4 January 2012 |

A quick thought on the venture capital diligence process: As I’ve dug in on hundreds of companies in the last year and a half of working in this job, I’ve found there are two mindsets that I get into when performing research or diligence on a company. The diligence process is one in which I try to build conviction; it’s becoming absolutely certain that this group of developers (and a black lab) are going to build a billion dollar company.

The first mindset is that in which I am utterly excited about the opportunity/team/technology and seek confirming evidence to support my view. It often takes very little for me to get over the proverbial hump on this type of investment, and I overweight evidence supportive of my thesis and underweight that which is disconfirming.  The confirmation bias in action.

The second mindset is one of slight skepticism but potential gain.  I see an opportunity there but not yet enthralled by it. I pick at the idea, try to re-shape it in my mind, seek out qualities of the team that are positive.  It often takes conviction from someone else with an incredibly intelligent perspective on the opportunity/team/technology to get over the hump.  Sometimes that conviction builds over time. Sometimes it doesn’t.

My experience and research into the process of investing tells me the second mindset is likely the better one, but the slow build to conviction doesn’t have the same level of satisfaction upon investment.  With no personal hype, there is not the same release of endorphins. Maybe it’s all for the better to overcome our irrational natures.

24 December 2011 |

@cdixon on the TripAdvisor IPO:

Big win for the “golden age of SEO” .  By which I’m referring to roughly 2001-2008 when “demand” for content (people typing in search queries) far outpaced supply (good content). Companies like Yelp and TripAdvisor (along with Wikipedia, IMDB, etc) grew huge during this period, almost entirely through SEO. They did this by getting highly defensible flywheels spinning where more content meant more SEO which meant more users which meant more content. It is now far more difficult to grow a startup primarily through SEO. Almost all monetizable search categories have vast excesses of SEOd content. Moreover, Google is creating their own content (e.g. Google Places) which, at least at times, they have favored in their search results.

Have heard Google’s big vision is 100% monetization on categories in which there is an “intermediary”. For example, Kayak (and many others) for travel, Nextag for shopping.

Google is no longer happy being just a CPC platform — they want to be in the transaction and improve its CPA model.  I suppose being closer to the actual transaction across the board is a better economic proposition. Is it always the case that CPA > CPC > CPM?

Indicating social proof in the VC fundraising process

28 June 2011 | 3 Comments

Bryce from OATV’s post a while back stirred up some debate over Angel List .  It was an important post in my opinion, but one line really stuck out to me.

Given that most companies seeking funding at this stage have little to no revenue, low user numbers and light usage data AngelList puts a tremendous amount of weight on something they call “social proof”.

While not many entrepreneurs have employed social proof in the process with such directness (at least at later stages of fundraising), I have noticed an interesting tactic that some entrepreneurs have employed when raising money.  I have no way of knowing if it’s intentional or not but it has happened with such frequency that I am led to believe it’s sometimes deliberate.

OMG... I hope you didn't see that.

I call it the “accidental VC slip” method. It goes something like this: an entrepreneur is pitching and goes to show a quick demo of the website on their laptop. However, the Google Calendar is in the open tab and very clearly shows the meetings with other top VCs in there. Or, the entrepreneur still had the wi-fi login screen from another firm in the browser. Or, an email from someone named Mike Moritz sits at the top of the Outlook queue.  I have even seen someone drop business cards from several Kleiner Perkins partners on the table, leave them on the table, then notice a few seconds later and quickly scoop them up.

I view this as a clever way to indicate the “social proof” that Angel List relies heavily upon. From the entrepreneurs perspective, it’s not typically urbane to talk about which other firms are involved in the process for a variety of reasons, and this acts as a unique “hack” to drive interest.  In VC, as in the movie industry, “ nobody knows anything ” so any small advantage will help take the process through to an investment.

Which comes first? Filling out a two-sided network

7 April 2011 | 1 Comment

Lately, I have been thinking a lot about the classic ‘chicken and the egg’ problem that network businesses face every day in the early stages of the corporate lifecycle.  As I noted in my post “ The power of a simple business model ,” when network effects are present in a business, the value of the business increases as each incremental user is added. Think eBay: it is more valuable for buyers with each incremental seller, and vice versa.

So, for businesses like eBay, which comes first: The sellers? Or the buyers? How do you get both?

One company I have been speaking with has – by my estimation – come up with a truly disruptive business model in the media space.  Indeed, they are proposing to turn a large, dynamic business on its head by reframing the way promotion of new content is done to end customers.  However, the value of the business is primarily dependent on end customers using it to begin with. While they have one side of the network – the producers – clamoring to use it and excited about the prospects, they are currently using it for free with knowledge that paying services will ‘switch on’ when a critical mass of end users of the service has been reached.

