Disrupt Your Industry With Love, Not Contempt

“You ever notice how the first slide in any pitch deck these days is ‘[industry] IS BROKEN?'” A friend pointed this out to me last week talking over coffee during a cold rainy New York afternoon. It was noted with a bit of smirk – both in terms of its consistency but also how it has a “to a hammer, everything is a nail” quality — the world is broken and entrepreneurs are here to make it better!

Now of course there’s a beautiful truth to this: entrepreneurs see problems everywhere. Problems they are compelled to fix. One of my emerging theories is the best products/startups are built on an emotional base of love and greed. Love in the sense that the founders are motivated by some deep warmth and appreciation towards the area they’re innovating within. And greed not solely in the notion they want to make lots of money – although they believe profits are a tool – but rather that they won’t stop until everyone is a customer because their product is just that good, and that’s the way the world should work. Looking at Homebrew’s 2013 investments I see clear examples of founders “fixing” their industries with love, not contempt. The two most striking for me are UpCounsel and The Skimm.

UpCounsel connects businesses with on-demand legal support by creating a marketplace, really a virtual law firm, of the best independent attorneys. Folks like the Wall Street Journal are taking notice. Matthew Faustman, UpCounsel’s CEO/cofounder, is a lawyer himself, having left prestigious firm Latham & Watkins to create what he saw as the future of the legal profession. UpCounsel wasn’t founded because Matt hates lawyers. Quite the opposite – he believes both lawyers and clients are underserved by current options and he can build a way for both sides to have more meaningful interactions. The large law firm structure is crumbling and UpCounsel wants to make sure every great independent lawyer has everything they need to succeed. Look at Matt – he’s a handsome smart guy. Could have stayed the course, made partner, got the nice house, etc. But that wasn’t the impact he wanted to make on his profession. He stepped away from a surer thing to do the new thing. And I see that DNA in his business. In the way they interact with lawyers on the platforms – recognizing they’re talented, unique individuals, not just fungible resources.

For Carly and Danielle at The Skimm – close to the same story. Two twentysomething NBC News rising stars but felt to the core of their bones that traditional media was underserving their generation and any other busy professional who wanted to stay in the know. What do most people do? Nothing. Keep collecting the salary, the promotions, the false stability. Instead they left. Not shaking a first at the existing institutions and toasting how they’ll burn them to the ground, but with love. We can do this different and better. And we need to do it from outside of the current structure in order to bring it to life true to our vision.

At Homebrew I’m getting excited by founders with domain expertise who turned their back on short-term traditional safety to build something they believe is better than their industry is currently offering. I know Matt, Carly and Danielle are doing it with love. Better ask them about the greed part too 😉

Mattermark’s 2014 IPO List

Mattermark is a startup focused on analyzing private companies. While most of their data is only available via subscription, they’ve got a free daily newsletter that’s worth signing up for – do that here. Today’s newsletter listed the 25 fastest growing companies who’ve raised >$80m in investment capital. Mattermark notes that this is a potential “IPO List” for ~2014. Interesting to see how many on here get talked about in the tech press frequently – and even more interesting to see the ones which don’t have the press halo but seem to be kicking ass.
mattermark IPO list

Amazon, Apple, Kickstarter and Everyone Else

I didn’t buy anything on Black Friday besides a coffee but the barrage of email offers did remind me of one thing: how little I care about most ecommerce retailers. Reflecting, there were only three sites where I spent >$500 in 2013: Amazon, Apple and Kickstarter (add Honest if you include our household’s diaper subscription. I’m not including airline, hotels, tickets because focused more on the delivery of a physical good). 

Amazon gets most of my online dollars and if anything changed this year it was the rise of Subscribe & Save, their version of a per-item subscription services. Via S&S we now get: three types of pasta, razor blades, two types of tea, paper towels, garbage bags, baby wipes and about two dozen other goods delivered anywhere from monthly to quarterly. Amazon is a juggernaut. There’s no reason to think they won’t have 80% of my non-perishable grocery and toiletry business in 2014.

Apple benefits from a few large orders each year – in this case a laptop, monitor, phone and assorted accessories. 

Although I have backed projects on Kickstarter for several years, this was the first where I really dug in largely from social discovery. Damn you Zach Sims and your love of notebooks and bags.

