Twitter Slows, What Blippy Thinks It Knows

Posted on January 19, 2010. Filed under: startups, venture capital | Tags: , , , |

Premise: Twitter’s fundamental innovation was a lowering of the effort required to establish a public voice.

So if you looked at the universe of public content creators, imagine a series of concentric circles, each representing an expansion in the volume of published voices.

Concentric Circles of Publishers

The inner circle would represent traditional journalists and authors.  It used to be the comittment and effort required to publish your voice was a dedication of your entire vocation to that effort.  Blogging platforms like wordpress and blogger then came along and lowered the required commitment from a vocational dedication to simply creation of long format articles that mirrored the structure of professional content creation, but without the effort of establishing employment/partnership with a 3rd party publisher for distribution.  That innovation increased the universe of content creators from XX professional writers (lets call it hundreds of thousands), to XX+YY writers+bloggers (I just read an estimate that in Feb 2006 (pre microblog explosion)  there were an estimated 200M blogs in existence).  The addressable market for blogging platforms like WordPress and Blogger was constrained by the effort/time required by a user desiring a voice to consistently create long format (multi paragraph) content.  At some point, their penetration reached a market of consumers who fundamentally desired a public voice, but who were not willing to put in the time and energy to maintain a blog.  Then along comes Twitter and other mircroblogging platforms with an innovation that reduced the comittment required to have a voice from hours per week (on blogging platforms) to minutes per week.  Twitter established the next concentric circle of publishers who desired a voice and were willing to put in a few minutes a week, but not a few hours per week, in order to maintain it and reach an audience.

Which brings us once again to the limits of Twitter’s addressable market, as defined by the population of people who may still desire a public voice, but who are not even willing to allocate the amount of effort/time that twitter requires in order to establish and maintain it.  So Twitter’s addressable market of users in confined to the total number of people in the world who desire a public voice and the percentage of those people willing to put in the required active effort to maintain it (leaving aside the user who is only consuming content on the site but not creating it…which is a whole other discussion).  I have no idea if the graph below is indicative of the company pushing up against those limits, or if there is some other explanation for the slowing in their growth curve, but I have no doubt that there are services on Twitter’s heels that seek to reach the next concentric circle of consumers desiring a voice, but who are too lazy even to actively engage in a microblogging platform.

One such service that seeks to reduce the active effort required to publish a “voice” is Blippy.com.  Amongst the venture/startup world, I would say there is a lot of anticipation around blippy, which I believe many are incorrectly viewing as the platform which could create the next concentric circle of publishers by making a feed of content that is almost passively (read: zero active effort) broadcast to a user’s “reader base.”  Once you sign up to Blippy, a feed of your purchases is published to followers.  So the user does not have to actively put any ongoing effort into publishing content (not even writing 140 characters), so long as they let Blippy pull transaction level data from the creditcards, online accounts, etc…While that may be interesting to a body of readers in a similar way as to how ones tweets are interesting to followers, I would argue that a stream of purchase data is not a true “voice” and does not empower users on the publisher side to “speak to an audience,” which is the value that I think sustains blog and microblog platforms.  So Blippy might look like a “micr0-micro blog” that would blow out another concentric publishing circle, but I don’t think that’s gonna be the case.  Now, there may well be other forces that contribute to Blippy’s growth and allow it to become an interesting consumer service, not the least of which, is people’s general desire to communicate their consumption behavior (“i bought this expensive thing, and i want everyone to see that I did because it says something about my success and ability to spend”), but that type of value proposition does not seem to have the same potential scale as a true innovation in the race to give a wider universe of consumers a public voice.  If anything, I’d guess that this type of passive data capture (also at the core of the burgeoning location based services market) will end up being a feature/input incorporated into true “voice providing platforms” like WordPress, Twitter, and whatever is after Twitter, as opposed to standalone replacements to the existent publishing platforms.

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FundlessFund Hijacks My Blog Today

Posted on January 18, 2010. Filed under: startups, venture capital | Tags: , , , , |

Since my blogpost on Friday introducing The Fundless Fund (FundlessFund@Gmail.com), a lot of folks have stepped up with interest in contributing to the Fund, and a lot of folks have been asking exactly what The Fundless Fund is….the short answer is…The Fundless Fund seeks to add as much value to the growth and development of early stage companies as a Y Combinator or seed stage investor, without any equity or payment in return…it’s an accelerant powered by fellow entrepreneurs, created in the vein of furtherance of our collective effort.

Based on the response I’ve seen so far, it seems like there are a bunch of related parties (investors, lawyers, accountants, established companies) that would like to pitch in.  That will be awesome for our “fund”, we just need to figure out exactly how to incorporate these parties into the mix without diluting one of the main values of The Fundless Fund, which is a complete alignment of incentives between the Fund and our entrepreneurs.  What I don’t want this to become is another “me too” organization sponsored by Sillicon Valley Bank or some law firm who’s primary purpose is simply to get a bunch of decision makers together in the same room (a room that happens to don the banners of those service providers).  I also have no interest in recruiting the 5 sexiest names I can get to sit on a panel, inviting a bunch of people to listen to a dog and pony show, and then prove to the 400 people who attend that my platform is strong enough to get 5 sexy people and 400 others to attend my event.  Rather, The Fundless Fund will take those 5 sexy people who are willing to donate an hour to our platform, identify the 5 most promising entrepreneurs who will benefit from an hour of their time, and we will use our “bullet” with those sexy people to get the 5 entrepreneurs into 1 on 1 meetings where progress can actually be made.  There is a place for networking events, and those groups and events are undoubtedly adding value to the New York Startup Ecosystem, but that is a saturated market that we’re not interested in playing in.

What we’re interested in doing is focusing a ton of high quality resources and attention on a much smaller number of people/companies…our goal is not to generate as much deal flow as possible, or to build the biggest community of NYC startup people…it’s rather to identify the brightest stars (whether first time or experienced) in our community and give them a leg up on fundraising, recruiting, and job search (if they’re not yet with a startup), all the while focused on a general transference of knowledge across the fund.  We want to help the best of the best to not get lost in the shuffle and noise of a not-fully-networked New York Startup community.  Why? Because it is our belief that those people with the most potential will build the biggest, most sustainable companies in the long run (but not without help).  Our city needs to birth a few multibillion public technology companies to cement an enduring infrastructure around this burgeoning startup energy, and it is our responsibility as entrepreneurs to maximize the likelihood of that occurrence.  Our fund is not a flash in the pan, looking for the next deal to bank/lawyer/account/invest in.  We have a long term view of this city’s ecosystem and we’re going to do our part to make it as easy as possible for resources (capital, talent, advice) to find the stars that are going to build New York’s homegrown Facebook, Google, Amazon, etc…

There’s a lot of plumbing that still needs to be worked through, but we’re off to a good start.  What you can do today to participate is as follows:

If you’re a startup/pre-startup that has raised less than $500K in the New York area, there are 2 actions for you to take today:

1)      Email fundlessfund@gmail.com with a short description of you’re company or future company, a link to some online public presence (site if you have one, linkedin profile, blog, etc…), and a brief description of your needs:

  1. People: (description of hires you’re trying to make)
  2. Capital: (no details needed, just are you going to need to raise money in the next 6 months)
  3. Advice: (general guidance and mentorship)

2)      Email fundlessfund@gmail.com and request to be added to our distribution list.  Even if you’re not in a position to join the fund’s portfolio today, stay connected and we’ll keep you up to date on how the fund is evolving and the best ways to get involved.

