Up & Right

When I see a startup’s logo I size it up. It often makes the first impression. Hokey? Terrible? Awesome? Do these guys get it? Do they understand how important design and customer-centric thinking has become today? Are they the sort of entrepreneurs I will get along with, that I will want to sit across the table from? 

I spend more of my time meeting with enterprise, SMB and financial services startups than pure-play consumer, but these sensibilities are still important in my mind at least. 

The problem is that they are not important 100% of the time. In some businesses you can over-think UI and UX. But I still analyze the logo. These days I do it consciously and try to handicap how much weight I put on the logo by the type of business I am looking at. I try to always account for stage too. If a team is in alpha or beta, they obviously get more slack.

But then there’s the question of what to do with, what to think of Twitter’s original logo. Even for an early stage company that thing was bad. (Note: If the first words that pop into someone’s head upon seeing your logo are “sinus infection” this is not good.)

In the end here’s where I come out, logos are first impressions; it is just better to get them right. Get them wrong and you just have to dig yourself out of a hole whether you like or not. It’s a small hole but a hole nonetheless. 

TAM or Total Addressable Market is something VCs care a lot about. Too small and VCs get scared off. Too big and you might be trying to boil the ocean and haven’t picked out a specific customer. 

But what I want to talk about is what TAM actually means. I see a lot of presentations that conflate TAM with TM and unfortunately that “A” in there is really critical. For instance, you’re an e-commerce company that plans on selling infant diapers online, InfantDiapersDirect.com. You could say, “Consumer Packaged Goods are a $2 trillion Industry!!!” But that’s not fair and you’ll only come off looking like you either tried to BS or didn’t understand what you were talking about. Unfortunately, we see this a lot…

Sure, you may eventually plan on selling more than infant diapers, but you have to define TAM for the foreseeable future. In our example, VCs are interested in knowing how big the US diaper market is (as measured by annual retailer revenues since you are a re/etailer). What % of that and $ value are infant diapers? What is the year to year growth rate? What is the average gross margin for retailers and etailers? Let’s suppose it turns out diapers are a $27 billion US market and Infants (and you always want to explicitly say how you define your market, in this case take 0-12 Months) are a $5 billion market. HOWEVER, only some customers will buy online for various reasons, so your addressable market will be smaller, let’s say 50% for the sake of argument. It is obviously your job as the entrepreneur in this example to figure out precisely what percent will be willing to shop online and justify that estimate with great research (ideally, both first-party and secondary). This is especially hard and important for new to the world / new to your customer segment products & services (ie if no one had ever bought a diaper online or online through a subscription service.)

We have arrived at a reasonable TAM, which happens to be $2.5 billion. This is what the VC was looking for. He or she will likely also want to know the gross margins and growth rates associated with the TAM as well as what percent of the TAM you think you can capture (ie market share) as obviously any incumbents or other startups may take share as well. You don’t have to bake in your assumption about market share into TAM because that would simply yield / approximate your revenue and not the TAM!

Now let’s suppose that TAM turns out to be $100mm instead of $2.5bn. This will be “too small” for most VCs (though maybe not all angels). What should you do? Well, potentially nothing. If you really want to build an awesome niche business, don’t let any VC steer you wrong. There are plenty of businesses that make tons of cash and make their founders very rich off of niche applications (thermometers for milk storage containers and trucks anyone?). But be prepared to be turned down by a lot VCs quickly and don’t let it damage your psyche. Another possibility is broaden your idea. Are you thinking too narrowly? Going back to our previous example, is there any reason to only sell infant diapers? Won’t the same customers who buy infant diapers buy other sizes as well? Perhaps you broaden the idea / TAM and become Diapers.com. But whatever you do, whether the market is tiny or huge, please don’t misquote the TAM.

The topic of pricing, or underpricing more specifically, has come up a number of times in the past week in my conversations with both portfolio companies and perspective investments. This has made me realize that many entrepreneurs start with the assumption that all startup products should be priced lower than the competition. But this thinking is flat out wrong. The conversations typically go something like this this (dummy numbers used):

“Our product is awesome. It’s the best on the market and it is disruptive. We’re pricing it at $1,000 while most of our competitors are $2,000 and our closest competitor is $1,500.”

