Things I'm passionate about: making things of value, venture capital, technology, startups, product strategy, simple design, branding, creative advertising.
Other things I love: music, investing, screenwriting, running, cycling, good food, wine, reading, San Francisco.
I think most people have one top idea in their mind at any given time. That's the idea their thoughts will drift toward when they're allowed to drift freely. And this idea will thus tend to get all the benefit of that type of thinking, while others are starved of it. Which means it's a disaster to let the wrong idea become the top one in your mind.
I suspect a lot of people aren't sure what's the top idea in their mind at any given time. I'm often mistaken about it. I tend to think it's the idea I'd want to be the top one, rather than the one that is. But it's easy to figure this out: just take a shower. What topic do your thoughts keep returning to? If it's not what you want to be thinking about, you may want to change something.
I have found that my best ideas come when I'm taking a shower, when my mind is left to wander. My thoughts will drift to the idea that is at the top of my mind and I will have a moment of clarity.
These days people seem to be addicted to information. We can't stop reading, watching TV, looking at photos, connecting with friends. But it's still important to have times when you just clear your mind and let it drift.
Here's what I've found helps to have these moments of clarity:
Great ideas come in the shower. Make sure you bathe often :)
Get plenty of sleep. Great ideas might not come while you're sleeping, but you will wake up refreshed with a clear mind
Walk a lot. I find the slow pace of walking is great for thinking
Go to the gym. Particularly when I'm on the treadmill or elliptical machine for 30 minutes, my mind gets bored and wanders. Great ideas surface when this happens
Paul Graham and Sachin are both dead on here. I too have found that my best ideas come to me when I'm in the shower. The real question is why?
The reason is pretty simple -- it is when my mind is most relaxed.
I would even expand this to say that my best ideas come to me when I'm in the shower after a long run. The main reason I love running for long distances is that it helps clear the mind. After the first couple of miles, the mind kind of shuts down and the body takes over. Hop into the shower after that run and you will find a totally clear mind ready for problem solving.
I would also a 5th item to Sachin's list here:
5. Go on a vacation.
If you, like Paul Graham mentions, consistently do not like the top idea in your mind, get away. Get out of town for a while. There is nothing like a vacation (ideally filled with lots of running, showering, eating and sleeping) to evaluate and prioritize what that top idea in your mind should be.
McClure, who recently raised a new $30 million fund 500 Startups, explains how even though the size of the fund is increasing dramatically, his investment philosophy is largely the same:
First, here's the way he sums up the new realities tech investing in 2010:
Fast Forward to Twenty-Ten, and let's take a look at these fundamentals, with a specific lens on the consumer market & internet startups:
PRODUCT now typically means a website or service, run on low-/no-cost open source software, hosted in the cloud on low-cost servers, developed in a few months (or a WEEKEND!) by a small team of 1-5 developers, who continuously test & iterate in real-time with online customers
MARKETing now typically means using a variety of online distribution channels via paid & organic search (SEM/SEO) on Google, viral/social amplification on new media platforms & social networks like Facebook, Twitter, & YouTube, and the quickly-growing mobile platforms of Apple iPhone & Google Android. With the exception of search, most of these distribution channels didn't exist 5 years ago, yet they now easily reach over 100M-500M+ users, with very low cost and measurable marketing campaigns such that even a small team can reach billions of people globally.
REVENUE can now be collected easily via a variety of online payment, transactional e-commerce, digital goods, subscription billing, lead generation, CPM/CPC/CPA advertising. Many people buy things online now, and many companies are even bought for usage & users ahead of revenue. In other words: Brothers Are Gettin' Paid, Yo. Cash Money, G. It's aaaaalll goooooood, mah nizzle.
Given these, he then describes his investment thesis:
Invest BEFORE product/market fit, measure/test to see if the team is finding it, and if so, then exercise your pro-rata follow-on investment opportunity AFTER they have achieved product/market fit.
Here are the specifics of how he plans to do that:
INVEST EARLY at LOW COST in people you think are smart and have built some promising products. understand if they know how to iterate and use customer feedback to improve their product and/or marketing. learn how to understand conversion metrics for their business & customer value.
then IF you see the metrics improving & customer / business value increasing... then DOUBLE-DOWN.
however this happens in 3 distinct stages:
1) PRODUCT: Discover a [large enough] customer segment with a meaningful problem / strong desire, and develop a functional solution for them to use (Minimum Viable Product aka MVP). I also call this when ACTIVATION happens. You should also make sure the user experience is compelling enough for them to use it more than once (RETENTION).
