1
The Importance of Being Dumb
2
Rocking the On-Demand Suburbs
3
Business On-Demand: The Next Trillion Dollar Opportunity
4
Death To Dinosaur Brands: How Millennials Are Redefining What It Means To Be Loyal
5
The Entrepreneurs I Love

The Importance of Being Dumb

Stupid is as stupid does.

-       Tom Hanks, “Forest Gump,” 1994

Nearly every VC firm in today’s market is focused on showcasing their brilliance: white-papers, 50 slide powerpoint decks, marketing departments and prescient theses that can be referenced for credibility. In fact, when I’ve met with elder VCs to seek mentorship, I’ve often been asked some variant of “what makes you a good picker of companies?” The implication is that I need to prove I’m smarter than the herd.

I’m now convinced that’s wrong. Great investors don’t need to be smarter: they need to be dumber.

To be more nuanced, one needs to be entirely comfortable in looking dumb – in feeling comfortable being wrong. Great firms (venture firms, startups, big cos, etc etc) will be cultivated when team members are comfortable being vulnerable enough to say dumb things, make dumb decisions, yet find collaborative support even when they are wrong.

At first glance, this approach might appear to be simply a question of a firm’s risk tolerance (should we make this investment?!? It seems too dumb to work!). But I think it runs far deeper – coming face to face with cognitive dissonance itself. Several months back, Roy Bahat, founder of Bloomberg Beta (a seed fund I respect immensely) noted to me that their investment process was rooted in a culture that focused on mitigating the cognitive bias of fearing looking dumb:

“A lot of this has to do with the psychology of the team. Peoples’ need to “feel smart” and, more importantly, avoiding looking dumb… that drives a lot. In our structure, it’s designed for me to be dumb. As long as *someone* around the table is smart enough on each deal to say yes, we win.”

Early in my tenure as a professional poker player, I realized that I was far more adventurous, creative, and risk-taking while playing online poker than I was while playing in casinos (my winnings online ultimately exceeded those in a casino by a factor of probably 1,000x). Given that my opponents in a casino were on average actually worse than my online competition, and I was focused on only a single table in a casino as opposed to 4-12 simultaneous games online, I was miffed. I identified two causes of this incongruity:

  1. I would keep a very large bankroll in my online poker accounts and this large number gave me the confidence to make mistakes knowing that I had ample reserves. In a casino, I rarely kept more than a couple of buyins in my pocket at any time and often felt cash constrained.
  2. Online,  I was largely anonymized. I could experiment with moves, run crazy bluffs, and trust my instincts to make daring call-downs knowing that I would never be blushing out of embarrassment, that no one would ever “ask to see my cards,” or berate me for my decisions.

The truth is that 99% of the time my play in both worlds looked identical. But the outlying 1% made all the difference – the confidence to tap inner creatively, reimagine a situation, and make a decision entirely antithetical to the standard move in a certain context. The greatest players I ever encountered: Tom Dwan, Jason Strasser, Vanessa Selbst, Phil Ivey, just to name a few, became great because in those moments where 99.9% of players would follow a formulaic, auto-pilot approach of the “optimal play,” they would catch themselves and ask: how would my opponent react if I did something entirely novel and unexpected? What would happen if I changed the assumptions underlying what is “optimal?”

They were willing and confident to look dumb because they instinctively knew you could never be great by being slightly smarter or slightly more optimal than the field. Being slightly smarter will undoubtedly win money – but it won’t yield greatness. To be fundamentally great you need to be fundamentally different. Simply put: you need to look dumb.

The underlying question is how one gets there.

Greg McKeown writing in what is probably my favorite book of the past several years, Essentialism, stresses the importance of playfulness to drive creativity:

Our modern school system, born in the Industrial Revolution, has removed the leisure – and much of the pleasure – out of learning. Sir Ken Robinson, who has made the study of creativity in schools his life’s work, has observed that instead of fueling creativity through play, schools can actually kill it: “We have sold ourselves into a fast model of education, and it’s impoverishing our spirit and our energies as much as fast food is depleting our physical bodies… Imagination is the source of every form of human achievement. And it’s the one thing I believe we are systematically jeopardizing in the way we educate our children and ourselves.” The idea that play is trivial stays with us as we reach adulthood and only becomes more ingrained as we enter the workplace.

