Friday, June 24, 2011

"These Giant Thinkwell guys are rock stars. They are the mega pimps of this era"

(The quote in the title is from rapper Sir Mix-a-Lot in this Business Insider article)

These guys are so good at making noise that I almost feel silly piling on, but since the cat is well out of the bag I wanted to at least confirm the news that Giant Thinkwell is our newest addition to the Founders Co-op family.

We got to know co-founders Kyle Kesterson and Kevin Leneway during last summer's TechStars Seattle program. They're insanely creative guys, and at first we weren't sure what to make of them or their product - a Tamagotchi-like celebrity game called "Raising Uncle Jesse". But the more time we spent with them, the more we liked what we saw.

When fellow TechStars alum (and former Microsoft and Cranium marketer) Adam Tratt joined the team we got even more excited - as did the gang at Madrona Ventures - and got out our checkbook earlier this year.

The team just shipped their first production game - a Facebook-based celebrity quiz show starring Grammy-winning rapper Sir Mix-a-Lot - but they've been hard at work for months on the underlying platform. The core insight is that "conversation marketing" has begun to penetrate forward-thinking corporations but hasn't yet become the norm for celebrity fan engagement. Giant Thinkwell is building social media tools and infrastructure specifically tuned to the needs of the entertainment business - allowing media personalities to engage with (and monetize) their fan bases in fun, creative and scalable ways that the mainstream tools aren't well-suited to.

I just learned that Mix-N-Match was featured on Jimmy Fallon last night, so I guess I'll just shut up now and let these guys do the talking from here on...

Monday, June 13, 2011

Why do investors say no? The Startup Genome project knows...

This article originally appeared on Seattle 2.0

Early-stage investors (disclosure: I'm one of them) are famous for saying 'no'. Entrepreneurs seeking capital will spend hours building PowerPoint decks, crafting emails and asking friends for introductions to prospective investors, only to receive an inbox full of one-line 'thanks but no thanks' replies. And that's when they get a reply at all.

How do investors make these snap decisions? Aren't they interested in innovation? Don't they get paid to take early-stage risk?

A new study from the Startup Genome Project shines an interesting new light on the question of why certain startups succeed and others struggle. Not coincidentally, their answers read like a playbook of early-stage investing do's and don'ts. If you're planning to raise money for your startup -- or if you write angel checks yourself -- I strongly recommend you read the whole study. As a preview, here are just a few of the study's conclusions and how they map to common decision-making patterns among early stage investors (myself included):
  • Startup Genome: "Solo founders and founding teams without technical cofounders have a much lower probability of success."
  • Investors: "Don't invest in software companies that don't have hackers at the heart of the org and cap table"

  • Startup Genome: "Solo founders take longer to reach scale compared to a founding team of two or more, and they are half as likely to adjust their strategy based on market feedback"
  • Investors: "Don't invest in solo founders (unless they're so extraordinarily mature and capable that you believe they can mitigate these risks)"

  • Startup Genome: "Balanced teams with one technical founder and one business founder raise more money, have more user growth and are less likely to scale prematurely than technical or business-heavy founding teams."
  • Investors: "Every team needs a healthy mix of Hackers and Hustlers"

  • Startup Genome: "Most successful founders are driven by impact rather than experience or money."
  • Investors: "Invest in passion, not greed"

  • Startup Genome: "Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new." 
  • Investors: "I don't believe your hockey stick. Tell me why what you're doing is truly disruptive."
  • Startup Genome: "Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely."
  • Investors: "You're not raising enough."
Investment decisions feel subjective because investors rely on their own entrepreneurial experiences -- and the lessons learned from the companies they back -- to develop highly individualized patterns of startup success and failure. Whenever they evaluate a new deal, they run the facts supplied by the entrepreneur about team, market, opportunity and approach through their mental database of patterns, looking for areas of fit and divergence. When they see a strong fit with their patterns of success, they get out their checkbook. When they don't (which is most of the time), they write one of those one-line emails and move on to the next deal.

I was fascinated and delighted to see so much overlap between the conclusions of the Startup Genome study and the heuristics of the early-stage investors I know and respect. Fascinated because I was skeptical that a quantitative study could discover much about as subjective and personal a pursuit as early-stage investing. And delighted because -- if you believe the results of the study -- there really are objective patterns of success and failure that any entrepreneur can also apply to increase his or her odds of success. And increasing your odds of success is something that both entrepreneurs and investors can get behind.

You can learn more about the Startup Genome Project's methodology here and download your own copy here

Tuesday, June 7, 2011

Carlson's Law, Software Innovation and Venture Capital

Tom Friedman's editorial in today's New York Times cited "Carlson's Law", a framework advanced by Curtis Carlson, the C.E.O. of SRI International:
"'In a world where so many people now have access to education and cheap tools of innovation, innovation that happens from the bottom up tends to be chaotic but smart. Innovation that happens from the top down tends to be orderly but dumb.' As a result, says Carlson, the sweet spot for innovation today is 'moving down,' closer to the people, not up".
Friedman used the idea to make a point about social disruption in the Arab world, but the same idea is equally applicable to the disruption now underway in the software innovation business.

