Waitresses Who Wear Red Get Better Tips (& Other Things I Learned From The French)

If you’ve been following my Twitter feed recent days you probably noticed I’m catching up on New York Times Magazines from the fall. One blurbed a French social scientist who has built an interesting, if not slightly controversial/un-PC, set of studies including:

There are others which tend heavily towards the freak in freakonomics…

You, Robot: Why We Tend to Believe Robots Have Their Own Will

If robots are going to be a bigger part of our lives – and they are – one fascinating area of research is the way humans tend to interact with them. The NYTimes writes that the “secret to robots with better social skills” is “exploiting human nature.” My favorite paragraphs:

“Provided with the right behavioral cues, humans will form relationships with just about anything — regardless of what it looks like. Even a stick can trigger our social promiscuity. In 2011, Ehud Sharlin, a computer scientist at the University of Calgary, ran an observational experiment to test this impulse to connect. His subjects sat alone in a room with a very simple “robot”: a long, balsa-wood rectangle attached to some gears, controlled by a joystick-wielding human who, hidden from view, ran it through a series of predetermined movements. Sharlin wanted to find out how much agency humans would attribute to a stick.

Some subjects tried to fight the stick, or talk it out of wanting to fight them. One woman panicked, complaining that the stick wouldn’t stop pointing at her. Some tried to dance with it. The study found that a vast majority assumed the stick had its own goals and internal thought proc­esses. They described the stick as bowing in greeting, searching for hidden items, even purring like a contented cat.

When a robot moves on its own, it exploits a fundamental social instinct that all humans have: the ability to separate things into objects (like rocks and trees) and agents (like a bug or another person). Its evolutionary importance seems self-evident; typically, kids can do this by the time they’re a year old.”

Why NYC Tech Scene Excites Me: Deep Roots

Writing this from a cafe in NYC, working through two potential Homebrew investments. Satya and I hypothesize that New York will be an important geography for us so we’re spending quality time leaning in. Why? Already have a bunch of local friends; critical mass of startups in verticals matching our Bottom Up Economy theme; on-the-ground frequently (I grew up here and Satya lived in Manhattan for several years).

My first NYC angel investment was in Charlie O’Donnell, 2007. Had two motivations. First, Charlie is a friend. Second, the round contained a who’s who of city tech. Good way for me to meet some folks who I’d respected from afar. Indeed, I believe that was my introduction to people like Fred Wilson and Scott Heiferman. Company ultimately folded but Charlie put together an amazing team – people like Hilary Mason and Alex Lines. Not just technologists who are good for NYC, but who can hold their own anywhere. Gave me the sense something was brewing.

Thinking back a few years, folks here were starting to puff their chests a bit. Google opened a big office and WC investors began to circle. But talk of NYC tech always lead with whatever company was hot at the time – as if that single comet proved the existence of an industry. Nah, that’s not how it works. You need something more fundamental. Now in 2013 there’s more bedrock.

What excites me most isn’t the Tumblr exit, the recent funding for Foursquare, or anything like that. It’s Roots. A critical mass of NYC startups based in NYC because they should be based in NYC. Bringing technology to financial services, publishing & media, commerce, advertising. Those are New York’s indigenous industries and it makes sense that some of the most exciting companies in these industries are being founded here.

That’s what attracts talent. That’s what attracts investors. The partners are here. The distribution is here. The competitors are here. I’ve been here for three of the past five weeks. One storyline: how quickly the folks shed by Fab are being snatched up by other promising companies. Spent part of my visit closing a very talented hire for our first NYC investment, The Skimm. He had his choice of jobs. Wanted to go somewhere he believed in and experience early stage first hand. The next generation of founders being groomed. Hoping I can write him a check in several years to start his own company. By that time Cornell Tech is throwing off talent too.

If you’re not Silicon Valley, the trick is to look at your indigenous resources and build on top of them. You need a superior answer to why a company should found itself locally. Go NY Go.

Deals We Lost: Homebrew’s Two 2013 Misses

When do you officially get christened a “VC?” Is it when you successfully raise your first dollar or finish the fundraising? Is it when you write your first check or see your first exit? With Homebrew, Satya and I both consider ourselves a startup in its “product-market fit” phase. Since raising our fund earlier this year, we’ve invested in a number of strong teams but this isn’t an easy business and we’re committed to bringing an operators mentality to what we do: measure and improve, every day, week, month.

