Tag: startups

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#unfiltered #3 Plan Bs – Should we have them?

I woke up today with a thought that’s been gnawing at me for years now. Why do we have backup plans – Plan Bs, Plan Cs, etc? Does it inhibit our drive? Or readily prepare us for the worst? At what point are we sacrificing our commitment for safety?

When I started this blog, my writing mentor recommended that I have 10 pieces written and ready before I launch my blog. And I did exactly that. All cards out, I still have 8 of my pieces saved in my backlogs, which as you have already deducted, I’ve used 2 of my pieces already. Why? My mentor told me that, in my commitment to publish content weekly, I will indubitably have dry spells – dry weeks. And I did… twice. So, I regressed to my lowest common denominator and pulled something out of my archives. But during those two weeks, it helped me stay in my comfort zone. That instead of fighting writer’s block (if such a thing exists), I chose to run from it.

Part of the reason I started this #unfiltered series is to help me be content with content. I am guilty of 8/10 times second-guessing my way out of doing something. If I contemplate over something long enough, I’ll realize fears that I never thought possible, and opt for the safer option – not doing it at all.

From when we were young, we’re taught to always prepare backup options. When applying to colleges, we’re told to apply to our 2-3 reach schools, and 10-15 other schools we’re confident about getting into. When applying to jobs, one of my hometown neighbors, 2 years my senior, advised me to apply to 200 jobs, expect 10-20 interviews, another 3-5 for final rounds, and 1-2 offers to choose from. Effectively, asking me to apply to 198 backup alternatives.

I get it. As the saying goes, beggars can’t be choosers. Both high school and my early years of college have drilled that saying into me – by my peers and by my teachers.

A part of me hates it, but a part of me realizes the truth in there. I saw that circumstances played an even larger role for my friends and peers who:

  • are going through tough times in this pandemic and economic downturn,
  • (whose) parents came from a lower income bracket,
  • are POC (people of color),
  • are female,
  • are/were open about their different sexual orientations,
  • didn’t graduate from a 4-year college,
  • lost limbs or appendages due to accidents or conflict,
  • are/were in debt,
  • and much more.

Half a decade back when I set out to meet one new person that drew my insatiable curiosity a week, I realized I’m a goddamn privileged person living in the 21st century. I’m a perfectly healthy, heterosexual Asian male who graduated from a 4-year university. If all hell breaks loose and my net worth goes to absolute zero, I have my parents’ home to go back to and a room and bed to call my own. And as a full disclaimer, the fact I’m contemplating this question in the first place means I’m privileged enough to do so.

And because I’ve had the liberty to do so, I realized that my greatest personal achievements came from when I didn’t give myself the option of a Plan B. For the people I reached out to and am in touch with above my weight class, I either have given it my all or was prepared to do so. For swimming, I treated each competition as my last, meaning I either gave it my all or nothing. And during more nights than I can count, I beat myself up over my inability to reach a milestone.

Yet, now in the land of venture, we learn to hedge our bets and come up with contingency plans. We learn once again to diversify our portfolio, and not put all eggs in one basket. Does that lead to why many investors fundamentally don’t have the conviction to lead deals?

On the founding side, you have it almost flipped. When you are trying to make ends meet, there will be times you have to take that one option and go all in. And you can’t let go until you do everything you can to make it a reality. When you sit in a position of privilege, you can have several contingency plans to hedge your bets. Ben Horowitz, author, founder, and investor, illustrated the dichotomy in his piece (and one of my favorites) about peacetime and wartime CEOs. There’s a part of me that strives to find that sense of urgency, like a wartime CEO. And go all in. Maybe this pandemic is the test where I can find where my values really lie.

To be frank, I haven’t come up with a conclusion to the dilemma. For now, I can only hypothesis-test and keep good track of the data that comes my way. But, so far, I can say that one’s tolerance for risk is positively correlated with one’s free cash flow.

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups!

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A Small Nuance with Early Growth Numbers

startup growth
Photo by Ales Me on Unsplash

My friend, Rouhin, sent me this post by a rather angry fellow, which he and I both had a good chuckle out of, yesterday about how VC is a scam. In one part about startup growth, the author writes that VCs only care about businesses that double its customer base.

