And that favoritism usually results in more money, more introductions, more involvement, in fact, more everything, which results in substantially more innovation.
The data showed that companies tied to a competitor by at least one VC firm in common were indeed less innovative than those unencumbered by such ties; in fact, they were 30 percent less likely to introduce a new product in any given year.
It gets worse.
The UNfavored startups were 55 percent less likely to introduce a product.
Proximity mattered, too; those farther away from a shared investor were 56 percent less likely to introduce a new product.
What if your VC is part of the “golden circle?”
Companies tied to VCs in the top 25 percent of reputation indexes were significantly less likely to introduce new products in any given year.
And I’m willing to bet similar stats apply to super angels, regular angels, incubators and the rest of the funding world.
Arcade City Austin / Request a Ride is a Facebook group that has grown rapidly in the weeks following Uber’s and Lyft’s departures. The group, which requires approval to join, is currently populated by more than 33,000 members who use the group to find rides to and from their destinations.
Beyond that effort, there is Zipcar, getme, Fare, Fasten, Wingz, zTrip, RideAustin and InstaRyde riding into town (if not already there) and all willingly complying with the required fingerprint background check.
“So I say we are going to IPO as late as humanly possible. It’ll be one day before my employees and significant others come to my office with pitchforks and torches. We will IPO the day before that. Do you get it?”
Graham discounts the world, the people in it and innovation itself.
Kalanick plans Uber’s IPO with no consideration of the economy, competitors or the speed at which things change.
Graham’s words have already come back to bite him; Kalanick’s probably will, too.
I find it forever fascinating to try and decipher the minds behind the creativity that stretches the boundaries and adds unique beauty to normal, real-world stuff. Here are two wonderful examples.
It takes a rare mindset to see a utilitarian object, with its own shape and use, and turn it into completely different object with a totally different form and use. The beauty is found in the operational innovation, since each of the final forms looks totally normal.
Or the artist’s mind that takes something that’s been around for centuries and keeps it’s utilitarian properties, while changing it in ways so far beyond the normal decorative and stylistic features that it is almost unimaginable — except to that one mind.
Wouldn’t you love to share a meal (or a bottle of wine) and just talk? No agenda, no purpose, except to bask in the creativity that flows from a truly original mind?
For years, venture capitalists have been pushing hypergrowth over profits, at least though the initial phases of investment rounds. Investors told Lehmann to reinvest the company’s money in pushing more growth over building a sustainable business.
That advice didn’t go far with the Postmates CEO. (…) Lehmann argues that it’s the CEO’s fundamental job to have looked at the margins and made decisions early on.
“Companies that run for the last two years in hyper growth are now wondering how to make money.”
I completely agree — hypergrowth without a hope of unit economics that lead to profitability has always been a fool’s errand with precious few exceptions, and even those had their “come to Jesus” realization points that the investors were getting nervous and were anxious for at least a hope of a repeatable, profitable set of unit economics.
There has been a sense that pushing the bidding of sequential funding rounds at ever-increasing valuations would create a kind of de-facto “momentum” and crowd-out 2nd and 3rd and 4th place contenders, or at least amass a large enough war chest to drive pricing down as much as needed to push competitors out of the running (usually also by creating such a huge and dominant brand that customer acquisition in a noisy market is too expensive to make progress to catch up with the so-called leader).
This is ultimately as silly as the Texas and Miami and Las Vegas housing bubbles, that depended on “the next fool” to buy-in at a higher valuation, depending themselves on having a subsequent investor bail them out at a higher valuation, and so goes the escalator. The problem is, the escalator gets to the top at some point and there has to be a “destination” where value exists and with it, a hope of profitability.
The unsteady IPO market of last year and the continued bearishness of the IPO exit market this year has effectively called-out that “top of the escalator” and there are no more “next fools” (i.e. large enterprise buyers at the >$1 Bil level and no robust IPO appetite from capital market leaders that demand value and cash flow and a hope of profits).
So now, once again we are back to reality.
The great news about being back to reality is two-fold.
