Analysis, Cool Stuff, Ooga Labs

Growth Frameworks

With each of the Ooga Labs portfolio companies, Stan and I spend a half day to give the whole team the basics on thinking about growth.  Then, over many weeks and months, we will work on specifics.

We have also occasionally been ask to hold closed-door “Growth Days” for some of the top VC’s in Silicon Valley, like Andressen Horowitz and KPCB, where they invite their portfolio companies to get a Growth overview and spend one on one time with us working through specific ideas they have.

We also have given keynotes at the Growth Hacker Conference, but we have never let those talks be broadcast.  We have given one interview on Growth Hacker TV.

When we open our conference NFX, we also typically share some of the ideas and frameworks we have for thinking about growth.  This Techcrunch article summarizes a bit of this.

Part of the information and thinking we share with these companies we put in this presentation that Loic Lemur asked us to give at LeWeb Paris 2013.  Here’s the video.

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Analysis, Cool Stuff

Metal, Paper, and Software: BitCoin and Digital Currencies

Bitcoin image for blog post

I’ve been fascinated with the nature of money, since 1993, when I read a history book which mentioned that prior to the US Civil War, there were thousands of private institutions that were issuing paper money notes… and people used them effectively.  I realized then that money is simply a collective belief that “something” can be exchanged for value in the future.  Confidence.  Belief.  Self-fulfilling group trance.

In 2004, thinking that creating a global digital currency was a good idea, I bought the URL Blue.com, which I have to this day.  The logic was that US money is green, so maybe the global currency should be named after the dominant color of our planet.

In 2005 I joined the board of SecondLife, a company with an internal economy in virtual Linden Dollars and a free floating exchange rate between Linden Dollars and US dollars. The magnitude of that internal economy eventually reached the equivalent of US$750 million.  Very real virtual dollars.

In 2009, Philip Rosedale — the CEO of SecondLife and a true visionary — Bill Tai, Stan Chudnovsky, Mitch Kapor and I spend several brainstorming sessions trying to come up with a plan to create a world digital currency, either by spinning out Linden Dollars or by creating something new, and calling it Blue.  Our plan came down to a BitTorrent-like system for an encrypted currency, open sourced software, currency units to be programmable, a floating exchange rate with all other currencies, and it even included a disappearing founder.  In other words, it was very close to what BitCoin actually pulled off while we were just talking about it.  There were two main differences: we hadn’t come up with mining as a mechanism to compensate the operators of the distributed network, and we never really believed we could keep our identities secret and thus “disappear” — something we knew was critical to building confidence in the currency.  So we never did anything.

In 2009, that same year, at David Hornik’s tech gathering The Lobby in Hawaii, Philip Rosedale and I led a group discussion called “One Currency to Rule Them All” where we discussed the potential for the creation of a digital currency that would live outside a virtual world like SecondLife in our real world.

So in 2011, when I first heard about BitCoin late, I immediately recognized it for what it is.  Since then, Stan and I have been playing with it and following it.  This lead to me running the BitCoin discussion at The Lobby in 2013, and the BitCoin panel at LeWeb in December 2013.   Here’s the video.  It is probably best viewed as a BitCoin 101 for your friends who want to understand the fascination with Digital Currencies and BitCoin.   Obviously, the next forty years will be interesting for money in general, and BitCoin is clearly the first shot, not the last.

As I put it to my Dad over the holidays: When humans had metal technology, we made money out of metal.  When we had printing technology, we made money out of paper.  Now we have software technology, we’re going to make money out of it, and BitCoin is the first potentially viable instance of that natural evolution.

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Analysis, Cool companies, Ooga Labs

Networks and Marketplaces

Marketplace image

Over the last 13 years, Stan and I have found ourselves drawn to focus on businesses that have network effects.  It started intuitively, then became explicit in 2003. Since then, we’ve started or advised over 25 companies whose core business was either 1) building a network of people who wanted to communicate, or 2) a network of buyers and sellers who wanted to transact.  Some of these companies have both.

There are others who have admitted a similar affection for these businesses, including David Sze and Reid Hoffman of Greylock, Fred Wilson of Union Square, Bill Gurley and Matt Cohler of Benchmark, Jeremy Levine of Bessemer.  And no wonder.  If you look at the biggest tech returns of the last 15 years, many of them were either marketplaces or networks, and if you consider companies that became worth more than $10B, nearly all of them fall in this category.  We’ve done a detailed analysis of this ourselves, and recently, James Slavet, also of Greylock, published similar findings.

So why isn’t everyone focused on these?  Increasingly, they are, of course.  But the fact remains, they’re f**king hard to pull off.  There’s a lot of art/luck in them, and that’s hard to predict and thus hard to invest in.  Over the years, we’ve watched/stumbled into/invented many tactics to manufacture a two sided network, to A/B test your way to virility, to foster liquidity and tipping points, to buy your network inexpensively, to iterate until you find the right subject matter or value proposition, build the right retention and feedback loops, etc.  These lessons can be applied today to increase the chance of successfully creating a functioning marketplace or network, or both.

