynamism of our ecosystem and send a message to the broader innovation community that Massachusetts is a great place to start and develop your career.
Many studies have shown that non-compete agreements reduce R&D investment and stifle innovation. MIT Professor Matt Marx conducted a seminal study in Michigan that showed that the enforcement of non-competes caused a sharp drop in mobility for inventors, thereby slowing innovation and economic dynamism. Professor Mark Garmaise of UCLA published a study which had similar findings and, further, assessed the state by state use of non-competes, concluding that Massachusetts had one of the strictest in the nation (see chart below from Highland's Paul Maeder, putting states on a 0-9 enforceability index scale).
Today, Governor Deval Patrick is officially proposing to change all that by putting forward legislation that will eliminate non-competes outright. If passed, this has the potential to eliminate a huge barrier to the free flow of talent to the best opportunities, thereby creating a more dynamic entrepreneurial environment in the state.
I give tremendous credit to Spark Capital's Bijan Sabet, who first raised this issue seven years ago. Many legislators and leaders got behind the effort, but no one has been able to galivinize enough support to convince the governor to lead here. Greg Bialecki and Jennifer Lawrence have made that happen and the tech community will be forever grateful if the legislature will embrace this effort, even if in the face of big company opposition.
House Speaker Robert DeLeo has been a champion for the innovation economy for years, kicked off by his (somewhat cheeky) open letter to Mark Zuckerburg to urge him to open a Facebook office in Massachusetts. Let's hope he's willing to support legislation that makes it easier for the next Mark Zuckerburg to leave his or her job to start the next Facebook...without the fear of old-school shackles and reprisals.
When the Cold War ended, President Bush (senior) used to talk about the peace dividend, the downstream economic benefit of reductions in defense spending. Echoing these words, one of my CEOs declared to me the other day that last week's activity in the cloud may have been one of the most important weeks in technology history, but we won't realize it for many years to come.
At Flybridge, we have long believed that the advent of cloud computing is the most important force in technology in decades. The entire Lean Start-Up movement and the recent proliferation of start-ups has been enabled by cheap computing power and storage. When I was an entrepreneur starting my company, Upromise, we had to buy big Sun servers for millions of dollars to launch our fledging website. Today, that same compute power is available to start-ups for a mere handful of dollars per hours.
Historically, Amazon's cloud offering (Amazon Web Services, or AWS) had little competition and, as a result, some have observed that as amazing as the cloud has been for start-ups, cloud pricing has not dropped as aggressively as Moore's Law would have suggested it might.
But Google finally appears to be catching up in the ever-important cloud services area. Last week, at its Cloud Platform Live conference, Google slashed pricing on their cloud platforms over 50%.
Then, a day later, at its AWS Summit, Amazon countered with its own radical price cuts from 36-65%. Despite those price cuts, Google is still cheaper than AWS in many categories. See the chart below, which GigaOm published, to show the comparison of the two offerings.
So why did my portfolio company CEO think this last week of price cuts was so historical? Because cloud infrastructure is like fuel for startups. As startup fuel prices go down, the downstream effect is powerful: starting and scaling companies has gotten yet even cheaper. With Google and Amazon battling it out, and IBM and Microsoft and others not far behind, this trend is only going to continue.
We have made a number of direct investments on companies circling around cloud infrastructure, startups like MongoDB, Stackdriver, Firebase and Apiary, to name a few. But what last week's price wars demonstrate is that the entire technology ecosystem will reap indirect benefits as well. The cloud is becoming a commodity, prices are going to zero, and technology companies around the world are celebrating.
When this 10s decade is over, we will look back and be amazed that a mere ten years prior, a few, absolutely massive financial institutions controlled the global banking industry. Software is eating the world, as Marc Andreessen famously observed, and an industry like financial services -- whose service offering is essentially all information-based -- is particularly susceptible to the disruptive force of technology. That disruptive force is particularly acute in the credit markets.
Consumer credit has long been a pretty sleepy industry. For years, the same 5-10 or so banks have been the main issuers of credit cards and the same 4 associations have been the main brands and platforms. But when the credit crisis hit, everything changed. Due to market forces and government regulations, banks abandoned the lower end of the consumer market. 20% of US households are now considered underbanked, representing a massive market opportunity. A further window of opportunity is the fact that credit cards are still charging 20% APR, yet interest rates are effectively zero.
Stepping into the vaccuum are new providers of consumer credit and broader banking services that are 100% virtual. ZestFinance (a Flybridge portfolio company) and Wonga are among those providing consumer credit in the form of installment loans, with ZestFinance leveraging the magic of big data to do more sophisticated underwriting. Lending Club and Prosper are showing the promise of peer-to-peer lending, issuing $2.4 billion in credit last year, a 3x increase over 2012. Institutions are taking notice - one investor that I spoke to in a peer to peer lender shared with me that hedge funds are now flocking to the platform in search of higher rates. ING - soon to be renamed Voya Financial - demonstrated that a bank could be constructed that serviced consumers over the Internet without traditional branches.
At the same time, the proliferation of smart phones is allowing consumers to access money and conduct financial transactions with extraordinary convenience. Why would those services and capabilities be only provided by traditional banks? China's Alipay reports that they processed $150 billion in mobile transactions in 2013 - nearly 6x the $27 billion PayPal reported (not including the Venmo acquisition, which is bound to accelerate growth in 2014). This intersection of mobile, convenience and new lending brands is going to substantially erode existing banking franchises in the years to come.
