June 2011 Archives

I bugged a friend of mine at Google and instantly got up and running on the new kid on the block, Google+. Of course, now I'm much cooler than you since I got in and you're not haha - alas, I'm sure that coolness is short-lived.

I launched into Google+ with little expectations. As soon as I got in, I was presented with a rather overwhelming page - circles? streams? friends? a bunch of tweet-like shares sitting there in my stream already - pictures also. Talk about information overload.

So I poked around. Trying to invite some other friends was really tough. Why bury that in the circles function? And why do I need to add their name? Can't I just send them an invite? After all, I want all my friends on the system.

But oh wait, these circles allow me to categorize my connections. The drag-drop UI is pretty slick, but geez I just ended up dragging them all into my Friends circle. It's too hard to categorize these people. And I'm pretty particular with who I add to my Facebook friends in any case - but even that has reached unmanageable numbers (or so I think: I just went to Facebook to look up how many friends I have and I can't seem to figure it out! I've got SO many that Facebook can't even count them up for me LOL).

Man, it seems that Google threw the kitchen sink in here. No MVP for them! Or actually, the M stands for Maximal instead of Minimum. So maybe MVP still applies! It will take me a few days to navigate around and figure this out. Somebody tagged me in a picture so many of the usual Facebookian functions are found here.

The stream is fun - seeing pictures auto displayed there is pretty cool, although it wrecks the stream UI a bit so scanning is tougher than just lines of text on twitter. Still, Twitter is the default real time stream of choice due to momentum.

Which brings me back to this point. Big, established internet companies have a huge advantage when launching new products in the area of distribution. In the old days at Yahoo!, we used to call this the "firehose" of users which we can direct to any property we launched. We merely had to create and launch a new site, and then if we could get permission to get it listed on the Yahoo! homepage, it would instantly get traffic. In fact, it didn't matter if the site sucked or not; merely putting it on the Yahoo! homepage guaranteed a steady stream of users who clicked on the link and visited the site. In fact, many business units in the past dangerously created revenue projections on traffic patterns generated by the presence of that link on the Yahoo! homepage, which suddenly were destroyed when somebody decided that the link to that site shouldn't be on there any more, or moved to a less advantageous position on the page like below the fold.

Today, getting users is tough - tougher than you can imagine. Which is really why only someone like Google could even think about launching something that competes not only with Facebook but also with Twitter at the same time, especially given the dominance that these two sites have among the userbase. A company which does not have an existing userbase with which to firehose a new service will stand little chance of gaining any sort of traction, like startups for example.

But is it enough? Firehoses are super important, but you have to firehose the right thing or else once the firehose stops, then traffic dies off too, like in my Yahoo! example. Or in some cases, even firehosing isn't enough to generate traction.

After a few minutes of playing around, it seems that the real time aspect dominates the initial views. Then, I can group my connections into circles and I can share posts to certain or all circles. And on top of that, there are some nice UI/UX enhancements and arguably there are some differences in UX between the two even as a lot of the UX is similar. I'm not sure Google+ has a better UX than Facebook or Twitter though; at the moment, they seem very similar and there are things I like more about Facebook and Twitter as I like some of the new elements in Google+. So I can say for now that I think that there really isn't some dominant aspect of Google+ that would attract me to switch and use Google+ more than my old services of Facebook and Twitter.

Therefore, if Google+ competes head to head with Twitter and Facebook, is the firehose enough to win, along with some incremental enhancements in the UX?

First, as I've often talked about, incremental improvement is simply not enough to cause switching (see condition 3 in What I Really Mean By "Souring on Internet-Only Startups"). The state of Google+ doesn't seem to be all that much better.

Granted, there may be better integration with Google services - many of us have often noted that email is simply a representation of a social network already but nobody has really exploited this fact to great effect. Certainly, a ton of people have Google mail services so there is an enormous base to draw from. Perhaps the inertia of early adopters may draw enough people in to start using Google+ to make it survive. Still, I think it is going to be hard given that Facebook and Twitter dominate social networking. To make it more likely, I think Google+ needs some exponential improvement over Facebook and Twitter but I don't see that yet; perhaps there will be something in the future.

Another potential competitive advantage that could be exploited is branding. Facebook used to be a cool brand but I'm not so sure right now - I think it's more utility now. Twitter is more recently cool and still there is more cool brand value than Facebook; it's also moving to utility now that people are exploring its news and communication delivery capabilities. But would you consider being part of a Google social network a must-have, enhancing your own coolness by being on it?

The firehose of a highly trafficked web service like Google is an incredible asset and brought to bear on a truly transformative, useful, and/or cool web service, it can accelerate discovery and adoption and vault it into the mainstream. But point that firehose at something less than that and the service will die once you take that firehose away. The jury is still out on whether Google+ can be more than just on parity with its competitors, Facebook and Twitter. If it doesn't, what waste of a perfectly good firehose...

A Case for Strong Entrepreneurs AND Great Ideas

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I was on a panel at Fundingpost's, Silicon Valley VC and Angel Conference this last Thursday and once again the topic of how important the startup's idea was, relative to other factors, in an investor's decision process to invest.