The only way to succeed in venture capital is backing wonderful entrepreneurs and working hard on their behalf. Add some good fortune and Homebrew will return sizable gobs money to our investors. As of today, we’ve made nine investments (four listed on our website and five not yet disclosed).

However, measuring the outcome of a fund has a long time horizon so there are several other metrics we keep on our dashboard. One is deals we lost: we wanted to make an investment but the startup chose to take an investment from someone else with terms we would have found acceptable. It’s kind of strange that no one discusses these publicly – market dynamics mean most firms experience these losses (we beat out other firms in almost all of our deals).

In 2013 Homebrew lost two opportunities and each time we learned something about our process and how to improve. Neither of the startups have announced their funding yet so I’ll need to be slightly opaque in the details.

Loss 1: Offered a Substantial Secondary Slot But Passed Since We Seek to Lead/Co-Lead

This opportunity looked juicy: two founders we knew previously, mission-driven, attacking a big market. The product was still evolving but their execution ability and customer development had accelerated nicely during the startup’s first few months. As the fundraising became competitive, there was another seed fund which wanted to take a larger part of the round – essentially function as a single lead. We were offered a substantial second slot but passed because it wouldn’t have achieved our ownership targets or desire to lean in via a board seat [note: why we think Boards at seed stage are important. It’s not about the investors, it’s about the CEO]. They subsequently closed the round with a great group of investors. While we believe our participation would have been long-term additive for them, we’re still rooting for their success.

Two learnings

A. We Let The Round Become Competitive: There were dynamics to the opportunity which suggest we could have led the financing if we moved earlier. At the time we were not ready to offer a termsheet because the founders were working in a new area. I wanted to see how their thinking evolved from the initial hypotheses. Despite the loss, we stand by that decision, but it was a good reminder that as you wait, others lurk, comfortable with the risk.

B. We’re Still the New Guy: The fund which took lead slot has been around longer with a bigger portfolio, so they were able to point evocatively to similar businesses they’ve funded with strong founder testimonials. Homebrew’s portfolio is of course smaller, but we can bring substantial advocacy from not just the founders we’ve backed but across our broader network, and since this deal, we’ve been more aggressive on having other references back us up.

Loss 2: We Need An “It Goes to 11” Playbook

What should we do when we feel a deal moving away from us? Homebrew hadn’t faced this situation before and thus recognized it a bit too late. The deal was always highly competitive and the founder made a reasonable decision to go with a firm possessing deep industry relationships, but still, it was one we wanted. We made an offer and kept up communication with the founder but couldn’t close. Other investors built their case and ultimately the last word.

How’d we react to this? The Homebrew “It Goes to 11” Playbook. Who can we bring to the table to lobby on our behalf when needed? How do we better surface and address any unexpressed, but open, questions? How do we take it to, well, 11. To be clear, this isn’t about variable enthusiasm in the deals we chase – we bust our asses before and after term sheets with every company we invest in. Rather it’s being clear with ourselves as to where the momentum in a negotiation is heading and being more deliberate about keeping it in our favor.

As 2013 winds down, I’m finding it exhilarating to build our new fund. We’ve got clarity in our mission, goals and a simple true north: create the type of early stage fund that we would have wanted to take money from. While it’s fun to high five when everything works out as expected, we also pause to learn from outcomes that went sideways. And then we’re right back at it.

Do You Pay Yourself First or Last?

“So you pay yourself last?” That was the summary of an entrepreneur friend upon learning the economics of VC. Thought it was an interesting way of phrasing it, and applies more generally to one’s approach in creating value: do you pay yourself first or last?

Quick primer on the way VC works:

  • You raise a fund from which to invest
  • From this fund you get paid a management fee each year and then a percentage of the profits ultimately made after returning the entire initial investment to your limited partners (you pay back your management fees before you consider the fund “returned”)
  • “Standard” terms are 2&20 – 2% annual management fees and 20% of the profits. I put standard in quotes because there’s room for negotiation based on your track record, size of fund, length of fund, etc
  • If you’re raising a big fund every few years, your firm is often starting off with millions of dollars of management fees before you’ve even invested a dollar. This is why it’s ok to let big time VCs pay for your dinner. And why LPs don’t like mediocre investors, because they’re perceived to be getting fat and happy without creating value

If you’re Homebrew, a first time $35m fund, well, you can do the math. We’ll still buy you dinner but it might be more like a pizza and six pack than Saison.  Let me be clear, I’m not claiming poverty. Homebrew pays me a salary less than I earned in 2001 but definitely have the potential to make substantial returns in profit sharing if we do well. Nothing wrong with that. But the only way we do that is to take the attitude of paying ourselves last.