The business lending market is no different. In fact, innovation in business credit may be outpacing consumer credit. Startups such as OnDeck Capital, Kabbage and Capital Access Network have each raised tens of millions of capital and are building large brands and franchises in servicing small businesses. With their bloated bureaucracies and overhead, banks are not architected to service this market effectively - particularly as more and more small businesses are reachable over the Internet. OnDeck recently reported a $77 million growth round and that it has acheived nearly $1 billion in loan volume. Kabbage is rumored to be on the verge of reporting a similar monster round. And Credit Karma, a credit management service for consumers, just announced an $85 million growth round.
A few weeks ago, Brand Finance released their annual survey of the 20 most valuable banking brands in the US. Atop the list were the usual suspects: Wells Fargo, Bank of America, Citi and Chase. The market capitalization of these four banks is currently around $800 billion. Will these same brand franchises be unassailable by 2020, or will a new cohort of brands emerge from this soup of startups and innovators? I know what venture capitalists and entrepreneurs are betting on.
Every year for the last four years, Fred Wilson has been kind enough to come up from NYC and join my Harvard Business School class. It is always entertaining, enlightening and fun. As always, I asked the 80 students in the class to live tweet during the class in order to capture the interesting nuggets and take-aways (and exercise their social media muscles). Below is a Storify of the tweet stream.
If you want to see how this year differed from previous years, go to:
And the defining project of our generation is to restore that promise."
- President Obama, 2014 State of the Union
In a past blog post last summer, I fretted that the latest wave of innovation - as amazing as it is - was not showing up in US worker productivity. At the time of my writing, the US Bureau of Labor Statistics had provided some pretty depressing data, with very modest productivity gains in 2011, 2012 and Q1 2013.
Fortunately, in the last year, the productivity numbers have shown a major uptick. It appears that our society and our businesses are getting more adept at absorbing all the new technology of the Internet Revolution. Unfortunately, the beneficiaries of the greater productivity - presumably driven by the boom in cloud computing, precision manufacturing, wireless broadband and other major infrastructure improvements - are America's elite.
A recent analysis by one of my favorite economic pundits, John Mauldin (who tends to be pretty conservative in his political views), provides some good data that drives this conclusion home. The chart below shows that full-time, full-year wages for male workers (presumably the female statistics would be clouded by a narrowing of the gender wage gap over this period) have grown strongly for the more educated workers over the last few decades and dropped dramatically for the less educated workers.
Further, if you take a close look at the jobs that are likely to be further impacted by our massive, secular shift towards automation, they are the very jobs that middle and lower educated workers hold. The chart below characterizes how disruptive technology will be to certain job categories.
Politicians are spending a lot of time talking about the inequality problem in America. If you consider how much automation and software disruption that is ahead of us, it is clear that the problem is about to get much, much worse.
What role will the technology industry play in dealing with the societal implications? I hope a large and positive one. The industry can not allow itself to be represented by the Tom Perkins of the world. Leaders in the technology industry need to step up and own the inequality problem.
That's not to say technology leaders should be slowing down our march towards disruption. As economist Joseph Schumpter pointed out, creative destruction is a powerful, positive force. But tech leaders need to work hard to improve the underpinnings of our education system (see Khan Academy), broken immigration system (see FWD.us) and other aspects of our society such that creative destruction does not equate to opportunity destruction. I love it when I read about tech leaders getting more engaged in policy and civic activities. Let's see more of it.
I love dressing informally, maybe too much. My wife frequently reprimands me for dressing down. I recently met with a US Senator in slacks and a collar shirt (which I thought was being respectfully dressy!) and he wryly cracked that I looked awfully comfortable. I sometime teach my HBS class in jeans (please don't tell the dean).
But lately, I have been wondering if entrepreneurs have taken informality too far. I don't mean dress code. I don't care how they dress. I mean their thinking and approach.
You probably see it all the time - hipster entrepreneurs with the cool affect walking into meetings carrying nothing but their smart phone. When asked to present their story, they ramble informally without a cogent direction. When a substantive discussion ensues, and good ideas and follow-up items are generated, they take no notes. And when the meeting wraps up, there are no action items that are reviewed, no closure regarding next steps.
My observation is that some entrepreneurs are confusing informal dress with informal thinking. I like dressing informally because I find it reduces barriers and allows for more direct, open dialog. I have noticed that people are more comfortable getting right to the point and being candid in their conversations when there are no hierarchies or barriers communicated through dress code. Studies reinforce this view.
But I can't stand sloppy, informal thinking. Crisp, logical discussions, well-organized meetings, good note-taking and dogged follow-up are all ingredients of successul, well-run companies. When a startup entrepreneur conveys the opposite in their approach and style - whether in a pitch meeting or in a board meeting - I question whether (to coin a phrase I learned at my first starup) they can operate their way out of a paper bag.
I sat on a panel this morning at an executive retreat for a Fortune 100 company focused on innovation and the impact of next generation technologies on their business. The company's president wore jeans for the first time in a business meeting and was getting some good-natured teasing from his staff. I loved it because it showed he was willing to knock down some walls. But you can bet the meeting started on time, ended on time and had a very clear agenda.
I was excited to see Care.com's successful IPO yesterday for multiple reasons.