The first step is even realizing you are attempting to develop a business that fits in this cohort of companies, and that there are now lessons to learn from prior successes.

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Analysis, Ooga Labs

We must do both.

multi-color

The book “Built to Last” is excellent. Here’s an excerpt.
“…a key aspect of highly visionary companies: They do not oppress themselves with what we call the ‘Tyranny of the OR.’ The ‘tyranny of the OR’ pushes people to believe that things must be either A OR B, but not both. “OR” thinkers say:

· ‘You can have low cost OR high quality.’
· ‘You can have creative autonomy OR consistency and control.’
· ‘You can make progress by methodical planning OR by opportunistic groping.’
· ‘You can create wealth for your shareholders OR do good for the world.’
· ‘You can be idealistic (values-driven) OR pragmatic (profit-driven).’

Visionary companies liberate themselves with the ‘Genius of the AND’ – the ability to embrace both extremes of a number of dimensions at the same time. Instead of choosing between A OR B, they figure out a way to have both A AND B.

– purpose beyond profit AND pragmatic pursuit of profit

– a relatively fixed core ideology AND vigorous change and movement

– conservatism around the core AND bold, committing, risky moves

– clear vision and sense of direction AND opportunistic groping and experimentation

– audacious goals AND incremental evolutionary progress

– selection of managers steeped in the core AND selection of managers that induce change

– ideological control AND operational autonomy

– extremely tight culture AND ability to change, move, adapt

– investment for the long-term AND demands for short- term performance

– philosophical, visionary, futuristic AND superb daily execution, ‘nuts and bolts’

– organization aligned with a core ideology AND organization adapted to its environment

We’re not talking about mere balance here. ‘Balance’ implies going to the midpoint, fifty-fifty, half and half. A visionary company doesn’t seek balance between short-term and long-term, for example. It seeks to do very well in the short-term and very well in the long- term. A visionary company doesn’t simply balance between idealism and profitability; it seeks to be highly idealistic and highly profitable. A visionary company doesn’t simply balance between preserving a tightly held core ideology and stimulating vigorous change and movement; it does both to an extreme. In short, a highly visionary company doesn’t want to blend yin and yang into gray, indistinguishable circle that is neither highly yin nor highly yang; it aims to be distinctly yin and distinctly yang – both at the same time, all the time.

As F. Scott Fitzgerald pointed out, ‘The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.’ This is exactly what the visionary companies are able to do.”

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Analysis

The Advisor Compensation Gap

I’m getting the feeling that there is a significant gap between what a good Advisor is worth to your start up, and what the going compensation rate for them is in Silicon Valley.  An Advisor typically gets .1% – .4% of a start up, vesting over 2-3 years, with 100% acceleration on change of control.  But they can add more than 10X that value to your company by doing just one of many things including: introducing you to a key teammate like a VP Engineering, giving you credibility where you had none, keeping you from wasting 6 months pursuing a wrong strategy, improving your pitch to investors by 10%, telling you business metrics that would’ve taken a year to discover on your own, or keeping you from signing a contract giving someone a “first right of refusal.”  Good Advisors often do several of these things, adding huge value, but not getting compensated for it.   

Off the top of my head, I can think of five possible reasons this gap persists. 

1) Advisors tolerate the gap because they have fun

2) Advisors tolerate the gap because they believe they will learning something valuable 

3) Entrepreneurs won’t pay more because Advisor performance is too variable.  Maybe the entrepreneur actually IS paying for the value overall because they give .1% – 4% to many Advisors, and only one Advisor makes the difference. 

4)  Perhaps there is no perceived cost to the Advisor for giving a few hours per month.  There really is both a cost and an opportunity cost, but the point is the perception of that cost may be too low due to underlying math, which says “What’s two hours out of 720 hours per month? Nothing, really.”

5) Perhaps Advisors tolerate it because it’s the going rate, and everyone has gotten used to it.  Kind of like how everyone has become used to 2.5% management fees for hedge funds. 

The other way to look at it might be to conclude there is no real gap.  Maybe I’m imagining it.  Perhaps we would feel this same gap for anyone in a startup if we looked closely at their situation… like the Office Manager, or the Director of Sales, or the interface designer. 

So I wonder what would happen if we created a website that auctioned off Advisor time?  Would the average compensation go up or down?  What should a rational Board of Directors be willing to pay for their CEO to get advice from a guy like Philip Rosedale about their startup?  Or from Caterina Fake about their Website design?

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Analysis

Talent or Luck?

einstein-tongue-luck-or-talent

There’s a lot of discussion about “bad luck” and “good luck” around here. My mom, who was visiting from Boston last week even asked me, “Do you believe in luck?”