If you’re a venture/angel-backed entrepreneur or if you used to be and can still speak to the experience, and you’d like to be involved in the operations of the FundlessFund (i.e. sit on the “investment committee,” donate your time to meeting with applicants and accepted people/companies, etc…):

1)      Email fundlessfund@gmail.com with a link to some public presence online and description of what type of value/resources you’d like to contribute:

  1. Introductions to investors
    1. i.      Angels?
    2. ii.      Seed/Feeder Funds?
    3. iii.      Venture Capital Firms?:
  2. Strategic Advice/Guidance & general mentorship of high quality early stage entrepreneurs
  3. Career Placement: do you want to help high quality talent land at your own startup or another startup in your network?

2)      Email fundlessfund@gmail.com and request to be added to our distribution list.  As we figure out the best ways to work with established entrepreneurs and executives, we’ll keep you in the loop and you can decided if/how you’d like to be involved

3)      Email fundlessfund@gmail.com if you’ve build a platform like this in the past and would like to advise on the construction and implementation of the fund

If you’re an Angel Investor, Seed Fund, or Venture Capitalist spending time in NYC:

1)      Would love your input and ideas: fundlessfund@gmail.com

2)      If you want to interact with us going forward, request to add your name to our distribution list

NOTE: Thanks for your patience as we play catch up to demand…we subscribe to the concept of customer development…first step is to figure out what everyone wants, next step is to productize it and begin to scale up

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Introducing the Fundless Fund…get involved

Posted on January 15, 2010. Filed under: startups, venture capital | Tags: , , , , , , |

I remember talking to Chris Dixon a while back about balancing his seed investing activity with running Hunch…at the time I looked at this from an investor’s perspective and thought to myself…”I would want my founder to be spending 100% of their effort and energy on the company that I put dollars behind.”  He explained that his activity as an investor is what keeps his thinking fresh, and that the stimulus of these conversations and data points made him a better CEO.

I didn’t really have a chance to understand this phenomenon in my last company because I was playing in a market with little or no overlap to most venture ideas/startups.  So even though I still thought like a venture capitalist, meeting with entrepreneurs and executives to discuss their companies and ambitions didn’t really present a whole lot of value to Untitled Partners.  Now that I am building a true consumer internet company at JumpPost (where other founders’ thinking enhances and is directly applicable to my own efforts), I find myself engaging in and building a body of “investor like” interactions (despite the fact that I don’t have a fund to invest).  I understand exactly what Dixon was talking about, to the point where I am actively allocating cycles of my week to meeting with entrepreneurs and people thinking about becoming entrepreneurs to discuss their businesses, pitches, products, fundraising strategies, etc…I don’t stand to gain financially from meeting with the next big thing (as I would if I was making angel investments), but I really like helping other entrepreneurs achieve their goals, and I get a ton of non-financial value from these meetings.

Charlie O’donnell wrote a post recently in which he called First Round Capital a “feeder fund for larger VC firms.” Meaning First Round, although a relatively small fund, has established great relationships with larger venture capital firms that are capable of writing the big checks that their companies might need.  So the idea is, you join First Round’s platform and then one of the big guys (Sequoia, Benchmark, Accel) follows.  Feeder funds, or seed funds, are the flavor of the month in the Startup Funding Ecosystem (see Dave McClures breakdown of this evolution in the market).  I’ll say they are largely accompanying/taking market share from professional angels who perform a similar “feeding” function into other Angels, Seed Funds, and Venture Capital firms.  This is all just to say that the startup investment landscape is largely driven by the referrals of trusted relationships.  Investors rely heavily on signals to determine what is and is not worth their time, so the opinion of someone who’s judgment they trust (as signaled by an early investment in a company, or even a “hey, you should take a look at this…met the founder…it’s interesting”) is how investors decide which 10 of every 100 potential investments that come through their inbox, they are going to explore.

You might say that over the past 5 months I have been building a feeder fund…minus the fund…This was not a calculated move on my part, but rather a pretty organic evolution that has increased in scope as I have watched the yield derived from building my own company on top of a “platform”.  A “platform” is any vehicle that creates a center of activity around a specific person or group of people.  In the case of a venture capital firm, the actual fund is the platform that serves this function…So when you have $1 Billion behind you, a gravitational force pulls entrepreneurs, executives, and opportunities toward the people operating on top of that platform (investors, EIR’s, etc.).  With exposure to all these parties gravitating toward the center of the platform, a VC is in unique position not only to identify relevant business opportunities, but also to realize those opportunities swiftly through the injection of capital or resources on hand. This is why being an EIR is such a cool way to build a company…the platform of a fund provides tons of exposure to interesting data/people/ideas provides fertile ground to develop a company.

In the absence of a fund, there are other types of “platforms” that an entrepreneur can leverage to increase exposure to opportunities and people.  Polaris’ DogPatch Labs (great job at Hackers & Founders last night) is an example of a platform, where if you sit in a shared space attached to a brand worth $1 Billion (even if you are not the one deploying it), you catch some fraction of the gravitational force that the Polaris itself commands.  Affiliations with networks of entrepreneurs like First Growth or even Meetup (to a much lesser extent), are ways of tapping into an existing platform’s pull, and hopefully using that pull to propel your startup further than it would go independent of any platform.

I have decided to build a new platform, Fundless Fund, and I invite you to participate in it.  This blog is one of the cornerstones of that platform, insofar as it has reduced the cost and effort required to market the value proposition of a young platform to a wide audience. I’ve combined that marketing channel with some embedded pieces of value that I have managed to acquire through my experiences in venture capital and entrepreneurship, and now I would like to roll them into what I will call my “fundless fund.” At some point in the future, perhaps when I make enough money to fund this “fundless fund,” (or perhaps when I establish enough credibility to have others back it), maybe this platform will be strengthened by the financial resources to accelerate growth within it, but for now, I am happy to announce the first day of The Fundless Fund.  The core values and opportunity that the Fundless Fund presents are as follows:

1) integrity

2) extreme candor

3) information not readily available elsewhere

4) exposure to potentially accretive ideas

5) exposure to a body of entrepreneurs and executives who have been filtered through the perspective and rigor exemplified by my posts (I’ve basically built a map of the smartest people I like in this world…which I think I will publish in a couple of weeks)

6) jobs: if you’re a star, we’ll give you a job or introduce you to some cool people who are looking to hire stars

7) money: if you’re company is fundable, happy to introduce you to as many Angel Investors, Seed Funds, and Venture Capital Firms as we can…If not, we’ll try to tell you what you need to do to get to a point where you are fundable.

This is pretty much an experiment in adding a new layer to Dave McClure’s Startup Funding Ecosystem.  I’d imagine it is a layer in which any entrepreneur or executive who would like to further the entrepreneurial movement as a whole might be able to contribute (independent of whether or not they have yet made the bucks to do so economically).  If there proves to be value in fomalizing this already existent layer in the stack, I will try to bring on some great people and partners to strengthen the effort.

