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Why the Midwest Needs Silicon Valley’s Respect
Looking Out Towards 2017
Why the Micro-VC Surge Will Drive Innovation Across the US
Trump’s Rust Belt and the Hoofbeats of Technology
The Increasing Cost of Consumer Startups

Why the Midwest Needs Silicon Valley’s Respect

The past couple of months have brought several visible pieces on the opportunity and strengths of Midwestern startups, and underserved ecosystems in general. From Dear Midwest: Stop Trying to Compete with Silicon Valley to The Midwest’s Healthy Fear of Failure Beats Silicon Valley’s Fail Fast Manta to my own piece that I authored with Samir Kaji of First Republic Bank, Why The Micro-VC Surge Will Drive Innovation Across America. These pieces complement some recent events such as Steve Case’s Rise of the Rest Summit which culminated last month in Washington, DC as well as Techcrunch’s recent series on Utah startups, showcasing extraordinary companies not on the Valley’s radar. The ultimate goal in these articles and efforts is to demonstrate the solvency of these secondary markets in their own right and embrace the differences   against San Francisco’s startup hub.


For the most part, I agree with the sentiments and arguments of these efforts – yet fear they’re largely irrelevant if no one is listening, or worse, if no one cares. Too much time is being spent on publicizing the obvious – that there’s enormous entrepreneurial opportunity outside of the Valley (and I’m complicit in that as well) – and too little time is being spent on cultivating the real relationships that actually yield results. And respect.

Here’s an example: recently, there’s been a lot of dialogue around the primary role of early stage VCs, with many emphasizing their role of “packaging” companies for future rounds of funding. Although a loose term, “packaging” isn’t pure vapor. It includes helping startups methodically plan and manage burn to hit the milestones the market expects, helping them focus their operations (and vision) to stay on track, and make smart additions to the team to support a focused story. But the most important part of packaging companies for future financing is having strong enough relationships and validation with external parties that an introduction or endorsement to a future investor brings it with automatic credibility. For my money, there’s only one way to do that: a trusted relationship. And, importantly, most venture backed startups in secondary markets will need to tap non-local capital, at the latest by Series B.

I have had a lot of people ask me why myself and the broader CV team make it a point to travel so frequently to San Francisco and spend so much time with non-local investors and operators. Shouldn’t we play our own Midwestern game they ask, and not try to emulate theirs? Shouldn’t we be team players back at home?

There are two fundamental shifts happening in the venture ecosystem that demand a focus on building credibility away from home.

First, traditional growth firms up and down both coasts are being squeezed on pricing by both mutual funds and foreign investors; much has been written already on the commoditization of growth capital. These investors are consequently increasingly looking to the Midwest to gain access to a proprietary deal source that is less correlated to Valley pricing. But like most things in life, it takes years to build networks and they are constantly wondering: whom can we really trust?

Second, as information becomes increasingly democratic, the best entrepreneurs care less about local capital and more about the best branded capital. The world is increasingly connected and good founders from Indy to Omaha can get credible intros to well known Valley firms from the get-go. The truth is though, that this is a mistake. The data I’ve seen suggests that companies that raise early stage capital from local, hands-on partners, tend to outperform those that skip to distant coasts. Many of these funds who might otherwise be intrigued by a Midwest opportunity, would also prefer a local partner with a strong reputation to complement a deal. But again: whom can they trust? Who is credible?

Underserved markets typically suffer from a lack of high conviction capital. But a disconnected or weak reputation can be equally as bad. I suspect the vast majority of entrepreneurs (and investors) fundamentally misunderstand the level of conviction required for a multi-party partnership to get on a plane and travel 2,000 miles. Turn the tables and imagine being the junior partner who convinced their team to leave their families for two days – and having to answer for it if the meetings are a bust.

Building relationships doesn’t happen on an intro phone call or even video chat. It requires in person communication, finding mutual interests, mutual friends, respect. Cheerleading at home is fun, but ineffective if no one is listening. Accomplished entrepreneurs from Scott Dorsey to Godard Abel to Matt Maloney aren’t just “Midwest” entrepreneurs – their presence is strong enough to attract material interest from the national stage back to their home market. But the interest in underserved markets is greater today than I’ve seen at any point before in my 10 years in tech. So who will serve it if that interest doesn’t know where to turn?

The Midwest should be the Midwest. No doubt. But it won’t thrive if it doesn’t actively build bridges and pursue external respect.

