Referral Programs Power the On-Demand Economy

Every on-demand app I know generates substantial volume from their referral program (let’s lump word-of-mouth into this as well since it often involves sharing a referral code). You know the “sign up a friend, they get $x off their first use and you get $x too.” I can tell you that Shyp’s referral program drives a significant amount of high value signups at an effective CAC much lower than app promotion on Facebook (and the Facebook, Twitter programs are still ROI positive).

If one can assume that referral programs are ultimately rational spend – that is, the programs are sustainable and aim to generate acquisition of a customer worth more than the freebies given to both the new customer and the referrer – then referral program terms actually tell you a lot about the margins, frequency of use and LTV of each market.

For example, Uber – with what I guess is a HUGE LTV – can afford to give free rides up to $20 discount to new customers and their referrers. Boss.

Shyp does a free shipment for each side up to $30 in value (that should tell you a little bit about how valuable an active customer is for them :) ).

Massage services also high value because high pricepoint – UnwindMe is Give $25, Get $25. Zeel is the same.

The food guys have a little more divergence among themselves and generally less value because margins are so low. Munchery is Give $10, Get $10 (although currently doing a $20 promo). Doordash is Free Delivery/$5 (I think). Sprig is Get $10, Give $10.

Some analysis of these referral programs would probably make for a good tech blog post.

  • Crafty strategies by customers to rack up referrals (I’ve seen people use SEM for their referral codes, create fake social media profiles, etc)?
  • How do the companies prevent abuse?
  • How do they experiment with value props to optimize CAC:LTV?

And so on….

UPDATE: ask and the internet delivers. Here are some links to more referral program thoughts ->

  1. Thoughts on Referral Programs by Josh Yang
  2. Airbnb Teardown by Jason Bosinoff
  3. Dropbox’s Referral Program’s Genius by Sean Lineham
  4. How to Optimize Referral Programs by Ina Herlihy

A Good Marketplace Looks Like a SaaS Business

Board Meetings are great ways to finish the week. Wait, let me revise that. Board Meetings are a great way to finish the week when the founders are describing a provocative discussion of the future. I had such a Board Meeting yesterday with UpCounsel, an enterprise marketplace connecting businesses (usually between 10 – 1000 employees) to high quality independent lawyers to address a wide variety of legal needs such as employment issues, contact negotiations, incorporation and expansion, etc.

Matt Faustman, UpCounsel’s cofounder/CEO, was highlighting interesting behavior by their customers over time. Namely the large amount of ongoing spend from companies who had used UpCounsel. This repeat usage let Matt start each month with a forecast of what percentage of revenue would come from previous customers versus new sales efforts. Without betraying his confidence I think it’s ok to share that for UpCounsel this metric is well over 50% on a monthly basis.

Of course it’s much easier to build an up and to the right graph when you can build off ongoing spend, but unlike a typical SaaS, most marketplaces don’t have a true subscription revenue stream, they just have active customers to draw upon. UpCounsel is still a seed stage company so while they’re in a healthy seven digit GMV runrate, they actually haven’t done much work at all on customer success or reactivation marketing. We’re just starting to see the maturing of early professional marketplaces, especially those involving white collar skills like legal (UpCounsel’s lawyers average 15 years of experience) but it’s possible they have same – or better – repeat spend rates than even the most enthusiastic consumer ones (for context, Etsy’s S-1 noted 78% of their revenue comes from repeat spend).

doug bigger

Five Questions with: Douglas McGray, Editor-in-Chief of California Sunday Magazine

So I’ve been doing these “Five Questions” interviews recently and, personally, I’ve enjoyed hearing from, and helping to spotlight, different folks from the tech community. The format brings me back to my brief stint at Late Night with Conan O’Brien where I worked on the team researching guests and helping to write interview questions. Usually with these posts I’m reaching out to people I already know but sometimes it’s an opportunity to meet someone new. Like Douglas McGray, the CEO and EIC of California Sunday Magazine, a newly launched multiplatform magazine. This article on the donut business was the first that made me say “damn, this is good writing” and I’ve enjoyed many issues since. 