1) Sub-billion dollar valuations are no longer an “embarrassment” to VCs; and
2) Entrepreneurs can reasonably weigh a variety of capital structures that include bank and trade debt as well as investment equity and debt structures, all supported by revenue and that means free cash-flow.
With this in mind, the VCs and the investment community in general must start to become “reasonable,” because they are suddenly back in the traditional capital markets and will have to compete with other capital sources and structures for the hot deals.
Middle and nascent deals will have to become cash-flow generating, and for this reason they will also (wisely) become more reluctant to give up huge chunks of equity just to bring in working capital (at least not until the enterprise value pops to a higher tier by using bank debt, trade debt and other creative capital structures).
Savvy entrepreneurs and founding teams will also be less excited about creating an early and dramatic bump in valuation just to bank growth capital, because a down-round will likely wipe out a giant proportion of their equity. The giddy “we are a unicorn” has turned into “what happens in a down round?” reality check, that most people forgot about. Early venture investors have protected their downside with special preferred terms that founders and exec teams rarely consider or can demand. If this were real-estate, it might even start to look like over-aggressive venture investors that pump up valuations too early, only to have the market adjust to “reasonable” later, were “predatory.” It is an interesting parallel that will not be lost on founding teams, angel investors and early exec team members that hope to be rewarded via their equity stake.
The reticence to of many of the younger venture investors (those with fewer than 20 years of experience) having yet to bring in a 5X or 10X much less a Unicorn, to invest in early stage deals, is now balanced by the abundance of crowdfunding and syndicate fundraising at the seed and angel level. This is a great organic re-shaping of the investment and capital markets in favor of the early stage company and entrepreneur.
There is also a growing recognition that the early stage deals that do get picked up by venture investors have been in a long slow decline and “narrowing” of deals to known insiders and repeat successful (i.e. “brought a good exit to a venture fund’) founders. I think that this is largely common sense (bet on the horse that won the last race for you), and also based on the reality that it is a rare and elite breed of entrepreneur that can see an opportunity and execute a successful solution. That said, a close examination of the venture deals that have been funded in favor of known founders pales next to the stats behind the successful new ventures that have been founded by first time startup teams. The difference is largely that part of the value-add from the venture investors is the addition of those “experienced” startup executives onto the exec team as soon as the big money comes into play. Thus the risk of execution is somewhat reduced.
What does that mean to today’s startups? It means that the old concepts of cash-flow, repeatable and scalable selling and service delivery models, the idea of managing customer acquisition, retention and lifetime customer value, are again in vogue.
As they should have always been. While there will continue to be many good reasons for companies to temporarily sacrifice cash flow and profitability for raw user or customer growth, the days of “just get 1 million users and we’ll figure out how to make money later” are – at least for the time being, gone. And we celebrate that.
Unit economics always wins. This goes back to the days of “the lemonade stand” cash-flow exercise. It’s what built the world’s greatest capital markets. And it will always remain the best place to start. Water, sugar, lemons, cups and napkins. And a sign and a cardboard box. “How many cups of lemonade must we sell at what price to pay for the supplies, time and sign?” Simple. One does not need an MBA or to be a dropout PhD candidate to start with those basic principles.
In another parallel with the real estate (mortgage) market, today’s startup teams should be asking themselves the same questions that prudent investors will be asking them (kind of like the new mortgage market, where everyone has to go through “full documentation” to get a standard mortgage loan):
How can I make money? How can I do it at scale? What is my selling process and is it repeatable? Who will pay for my service or product and what will they pay, and why? How much money do I need in working capital to find my perfect product-market fit and establish the right selling model and price point/margin? What are the unit economics of my business? What drives retention and churn? What prevents others from copying me and disintermediating my base? Is there a brand value that creates loyalty, or is this market driven by other values and factors? What are my logical exits? Who are the logical acquirers? Is there a realistic IPO path?
Yes, we are back to reality. It sucks for some people. And that’s okay. Those people should get with the program or get out of the startup business. Disrupt and question everything. Be bold, revolutionary, even bombastic and disrespectful of the incumbents and status quo. But don’t ignore the fundamental rules of business that underly the path all companies must tread to go from small to large, and startup to profit and successful exit. After all is said and done, you have to make payroll. Sell to a customer a second time. Own a brand people love and trust.