What was my long tail? Zappos, Grand St, Field Notes and I’m sure several other clothing retailers.

Is your ecommerce spending similarly concentrated?

Skimm Founders Write About Funding Lessons Learned

What does true founder honesty & authenticity look like? Like this:

The Good, The Bad and The Ugly 

Fake It Till You Make It

It’s wonderful to see the founders of The Skimm talk openly to their community about the fundraising process. I can imagine that some founders think admitting what you don’t know is a sign of weakness. It’s actually a sign of self-awareness, strength and self-confidence. Qualities which were apparent in Carly and Danielle from our first meetings together. Qualities which led to us funding their effort to reshape the news

I’ve written before about what to tell VCs when you’re missing the data we want to see. The Skimm founders did this effectively and they earned the support and capital of Homebrew + others.

Three New Types of AngelList Syndicates I Hope to See

So far most of the top funded AngelList Syndicates look, well, not surprising. Capital has lined up behind social proof – angels with notable reach or track record. Additionally, funds such as Foundry Group and Google Ventures have taken their own approaches – the former creating a separate early stage entity, the latter encouraging their seed stage partners to create standalone personal syndicates. While these are all credible let’s be honest – it’s a little boring. I’m an individual investor in AngelList (pre-Homebrew) and remain excited about opening up supply and demand within early stage investing. As part of my seed fund Homebrew, we were also one of the first VCs to co-lead an investment alongside an AngelList syndicate (see Shyp).

Ultimately my hope is to see AngelList Syndicates do more than fund the same companies, just by different people (the “syndicates vs VCs meme”). Here are three types of AngelList Syndicates which I believe could be profitable for their investors and additive to the ecosystem.

1) The International Dealflow Syndicate

US-based seed VCs rarely invest outside of the country (500 Startups is one exception) leaving a potential gap in the market for folks with international expertise. Lee Jacobs is one example of a Syndicate lead who is sourcing deals from South America. While larger funds are interested in these companies at later stages of development, the resources it takes to cover the international markets at seed stage is likely not one they want to make. Instead a series of AngelList Syndicates could serve as complements or substitutions for local in-market dollars overseas.

2) The Bundled Expertise Syndicate

20 hardware engineers getting together to form a Syndicate. Now that would be interesting. If I was funding a relevant company I’d love to have such expertise investing. Let the Syndicate handle filtering for membership – it would almost feel more like an investment club – but they would see themselves as value add angels, without the company needing to add them all individually to the cap table or hold 20 separate pitch meetings. This model applies to any vertical or expertise – imagine a Syndicate of 10 great growth hackers – would you not salivate to have them in your deal? And accordingly, they’d be able to attract investors not because they have a large Twitter following but because they’re bundling a scarce and desired skill.

3) The Alternate Liquidity Syndicate

Institutional VCs rely a model which optimizes for billion dollar outcomes via an acquisition or IPO. Smaller liquidity events can still be valuable to a fund (very dependent upon size, stage and ownership percentage), but if you’re in the venture business, you’re playing into some variation of the ‘swing for the fences’ mentality.

But what if there were a group of investors who were comfortable with different types of businesses or different funding cycles. Instead of doing increasing financings every 12-18 months, what if a company took a smaller amount of money, went back to their investors infrequently and got to profitability. Maybe they’d throw off cash dividends for years to come. Or have different liquidity assumptions beyond acquire or IPO. Venture firms turn their back but Syndicates set up with this investment model might think differently. We look at AngelList today as a platform for early stage venture-style tech investing but as software eats the world, there are startups enabled by tech but not necessarily startup rocketships, in model or ambition. With seed capital requirements which fall somewhere between a bank small business loan and venture. Would Syndicates be a solution?

One of the most exciting aspects of platforms are you can’t always predict how they’ll be used. If AngelList is open to the experimentation, I’m hoping that Syndicates will evolve and push in many new directions.

Why I Don’t Ask “Is This a Billion Dollar Business” Before I Invest

Unicorn hunting is hard! As Aileen Lee’s recent blog post suggested, there are only a few dozen billion dollar+ companies created each decade. If you’re a large venture fund, you need to be invested in several of them in order to show returns considered upper-echelon. For early stage funds like ours (Homebrew is a $35 million seed fund), backing a unicorn can result in overall ROI of 10x or higher. Chris Sacca’s Lowercase Capital invested in both Twitter and Uber early. Steve Anderson’s Baseline was in Instagram. Both of their funds have performed extremely well.