My response to this is that you’re either underpricing or your product is NOT always better to all customers. I’ll take each one of these two possibilities in turn. First, you are underpricing. Startups often assume that they should price lower than the established competition to gain market share. My problem with this is that in reality businesses and consumers often (unlike they teach you in school) infer quality from price among other factors. This problem is particularly pronounced in opaque products that are new or complex—and startups tend to launch new to the world and opaque products pretty damed frequently! Once you underprice your buyers will this lump your product into comparisons with whatever is in the same price band. This can be damaging to your brand if you’re trying to build a premium brand. It can also be damaging to your brand because your product is making awesome product claims—“It can do X and Y!” but is underpriced, which makes the buyers doubt it can actually do X and Y. Buyers have been trained to be skeptical! This makes your branding inconsistent. Thus, if your product is better, price it accordingly. As counterintuitive as this may sound, my experience shows that this will actually help your sales and marketing efforts. 

The second reason you might be underpricing is that your product is not really as good as the competition. Sounds crummy right? Hard to stomach that thought? It shouldn’t be! Truly disruptive technologies start out cheaper AND “worse.” Think Salesforce.com. At first it was cheaper than traditional CRM solutions, but it was also much less functional. Sure it had certain advantages we can all see now, but it has come a long way since then. Over time these disruptive technologies improve and take price too as their products go upstream. So sometimes when it comes to pricing the most important thing to do is to be honest with yourself and your team. Is your product really all around better than the competition or is it “worse” (ie less functional in certain ways) but potentially disruptive for one reason or another? Network effects and externalities are another subtlety to consider in pricing, particularly for consumer products. Network effects are why Facebook and Foursquare are free for consumers. However, while almost every entrepreneur I’ve met assumes their product has “incredibly powerful network effects,” in reality I think they are more rare than we lead ourselves to believe. Be honest with yourself, does your product really have hugely powerful network effects that justify underpricing the product to gain market share? Once you have market share how then will you monetize it?

If your product is better and you’re building a premium brand, price at a premium. If your product has limited functionality but the potential to improve over time and disrupt incumbents, consider under-cutting the competition—but don’t assume this is always the way to go!

Key takeaway: Startup pricing is not one size fits all and I think startups are more prone to underprice their products than overprice. And if you need a good visual to remind you that putting things on sale is not always great for your brand, I’ll leave you with this: 

http://www.youtube.com/watch?v=YtespeLin2c

As a cancer survivor and former startup guy, it occurred to me today there are a few similarities in surviving the two. They’re both emotional roller coaster rides with unparalleled highs and lows. Believe me, when you’re diagnosed and being treated for cancer those can be some of the hardest days of your life. But when you get positive news on your health, especially right after the tough days, those times are unbelievably good.

Startups are the same way. When you’re just starting out nothing can stop you. Until something does. And then that’s one of the worst days of your professional career. Everything seems meaningless and you wonder if you’ve been wasting your time. 

And so goes the emotional roller coaster until ideally you can smooth out the oscillations and find some level of peace.

Surviving cancer and surviving life at a startup therefore require some of the very same emotional skills. They require the ability to simultaneously 1) Keep an honest and realistic perspective/assessment of the overall situation, yet 2) Believe you will win (even irrationally and against all odds) and compartmentalize all the possible downside scenarios and risks. If you were to dwell on the downside possibilities, you would be paralyzed from acting. Tricking your mind into maintaining these two conflicting points of view is difficult and takes some time. There will be days when only one point of view will win, but you must try your best to let them balance each other out into an even homeostasis.

Have you started a company or worked at a startup and/or survived cancer and been on this roller coast? Have you done both simultaneously?

A couple of the most common questions entrepreneurs face are “how much traction is enough before approaching VCs?” and “how do you define traction—what are the right metrics?”

The answer to how much traction you should have before approaching VC is a fairly simple one: as much as possible. You want to maximize your bargaining power and to the extent that you have 1,000 users versus 0 or 1,000,000 versus 1,000 users this will affect your relative terms and valuation. There is no “right number” or universal metric of course as a B2B enterprise software company may have a ton of traction with just three customers but the next Facebook or Groupon killer may need 30,000 users for angels to even take the meeting. 

So once again we come back to the question, what is traction for your business? Rather than breakdown technology into a thousand and one subsectors and provide some bullshit guidance on what traction is for each (and that answer will not be universally correct as the answer will vary by investor stage, preference and the individual circumstances), here’s a way of thinking about it instead—the way VCs implicitly think about it. 

VCs, even the ones with amazing track records, aren’t very good prognosticators or futurists. VCs are really just detectives in search of evidence. We often start off with a given hypothesis in a market facing disruption, look for companies around that hypothesis and then try to pick the best one.

