Wednesday, November 23, 2011

Holding your hand to the fire

Several months ago, I wrote a post about the four stages of learning.  Implicit in the transition out of stage 1, the "enthusiastic beginner", is the fact that to really learn something, you need to try to do it, and inevitably, do it wrong.  

Given the wealth of fantastic content out there in the blogosphere, especially when it comes to starting a company, raising capital, building a product, etc., it can be tempting to try to read blogs and hope that they'll help you navigate potential road mines. But if you are brand new to any one of these domains, most of what you read won't really "catch" in your brain. Instead, I find the best time to learn something is after I just messed up on that thing.

So if you're starting something for the first time, and find yourself making rookie mistakes like building too many features into the first version of your product, or not having your "elevator pitch" ready when you pitch a VC, don't worry.  To really learn, you need to hold your hand to the fire.

As Rob May of Backupify once tweeted, "Everything I learned about doing a startup came from doing a startup... not reading blogs about it."

Sunday, October 16, 2011

Can product "disruption" become a new paradigm?

Facebook is an incredible company, and it’s incredible for many, many reasons. But one of the things that most impresses and amazes me is Facebook’s relentless reinvention. The company has disrupted its product, and therefore its users, on multiple occasions. I’m sure everyone remembers the backlash Facebook weathered when it launched its newsfeed. And of course, we’re still less than a month into Facebook’s newest disruption, this time to its profile page.

Facebook is in rare company. Microsoft, to its credit, disrupted its Office product suite by introducing the ribbon (which was probably a great change for my mom, but drives me a bit crazy), and more recently disrupted its Windows suite. But I’m having trouble thinking of other companies that have taken their core product and fundamentally changed it in a way that is both disruptive to its end users and unavoidable.

Recently, I’ve started to use’s CRM. Although Salesforce is a huge step up from the other CRM I was using, it’s clear that the application was designed several years ago and has since evolved but hasn’t fundamentally gone through any disruptions. While the UI/UX must have been a dramatic, disruptive improvement upon other legacy CRMs when it launched, as it continues to evolve, it might one day find itself surprised by a new, shiny startup that takes advantage of the last five years of technology innovation (both technically and UI/UX-wise).

Obviously, there’s a reason why you don’t see a lot of disruption. It’s incredibly difficult to execute, and unbelievably risky. Large companies aren't known for pursuing risky strategies.  But could a Marc Benioff look to Mark Zuckerberg as a disruptive role model?  Crazier things have happened. Facebook is leading the way not only by example, but by lowering the riskiness of disruption by forcing its 800m+ users to better embrace change.

We’ve gotten used to hearing about struggling startups “pivoting”. It would be pretty incredible if we soon found ourselves getting used to hearing about companies with market dominance “disrupt” their products and leap from the past to the future.  

Wednesday, July 20, 2011

Are you a vitamin, a painkiller… or a drug?

It’s become commonplace to describe products as either painkillers (“need to have”) or vitamins (“nice to have”). Painkillers are products that address existing needs/pain points. Companies selling painkillers harvest customer demand; the prospects are already searching for someone to fix their problem and take their money. Vitamins on the other hand don’t really address an immediately apparent need. Instead, the vitamin company must sell a prospect on how their solution will make the prospect’s life better. The problem with vitamins is that it’s hard to get people to pay for them and once you have them as customers, hard to keep them paying. Painkillers on the other hand are sticky. Once you start using it, you’re hooked. For this reason, investors have preferred investing in painkillers over vitamins.  While the vitamin vs. painkiller dichotomy is helpful, I don’t think it properly describes an important small-but-growing group of products: the drug.

While painkillers kill existing pain, drugs kill pain consumers never knew they had.  Like vitamins, drugs must sell a prospect on how their solution will make the prospect’s life better. However, unlike vitamins, drugs become as addictive as painkillers.

I think there are three qualities that distinguish drugs from vitamins:
  • Accruing benefit. The more you use the product, the better it gets. I think this is largely because a consumer adds data to the product, either passively or actively. 
  • Mounting loss. The flipside of the accruing benefit is that the longer you stay with the product, the more you rely on the product and therefore have to lose by leaving the product. Going cold turkey is hard. 
  • Product-market fit. At the core, drugs are vitamins with product-market fit. Drugs pass Sean Ellis’s product-market fit question, “how disappointed would you feel if you could no longer use this product?” with flying colors. 
For example, for me, Evernote is a drug. Sure, it’s a productivity tool (the quintessential definition of a “vitamin”) but I’ve become an addict. Essentially, Evernote’s freemium model was like a drug dealer offering a little “taste”. Now it’s become such an ingrained part of my life; my lifetime value for Evernote is going to be very, very high. Products like Dropbox, Pivotal Tracker, and Sanebox also resemble drugs to me, and I think Bessemer portfolio company BillGuard might have the potential to become one.