Overwhelmingly, the panelists' response that super smart and entrepreneurial people were much more important at early stage. This was because of the fact that almost always their initial idea was going to be wrong, or needed to be adjusted, and that someone needed to be smart and adaptable enough to pivot their activities into a viable entrepreneurial direction. So like war, the initial plan seldom survives contact with the enemy, or the marketplace.

However, I think I was one of two folks who said that we bet on superior people that were ALSO working on a great idea.

There are numerous documented cases of investors who bet almost solely on rockstar entrepreneurs and will invest in a team that has genius credentials, even if the idea is underdeveloped. Why they would execute such a strategy:

1. Their past experience has shown that smart entrepreneurs has been more predictive of a successful outcome, but relatively independent of the idea they are working on or where they started.

2. They have enough capital to spread their bets among many smart teams and be less sensitive to exactly how good their initial idea is.

3. Given enough capital, a strong team/entrepreneur has enough runway to take a less developed idea and iterate until it is a strong idea. So those who qualify for item 2 above will readily support strong teams/entrepreneurs because the initial capital outlay is large for the startup, but still miniscule relative to their entire fund.

3. In today's world, there is a huge movement to create and nurture entrepreneurs. Joining up with this effort aligns with their own thinking that more entrepreneurism is good for the world, as well as generates positive public relations with the outside world on these efforts. Thus, to support rockstar entrepreneurs at early stage is a positive thing for them and the world.

Many big names are executing this kind of strategy right now. If they are doing well, then shouldn't I also worry less about the idea and just bet on super strong teams, even if their idea is relatively weak?

Why I look for strong entrepreneurs AND great ideas:

1. I have met strong teams but with underdeveloped ideas and walked away from investing. This is a personal choice, where I like to support them in their direction and especially if I have experience or an affinity for the direction they took. If the direction they take is very fuzzy, then I feel less of a connection with their project.

2. Personal experience plays out here, but I have seen many super smart people fail at their ideas. So for me, it's not enough to just bet on rockstars and be more lax about the idea. I want to maximize my odds of success by finding strong entrepreneurs who are at least starting with some breakthrough idea. If they do not start with a breakthrough idea, then it is just as possible that they will pivot their way to one as it is to pivot to nowhere.

3. Now that I am at Launch Capital, I have more capital to deploy but still it is not at the level of other funds who have much deeper pockets. So there is a practical strategic consideration I need to make in the face of what Launch Capital can bring to the table. It is not possible for us to make the number of bets into smart people as others are making, and therefore I must be more discerning in my decision process.

4. Today, we are seeing an explosion of entrepreneurism. People are graduating from top universities and taking their genius-ness out to Silicon Valley to create a startup. However, this has generated what I call the MIT Problem for Startups where *every* team I meet is super-strong and smart. Even those in the valley who execute the invest in strong teams strategy can't invest in everyone. So what differentiates you from the next team? Not everyone from MIT has what it really takes to become an entrepreneur, even if you have genius intelligence. One of those differentiating factors is your idea, especially if it is a superior one.

In times past when entrepreneurism wasn't so popular, a superior team would definitely have an edge over an average team since there weren't that many of them. But I think in today's world, there are too many people with superior credentials to pick from and it's not possible for all of them to succeed. So there needs to be some other aspect which differentiates them from others - hence the presence of a superior idea.

5. Given that we are seeing not only an explosion of innovation, but an explosion of me-too ideas, many strong teams are working on the same or similar ideas. Even strong teams are not enough to dominate a marketplace if every team (who are also strong) is going for the same customer with a similar product. The chance is very great that you will all divide up the market and end up with smaller pieces of the whole no matter how much of a genius you are.

I don't want to invest in a strong team working on a me-too product, or an incremental product, or building a product in a super-crowded marketplace of other similar or "blurry" products. I want a strong team working in an area that is game changing, exponentially different/better, or simply has not yet been worked on yet.

6. At early stage, you don't have much time to operate. Your clock is ticking as your bank account runs down and you better have some sort of traction for your product/service before it does. Thus, if you start with a weak idea, you may need a lot of time to iterate to find a viable idea to turn into a business. But you're early stage - you don't have time! If you happen to start with a superior idea, then you're at least pointing in a direction that has a lot of positive factors for success; undeveloped ideas are much less certain and I've seen a lot of people end up with nothing as their bank accounts ran out, no matter how smart they were.

It's all about increasing my chances for creating a good outcome for my investment and time. Strong entrepreneurs are a prerequisite for success, but in the crowded startup world of today, it's not enough to lessen the impact of weaker idea they are working on. If there are so many ideas being worked on, then I can wait for the right smart/superior team to come along who is also working on a superior idea. Then my probability for getting a great outcome for my investment is much higher than without a superior idea.

Footnote: In thinking further, it is obvious that even those who invest in super strong entrepreneurs are still looking at their ideas. Even though they are writing about the fact that it's all about super smart entrepreneurs, they are still banking on the idea in their decision process because otherwise more people would get funded. Very rarely do entrepreneurs get funding to work on really weak, undeveloped ideas; usually these people are repeat entrepreneurs with a stellar track record and with a prior relationship with the funding source.