They key to all this for the VC is evidence. We worry that our hypothesis may be wrong or that we may “back the wrong horse.” Your job as an entrepreneur is to convince us that 1) Our/Your market hypothesis is correct (i.e. the market is worth winning) and 2) Your startup will be the one to win the market.

That’s where traction comes in. VCs want to see the numbers trending in the right direction to suggest 1) and 2) are in fact true. That’s why VCs are always looking for the proverbial “hockey stick” in user/customer and revenue growth. So I can’t tell you what traction is for your business but, like the Supreme Court judging pornography, I know it when I see it. Put yourself in a VCs shoes and think about what you would look for if you were investing in your business. Now do the same thought experiment, except you as the VC just received five business plans that are nearly identical to your original plan—now which one of those five would you invest in? Which metrics would be the key distinguishing ones? 

There’s a reason this blog is titled Up & Right. It’s not just about what a startup should ideally do once I invest, but what I like to see before I invest.

PS - Shout out to Chad Lomax, Co-Founder of Goshi.me, an Excelerate Labs startup for suggesting this blog topic.

Back in August, the NY Times ran an awesome discussion piece regarding Mayor Bloomberg’s plan to have an engineering and applied sciences university powerhouse open a campus in New York City—most likely going to either Stanford or Cornell. Some fantastic tech influencers weighed in including Craig Mod of Flipboard, Caterina Fake of Flickr & Hunch, Fred Wilson of USV, David Tisch of TechStars and Martin Kenney of UC Berkeley. (Anil Dash and Chris Dixon have also written enlightening pieces.) As a Stanford grad who has worked in the tech scene in both Silicon Valley and NYC I believe I can provide a different perspective than previous commentators. (I’m pretty sure none of the previous commentators attended Stanford, one of the two frontrunners.)

Caterina said “Entrepreneurship cannot really be taught in a university setting” and Ellen Ullman said “Creative moments can’t be reproduced.”

While I agree with very narrow interpretations of these two statements it doesn’t quite get at the heart of the matter and the heart of what makes Stanford for instance so damn amazing and successful. Stanford doesn’t “teach” entrepreneurship. It doesn’t “make” it either. And it certainly doesn’t “reproduce” creativity. Stanford *lets* entrepreneurship and creativity happen. This may sound like a minor distinction but it makes all the difference in the world.

Stanford’s open, liberal and accepting atmosphere creates an environment where students feel free to take risks, try new things, be wacky and…well…think different. More than any single initiative, class or program Stanford has it is this safe and accepting atmosphere that drives Stanford’s entrepreneurial heartbeat. 

Do I think NYC’s Applied Sciences campus will be successful? I think that is still to be determined. Like a startup with a great business plan in a great market, execution will still matter. If the winning school, be it Stanford, Cornell or another party is able to create an environment similar to what I experienced in undergrad at Stanford that allows its students to take risks, yes, I think it will be successful and meaningfully contribute to the prosperity of this great city and nation. If, however, the program is run with a strict eye toward results, ROI, progress and other such measurable results (“teaching and making entrepreneurs”) I think it could backfire and the unintended consequence will likely be failure in those endeavors. 

All that said, I am absolutely pumped for the applied sciences program and I’m hoping Stanford gets the nod and helps New York go even further than it has in becoming one of the world’s great technological tent poles.

—-

Note: One could (and probably should) write an entire book on how and why Stanford creates this open environment, but in the interest of brevity I’ll cite just a few notable examples that I think sufficiently and very colorfully demonstrate the point. These are specific examples to be sure and I know every university has its bizarre rituals involving naked children running around quadrangles, but Stanford is unique in its propensity to make *everything* and especially very *public* things weird thus promoting creativity and, importantly, for the administration to actually *approve* of these creative outlets. I’d also add that these examples also generally raise eyebrows, looks of puzzlement and even jeers from other universities so that’s how I know they’re sufficiently odd. 1) Wacky Walk at graduation 2) The unorthodox LSJUMB (Stanford Band) and 3) Stanford’s willingness to give away its classes online—literally subverting their own business model. 

The VC “old boys network” is not dead yet but it just might be stone dead in a moment. This business is no longer just about relationships—strategy and tactics are now critical too. Why is VC changing? Competition. The world at-large and VCs alike are prone to think of financial services providers (such as venture capital firms, private equity firms and hedge funds) as a special class of product or service immune from the normal laws of business physics, but this just isn’t the case. In fact, VC resembles a nascent, relatively immature industry that is (finally) growing up—after all it is only sixty years old!