The author’s argument isn’t completely unfounded. And it’s something that’s given the industry as a whole a bad rap. True, growth and scalability are vital to us. That’s how funds make back their capital and then some. With the changing landscape making it harder to discern the signal from the noise, VCs are looking for moonshots. The earlier the stage, the more this ROI multiple matters. Ranging from 100x in capital allocation before the seed stage to 10x when growth capital is involved. But in a more nuanced manner, investors care not just about “doubling”, unilaterally, but the last time a business doubles. We care less if a lemonade stand doubles from 2 to 4 customers, than when a lemonade corporation doubles from 200 to 400 million customers, or rather bottles, for a more accurate metric.

After early startup growth

Of course, in a utopia, no businesses ever plateau in its logistical curve – best described as it nears its total TAM. That’s why businesses past Series B, into growth, start looking into adjacent markets to capitalize on. For example, Reid Hoffman‘s, co-founder of LinkedIn, now investor at Greylock, rule of thumb for breaking down your budget (arguably effort as well) once you reach that stage is:

  • 70% core business
  • 20% business expansion – adjacent markets that your team can tackle with your existing resources/product
  • 10% venture bets – product offerings/features that will benefit your core product in the longer run

And, the goal is to convert venture bets into expansionary projects, and expansionary projects to your core business.

Simply put, as VCs, we care about growth rates after a certain threshold. That threshold varies per firm, per individual. If it’s a consumer app, it could be 1,000 users or 10,000 users. And only after that threshold, do we entertain the Rule of 40, or the minimum growth of 30% MoM. Realistically, most scalable businesses won’t be growing astronomically from D1. (Though if you are, we need to talk!) The J-curve, or hockey stick curve, is what we find most of the time.

The Metrics

In a broader scope, at the early stage, before the critical point, I’m less concerned with you doubling your user base or revenue, but the time it takes for your business to double every single time.

From a strictly acquisition perspective, take day 1 (D1) of your launch as the principal number. Run on a logarithmic base 2 regression, how much time does it take for your users (or revenue) to double? Is your growth factor nearing 1.0, meaning your growth is slowing and your adoption curve is potentially going to plateau?

Growth Factor = Δ(# of new users today)/Δ(# of new users yesterday) > 1.0

Why 1.0? It suggests that you could be nearing an inflection point when your exponential graph start flattening out. Or if you’re already at 1.0 or less, you’re not growing as “exponentially” as you would like, unless you change strategies. Similarly, investors are looking for:

ΔGrowth Factor > 0

Feel to replace the base log function with any other base, as the fundamentals still hold. For example, base 10, if you’re calculating how long it takes you to 10x. Under the same assumptions, you can track your early interest pre-traction, via a waitlist signup, similarly.

While in this new pandemic climate (which we can admittedly also evaluate from a growth standpoint), juggernauts are forced to take a step back and reevaluate their options, including their workforce, providing new opportunities and fresh eyes on the gig economy, future of work, delivery services, telehealth, and more. Stay safe, and stay cracking!

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups!

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#unfiltered #1 Urgency – Thoughts on Coronavirus, Innovation, Space Travel, and Love

unfiltered vc urgency

Coronavirus. Candidate primaries. Market crashes. And what motivates us to get shit done. During a bite with one of my buddies from college, we ended up chatting about a myriad of topics. From crying when we scared as a baby to eating when we’re hungry, humans inherently act reactively than proactively.

Let’s put it into perspective:

  • Wildfires in Australia and previously in California brought nature preservation front and center.
  • Because of the coronavirus, China set up a hospital in 10 days. Whereas in SF, it takes years to extend our public metro, BART, to just one more station.
  • In startup land, look how much innovation is being done on the SaaS front. Competition drives progress. A need to be better than your competitors, or perish. On the flip side, innovation at the frontiers of technology are happening at a much slower pace. You’re right in thinking part of it is due to an element of technological risk and mystery. But a large part is also due to funding, awareness, and urgency. I was catching up with another friend, not too long ago, who’s working on the frontiers of AI research. He told me that he’s just not motivated to meet any deadlines. If he misses it, “Oh well.” And if he does reach any milestone, there’s barely a pat on the back.
  • Neil deGrasse Tyson, and I’m paraphrasing here, once said (in one of his StarTalk Radio episodes): we think if we reach commercial viability of space travel or tourism in 50 years, that it’ll be really impressive. But it’s really not. Why? If, hypothetically, aliens from another galaxy contacted us today and said, “We’re going to invade your planet in 50 years”, we will have a different sense of progress. And if in 50 years, we can only just start to commercialize space travel, we’d be sitting ducks.
  • If you have a final in the morning tomorrow and you happen to be a procrastinator (or not), you’re going to be burning the midnight oil. Otherwise, realistically, would you be studying day and night every day?
  • Tim Ferriss asks himself this one question: If in 2 years, you’re set to die. In perfect health, and a perfectly natural death. What do you have to do before you die? What will you regret no having done? So, what really matters? (I lied; it’s not really one question.)

So, how do I induce a sense of urgency? How do I motivate myself when I don’t have any impending time horizons?

One, accountability partners. Friends who keep me (and me them) accountable to my goals, like my birthday resolution. Where in 6 months, upon failure, I lose $100. Or upon success, I get treated to a really nice meal.

Two, something I took from my good friend. I once asked him about how he continues to push himself towards new experiences every month. After all, he’s the kind of person who lives a life that makes me feel as if I’ve done nothing. In response, he said:

“Fall in love.”

“I don’t get it,” I replied perplexed.

“Because it’ll make you want to impress your crush. And when you go on that date every week or every two weeks, you’ll want to show off. And the only way you can show off is if you have something to show off. So, I don’t let my dreams sit. I get shit done.”

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

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The Marketplace of Startups

books about startups

Over the past decade, stretching its roots to the dot-com boom, there have been more dialogue and literature around entrepreneurship. In a sense, founding a business is easier than it’s ever been. But like all things in life, there’s a bit more nuance to it. So, what’s the state of startups right now?

Lower Barriers to Entry

A number of factors have promoted such a trend:

  • There are an increasing number of resources online and offline. Online courses and ed-tech platforms. Fellowships and acceleration/incubation programs. Investor office hours and founder talks. YouTube videos, online newsletters, and podcasts.
  • The low-code/no-code movement is also helping bridge that knowledge gap for the average person. Moreover, making it easier for non-experts to be experts.
  • The gig economy have created a fascinating space for solopreneurship to be more accessible to more geographies.

Demand (by consumers and investors) fuels supply of startups, through knowledge and resource sharing. Likewise, the supply of startups, especially in nascent markets, fuels demand in new verticals. So, the ecosystem becomes self-perpetuating on a positive feedback loop. As Jim Barksdale, former Netscape CEO, once said:

“There are only two ways I know of to make money – bundling and unbundling.”

BundlingUnbundling
Market MaturityMarket Nascency
HorizontalizationVerticalization
BreadthDepth
Execution Risk
Bias		Market/Tech Risk
Bias

Right now, we’re at a stage of startup market nascency, unbundling the knowledge gap between the great and the average founder. This might seem counter-intuitive. After all, there’s so much discourse on the subject. There’s a good chance that you know someone who is or have thought about starting a business. But, I don’t believe we’re even close to a global maximum in entrepreneurship. Why?

  1. Valuations are continuing to rise.
  2. Great founders are still scarce.
startup growth
Photo by Isaac Smith on Unsplash

Valuations are shooting up

Valuations are still on the rise. Six years back, $250K was enough runway for our business to last until product-market fit. Now, a typical seed round ranges from $500K-$2M. A decade ago, $500M was enough to IPO with; now it only warrants a late-stage funding round. By capitalistic economic theory, when a market reaches saturation, aka perfect competition, profit margins regress to zero. Not only are there still profits to be made, but more people are jumping into the investing side of the business.

Yes, increasing valuations are also a function of FOMO (fear of missing out), discovery checks (<0.5% of VC fund size), super duper low interest rates (causing massive sums of capital to surge in chase yields), and non-traditional venture investors entering as players in the game (PE, hedge funds, other accredited investors, (equity) crowdfunding platforms). It would be one thing if they came and left as a result of a (near) zero sum game. But they’re here to stay. Here’s a mini case study. Even after the 2018 drop in Bitcoin, venture investors are still bullish on its potential. In fact, there are now more and more specialized funds to invest in cryptocurrency and blockchain technology. Last year, a16z, one of the largest and trendsetting VC players, switched from a VC to an RIA (registered investment advisor), to broaden its scope into crypto/blockchain.