First, it augurs well for 2014 as another strong IPO year in genearl and for technology companies in particular. A University of Florida professor has a nice analysis of the 2013 IPO market and shows that there were 146 IPOs in 2013 (51 VC-backed, although NVCA claims 82 VC-backed), up from 94 in 2012 (48 VC-backed) which had been in turn up from 81 in 2011 (44 VC-backed). Another excellent IPO analysis from Fortune showed that the real winners of 2013 were the class of 2012 IPOs, which have traded up 64% by year end 2013.
Second, it is another nice win for Boston. Despite a flurry of biotech and enterprise tech IPOs and big M&A events in the last few years, there have not been many consumer wins in Boston and Care.com is a nice one for the region (see my post: "Boston Unicorns").
But what really makes me happy about the Care.com is the people behind the company. The five founders (Sheila and Ron Marcelo, Dave Krupinski, Donna Levin, Zenobia Moochala and Diane Musi) worked with me at Upromise and I think the world of each of them. They started the company with a mission-driven vision and have stayed together as a tight-knit founding team from the onset.
One of the things that makes a startup region successful is when a successful exit happens and an alumni network forms that creates additional successful startups (i.e., the "PayPal mafia" effect). This happened in my first company, Open Market (IPO'96), which spawned a dozen CEOs/founders in the area (e.g., Gail Goodman/Constant Contact, Jon Guerster/Digital Lumens, Eswar Priyadarshan/Quattro Wireless and m-Qube, Ted Morgan/Skyhook Wireless). BostInno did a nice piece on the "Open Market Mafia" and has a whole series they call "Tech Mafia Mondays"). I am so happy to see it happening with the Upromise alumni network as well, which includes CEOs/founders like:
A year ago, I felt 2013 would be the Year of Grit - a year characterized by toughing things out in uncertain times. Well, we certainly did that, and 2013 has ended up looking a heck of a lot better than it began.
2014 is shaping up to be the Year of Results. We begin 2014 with a lot of optimism in the air. In a recent survey conducted by the NVCA, portfolio company CEOs and VCs are feeling as good about the future as they ever have, with a stunning 86% of CEOs who plan to raise capital saying it will be the same or easier to do so as compared to last year. Half of CEOs and VCs are optimistic about next year's exit environment.
A rising stock market makes everyone feel good. The NASDAQ is up 30% this year and achieved its highest level since September 2000. The S&P has closed at a record high 44 times in 2013 and the Dow Jones has achieved 50 record highs this year - both indexes are up more than 20%.
When the stock market is down, we VCs like to say that our little tech companies are not affected and simply keep their heads down and build valuable companies. But when the stock market is up, sentiment swings quickly. We rush to take companies public or sell them to take advantage of "the exit window". It is natural, therefore, that a robust stock market has led to a robust IPO market. More and more companies are eyeing 2014 and research conducted by analyst firm 451 suggests it will be a record year for tech IPOs and also suggests M&A will see a strong increase in 2014 as compared to an already solid 2013.
Now it is time to deliver on all that promise. Aileen Lee's now-famous unicorn analysis listed 39 companies founded in the last 10 years who had achieved $1 billion plus valuations. 12 are private companies (Palantir, Dropbox, Pinterest, Uber, Square, Airbnb, Hulu, Evernote, Lending Club, Box, Gilt, Fab.com). At least another dozen with very lofty private valuations wait in the wings (including Spotify, MongDB, Snapchat, Etsy, Actifio, Automattic, OPOWER, Hubspot, Flipboard, Hootsuite, Appnexus and many others). Not all of these companies will go public or sell out in 2014, but a good number need to in order to deliver on the promise that has been built up in this post-bubble, post-recession era.
And if you are worried about bubbles right now, don't. I wrote a blog post two and a half years ago in response to cries of a bubble that it felt a lot more like 1996 than 1999 right now. In other words, when analyzing unemployment rates and other macroeconomic fundamentals as well as positive structural elements of the tech economy, the rebound was just beginning and had a good 4-5 year run in front of it. Sitting here at the end of 2013, I still feel that to be the case. The fundamentals of a rebounding US economy in combination with the disruptive forces of the cloud, mobile, big data and software eating everything remain strong. The start up economy will overheat at some point, it always does, but that point is not now.
So, buckle up for 2014 - a year where many of those lofty promises of better times over these last few years begin to convert into tangible results.
Last week, I used Aileen Lee's excellent TechCrunch article on Unicorns as a jumping off point to analyze the role of the MBA in creating these unusually valuable companies. This week, I want to take a local lens and analyze these special companies that have been created in Boston. As was the case last week, I was ably assisted by HBS 2nd year MBA student Juan Leung Li.
In order to have a reasonable population of companies to assess, we tweaked Aileen's definition. We looked at the companies in New England (call them "Boston and surrounding") that had exited in the last 10 years (2003-2013) with greater than $500 million in market valuation. Some of these companies had been around for a few years, but we felt this slice would allow us to assess companies that had recently created extraordinary value in a relatively short period of time. In the case of M&A situations, we value the company at the time of the M&A. In the case of public companies, we valued the companies at the market close of 11/15/13.