Looking Out Towards 2017

2016 was a good but challenging year for me. It was a year in which I watched family members battle serious health issues, a year where I allowed myself to become distracted and reactive at home and at work, and one where my professional insecurities often got the better of me. But, like most challenges, they make us stronger and I’m extremely confident heading into 2017.

Numerous investors have announced their predictions for 2017, notably Fred Wilson, Sam Gerstenzang, Rob Go, Glenn Solomon, among others. I’m not smart enough to play that game, but I did want to use my blog to both formalize for myself, and publicize to others, my focus in 2017.


2017 Operations

The biggest mistakes I made in 2016 were not taking enough time for myself and allowing myself to become deeply reactive. There is no worse curse in venture than to be a reactive player; it is fundamentally impossible to be extraordinary if your days are prescribed by others.

Deeper, not taking enough time for oneself is a function of being overly reactive. When you allow your schedule to be determined by others, you are in effect conceding that your own thoughts, imagination, brainstorming, headspace are secondary. I don’t believe this to be true.

My 2017 is going to look different than 2016. I believe I am at the point in my career where I can de-prioritize my fears of missing great deals and instead focus on finding the right ones. To that end, I am going to take many fewer inbound meetings in 2017 and instead build a strong pipeline of outbound ones. I am going to chase relationships that I am passionate about, rather than the ones that are convenient or obvious.

I am going to spend less time on e-mail and more time learning, discussing and engaging. One thing I’ve done poorly in my venture career is not go deep enough into the weeds with entrepreneurs. As a writer, I am extremely enamored with stories and storytelling. The benefit of this is that it enables me to quickly parse out big, category defining ideas and hone in on them. The detriment is that I frequently focus too heavily on the vision and ignore the implausibilities and difficulties underlying the story.

2017 Investment Thoughts (not Theses)

Before getting into specifics, I think that 2017 is the year that many investors realize they need to begin learning new industries. Pure play mobile has hit crescendo and SaaS is so mature that we’re now funding SaaS to manage SaaS. In late 2012/early 2013 I decided I would learn everything I could about bitcoin. I mostly didn’t take a meeting for six weeks, but emerged from my cave slightly bearded, had taught myself to mine Bitcoin (and many alts), knew all the big personalities on Bitcointalk and became well written on the industry.

In 2017, I expect to do that again, hopefully twice, if I get my way in genomics and urbanization.

Here are some other areas I have opinions on:

  • Fintech: Over the past several years I’ve spent my energy becoming well versed in many disciplines of consumer internet from e-commerce to retail to marketplaces to bitcoin. For 2016 I put my mind to getting smart on the fintech sector – both consumer and enterprise facing – and we made two related investments over the course of the year: M1Finance and Sunbit.

I had de-prioritized fintech opportunities in 2015, believing that we were a relative late mover to the market and that many of the early winners from Lending Club to Avant to Wealthfront had strong platforms and balance sheets from which to move horizontally away from their core products into adjacent markets. Then, in early 2016 LendingClub experienced a fall from grace, it’s CEO stepped down, and the entire sector hunkered down into crisis mode. I love, love markets in chaos. The chaos reignited my interest in fintech – I was convinced there would be extraordinary opportunities overlooked as investors felt over-exposed. But what I learned in 2016 was that fintech, broadly, remains one of the largest disruptive opportunities of my generation, and I plan to hunt actively for winners in 2017.

  • E-Commerce: As a consumer, I love e-commerce. I love Amazon Prime. I love discovering new millennial brands from Everlane to Allbirds. And yet, over the course of 2016, albeit it kicking and screaming, I was forced to concede that – as one of my business school Professors taught me – “the internet… is a crappy place to have a store.”

The struggle with that statement is that the internet, in many cases, is actually a phenomenal place to acquire and retain customers. But many of the other capex costs can be prohibitive.

In 2017 I am likely to take a material step back from traditional commerce and d2c brand related opportunities while keeping an eye out for the rare few that are fundamentally recasting cost structures and/or reducing consumer friction by a factor of 10.

  • Crypto: This is arguably fintech, but in my opinion, the next generation of distributed applications – although tokenized – are often only tangentially related to anything financial. I continue to believe that distributed applications, most commonly “altcoins” represent an extraordinary opportunity. And while investing in crypto tokens is not something we have license to do at Chicago Ventures, it’s an area where I plan to spend much of my personal free attention and time (and would gladly meet any entrepreneurs building next gen distributed apps).
  • Reimagination of Cities: I spent much of 2015/2016 focused on the future of the home, reflected both in my piece Furnageddon – about how the furniture we live on is changing – and in our investment in Havenly. But as I dived deeper into urban living, meeting with several companies re-conceptualizing the types of spaces we live in, I began recognizing that technology is fundamentally changing the ways we act in our urban areas as well as their associated suburbs.