Do Not Let History's Mistakes Repeat Themselves

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Charlie O'Donnell of First Round's NYC team recently wrote a very important post entitled, Ignore startup history at your peril. It was so good and relevant to today that I'm adding it to my list in my post, If We Meet, I Will Ask You....

To summarize his post, he basically loves to ask startup founders why haven't the previous entrepreneurs in his space succeeded and how did they fail. Given today's proliferation of clones of every idea out there, or even near clones, it is hard not to be able to find competitors in the near past who have tried your idea and failed. Also, given founders posting a lot about their mistakes, and Techcrunch, et. al. documenting the closure of all these startups, it would seem relatively straightforward to dig up reasons why a lot of similar startups failed. Or, our entrepreneur networks are pretty darn small now; it would not be hard to go and simply ask around and thus find out about any startup out there.

Why would you want to do this? Well, it's to not repeat the mistakes of the past. And if you don't go figure out why someone else failed at what you're working on now, the likelihood of you flailing through mistakes made by someone else is pretty high. I totally agree with Charlie wanting entrepreneurs to not only be experts in their respective spaces, but also students of the history of past startups who have tried and failed, and, by the way, also succeeded.

Many thanks to Charlie for bringing this up and I'm adding it to my list to ask entrepreneurs during pitches.

Yesterday I had a conversation with my managing director about my investing pace. It had seemed to both of us separately that I had a lot going on, and that I was potentially going to invest in what seemed to be a large amount of startups in a short amount of time. After all, this is my 11th week at Launch Capital - barely 3 months in!

While my pace was blistering by some measures, after some reflection it wasn't so bad after all. Some thoughts on this pace:

1. We looked at the other directors at LC and noted that for some reason, deals seem to come in waves and bursts. Sometimes the bursts can be planned for, like after a Ycombinator or Techstars Demo Day. Other waves come with no warning whatsoever. Or some deals drag on and then run into other more faster moving, hot deals in the future.

And there are long periods of calm where there seems to be no attractive deals for a while. It's in these times I take a breather, but also wonder if I'm doing something wrong that deals have dried up.

2. We talked about adjusting the pace. This could be raising our bar, although I was already only looking for startups with very high potential (see The $100,000,000 Question) and not those whose trajectory was more obviously a smaller exit. We could shift our bar, like being really focused only on startups I had personal interest in. However, we noted that we didn't want to potentially overlook an opportunity simply because it wasn't in some area of determined focus.

3. I also noted that although we had set a goal of investing in 7-10 seed startups this year, the calendar year was problematic to review pace. This is because the second half of the year has 3 dead months in it for fund raising: August - when the investment community all go on vacation for the summer; November/December - when we all dive into the three holiday whammy starting with Thanksgiving, and then it's Hanukkah and Christmas.

Thus, in any given calendar year, there are only really 9 months where rounds have the best chance to be closed. Even though in reality not all investors go on vacation, the problem is that many venture funds operate via partnerships. Often the entire partnership needs to agree on an investment before it takes place; all it can take is enough of the partnership to be on vacation and that can mean that a round can't close with that fund. So investment pace can be raised during those 9 active months as those startups who happen to be fund raising then have a much higher probability of closing their rounds.

4. As mentioned previously, some funding rounds can drag on for months before they close. Nobody ever plans on that, but sometimes it takes time to round up investors to believe in a startup enough to commit. Given my experience, it can be deceptive that I am working on many startups at once because their actual funding rounds may not close until months later, as the entrepreneur tries to find a lead somewhere.

While I talk about my own investment pacing and the environmental factors that affect it, I think this has important implications for startups and the timing of their fund raising.

In the last few years of angel investing, I've observed that startups who start fund raising in the summer are at higher risk to not closing their rounds before the end of the year, due to the 3 down months in the latter part of each year. Starting fund raising in September is even worse because you really have to finalize everything in 2 months; if you start drifting into November, then people begin go on vacation and it's harder to find your investors (and their money). Inevitably, many of these startups drift into January and finally are able to close their rounds.

This is not so true for startups who close rounds with all angels. Individual investors are not beholden to a partnership and can make decisions in more flexible timeframes.

The 3 down months in the latter part of the year also affect those who are looking for their next rounds. Remember that fund raising in the second half of the year really only means you have 3 months to work in - It can be particularly problematic if your burn rate and plan show you running out of money in November or December!

Remember that if you need to raise money, you need to do so before your money runs out. Sometimes people say that the rule of thumb is to start looking for your next round 4-6 months before your current funds run out. However, nobody can predict how long your fund raise will take. Depending on investor interest and your progress, you may raise in a few weeks; or you may need a few more months in if interest is low or your progress isn't substantial. In tough economic times you may find that it takes an extraordinarily long time to raise a next round; you may even need to go asking for a bridge to carry you through what inevitably is the new year when fund raising probability goes up again.

My advice to startups is - no matter what, try to plan for your funds to run to the middle of the calendar year, which has you raising your next round in January. If you need to raise money in the second half of the year, you're putting your venture at much higher risk than otherwise.

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