As this fund is fundless, we’ll be very psyched to receive anyone who wants to throw some value into the mix.  If you’re great at organizing events…awesome…if you want to hack together a shitty website for the “fund”…awesome…if you want to meet young entrepreneurs and are in a position to provide the types of value I outlined above…awesome…if you have ideas on how to actually do this well…awesome.  If you want to vote this up on HackerNews, post it on Digg, or do anything else to get the message out to entrepreneurs and would be entrepreneurs that help is available and 100% free…donated by people who are trying to further out collective effort…awesome…Get involved by emailing FundlessFund@gmail.com (ideally with some link to your public presence online).

Note: I still spend 90% of my cycles on JumpPost, so patience with the speed of development/action is appreciated until we “staff up” a bit.

Second Note: If you think this is a dumb effort, or have any ideas about how to make it less dumb…please comment

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5 Reasons Why Lying is Stupid in Startups (and Life)

Posted on January 12, 2010. Filed under: startups, venture capital | Tags: , , , |

1) You spend more energy/bandwidth maintaining a lie than you do dealing with the adverse effects of telling the truth: This is the main reason why I have categorically banned mistruths from my life (I’d say, by the way that 0% mistruth is almost impossible, but I have gotten damn close over the past 6 months or so).  In the near term, there are so many opportunities to “facilitate your path” through a small mistruth.  I challenge you to count the number of mistruths you tell in a day (I’ll bet it is north of 5)…It may seem like these mistruths are making your life easier (getting out of meetings you don’t want, getting meetings you do want, etc…), but I would argue that even the mistruths that are intended to make life easier end up requiring more energy than their truthful counterparts.  Let’s take the example of a friend who would like to work at your startup, who you don’t think is the right fit.  When they email you to ask for a coffee and you have 15 other things on your plate, the near term easiest solution would be to say “I’m slammed this week…can we try to catch up next?”  That clears you inbox in 10 seconds and you can move on to areas where you’d like to focus.  But what happens when that person email you again next week?  Now you need a new excuse, so you say “hey man, I’m traveling this week…I’ll ping you when I get back.”  That’s an additional xx units of bandwidth you spent creating a more complex excuse not to meet.  Then, when you do bump into this friend a month down the line, and he asks how your trip was, the entire balance of your interaction, and every interaction that follows, must exist with maintenance of your initial mistruth about being out of town.  That’s a lot of mental bandwidth to expend.

Now let’s think about what the case where you had taken 2 minutes, instead of 10 seconds, to address your friend’s initial request honestly but respectfully.  That’s 60 seconds of analysis as to why this person is not the right fit, 30 seconds on what you’d like to communicate to them, and 30 seconds to write, “hey man…the first 6 months of this company, we have very specific needs with regard to domain expertise.  If something comes up that seems right for you, I’ll let you know, but happy to grab coffee and talk about who else I know that might be looking for someone like you.”  Now, you won’t feel uncomfortable seeing this person, you don’t have to maintain any mistruth, and although you may not have given them what they really wanted, you are still being a solid friend and helping out where you can.  Life is FULL of these opportunities to take an extra pause to think about what you really want to say, as opposed to what’s easiest at first glance.

2) Interesting ideas and conclusions occur at the point where you analyze a temptation to lie: Simply by training yourself to pause before delivering a mistruth, you will begin to think more deeply about the points of friction in your life that evoke such an inclination.  Analysis of these points of friction can lead to proactive reduction in occurrence.  Pay attention to these points instead of glossing over them with an easy lie and you can begin to consciously influence their frequency.  For example, when an investor asks you “so what worries you? What keeps you up at night?” you could either give the stock answer which reveals a minor concern and represent it as your largest concern, (and then repeat this answer every time someone ask you this question)…or you can tell them the actual greatness weakness in your model…you might think that you are hurting your chances of raising capital, but in actuality revealing this weakness will force you to resolve/strengthen it (maybe even through a dialog with said investor).  Once strengthened to the point where this weakness does not prohibit investment, you will no longer feel inclined toward dishonesty when faced with the question.  Short term you may increase the risk of securing fundraising, but long term you are decreasing the risk of failure….

3) You set a context for interaction that results in other people telling you the truth (better data): If you make it clear that you will never lie to a party with whom you are interacting, that establishes a plane of trust that is usually reciprocated.  People feel much worse about misleading someone who they know is being completely honest with them (as opposed to a dynamic of gamesmanship in which misdirection and indirect communication on both sides is understood).  You would not believe how frequently professionals set this indirect tone when engaging with external parties…waste of time, energy, and generally a very myopic approach to maximizing value of relationships.  By establishing an environment of honesty and direct communication in any interaction, personal or professional, you will receive a flow of more accurate data on which to base decisions and opinions.  Better data equals better decisions.

4) Being direct about what you want usually gets you want you want: Ask for the order, whatever it might be.  Trying to extract value through indirect communication takes longer and often fails.  Example: When I began to raise my first seed round I met with a friend who is an entrepreneur and seed investor.  I hadn’t really asked anyone for money yet (and I felt a little uncomfortable doing so), so I pitched him under the guise of “seeking advice.”  When the meeting was over, he said “I hate it when people aren’t up front about what they want.  If you are asking me for an investment, ask me directly.”  He forced me to “ask for the order” and from that point forward I had no problem doing so with everyone else.  After that I started asking people for investment instead of advice and guess what I got?

5) Sometimes you get caught: this one is straightforward…when you get caught in a lie you lose credibility and damage your relationship with the recipient as well as your overall credibility.

There are many more reasons (ethical, karmic..etc…) why setting a personal goal of zero lies per day is a righteous endeavor.  The purpose of this post is simply to outline some of the more practical and tangible effects of eliminating mistruth from your existence.  So now I have established a plane of truth with every one of you.  Anything I tell you and anything you ask me (professional or personal), my response will be 100% truth.  Fire away.

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Newsflash: Your Startup Is Not In The Playbook

Posted on January 6, 2010. Filed under: JumpPost, startups, Uncategorized, venture capital | Tags: , , , , , |

A former investor of mine, Fabrice Grinda, recently wrote a blog post enumerating the reasons why businesses that are started with two co-founders are more likely to exit big than are those with a single founder at the helm. That line of thinking seems to be the common sentiment at least in the venture world, and one which having seen more than a thousand founder/cofounder setups while on the venture side, I think I would tend to agree with.  When I started thinking about leaving General Catalyst to start my first business, I mapped out a progression of events necessary to take the plunge and build a company.  The planned progression of events went something like: 1) idea, 2) diligence, 3) cofounder, 4) quit job, 5)raise capital, 6) build product, 7) achieve seed stage milestones, 8 ) raise more capital and scale.

This play book is sort of a standard one that I had heard many entrepreneurs and investors tout, and not having been through it before, I largely executed according to plan (minus 7 & 8 that is).  What I’ve learned, however, is that someone else’s play book is only a guide, and to execute against it without flexibility and recognition of your own context/data is a mistake.  Nothing in startup world happens exactly as you expect it to.  Sometimes a recognition that you need to write your own play book can prevent what I’ll call “inorganic progress.”

“Organic progress”, to me, is when the events in an operating plan occur as the result of successful completion of tasks/goals/learning on which that new event is dependent.  In other words, progress that occurs naturally or without force.  An example of organic progress would be when a management team builds a product, puts it out to consumers, people buy this product, and THEN they design a customer service program to support their newfound customers.

“Inorganic progress”, then, would be occurrence of an event ahead of completion of the tasks/goals/learning on which that event is dependent.  Or, forced progress.  The company builds a product, puts it out to consumers, and then designs a customer service program in anticipation of its first customers…although it may seem that management is getting ahead (or making progress) by finishing their customer service design quickly, they are doing so without the data/learning of customer feedback, and thus an event (the customer service design) occurs before it’s antecedent (inorganically).