If the entrepreneurs we back succeed (both economically and in being proud of what they’ve built – that’s our double bottom line), then our investors get their target returns and we see our share. Satya and I were very intentional to not try and innovate on our approach to startup cap tables or LP agreements. We want our pockets bulging because we’re producing results – and being able to raise a fund was just the starting gun, not the end game. This isn’t unique – there are many other VCs who think the way we do – although maybe not everyone 😉

Remembering back to when I worked at Google, I took a similar approach, albeit not always to my benefit. I never did the “I’ve got an offer from Facebook so give me more money” dance. Many folks I know did. Some did it multiple times. I likely have colleagues who were lesser performers but had larger W2s because of their ability to find points of leverage and exploit them. I do that now, but I do it on behalf of my investments.

Am I jealous of those who did it on behalf of themselves? To be honest, kind of. But envy about the past isn’t productive energy. I was in the 1% economic class during my Google days. What would I rage against – that I wasn’t in the .5%?

Do you want to be paid enough, be paid fairly or be paid the most? I tend to be in the intersection of enough and fairly. But I’m also human, so I get my dander up when the folks with the most money seem to have gotten it without performing (which of course is just a personal value judgment full of its own bias).

The point of all this? Only some advice:

  • Focus on paying yourself fairly but last
  • Grow the pie before taking your piece. It’ll go better than seeing the pie as fixed and fighting for a disproportionate slice — and I think ultimately lead to great wealth for you if you’re any good

Oh, and any time I write about compensation, I link back to Mark Suster’s great 2009 post: Time to Learn vs Time to Earn.

$400 for The Information Is About What’s Missing, Not What’s There

What are we, less than two week’s into Jessica Lessin’s launch of The Information? As a subscriber I’ve read every article and enjoyed the majority. I applaud Jessica for staking out a high pricepoint – it holds her accountable to deliver the value she seeks to command and changes the economics of her true north (plus always easier to discount than raise prices). Her game is now about getting 10,000 subscribers to pay $400, not 40 million uniques to click on slideshows. Comes from someone with a WSJ mentality and a confidence that influence and personal brand aren’t tied to comscore. The Information is meant to be a business expense, with an audience who is less price sensitive because they’re (a) rich or (b) making the company pay.

What’s interesting about the initial content is that while it’s good, it’s not necessarily unique. Sure they’ve gotten a bunch of scoops but that’s not what I’m referring to by “unique.” Rather they’re not doing journalism that’s forbidden on other sites. Their articles feel like the best of what can also be found on NYTimes, Fortune, All Things D, etc when someone is writing original content and not chasing a press release or app update.

For me the value in The Information is not solely in what they’re providing but what they’re leaving out. The ~two articles a day are both interesting. Because they’re not playing a page views game, they don’t need to overload me with 25+ posts every 24 hrs. The site is spartan because they don’t need to worry about IAB units. A small number of writers building their beats give me the chance to see each journalist’s style distinctly, not settle into some random byline slot machine of varying quality.

Some folks are raising an eyebrow on the pricetag. “What are you getting that’s worth it?” Strangely my reply is as much about the 80% I’m not getting as the 20% they’re delivering. And I think that’s what Jessica is going for.

Two other The Information randoms:

1. The price anchoring is going to help other sites who want to charge, just charge less, by legitimizing the general notion of paying for content. Some number of people might be increasingly amendable for paying $50/yr (or whatever) for a specialty newsletter, etc. This is a good thing. We need to get in the habit of paying directly for content.

2. There are a ton of people I know who share passwords within their firm. My advice to Jessica:

Just randomly send emails to your subscribers at any VC firm saying, “hey I’ve noticed multiple people have logged into your account at once. If you happen to be sharing your password, would you mind supporting us by asking your colleagues to buy their own subscription at <link>. If this is you logged into multiple browsers, no worries. Thanks!”

I think she’d get a 50% conversion off just that note 🙂

Homebrew’s Bottom Up Economy: Two Links

Out of both opportunity and necessity, consumers, developers and SMBs are creating/accessing new marketplaces, revenue streams and efficiencies. The individual, or teams of 5, 50, 500 increasingly innovate and create via technology. That’s the main premise behind the current investment strategy of our seed fund Homebrew. We call it The Bottom Up Economy.