Hunter Walk: So a few months back this amazing magazine called California Sunday started showing up monthly. How do you describe California Sunday to people and why does it exist?

Douglas McGray: I’m glad you’re enjoying it! The California Sunday Magazine tells stories about people and culture and ideas in California, the West, Asia, and Latin America for a national audience. We pair those stories with really striking, original photography and design and deliver them to people when they have time to enjoy them: the weekend. We create a great reading experience for the web, as well as a print edition, which gets delivered with select Sunday editions of the Los Angeles Times, San Francisco Chronicle, and Sacramento Bee.

HW: Why “California” Sunday? Would New York Sunday work? Texas Sunday?

DMcG: Most of the really good magazine-style features we read are published by East Coast media companies. Those companies tend to be pretty East Coast–centric. But the West Coast is huge and fascinating and influential. And when you live here you feel an especially close connection to Asia and Latin America. All that makes California an unusually great place to find compelling stories, and a pretty perfect home (we’re based in San Francisco and Los Angeles) for a premium media company launching today, looking forward.

Plus, when you think about it, California is more than a place. It represents a set of ideas and values; a look and a feel. We reflect those qualities in our work and in California Sunday’s brand.

HW: You took an interesting approach to initial distribution, getting bundled alongside the Sunday newspaper in several cities. Can you talk more about how that developed?

DMcG: A few years ago we created a live event series, Pop-Up Magazine, which features writers, radio producers, photographers, filmmakers, artists, and musicians performing multimedia stories for a live audience. (We have fun shows coming later this month in San Francisco and Los Angeles. Details at The series had become popular. We held shows at the 2700-seat symphony hall in San Francisco that sold out in a few minutes. We collaborated on a music show with Beck and McSweeney’s and a sports show with ESPN. I thought there was an opportunity to start reaching a bigger audience, bringing stories to people in different ways.

I was especially interested in leisure time, when people have more time to pay attention, take something in, enjoy it, remember it. By design, Pop-Up Magazine produces shows for evenings out. The other time of the week that interested me was the weekend. I noticed that none of the big West Coast newspapers included a high-end, feature-driven magazine. Despite what you hear sometimes, print can be a great platform and a great business, or part of a great business, if you can reach a certain scale. It occurred to me, we could pay the newspapers to insert the print edition of a new magazine in some number of their copies — and pick zip codes where demographic research shows the most enthusiastic audience for this kind of magazine is likely to live. Newspapers offered an efficient, existing distribution channel. So a lean, nimble media company could launch with, say, 400,000 circulation, a huge launch for a traditional media company. And that reach that would appeal, right away, to national advertisers. And we wouldn’t have to spend years and tens of millions of dollars getting there. We approached the newspapers about buying insertion, and they knew Pop-Up Magazine’s reputation. They thought it was a great idea. So we were on our way.

HW: When I talk with tech startups we focus a lot on quick learning and iteration. What have you learned after the inaugural issues? Where were you right, where were you wrong?

DMcG: We thought it was important for a media company today to have multiple sources of revenue. Too many media companies are overly dependent on one revenue stream, like web advertising. We sell subscriptions and live event tickets; we can offer advertisers print pages, digital experiences, live event sponsorship; we have a small in-house studio, separate from editorial, that partners with brands and agencies to design creative “story advertisements” (a campaign with Google has gotten admiring coverage not just from advertising press but also Rolling Stone and New York Magazine); and there are at least a couple additional revenue streams we’ll be looking at in the weeks and months ahead. This approach has gotten us off to a good start. We’re just a few months old, we have a lot of hard work ahead of us, but the mix of live, print, digital, and creative services, and perhaps more seems like a sturdy foundation.

Also, we continue to love publishing for leisure time. So many huge, rich media companies are competing for the same slivers of time — when you’re killing a few seconds or minutes during the workday. We thought we could reach a great audience offering a complement to that, focusing on nights and weekends, and so far we think it’s going really well.