It has been my experience that when progress is forced, although potentially forward moving from an aesthetic sense, this is progress in a wrong direction.  The customer service design, when created through inorganic progress, will not address the needs of the company’s customers, thereby creating an operational inefficiency that would not have arisen had management allowed this piece of progress to develop organically.

As it turned out in our last company, steps 1-4 were in line with the concept of organic progress.  My immediate instinct when starting JumpPost was to replicate a known play book: 1) idea, 2) diligence, 3) co-founder, 4) give up job opportunity in venture capital (replaced quit job), 5) raise capital.  What I realized when I began executing on this play book, however, was that I had a previously non-existent understanding of the difference between organic and inorganic progress.  Steps 1 & 2 were the same, but as I began to work on 3, I realized that recruiting A level talent, and especially a cofounder, could be a 6 month cycle.  A number of people I am close with expressed an interest in cofounding the company, and had I been executing to “plan,” I would have taken one of them on before moving forward to step 4, but this didn’t seem “natural.”  Why? Because I was missing two antecedents to this decision.  The antecedents, in this case, being 1) an understanding of what domain expertise would become most important to our company, and 2) an understanding of what caliber of talent I could expect to bring on board pre vs. post venture financing.

So…I sort of tabled the old play book, continued to meet with interesting people, but began executing the subsequent steps before completing step 3 (cofounder)…As soon as I moved past step 3, another deviation from the play book arose.  The play book would have said I needed to raise capital in order to develop the JumpPost product (especially without a technical cofounder), but again it didn’t seem natural…what I realized was that I wasn’t ready to commit to investors a single vision for the Company without the data of product/market fit behind us.  So I read a lot about a new play book, rooted in the philosophy of customer development, and then began recruiting a team to build something ahead of financing.  Now, we will begin to acquire the data needed to complete step 5 (fundraising) organically.

I ran into Chris Dixon on the street in our neighborhood a few weeks ago, and after chatting for a bit about this blog, he asked about JumpPost.  His first question was “how are things going? still searching for a technical cofounder?”  From an investor’s perspective (and Dixon is another example of a guy who has seen a thousand startup teams, and subscribes to the “cofounder law” for many of the reasons Fabrice articulated), acquisition of a cofounder (step 3) was a data point that would indicate where I was in the progress of a conventional startup play book.  Although my answer to his question was, “yea, I guess so,” the reality was I was well beyond this step in the play book, but only because I decided a while ago that I would design a new play book, drawing on conventional wisdom for sure, but not without a few of my own creative plays mixed in.

So all this talk of organic and inorganic progress is just to say that while I recognize Fabrice’s points about the benefits of a cofounder, I will not take on a “cofounder” until it organically presents itself.  As JumpPost progresses, I view every early hire, part time contributor, and even advisor as a founding member of our company and I rely on them all as a sort of “aggregate cofounder.”  The interesting part is we are going to hit step 6 (product) and have a real good shot of hitting step 7 (achieve seed stage milestones) of the old play book, before executing on steps 3 (cofounder) and 5 (raise seed round).  It just happens that this was the most organic and natural path of progress given all the events/goals/learning that we have experienced to date.

So, I guess my advice to entrepreneur’s considering Fabrice’s (and common wisdom’s) suggestion that “2 [founders] > 1”  would be, “yes, a cofounder does represent a huge amount of value when starting a business…BUT there are many ways to skin a cat, just make sure you don’t do it inorganically.”

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The 3 Most Important Words in a Founder’s Vocabulary

Posted on December 14, 2009. Filed under: JumpPost, startups, Uncategorized, venture capital | Tags: , , , |

I have always been amazed by people’s unwillingness to utter the words “I don’t know.”  These three words have been, by far, the most important words in the course of my professional development.  I remember working for a Hedge Fund when I was a sophomore in College, and being tasked with maintenance of a model that one of my bosses had developed to track financial performance of distressed public companies.  I had “sold” my way into this internship leaning heavily on my previous “experience” interning at a Broker/Dealer in high school, but the truth of the matter was, I had no fucking idea what the numbers in this model meant.  My high school internship had consisted of running tickets on a trading floor and picking up breakfast for a bunch of Boiler Room brokers.  While I did get a taste for the “excitement of the markets,” I received absolutely no background in accounting, could not read a financial statement, and was ill equipped to be updating and “analyzing” the data in this model.

I spent about 2 weeks faking my way through this task (while working hard to add value in other places where I was more confident), and then I realized how inefficient it was for me to be performing it with my limited knowledge.  I remember coming clean with my then boss, and saying, “I don’t know what any of these numbers mean.”  I expected him to be extremely disappointed, but instead he sat down with me, spent a few hours explaining the basics, and I became infinitely more dangerous and valuable to the Company.  I internalized that lesson early, and now I apply it on a regular basis.

Admitting that you don’t know something is by far the fastest way to learn it.  When I got to General Catalyst Partners, I literally did not know the difference between an application and an operating system.  I had to learn a whole new language, and the way I did it was by writing down every single word and concept I didn’t know, most of which were extremely basic and revealed my complete lack of experience, and then I would corner people in their offices and ask them to explain the items on my list.  For about three months I was the kid who didn’t know anything, and then for the next two years I was able to speak intelligently across just about every industry and market to which we paid attention.  I remember watching the learning curve of one of the guys who joined our team after me, and it was so much slower than it should have been.  I realized the reason was because he never asked for anyone’s help.  Never admitted when he didn’t know something, but instead sort of nodded his way through conversations about subjects he hadn’t learned.  Had he sucked it up and admitted what he didn’t know up front, his learning curve would have been much steeper.

Especially as a non-tech founder (and as a tech investor) I am constantly dealing in realms where my domain expertise is a fraction of the folks’ with whom I work.  SEO is a great example of an area where I lack the necessary domain expertise to be dangerous.  I could either keep on referencing SEO as a strategy we are going to implement at JumpPost, without understanding how it works, or admit that I get conceptually why Search Engine Optimization is important, but to be honest, I have an extremely cursory understanding of how it works.  As soon as I admit that, while potentially unimpressive to the investor with whom I am speaking, or the potential hire with whom I am recruiting, I am now able to sit back and listen as they explain the three pieces of “low hanging fruit” we can achieve while knowing nothing about SEO, as well as the three more complex concepts around the relationship between SEO and Product architecture that I can now implement during the build of our product.  The alternative, of course, being that I could gloss over this “blind spot,” notice in 6 months that we are stinking it up on organic search traffic, and then admit that we don’t really understand SEO, at which point I’ll have to explain to said investor why I just wasted $XX of his investment building a non-SEO friendly product that now needs to be rebuilt/augmented at an additional expense to the Company.

When you expose a “blind spot” in your skill set/knowledge base, those who are in a position to teach don’t feel any need to impress you with their knowledge.  Rather they speak to you like they would a first grader, which is exactly where you need to start when you are learning a new language.  Imagine trying to learn Italian by sitting in an a 3rd year Italian course.  It would be nearly impossible and you would immediately raise your hand and say “I think I’m in the wrong class, where’s Italian 1?”  If you’re a non-tech founder, for example, not raising your hand when designing a product with your lead developer and saying “Where’s PHP 101?” is simply stupid.  Your job may not be to write the code, but if you don’t understand the basics behind every layer of your product, how can you recruit intelligently, weight the effort of your design against internal resources, and contribute ideas to the development process in a method that is easily digestible to the rest of the team.  Even in areas where you don’t need to become an expert in your Company, taking the time to learn the basic principles behind everyone’s efforts is essential for effective communication both within your Company and with parties outside of it.