2) MARKET: Test for scalable distribution channels that allow you to acquire large # of customers at cost less than what you will generate (ideally, at <20-50% of annual revenue so you have some cushion). You may also find you have to go back to #1 and change some things, or discover entirely different marketing campaigns & concepts to get to scale. If you're lucky you may even discover a way to get your users to spread the word for you (word-of-mouth and/or viral features).
3) REVENUE: hopefully your MVP is already obviously valuable enough that people will pay something non-zero for it. regardless, the goal is to test & optimize for product/market(ing) combinations that generate cash-flow positive outcomes at scale, over short periods of time (or longer periods if you have financing structure to merit). i tend to prefer business models with low complexity, such as direct transactional or e-commerce models, subscription billing models, or lead-gen / affiliate models.
Again, these are the highlights, but his whole post is worth a read. A very well articulated investment thesis overall; one to be sure he will execute well on.
Mark Suster is on a roll. Yesterday he wrote a great post on how VCs calculate valuation differently from founders. I spent a lot of time researching term sheets and valuation 3 years ago when raising money for my last company. I wish I had read this post back then; it would have saved me a lot of time. So go read it. Or better yet, watch the video:
In the video, Mark and Kelly Hwang walk through a very useful cap table spreadsheet. If you are an entrepreneur or interested in VC, go download it. Play around with the formulas. Run through different scenarios in your head. Or better yet, create your own from scratch. That's what I did and I think that's the best way to learn it on your own.
Other great resources for learning about term sheets are:
Chris Sacca mentioned in a video interview recently that VCs are being much more transparent than they used to be. And that's a good thing. This is complicated stuff and the more transparency, awareness, and overall education we have on the subject the better.
Well last night I came across this GigaOm video of my favorite in this class of "super angel" investors, Chris Sacca.
Sacca recently closed an $8.5 million fund to make seed-stage investments through his firm Lowercase Capital. While he is most famous around the Valley for these early stage investments, turns out he also has another fund solely dedicated to buying out the shares of early stage founders. The idea is similar to the later stage funding rounds now common among large tech companies like Facebook and Zynga; it allows founders to take money off the table and continue to grow their business instead of selling it. Yet, Sacca is taking this a step further and is doing it at a much earlier stage.
Here's part of his rationale:
"I think what we're starting to realize is that founders need some kind of comfort, a little bit of a hedge, to make sure that this isn't an all or nothing ... In a big VC fund, you need these massive billion dollar outcomes in order to move the needle. But I feel like if they really want their entrepreneurs to push to that level, they have to give them opportunities to take a little bit of money off the table."
Sacca then references the Foursquare deal and how Dennis Crowley and the other founders took $4 million off the table out of the $20 million that was raised. He speculates that doing so puts those guys in a place where they're more relaxed and in a position where they can really focus on going out and building the next multi-billion dollar company.
I also love that he refutes the idea behind the phrase "Pulling a Patzer," which is a reference to the story of Mint.com's Aaron Patzer who sold Mint to Intuit for $173mm and is now common Valley parlance for selling too early. He calls the notion "bananas" and I couldn't agree more.
The whole interview is worth watching, but the part about his fund to buy founder stock starts at around 4:30.
Again from my vantage point, the benefits of helping entrepreneurs take money off the table are many:
Allows them to pay off their credit card bills and get to positive net worth
Gives them a bit of a hedge so they can cover their risks
Rewards them for their hard work and sweat equity
Makes them less likely to sell their company
Lets them retain control so they continue to grow the business
And most importantly ... let's them actually enjoy life a bit
I couldn't be more impressed with the strategy and hope it's a trend that continues.
I agree with the post entirely. One of the most interesting aspects within tech VC right now is the growing angel and seed fund phenomenon. Recently there has been a lot of buzz about on the subject, starting with Paul Kedrosky saying that a super-seed crash is coming. Chris Dixon then responded that the bubble in early stage investing is really due to entrepreneurs getting smarter. Fred Wilson followed with his thoughts in a great post saying the total capital needed to scale a business is still the same (~$20mm) but can now come after the business has traction:
What has changed in technology venture capital is not so much the total capital requirements, but when they are required. This is very good news for everyone involved. It means entrepreneurs that don't have to take expensive dilution early on in the development of their business. And it means that entrepreneurs can raise the big money later on when their business is worth more. It means that entrepreneurs should be able to keep more of the companies they start. That is good for everyone.