Initially, we published monthly, pushing stories online when they came out in print. Now we’re publishing stories online just about every weekend, and we like that rhythm better. I’m eager to publish more stories every weekend.

Our biggest mistake… We thought there was an opportunity to launch as a lean company, and produce big-media-company products (a high-quality, big-audience print and digital title; ambitious, big-audience events). We wanted to be cautious about growing the company too quickly. A few months in, we think there’s an opportunity to grow faster than we projected, and especially produce more Pop-Up Magazine events, including new kinds of events. We’d like to take some steps to make that possible. But, frankly, I’d make the mistake again. We could have bet big on the wrong approach. We have a very good idea, now, exactly where the greatest immediate opportunities are.

HW: More content and more formats than ever. Fixed amount of attention. What happens?

DMcG: Great opportunities to bring people stories in old ways and new ways. Smart, beautiful stuff has a way of finding an audience. It really is an exciting time.

zach sims

Five Questions with: Zach Sims, Codecademy CEO/Cofounder

I honestly don’t recall how Zach and I met but it was likely via a mutual NYC tech friend or his snappy Twitter stream. Either way, he’s cost me thousands of dollars alerting me to notebook and backpack/gearbag projects on Kickstarter that deserve support (he’s also into pens, but that I just don’t get). Codecademy has been focused on helping people worldwide learn to code. Recently they’ve been pretty heads down on global expansion so I thought it would be fun to check in with Zach for Five Questions.

Hunter Walk: First, let’s just refresh folks on how Codecademy got started

Zach Sims: We started working together in January of 2011 after my cofounder Ryan and I saw the huge gap between education and employment. I was a Political Science major working at GroupMe in my free time and realizing that what I was doing in the classroom was entirely different from what I was doing in the working world. Ryan, meanwhile, had started teaching people to program through a club he started at Columbia, the Application Development Initiative. The two of us started trying to find a way to reduce the gap we saw between the classroom and the real world, but ended up taking a number of different approaches before settling on what became Codecademy (which ended up starting over the summer when we were in YC). Over the summer, I was teaching myself to program with Ryan’s help and using everything I could find (books, videos, tutorials, etc.) so I could contribute more to what we were building. Eventually, we realized that building something for me to help me learn to program would help solve the original problem we were solving — connecting people with the most in-demand skills to help them find jobs.

HW: Startups are about testing, learning, iterating. What’s something you believed to be true a few years ago that now you realize was wrong?

ZS: Early on, I think we thought overcommunication was a problem. As a consequence, we didn’t communicate vision, objectives, or projects clearly enough or often enough to our team. Now, I try to integrate the company’s vision, strategy, and objectives into nearly every meeting — there’s no such thing as overcommunicating in a startup.

HW: It’s easy to get distracted with shiny objects – conferences, events, press – how do you decide what to participate in vs stay heads down?

ZS: I think this is a constant process and it’s something I try to be hyper aware of (and, to be honest, I try to say no more often than I used to). Each quarter, our team sets goals which them trickle down to individual goals. I set mine and try to make sure that things like conferences, events, and press fit into one of my priorities. Otherwise, it’s either personal time or it doesn’t make it on my schedule.

HW: How nervous were you on The Colbert Report?

ZS: I was definitely a bit nervous I’d end up skewered like some of his guests, but Stephen was friendly in the pre-show conversation and actually mentioned he was a fan of what we were working on. He ended up with a few dangerous questions, but it didn’t feel adversarial at all.

HW: Who are two underrated folks in the New York tech scene? Don’t worry, I won’t ask you for overrated ones…

ZS: There are almost too many people I know at this point to count. I’m a fan of someone who actually unfortunately just left the New York tech scene: Moawia Eldeeb, the cofounder of SmartSpot (a Y Combinator company in this batch).

Five Questions Charlie O’Donnell Asked Me to Answer

So, I was going to do a Five Question Interview with my friend Brooklyn Bridge Ventures founder Charlie O’Donnell but he turned the tables on me. Charlie suggested that I answer five questions from him on my blog and he’d do same on his. Mine are below and you can read Charlie’s here.