Because drugs can't harvest demand in the same way painkillers can, but also because it becomes harder and harder to let go of a drug the longer you use it, drug-like products are perfect for a usage-based freemium model. The barrier to getting a customer hooked on the drug goes down significantly (though not completely) when the initial "taste" is free.  Vitamin-like products, meanwhile, need to extract as much value as possible while the customer is active because their churn rate will be much higher.

(hat tip to greg duffy at dropcam for inspiring this post.)

Thursday, June 23, 2011

2011 is the year entrepreneurship went global

Entrepreneurship is flourishing everywhere. Not just in the US, not just Israel, not just China. Everywhere. The world wide web always held the promise of a flat world, but the startup world is finally flat. An idea is seeded in Chicago, and it very quickly blooms across the world.

The result of this new generation of entrepreneurs is that local companies must race to be global. Groupon couldn’t just launch in the US, hone its product, and then launch internationally in a measured roll-out (much like Yelp has been doing). It has had to race to plant a flag in countless countries around the world if it has any chance of becoming a global brand. AirBnB just started running the same sprint, and they are rumored to be raising a giant warchest to help them get there.

It didn’t used to be like this. Startups could focus on the US and launch internationally when they got there. The competitive race was here, not abroad.  But now, things have changed.  Entrepreneurship has finally gone global, and many US companies hoping to expand internationally are facing stiff competition.  

Monday, May 23, 2011

Accomplishment Arbitrage

I've noticed there is a fair amount of what I'll call "accomplishment arbitrage" taking place regularly in the tech world right now.  "Accomplishment arbitrage" occurs if someone refers to an accomplishment that occurred in the past when the value of that accomplishment was different than it is now.  For example, if the accomplishment was easier to achieve in the past, the speaker can take advantage of that spread in value, make claim to an accomplishment that happened in the past with perceived value that is higher than the true value of their accomplishment, and in doing so, essentially arbitrage the accomplishment.  On the flipside, if it was harder to achieve in the past but newly easy, the speaker can once again take advantage of the lag in understanding. The key is that there is a disconnect between the perceived value of an accomplishment, and the true value.

Evolution in accomplishment value happens a lot outside the tech world.  Take sports, as an example. People keep on getting faster and stronger. But this consistency makes it hard to arbitrage the accomplishment.  If a swimmer who swam in the 2008 Summer Olympics told their 100m freestyle time to someone who swam in the 1932 Summer Olympics, the old timer would look the youngin' up and down and quickly say, "so what? It's easier now!"

The problem with accomplishments in the tech world is that they're not consistently changing in one direction, and it's not as obvious that you're talking to the equivalent of the 2008 Olympian.   Take the statements, "I sold my company for $500m" or "I invested in a company that was acquired for $500m."  I wasn't in high school yet so I don't have a good sense, but I would guess that a negative arbitrage occurs if the acquisition happened before 1995.  But a big positive arbitrage occurs if the acquisition was in cash and took place in the late 90's / early 00's.  An even bigger positive arbitrage takes place if the acquisition took place in the late 90's / early 00's in an all-stock transaction with a public company (that probably no longer exists). Of course, the speaker best takes advantage of this value arbitrage by providing none of this context.  The same phenomena is true for when it comes to taking a company public.  Sometimes it's been easy, sometimes it's been hard. But we interpret the value of the accomplishment based on how easy or hard it is to accomplish now.

The bubble is a great source of accomplishment arbitrage value.  I think we're currently creating a new breed of accomplishment arbitrage.  As an example, take what it means to "be an investor" in a particular company.  The vibrant secondary markets for companies like Facebook, Zynga, Twitter, LinkedIn and others, not to mention large seed syndicates, has altered the value of what it means to "be an investor".  Nonetheless, we're still holding on to the traditional definition of what it means to "be an investor" because for the most part, the traditional definition of being an investor is still the dominant type of investment.  Unfortunately, this makes this type of accomplishment arbitrage even harder to spot -- it's still the exception to the rule.  Still, while I see a lot of positive arbitrage going on now, in five years, my guess is the spread on this claim will be even larger.

Wednesday, April 20, 2011

Stop calling Groupon “social commerce”.

