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The Entrepreneurs I Love
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Are We Already Rebundling Mobile?
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Dude, no one will ever buy that online. AKA how incumbents get pwned in tech.
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“I’m only looking for billion dollar outcomes.” Why that’s absurd & why it’s not :-/
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No Thanks, Forbes. The ACTUAL Hottest Chicago Startups

The Entrepreneurs I Love

Hard to believe it’s been more than three years since I first entered the venture capital scene back in 2012. As I reflect back on some of my fundamental changes and learnings as an investor, one in particular pops out: the importance of passion.

But not an entrepreneur’s passion: my own. I was influenced in this regard by a well-known venture capitalist who related to me an experience from early in his career – one of the first companies he ever brought to his partnership for investment. The company was undeniably a healthy business – good margins, growth, etc. But the founders weren’t energetic, the vertical they were focused on wasn’t overly captivating. His partners asked him: are you really so passionate here that you want to commit to spending the next ten years of your life with this group of entrepreneurs?

He realized he wasn’t.

I think many investors make this mistake. When we enter the industry, we want to be active investors, get out into the market and learn. We focus on all the macro factors – market size, growth rates, customer reference calls, etc. But we forget about ourselves, our passion.

What I’ve discovered about myself is that while I may have some high-level categories that excite me – network effect businesses, millennial-first companies, on-demand services – an entrepreneur I fall in love with can get me passionate about the sleepiest of verticals or products.

I’m sure everyone is different but for me, here are the two types of people whom, when I meet them, I want to dive deeper and deeper, irrespective of their focus:

  1. Imaginative – The vast majority of entrepreneurs I meet are working on an incrementally improved solution to an existing problem.

The entrepreneurs I gravitate towards take a different approach. They start in the same place – recognizing an existing problem – but then let their imagination stretch the solution to the farthest ends of the impossible. Only once they have reached the idealistic, ultimate dream for how a problem could be solved – even if it requires the world to operate in some magical universe – do they begin to work their way back to reality.

I call this the “what if” exercise. The benefit is that by imagining an end-point wholly independent of existing assumptions or axioms, one has a shot to fully re-imagine an industry, rather than simply iterate on it.

The second benefit is that by clearly identifying the endpoint, an entrepreneur can brainstorm many different paths backwards to the existing pain point – slowly applying existing constraints or restrictions as reality re-emerges. In my mind, this provides the greatest opportunity for an imaginative business.

  1. Ground-Up Unit Economics – I’ll admit this one surprised me and superficially appears to be the inverse of my “imaginative” profile (although I’ll explain why it isn’t). This is an entrepreneur who clearly identifies the unit economics, operating margins, etc she feels are necessary to build a category defining, healthy business – and works outward from there to assess what level of products or services can be offered that meet those unit economic profiles.

 This type of focus is obviously more relevant in a retail or consumables type of startup. But I love it for a couple of reasons:

 I feel that many startups identify their competitive set on the traditional four-quadrant vector map. Yet, that is merely an exercise in differentiation. What I find more helpful is assessing my competitive set by weakness or strength in operating model. I have said many times that two fundamental factors provide for a real margin of error when building startups: frequency of purchase, and unit economics.

 When an entrepreneur shows me how their competitors have fundamental, conceptual, operating flaws in their business that constrain their gross margins to (for example) half of what’s achievable by operating differently, I get really darn excited – especially in a category I care about! Because I know how important margins are.

 Second, I feel like this is just another approach to the imaginative profile. An entrepreneur assumes an end point (in this case, unit economics) and works her way backwards to the best possible product or experience that can be offered under that constraint. As Jack Dorsey famously says: “constraints yield creativity.” Moreover, starting with this constraint can often reflects a level of diligence and responsibility to a business that is downright refreshing.

At the end of the day, as an early stage investor, I feel like my job is to bet on people. But within that larger mandate, I tend to invest in the two types of people mentioned above.

If you don’t fit one of those two buckets, don’t fret. All VCs are different. What inspires me, might turn off someone else. But I do think all investors should go through the exercise of reflecting on what types of people they feel passionate about. At a minimum it will help us respond to entrepreneurs faster, pass a founder to another partner whose passions are more closely aligned, and not waste time on instances where our passion simply isn’t there.