Beyond product, this practice applies to marketing, fundraising, business development, and every other effort that you are pushing forward in your Company.  I remember negotiating a business development agreement with Citigroup in my last company.  I identified a natural partner for our business, got in front of the right people to pitch it, and got their verbal commitment to move forward with a deal.  We sort of lingered in that realm of “ok, so we want to work together” for a couple of weeks, and then I realized that I didn’t know how to turn that sentiment into action.  I remember calling Brad Handler, who is the founder of Exclusive Resorts (and at the time a very important potential investor and business development prospect himself) and telling him “listen, I have this deal with Citigroup that is within reach, but I don’t know what to do now.”  He taught me how to write and deliver an LOI (Letter of Intent), described the process of turning that LOI into an Agreement, and coached me on how to get the deal across the finish line.  Now, in the course of acquiring this knowledge, I exposed our inexperience to one of the most valuable companies for the future of our business, but I only had to do that once, and every business development effort I encountered from that point forward I came at from a position of strength.

So the moral of the story is, don’t fake it.  When you don’t know something, admit it confidently, learn it, and move forward.

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Gilt, Groupon, One Kings Lane, Oh My

Posted on December 9, 2009. Filed under: startups, venture capital | Tags: , , , |

When I shut down Untitled Partners, before returning half the money to our investors, I went through the analysis of potential pivots we could make in light of the change in macro environment post meltdown.  As prices in the art market plummeted and volume of transactions evaporated, what the art market really needed was an effective liquidation model to help suppliers free up cash by delivering deep discounts to buyers who would not buy on any other terms.

At this time (early 2009), Gilt.com was about two years into their business, showing meteoric growth, largely because luxury clothing retailers (suppliers) were experiencing the same inventory management and liquidity issues that were luxury suppliers in our market.  For those not familiar with Gilt.com, they are basically an online T.J. Maxx (or “sample sale” if you want to get cute about it) for high end fashion apparel.  Consumers are able to purchase luxury goods online at 50-70% discounts during short window sales.  Retailers sacrifice margin (through discounting) in exchange for volume (through online marketing) while still protecting their brand and price point due to the one-time, short windowed nature of the sales.  Gilt, although they couldn’t have known it from the start, timed the market perfectly.

In a boom market, the effort of convincing these luxury retailers to give up this kind of margin, and to potentially dilute their brand, would have been a heavy sales effort.  But when people stopped buying $2000 handbags in Bloomingdales, manufacturers of said handbags were much more willing to take risks in order to keep their cash flows above water.  Like any marketplace, with supply, demand will follow, and in a market where even the wealthiest consumers are cost conscious and scared to spend, the value proposition of absurd discounts resounded greatly.  The result: Gilt did $25M in revenue in 2008, claims to be on track for $125M this year, and was just valued at $400M in  a $40M venture round led by General Atlantic and Matrix Partners.

The logical startup move for our company, given the success of this liquidation model in an analogous market, would have been to pivot toward a Gilt model in the high end art market…but an illogical supply chain and status-conscious consumer in our market ruled this move out.

So we weren’t able to leverage the beauty of  a liquidation model in a down market, but many others were.  Multiple “me too” Gilt competitors experienced similar growth trajectories.  Gilt’s market crowded with the presence of Rue La La,  Ideeli, and others, but to date, there has been enough volume to go around.  I hear a lot of new startup ideas, and I can’t tell you how many aspire to be “the Gilt for this” or “the Gilt for that.”  Gilt, itself, even funded an extension of their model in the travel market (now called Jetsetter.com).  Kleiner Perkins and First Round Capital just backed a similar model called One Kings Lane in the home furnishings market…and modifications of this liquidation model have even been implemented with great success in the local SMB market (i.e. Groupon, which just took $30M bucks from Accel).

So here’s my question…all of these models experienced their growth when they were able to provide fledgling businesses with an avenue to move inventory in illiquid markets.  But what happens when the economy fully recovers, retailers are able to move their supply without deep discounting, and the already saturating market full of liquidation companies begin running into stiffer competition for inventory?  The consumer side of their model shouldn’t change.  Consumers will always want deals and be happy to by at discounts, but the breadth and quality of inventory that these companies can offer will decline.  Perhaps stupidly (I have only the most superficial data to support this thesis), I am guessing that most of these models will shift onto a trajectory of more linear growth in the next 18-24 months…

This is not an argument that all the venture investment that has gone into the space was poorly spent.  The growth that has already occurred will sustain these early winners for years to come, and the macroeconomic picture isn’t going to 180 tomorrow.  My caution, is more for entrepreneurs and very early stage startups that are contemplating this type of model now and going forward.  Seems like the perfect storm for liquidation models is close to or already behind us.

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The “Real” Behind Online Analytics (Entrepreneur’s Therapy Session)

Posted on December 7, 2009. Filed under: startups, Uncategorized, venture capital | Tags: , , , |

Being an entrepreneur or an investor in consumer internet land, it is very easy to become jaded by big numbers.  The metrics we use to track engagement with an online product or content are dehumanizing.  People who interact with an online site are immediately transformed into statistics like “active users,” “clicks” and “page views,” and somehow they become less real.  Mark Zuckerberg announces that Facebook has surpassed 350 Million “Users” and I am conditioned not to internalize just how many people are engaging in the action of Facebooking.  I guess when I hear a number like that, I try to benchmark it against big numbers I am already familiar with, to get a sense of scale.  I’ll say, “350 million people is 5% of the World’s population,” that is amazing market penetration.  But still, that number may as well be written in cotton candy, hanging from a tree in The Cat and the Hat, puffing out plumes of saffron colored smoke into a balloon shaped like the letter R.  That’s how far my perception of “350 million users” is from the reality of 350 million people performing one single and common action.

This only really dawned on me yesterday, when I stumbled into Madison Square Garden, sat down in the 8th row, and looked up into an endless sea of Knicks fans.  I thought to myself, “there are a ton of fucking people, packed into this arena, all concentrating their attention on the same thing.”  I leaned over to my friend, Phin (who has been kind enough to bring me to these games for the last 15 years), and for the first time I asked him “How many people does MSG hold?”  Phin answered 19,763, and I was paralyzed.  I thought to myself, “on any given day, I can write a blog post that reaches half of this arena, and it would be equivalent to calling a time out, handing out a piece of paper to the entire left side of the Garden, and having them read it in silence for 30 seconds, before the game resumes.”

Something is lost in the translation from a physical crowd to an online crowd.  As I try to identify what it is about that arena that I find so impressive, despite the relative size of its audience compared to online crowds, I am drawn toward a few concepts: 1) concurrency, 2) time, and 3) friction.