Reality only sucks because it makes you work harder to win, and forces you to confront inconvenient tasks and difficult questions. Short cuts are nice but when they don’t work you end up falling off of a cliff. Better to work harder than run headlong at a cliff you can’t see coming.
Yesterday I described how I came to start my company Quant Price. Today is the story of what happened after that decision.
I first did the Founder Institute program that helps entrepreneurs create companies. They introduced many concepts that are hard for first time founders to grasp. Things of HUGE importance ranging from talking to potential customers to validate the idea to seeing how buying decisions are made.
There are many things that can make a startup fail. Each of these factors are risks. A successful startup has avoided each of these pitfalls in succession.
There is a step by step process to developing the idea and de-risking it. The founder Institute program helped me think through them.
One shortfall of the program was that it has a cookie cutter view to creating startups. It requires that everyone fit into a mold. This may not serve every startup well. I’d probably have taken it to completion if I were not “terminated” for having a hard time getting a sufficient number of video interviews.
Though to be rational, I’ve to admit that it’s also possible that I just have a very bad idea or am not really cut out for this. I may only know very late because “I’m drinking my own Kool-Aid”.
The risks are huge. There are a lot of things that matter to a startup being a success. There has to be value in the product. There has to be a way to reach a big chunk of the market. There has to be a way to convert all those gains into money. People have to believe in the dream and be willing to contribute for free for the duration that the cash flow doesn’t exist. It takes a lot to keep a startup together.
It was very hard to find my first customer. I didn’t even have my marketing material when I went to interview Katherine Krug the founder of Getbetterback.
Partially because I didn’t realize that I was supposed to bullshit my way through such meetings and, frankly, partially because I didn’t know how to bullshit about it if I had to.
Fortunately, Katherine is one of those people who tests things like prices. I think she was lucky to not have a mentor who had a strong opinion about pricing. (I still can’t believe that people don’t test their prices.)
Katherine first did a price test with Optimizely. Unfortunately, Optimizely is not really geared to do price tests. Additionally, putting Optimizely code on your web page makes it load a lot slower for the end consumer. That itself reduces conversion rates.
It made me wonder if people don’t know or just don’t care about the impact this has on the browsing experience.
Optimizely targets conversion rates, so once Katherine was done with the test it told her how many people had converted to buy at different prices. Obviously at the higher price, fewer people converted.
But the real question was which price lead to better margins?
And was the test significant?
That is when she realized she needed Quant Price.
I salvaged the Optimizely results to guess what the next prices for the next test should be.
We used our pricing engine and did an A/B test. It turned out that seemingly identical prices $49 and $59 were over 26% different from a revenue perspective.
We also realized that changes to the web design and the holiday season could change the optimal price. So much so that at some point $69 was 22% better than $59 because of the Christmas buying spree.
Hidrate, my second client, was easier to find after we put up a video interview with Katherine.
With Hidrate, we seemed to run into some bad luck. The $59 price for them was identical to $49 from a profit perspective. But as luck would have it, they were running out of inventory. Now, at the $49 price they were burning through 45% more inventories to make the same amount of money as at $59.
Once we told them about it, they raise their price to $59 to save inventory. They kept their customers happier for longer AND made money to buy more inventories without losing the company to investors.
We did all this by using technology developed for finance. Quants in the financial industry are usually tasked with pricing securities worth trillions of dollars based on market data. There are multiple factors that affect the “fair” price of a security.
I learned how this valuable task of pricing can be automated incorporating available data.
Many companies now quote prices and sell exclusively online. Computers can be used to make pricing decisions based on price sensitivity of individual customers, business specific parameters, such as inventory availability and market conditions and the current season.
Airlines and Amazon already do this on a massive scale and are very profitable as a result.
SaaS companies and large-to-medium scale retail operations could be next in line.
Fortunately, our market is easily defined. We are looking to help companies with more than 300 distinct customers. This is desirable because with more data we can get statistical significance on more complex models.
We are looking to help SaaS companies that want better pricing models. For them, we have a solution that reduces churn and increases revenue at the same time !