Are We Already Rebundling Mobile?

Hard to believe that it was only a year ago that the clear trend, led by Facebook’s Messenger App, and Foursquare’s Swarm App, was towards unbundling experiences on mobile and building single purpose, highly focused applications.

Is the tide turning? Uber recently began rolling out UberEats across multiple markets, which as far as I can tell is its first permanent category extension*  – fundamentally distinct from UberKittens, UberFlowers, and CornerStore which have all been temporary or seasonal extensions.

UberEats, like prior experiments, leverages the core in-app experience: its trademark horizontal sliding bar. I’m not alone in long thinking that Uber would roll-up the majority of profitable on-demand categories. But I’ve also struggled to conceive how they could maintain their hyper curated, efficient workflow which launching new verticals. To quote Andrew Weissman, Uber is about “reducing cognitive noise” – but if they built their brand on “reducing cognitive noise,” then how will consumers react when the music starts blaring?

And Uber’s not alone. The recent emergence of (and consumer interest in) Magic, GoButler, Operator, even Alfred, all represent a new aggregated, bundled, application layer on top of a slew of vertical specific, single-purpose services. Have we reached peak app capacity?

I don’t know.

As far as I can tell, the conversations began in mid-2012 with a blog penned by Albert Wenger of Union Square Ventures where he wrote:

The real problem, I am beginning to think, is more dramatic: the shift to mobile may make Facebook less relevant altogether.

Why? Mobile devices are doing to web services what web services did to print media: they unbundle.  On my phone another app is just a button push away and there is relatively little that fits on each screen.  So it is just as much effort to go to another part of the Facebook app as there is to go to a different app altogether.  So Facebook for mobile may not be Facebook at all but rather a combination of say InstagramKikTwitterFoursquare and others.

Benedict Evans in early 2014 penned an equally influential piece, noting:

On a desktop website, you could always add a feature as a new tab on your site navigation, and clicking that was easier than going to another web site. But on mobile, all apps are just two taps away, while there is very little room for links to more features in any given app’s home screen – they quickly get shoved into the ‘hamburger’ menu, and soon after fall into the ‘hamburger basement’, down below the bottom of the screen. This gives startups scope to unbundle features from larger companies’ products, and also means those companies themselves unbundle their apps into separate single-function apps.

But what’s clear is that unbundling was never actually a universal phenomenon. In Why Mobile Bundling Isn’t Inevitable, Taylor Davidson argued that development across deep-linking and app extensions could reduce reliance on single-purpose platforms:

And it may cause us to rethink the notion of unbundling as well. If we don’t have to open an app to get something done, then why can’t a larger set of features be bundled? The US market isn’t inevitable: the Chinese Internet market is a perfect example of how we’ve seen a different kind of bundling emerge, with a different set of discovery challenges, because the services are aggregated differently.

The difference noted in the Chinese market, most fundamentally within WeChat and LINE, was broken down by Ben Thompson around the same time. Specifically, that these messaging platforms had become horizontal aggregators of commerce, games, search and discovery. Perhaps, he would note later in 2014, they were even evolving into the effective OS for mobile devices:

Were Uber to become ubiquitous, could businesses be built on top of it? What would such an operating system look like? An out-there idea to be sure, but in the realm of possibility.

More likely is that the messaging services become so dominant that they render the underlying mobile platform unimportant. This too would be similar to the effect of the Internet on the PC: the biggest reason the Mac was able to make a comeback from near death was because the Internet – and web apps – ran everywhere. It didn’t matter what browser7 or OS was on your actual PC. Similarly, if all essential apps and servers are routed through your messaging service, then the underlying OS – whether iOS or Android – is increasingly irrelevant.

It therefore makes sense that the recent spate of bundled aggregators are built on top of SMS – probably the platform ultimately most immune to horizontal extensions within the private messaging networks.