1) Concurrency: I guess I have a newfound respect for a product that captures a high volume of concurrent users.  The trend toward On Demand information consumption has removed a key constraint in attaining a volume of consumers.  Live (in person) entertainment is one of the last frontiers where the concept of On Demand consumption is impossible.  An event is only consumable in person during a specific window.  Therefore, 19,763 represents a much larger market share (of attention) than does the same number in the online sphere.  The potential volume of attention during the hours of 12:00-2:30PM is 1/12 the addressable attention of a piece of online/on demand content.  Think about how asynchronous consumption has expanded the addressable audience of a television show.  Between DVR, DVD, Hulu, and Cable On Demand, an episode of television has a near infinite number of opportunities to reach a consumer, as opposed to 10 years ago when an episode of Seinfeld could only reach the number of people sitting in their living room from the hours of 8:00-10:00 on Thursday nights.  Madison Square Garden is still living within the constraints of concurrent consumption.

2) Time: this is a metric that actually translates well between the physical and online realms.  A minute of someone’s time is a minute of someone’s time independent of whether it is spent consuming a product in the physical or online realms.  The product of a live basketball game is significantly better than the product of a blog post, which is why the Knicks are able to capture a full 2.5 hours of 19,763 people’s time.  I would have a very hard time convincing a reader to spend 2.5 hours reading this blog.  Time on site is actually a great metric to bridge the disconnect between the online and physical worlds.

3) Friction: by far the most amazing thing about filling an arena with 19,763 people is the amount of friction the Knicks are able to overcome in order to reach their audience.  Getting a consumer to move his physical location is probably 10,000 times harder than getting a consumer to move his online location (from one site to the next).  Consumers drop off from any product when they encounter friction of experience.  The amount of value on the other end of that friction determines how much friction a consumer is willing to endure before giving up and reallocating their attention/effort to an alternative.  When you load a webpage and it doesn’t render properly, you will hit refresh.  If you try again, and it fails, you might hit refresh.  Try a third time and almost everyone will give up on that piece of content.  If it was raining yesterday, I still would have gone to the game.  If the subways weren’t running, I would have taken a cab.  If there was a riot outside MSG, I probably would have passed.  The fact that the Knicks are able to mobilize this volume of people to stand, clothe, travel, and congregate is a testament to the quality of their product relative to alternatives (Sunday afternoon football on TV, shopping at the Apple Store, etc..)

All that being said, Facebook destroys the Knicks with the time lever alone.  It is a far superior product.  The aggregate volume of human time that their 350 million people devote to a single experience is breathtaking (with or without the crutches of a low-friction environment and asynchronous product consumption).  To all the web entrepreneurs out there, living in the analytics behind your product (especially if you haven’t broken out from 50,000 users to 350 Million): start visualizing your audience in the physical world.  Size up a crowd in the most densely populated area in which you find yourself, and then remember that it is likely a fraction of the number of people you reach on a daily basis.  It will make you feel good.

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Seed Investor’s Guide to Finding the Next Twitter

Posted on November 30, 2009. Filed under: startups, Uncategorized, venture capital | Tags: , , , |

I had breakfast this morning with my friend Ben Lerer.  He, and his dad Ken Lerer, have recently put together a seed fund to make angel investments in early stage consumer companies.  He asked me a question, which two years ago, I would have been able to answer in a heartbeat, but today caused me a moment of pause.  He asked me what companies are on Twitteresque growth trajectories that would be worth investing in regardless of price.  The reason I paused was because working at a venture capital firm for a few years, you get to a point where your thinking is probably 6-12 months ahead of the curve.  But lacking thousands of data points on blazing markets and the companies within them, I have probably lost that 6-12 month advantage.  I still read a ton, and spend time with smart folks from the entrepreneurial and VC communities, but the fire hose of information isn’t quite as fat.

Part of the job of an Associate at a venture capital firm is to identify new and emerging spaces that are worth investing ahead of, and exposing those opportunities to the partnership.  Microblogging in 2007 was one of those spaces.  To this day, Joel Cutler (who happens to be absolutely brilliant) at General Catalyst will tell you he owes me “a good drink of wine” for passing when I insisted we should fight to bet on Twitter, despite what seemed like a hefty price tag in the first venture round that Union Square Ventures ended up leading (the round got done at a $20M valuation, and two years later Twitter was just valued at $1 Billion).

That’s sort of the nature of being a junior guy at a venture firm.  Because you have less responsibility with the existing portfolio, you are able to spend more time than the old guys taking in new data and expanding the firm’s thinking into untouched markets.  You develop theses around that data, and when you find something you truly believe in, you need to pound the table so that the Partners who have not spent the last 3 months learning this new space with you will listen and understand the opportunity.  Even still, there is a very good chance that nobody will be willing to use one of their bullets on your idea.  Each partner at a venture firm gets to make 3 or 4 bets a year (might vary a bit from firm to firm depending on size of fund and number of partners), and a firm probably looks at 2,000-5,000 deals a year.  Passing on winners is part of the business.  Bessemer actually has a great page on their site where they display the firm’s Antiportfolio.  The Antiportfolio is a list of all the massively successful companies they could have invested in, but didn’t.  A star studded list of billion dollar logos is accompanied by hubristic quotes from the “passing partners,” explaining why they would never invest in the likes of Ebay, Apple, Google, Intel, Paypal, etc…

So in the absence of an immediate answer to Ben’s question, I can perhaps supply a recipe for any early stage investor who is trying to get ahead of the curve.  This is my process for finding the next Twitter:

1) Read: Macro (i.e. Economist) and micro (vertical blogs) content ingestion (30%)

2) Try: Personally experience as many products and services as possible in markets of interest, identify game changers (15%)

3) Experts: Develop and test theses with thought leaders from industry and academia (15%)

4) Entrepreneurs: Speak/meet with every entrepreneur attacking a given market, identify current state of the market and who is best positioned to capitalize on sea changes and future direction (40%)

5) Repeat steps 1-3 over time and across markets

Oh, and if you’re the next Twitter, and investors haven’t found you…you can email me, I’ll try to put you in touch with the right folks…

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“Open Sourced” Job Spec

Posted on November 27, 2009. Filed under: JumpPost, startups, Uncategorized, venture capital | Tags: , , , |

On November 5th, almost exactly 3 weeks ago, 253 people read my first blog post.  On November 25, 2 days ago, 4,730 people showed up.  While I am excited by the growth, I am still searching for better ways to harness the collective knowledge within this new community.    Despite more than 5,000 people reading the last post, only 8 decided to comment and continue the line of thinking.  Less than 2/10 of a percent participation is not very good.

Today, I want to experiment with a new concept.  I’d like to take a page from the open source software movement, and apply that spirit to the creation of a VP of Marketing Job Spec.  For those not familiar, the theory behind open source software development is that much of the coding effort required to carry out development of a project overlaps with the effort required to build other similar (or not so similar) products.  By openly sharing a body of code with everyone in a given community, all members within it are able to leverage what has already been accomplished/created, instead of reinventing the wheel from scratch.  So if I’m building an e-commerce site and I want to include a shopping cart function, I could spend hours developing my own from scratch, or I could just plug in an open source module that another developer wrote, knowing that his code will do the trick.  With the time I saved, maybe I will figure out how to build a feature on top of his code that reduces drop off, and then, if I’m cool, I’ll publish the code behind my enhancement back to the community (open source developers, if I butchered this, please chime in).

So now that I have all of you smart people reading this blog, I figured we could draw on some of your collective knowledge in an effort to create the ideal Job Spec.  Whatever we create here, will hopefully be the result of years of experience and lessons learned by those who have hired well (and not so well).  My hope is that the document we create will enhance our hiring at JumpPost, but also that it will serve as a template from which any startup recruiting a VP of Marketing can build.