There is a lot of enthusiasm and attention around “social commerce” right now. People point to companies like Groupon, Living Social, ShoeDazzle and others as examples of the promise of a new generation of social commerce companies. The explosive growth of these companies has certainly been incredible, and I have no doubt that many new, fantastically successful e-commerce concepts will emerge that will leverage social in some way. Nonetheless, I think people have been giving social too much credit when it comes to the “social commerce” examples we have thus far, and have been misplacing our emphasis on "social" in e-commerce.

In e-commerce, there are two truths: Customers will always want lower prices, and once they’ve spent their money, they’ll always want as close to immediate gratification as possible. (A third principle, that customers will always want more selection, though I think probably true, is up for debate. It might asymptote given the paradox of choice.) If an e-commerce company forgets either of these two maxims, they’ll soon find that their customers have gone elsewhere.

With “social” however, the same is not true. It’s not the case that a customer will always want their e-commerce experience to be more social. Will customers want and enjoy some social features? Sure. There absolutely is utility in social features (more on that later) not to mention fun/entertainment, but it’s just not the case that consumers will always ask for more social features in the same way that they’ll always ask for cheaper prices and faster delivery (or even, more SKUs). In the customer’s hierarchy of e-commerce needs, social must surely be #3 at best (and frankly, I think breadth of SKU selection would be #3).

What does this have to do with “social commerce” darling Groupon?

Imagine a world in which Groupon had no social elements that form part of the user experience (i.e., no “tipping” once a certain number of people bought a deal). Would the company be the same one it is today? It might not have grown as fast, but with its brilliant and disruptive product offering, I have no doubt it would still be a fantastic business. Now imagine if Groupon had all the social features and more, but no discounts. It might still be around today, but Groupon would have been a shadow of its current form.

Groupon’s current success is not because of the social elements on the site. Consequently, I think it’s incredibly generous to "social commerce" to call Groupon a social commerce site. Its success has always been because of Groupon’s ridiculously low prices and immediate gratification. The same can be said for other “social commerce” examples like ShoeDazzle (fantastic deals on knock-off designer shoes thanks to their vertically integrated business model), and Woot (probably the first e-commerce experience with social elements). The social features integrated into these sites enhance the user experience, but they play second (or even third) fiddle to the real value proposition of these sites: lower prices and availability.

Why then is “social commerce” important? E-commerce is about lower prices and availability.  Social is about discovery. I believe the companies that will emerge in the near future as the true "social commerce" leaders will leverage social for discovery.  Not for fun, not for recreation, not for being social for the sake of being social.  So, please, enough calling Groupon a "social commerce" leader.  Amazon out-socialed Groupon years ago.  What do you think Amazon's feature "Customers who bought this item also bought" is?

Thursday, March 17, 2011

A big thank you to the Cornerstone OnDemand team!

Four and a half years ago, I started digging into the software as a service space, pursuing an investment roadmap that Bessemer was very excited about.  Early on, I came across Cornerstone OnDemand.  Talent management seemed like an interesting and large market, and the website had some nice customer logos on the site, so I reached out to Adam, Cornerstone's CEO, to learn more about the business.  I started with a voicemail, and when I didn't hear back, an email, and then another voicemail, and another voicemail... four more voicemails and one more email later, I finally tracked Adam down.  Let me tell you, Adam was worth the hunt!

Adam was a guy who loved to learn.  A former investment banker (don't hold it against him), Adam racked up a JD (another thing you shouldn't hold against him), a MBA (another thing...), a BS and a CPA.  He is also, perhaps, the most goal-oriented guy I've ever met.  Adam, along with his co-founders Perry Wallack and Steven Seymour founded Cornerstone in 1999.  I would be willing to bet that the day Adam, Perry and Steven incorporated Cornerstone, Adam set his mind on building a public company.

1999, I don't need to tell you, was a crazy time.  Despite everything happening around them, Adam and his team put their heads down, built a fantastic product that their customers needed, and didn't raise a dollar from institutional investors.  That is, until I introduced Adam to my colleague Byron Deeter (who can resist?).  The rest, as they say, is history.

Today, Cornerstone went public on the Nasdaq at a $13.00 price per share and closed 47% up at $19.07, a $885m market cap.  What an amazing ride.

Joel Cutler of General Catalyst, whom I had the pleasure of seeing in action on the Board of Bessemer/General Catalyst portfolio company OLX (acq by Naspers), likes to say that investors are "invited guests" at a company.  We try to be helpful where we can, but at the end of the day, it's the team that lives and breathes their company 24/7 and determines the ultimate success of a company.  So a big thank you to the Cornerstone gang for letting us join them for this ride, and a big congratulations to my colleague Byron on such a fantastic investment.