I saw a nice interview in Techcrunch with Niko Bonatsos at General Catalyst who had a similar observation, in Investing in the future of urbanization. The 2016 election reminded us that the country is a very diverse place, often with misunderstood needs and incentives. It will be a large focus of mine going into 2017.

In 2016, we invested in Predata believing that geo-political instability was increasingly impacting the bottom of lines of many large institutions, from traditional corporates to finance houses. From my vantage point, I believe that consumers also want to increasing manage the perceived risks in their lives. One example of this from 2016 is a company called Point that allows consumers to hedge their investment in their homes by pulling 10% of the value out for liquidity, with no monthly payments. One of my professors Toby Moskowitz once said to me in business school, that “buying insurance is a poor financial decision, but we all purchase it because it’s fantastic from a covariance perspective.” I’ve long felt that should yield some interesting technology driven opportunities.

  • Betting Markets: Many of you know that my background is in the poker industry, initially as a professional and later as an operator. Online poker is probably a $5-10B market, but is contracting slightly year over year. Similarly, daily fantasy sports started 2016 as an exceptionally hot space, but it turns out it wasn’t a fundamentally great business model (see my article: “Game Over: Why Daily Fantasy Has Already Been Won.”)

 Although DFS is unlikely to become the $100B industry that was predicted, betting markets are still amongst the most exciting markets to observe once they become liquid. Heck, the equity futures market is effectively the world’s largest betting market. I continue to believe eSports has an intriguing market in p2p betting and made an investment in multi-table gaming tournaments via Gunslinger.

Some other angles on p2p betting networks such as Quantopian/Quantiacs really excite me as does Numerai. There are also a lot of other areas of illiquidity that make really intriguing liquid markets – from owned assets to information. If you’re building anything in this area, I would love to chat.

I hope that’s helpful and wish everyone a happy and successful 2017. Thanks for reading.

Why the Micro-VC Surge Will Drive Innovation Across the US

The following was co-authored by Ezra Galston of Chicago Ventures(@ezramogee) and Samir Kaji (@samirkaji) of First Republic Bank.

Over the last several years much has been made of the opportunity, or perceived lack thereof in technology centers outside of the Bay Area and NYC. From Steve Case’s Rise of The Rest Tour, to Google for Entrepreneurs, to Brad Feld’s Building an Entrepreneurial Ecosystem , the discussion has consistently been overwhelmingly positive.

It’s easy to understand the stance as who wouldn’t want to support entrepreneurship, irrespective of geography? However, it’s hard to discern whether these opinions were borne out of a utopian desire or a sincere belief of true financial viability in markets outside of NYC and the Bay Area.

In Fred Wilson’s widely discussed (and debated) piece “Second and Third Tier Markets and Beyond,” he suggested that the opportunity outside of the Bay Area was significant, citing the successes of USV in New York, Upfront Ventures in LA and Foundry Group in Boulder:

“The truth is you can build a startup in almost any city in the US today. But it is harder. Harder to build the team. Harder to get customers. Harder to get attention. And harder to raise capital. Which is a huge opportunity for VCs who are willing to get on planes or cars and get to these places.

There is a supremacism that exists in the first and second tiers of the startup world. I find it annoying and always have. So waking up in a place like Nashville feels really good to me. It is a reminder that entrepreneurs exist everywhere and that is a wonderful thing.”

In an effort to move past anecdotes however, we wanted to explore one of the components that helps drive and catalyze early entrepreneurial activity in any localized geography — the availability of early stage funding.

Simply put, non-core US tech hubs are reliant on local early stage capital to subsist since seed stage fund sizes often make remote investing impractical (by contrast growth stage investors who manage large funds and have significant resources can easily invest in breakout companies outside their region).

With the hypothesis that quality local seed capital is needed to foster a strong entrepreneurial ecosystem, our analysis is centered on whether the MicroVC surge, has provided (or may provide) a material impact to these “2nd and 3rd” tier US geographies.

Fortunately, there’s good news for entrepreneurs everywhere. Of all of the Micro-VC funds raised since 2010 (this number includes firms currently raising funds), over 40% of Micro-VC’s formed were based outside of the country’s largest tech centers of SF, LA, NYC and Boston, a number we found quite surprising.