But something feels amiss. Why? I consider Jeff Jordan’s People Marketplaces to be a formative influence on my view of commerce:

Our hypothesis is that the horizontal plays may suffer from a potential “paradox of choice”: Consumers could be getting overwhelmed by the seemingly infinite array of potential service options presented by horizontal platforms, but consumers can easily understand the highly specialized value proposition of a company offering services in one vertical…From a product perspective, the vertical apps can tailor their workflow to the unique characteristics of that vertical—the best way to find someone to clean your house is different than the best way to find a ride.  And from a marketing perspective, a narrow focus on one vertical lets the company do things to potentially accelerate each side of the two-sided marketplace.

One last thought? Maybe the recent horizontal aggregators work because they leverage the workflows of the vertical players while offering a single-purpose point of entry for the consumer: SMS.

But if so, we’re left with one final conundrum from Jeff Jordan’s thesis – the principality of convenience versus value. He continues: “it appears that the early breakouts in the space are those that offer both convenience and value.  It’s clear that the market size of people who are willing and able to pay a premium for convenience is much, much smaller than those who are attracted to both convenience and value.”

The horizontal aggregators, by virtue of being aggregators, are fee-taking middlemen. They may increase convenience, but to the detriment of value. Yet bundling doesn’t need to increase costs – in fact, the synergistic savings from managing a single product (as opposed to two) could well reduce operating costs – if the workflow isn’t degraded to the point of lowered consumer demand. Maybe this, then, is the answer. As we move into a market cycle where the smart money is increasingly focused on business fundamentals, margins, and unit economics, perhaps bundled businesses simply make more long-term economic sense.

I know I’m not smart enough to answer the question. But I hope these thoughts are helpful to the continuing dialogue.

*You could argue that UberRush is a permanent product extension, but it’s (a) only available in NYC whereas UberEats is in Chicago, LA, NYC & Barcelona and (b) UberRush doesn’t require a fundamental infrastructure shift whereas UberEats theoretically must keep hot food hot, cold food cold, etc. 

Dude, no one will ever buy that online. AKA how incumbents get pwned in tech.

I’m blessed to work at Chicago Ventures with some extraordinary people who are continually pushing me to evaluate whether I’m too accepting of the status quo, challenging me to re-imagine the future, and, ultimately, the types of investments we make.

Most recently my colleague Pat Ryan Jr. pointed me to a recent Fred Wilson blog, Don’t Automate, Obliterate, and the corresponding Harvard Business Review article. Tl;dr? Cliff notes are that it’s far more valuable to re-imagine an industry from the ground up rather than trying to build an efficiency focused, automated piece of software on top of it. Two examples: Instead of building call routing and dispatch software for the taxicab industry, re-imagine the taxi industry as P2P ride sharing, a la Uber. Or, instead of building document management software for the legal industry, fundamentally re-consider what the legal world might look like under a crowd-sourced model, for example UpCounsel.

The whole discussion reminded me of a conversation I had with a well known VC about three years ago in NYC. In it, he reminded me that in the early days of e-commerce, shoes were considered an untouchable category – “who would ever buy shoes online? You need to try to them on!” And they remained elusive until Zappos came along and offered a seemingly implausible value prop: what if we were to ship you unlimited shoes for free? Let you keep them for a year to try them out? And then let you return them for free? We all know how that story turned on.

Similarly, he noted at the time, furniture – sofas, mattresses, tables, etc – were one of those categories that hadn’t been cracked by e-commerce. The unit economics made delivery expensive. And, like shoes, consumers wanted to try them on. Is it comfortable? Do the colors match up with room palette? What if, he proposed at the time, a furniture company offered the following value prop: We’ll show up at your home, for free, with ten different sofas of varying feels and colors, let you try them all out for free, and then just keep the one you want and send all the rest back for free?

Compelling. But entirely impractical, if not outright impossible. Right?

Enter Casper.

If you’re not aware of Casper, they’re a web-only millennial focused mattress company promising free delivery within 90 minutes in NYC, a 100-day try out policy, and free-returns (for any reason) if you’re unhappy. Oh, and they’re a fraction of the cost of traditional Serta, Stearns&Foster, Tempurpedic mattresses. Oh, and they come with a 10-year warranty. Oh, and the reviews are off the charts. Oh, and it goes on and on.