When we play, we are engaged in the purest expression of our humanity, the truest expression of our individuality…Play expands our minds in ways that allow us to explore: to germinate new ideas or see old ideas in a new light. It makes us more inquisitive, more attuned to novelty, more engaged…Play broadens the range of options available to us. It helps us see possibilities we wouldn’t otherwise have seen and make connections we would otherwise not have made. It opens our minds and broadens our perspective. It helps us challenge old assumptions and makes us more receptive to untested ideas. It gives us permission to expand our own stream of consciousness and come up with new stories. Or as Albert Einstein once said: “When I examine myself and my methods of thought, I come to the conclusion that the gift of fantasy has meant more to me than my talent for absorbing positive knowledge.”

When more traditional thinkers look at startup culture – stocked pantries, ping pong tables, arcade games, frequent parties, kegs in office, open space for chatting – and express confusion, or even disdain, they are missing its root function: to cultivate fun; to cultivate play. There many ways to keep employees happy – health benefits, lenient vacation policies, etc. And those are also undoubtedly important. But they don’t promote playfulness within an office setting. Playfulness will drive creativity – and will drive extraordinary thinking.

It took me years to realize it but what made my friends so darn good at poker is that they were always having so much fun when they played. Looking back, I now realize that I played my best poker when I stopped trying to be technically perfect – and instead focused on the pleasure of interpreting puzzles and analyzing challenging situations.

When a group of people are engaged in creative thinking, they’re all, intrinsically, exposing themselves – their ideas, their thoughts, their essence. And the vast majority of ideas expressed in a creative setting are rejected – frankly, because they’re dumb. The catch is that the winning ideas may well actually be smart (although they’re often controversial) – yet they can only emerge in an environment where team members are comfortable being vulnerable, being dumb.

The firms and companies that can cultivate this culture have a shot at greatness. All others are playing for second place.

Rocking the On-Demand Suburbs

I’m rockin the suburbs
Just like Michael Jackson did
I’m rockin the suburbs
Except that he was talented
I’m rockin the suburbs
- Ben Folds, 2001

One of the difficulties to date for geo focused on demand services is managing to penetrate the suburbs. The suburbs are significant; while the idea that two thirds of the US population live in the 100 largest metropolitan areas is mostly factual, the truth is somewhat more nuanced. From the Daily Beast:

Both the 2010 Census and other more recent analyses demonstrate that America is becoming steadily more suburban: 44 million Americans live in America’s 51 major metropolitan areas, while nearly 122 million Americans live in their suburbs. In other words, nearly three quarters of metropolitan Americans live in suburbs, not core cities.

By a margin of nearly 3:1, the suburbs represent a prize far larger than do core, downtown, metropolitan areas.

But getting there won’t be easy. From a Twitter conversation this past weekend based on Fred Wilson’s recent blog, Kozmo:

The fundamental challenge is twofold: (a) First, the lack of population density makes achieving delivery windows, cracking unit economics, and “scaling” outright difficult and (b) While a city might have a particular culture, each city has multiple suburbs, each with their own nuanced differences. For example amongst Chicago suburbs – Evanston, Lincolnwood, Skokie, Park Ridge, Oak Park – some are university towns, some trend younger, there are unique religious differences in each, etc.  The marketing and logistical complexities are considerable. In fact, these challenges are what make Uber’s seemingly endless penetration into the suburbs, many barely at 100,000 persons, all the more extraordinary.

It was this series of practical complexities that drove our seed investment in Curbside (well, that, and an exceptional founding team!) As the name suggests, Curbside powers on-demand pick-up of goods from a variety of retailers at, well, the curbside. Even if you’ve tried the legacy in-store pickup programs from certain retailers, you would’ve still had to deal with parking, wait in line, often wait for your orders to be aggregated, lug bags back to your car, etc. Curbside makes the pick-up experience delightful: simply pull up & employees, having tracked your approach via GPS, will be waiting for you – pop the trunk and you’re good to go.

The beauty of the model is that while it of course works in downtown metropolitan areas as well, it solves the suburban density conundrum that delivery or at-home on demand providers grapple with by aggregating what would otherwise be dispersed, inefficient, demand and centralizing it into known checkpoints. Put simply: it inverts the on-demand model by pulling consumers towards a known landmark rather than pushing a dispersed workforce towards them – while layering on the delightful experience consumers have come to expect. I’m sure there are other models – Uber, as mentioned, has minimal launch/maintenance costs for secondary/suburban markets which appears to be working for them as well.