Great founders are scarce

“The only uncrowded market is great. There’s always a fucking market for great.”

– Tim Ferriss, podcaster, author, but also notably, an investor and advisor for companies, like Facebook, Uber, Automattic and more

Even if founders now have the tools to do so, it doesn’t mean they’ll hit their ambitious milestones. For VCs, it only gets harder to discern the signal from the noise. Fundamentally, there’s a significant knowledge delta – a permutation of misinformation and resource misallocation – in the market between founders and investors, and between average founders and great founders.

The Culinary Analogy

Here’s an analogy. 30 years prior, food media was still nascent. Food Network had yet to be founded in 1993. The average cook resorted to grandma’s recipe (and maybe also Cory’s from across the street). There was quite a bit of variability into the quality of most home-cooked dishes. And most professional chefs were characteristically male. Fast forward to now, food media has become more prevalent in society. I can jump on to Food Network or YouTube any time to learn recipes and cooking tips. Recipes are easily searchable online. Pro chefs, like Gordon Ramsay, Thomas Keller, and Alice Waters, teach full courses on Masterclass, covering every range of the culinary arts.

Photo by Brooke Lark on Unsplash

Has it made the average cook more knowledgeable? Yes. I have friends who are talking about how long a meat should sous vide for before searing or the ratio of egg whites to egg yolks in pasta. Not gonna lie; I love it! I’ll probably end up posting a post soon on what I learned from culinary mentors, friends, and myself soon.

Is there still a disparity between the average cook and a world-class chef? Hell ya! Realistically I won’t ever amount to Wolfgang Puck or Grant Achatz, but I do know that I shouldn’t deep fry with extra virgin olive oil (EVOO) ’cause of its low smoke point.

Great businesses are scarcer

The same is true for entrepreneurship. There are definitely more startups out there, but there hasn’t been a significant shift in the number of great startups. And the increase in business tools has arguably increased the difficulty to find business/product defensibility. It’s leveled the playing field and, simultaneously, raised the bar. So yes, it’s easier to start a business; it’s much harder to retain and scale a business.

It’s no longer enough to have an open/closed beta with just an MVP. What startups need now is an MLP (minimum lovable product). Let’s take the consumer app market as an example.

The Consumer App Conundrum

Acquiring consumers has gotten comparatively easier. Paid growth, virality, and SEO tactics are scalable with capital. More and more of the population have been conditioned to notice and try new products and trends, partly as a function of the influencer economy. But retaining them is a different story.

So, consumers have become:

  1. More expensive to acquire than ever before. Not only are customer acquisition costs (CAC) increasing, with smaller lifetime values (LTV), but your biggest competitors are often not directly in your sector. Netflix and YouTube has created a culture of binge-watching that previously never existed. And since every person has a finite 24 hours in a day, your startup growth is directly cutting into another business’s market share on a consumer’s time.
  2. And, harder to retain. It’s great that there’s a wide range of consumer apps out there right now. The App Store and Play Store are more populated than they’ve ever been. But churn has also higher now than I’ve seen before. Although adoption curves have been climbing, reactivation and engagement curves often fall short of expectations, while inactive curves in most startups climb sooner than anticipated. Many early stage ventures I see have decent total account numbers (10-30K, depending on the stage), but a mere 10-15% DAU/MAU (assuming this is a core metric). In fact, many consumers don’t even use the app they downloaded on Day 2.

Luckily, this whole startup battlefield works in favor of consumers. More competition, better features, better prices. 🙂

So… what happens now?