In total, those Micro-VC funds raised outside of the four core tech centers since 2010 represent $6.7B in investable capital, the vast majority of which have driven significant investment dollars in their geographies.

More important to note is that the opportunity in these secondary ecosystems is unequivocally noteworthy. Using M&A activity as an evaluation metric, these ecosystems, despite a relative dearth of funding, have performed quite well:

In each year dating back to 2010, the percentage of Micro-VC funds raised outside of SF, LA, NYC and Boston materially lags the volume of M&A activity, on % basis, in those same areas. This suggest that Micro-VC funds located in secondary markets face less competition — and proportionally more opportunity — for strong financial outcomes by betting on that delta. Now, it’s true that these opportunities are a bit geographically dispersed, however it’s clear that certain cities (Seattle, Boulder, Austin, Salt Lake, Chicago) have made great strides in developing great entrepreneurial talent.

This dislocation in M&A proportionality is of course amplified by the concentration of funds in the Bay Area and NYC. Because coastal deals are more competitive due to an oversupply of capital, they boast higher entry prices (valuations) than do deals in secondary or third tier markets — and the effect on a returns basis may also be material. Case in point: according to Angelist, the mean valuation for deals in Silicon Valley since 2010 is $5.1M. That compares to $4.5M in Chicago, $4M in Indianapolis, and $3.7M in Detroit — offering Midwest investors anywhere from a 10–30% discount at entry.

There are other ways of interpreting the data. One could argue that Bay Area deals deserve to be higher priced due to a premium in the quality of founding teams. Or that the pure volume of M&A in the Bay Area and Boston de-risk the level of returns variance for any particular fund. Those arguments may be with merit but are also balanced by data released by Pitchbook that show cities such as Chicago, Seattle and Washington D.C effectively comparable on a multiple of returns basis:

It is nearly indisputable that large technology companies are being built and enormous value is being created outside of the coastal venture markets: examples include Grubhub, Groupon, Domo, Qualtrics, ExactTarget and HomeAway. But these markets will require more patience for company maturity, a willingness by fund Limited Partners to accept greater short-term volatility, and conviction that key talent will stay in non-core markets due to a desire of staying local and the avoidance of the high cost of living present in the major US tech centers.

While the rhetoric around non-core markets has been historically positive, it appears that the early stage capital surge through Micro-VC funds may be a major factor in these areas actualizing on their potential.

Extra special thanks to Peter Christman for his tireless work in helping to analyze, aggregate and process the data underlying this article.

Trump’s Rust Belt and the Hoofbeats of Technology

I am permitting myself one political/policy related post on this blog. I can’t help it. I am child of the beltway: my father served in the Clinton White House and I spent my early years on the floor of the West Wing doing 3rd grade homework. This piece takes no sides. It merely offers observations based on my perch in the Midwest.

President-elect Donald Trump’s historic path to victory was driven by a wave of discontent amongst the Rust Belt’s working class – and specifically by unexpected victories in Ohio, Pennsylvania, Michigan and Wisconsin. It’s a demographic that has experienced thirty years of economic stagnation – median family net worth in these areas in unchanged since 1996, materially lagging the effects of inflation – and many of its previously stable jobs have moved overseas.

The Rust Belt is an area of the country that I’ve spent much of the past decade focused on. I moved to Illinois from New York City in 2007 to help build a startup technology company. And over the past five years, we, at Chicago Ventures, have raised over $100M to invest in technology startups in the central region. Spanning dozens of investments, the firms we’ve backed now employ several thousand individuals and collectively generate hundreds of millions of dollars in revenue. Our efforts follow a broader trend: in 2016 alone, nearly $1B was raised by venture capital funds with a mandated focus on the Midwest and central regions. In 2015, $2.9B of venture capital dollars were deployed into Midwestern companies, a 50% boost from 2010’s $1.9B tally.


But these efforts are largely irrelevant to Trump’s disaffected base. The areas that have most benefitted from the growth in the technology sector since 2010 are metropolitan cities such as Chicago – 40,000 new jobs, the Twin Cities with 10,000 new technology jobs, even Columbus and Madison. These cities – by nearly every economic and educational metric – are dislocated from their rural surroundings which offer a dearth of high tech jobs.