It also means that VCs don't have to take big risks early on. They can write checks in $250k and $500k sizes. It means that when the businesses develop into winners or likely winners, they can write the bigger checks like $3mm or $5mm or even $10mm. This is good for the VC business. Less writeoffs, more capital deployed into the winners and less into the losers.
9. And VC’s are doing earlier stage deals – And we all know that VCs are doing earlier stage deals. The most notable is First Round Capital who built their entire fund and model around this type of investment and the notion that exit values in the future will be lower than they were 10 years ago. They are also the most innovative new fund to enter the market in the past 10 years in my opinion. There is also True Ventures that does early stage, seed investments. And of course Foundry Group, Union Square and a whole host of other firms including my own. I have written more in depth on this topic in the past.
10. This is producing a “boomlet” or a bubble in early-stage investing. That’s OK. – This massive increase in seed & angel funding caused Paul Kedrosky to predict that there is a coming seed fund crash. I don’t know whether there is a “crash” coming per se but I do believe that too much money is going into angel and seed companies too quickly. I’m OK with this – it feels fairly benign. But one problem it is causing is that early-stage deal prices are creeping up again higher than historic norms. This smells like classic froth to me. So IMHO it’s probably more of a mini “bubble” than an impending crash.
11. But it takes the same amount of money to scale a big business and this is where outsized returns are earned – If you want to build a big business you still need big bucks. Fred Wilson wrote a great piece on this. He acknowledged the importance of the growing seed fund movement in creating a new wave of cost-effective innovation. He then profiled his portfolio company FourSquare who started with a very small investment. But now that it’s time for them to scale they need a lot more capital and therefore just raised $20 million from Andreessen Horowitz. Think about it – while FourSquare has established itself as the clear market leader it is unquestionable that Facebook, Yelp, CityGrid and many more well capitalized companies will be gunning for them. Staying “lean” is not an option. If FourSquare wants to dominate it’s market it’s time to GO FAT.
Mark also talked through these points on video on the latest episode of This Week in Venture Capital. The whole video is worth watching but I've embedded it right at the point where they start talking about seed funding:
It is a fascinating time for technology VC to say the least. One thing is for sure, it is an industry that is evolving rapidly. I think Mark is right that we'll start to see more natural selection of the industry over the next couple of years where each segment – seed, super seed, A round VC, B round VC, and growth equity – is right-sized given its total market size.
As for the innovation engine, I agree with Fred Wilson that this is good news for everyone. The companies that don't work will fail faster. For the companies that do work, the entrepreneurs will be able raise more money at a later time when the business is worth more, thus they'll be better able to keep control of their company. The seed investors will fail a lot too but will get handsomely rewarded for their big risks when a few of the companies become winners. Lastly, the VCs don't have to make as many early bets so they eliminate more risks and can better deploy capital to the likely winners. Again, good news for everyone.
Here's Garry in describing what you really want in a neighborhood:
"What you really want is: a) closeness to startup community, b) easy access to food, and c) easy transit (notice all the areas are right next to the SF transit corridor) so you don't need a car."
Specifically to San Francisco, Garry suggests three areas: expensive SoMa, affordable SoMa and The Mission. Check out his commentary on all of these.
I agree with both of his points on affordable SoMa and The Mission. He's especially spot on that The Mission has some of the absolute best food in the city. To me, it's best to start in either one of these and move into the expensive part of SoMa as you grow and scale.
All in all, a great resource for any startup entrepreneurs looking to move to the Bay Area.
Garry is also on Twitter here. Go follow him because he's got plenty of other good gems like this.
While I was away on an unplugged vacation last week, I missed out on a great back and forth between Ben Horowitz and Fred Wilson on the optimal amount of fundraising for a startup, specifically in an economic downturn like the one we're currently in.
It was a great discussion and I highly recommend reading all parts. Here they are in succession:
In the meantime, the unemployment rate in California is now over 12%, a near record high. The national rate is at 10%. Credit markets are totally frozen and small businesses—the most dynamic part of the U.S. economy are suffocating for lack of operating capital. So slightly tweaking a law to allow smart foreigners to jumpstart our economy would seem to be a really easy decision politically and economically. Rather than listening to the emotion of misguided anti-immigrants, we need to listen to reason. After all, it is immigrants like Alex who have started 52% of Silicon Valley’s tech companies in recent times.