We found 50 such companies (updated from 43 originally). That is, 50 companies in the Boston and surrounding area that had achieved > $500 million in value during the last ten years. 19 of these had achieved > $1 billion in value (Aileen's cut off, although she had constrained the founding date to the last ten years rather than the exit date, which obviously yields a broader population). A chart showing these 20 companies can be seen here:
Lack of Massive Winners. The perception that Boston has not recently generated massive wins appears to be only somewhat accurate, depending on which sector you focus on. Of the 19 companies that were > $1 billion in value, seven were greater than $2 billion (TripAdvisor, athenahealth, IPG Photonics, Alnylam Pharma, Starent, Boston Biomedical, Acme Packet). That said, only three of these companies are software technology companies - TripAdvisor ($12.5B), athenahealth ($5.0B) and Starent ($2.8B) - and they were founded in 2000, 1997 and 2000, respectively. In other words, there have been no multi-billion dollar valued tech companies founded in Boston in the last 13 years. There are three companies that have achieved >$1 billion in value in the tech sector founded in the last 10 years: Demandware ($1.9B/2004), Kayak ($1.8B/2004) and Fleetmatics ($1.4B/2004), although the latter was founded in Dublin.
Essential Role of Immigrants. Here was a statistic that blew me away: over half of these companies (51%) had an immigrant founder. In my research related to my Senate testimony on immigration reform, I noted that 40% of Fortune 500 companies had an immigrant founder. Apparently, successful Boston-based startups have an even greater concentration of immigrant influence.
Strong Diversity. The breadth of the Unicorns is impressive, reinforcing the view that Boston's startup ecosystem is one of the most diverse in the world. Of the 50 companies that achieved > $500M in value, 23 were life sciences (plus materials science), 22 enterprise technology and 5 consumer technology. To see the companies in their various segments laid out, see the chart below:
Much of this data refutes the belief that all the major startup winners have been created in Silicon Valley. In fact, the vibrant life science sector is now arguably more heavily concentrated in Boston than in any other cluster at any other time in history. That said, Boston has definitely come up short in the race to build massively valuable tech companies. And if you want to build a consumer Internet company, there are few role models.
However, I am quite optimistic about the future. As evidenced by this review of the Boston startup ecosystem, the quality and robustness of the environment has improved greatly in the last few years. As for big winners, the pipeline looks pretty good. Globoforce and Care.com have filed to go public and companies like Acquia, Actifio, DataXu, Dyn, Hubspot and Wayfair and are all reputed to be on a similar path in the next year or two.
If you want to see the entire spreadsheet with the underlying data, you can click here.
I like being a contrarian. As a kid, if a certain TV show was popular amongst my buddies, I’d purposefully ignore that show and search for other shows that were less well known (e.g., Hogan's Heroes was a personal favorite that never hit mainstream). When someone declares something is conventional wisdom, I look to poke holes and challenge the underlying assumptions.
Recently, the conventional wisdom in Startup Land has been that young, technical founders are the prototype for creating valuable companies. The formula, this theory goes, is to find a hacker in a hoodie and bring out the wheelbarrow of cash to back them. Think Mark Zuckerberg/Facebook, Drew Houston/Dropbox, David Karp/Tumblr and – the most recent poster boy darlings of Startup Land – the SnapChat founders.
I have always thought that stereotype was skewed. Don’t get me wrong – I love young founders. At Flybridge, we have invested in many of them (e.g., Eliot Buchanan and Dan Choi at Plastiq) and we plan to continue investing in many others. But in my twenty years living in Startup Land, I have found that there is no single model or archetype for success. Success comes in many flavors and combinations. And, in my last five years on the HBS faculty, I have become more convinced of the value of the MBA entrepreneur.
Thus, I was thrilled to read Aileen Lee’s terrific analysis of unicorns (companies that have been created in the last 10 years worth more than $1 billion) and have it shatter this piece of conventional wisdom. Aileen systematically analyzed the common characteristics behind this cohort of 39 companies and found that “inexperienced, twentysomething founders were an outlier. Companies with well-educated, thirtysomething co-founders who have history together have built the most successes.”
Aileen’s analysis didn’t provide any data on the role of MBAs in the unicorns. So, in partnership with HBS second year Juan Leung Li, we did some of our own digging. Here's what we learned:
33% of the Unicorns had at least one founding member who had an MBA. Examples include Kayak (Steve Hafner/Kellogg), Workday (Aneel Bhusri/Stanford and Dave Duffield/Cornell), Yelp (Jeremy Stoppelman/HBS) and Zynga (Mark Pincus/HBS).
82% of Aileen's Unicorns had at least one founding member or current executive team member with an MBA. Examples of unicorns where MBAs were hired to help build the company include Evernote (COO Ken Gullicksen/Stanford), Facebook (COO Sheryl Sandberg/HBS), Twitter (COO Ali Rowghani/Stanford).
Of those that had MBAs, the leading schools represented were: HBS (21%), Stanford's GSB (17%) and Wharton (10%).
This week, John Byrne of Poets & Quants published a complimentary analysis, ranking the top 100 MBA Start-Ups. In this analysis, he found some terrific companies that have been MBA founded in the last 5 years, such as Okta, Rent the Runway, Warby Parker and Wildfire. Among this MBA founder list, HBS (34%), Stanford (32%) and MIT (11%) came out on top.