Recently read bunch of interesting posts on aspects of the Bottom Up Economy, so link blogging two here:

As Software Eats the World, Non-Tech Corporations Are Eating Startups – TechCrunch covers the increasing trend of traditional large companies purchasing technology startups. Basically ties back to the fact that technology is no longer an industry vertical but a horizontal capability that every leading company will need to understand. When I look at the companies we’ve invested in, I can easily identify several potential acquirers who come from the “non-tech” world. Great opportunity for founders to have another exit path.

The Limits of Capitalism – VC Fred Wilson articulates the societal tension being caused by economic and skill displacement from the shift to a technology driven economy from the footprint of industrial capitalism. When we say that the Bottom Up Economy is one of both opportunity and necessity, this is one aspect of what we mean. There are a host of people – good, smart people – who find their careers and stability shaken by these changes. At Homebrew we believe this creates opportunities for many different types of startups to address their needs.

What Y Combinator, SV Angel & a16z Can Do to Help SF [Updated]

Fake Google Employees. Startup founder Facebook ranting about the filth of San Francisco. This week has seen two foolish flashpoints in the important discussion of how San Francisco can remain vibrant, diverse and welcoming. The question around civic obligations, personal responsibility and evolution of American economy/politics won’t be addressed by me here. They’re real, they’re complex and they’re not limited to just SF. Empathy can be gained through broadening of perspectives but when you’re running a startup, you often become more narrow, focusing 100% of your energy on bringing a company to life. The investor ecosystem, which relies upon and profits from these efforts, can help. I want to suggest one immediate step we can take to broaden perspective among young startup founders.

Y Combinator, SV Angel & a16z can invite their founders to do a morning of service at SF Project Homeless Connect. I toured SFPHC earlier this year via sf.citi and was blown away by the groups coming together to provide services. Health care, explanation of benefits and job programs, free glasses – all in one place.

Why am I highlighting these three investors? Because they represent the breadth and influence within the Bay Area tech sector right now. They’re all progressive organizations in many respects – for example, YC now admitting nonprofits, Ron Conway’s focus on helping tech industry integrate into SF and a16z partners pledging large amount of their earning to charity. How can we use this energy to reset the norms of our community?

Will a single morning of service suffice to solve the issues being raised? No, of course not, but it will allow several hundred founders to experience something personal.

Is homelessness the only worthwhile problem? No, of course not, but don’t let complexity get in the way of a simple act.

As a venture investor myself, should I back up my words with action? Yes. Homebrew’s holiday “party” was a volunteer event where we painted public school classrooms with some of our portfolio companies. And I would be proud to join these investors in the volunteer event suggested here.

We can do this in January. It just starts with one of these firms – or another large investor – raising their hand.

[Updated! Above I mention SF Project Homeless Connect as an amazing way to really see what’s going on in the city with our homeless population – really, if you haven’t seen it yourself please do. I was introduced to this organization originally via Ron Conway who five years ago got involved in Project Homeless Connect, helping to raise $1m to augment the SFPHC budget (in addition to volunteering himself at civic center). Didn’t have this info when I wrote the post so wanted to add and apologize for any confusion around Ron & SV Angel’s direct support of SFPHC. The investors noted here obviously all care deeply about SF – what I’m hoping the next generation of founders can do is also experience the city in a hands-on way]

[personal note: moved to Bay Area in 1998 for school & became SF resident in 2000. Fortunate in many ways, including economically. Now have a daughter and want to stay in SF, not suburbs. Proud of what the tech industry has done and contributes to the Bay Area but also hope to introduce philanthropy, volunteerism and empathy into our culture in a deeper way.]

Why Vertical Incubators Are More Interesting to Investors

According to AngelList there are 1,530 organizations listed as “incubators.” Even assuming several hundred of these are using the broadest definition of the word to describe themselves, it’s an incredible number. Many (the majority?) are what I’d categorize as “horizontal” – that’s to say, they don’t focus on a specific industry but rather try to help a group of startups generally advance their development. Whether you want to call them incubators, accelerators or any other name, the template is pretty similar: fixed amount of time inside the program in exchange for equity (and sometimes a cash investment).

As a seed fund investor here’s what I want from an incubator: (a) serve as a selection filter for me to meet interesting companies and (b) give their startups a competitive advantage via deep network beyond their incubation. I know that many incubators commit to doing more than this – mentors, curricula, coworking space, most also do some sort of demo day to organize fundraising. That’s fine – my issue isn’t that an incubator isn’t good for the entrepreneur – that’s each founder’s decision. Rather most incubators lack the resources and traction to rate highly across my criteria above.