Given these realities wouldn’t you expect us to ask ourselves “is this a billion dollar company?” before making an investment? Well, we don’t. Not because we don’t want to invest in high growth unicorns or that we’re serious about maintaining a disciplined approach to our strategy. ~6 months into Homebrew I’m still evolving my filters but my inclination is it’s the wrong question for a seed fund like ours to pose. One which might actually cause us to miss out on big returns.

Why?

It’s Not About the Market Size, It’s About the Size of the Problem the Startup is Solving. Billion dollars startups don’t always start out as billion dollar markets. Yes sometimes they are clearly going after a marketspace that’s already defined: CRM 2.0 replacing CRM 1.0 but there are other paths to riches. Billion dollar companies often create new markets by tapping into unmet demand. Billion dollar companies can start out looking like toys. It can be about levels of zoom – like on a Google Map. If you thought airbnb was just the size of the hostel market and not the hospitality market, you missed out. If you thought Uber was just the size of the black car market and not the transportation market, you missed out. At Homebrew we try to understand the problem, the customer mindset and business model (current and/or potential).

The “Why” Will Show You The Way. In addition to understanding the Who, What & How of a Startup, we spend a lot of time on the Why? Why are the founders dedicating minimally several years of their lives to this effort? By understanding the motivations of the entrepreneurs – what’s driving them, what does success look like to them – you can try to determine whether they’re in for a potentially long journey or is this nearterm opportunism. A big evergreen problem to solve and a superior team that wants to make sure they’re the ones to solve it = recipe for a billion dollar company.

So there is one question with a dollar sign that we do ask ourselves: How Can This Investment Return the Fund Once Over (ie $35 million)? This is a factor of the company’s ultimate value and the percentage of it that we own. Let’s say we’re going to own 10% in return for our seed investment. Assuming we continue to invest our pro rata, the company would eventually have to exit for $350 million to return $35m to Homebrew. We ask ourselves this question because different companies have different paths to this outcome based on their business – for example, an agency that primarily relies upon billing customers for project work will be valued at a much smaller multiple of revenue than a SaaS company with a reoccurring revenue stream and margin leverage. While we don’t make investments solely based on this question, if we have a difficult time answering it might mean the opportunity isn’t a good fit for our model. It also helps determine our thinking on ownership percentage – whether we think we need to investment more or less to get to a comfortable point. Note that this has nothing to do with probability of achieving said outcome – that’s a totally different calculation. This is more about understanding some of the possible paths to an outcome which starts to make a difference to our investors.

If a venture capitalist asks a founder “will this be a billion dollar company?” there’s only one right answer: “yes.” Unfortunately that question – and its answer – really doesn’t tell you much. Nor is always trying to place the company into a well-understood bucket. But if you ask a different set of questions, perhaps you’ll end up with a few unicorns of your own.

Reshaping the News: The Skimm Raises Seed Round from Homebrew

Content is about knowing your audience. About knowing where you fit in their day and needs. About creating habit. About having growth and business models which match what the Internet is good for – namely, connecting you with sources of trusted information for “what you need to know.” And speaking in a human voice to your community while inviting them inside. This is what we observed while working at Google, YouTube and Twitter and it’s what we see at The Skimm, Homebrew’s most recent investment. The Skimm delivers a handcrafted summary of top news stories into your inbox each morning. Written not by an algorithm but by two ex-NBC News producers.

Homebrew invested because we believe in new players innovating within traditional markets. What we saw here (and in UpCounsel, an earlier investment bringing on-demand legal services to SMBs) is that innovation comes from talented young industry professionals who are changing the status quo because they love the future more than the past. Carly and Danielle, the Skimm’s founders, were rising stars within their company, but they were willing to give up the safe path. They LOVE the news. They just want it to be written, packaged and delivered to their generation – and future generations – in a different way. And quietly they’ve built a six digit subscription base that’s growing quickly because of passalong and word of mouth.

We read The Skimm. We invested in The Skimm. And we’re excited to see Carly & Danielle put their stamp on the industry they love.

Sign up for The Skimm.