I will start with a brief description of what JumpPost is, and then work into what I think we need:

JumpPost is somewhere between an online classifieds site and a low cost online real estate broker.  So, if Craigslist and Redfin had a baby, it might look something like JumpPost.  From a customer acquisition perspective, we are focused on general population consumers who are psyched about saving/making money during a change of residence.  We’re not interested in reaching home owners (at least for now), and folks who live in cities are more exciting than suburbanites and rural dwellers.  It’s a pretty wide net we can cast, and some of our value propositions are unique (read: won’t be competitive to acquire certain types of users), while others are highly competitive.  In a VP of Marketing, we are looking for someone who has a play book for building a liquid online community through a series of paid and non-paid customer acquisition strategies.

I’d like to collect contributions to three lenses through which we can identify a star VP of Marketing:

1) General Personality traits: What type of person makes a great online/consumer marketer? ideas that might be right or wrong include:

– data driven thinker

– addiction to analytics

– detail oriented

– quantitative bent

– understanding of relationship between product development and marketing efforts

– what else?  What personality traits do the best marketers you know exhibit?  Any surprising ones? Any huge red flags that your bad marketing hires displayed?

2) Specific marketing skills and experience requirements:

A) What unique skills should this person possess? ideas include:

– fluency in Google Analytics

– proficiency with SEM keyword tools/models (i.e. Clickable)

– what else? (I actually don’t know what are best in class skills here)

B) What experiences and backgrounds best prepare someone for this type of gig? Ideas include:

– comes from an analogous market acquiring similar demo of user (in our case: online travel, online classifieds, online real estate, online jobs, marketplaces, etc…)

– managed SEM campaign of $XX million budget with XX level of success (what are the metrics to judge success here? What’s a good baseline to measure outperformance vs. underperformance?)

– designed and executed successful referral program alla Gilt.com, Jetsetter.com, etc…(again, what’s a good baseline for measuring outperformance vs. underperformance?)

–  fluency acquiring customers from within larger platforms like Facebook, Twitter, etc…

– took an online consumer facing site from xx users to yy users in xx months (what’s best in class here, and how do we separate out the candidate’s contribution to that growth from all other efforts that played a hand?)

3) General traits and skills necessary for an early stage startup team member: What are the must haves and red flags when determining if a hire for any early role will be able to hack it in the beginning stages of  a company’s development? Ideas include:

– previous experience growing a company from alpha product to exit

– effusive and clear communicator

– “roll up your sleeves” attitude, no job is too small (not going to try to hire service providers to do all the work)

– comfort with a lack of structure and ability to create and execute own initiatives

– what else?  what are the best predictors that an early hire will be a star team member?

So, my suggestions are in no way exhaustive.  Please, those who have successfully and unsuccessfully hired an online VP of Marketing, rip this apart and share your experience in the comments of this post.  Where am I right on? What is way off?  Let’s try to fill these three buckets and I’ll publish a composite spec for all to build off of going forward.

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Founders Need Rock Hard Abs

Posted on November 25, 2009. Filed under: startups, Uncategorized, venture capital | Tags: , , |

There are two primary reasons why a founder needs rock hard abs:

1) working out of cafes and apartments, hunched over 12″ screens in shitty chairs with improper lumbar support is NOT good for your posture.  A strong core will help…

2) in the early stages of building a company, it is absolutely essential that you learn how to take a punch to the gut.

I have two close friends from Dartmouth who got flown out to the Valley this past weekend for final round interviews with Y Combinator.  Y Combinator is basically a hybrid venture capital firm/startup boot camp. A couple of times a year, they “admit” a class of very early stage startups, give them small dollars and a ton of advice and resources, and essentially groom them into venture-financable companies.  It is a spectacular head start for first time entrepreneurs, who give up less than 10% of their companies, and graduate with an embedded network and a sharper set of skills to go make it happen.

I just got the news that said friends didn’t make it in.  I thought for a few minutes about the implications of this data on the trajectory of their company, and realized that the actual value lost in that opportunity is minimal (a near commodity), but only if they replace that opportunity with something comparable, or even more valuable.  Is Y Combinator a great head start? Sure.  But so is the participation of some professional angels, or an early stage seed fund, or one of the 6 other clones of Y Combinator that have popped up in the last two years (Techstars, Dreamit, etc..).

BUT, it is not this value lost that poses the greatest threat to their business.  The real danger lies in the impact that bad news has on a company’s culture, founders’ state of mind, rate of progress, and general confidence.  After two months of product development, business planning, and strong forward momentum, my friends just got their first real “punch to the stomach.”  And that, by the way, is exactly what bad news feels like when you are starting out.  So much of your effort. time, and identity is wrapped up in this creation, that bad news can actually have a physical impact on founders.  Much like getting dumped by a woman you love, entrepreneurs will speak of a pain in their stomach or chest that they just can’t shake.

So much of early success comes from founders evangelizing their efforts, and sharing their company with anyone who will listen.  Momentum plays a huge role in a founder’s ability to do so, insofar as it is a lot easier to sell a vision that you passionately believe is going to come true, than it is to sell that same vision in a time of personal doubt.  Customers, partners, investors, friends, and family can smell that doubt in a founder’s mind.  This reality provides a positive feedback loop which furthers the doubt, and so on and so forth.

The same is 100% true for positive data…and therein lies one of the most important lessons I have learned about starting a company: No matter how bad the news, it is essential that you absorb that blow, deal with the immediate implications, and then do anything you can to generate some good news.  The faster you can cut off that positive feedback loop, and shift the momentum of your company back in the right direction, the better chance you have of replacing that “lost value” with something of comparable or greater value.  It is your responsibility as a founder, to turn this corner faster than everyone else in your company, and let them draft off of your forward momentum.

None of this is an argument for denial of the facts, and believe me, hindsight is 20/20 (there were days in Untitled Partners where I was not able to do this fast enough), but I think this skill, of taking a punch, and getting back up fast, is one of the most important to develop in a founder’s tool kit.  And there is no “faking it.”  You can’t just throw a smile on top of negative energy and sell everyone on “the positives.”  It is about actually addressing bad news, developing methods to accelerate your personal recovery time, and then quickly taking steps to right the ship.

Think about how many times Rocky gets pummeled in that fight with the giant Russian dude who killed Apollo.  Every time he gets knocked down to the mat, he gets back up faster…and at some point…the dude that’s throwing all the blows get’s tired, a window of opportunity emerges, and that’s when Rocky is able to start landing his jabs.  Momentum shifts, the crowd rises to their feet, the right kind of positive feedback loop commences, and he achieves the impossible.  Next time you watch that movie, take a look at Sly’s abs…rock hard, baby.  Team Data Owl…start doing crunches.  how fast can you flip this switch?