Why all the momentum with MBAs and start ups? Simply put, the major schools have radically changed their curriculum. These schools and others have become super-focused on training their MBAs to be effective executives across a range of company sizes, from start-ups to large enterprises. For example, HBS now teaches two courses to help train students to be effective start-up executives: Launching Technology Ventures (which I teach) and Product Management 101. MIT is considering offering their own version of these classes in the spring or next year and Stanford has a plethora of strong course offerings for future start-up executives.
So the next time someone tells you that you need a hoodie to be a great start up entrepreneur, don't be afraid to flash your MBA diploma with pride.
To see the detailed spreadsheet that Juan Leung Li did, click here.
The art of Product Management continues to evolve. I've enjoyed spending time with many VPs of product in the last year since I co-authored an HBS note on the role of the Product Manager to develop more insights, materials and case studies on that revolution.
Earlier this week I taught a seminar on product management to MIT Sloan students as part of their "Sloan Innovation Period (SIP)" curriculum. Although it's not exactly the EdX experience, in the spirit of open courseware, I thought others interested in the topic might enjoy the materials I used for the class, which are here:
I spent last week visiting Israel with a group of fellow venture capitalists touring Start Up Nation - a trip sponsored and organized by CJP. We had a terrific time - despite being in the midst of a pretty tough neighborhood, the country's innovation economy is absolutely booming. A recent report named Tel Aviv the second most vibrant start up ecosystem in the world, behind only Silicon Valley.
A few take aways from the trip provided us with some insight into why such a tiny country (population of only 8 million) is doing so well:
Big Winners are Emerging. There used to be a perception that Israeli start-ups had great technology, but were weak at growing sales and marketing and so had to sell out to bigger companies early in their lifecycle, precluding the opportunity to build very valuable companies. The success of Waze ($1B sale to Google), Wix (IPO filed), Outbrain (IPO rumored to be quietly filed or in process) have entrepreneurs on the ground thinking big. The Times of Israel reports these success stories are inspiring Israeli start-ups to focus on the IPO path rather than M&A as a potential path to greatness. I see this through the lens of our portfolio company, tracx, whose ambitions to build a great SaaS social intelligence company seem to rise with the country's ambitions.
Start Up Heroes. A culture is defined by its heroes. The American entrepreneurial narrative has been shaped and amplified by the oft-celebrated heroic journeys of Bill Gates, Steve Jobs and Mark Zuckerberg, among others. The Israeli narrative has gone from celebrating its war heroes (think Moshe Dayan, Ariel Sharon, the Mossad) to celebrating its entrepreneurs. I think we were told no less than a dozen times that Warren Buffet's largest international investment was in an Israeli company ($6B for Iscar) and yesterday it was reported that he is acquiring his third Israeli company. The country is bursting with pride at its latest Nobel Prize winner in Chemistry (now numbering 11 Nobel laureates in its 65 year history). Everywhere you go, Israelis want to tell you how smart and entrepreneurial they are! Unlike any culture I have ever seen, this country gets the value of raw intelligence.
Partnerships Matter. Knowing their position as such a small country, Israeli businesses are always looking to partner outside of Israel. Native Israeli venture capital represents only 25% of the VC capital invested in the market - most of the money is coming from global firms like Battery, Greylock, Lightspeed, Sequoia and others. The two recent partnerships from Israel's elite technical university, Technion, are manifestations of this open approach. First, the ambitious partnership with Cornell to build a new engineering school in New York City - called Cornell Tech - which appears to be off to a strong start, helped in part by a $133M gift from Qualcomm founder Irwin Jacobs. More recently and announced while we were on campus, Technion announced a joint venture with a Chinese university to build a new campus in Guangdong thanks to a $130M gift from Chinese billionare Li Ka Shing, a large investor in Waze, matched by the Chinese government.
These elements suggest a bright future for Start Up Nation. Now imagine what would happen if a peace agreement with the Palestinians could be reached (for a glimmer of home, read this NY Times report on a recent interview with President Abbas) and a nuclear deal with Iran (again, if you're an optimist, read today's WSJ report on Iran's seriousness in negotiating a deal).
I make a lot of lists. It’s an old habit that started when I
was in grade school. Lists of to dos,
lists of goals, lists of workouts. Lists, lists, lists. I’m also a nostalgic person and so I tend to
save a lot of these lists and use them as touch points for storing memories and
keeping track of the passing of time.
Every now and then I’ll come across an old list and re-read it. Some of them make me think deeply and others
make me laugh at my younger self’s absurdity.
Recently, I came across a list in my desk labeled simply
“Mentors”. I’ve had a lot of mentors in
my life – many who may not even know they played this role for me. I’ve always kept an eye on them and noticed
the choices they’ve made and how they’ve carried themselves personally and
professionally. A number of years ago, I
drew up a list of my mentors as it helped crystallize for me who I admire, why
I admire them and what I can learn from them.
It was fun to stumble upon that list again and reflect on my choices.
Then, I read an interview with my friend Barb Goose,
president of Digitas, where she talks about reverse mentors. It inspired me to draw up another list.
Reverse mentors are people younger than you who you admire
and learn from. Everyone on my mentors
list is older than me. That was my
traditional definition of mentor – someone ahead of you in life that inspires
you, helps guide you and show the way to live.
But when I read Barb’s reason for seeking out reverse
mentors – younger folks who she learns from in this rapidly changing, digital
world – it really resonated with me.