Casper actually was an impossibility. Until very recently. Its success is a combination of the availability of low cost on-demand delivery (powered by Zipments no less! [Disclosure: Chicago Ventures is an investor in Zipments]), reduced costs via vertical integration, and innovative customer acquisition channels. Most importantly, Casper is evolving into a lifestyle brand.

Casper exists because its founders elected to challenge incumbent assumptions about what a mattress felt like, how it could be purchased and what it would cost. While their new assumptions were, even recently, implausible, they are now entirely actual.

It is similar to a refrain that famed angel investor Gil Penchina likes to use: “What has fundamentally changed about the world today that enables your business to succeed when all previous attempts have failed?”

As an investor, I am continually scouring the ecosystem for founders who are challenging incumbent assumptions and looking to reimagine industries. Just like it was once considered impossible to disrupt the floral wire services because of their mass marketing spend, David, Farbod & Gregg at Bloomnation challenged that belief by asserting that florists themselves, if empowered with proper tools, could side-step these incumbent middlemen. And they are winning. And florists love them.

Trying to accomplish the impossible can be dangerous – hell, often delusional. But if you’re challenging incumbents because you’ve noticed a shift in the axioms they depend on for success, I’d love to chat.

 

“I’m only looking for billion dollar outcomes.” Why that’s absurd & why it’s not :-/

Mazel tov technology world. Yesterday (March 31st) you minted two new unicorns: Sprinklr & Tanium. The former’s fundraise elicited my favorite tweet of the day:

But in all seriousness, according to the Wall Street Journal, those fundings bring the number of billion dollar companies to eighty.

So why should you, Ms. Aspiring Entrepreneur care?

I hear lots of other VCs say casually or even in direct feedback “I don’t think your company has billion dollar potential.” Personally, I initially thought that benchmark was absurd – even if you accept Peter Thiel’s power law hypothesis that you should only make investments that can return the fund. For a MicroVC such as Chicago Ventures (and there are now more than 200 of us!) investing out of our $40M first fund, if we own 10% of a company that exits for $400M, we return the fund. Own 15% and a sub $300M exit gets us to the promised land. Own even more and you get the idea. Take that you bigtime, arrogant, Midas List VCs…I will darn well invest in $300M companies!

And then we started learning that our mathematics didn’t actually work in practice. The problem is that nearly every company we invest in will require more than our $2-3M of seed capital. As an exercise, let’s assume that Company X, which has the potential to be a healthy $350M company, is growing nicely on a $3M seed round. It wants to tap Series A investors for a $10M round at a $30M pre-money valuation ($40M post). That means Series A investors, under a best case scenario, will see a <9x return on their money.

Series A investors should be thrilled to return 9x their money…right? Not quite. Anecdotally, I’d estimate that most top tier institutional A round investors are still looking for 25-50x upside on their money in an investment. Empirically, let’s return to our exercise. Tier 1 Series A Investor invests $10M at $40Mpost, and voila, Company X kills it and exits for $350M.  Series A investor returns $87.5M which, on a $250M fund, is barely a third of the fund. Oops?

What we’ve proven is that there’s an economic disconnect between Seed investor threshold and Series A investor threshold. If we had more time, we could repeat this exercise for A round to B round, B to C, etc. You’d find the same tension. In fact, if you analyze the above graph, you’ll note that MicroVC funds (sub $50M) have zero minimum returns overlap with Series A funds >$150M. That is what’s powering the disconnect.

So what happens to Company X? Often Company X is actually a really good business – with strong leadership, traction and economics. In those cases, Company X is generally able to tap either lower tier institutional VCs or non-institutional money: corporate (strategic) venture, HNWI, or private family offices. That is OK, conceptually, but it generally doesn’t make CEOs happy and it can be a challenge for us to explain to the investors in our fund as well.

As a friend to entrepreneurs, this setup is frustrating. But it is the reality. If there are any suggestions from the crowd on how to bridge this gap, I’d love to hear how other funds or investors are handling it. One obvious answer: Raise a larger fund so you can support companies through later rounds. As a 3 year old startup ourselves, we don’t quite have the track record to do that yet – but it’s certainly something we’re thinking about.