The phrase "cheap tools of innovation" is as concise a description of the current state of the software business as I've come across.

Between powerful, open-source development frameworks like Ruby and PHP and cheap, pay-as-you-go cloud infrastructure services like Amazon Web Services, Urban Airship and Twilio, world-changing software innovations can now be created and brought to market by small teams of two or three developers. Ideas that once required millions of dollars of venture capital to build now require hundreds of thousands - or for the right team of motivated entrepreneurs, none at all. (Yes, additional capital is still needed to scale these innovations, please see below for more on funding innovation v. growth).

By pushing the atomic unit of innovation so far down the economic stack, the technology business has manufactured a set of unintended consequences that are still reverberating across the industry. I've outlined five consequences of this unfolding disruption here:

  1. Innovation has been outsourced to entrepreneurs

    From Bell Labs to DARPA to 3M, some of our most enduring legends of commercial innovation come from military and industrial R&D. In capital-intensive industries like materials science, manufacturing and biotech this is still true. But in software - and nearly every modern industry is massively reliant on software - the diversity, creativity and sheer speed of innovation now unfolding in the entrepreneurial community is running circles around enterprise R&D.

    Why is this true? Some of it surely has to do with the traditional entreprise complaint: bureaucracy. But much more important - and much harder to reverse - is the inevitable flow of creative talent away from entreprise roles to the various forms of creative free-agency afforded by a global information economy. When the means of creative expression, production and mass distribution are available to the many, the most creative and capable people will choose to create on their own terms (even if those creations are ultimately designed to serve the needs of enterprise).

  2. Venture capital has become growth capital

    For the last 50 years or so, the capital markets have delegated the high-risk task of innovation investing to venture capital firms. And when ideas need millions or tens of millions of dollars to evaluate, venture capital is still the right path. But firms with hundreds of millions dollars to manage and tens of partners to manage it can't afford to dribble it out in fifty- and hundred-thousand dollar increments. And for many - arguably most - new software ideas, those are the increments that make the most sense.

    This has put the traditional venture business in an awkward position: notionally the risk-seeking funder of first resort, venture firms are now seen by software entrepreneurs as slow-moving, risk averse growth investors, unwilling or unable to deal in denominations and on terms suited to the current state of the innovation marketplace. Some traditional firms are making smart moves and adding new offerings to address this new market reality; others seem still to be hoping that the genie will go back in the bottle.

  3. Entrepreneurs have become the primary funders of software innovation

    If venture firms are no longer structurally suited to or sought-after for early-stage capital, where are these dollars coming from today? From other entrepreneurs. Fred Wilson describes the phenomenon as "recycled capital", and it's a perfect description of what's now happening in Silicon Valley, New York, Seattle and other markets with healthy local innovation economies. Entrepreneurs who have realized excess returns from their own companies are now redeploying those gains to fund the next wave of innovation.

    Some of this is entrepreneur capital is coming from individuals, facilitated by new online market-makers for angel investments, but most of it is flowing from a new type of venture firm - variously described as "super angel" or "micro VC" funds. These aren't (or at least aren't billed as) baby VC firms just working their way up the funding ladder, but rather are purpose-built to operate at a scale better suited to the new reality. So rather than raising hundreds of millions and investing $10-$20 million in each deal, these funds have $20 or $50 million and invest as little as $50K at a time. And they aren't run by investment bankers - the best of these funds (firms like First Round Capital, Floodgate, IA Ventures and Founder Collective) were built by successful serial software entrepreneurs who saw this change coming and created the kind firm they would have wanted to work with as entrepreneurs.

  4. Consumers are the new arbiters of the innovation marketplace

    This is probably the most controversial idea on this list but I see evidence for it everywhere I look. When only a few dozen software firms were passing through the eye of the venture capital needle each year, a small number of well-connected investors effectively controlled the market for innovation. But when any qualified developer anywhere in the world can build a product and put it online for all to use, innovation can come from any corner of the economy. By implication, the actual users of these services are the ones that choose what succeeds and what fails, and the capital markets are now chasing small groups of influential early adopters in hopes of discovering and jumping on the investment bandwagon before the good ones get away.

    Nowhere is this more true than in the mobile software ecosystem. In just a few short years, Apple has created the highest-velocity channel for software innovation ever seen. Just four years after the iPhone was announced there are now more than 500,000 applications available for it in the Apple App Store, and a comparable number for the even younger Android ecosystem. Even in the enterprise, consumer-employees now dictate what devices and (to some extent) software they want to use and CIOs scramble to support and secure the resulting device/software/network topology.