Lastly, while I’m generally hesitant to generalize my personal anecdotes, I’d imagine my experience being a father of a 2.5 year old (with a second, Gd willing, to arrive shortly) will resonate with most young parents. While on demand services are a definite convenience, the reality of having children demands lots of time out of the house: parks, weekend activities and the like. For my young son, the grocery store is actually the ultimate in Sunday entertainment (sorry Instacart!). But after a couple reps of buckling/unbuckling the carseat, he’ll pretty much lose it. Thus, there is definite value in services that can cater to those centralized locations – and enable me to leverage my existing movements – for example, servicing my needs from Target and CVS while I shop with my son at Mariano’s.

Given that birth rates rose in 2013 for the first time this millenium, if my experience resonates, the suburbs - argues Joel Kitkin in Forbes - will be the battleground:

Virtually all the metro areas where there has been the strongest growth in families from 2000 to 2013 are highly suburban, highly affordable and located in the South and Intermountain West…Of course, there’s a steady drumbeat in the media proclaiming that families with children are returning to dense cities and expensive regions. In reality, the numbers don’t add up.  Among the 10 large metro areas with the lowest percentage of children are New York, Boston and San Francisco-Oakland, where the percentage of 5- to 14-year-olds is 11.5%, the lowest in the nation except for Pittsburgh (10.8%).

If you’re building products focused on the suburbs or non-core metro areas, let’s talk. More than anything, I’d be curious to learn how you’re conceptualizing your project.

Business On-Demand: The Next Trillion Dollar Opportunity

Yesterday morning, I took to Techcrunch to publish some thoughts I’ve been working on for a while now: The Trillion Dollar Market To Remake Business Applications.

In my view, the fundamental key takeaway is in the fourth paragraph:

With the enterprise undergoing many fundamental changes – from the Bring Your Own Device movement of the late 2000’s to the recent explosion in cloud software – one additional trend is now emerging: that enterprise buyers act significantly like consumers when purchasing services.

When I shared the article to my friends on Facebook earlier this evening, I did so with the following context: “How those on demand apps you love so much will soon be taking over your business too!” What I really should have said was as follows: “You know all those on demand apps that are becoming second nature in our personal lives? Your corporate life will very soon look and feel extremely similar.” The reason that “enterprise buyers act like consumers when purchasing services“ is because enterprise buyers are consumers. The platforms that can realign the motions we’ve become habituated to in our personal lives for the enterprise are going to win much of the $Trillion opportunity that’s up for grabs. I’m convinced of that.

I wanted to open-source the brief slide deck I put together to cover the emergence of these B2B On Demand services. If you have suggestions for companies or categories to add to my market map, please don’t hesitate to let me know in the comments or via e-mail.

Another nuance I find interesting about this space is the convergence between the Enterprise and SMB in adoption of these tools. Because purchasing within these applications is often authorized by a single mid-level manager (or even an executive assistant in some cases) the user experience is decidedly consumerized. What that means is that unlike a lot of enterprise software, these apps will largely be able to bridge both big firms and small and increase their market opportunity – and will increase their moat around the market because an SMB-focused tool, for example, is less likely to steal share. I think this concept is worthy of a post in its own right and I will try to do the near term.

Jeremy Liew of Lightspeed Venture Partners recently uttered a line I found deeply poignant: “It’s hard to predict the future. It’s easier to be open-minded to what’s present.” B2B On Demand is a trend which should not be ignored. I think given the opportunity size and the number of verticals, it is both massively under-innovated and massively under-funded.

Last, another good read is: The Arrival of On Demand in the Enterprise which was sent to me by Bucky Moore of CostanoaVC (and which preceded my article by 2 weeks). Some very nice thoughts on why they invested in Directly and where they see the space going. I can say that Chicago Ventures and Costanoa see eye to eye on this.

Please don’t hesitate to reach out, and if you’re an entrepreneur building in this space, I’d love to meet you.

Death To Dinosaur Brands: How Millennials Are Redefining What It Means To Be Loyal

The following article initially appeared in Forbes on June 3, 2015.