It comes down to two main questions for early-stage founders:

  1. Do you have a predictable/sensible plan to your next milestone? To scalability?
    • Are you optimizing for adoption, as well as retention and engagement?
      • With so many tools for acquisition hacks, growth is relatively easy to capture. Retention and engagement aren’t. And in engagement, outside of purely measuring for frequency (i.e. DAU/MAU), are you also measuring on time spent with each product interaction?
    • How are you going to capture network effects? What’s sticky?
      • Viral loops occur when there’s already a baseline of engagement. So how do you meaningfully optimize for engagement?
    • From a bottom-up approach (rather than top-down by taking percentages of the larger market), how are you going to convert your customers?
    • How do you measure product-market fit?
  2. What meaningful metric are you measuring/optimizing?
    • Why is it important?
    • What do you know (that makes money) that everyone else is either overlooking or severely underestimating?
    • What are you optimizing for that others’ (especially your biggest competitors) cannot?
      • Every business optimizes for certain metrics. That have a set budget used to optimize for those metrics. And because of that, they are unable to prioritize optimizing others. So, can you measure it better in a way that’ll hold off competition until you reach network effects/virality?

Building a scalable business is definitely harder. And to become the 10 startups a year that really matter is even more so. By the numbers, less likely than lightning striking you. In my opinion, that just makes trying to find your secret sauce all the more exciting!

If you think you got it or are close to getting it, I’d love to chat!

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Part-time vs. Full-time Founders

Over the weekend, my friend and I were chatting about the next steps in her career. After spending quite some time ironing out a startup idea she wants to pursue, she was at a crossroads. Should she leave her 9-to-5 and pursue this idea full-time, or should she continue to test out her idea and keep her full-time job?

Due to my involvement with the 1517 Fund and since some of my good friends happen to be college dropouts, I spend quite a bit of time with folks who have or are thinking about pursuing their startup business after dropping out. This is no less true with 9-to-5ers. And some who are still the sole breadwinner of their family. Don’t get me wrong. I love the attention, social passion, literature and discourse around entrepreneurship. But I think many people are jumping the gun.

Ten years back, admittedly off of the 2008 crisis, the conversations were entirely different. When I ask my younger cousins or my friends’ younger siblings, “what do you want to be when you grow up?” They say things like “run my own business”, “be a YouTuber”, and most surprisingly, “be a freelancer”. From 12-yr olds, it’s impressive that freelancing is already part of their vocabulary. It’s an astounding heuristic for how far the gig economy has come.

Moreover, media has also built this narrative championing the college dropout. Steve Jobs and Apple. Bill Gates and Microsoft. And, Mark Zuckerberg and Facebook. There’s nothing wrong in leaving your former occupation or education to start something new. But not before you have a solid proof of concept, or at least external validation beyond your friends, family and co-workers. After all, Mark Zuckerberg left Harvard not to start Facebook, but because Facebook was already taking off.

Honing the Idea

The inherent nature of entrepreneurship is risk. As an entrepreneur (and as an investor), the goal should always be to de-risk your venture – to make calculated bets. To cap your downside.

Marc Benioff started his idea of a platform-as-a-service in March 1999. Before Marc Benioff took his idea of SaaS full-time, he spent time at Oracle with his mentor, Larry Ellison, honing this thesis and business idea. When he was finally ready 4 months later, he left on good terms. Those terms were put to the test, when in Salesforce’s early days, VCs were shy to put in their dollar on the cap table. But, his relationship he had built with Larry ended up giving him the runway he needed to build his team and product.

Something that’s, unfortunately, rarely talked about in Silicon Valley and the world of startups is patience. We’ve gotten used to hearing “move fast and break things”. Many founders are taught to give themselves a 10-20% margin of error. What started off as a valuable heuristic grew into an increase in quantity of experiments, but decrease in quality of experiments. Founders were throwing a barrage of punches, where many carried no weight behind them. No time spent contemplating why the punch didn’t hit its mark. And subsequently, founders building on the frontlines of revolution fight to be the first to market, but not first to product-market fit. Founders fight hell or high water to launch their MVP, but not an MLP, as Jiaona Zhang of WeWork puts it.

In the words of the one who pioneered the idea of platform-as-a-service,

The more transformative your idea is, the more patience you’ll need to make it happen.”

– Marc Benioff

As one who sits on the other side of the table, our job is to help founders ask more precise questions – and often, the tough questions. We act more as godmothers and godfathers of you and your babies, but we can’t do the job for you.

