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.

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…

The left is Android/Google’s Andy Rubin 2007. The right is Rubin 2013. Nice setup. Should we speculate that Rubin is highlighting he’s been building drones for six years now (same NYTimes author and photographer too)? Also, guy ages well eh?

“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 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.

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?

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.

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.

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.

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.