Charlie: What’s on your priority list to learn how to do better as an investor?

Hunter: Two main priorities – refine my own playbook and iterate/learn with the urgency of a startup, not a typical VC fund. I’ve written before about ‘playbooks’ and my desire to not be Fred Wilson 2.0, Brad Feld 2.0 or Marc Andreessen 2.0 (or any other notable investors) but Hunter Walk 1.0.

For Homebrew overall, Satya and I have a 20 year roadmap that we’re executing against. Our “product lines” are Credibility (in the marketplace), Community (among Homebrew founders, advisors, friends) and Counsel (high quality and scalable). We aren’t interested in just raising money, making some investments and seeing what happens. The way we think about it is, we have a small number of principles and a large number of hypotheses. We’ll stay true to our values while we test and evolve our tactics.

We raised our first fund on reputation and history. Our second fund on momentum. Come fund three, it’ll be results more than retweets that our LPs are judging us on :)

Charlie: Mark Zuckerberg leaves Facebook to start a new company.  He’s raising $20mm on a $200mm post for an idea on a napkin.  Are you automatically in, do you ask him what the idea is, or do you pass on valuation?

Hunter: Our model is to make 8-10 investments per year where we believe we can commit enough capital (aka ownership) so that a successful outcome can be meaningful to our fund. So let’s say we did $1m of that round. In order to return 1x our fund ($35m), he’d need to get to $7b valuation. Bet on Zuck :)

Charlie: Who are the three most underrated investors in venture capital?

Hunter: “Most underrated” is tough to answer so I’m going to answer slightly differently: here are three investors at different stages who I think are great and don’t seek out press or brag as much as some of us do.

Angel – Scott Belsky

Scott founded Behance and is also an active angel investor. We’re lucky enough to count him as a friend and Advisor to Homebrew. He’s an investor in Uber, Pinterest, Warby, Shyp and many other successful startups. There are MUCH less successful angels who crow about their wins. Scott is just an amazing smart and decent guy who really works with his investments. A gem.

Seed – Manu Kumar/K9

Another guy who stays out of headlines unless he’s helping a portfolio company or discussing an industry POV where he has actual experience, not just ‘content marketing’ bs. Invests seed stage in wide variety of companies but special love for true tech based startups. We haven’t coinvested with Manu yet but would look forward to doing so in Fund II.

Multi Stage – Ethan Kurzweil

Ethan is earlier in his career but has Twitch and some other exits on scoreboard and Twilio lined up in IPO chute. What I appreciate about Ethan is that he’s always going to have his own opinions and not just chase sexy shit. By the way, I was tempted to call this category “later stage” because it totally pisses these guys off when you call A Round “later stage.”

Charlie: Any misses, and why did you pass?

Hunter: We’ve written about our losses on my blog. Regardless of financial outcomes – we’re only two years in so even companies that have marked up significantly aren’t “winners” yet – I think I’ve got two regrets.

One was a situation where I probably overthought the way I would approach the problem vs trusting the founders. The other was one where Satya and I disagreed (I liked, he didn’t) and I wish that I would have done more work on it to push towards conviction. Instead his thoughtful questions had a chilling effect and we passed. Too early to know whether it was a “miss” or not, but in retrospect, I didn’t like my reaction.

Charlie: What opinion do you have about venture capital that would be generally unpopular with entrepreneurs?

Hunter: Not sure there’s anything about VC I believe that would be generally unpopular with entrepreneurs, although I have some thoughts about VC that would be generally unpopular with other VCs! But since that wasn’t the question, I’ll try to answer what you asked. One opinion we have that isn’t universally held by founders is the value of adding an external Director to your Board at seed stage. My partner Satya has written about this more extensively, but it comes down to helping a founder build the cadence of running their company before they go raise an A round. We believe coming up for air every 4-8 weeks to discuss one or two strategic questions about the startup is critical and gets founders more prepared to raise a strong A Round because they can discuss both the current state of their business AND their longterm vision.