To justify building a company-specific solution, we need to be able to service a pool of revenue of over 10M$/year.
Quant Price’s free app Qbot is available to smaller companies in the Shopify app store.
In order to make our technology more accessible we packaged it into APIs and apps, that help us expose this functionality to more companies.
After I got my Masters in Computer Science and Optimization from USC, I worked for banks for a while as a quant (people who do quantitative or mathematical stuff such as build complex models to evaluate financial securities, risk and reward).
Contrary to what most people would tell you about working for a bank, I found the work very interesting—not surprising, given my math background.
But much as much as I enjoyed my work, I was bitten by the entrepreneurial bug and wanted to do something original.
I’m an engineer at heart and I like inventing things that makes life better or improve what people are already doing.
Innovation seems to happen overwhelmingly in small to medium companies and then big companies usually buy the promising smaller ones.
Doing my own thing would also gave me the ability to try out new things at an amazing pace that makes the process of discovery a lot faster.
Initially I had the bright idea of trying to beat the banks at what they do best: price securities.
I invented a way of making models that could learn more from purchase data about pricing than conventional models do and put those models to work trying to outguess Wall Street computers.
Eventually, I realized that even though my algorithms were smart, the networks that were affordable to me were too slow to use this information for the strategy I developed.
Even though I could predict prices, I couldn’t get ahead of computers that were closer to the exchange to make the profitable trades.
I had to make a pivot or bet even bigger and buy access to the necessary networks.
I paused to think for a while and it occurred to me that the world is full of things that need to be priced.
So, why stick to the business of securities where so many quants and fast computers were concentrated in solving a problem with a lot of history?
Why not solve a Main Street problem?
I began looking for a niche where there was a significant problem that I could solve.
About that time I heard a story on the NPR money podcast.
Two sets of people were asked to guess the weight of a cow shown in a picture. They first asked a bunch of experts what the weight might be and each gave a different answer. They also gathered answers from a crowd of non-experts on a website.
The median value in the crowd of non-experts was much closer to the true weight of the cow than the group of experts!
That led me to think about how the wisdom of crowds could be used to help small companies make better decisions.
Of course, I wanted to monetize the information in the buying decisions that people make.
How about learning the perfect offer to make to shoppers at an online store?
I’d recently built complex pricing models to value financial securities, so I knew I could do this.
I quickly noticed that small businesses were leaving a lot of profit on the table. They were essentially using rules-of-thumb, instead of measuring price sensitivity and making optimal offers for peak profit just like the airlines, Airbnb and Amazon are already doing.
How much of an advantage can optimization bring?
For example, the average retail store runs with a 5% net margin. What if the store could raise the sale price (after any discounts) of the average item by 1% without affecting demand?
That would raise their margin a staggering 20%! And that is what happens with just a 1% change.
Imagine what can happen with a larger price change.
In our experiments with stores on Shopify, we noticed that they were so far off the optimal price that they were making less than 70% of what they could be making if they could tune into the crowd.
That is beyond a big deal!
So I began working on an app with the vision of using optimization to create better offer management strategies.
Over the last year I created the company, Quant Price. You can try our first app for free on Shopify.
Join me tomorrow for a closer look at what Quant Price does.
By groundbreaking, I mean a technology that changed society, changed every other industry in the world. The World Wide Web was groundbreaking. The internet was groundbreaking. The personal computer was groundbreaking.
And before you write Rosoff off as a know-nothing consider Peter Thiel’s comment.
“We wanted flying cars, instead we got 140 characters.”
It’s nice to know my nobody-know-nothing opinion is in good company.
In the tech world IoT is supposedly the bright light on the horizon, but don’t hold your breath.
Worse for tech, the public is waking up to the fact that it doesn’t give a damn about people’s privacy, security or even safety as long as they buy — at least not until it’s forced to and then only enough to shut up the noise.
As Accenture puts it, companies must “ignite” the next five years of growth by coming up with products that “offer a compelling value proposition,” “ensure a superior customer experience,” and “build security and trust.”
Read the article. Digest Accenture results.
Then think about what you can build that would impress a 5-year-old—even a little.