Entrepreneurship, technology and innovation are profoundly influenced by
the young. If you’re not tapping into their knowledge base and seeking their
insight on trends and opportunities, you’re missing out on a valuable
resource. Upon reflection, it’s one of
the reasons I so much enjoy the teaching I do at Harvard Business School. I learn a tremendous amount from the students
and they are always helping me think about the latest disruptive ideas,
technologies and companies that are emerging or challenging how to best go
about building start-ups to tackle these opportunities.
So now I’ve got my reverse mentor list. I’m tucking it away in my desk for another
few years and look forward to tracking the careers and choices of those on it.
Every year, I give an open talk to the returning students at Harvard Business School on what makes the Boston start-up scene special. I do it for two reasons: 1) as an advocate for the local innovation ecosystem, I want to make sure all these smart, talented folks from around the world can access and plug in to the amazing local resources available to them; 2) Boston is a microcosm of the ingredients for a successful start up community, a topic of great interest to policy makers and leaders all over the world (for more on this topic, see Brad Feld's excellent book, StartUp Communities). The city of Boston is a relatively small one (the 21st largest city in the US with a population of 600k and a combined metro area that ranks it 10th), yet it is consistently ranked as one of the most innovative clusters in the world.
I have written in the past that in the IT sector, Boston suffers from not having more "platform companies", such as Facebook, Google, Twitter, LinkedIn. As the above presentation shows, only a few companies in Boston are of the scale where they are platforms for other startups to plug in to and large enough to create their own industrial clusters. Hopefully, that will change in the coming years.
I’ve been thinking a lot lately about the unsung hero of
many start-ups: the other founder. A lot has been written about the founder/CEO
and her growth and evolution as a company grows. But little is written about the (nearly
omnipresent in my experience) co-founder – the #2, behind-the-scenes partner
who teams with the founder/CEO from the very beginning to build the company. In the image above, most everyone knows the name and image of Larry Page - cofounder and now CEO of Google. But how many folks know Sergey Brin (on the right) and the role he has played in building Google to its massive success and a market capitalization of nearly $300 billion? Sergey Brin is the other founder.
I’ve probably been thinking about this topic a lot lately because
I’ve been recently meeting with the other founder at a few of my portfolio
companies. The conversations we’ve been
having have a consistent set of themes.
The other founder usually begins with a particular range of
responsibilities that compliment the founder. They may run a
function, such as product or engineering, or they may have a broader
operational role and carry a COO title.
Typically, a 5 person company doesn’t need a COO, but it’s a useful catch all
title for the other founder because it sounds better than “vice president of
miscellaneous” or “SVP of whatever falls through the cracks,” which are more
accurate descriptions of their role.
The challenge for the other founder is that as a startup
evolves from “the jungle” (super early stages, chaotic organization, prior to
achieving product-market fit) to the “dirt road” (developing some
organizational maturity and initial product market fit), senior functional
executives often get hired from the outside to take over departments. These executives naturally encroach on the other founder's responsibilities.
For example, at one of my portfolio companies,
the other founder looked after administration, finance, operations, product
and engineering. Basically, everything but sales and
marketing. But then the company hired a VP of
operations. And then a VP of
finance. And finally a VP of
engineering. And suddenly, after
transitioning each function successfully to an outside senior executive one at
a time, the other founder had successively worked himself out of a job.
The board and investors are super focused on making the founder/CEO successful – building an executive team
around them, perhaps even a COO/president to compliment their skillset and help
the company scale. Or, as in the case of Google's hiring of Eric Schmidt, an outside CEO who can guide growth and scale. In these situations, everyone is focused on the impact on the founder - what his role will be, how he handles the transition. Very little board
attention is typically focused on the role, evolution and growth of the other
founder.
I would submit that ignoring the other founder is short-sighted. I recommend boards and CEOs spend more time
worrying about the role of the other founder and helping her successfully
evolve over time. Typically they are
intensely loyal to the company and the founder/CEO, valuable sounding boards
for the executive team and the founder/CEO and champions of the company culture
and mission.
Here are a few approaches or archetypes that I typically see
as the role of the other founder evolves over the life of a startup:
Become a functional owner. The other founder may be “VP of miscellaneous” in the beginning
days of the startup, but be explicit about which functional area she should
expect to own over time. That way, she can develop the skills in that area in a focused fashion and slot in
appropriately when the time is right.
Product management is a popular functional area for the other founder as
the other founder is typically close to the customer and business problem being
solved. Further, the role doesn’t
involve managing tens or hundreds of employees, a skill that is typically
better suited for experienced functional operators. Another one is business development for
similar reasons and because it involves selling the company into an ecosystem
of partnerships, requiring a blend of product knowledge and marketing skills.
Grow into the COO role. One successful portfolio company of mine had
two young, MBA founders. One played the
CEO/cofounder, Mr. Outside role and the other played the COO/cofounder, Mr. Inside
role. Even as the company scaled, the
young COO rapidly learned how to be a successful operator at scale. I have had other companies hire coaches to help the young other founder grow into the COO role. For the right profile, this can be a great role for the other founder.
Drive the next strategic
initiative. As startups evolve into
functional startups, they get very focused on the here and now: shipping the next product release, successfully
closing the next quarter, closing an important partnership. Yet, startups need to always worry about
what’s around the corner and have resources dedicated to strategic initiatives
that can provide non-linear growth. This
is an area where the other founder can be very valuable. Because of the respect he has within the
company and their ability to cut across functions, he is well positioned to
drive strategic initiatives and providing the “startup within a startup”
culture necessary to innovate.