To Hire Excellence, You Need to Know What Excellent Looks Like

If you don’t think marketing is important, you’ve never worked with a great marketer. Think the best products just sell themselves? Then you’ve never worked with a great salesperson. Ugh, product managers just get in the way. Then you’ve never worked with a great product leader. When Founders make hiring mistakes, or tolerate middling team members, it’s often because they don’t know what excellent looks like. Until you’ve see an artisan practice their craft, it’s difficult to discern Jiro from any other sushi chef.

What’s an entrepreneur to do?

  • Meet Some Excellence: Ask investors, your lawyers, other founders to introduce you to someone who is an excellent [lawyer, CMO, UX designer, etc]. Take them to a meal or for a walk. Ask them how to ID excellence within their profession: what types of experiences to look for, what interview questions to ask.
  • Bring Excellence Into Your Interview Process: If you’ve got an advisor, investor or friend with experience in the discipline you’re trying to hire, bring them into the final interview process for candidates.
  • Benchmark Excellence: What’s the right close rate for an excellent salesperson? Best practice response rates for email marketing? Sure it can be apples to oranges, but come up with a performance range that suggests excellence and if a team member isn’t performing within it, work with them to figure out why.
  • Ask The Person You’re Trying to Hire: Seriously, just ask the question “what makes an excellent marketer” and/or “what do you do better than other folks we’re interviewing.” It can be a little awkward but revealing. Some folks will blend confidence with their modesty. Others will just brag without much behind it. Regardless self-awareness plus a thoughtfulness as to what excellence looks like in one owns profession is valuable. It can also be situational – for example, someone might be able to connect their own skills to the particular phase or type of work your company is doing. Generally good but situationally excellent isn’t uncommon.

Most startups can’t survive ‘good enough.’ Shoot for excellence and build a culture of helping excellent people thrive.

Update: Joe Kraus of Google Ventures wrote a very similar post in 2012. Thanks to @jasoncrawford for finding.

VCs: Be a Partnership, Not a Collection of Partners

As a seed stage fund most of my time is spent with the founders we’ve invested in already and those who are talking with us about potential funding. Each week I’ll also catch up with a handful of other VCs, either because we’re looking at deals together or just generally updating folks on our Homebrew mission. The question I get most often from them is “Is that Homebrew tattoo real?” but I’ve already written about that 🙂 The second most frequent question – usually from partners at funds who are less active in seed but find point of entry in A or B Rounds – is some variation of “what do entrepreneurs think about our firm?” There’s always one thing I can tell them – entrepreneurs want their VC backer to feel like a partnership, not just a collection of partners.

What’s the distinction between the two? Here are some of the ways founders have articulated the differences to us:

  • When they’re pitching and coming in to meet a second partner, or pitch the partnership group, does it feel like the group has been briefed on what was already discussed or are the founders forced to repeat everything again. Does each meeting with the firm build on the previous one?
  • Do the partners focus on various verticals or industries and ensure the founders land with the best match for their company, or is there a lot of overlap and it’s someone’s deal just because they were point of introduction?
  • Does the firm stand for something? This does not necessarily equate to strength of brand or social media noise, but rather, does it feel like the partnership exists because they have a mission to accomplish or just because they have a slug of money to invest?
  • When the founders need operational help or guidance, how often do other people at the firm outside the deal partner offer to help?

When we formed Homebrew we committed to be a true partnership. In fact, Homebrew wouldn’t have existed in any other combination than the two of us coming together – neither Satya or I were thinking of starting a fund on our own. And although we intend at some point to invite other General Partners to join us, we want to be intentional about remaining a partnership that is greater than the sum of its parts. Brad Feld of Foundry Group, a firm and team who have been especially helpful to us, writes about this in his post Business Love. As Brad says,

The process of creating and building new companies from nothing is hard. It’s incredibly rewarding when it’s successful, but the process can be an excruciating, chaotic, and messy. There are moments of extreme stress. Failure is always lurking in the background. Working alongside people you truly love makes a huge difference, at least for me.

I’ve been in this business only a short while and have plenty to prove over the coming years, but my guess is that the “collection of partners” model will struggle in the face of truly integrated partnerships who are able to move quickly, evolve with the markets and signal to founders that they’ve got the commitment of an entire organization behind them.