Assuming you follow the tech news in one way or another you know that 2015 hasn’t been a kind year to women in tech.
Although it didn’t start this year, trolling, bullying, trashing, violence and death threats have become almost everyday occurrences.
As with most haters, they manage to ignore or deny the positive, such as Ada Lovelace, a Countess who wrote the first-ever computer algorithm and dreamed up the idea of artificial intelligence.
So in the spirit of positivity and hope for improvement in 2016, I thought I would share the story of Katherine Johnson, who calculated the trajectory of Alan Shepherd’s 1961 trip into space, which was America’s first, as published by NASA, where she worked for many years.
I wonder how many techies could do something similar today without using a computer or other current tech.
Katherine Johnson was 90 on Tuesday, an apt date because it also was National Equality Day.
Not that she ever thought she wasn’t equal.
“I didn’t have time for that,” said Johnson in her Hampton home. “My dad taught us ‘you are as good as anybody in this town, but you’re no better.’ I don’t have a feeling of inferiority. Never had. I’m as good as anybody, but no better.”
But probably a lot smarter. She was a “computer” at Langley Research Center “when the computer wore a skirt,” said Johnson. More important, she was living out her life’s goal, though, when it became her goal, she wasn’t sure what it involved.
Johnson was born in White Sulfur Springs, W.Va., where school for African-Americans stopped at eighth grade. Her father, Joshua, was a farmer who drove his family 120 miles to Institute, W. Va., where education continued through high school and then at West Virginia State College. He would get wife Joylette a job as a domestic and leave the family there to be educated while he went back to White Sulfur Springs to make a living.
Katherine skipped though grades to graduate from high school at 14, from college at 18, and her skills at mathematics drew the attention of a young professor, W.W. Schiefflin Claytor.
“He said, ‘You’d make a good research mathematician and I’m going to see that you’re prepared,’ ” she recalled.
“I said, ‘Where will I get a job?’
“And he said, ‘That will be your problem.’
“And I said, ‘What do they do?’
“And he said, ‘You’ll find out.’
“In the back of my mind, I wanted to be a research mathematician.”
It didn’t involve teaching, though she did it for a while, starting at $65 a month. While on vacation from a $100-a-month teaching job in 1952, she was in Newport News. “I heard that Langley was looking for black women computers,” she said.
She was put into a pool, from which she emerged within two weeks to join engineers who, five years later, would become involved in something new called the “Space Task Force.”
That was 1958, when the National Advisory Committee on Aeronautics became the National Aeronautics and Space Administration. She did the math.
“We wrote our own textbook, because there was no other text about space,” she says. “We just started from what we knew. We had to go back to geometry and figure all of this stuff out. Inasmuch as I was in at the beginning, I was one of those lucky people.”
That luck came in large part because she was no stranger to geometry. It was only natural that she calculate the trajectory of Alan Shepherd’s 1961 trip into space, America’s first.
“The early trajectory was a parabola, and it was easy to predict where it would be at any point,” Johnson says. “Early on, when they said they wanted the capsule to come down at a certain place, they were trying to compute when it should start. I said, ‘Let me do it.
You tell me when you want it and where you want it to land, and I’ll do it backwards and tell you when to take off.’ That was my forte.”
More flights became more complicated, with more variables involving place and rotation of Earth and the moon for orbiting. By the time John Glenn was to go up to orbit the Earth, NASA had gone to computers.
“You could do much more, much faster on computer,” Johnson says. “But when they went to computers, they called over and said, ‘tell her to check and see if the computer trajectory they had calculated was correct.’ So I checked it and it was correct.”
So the “computer” began using a computer. And in 1969, while at a sorority meeting in the Pocono Mountains, she gathered with others around a small television set to see Neil Armstrong land on the moon and take the first step by a human there. There was some marveling, but not much.
“It all seemed routine to people by then,” Johnson said.
But there was an extremely nervous “computer.”
“I had done the calculations and knew they were correct,” said Johnson. “But just like driving (to Hampton in traffic) from Williamsburg this morning, anything could happen. I didn’t want anything to happen and it didn’t.”