The “Tough” Questions

To early founders, aspiring founders, and my friends at the crossroads, here is my playbook:

  • What partnerships can/will make it easier for you to go-to-market? To product-market fit? To scalability?
  • What questions can you ask to better test product feasibility?
  • How can you partner with people to ask (and test) better questions?
  • What is your calculus that’ll help you systematically test your assumptions?
  • Do you have enough cash flow to sustain you (and your dependents) for the next 2 years to test these assumptions?

Simultaneously, it’s also to important to consider the flip side:

  • What partnerships (or lack thereof) make your bets more risky?
  • How can you limit them? Eliminate them?

And in sum, these questions will help you map out:

At this point in your career, does part-time or full-time help you better optimize yourself for reaching my next milestone?

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An Innovator’s Inspiration

Photo by Skye Studios on Unsplash

Creativity.

I have a love-hate relationship with that word. On one hand, I love and seek to learn from creative souls. It’s a trait that I seriously respect in individuals, regardless of industry, profession, or background. On the other hand, it’s rather amorphous. What’s creative to me may not be creative to you. We are bounded by the parameters of our experiences and what we, as individuals, are exposed to.

So, where do innovators draw inspiration?

Over the years, I’ve seen inspiration stem from three main frameworks:

  • The flow from art;
  • Margins;
  • And, what people dislike.

The Flow from Art

I seem to find that the data largely (with a few outliers) points towards the following:

Art precedes science. Science precedes tech. Tech precedes business. Business precedes law.

Art is bounded only by one’s imagination. Science, which draws inspiration from art, is limited by our physical universe and the fundamental laws. And, tech rides on the coattails of science, restricted by the patterns recognized in our universe by scientists before them. Similarly, business can only optimize existing technology. Following suit, regulations and legal practice can only debate and prevent ramifications that have turned from hypothesis to reality.

On one end of the spectrum, fiction has driven innovation on the fundamental, scientific front. Scientists have tried to make the impossible – fiction, superstition, assumptions, and imagination – possible. On the other end, the legal and regulatory space has empirically lagged behind business innovation. From autonomous driving to the shared economy to video games, a regulatory emphasis came only after incidents occurred. I’m a huge proponent of founders becoming self-regulatory. But that is a discussion for another day.

Margins

As Jeff Bezos famously said:

“Your margin is my opportunity.”

In the lens of a businessperson, profits exist on the margins. In a fully saturated market, as we learned in economics class, perfect competition will squeeze out profits. That margin can be delta between human perfection and imperfection. It can be the difference between a naive and sophisticated individual. It can also be the blind spots between a self-awareness and ignorance.

The good news (and bad news?) is that humans aren’t rational. As much as we try to be, we’re not. We repeat the same mistakes. After all, that’s where our favorite stories come from – the fact that we’re imperfect. If we were rational, our friendly neighborhood kid from Queens wouldn’t have to struggle with identity. Or, Skinner, the head chef at Auguste Gusteau’s restaurant, wouldn’t be out to exterminate my favorite rat chef.

From a nonfictional front, if we were rational, gambling, the lottery, therapy, and more wouldn’t exist. In fact, there’s a whole industry that capitalizes on human imperfection – insurance. We choose to reach for that last cookie when we know a healthier diet with less sugar is better for us (I’m guilty as well). We set New Year’s resolutions to work out more, but regress to our couch norm after the first month. Walter Mischel famously conducted The Marshmallow Experiment. When given the option to wait 15 minutes to double their treats, many children opted for immediate gratification.

There would be way fewer founders if they were rational. I mean, come on, the numbers work against them. 90% of startups fail. So, from a VC’s perspective, we have to ask ourselves:

What’s is the underlying notion that makes this product work?

What is that innate theme in human or societal development that won’t disappear anytime soon? What factors produce such a trend? And what margin is it taking advantage of? Uber was made possible with the evolution of smartphone and faster data. As more data were archived online, Google became a reality because of the internet and browser. Two current examples of underlying notions include:

  • Audio, including, but not limited to, podcasts and audiobooks, is the new form of content consumption. Not only does it free up consumers’ hands and eyes up, audio content is often easier to digest. The spoken word has been around millennia, whereas print is fairly new invention. Emotions and sarcasm is often easier to relay via audio than via print. So, what else is possible?
  • With growing consumer sentiment against traditional social media, like Facebook, Twitter, and Instagram, there is a shift to social experiences surrounding active participation. Sarah Tavel writes a great piece on this. Examples include Discord, Medium, TikTok, and user-generated content (UGC) in video games, like mods and in-game skins. Many of the traditional social media platforms leave users with a more negative passive experience, where they feel a sense of FOMO (fear of missing out). Through active participation, users can be a part of the conversation, rather than watch from the sidelines.