How is VC changing? Well it is changing just like any old industry might when competition is introduced. Let’s look at some examples - here I have paired some characteristics of industrial competition & evolution with VC-specific examples:

• Scale / Professionalization (destroying the “mom & pop”) - Super angels (SV Angel, 500 Startups)
• PR & Marketing - Fred Wilson, Brad Feld, Mark Suster, Chris Dixon
• Co-Branding - KPCB iFund (+Apple) 
• Specialization -  IA Ventures (sector/theme), First Round (stage)
• Globalization - Walden International, Canaan India, Tiger Global, DST, the rise of NYC
• Franchising - DFJ, TechStars
• Strategic Investments - TechStars + RRE Ventures/Foundry Group/et al; RRE Ventures + Betaworks; YCombinator + DST
• Vertical Integration - NEA, Accel
• Transparency and Efficiency - AngelList, TechCrunch, TC Crunchbase, Twitter, blogs
• Salesforce / IT - TCV, Accel, Bessemer, etc. (use CRM software and employ armies of analysts)

In other words, VC is changing and it’s geting more competitive. Relationships in this business will always be critical, but strategy is now a must. Just like the startups that VCs invest in, venture firms themselves must be careful to set strategy for the years to come. Those firms who evolve the fastest (and in the right ways….) are most likely to survive. 

Have any examples I missed?

I am a hands on guy. I’ve always believed that one of the best ways to understand technology is to actually use it. So with that in mind, I recently went out and bought the Nexus S 4G on Sprint which is the first mobile phone to support Google Wallet. I’m keenly interested in next-generation mobile financial services so I needed to try it for myself. Here’s what I learned.

I used the Nexus + Google Wallet twice in one day to pay for NYC taxi fares. The first time it went off without a hitch—I was feeling pretty good about it! However, the second time was the learning experience. I’m sitting in the cab composing an email and I lose track of time. The next thing I know the cabbie is asking me for the fare and we’re stopping traffic on a cross-street in NYC. So what do I have to do?

1. Stop writing my email (after a couple more taps of course) and save the draft
2. Leave my Inbox app and head to my Android home screen
3. Hit the icon that shows all my Android Apps
4. Flick to scroll to find my Google Wallet app
5. Launch Google Wallet 
6. Enter my four digit PIN
7. Select “Payment Cards” from the Google Wallet home screen—tapping three times because the app is unresponsive the first two times
8. Tap my phone against the NFC reader in the cab

WOW SO MUCH EASIER THAN CASH OR SWIPING A PLASTIC CREDIT CARD! Not really. In fact, this was kind of a pain in the ass. My point is simply that much of the hype around NFC comes from increasing the velocity of card-present payments, but this is clearly not a bulletproof argument in reality.

I also don’t believe the “disappearing wallet” claim, at least not in the near term. I’ll still need my driver’s license and a few other pieces of plastic and paper that can’t / won’t go NFC for long enough that I’ll need a wallet anyhow…plus, plastic credit cards have *awesome* standbye time relative to my Nexus S 4G which has been known to run out of batteries in less than 12 hours. (It would be no fun to be stuck with a dead cell phone and not a single dollar to get home.)

What does this mean? It means for e-wallets and NFC to survive and thrive, there needs to be new and interesting value propositions to consumers. The value prop may come from customer loyalty, couponing and Groupon-style deals / discounting. That’s what people are talking about now at least—and I think that will be part of it but not everything.

Another possibility is speeding up ecommerce. Imagine an e-wallet that launches when you go to checkout from an etailer on your mobile phone. The etailer’s checkout process makes an API call to your phone that open’s Google Wallet. You enter your PIN and you are done. You never have to be a data monkey on an awkward virtual mobile keyboard. That would be huge for both merchants and consumers.

I also think NFC and e-wallets could have uses that aren’t obvious. For instance, when GPS was making its way into phones six years ago who could have predicted FourSquare as an end-user application? Hardware is often like that: you put it out there and then the developers figure out what to use it for. I’m excited to find all of the innovation going on and coming in this space.

I’ve decided to shake my digital Etch-a-Sketch and refresh tomloverro.com in my new role as a venture investor and Principal at RRE Ventures. From now on “Up and to the Right” will simply be “Up & Right” but will still reside at tomloverro.com. 

I am preserving and archiving my previous blog entries at: 

http://tomloverro.posterous.com  

I hope you enjoy v2.0. Feedback is welcome.