It gets worse. A Trump White House might well aim to stem blue collar job losses via anti-trade policies, but it will nevertheless face extraordinarily strong headwinds. Software – which Marc Andresseen presciently noted in 2011 – is undeniably “eating the world.” Just last month, Otto – which Uber acquired for $680M earlier in the year – completed its inaugural autonomous trucking delivery. Trucking, with a mean starting salary of $51,000 according to Indeed, employs 3.5 million drivers across the country and is the most common job in nearly every state Trump carried, according to 2015 Census Bureau data. Progress in artificial intelligence and robotics is already threatening tens of millions of additional service level jobs from customer service to nursing, and is even encroaching on white collar industries such as CPAs, financial advisors, even optometrists. The effect on the Rust Belt could be devastating.

New jobs are likely to be created to service growth in emerging technology industries. But they, like many of the 5.8M jobs already open (and unfilled) according to the Labor Department, are also likely to demand highly skilled professionals and skew towards urban areas.

Still, having invested throughout the central region for the past five years, I do believe there is room for optimism. First, the Midwest is home to many of the premier universities and computer science programs in the country. Michigan’s “No Worker Left Behind” experiment, which lasted three years and culminated in 2010, may provide a key. The act, which opened up all of the State’s universities to low income or laid-off workers, retrained 100,000 individuals over that period. According to a 2013 study of 4,500 of its participants, 55% attributed success in obtaining a new job to the program while 58% said they found it helpful in performing their jobs. Moreover, according to former Michigan Governor Jennifer Granholm, the program offered many of the state’s most displaced workers a second chance at “dignity” – which has been an increasing focus of the post-election discussion.

Second, many Midwestern states offer Angel Investment Tax Credits designed to spur innovation and increase jobs in high growth startups. However, these tax credits often make little distinction between investing in distressed versus non-distressed areas, with the effect that the overwhelming majority of rebates stay in existing technology centers. I have watched firsthand as the majority of these credits have supported businesses that would otherwise still have been funded and provided rebates to institutional investors who were largely agnostic. States must work to re-think these programs to stimulate technology development specifically in distressed areas.

Third, and most importantly, more school districts – especially those in rural areas – should follow Chicago’s lead in making computer science education mandatory. A 2015 Gallup/Google poll found that 90% of parents view computer science education as a good use of school resources and 67% want it to be mandatory. CS education is about more than web development jobs – it will provide improved literacy as the digital age spurs a more technology driven, rather than asset driven, economy. This effort, like the others, has the added bonus of improving the dignity and self-confidence of our valuable working class.

Pundits have defined the election as a referendum on the status quo; but the status quo was already in grave jeopardy. This election, globalization took the blame – but in 2020, it may well be technology and automation.

The Increasing Cost of Consumer Startups

If you have the dubious distinction of spending as much time around consumer facing seed VCs as I do, you likely start or end every conversation with some variant of “what’s exciting you these days?” And for the first time in my nearly 5 years in venture, the answer for the past six months has inevitably echoed some variant of “it’s been slow.”

So what is going on?

The narrative for the past several years has been that the proliferation of cloud services, AWS in particular, has vastly reduced the cost of getting a startup off the ground. But I believe the low cost days have rather abruptly come to a halt – at exactly the wrong time. Not because AWS is suddenly expensive, but because the types of consumer behavioral shifts now being targeted are fundamentally more expensive.

Although I’ve been socializing this for a few months internally and amongst peers, I finally mustered the courage to write this piece after reading Sam Lessin’s Era of Lean Startups Comes To An End and Michael Eisenberg’s The Big Disruption.* Recode’s The App Boom is Over also plays a supporting role. Here’s the punchline: the low tech, low cost, low hanging fruit of the digital (and subsequently, mobile) era – digitizing or mobilizing offline to online processes – are coming to an end**. And until the next great platform or behavioral shift, the costs of innovation will be material higher. As we used to say in my card playing days, “the price of poker just went up.”

Here’s how Sam Lessin, writing at The Information puts it (pretty graph and all):


For the past 10 years or so, startups have had two defining characteristics. First, they cost almost nothing to start. The intersection of good open-source software, infrastructure as a service, inexpensive distribution, and some plug-and-play monetization options like Google’s Adwords or an app store put all the power in the hands of small technical teams.

Second, when something worked—as rare as that was—the ability to scale and create extreme value very quickly was unprecedented…

But things are changing once again. Open-source software and infrastructure as a service will remain cheap forever. But the low-hanging fruit of highly scalable software startups has mostly been eaten. The winners in areas like media, messaging, advertising, and games have been established.

The next big opportunities seem to be shaping up around things like self-driving cars, on-demand services, VR, bots, bio, drones. But such opportunities lack turnkey generic infrastructure which enables development costs to drop close to zero. They are all expensive games in which to participate.