Sunday, March 6, 2011

Prediction: Facebook won't be a viable marketing strategy for startups

Chris Dixon is causing (surprise surprise :) a bit of an uproar with his blog post "SEO is no longer a viable marketing strategy for startups."  Chris's post is overstated but what I agree with is that SEO is no longer viable as the primary marketing strategy for a startup.  To help explain this, it's worth putting SEO in context of other [former star] free acquisition channels.

Email, not Google, was the first great source of free user traffic on the internet.  Hotmail, Kazaa, Skype... the list goes on.  Email was novel and inboxes were essentially greenfield.  But as more and more startups started using email as their main customer acquisition channel, the efficacy of email declined.  The channel was congested, and people had email invite fatigue.  Today, startups still try to get users to email their friends and get them to join a new service, but it's no where near as effective as email invites once were.  Email invites have gone from being an effective primary marketing strategy for startups, to being a small piece and better leveraged for nurturing existing customers rather than acquiring new ones.

Then Google entered the scene as the dominant search engine with a brand new free marketing channel.  Suddenly, organic results was the new greenfield.  Many companies (like TripAdvisor and Yelp) exploited this opportunity by creating content that catered to certain search behaviors (e.g., best hotels in [Aruba], [sushi] [94114]).  In SEO there is stickiness and accrued advantage to companies that list high in Google's organic results thanks to the content asset and value of links. (To be fair, email invites, you could say, also had an accrued advantage because if you received 10 invites from different people for the same site, you'll pay attention whereas you won't for the company you just got one invite.)  But unlike email, Google results are segmented.  While you just have one "inbox"/behavior in email, in Google there are numerous "search behaviors".  So the possibility of building a startup on the shoulders of free traffic from Google has lasted longer than it did for email.  As new search behaviors emerge (e.g., online coupon searches was only recently exploited by companies like RetailMeNot), new companies will be able to take advantage of the new greenfield.  But for the categories that are already dominated by an incumbent player, while there is the constant chance that Google will make an algorithm change that switches things up, it's exceedingly difficult to build a new company primarily on SEO.

This brings me to our current day and age, with what I'll call heavily amplified word of mouth in the form of Facebook and Twitter.  When Facebook first launched its app platform, it was undoubtedly the most effective free online acquisition channel yet.  Remember iLike's astounding growth?

In a crazily short period of time, some amazing companies have been built on Facebook (and Twitter as I blogged about here).  But like all the former free acquisition channels, as more companies flocked to Facebook to capitalize on the new greenfield, diminishing returns kicked in (and Facebook took more control).  Don't get me wrong - Facebook is still a fantastic channel and still strong enough to be a startup's primary marketing channel, but for a newcomer, especially for a newcomer trying to make a mark in a category already dominated by an incumbent (e.g., social gaming) it will never have the same efficacy it had back in 2007.  Consequently, it will become increasingly difficult for a new startup to leverage Facebook as its primary marketing strategy.  

SEO, like email, is no longer a viable primary free marketing channel for startups to build their companies.  But eventually, Facebook won't be either.  It's interesting to note, by the way, that each channel has favored a different kind of company (e.g., SEO=content rich, Facebook=social).  What's will be the next great channel, and what type of companies will it favor?

Friday, February 18, 2011

The makings of an overnight success

Almost a year ago to the day, I mentioned on my blog that I would be hosting a Pitch Deck Study Hall.  My offer was for people to send me their Pitch Decks, and I would try to provide some feedback.  Many entrepreneurs took me up on the offer, including NYC's Mike LaValle

Mike, bless his heart, sent me one ugly deck, whose cover I'll post here.  (Don't worry - he's given me the okay to post about him!)

His deck inspired a follow up post of mine, where I instructed entrepreneurs that their pitch decks should strive to be like a perfect date:  they need to have a great personality, and be good looking. 

Despite Mike's less than overwhelming powerpoint skills (wink) there was some great content there and Mike and I started to check in with each other every few months.  Each and every time I caught up with Mike, the progress he was making at Gojee exceeded my increasingly high expectations.  First it was the technical team he recruited when so many entrepreneurs in NYC struggle to recruit one developer, let alone a team.  Then it was closing a large supermarket chain.  Then it was recruiting the uber talented "interface slayer" KC and designer Adam Meisel.  Each time we spoke, I asked how Mike did it all, hoping to learn some new trick, but it always came down to plain ole' hustle and hard work.

When I check out Gojee now, it's awesome to see how far the company has come from that first pitch deck.  So often in my job, I have the privilege of working with entrepreneurs as their business start to hit an inflection curve and take off.  From where I sit, very often these companies look like they are overnight successes.  But the truth is that behind every overnight success is an entrepreneur like Mike who has been working his/her butt off for several months before it finally starts to work.