The key issue has become: how do they get the end customers using it?

This is where deliberate product strategies to drive usage come into play. Chris Dixon has written about this on several occasions and proposed clever solutions: here and here .  However, the writing that I have found most useful for framing my thinking has come from the inimitable Joel Spolsky in this post .

Spolsky frames the issue as a lack of ‘backward compatibility’. He states

If you’re in a market with a chicken and egg problem, you better have a backwards-compatibility answer that dissolves the problem, or it’s going to take you a loooong time to get going (like, forever).

Think of it this way: a new operating system has very limited value without software to run on top of it. This issue can be solved by allowing compatibility with solutions currently used by the customers you want to steal away.

In media, backwards compatibility means offering what the alternatives offer in terms of an experience to really hook the mainstream, or alternatively play to a niche.  If it’s music, then one needs to offer an equivalent content library. If it’s video sharing, one probably needs to start in a niche of really avid video sharers to gain a critical mass then expand into other niche areas before taking on mainstream competition. Meta layers are an interesting way to approach the market (say, offer better discovery of videos on other sites, think Metacafe versus YouTube , or Shortform ‘s channel approach) but the process must be *much* better than what is currently available on the site leader.

Most companies don’t have the luxury of taking “like, forever” so deep thought around this issue is necessary to figure out what exactly ‘backward compatibility’ means for that particular industry.

Warren Buffett and optimism for our future

26 February 2011 | 0 Comments

I’ve long been a huge fan of Warren Buffett and Charlie Munger – their words of wisdom often go beyond the narrow confines of ‘value investing’ and into every day life.

Contrary to the tone of what you might read on the front page of newspapers or on CNN.com, Buffett’s latest Berkshire Hathaway annual letter instills a strong dose of optimism, reminiscent of Matthew Ridley’s Rational Optimist .

No matter how serene today may be, tomorrow is always uncertain.

Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.

It is easy to point out the faults with today’s society and apply that to where we appear to be headed. Unrest in the Middle East, rampant commodity inflation, and a government that appears incapable of coming to decisive decisions drive an inherent pessimism that trickles down from the media to saturate the worldview of many US citizens today. However, what many fail to realize is that this has likely always been the case. The degree to which we communicate and interact with media today may be different, but the underlying thoughts were always there.

Alice Shroeder’s of Buffett briefly mentions that he would sit for hours reading old newspapers going back to earlier parts of the 1900′s to get a sense of what the tone, advertising, and stories were like. One often hears that things were always better ‘back in the day’, but not many actually go back to get a feel for the time first-hand. I trust his assessment.

Right now looking at how far we’ve come and the accelerating pace of technological progress, things look pretty damn good.  And they will likely get better.

Knowing where the pipes are buried

17 February 2011 | 0 Comments

One of the tenets of investing is similar to what any company or sports team strategically attempts to do every day: find a competitive advantage.

In investing, an advantage can come in three forms: analytical, psychological or informational. Analytical advantages come from being able to analyze data better than others, which is very hard to get. Data availability and analytical sophistication has been pushed to a level that only PhD’s in Mathematics or Physics can explore the boundaries for an analytical advantage in public markets. Psychological advantages can come from being able to understand things like  herd mentalities or irrational behavior.  Living in a place like Omaha, Nebraska instead of New York City helps because one doesn’t play tennis every weekend with others in the industry. But again, it’s fairly difficult to obtain as it requires a knack for thinking differently, which goes against our better natures.

Informational advantages are the most interesting but are fairly straightforward: obtaining information that others don’t.  Sometimes this manifests itself in private information that legally can’t be acted upon (inside information like knowing sales numbers on certain products before earnings reports or knowing about an M&A bid before it’s public). Other times it’s perfectly legal and many investors just didn’t do the work to dig it up.  Private market investors can get the vaunted “proprietary” deal flow with specialized knowledge or a strong, trusted network. This can be a really difficult advantage to get, but oftentimes it’s the simplest.

I’m reminded of a story a friend told me:  She was involved with a horse stable in a park in San Francisco. A group of people would dedicate time to feeding and caring for the horses.  One day, they noticed a steady stream of water running just down the middle of the stable, originating from a nearby hillside. They figured the water was coming from a burst pipe so they contacted a number of plumbers to come out and fix the problem. A few came, looked at the problem and said they couldn’t help because they couldn’t locate the burst pipes, which were buried in the side of the hill.