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Consumer Liquidity, Fingerhut, and Good vs. Evil

Posted on November 20, 2009. Filed under: startups, Uncategorized, venture capital | Tags: , , , |

I remember the first time I truly understood the power of credit.  I was 22 years old, working in leveraged finance, and I came across a company called Fingerhut (backed by Bain Capital Ventures and Battery Ventures).  Fingerhut may be one of the most elegant and evil business models I have ever seen.  Essentially, they are a catalog retailer, much like LL Bean or The Sharper Image, selling consumer electronics, jewlery and other semi-luxurious indulgences.  Based on that description, who would you think is their target customer? Probably middle to upper middle class professionals with large amounts of disposable income, right?  Wrong.  Just the opposite.  Fingerhut’s mission is to get their catalog into the hands of sub-prime (low income) consumers, under the tagline “Now You Can.”  Basically, they have an embedded sub-prime credit vehicle which extends loans to their customers, who otherwise can’t afford the items in their catalog, so that these luxuries become attainable.  That practice, in and of itself is not so offensive, but here is where it gets fucked up.  The same Sharp 37″ Aquos LCD HDTV selling on Fingerhut right now for $999, is widely available on Google for $859 or less if I actually felt like sifting through all the results.  So Fingerhut charges sub-prime consumers a 15% plus premium for goods they shouldn’t really be buying, and their customers don’t blink.  Why?  Because Fingerhut extends a semi-usury line of credit to their shoppers who don’t have the cash (or credit) to buy the cheaper good elsewhere.  Now, insert all the nightmares you have already heard about sub-prime lending into the model, and you have a pretty good sense of how these consumers are getting raked.

So, here’s what’s interesting.  When a sub-prime consumer is going to default on some outstanding debt, they typically have more than one creditor chasing them for money.  So how do they choose who to pay and who not to pay?  With company debt, there is a very clear capital structure where senior lenders (low interest rate lenders) have a liquidation preference (right to collect 1st) over junior lenders (higher interest rate lenders), and both types of lenders get their money before equity holders (owners) ever see a dime.  But consumer debt doesn’t work like that.  If I have $100 in the bank to pay my creditors, but I owe $75 to HSBC, $75 to my landlord, $75 to AT&T, and $75 to American Express, it is up to me to decided who I pay and who I don’t.  Now, a rational consumer will pay the debt that carries the highest interest first, but it’s almost a coin flip if they are going to completely default on HSBC or Amex.  In fact, they will probably pay AT&T before they pay either credit card company, because the immediate impact of losing their cell phone is more “real” than the thousands of dollars they are going to rack up in debt by not paying HSBC (even though if you said, turn your phone off for a month and I’ll pay you thousands of dollars, they probably would do it).  Anyway, the point is: where do you think Fingerhut’s debt fits into this decision making process of who to pay?  Let’s just say the landlords of Fingerhut customers are not happy campers.  And there is where I first understood what it meant to make a consumer more liquid.  There will always be demand for a credit product that makes a consumer more liquid, especially if that liquidity is not available anywhere else.

Now obviously, whenever a lender is able to create a credit product that no other lender is offering, they are exposing themselves to a higher default risk, but in Fingerhut’s case, they have subsidized this higher risk of default (or rather they can tolerate a higher default rate) through the increased margins they are able to realize on the retail catalog sales.

When the economy tanked, and before I started to work on JumpPost, I spent about 2 months (with the help of a west coast venture capital firm), trying to figure out how I could make a now cash-strapped American population more liquid.  My energy turned to consumer finance and credit products, as that seemed to be the best way to put a little extra cash in people’s pockets, but amongst other very serious business risks, I learned that businesses in this space tend to dip their toes in murky waters.  I think most people, at one point or another in their career, are faced with an inflection point where they need to decide “Am I on the side of good, or the side of evil?”  It’s not necessarily quite so binary, and everybody’s definition of good and evil is different, but I think you need to be able to wake up in the morning and like the guy who you see in the mirror.  So, I found another way to put cash in consumers pockets: JumpPost.  We’re heads down getting an alpha product up and running, but as early as January, we’re going to start helping consumers earn a little extra spending money…And that feels pretty good.  Dudes at Fingerhut, probably not feeling quite so good.

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NYC Venture Capital War

Posted on November 16, 2009. Filed under: Uncategorized | Tags: , , |

I took a trip out to Larchmont, NY a few weeks ago to catch up with my friend and former board member, Rob Stavis.  Rob is one of the most thoughtful, down to earth VC’s I know, and extremely direct in his communication style.  After spending an hour fumbling through an unformed description of what I’ve been working on (developing a pitch is iterative…you need to cut your teeth and learn with the people who already think you’re smart, before perfecting it and exposing it to new ears), the conversation turned to recent developments in the New York startup community.  I argued that there is a fierce turf battle emerging amongst investors in this market, and that it is largely being won in the blogosphere/twittersphere.  Pioneered by Fred Wilson at Union Square Ventures, there is an emerging class of blogging investors who have realized that a blog is more than just a forum to express your thoughts and ideas, but rather it is a “must have” enterprise tool.  Fred recently posted some of the metrics around value USV has extracted from his commitment to blogging, and the points on the scoreboard are indisputable.

Stavis, much like my friend Neil Sequeira at General Catalyst, said that his firm has recognized the opportunity that a real social media presence presents, but still neither firm has really committed to it.  My guess is whether now, or two years from now, you will see most already established top-tier VC’s like Bessemer and GC come around to this new requirement.  In the meantime, newer firms like Spark Capital, Union Square Ventures, and First Round Capital are winning the war by capturing entrepreneurs’ mind share through the creation of insightful online content (both short form through vehicles like twitter, and long form through blogging platforms like wordpress, blogger, tumblr, etc…).

Venture Capital firms live and die by the quality of their deal flow.  In the last 18 months, Spark Capital, General Catalyst Partners, Polaris Venture Partners, First Round Capital, Matrix Partners, Flybridge Capital Partners, Venrock and a handful of other out of town VC’s have stepped up their commitment to NYC.  Some of these firms have put a “man on the ground” here in New York, as a means of sourcing the best deals, while others have joined together to sponsor Y-Combinator style collectives like First Growth Venture Network (architected by mover and shaker lawyer Ed Zimmerman).  The physical presence that many of these firms have recently established is significant, but one body on the ground is not nearly as scalable as one voice in the blogosphere/microblogosphere.

The most basic play book that I see blogging investors execute is dissemination of practical fundraising tips. Basically, investors share their domain expertise around term sheets, pitching, and preparing for VC funding as way to deliver value to aspiring entrepreneurs.  Although this is a real service to entrepreneurs, and a great way to build an “entrepreneur friendly” brand,  it just the first step in what can be achieved through this medium.  The more creative and insightful investors are using blogs as a way to communicate to the entrepreneurial community that they are smarter than their competitors.  That they “get it,” no matter what “it” might be.  They take stances on markets and trends and share opinions which distinguish them as capable of adding real value and expertise to a young company.

The most successful VC blogs, like Fred Wilson’s AVC, have gone even one step further than creation of insightful content.  They have actually created an online community around their blog, where ideas and insights are not just flowing from the author of the blog to his/her readers, but also from readers to the author, and most impressively from one reader to another.  The dialog that occurs in the comments surrounding Fred’s posts is what makes his blog special.  10 years ago, an entrepreneur would have had to attend a conference in some physical location, and potentially buy a $400 plane ticket, in order to enjoy the type of collective learning and discussion that occurs on Fred’s blog every day.  My hope is that this blog will turn into a forum for readers to communicate with each other as well.  I love reading everyone’s comments and responses to my posts, but I’m even more excited to see when readers comment on each other’s ideas.  So please do establish a voice in this community.  No idea is too small or stupid.  Just throw out your thoughts and questions and hopefully we can make some progress together.

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    About

    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at Jordan.Cooper@gmail.com (p.s. i don’t use spell check…deal with it)

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