Posts

Fred Wilson’s perspectives on trends in consumer web investment created a big brouhaha over the weekend. Commenting on a WSJ article, Wilson offered his confirmatory observations that follow-on investments in the consumer web have become more challenging as momentum investors have shifted toward enterprise.

Over the past 18 months, valuations of later stage consumer internet companies have ballooned into the hundreds of millions propelled by enormous user growth. For many of these startups, revenue hasn’t been able to keep pace with rising serving costs. It’s not surprising that some members of the eight figure valuation club can’t raise follow-on rounds at even greater premiums - the economics can be challenging. It took YouTube something like seven years to break-even.

Last week I wrote about the importance of a financial plan for startups at every stage. It’s a challenge to balance the predictability the board requests and the ambition the company wants.

Often, as startups grow, they adopt two plans: a board plan and a company plan. By creating two plans and presenting each to the right audience, founders can communicate and motivate their teams effectively.

The board plan is the more conservative of the two. Typically, the founding/management team has a high degree of confidence in the board plan, something like 90% confidence. The board plan’s audience is the board. It’s often viewed as the commitment the management team makes to the board, so it can be used as a framework for evaluating the team’s performance at quarter or year end.

Over lunch last week, I asked a Redpoint entrepreneur, who had recently sold his company, how his board could have been more helpful to him. His answer surprised me.

He wished the company had built a financial/operational plan sooner.

Building an financial plan is challenging and it is often perceived as a waste of time because the plan can be so inaccurate. Lots of entrepreneurs tell me their plans are just WAGs - wild assed guesses. And to some degree they are.

When building a freemium SaaS company or an ecommerce company or any product that requires users to move through a funnel towards an objective, it’s important to track this funnel to understand where the funnel can be improved.

But tracking one funnel may not be enough. The aggregated funnel may be masking conversion differences across customers segments. For example, at Expensify conversion rates to paid vary quite a bit across customer size. But the total conversion-to-paid rate hides these nuances.

Great products are like ducks. They are calm above the water but paddling furiously below the water. An entrepreneur told me this quip last week and I think it had great wisdom in it.

In other words great products are graceful. They make something complex look effortless.

Great athletes are the same. So are great dancers. And even great entrepreneurs.

The secret within this aphorism is that success is a grind. It is hard work. It’s easier to let it all hang out for others to see how hard work can be. Often we want others to understand how challenging a problem was to solve or how stressful a deal was to close or how complex a product is.

Vinod Khosla penned a great overview of the three phases of a company this weekend. He identifies the hub and spoke phase, the organized chaos phase, the functional management phase.

Once a founder has experienced each of these phases, it’s easy to identify the them in retrospect. But companies don’t transition from one phase to another in discrete steps. Instead, they morph and evolve fluidly into these phases.

Throughout this metamorphosis, two things must remain constant to keep the startup functional: the vision/mission of the company and the culture of the company. Lacking a consistent vision, the startup can enter a tailspin - with a team unclear on the path to pursue. Without the right culture, teams fall apart.

Peter Thiel and Gary Kasparov wrote in the Financial Times about “Our dangerous illusion of tech progress”. The main point of the article is quoted below:

[We are living in an era of] cautiousness far too satisfied with incremental improvements. Our ability to do basic things such as protect ourselves from earthquakes and hurricanes, to travel and to extend our lifespans is barely increasing [since the 1960s]. The genuine progress in IT from the 1970s up to the 2000s masked the relative stagnation of energy, transportation, space, materials, agriculture and medicine.

Yesterday’s post on distribution partnerships for startups elicited a few comments and questions about other important elements startups should consider when contemplating partnerships. I’ve listed a few other major partnership elements below.

Qualifying the Partnership

Quality of inbound traffic - As part of measuring the cost/benefit of a partnership, it’s critical to understand quality of traffic/customers from a distribution partnership, as @jamesreinhart pointed out. Ideally, a startup should collect data on the performance of a distribution channel before entering into a long-term agreement with a partner. Conversion rates can vary widely by channel and lots of poor traffic isn’t worth the effort.

When a startup is approached by an established company about partnership, it can be a very exciting time.

Sometimes partnerships change the trajectory of a startup. Other times, the weight of partnerships can crush startups. Servicing a much larger partner’s needs with a small team can be a full time job and deprive the startup of any time to advance their independent projects.

When evaluating a partnership, the most important first-pass analysis to conduct is to understand whether in the success scenario, the partnership is worth the effort by comparing the startup’s progress to a conservative estimate of internal growth.

This morning NPR profiled an education researcher comparing and contrasting the way different cultures approach intelligence and learning in schools. Though the debate about education methodologies is fascinating, I found the one of the stories in the report reminded me of the importance of transparent cultures in startups.

In 1979, Jim Stigler, a researcher from UMich went to study education in Japan. Sitting in the back of a fourth grade math class, he watched as the teacher asked the class to draw cubes.