My answer is that our concept of “luck” is fundamentally time-based. In other words, given enough time (or iterations), luck, or randomness, melts away, and each of us tends to our talent level.

For example, you can look at a guy like Matt Cohler.  He joined LinkedIn when he first got to Silicon Valley around 2003. Luck? Maybe. Then he joined Facebook. Luck? Hmm… Now he’s an equal Partner at Benchmark. At this point, it’s getting hard to claim luck as the explanitory variable for his success.

Were you unlucky not to raise money before the crash? Were you unlucky when your co-founder went wacko? Were you unlucky not to sell your company when it was soooo close? Maybe, but there may also be a pattern that a third party could easily discern.

I can point to 30+ lucky things that happened to me in the last 10 years that have allowed me to be where I am (where ever that is…). When people ask me about it, I tell them it’s mostly luck. And that’s true for each individual event. However, the full truth is that if you back away and look at a person’s career over 10-15 years, those thirty lucky things happen because of their processes and decision making.

For instance, those thirty lucky things happened because my team and I always work hard enough to have multiple options for every key success factor such as revenue sources, where to lease real estate, who to raise money from, who to hire for a key position, who to partner with, methods for trimming costs, etc. These thirty lucky things happened because I had reasonable judgment on who the good people were. They happened because I chose to move to San Francisco instead of staying in Boston. They happened because I stayed in the game long enough to survive 300 bad things so the 30 good ones could fall on me. Etc. My processes and judgment were such that over time, I am where I am. Over the same period, some people have soared higher, some lower.

It often feels like luck plays a huge role. But as time goes on, there is no such thing as luck.

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Analysis

The Economics of Creativity

Creative endeavors are, for creative people, estatic experiences.  Playing music, writing poetry, sculpting, designing websites, cooking, etc.  Fun and spiritually fulfilling, creative endeavors also make you popular.  Creative people will create for free.  Even at free, it’s a good deal. 

But in every age, technology favors some creative talents over others with huge quantities of money.  Often shocking amounts of money.  I started thinking about this when I read Billy Bragg’s editorial calling for Michael Birch, the creative genius behind Bebo (who is a friend and Adviser to Ooga) to share some of his earnings from the sale of Bebo with the musicians who put their music and video up on Bebo’s site and contributed to Bebo’s popularity.  A good summary of the resulting debate is here on ReadWriteWeb

It occured to me that Bragg feels wronged because he doesn’t understand that a technology shift has taken place and he, with his talent for recording music, will no longer be over compensated for that talent, something which he would actually do for free.  The new creative talent which is being over-rewarded is inventing great user experience on computer screens — something Birch would probably do for free, given that it’s fun, inherently fulfilling to do for him, it touches millions of people and it makes him popular.  His particular bundle of creative talents happen to fit with the economics of creativity in this age. 

Let me flesh out a few more examples to amplify.  In the mid 1800’s a grandfather of mine (who was an American) married a Von Brandenberg woman in Germany, where he was living with his dad who was the conductor of the Berlin Orchestra.  I found out a few years ago that a Von Brandenberg is kind of royalty in Germany.  How could it be, I thought, that my dumpy ancestor could marry a royalty.  I didn’t make sense.  Until you realized there was no radio back then.  People who played in the orchestra were rock stars of their day, and the conductor too.  Even the conductor’s son was part of the creative elite.  Royalty lavished big bucks on musicians and, I guess sometimes, fell in love with them.  That was the technology of the day, and it happened to favor the particular bundle of talents my great great great grandfather had.

Fast forward to 1925 when my grandfather was trying to make it as a cellist in Boston.  He got paid for playing his cello at dinner at the Chatam Inn on Cape Cod but he could barely support himself and his bride.  When the kids came, he became a machinist and a fork lift driver at a brewery.  His creative endeavor no longer paid the bills because radio was availble and the transition was underway in the 20’s from rewarding live music to rewarding recorded music.  Later in his life, my grandfather would practice and play the cello for free.

Forward to the 1940’s when my grandfather’s sister, Florence, 20 years younger than my grandfather, loved to sing from the time she was three years old.  It was in her nature and she would do it for free.  She recorded 8 albums in the 1950’s which were distributed on vinyl and played on radio stations around the U.S.  She’s loaded!  The technology available to distribute creative endeavors richly rewarded the talent for recording music.

Forward to the 1990’s, when a friend from college who won the Julliard Prize for playing piano, tried to make it as a concert pianist.  She was much more talented than my grandfather, but by the 1990’s, the economics of live music had deteriorated to $50 stipend for an hour performance.  And it takes her 80 hours to prepare for that hour.  She still performs every chance she gets.  She’s willing to do it for free today, while my ancestor got to marry royalty 150 years ago for a similar talent.

Designing user experiences on computer screens may be one of the creative endeavors economically favored by the state of  technology today.   How long do you  think it will last?

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