This set of themes is one that I’m personally very familiar with
because I played this role at one of my startups, Upromise.
My title at the start was president and COO – thus I initially played the
Mr. Inside role and rapidly grew into running a large organization. Then, as we hired a skilled operational CEO,
I transitioned to driving strategic initiatives.
I guess that’s why I’m always a sympathetic ear for the
other founder.
I've been thinking a lot lately about scaling sales.
In every start-up, finding initial product-market fit is a magical moment. Before this occurs, the sales process is a craft or an art - custom-made by the founder or evangelist sales VP. You dive deep into a customer development process, working closely with a few customers who feed you requirements and are willing to trial an imperfect product that is evolving quickly.
But once you achieve initial product-market fit and are down the Sales Learning Curve, suddenly you are faced with a new challenge: how do I scale up the sales efforts? How do I build a repeatable, scalable sales process that is like an industrial machine - not a crafts project?
Across our portfolio and in my own entrepreneurial experience, I have seen three main sales models work successfully in scaling B2B sales: 1) Enterprise; 2) Telephone; and 3) Developer-driven. B2C sales and customer acquisition efforts are a different matter (and one I'll perhaps address in a future blog), but for B2B, those three models are the most common pattern. I'll discuss each one below.
1) Enterprise Sales
The enterprise sales model is a pretty simple one and was the predominant model ten to twenty years ago in the IT industry. If you want to scale sales, you hire more sales reps. Find a new sales rep with industry experience, a rolodex and a strong track record. You assign an annual quota to each rep, train them, feed them some sales tools and assign them a sales engineer (particularly for more technically complex products) and coach them along the way. After 3-6 months, they work their way down the learning curve, close their first deal and are off to the races.
The typical quota for a sales rep varies by type of business model (SaaS vs. perpetual), product gross margin (e.g., 80-90% software products vs. 40-50% advertising products) and company maturity (e.g., a "jungle" stage company would have a lower quota than a "highway" company). Typically you want to see a 3x ratio between the contribution margin per rep (factoring in the lifetime value of the customer, or LTV) and the cost per rep to acquire that customer, fully loaded (i.e., customer acquisition cost or CAC).
For example if you have a 90% gross margin SaaS software product and assign a $1.1M in quota for a rep (i.e., $1m in contribution margin) that makes $250K at target and assume another $50k in benefits and travel costs and $30k in marketing and support costs for a total of $330K, then you have a 3x LTV:CAC ratio in year 1. Another rule of thumb for SaaS companies, some focus on "the Magic Number", which is the ratio of new sales to sales and marketing expenses.
If the customer is a recurring customer, then they are more valuable and a lower quota might be tolerated, although a separate group of account reps are often accountable and paid commissions for the renewal revenue. If the marketing support is greater and the product is more mature, than a higher quota might be assigned. In my former company, Open Market, we had rising quotas each year as we got more mature, from (if memory serves me) $1.1M to $1.3M to $1.5M to $1.7M to, finally, $2M in annual quota. Advertising sales reps, with a 40-50% gross margin, might have $3-5M in annual quota.
Although it is an excellent fit for complex enterprise-class solution selling, many people think classic enterprise sales, as a standalone go to market model, is broken. When you analyze it carefully, unless you can support large quotas due to very large deal sizes, it can simply be too expensive to hire senior sales representatives, distribute them around the country, set up offices and support them. Many are therefore proponents of a sales model that relies more on telephone-based selling, as described below.
2. Telephone Sales
The telephone sales model is based on a group of lower-paid, typically younger sales representatives that sit in cubicles next to each other and grind out call after call. To implement this sales model effectively, there needs to be a tight coordination between sales and marketing to generate qualified leads and to feed these leads to the sales organization. There also needs to be a large target universe of potential customers to justify the volume of calls - the model simply doesn't work if your target market pool is in the hundreds or even thousands.
Sales reps in this model may be closers or simply openers who qualify leads carefully and then hand them off to the closers (in this scenario, the telephone-based representatives are often called business or sales development representatives -- BDRs or SDRs). Many organizations will have two separate groups - a group of SDRs that are nurturing leads and conducting product demonstrations and a group of telesales reps who are closers. It is not uncommon for the SDRs to be right out of college or, at most, have only 2-4 years of experience and be earning base salaries as low as $30-40K. Their quotas may be as low as $400-500K, but their salary at target might be only $80-100K. With no travel budget and no field offices, the numbers pencil out nicely. The telesales team can also be a nice training ground for enterprise sales reps - a path that can be cheaper and less risky than hiring someone externally.
Generating a high volume of leads for the telephone sales rep is the key to making this model work. It is all about (highly qualified) leads, leads, leads. Leads may be through inbound marketing techniques (such as webinars, blogging, white papers or other forms of content marketing) or outbound marketing techniques ("smile and dial" against a list of prospects). The Hubspot folks (who are terrific in this area) estimate that each SDR in their mid-market group needs 150 leads per month to be productive and busy while for the small business team, they target feeding 2000 leads per sales rep per month. This is an appropriate number to figure out and model to help guide whether you need to ramp up marketing (demand generation) or sales (closing) as you scale.