Implication? I’m probably not attending many demo days (although I’m 100% open to startups in ANY incubator reaching out to make an introduction if they think they’re a great match for Homebrew’s focus).

Now what DOES interest me? The rise of the vertical incubator focused on bringing together a set of startups aligned around a particular technology or industry. Examples like Rock Health in Healthcare or the multiple instances TechStars is spinning up, such as the RGA connected devices incubator in NYC where I’m a mentor. Often done with a corporate partner or other strategic relationship (university, investor) these have potential because they have a path to solving my needs:

(A) Selection Filter: If I’m interested in the vertical, high ROI way to see a bunch of startups thinking about the space. Good chance for me to “give before I get” by sharing what we’re seeing in the marketplace and within the companies we’ve already funded. Even the most promising founders might be attracted to the incubator because of deep industry focus.

(B) Competitive Advantage: Deep set of industry-specific relationships and mentors, not just helpful but non-specific list of alumni founders to draw from. And industry corporates which are keep a close eye on the startups because of their need to stay close to innovation. Down the road these could turn into partnership opportunities, strategic investments or even M&A.

I root for any entrepreneur who brings drive, intelligence and integrity to their startup. But for most investors time is even more precious than capital, so the reality is I can only focus on a handful of incubators, and in many cases, vertical beats horizontal.

Facebook Credits Could Have Been Bigger Than Bitcoin. Four Reasons Why.

Money. I’ve been obsessed with it for years. Not accumulation but the construct. Any currency is a mass hallucination. A store of value which holds its place only so long as there’s collective belief in it. Studying the history of American dollar bills during my study at Vassar. Diving into the “is it art or counterfeit” debate around JSG Boggs. My early years at virtual world Second Life helping to create a virtual currency called Linden Dollars with a floating point exchange rate. Accordingly it shouldn’t come as a surprise that I’ve followed bitcoin for a few years now. The notion of a universal monetary unit tied to something other than a nation state? OMG YES. But I’ll admit that my original beliefs were completely the opposite of how bitcoin has emerged. I expected we’d see something corporate-backed and tied to identity, not distributed and anonymous. And I thought it would come from Google or Facebook.

Jessica Lessin’s The Information had a great article today about Facebook Payments (behind paywall). Reporter Katie Benner notes that unlike earlier grander ideas, Facebook’s strategy now seems to be more about just one-click ordering using an on-file payment method. Big difference from the days of Facebook Credits, a Facebook Platform initiative to allow in-game items, movie rentals and other purchases. When Credits first launched I thought “holy shit, they’re going to do it” with both surprise and admiration, where “it” was the first global shadow currency. That Facebook Credits would be a way to pass value between consumers and businesses -and- person to person. Why?

1. Immediate Utility Different Than The Dollar (First Party Utility)

An alternate currency needs to have bootstrapped/kickstarted market liquidity and validation. Facebook, at the time, had the power to tell all Facebook Platform app developers that they needed to use Credits as their virtual currency. Immediately there was a widespread use case and reason for consumers to hold Credits instead of Dollars. The issuer of the currency was also able to create a market.

2. Broader Third Party Recognition

Once the Games market was set, other on-platform businesses started to experiment with Credits. For example, you could rent movies from Warner Brothers. At the time “F-Commerce” (omg what a horrible name) was trendy and all different types of apps were being used to help merchants set up storefronts within Facebook and on their Facebook Pages.

3. Tied to Identity & Reputation

Because Facebook is a real name space, it was exciting to imagine that Facebook Credits could come with a reputation system. There hasn’t been an interesting transaction-oriented reputation system on the web since eBay built their user ratings, and that never broadened despite fact that eBay User Ratings + Paypal COULD HAVE BEEN HUGE AS A PLATFORM. Within Facebook, or anywhere that you could sign in using Facebook ID (which is still the most robust part of their platform play), you would have a one-click payment system tied to a user history. Huge.

4. Inherently Global

Facebook was also the first global social network at scale. That meant you were going to run into inter-country transactions and a frictionless proxy currency would have had use. Within a single country it would be very hard to replace the local unit of exchange, but across borders, less so.

Why didn’t the Hacker Way push Facebook to be aggressive here. Hacking money? That’s so cool. Unfortunately they turned in another direction. Admittedly they had much on their plate and needed to focus, but I wonder why they don’t take on a few of these 100 Year Hacks…