In May Goldman Sachs released the fifth report in its series on Millennials — the generation of adults born after 1980 — this year focused on the “Millennial Mom.” With birth rates rising for the first time since the Great Recession and Millennials on the cusp of usurping Baby Boomers as the country’s biggest spenders – the time is now, Goldman argues, to invest in firms that leverage these trends.

While Goldman’s data is factual, its conclusions are incorrect. The megabank’s top picks? Willams-Sonoma, Hasbro and Carter’s. In other words, established brands that weren’t built for a world run by tech-savvy, socially conscious Millennials.

Where’s the proof? To start, Buzz Marketing Group, a leading youth focused research firm (where I worked a decade ago), reported in its March 2015 “Millennials and Retail” study, that among 493 respondents “Brand Loyalty” ranked toward the very bottom of the purchasing decision funnel. Value for money, quality of products, promotions, store locations, even store hours were all prioritized noticeably higher. The Millennial, it would seem, regards brands as commoditized. Yet this self reported apathy towards brands is empirically false. Examples such as Jessica Alba’s eco-conscious Honest Company, upstart eyeglass retailer Warby Parker and dozens of other consumer companies growing at breakneck speeds abound.

The resolution to this puzzle is nuanced: It’s not that brands are structurally dying – it’s that traditionally defined brands are dying – replaced by firms, products and media so inextricably connected with Millennials’ lives that they don’t even recognize them as brands. Simply put: advertising-driven, one message-to-many brands are dinosaurs being replaced by immersive, experiential, deeply personal companies. (It should be noted that Goldman also identified firms such as Grubhub, Zulily Whole Foods and Disney for investment – whom could all meet the criteria of being Millennial-first.)

It’s also not that Millennials aren’t loyal – on the contrary, repeat purchase rates at many millennial-first retailers are accelerating – it’s simply that they’re rejecting established names in favor of those built by their peer group. Brands that communicate in an authentic, rather than autocratic, manner. Only a small fraction of the largest companies speak our language. For a decade the power of that reality was all fun and Facebook games – seen in social media adoption and not much else. Millennials didn’t have much purchasing power and weren’t buying cars, houses or healthcare. Ten years later, Millennials are wielding thick wallets. The consequence? Nearly the entire domestic GDP is suddenly up for grabs.

As talk of a technology “bubble” rages on among Silicon Valley pundits, to those of us in the Millennial generation, the approaching onslaught is abundantly clear. The Millennial’s expectation of immediacy, transparency, simplicity, and relatability are the mandates now driving disruption in every industry – not only from the aforementioned examples in consumables and fashion, but also heavy industries such as healthcare, finance and enterprise software.

The profile of an enterprise software CEO is rapidly changing. When I first entered the venture industry four years ago, I would often hear senior operating executives (often in their 60s) proclaim their business model structurally could not succeed with twenty-something founders. The business was too complex, they said, and refused to take a 25 year-old whippersnapper seriously.

Four years later, the founders behind some of the fastest growing enterprise software businesses in history are Millennials: Stripe (ages 26 and 24), Zenefits (age 34), Box (age 31), and Mixpanel (age 26). Their success stems from the growth of cloud-based, API driven infrastructures. Product and business model re-imagination is now easier than ever, enabling “kids” to build software which can be adopted bottoms-up. Meaning lower level employees can integrate the products with existing software (without permission of superiors) and prove its value in real time. This is in sharp contrast to traditional top-down sales cycles.

Speaking at an event this month in San Francisco, noted venture capitalist and early Snapchat investor Jeremy Liew remarked: “It’s hard to predict the future…It’s easier to be open minded about the present.” Present reality is clear: the notion of a corporation broadcasting a message to everyone is dated because customers are actively building the brand of the company themselves – irrespective of whether that company has made such activity permissible. Millennial-first platforms are leveraging this cultural shift by sitting in the stream of conversation and engaging.

The implications are far reaching.The challenge to all incumbents is greater than simply launching an Instagram account. Nor is it merely an academic exercise in disruption. The shift in purchasing power is spurring a holistic re-imagination of our entire economy – and it stands to produce scores of juggernaut businesses – while leaving dinosaur businesses in the dust.

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.

Copyright © 2014. Created by Meks. Powered by WordPress.