I broke my rule again and wrote about VC. Oh well :(

Till next time,

Ezra

No Thanks, Forbes. The ACTUAL Hottest Chicago Startups

Look, I’m a huge fan of Forbes. I read Term Sheet religiously. I have friends who work there as journalists. And I think their April 2015 issue feature articles about Benchmark Capital and Chris Sacca are two of the most intriguing VC profiles I’ve read in a while. Flat out they are killing it.

But their take on Chicago’s “Hottest Startups” can at best be described as, well, laughable?

 

 

And from ChicagoInno’s Will & Jim:

While they certainly got some things right, the inclusion of two public companies, Grubhub & Groupon is obviously a miss. It’s not 1999 where you could IPO off a biz plan and some wireframes (I once put $2k into eFax when I was a teen, oops!!). Those companies are 9 years old now. That’s not a startup. And the inclusion of GoHealth? It’s a hell of a biz, but it was founded in 2001. I was 16. 14 year old companies are not startups. I think what much of the media often conflates is the difference between “startup” and “tech company.” Protein Bar is much more of a startup than GoHealth…

So with all that said, here’s my list of Chicago’s Eight Hottest Actual Startups (in no particular order):

  1. Raise.com - Is the fastest growing marketplace for buying/selling unused giftcards. What makes Raise.com special is their mobile focus, enabling consumers to purchase a discounted gift card, on-demand, at a Point of Sale kiosk, to immediately save money on a purchase (above and beyond regular coupons). In the past 24 months, Raise.com has raised $81M in VC funding and now boasts 125 employees.
  2. AvantCredit – The fastest growing full-stack digital lender of consumer loans, Avant was started by Enova Financial (CashnetUSA) founder Al Goldstein. With over $500M in equity and another $500M in debt raised over the past 24 months, the company is now valued above $1 billion.
  3. UpTake.io - Super secretive Uptake was founded less than 18 months ago but has made a significant mark on the Chicago scene, hiring over 100 employees in six months and consuming the bulk of Brad Keywell’s time. Fortune has the only deep scoop to date, revealing among other things that they have a deep partnership with Caterpillar.
  4. Shiftgig - The early leader in people marketplaces for temp or hourly workers, Shiftgig had a tremendous 2014 growing 10x year over year, while its member base eclipsed the 1M verified profiles mark. With a recent $10M announced Series A and over 100 Chicago based employees, the company expects to keep growing into 2015. **Chicago Ventures is an investor in Shiftgig.
  5. Civis Analytics – Founded by former Obama for America techie Dan Wagner and funded by Google Chairman Eric Schmidt, Civis is “building a data driven world.” Although mostly secretive about both their clients and products, they acknowledge working with Boeing, Discovery and the American Red Cross are known to build deep analytics platforms to service both enterprises and non-profits to better understand their customers, strategy and spending.
  6. Signal - Founded in 2009 with well heeled technologists Mike Sands, Mark Kiven and Eric Lunt at the helm, Signal (fka BrightTag) has raised over $50M in VC financing while scaling past 150 employees. Its suite of products enabled brands and agencies to track the offline to online conversion path of customers as well as glean advanced analytics from digital tag management. It may not be sexy but its consistent with strong institutional and corporate investors.
  7. Keeper Security – Despite being entirely under the radar, Keeper is consistently amongst the top grossing apps on iOS month after month for its password manager and digital vault. Having now eclipsed 50 employees (according to LinkedIn), Keeper looks to become the next great bootstrapped Chicago story.
  8. Kapow Events - Barely three years old and already the leading platform for curated corporate events booking, Kapow has made big moves including adding Grubhub co-founder Mike Evans to its board (according to LinkedIn). Despite having started 2014 active only in Chicago, Kapow now services 8 cities with Houston, Philly & DC also listed as Coming Soon. **Chicago Ventures is an investor in Shiftgig.

Close Calls: Mu Sigma (11 years old), kCura (15 years old…sorry half my age is not a startup), ContextMedia (9 years old), TrunkClub (acquired, although still effectively a startup), Sprout Social, SingleHop (9 years old).

Have a suggestion for what I missed? Post it in the comments and I’ll make some changes if people think I’m wrong.

Till next time,

Ezra

 

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