What do you dislike?

Speaking of negative experiences, aversion is a strong motivating emotion humans have. Like prospect theory illustrates, loss invokes a stronger response than gains. It also happens to be one of the reasons why I probe how obsessed a founder is about a certain problem.

In a recent interview with Andrew “Kappy” Kaplan, host of the podcast, Beyond the Plate, Grant Achatz, legendary chef, talks briefly about how he drew inspiration from his daughter’s dislike of cheese, yet she still ate pizza and grilled cheese sandwiches. Similarly, when his guests at Alinea didn’t like sea urchin, he thought about the ‘why’ and if he could circumvent their aversion by playing with various variables, including iodine concentration.

So, what do you dislike (with a passion)? What about the people around you? And can you figure out a way to change or eliminate that frustration? Take some time through the idea maze.

In closing

Ideas come in all shapes and sizes. Some may be more obvious than others. Some may snowball into a best-selling one. Although I’ve shared the three most common frameworks that I’ve personally generated and seen others find inspiration, it is, of course, not the only ways to exercise your creative muscle. In fact, the first step into being more “creative” is being cognizant about everything around you.

Two years ago, one of my former professors recommended I start ‘idea-journaling’ every day. Since I’ve started, I began noticing more and more stimuli from my surroundings, conversations and frustrations.

It may be a start, but it’s by no means an end. Stay curious.

Photo Credit: Ariel Zhang @yuzhu.zhang
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The Different Types of Risk a VC Evaluates

Photo by trail on Unsplash

Founders take on many different types of risk when creating a business. Subsequently, investors constantly put founders and their businesses under scrutiny using risk as a benchmark. In broad terms, in my experience, they largely fall under two categories: execution risk and market risk.

Finding Product-Market Fit and “Idea-Market Fit”
Where I first introduced the dichotomy of market and execution risk in the frame of idea-market fit.

Some Background

Contrary to popular belief, VCs are some of the most risk-averse people that I know. As an investor, the two goals are to:

  1. Take calculated bets, via an investment thesis and diligence;
  2. And de-risk each investment as much as possible.

From private equity to growth equity to venture capital, more and more investors are writing ‘discovery checks.’ Typically, funds write checks that are 2-4% of their fund size. For example, $100M fund usually write $2-4M initial checks. Yet, more and more investors are writing increasingly smaller check sizes (0.1-0.5% fund size). In the $100M fund example, that’s $100-500K checks. This result is a function of FOMO (fear of missing out), as well as a proving grounds for founders before the fund’s partners put in their core dollar. Admittedly, this upstream effect does lead to:

  • Less diligence before checks are written (closing within 48-72 hours on the extreme end, and inevitably, more buyer’s remorse);
  • Less bandwidth allotted per portfolio startup (even less for startups given discovery checks);
  • And, inflated rounds (and therefore, inflated startup valuations).

The Risks

The risks for a startup investor are fairly obvious, and so are the rewards. Effectively, an early-stage investor is betting millions of dollars on a stranger’s claim. But not all risks are the same.

In the eyes of a VC, an execution risk is categorically less risky than a market risk. Furthermore, even within the category of execution, a product risk is usually less risky than a team risk.

Execution Risk

Why are more and more early-stage investors defaulting to enterprise over consumer startups?

Two reasons.

  1. Enterprise startups often run on a SaaS (software-as-service) subscription business model. There will always be recurring revenue, assuming the product makes sense. For an investor, that’s foreseeable ROI.
  2. It’s an execution risk, not a market risk. Often times, an enterprise tech startup is the culmination of existing frustrations prevalent in the respective industry already. And therefore, have reasonably stable distribution channels and go-to-market strategies.

Eric Feng, formerly at Kleiner Perkins, now at Facebook, used Y Combinator’s data set at the end of last year to illustrate the consumer-to-enterprise shift.