What’s a Seed Fund to Do When a Seed Round is $20 Million?

There’s a funding phenomena I’m wrestling with these days – the Straight to A. As VC Matt Turck notes, there’s been an increase in startups whose initial round of institutional funding looks more like an A Round than a Seed Round. That is, raising $5m+ at a $20m+ post-money, lead by a large multistage VC. These rounds most frequently occur when it’s a repeat founder with pre-existing relationships to a fund, but we’ve also seen them occur because a company didn’t raise institutional funding until later in its development or because some combination of their fast growth and competitive dynamics mutated what was originally intended to be a seed round.

With Homebrew we’re focused on being ‘partners of conviction’ to founders during the first few years of their companies. This traditionally means entering at the seed round stage (an initial financing of < $3m, lead or co-lead by us), but we’ve got access to these Straight to A rounds as well via pre-existing relationships with their founders or the lead VCs. So what’s a seed fund to do when a “seed” round is $20m? It’s something we’re wrestling with because in many cases I don’t think these rounds are necessarily right for us or the founders (the risks of raising ‘too much money’ we’ll save for a future post).

Here’s what we’ve observed and how we currently think of these rounds

  • When evaluating any metrics around the state of seed financings, I believe valuations have plateaued a bit and one reason is the increase of Straight to A from experienced founders (and these A Rounds not getting tallied in seed data.
  • In Homebrew I we participated in three rounds that I’d describe as Straight to A. In all cases we wrote a check that was on the average to high side for us. We did so because (a) we felt like the potential return could be meaningful to our fund despite smaller ownership percentage, (b) the founder and/or industry was well-known to us and (c) we had working experience with the lead investor.
  • Heading into Homebrew II, Satya and I are still discussing our framework for evaluating these opportunities. I think they’ll continue to be exceptions for us – the dynamics are so totally different from the majority of our investments.

What are the risks of seed funds participating in these Straight to As?

  • Investor Misalignment: When seed funds participate in these deals they need to feel confident that their interests are aligned with those of the lead investor (which will usually be a much larger fund with a different returns model).
  • Second Seat Syndrome: While an investor’s credibility with founders always needs to be earned, it can be more difficult to do when there’s a much larger lead VC leaning in at the earliest stages of the company (for better or worse!).
  • Misjudging Good vs Great: Seed investors aren’t spending their time evaluating A Round companies so when you look at Straight to As, many of them look “better” than the average seed investment because there’s more of a team in place, or more progress made or more ‘polish’ etc. But it’s important to not compare them to just other new seed deals you could do but to what a top A Round company should look like. That is to say, if you’re paying 5-10x post-money, that company should have 5-10x the potential.
  • Check Creep: You start writing larger checks, committing both your initial average check and your reserves for that company in a single instance.

So I think in 2015 we’ll see a continued increase in Straight to A Rounds, there’s enough money raised by large funds and repeat founders to sustain for a while until the industry figures out whether these funding strategies are helpful or counter-productive to the entrepreneurs. And I think we’ll be refreshing our own POV over the coming weeks.

B2C becomes B2B every time someone walks into an office with their smartphone in their pocket

B2C becomes B2B every time someone walks into an office with their smartphone in their pocket. It’s been amazing over the last 18 months to see Shyp make organic inroads into small businesses, retailers, marketing departments, etc not because they’ve targeted these customers or because the product has evolved specifically in their direction (more work to be done!) but because individuals in San Francisco, NYC, Miami have used the app in the personal lives. It then occurs to them that this magical service isn’t just for sending a gift or returning an ecommerce purchase but can be used for jobs big and small, one-offs or reoccurring. There’s a car dealership using Shyp to send 75+ parts per week to mail order customers. There’s a SF-based unicorn startup which did $20,000 of shipping with Shyp one week. There’s a major league pro sports team which sent expensive memorabilia to select season ticket holders. So wonderful to see the breadth.