The other day, Mike sent me an email mentioning yet another impressive milestone.  I won't steal Mike's thunder here but suffice to say, I have a good feeling that Gojee will one day be an overnight success as well.  It's been pretty inspiring to watch.

Sunday, February 13, 2011

Being coachable

The other day, a very talented NYC-based entrepreneur asked me if I could grab lunch with him. He’s the CEO of a company whose user growth is the quintessential “hockey stick” ramp (so much so, that when he sent me the graph of his user growth, I actually photoshopped a picture of a hockey stick on to the graph of his user growth and sent it to him – it was an exact match!). Needless to say, I was happy to catch-up. At lunch, it turned out he wanted to discuss some ideas he had around his business model before his board meeting the next day. As we chatted, I remembered a 2x2 I had learned in my brief stint as a consultant: 

The basic premise is that everyone goes through four stages of learning. First, a person starts in stage 1, the “enthusiastic beginner.” We’ve all been there…. You think you have all the answers but really, “you don’t know what you don’t know”. For example, I remember the first term sheet I ever drafted; I thought it was a piece of cake. It probably took me 30 minutes to complete a draft. Then I got redline back from the Partner with whom I was working. Clearly, I didn’t know what the heck I was doing!

To learn and progress as a person and leader, you must have this moment of humility.  This "learning moment" is when a person opens themselves up to learn and progresses to stage 2. Stage 2 is the “struggling learner.” You suck, and you realize it. Nonetheless, gradually, you push through, learn, and move to stage 3, the “cautious contributor.” Some positive feedback later, and you start to realize your own competence and you become a “peak performer.”

All people start in Stage 1, but some never leave. I think this is what is meant when people describe someone as not “coachable.” They never let themselves have that moment of humility and self reflection when they realize their own lack of competence, and therefore mistake Stage 1 for Stage 4. Unfortunately, that person will never grow as a leader.

My lunch date on the other hand was clearly a cautious contributor and well on his way to being a peak performer. All the ideas he had around the business model were great; he just wasn’t yet completely confident in his own business model savvy.

Inevitably, any new CEO will find him or herself trying to tackle something that he's never learned before.  I think great VCs and mentors often double as a coach in these instances, and help coax the CEO all the way from stage 1 to stage 4.

Speaking of which, I emailed the CEO after his board meeting and asked how the meeting went. “Great!” was the response. Sounds like someone made it to stage 4.

Thursday, January 27, 2011

California Dreamin'

In late February, I’m going to be moving to San Francisco to work in Bessemer’s Menlo Park office.

Having lived in NYC for most of my life, the move is really bittersweet. On the bitter (read: sad) side, my life is in NYC. I love my friends here, my family, the people I’ve gotten to know in the tech community these past four+ years… And, of course, I love NYC. I’m such a freakin’ New Yorker. I’m impatient, snarky, optimistic yet cynical… if they gave tickets for speed walking on sidewalks, I would have had my sidewalk-walking license revoked.  Lets see whether SF mellows me out...

But of course, there’s the sweet side. I've always wanted to give San Francisco a try -- it has so much to offer. The tech scene, the weather (how can you not think about that on a week like this one?), Sonoma, Yosemite, avocados, hanging out with my BVP colleagues in Menlo Park… And did I mention it’s legal to drive a Segway on the sidewalks in SF? Just sayin’.

But man oh man…. it’s going to be a huge change.

What this means:

Am I leaving NYC’s tech scene? Hell no! When Jeremy first broached the idea of moving to San Francisco, one of the first things out of my mouth was that I wanted to be able to visit NYC as frequently as I’d like. I’m a NYC tech community groupie and a huge fan of the many exciting companies growing up in NYC. So sorry, but you ain’t getting rid of me!

Is this permanent? Your guess is as good as mine.

Anything you can do to help? Gosh – thanks for asking. Honestly you guys, excluding the Bessemer folks, I can count all my friends and close contacts in San Francisco with two hands…. Maybe one. In the late nights when reality of the move hits, one of the things that always re-energizes me is the thought that my wonderful friends in NYC will have wonderful friends in San Francisco and help us connect. So from the bottom of my New Yorker heart, I would welcome any and all introductions to friends and contacts in the Bay area. If anyone comes to mind, you can reach me via email at [sarah] at bvp dot com. I will love you forever. And of course, if you are a SF-based reader of my blog (thank you!) please reach out! I’ve met a lot of great people in NYC thanks to my blog, and hope SF will be no different. 

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