Using discovery checks, and playing pre-core business, VCs can evaluate team risk. Between the discovery check and their usual ‘core checks’, VCs can also test their initial hypotheses on their founders.

As a startup grows, especially after realizing product-market fit, market risk becomes more of a product risk. Best illustrated by market share, product risk is when a product fails to meet the expectations of their (target) customers. It can be evaluated via a permutation of key metrics, like unit economics, NPS, retention and churn rate. There is an element of technological risk early on in the startup lifecycle for deep tech ventures, but admittedly, it’s not a vertical I have my finger on the pulse for and can share insight into.

Given that VCs are either ex-operators or have seen a breadth of startup life-cycles, VCs can best use their experience to mitigate a startup’s execution risk.

Market Risk

Market risk requires a prediction of human/market behavior. And unfortunately, the vast majority of investors can predict about the constant evolution of human behavior as well as a founder can. What does that mean? Founders and VCs are walking hand-in-hand to gain market experience. It, quite excitingly, is an innovator’s Rubrik’s cube to solve.

Market risk is frequently attributed to consumer tech products. In an increasing proliferation of consumer startups, consumers have become more expensive to acquire and harder to retain. Distribution channels change frequently and are determined by political, economic, technological, and social trends.

In Closing

Every VC specializes in tackling a certain kind of risk. But founders must quickly adapt, prioritize, and tackle all the above risks at some point in the founding journey. As Reid Hoffman, co-founder of LinkedIn, famously said:

“An entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”

Happy hunting!

Posted on

Being Nice vs. Running a Great Business

Photo by Matteo Vistocco on Unsplash

While on my way to see a friend the other day, instead of cancelling, our Uber Pool driver decided to wait for the third rider. After a few exchanges of texts and calls, to the vocally evident dismay of the rider before me, we ended up waiting eight minutes. Therefore, delaying the rest of our arrival times by that same margin. In the ensuing silence that followed, I spent a little time thinking about the fascinating dichotomy between being nice and running a great business.

At the risk of receiving two low-star ratings, our driver opted to be nice and wait for the potential one five-star rating. To his credit, the third rider was incredibly grateful for his patience. In an alternate universe, he would have chosen to cancel the last rider’s request after waiting about two minutes.

The Examples

Social stereotypes might suggest that being nice and running a great business are two polar opposites. The portrayals of Mark Zuckerberg, in The Social Network, and Steve Jobs, in every biographical movie of him, only further perpetuate this motif. But, the truth is they’re not mutually exclusive. Many of the best businesses out there, like TOMS and Salesforce, are purpose-driven and spread positive impact. In the past few years, it should and has been, for many, a priority for building a brand.

Driving positive social impact is beginning to gain traction among a class of notoriously financially-driven individuals: venture investors. Although impact investing is one way, prominent VCs, like Felicis Ventures and Brad Feld, have also committed to founder’s mental health.

The marriage of being nice and running a great business comes in two parts:

  • Transparent and honest communication with your customers,
  • And, follow-through on promises and feedback implementation.

After all, it’s a collaborative effort.

One of my favorite examples is Digital Extremes – the developer for one of the most popular games on Steam, Warframe. Like many other businesses, they donate regularly to charities – from leukemia awareness to children’s health to most recently, the Australian wildfire. But, unlike many others, they engage their users every week through their stellar community management team. In fact, their community director, Rebecca Ford, was recognized in the 30 Under 30 Forbes list this year. Through a weekly permutation of developer streams, forum posts/polls, and social media content, they listen and engage with feedback. And through weekly hotfixes and content updates, which already speaks volumes in the game industry, they incorporate that feedback.

Don’t just take my word for it. Their subreddit serves as an example of one of the most positive and honest communities I’ve ever seen.

In Closing

Of course, no business is perfect. And the business may not always agree with the consumer’s thoughts. But, through transparent communication, radically candor (thank you to the brilliant Kim Scott), and following through, you can be nice and run a great business.

Instead of staying silent, if our Uber driver had asked us if we were in a hurry and agreed on a time limit to how long we’d wait (maybe even offered us a snack during the wait, but that might be stretching it), he might have gotten three five-star reviews.

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