And Michael Eisenberg, founder of Israel-based Aleph takes it one step further:

Much of the next level of innovation will play out in the physical world, the financial markets and the world of experiences. Those innovative companies will take more money up front and they will become ever larger parts of VC portfolios.

I actually think Eisenberg gets even closer to nailing the emerging reality than does Lessin. For example, on demand services are expensive to scale, but cheap to launch. Bots are inexpensive to code. A lot of drone infrastructure is commoditized and modular at this point. Etc. But there are certain assets that are immutably capital intensive: real estate, logistics, banking, just to name three.

Let’s take the future of transportation for example (old timers might call this “logistics”). Boom is building the next generation of supersonic jets in a hanger outside of Denver. An actual real life jetplane. That is inherently capital intensive. The TSA/airport disrupters, as related in the WSJ’s All You Can Fly Experience, either purchase planes outright, lease planes, or pre-book large amounts of latent inventory – all demanding large upfront capital commitments. Turns out, putting a physical plane into the air is pretty darn expensive. Other next gen transport cos such as the Hyperloop raised $11M out of the gate to prove a prototype and another $80M soon after with a working test run. Good luck as a MicroVC.

Or, let’s take the reimagination of living. Whether its co-living operators such as WeLive and Common or subscription based flexible living models such as Roam, these companies also demand large upfront leasing obligations and build out costs. The paradox for seed investors is that a traditional seed round of a couple million dollars really only provides for a single (or at most, a couple) leases – all of which remain below full utilization for many months, constraining growth and economics. Want to bet on tiny homes or e-commerce driven pre-fab modular homes? That comes at a price too: Bluhomes raised $11M to launch its prototypes, and tiny home networks such as Kasita and Montainer also demand heavy prototyping and manufacturing costs to scale up their networks. ***

Even the millennial-first ecommerce brands (Bonobos, Trunk Club, Warby Parker, Baublebar) have, over the past several years, shown an increasing disposition towards brick and mortar exposure to combat clogged online acquisition channels. Not to mention a significant push from investors into private label inventory in order to boost otherwise anemic contribution margins across the sector. Stores. Inventory. All material overhead costs. And early in a company’s lifecycle too.

If, as Eisenberg suggests the “next level of innovation will play out in the physical world,” there is likely to be a bifurcation of the seed stage funding stack. Strategic angels still have a place as founders may need $500k-1M to show an MVP, prove one element of the technology, and surround themselves with credible advisors. But the emerging world of capital intensive or asset heavy companies puts a material strain on the $25-50M MicroVC funds who are most comfortable writing $250-750k checks into $1-2M funding rounds.

Sure, these rounds may still occur, but they won’t be as a frequent. Future funding requirements for those businesses – often in breakneck succession – might well crush the model. And, at a minimum, only the MicroVCs with the absolute strongest upstream brands will survive. These VCs will have two options: ship checks into far larger rounds ($7-15M) with a similar risk profile or target more incremental, derivative companies with lesser upside and more balanced financing needs. The shift is occurring “at exactly the wrong time” – right when hundreds of seed funds have recently been raised.

Of course, of course there are still amazing, cash efficient, asset-light opportunities across consumer sectors. But, anecdotally, they are harder to discern and appear less frequent. Irrespective, these more physical/experiential companies represent bold bets on the future – and investors had better come to terms with it. For better or worse, the price of startups has just gone up.

* Tomasz Tonguz at Redpoint released “The Decline of New SaaS Company Formation” this morning with data suggesting that new SaaS companies are being started with reduced frequency in 2015 & 2016. It’s likely the same “low hanging fruit” argument could be applied to traditional SaaS (non AI/ML, chatbots, etc) as well, as Tomasz notes: “The key systems of record in SaaS are already in place. Salesforce, Netsuite, Marketo/Eloqua/Pardot/Hubspot, Zendesk. Subverting those incumbents is going to require a meaningfully better product or substantially more effective customer acquisition channel.”  

** Grubhub and Opentable are two quintessential examples of this transition. Whereas in an offline world, one might pick up a phone and call a restaurant to book a reservation or order food delivery, Opentable enabled that process to be fulfilled via frictionless point and click. Many of these digitization transitions, including our investment in Spothero, have the additional benefit (and value creation) of opening up highly opaque inventory, thereby increasing frequency. 

*** One could make the case that startups can offset these overhead costs via pre-order/pre-sale/Kickstarter revenue.

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