To that point, a well-run telesales operation will be super metrics-driven. You can measure EVERYTHING - how many calls per day per rep, how many connects per call, how many positive conversations that lead to follow-up, how many demonstrations, how many proposals, etc. These measurements help with the "machine-building" process as you can more predictably assess how you are doing at any given time and where you need to focus your resources - more leads, more SDRs, more closers, etc. The best sales VPs of telesales operations are more like accountants than charismatic salespeople. If you hire a charismatic leader as your head of sales, make sure you hire a director of sales operations to support them. I never fully appreciated the value of this role until I saw it in action myself at Open Market where the director of sales operations managed all the numbers and operational details, freeing up the charismatic sales VP to hire, lead and close the big deals.
Alignment between sales and marketing is critical in any sales model, but under the telesales model it is even more critical. Organizationally, SDRs may even work under the marketing organization while the closers work for sales. Whatever the organizational configuration, the definition of a lead, clarity on the quantity of leads being targeted, and alignment on the quality of a lead required before handing off from marketing to sales are all key elements to work through. Marketing automation platforms are particularly helpful here so that you can track someone from website visit all the way down the funnel through close.
Again, there are many who believe even the telesales model is flawed and outdated. Hiring armies of young, inexperienced professionals and training them to become sales reps and operate in a "boiler room" style environment can be expensive. To achieve friction-free revenue (and who doesn't want friction-free revenue?), a third sales model has emerged which I'll call "Developer Driven".
3) Developer Driven Sales
My partner, Chip Hazard, wrote a terrific blog post on the power of developer-driven adoption, something we have seen play out very successfully at a few of our portfolio companies, but most notably 10gen (maker of MongoDB). As Chip points out, if you can architect your product as a platform (build APIs that are accessible to 3rd party developers) and get bottoms-up adoption from the development community, you can drive adoption without investing heavily in sales. Chip's examples are mainly from technical products (his main area of expertise), but this approach can be employed for any product where customers can trial, see value quickly and begin adoption without taxing your sales resources.
To do this effectively, you often need to employ a freemium business model - making it easy for a developer or customer to try your product for free, get set up and quickly self provision (ideally within 5 minutes) without ever speaking to anyone at the company. This provides the ultimate inbound marketing model - customers contact you when they have tried your product and are convinced it provides them with value. Once value is established and the product usage ramps up, you can hear the cash register ringing.
Instead of hiring telesales people, you hire "Community Managers" who arrange hackathons and meetups, actively engage the community on the forums, and shares relevant content through various social channels. When things are really working well in a developer driven model, developers are embedding your platform in their products and each developer becomes a marketing agent for the company. In effect, your developer support team becomes your marketing team.
Summary
The magic in developing a go to market strategy is that there is no "one size fits all" approach. Many companies will design their sales and marketing machine as a blend of each of these approaches. Use a developer-driven model to drive trial and inbound activity. Telesales to close high-volume, smaller deals. And then enterprise sales for the select strategic deals with average sales price (ASP) > $100K.
Different phases of your business will see more emphasis on one area than another. For example, many companies embark on a freemium model initially, then depend on inbound upsell, later hire a telesales team to ramp up the upsell process by adding outbound activities, then hire an enterprise team to close the big deals. Dropbox is an example of a company that has followed this path with tremendous results.
The main point is that you need to be as strategic and thoughtful in designing your go to market model as you are in your product or company strategy. Only then can you evolve from a crafts model to a machine.
I include a chart below from a recent board presentaiton from my portfolio company, tracx (a SaaS social intelligence platform) that frames the multi-stage process in a particularly clear manner.
To read more on this topic, here are a few books / blogs I recommend:
Today's IPO by Tremor Video is seen by many as a harbinger for the adtech community (full disclosure: Tremor Video is a Flybridge portfolio company). Rightly so. Tremor is the first public offering of an adtech company since Millenial Media's IPO in April 2012. One can argue how successful the Tremor IPO was, and the broader industry implications, based on the first day's opening price and trading, but the real test of these offerings is what happens next - how companies perform and execute over the next few quarters.
One thing that is clear, though, is that the advertising community would be wise to keep an eye on the "tech" portion of "adtech". I have argued in the past that software is eating marketing. Simply put, technology is radically transforming the marketing function and the role of the marketing professional. The flow of advertising dollars into digital, addressable media is well-documented and well-understood. It is estimated that in 2013, $100 billion will be spent on digital forms of advertising, representing more than 20% of the total advertising market and continuing to grow rapidly in share (see chart above).
Less understood is that managing digital advertising is far more complex than its analog counterpart. Advertising agencies have retained their industry wide hegemony as a result of this complexity. With so many new technology vendors popping up and so many immature point solutions being deployed, the core competence of agencies has gone from being great at relationship managemnent to being great at technology platform management. As DataXu's Mike Baker likes to say, Mad Men have become Math Men.
But, in every industry, software improves and gets simpler and simpler. Technology platforms gain in scale, become more mainstream and training programs become more mature. As all this happens, agency services are required less and less.
So, the lesson that may get loss in the Tremor IPO hoopla? Agencies are being transformed. Technology companies are sweeping into the advertising industry, much like they did in marketing (see Salesforce.com, Eloqua/Oracle, Exact Target/SalesForce, Neolane/Adobe). And the days of getting the job done with thin technology in combination with armies of bodies are over. To be a valued, strategic player in the market, you had better have a thick, differentiated technology stack.