Her work at Langley spanned from 1953 to 1986. She is still involved in math, tutoring youngsters, and she remembers where NASA’s space program was, even as she watches where it is now on television.
“I found what I was looking for at Langley,” she says. “This was what a research mathematician did. I went to work every day for 33 years happy. Never did I get up and say I don’t want to go to work.”
Johnson also spends time talking with children, making sure that they know of the opportunities that can be had through mathematics and science. She laughs when she talks of being interviewed long distance by a fourth-grade class in Florida.
“Each of them had their questions, and one asked, ‘are you still living?'” Johnson says. “They see your picture in a textbook and think you’re supposed to be dead.”
Far from it. Instead, she’s celebrating yet another birthday on Women’s Equality Day, without admitting that there was a time when she didn’t feel equal.
Today we welcome Janelle R. Alexander, a new voice at MAPping Company Success. Janelle is a successful entrepreneur and one of the smartest and most fun people I’ve met in a long time. (Click About Janelle to learn more.)
I had the opportunity to attend the 2015 Lean Startup Conference a couple of weeks ago. While I had read and embraced the writings in The Lean Startup years ago, this was my first occasion to attend the now-iconic startup event. The environment there was buzzing with startup geekiness and I loved every minute of it. My takeaways from the event are 3 key learnings and one confession. First the confession: I missed the point when The Lean Startup went from methodology to movement.
It’s brave of me to admit this. I espouse passions for early-stage companies, inclusive innovation (a.k.a. diversity in entrepreneurship) and positioning New Orleans as a leading startup hub—Lean Startup methodology provides a clinical process to power all 3 missions. I’m not sure under which rock I was sleeping. I understand the genesis of the movement—the wisdom of Eric Ries’s continuous innovation, minimum viable product and validated learning warrants a loyal following. And yet I still marveled whenever I met yet another devotee who had flown from Australia or Sweden or Ireland, all speaking in a shared Leansian language (“…it’s a lean startup company,” “by then they’d developed their MVP,” “then we iterated,” etc.).
Realization #1: Lean Startup methodology could be a pivotal force in fostering diversity and inclusive innovation
There are real barriers to entry for startups founded by women entrepreneurs and those of color. One of them is a disproportionate lack of access to resources—e.g. capital, networks, influencers, anchor customers. When these resources are markedly low or missing entirely, the nefarious runway becomes shorter; the importance of eliminating uncertainty and working smarter not harder becomes decisive. In short, adopting Lean Startup methodology is obligatory for underrepresented entrepreneurs.
Realization #2: Data is the equalizer that makes innovation truly inclusive
I sat listening to Alistair Croll Lean Analytics talk. Nearly every seat had a laptop open, and, from what I could tell, every monitor was showing Slack. Mr. Croll’s talk drove home the measure and learn parts of the methodology. His Street Smart Tactics were distilled for maximum relevance and insight which rang true (and were a delight to hear).
At its core, Lean Startup methodology is powered by data. Data is the new abundant resource for diverse entrepreneurs, which will offset the historical obstructions to the old school forms of capital.
Some Quotes to Remember from his talk:
“Archimedes had taken a bath before.” Meaning: The old tale of Archimedes’ displacement discovery in the bathtub was used to show that it was the king asking the right question which led to the discovery, and more importantly, the new data.
“Business plans are a lot like drawing a map before you’ve gone exploring”
Realization #3: New Orleans is the perfect environment for Lean Startup methodology
New Orleans is quickly establishing itself as an emerging startup hub. Collision is coming here. Mega companies have relocated here. Forbes thinks we’re great. The energy surrounding entrepreneurship in this city is palpable, and New Orleanians embrace this new focus with their usual delight and fervor. I heard Steve Case say about New Orleans that it’s a model for community connectivity and inclusiveness. It is in such an environment that Lean Startup methodology can thrive. Here we support our entrepreneurs in a way this native New Yorker never anticipated when I first moved to the Crescent City. Here, the community organically does what it can to minimize the entrepreneur’s time through the loop that is the Lean Startup process.
I came back ready to spread the word, and excited that I had another tool in the toolbox.