Frustrated, a few enterprising volunteers attempted to locate the blueprints of the piping system… to no avail. Nobody seemed to know where they were. Finally, a long-time volunteer remembered that there was one particular plumber they always used for the area. They called him up and he came out, knew immediately where to find the pipe and fixed the problem.  When pressed on how he knew where the pipe was, he very openly told them his story.

Many years earlier, he came across the blueprints for the pipe system. Being the enterprising gent that he was, he snatched the plans and kept them. From that point forward, any problems experienced with those pipes, he was the only guy they could go to in order to fix them.  A nice competitive advantage. He could sit back and expect guaranteed business.

Want to succeed?  Know where the pipes are buried in your business and don’t tell anybody else.

The opportunity for an academic graph

23 January 2011 | 0 Comments

Rafael Corrales’ post about reaching out to his Professors to get their top papers (in order to find great ideas) pointed out a glaring shortcoming (and therefore opportunity) in academia.

I posted in the comments to his post that there are two major shortcomings:

  1. Content is primarily behind walled gardens. It’s a pain to get access to many academic papers (often have to pay, why?). Can’t link directly to the paper when you cite in a blog post or article (this is an opportunity to create a different type of citation mechanism).
  2. Sites that have content do not do a good job of indexing. Google Scholar tries to fix that but I believe they only index the abstracts, not the full paper.

He aptly pointed out that these are simply accessibility and discoverability problems.

On accessibility: I often find myself staring at a site like or EBSCOhost that force me to pay to gain access to academic work. Shouldn’t this knowledge be free? In fact, there are many sites that will get you to pay for academic papers when they are available for free elsewhere, but can only be found with quite a bit of searching. Which leads to my next point.

On discoverability: if you have a particular interest (say, social psychology), how do you find the top papers in that field? How do you find the academics that are most interesting in social psychology? Are citations a good-enough measure of quality for the laity – what about a straight-up review and rating (Yelp-style)?

A quick run through and dug up a few interesting options beyond Google Scholar.  Many responses on Quora and the web were “ Just ask a Librarian ” or find an academic in the field and ask them.  While certainly a viable option, it doesn’t exactly fit with my predilection towards simple technological solutions. Some sites suggested seem promising (at least for the discoverability part) and are attempting to fix this issue in various forms.

Thinking bigger picture, there appears to be a unique opportunity to go beyond the citation-driven measure of quality and walled gardens of content to create a full “academic graph” of connections between people, publications, papers, and ideas.  I’m glad to see some entrepreneurs going after that opportunity.  But first things first, all this knowledge needs to be easily discoverable and accessible.

An engineering mentality

18 January 2011 | 0 Comments

In many cultures – but unfortunately not to the same extent here in the United States – being an engineer is one of the highest status positions one can have, on par with being a medical doctor.  Even the US, rewards are reaped as engineers command far above average salaries.  Statistics show that the college major category with the highest probability of reaching a C-level position at a Fortune 500 company is engineering. Engineering PhDs were highly sought after for their analytical prowess in the mid-2000s to run obscene sums of money for quant-based hedge funds.

Engineering requires a high level of focus and commitment to solving an intractable problem, often leading to creative approaches.  I think a different way of stating this is by implying that engineers take a “systems” level approach to viewing a problem.  So for endeavors outside the realm of pure mechanical/computer/biological engineering – such as managing people or figuring out business strategy – much like assembling an IKEA table, engineers look at the problem as a system with functional pieces that can be fit together.  Break the problem down into it’s components and figure out a better way to reconstruct it.

Rebecca Lynn puts it a slightly different way and highlights three characteristics of an “engineering mentality” applied to effective marketing:

  1. Test everything.
  2. Make decisions based on numbers.
  3. Abide by the rule that the customer is always right.

Why marketing your company is changing

10 May 2010 | 0 Comments

Just two quick tidbits that show how/why the marketing/distribution world is changing. Both I feel are fairly telling without much explanation.

The first I found in a presentation from Drew Houston of Dropbox and Adam Smith of Xobni :

The second comes from Conan O’Briens recent talk at Google; fast forward to the 15 minute mark and watch through the 19 minute mark: “The world has completely changed.”

The software patent debate

10 May 2010 | 0 Comments

There is an interesting debate raging right now about software patents – which fall under the purview of “business process patents.”  Fred Wilson posted this video recently to AVC.com and I feel it sums up the issue succinctly. It’s well worth a watch if you have a free half hour.  (Also don’t worry about the German advertisement, the video is in English)

Video: Patent Absurdity – Dokumentarfilm (28:54)