  5. The war for attention is the first and hardest battle most entrepreneurs now face

    If consumers decide which innovations live and which die, how do winning ideas set themselves apart? Over time, speed and agility offer accretive advantages over slower competitors, but at launch all startups are created equal. The ones that win are those that combine elegant and simple user experiences with crafty attention-getting schemes that help them push through the massive information clutter of the modern media landscape. As Micah Baldwin puts it, every startup needs both a Hacker and a Hustler: the hacker builds while the hustler does whatever it takes to create and nurture that first wave of customer-promoters.

    In this context, it should come at no surprise that early stage entrepreneurs were the first to master social media marketing techniques: when you don't have money but you *do* have customers, the most effective marketing strategy is to enlist those customers as your promotional arm. Paid media costs money, but tweets and Facebook wall posts are free.
The "chaotic but smart" innovation now underway has created such a bloom of enthusiasm for software startups that many pundits are now wringing their hands about a new "bubble economy". Early-stage valuations are definitely creeping up, and many investors are likely to lose money on bets that don't cross over from early-adopter love to mainstream success. But the fact that the capital markets haven't yet figured out how to play this new game of bottom-up innovation doesn't make it any less real. And I don't see any way that this particular genie gets put back in the bottle...

Wednesday, June 1, 2011

Taking the long(er) view

Patience is not my middle name.  As the youngest of three kids I was always in a hurry to grow up so I could do whatever the big kids were doing. And since there's always someone older, faster, smarter, richer and better-looking than me (especially that last one), there's never been a natural brake on all my hurrying and striving.

But lately - maybe since I turned forty a few years back - I've found myself taking a somewhat longer view. This may come as a surprise to anyone who works closely with me, since it doesn't translate into taking on any less (more like the opposite, actually). But I now have some goals that are really important to me, and that I know I can't make happen any faster than they already are. These include:

  1. Helping my kids grow up

    My son just turned six, my daughter is four. They're completely different from each other, hilarious, fascinating and infuriating all at the same time. Trying to be a good parent - which is a hell of a lot harder than my parents made it look - is the most important thing I'm doing right now.

    Six and four came faster than I expected and I don't want to hurry through any of my time with them, which means this particular 20-year planning cycle is the through line that the rest of my life has to wrap around for the forseeable future.

  2. Helping our portfolio companies grow up

    I switched from founding + operating to investing in startups about three years ago. In that time I've played a role - sometimes very active, sometimes less - in helping more than 30 new startups get off the ground. My longest-running seed investment is over five years old, and my newest hasn't even shipped yet.

    Once in a rare while the stars will align and a company will get acquired within 6 months (nice work, Dan), but most of the time things take much longer to develop. People quit, strategies change, customers show up slowly, revenues ramp more slowly still. Every time I add a new portfolio company (like I did today), I extend the planning horizon for my life as a professional investor. If I take my job seriously - and if you ask around I hope you'll hear that I do - I'll be actively involved in each of these companies, doing whatever I can to help them succeed, until they no longer exist as independent firms. Based on the advice of folks who have done this much longer than I have, I should expect that to be five years on average, seven to ten at the outside.

  3. Building Founders Co-op with my partner Andy

    It's not quite true that I stopped founding and operating companies when I became an investor. I'm a co-founder (along with Andy Sack) of something called Founders Co-op. Like most of our portfolio companies we're small (just two people), lean (we don't take salaries and most of our limited budget goes to lawyers and rent) and hungry (we want to make a big dent in the early-stage investment community in the Pacific Northwest, more on that below).

    Unlike most startups, though, ours has a built-in clock, and it's a long one. Every fund we raise (we're on number two) has a 10-year legal life with an optional two-year extension. And the only way we stay in business is to raise a new fund every three or four years. The good news is I've never had more fun or felt better-suited to my chosen path. But, unlike most of the startups we work with, ours is a "get rich slow" business at best (and even that is far from guaranteed).

  4. Helping the Pacific Northwest become a kick-ass market for software entrepreneurs

    This isn't just my project, but it's one I care passionately about. I grew up in Seattle and - since returning in 2001 - have gone all in on the Pacific Northwest as the place I want to build my life and career. We have great magnet companies, great schools and the kernels of an entrepreneurial ecosystem that can - over time - rival that of any global city. But as I've come to appreciate, this is not accomplished overnight.

    The foundation stones for Silicon Valley's current dominance in software entrepreneurship were laid in the 1940's and '50s. Our own roots are not so deep, and it will take sustained effort by many people across the local spectrum to build a similarly rich and diverse ecosystem. As Mark Suster generously pointed out during his recent visit, many of those people are already fully engaged in the project. And by aligning ourselves with similar efforts in other "secondary markets" for entrepreneurship, we can inject greater velocity and excellence into our system than we would have if we tried to do it all ourselves.
If I do them right - and am lucky enough to live a long life - pursuing all of these projects with commitment and purpose could take me into my eighties. A few years back I couldn't imagine a planning horizon longer than ten years, and now that's more like a unit of measure. The weirdest thing about it is that it feels pretty good.