March 31, 2011
Things have been particularly crazy around here of late and as a result, I’ve now broken my “If I’m going to blog I need to do it at least once a week rule.” Ugh. I’m sure it will happen again, but I’m trying, really.
I ran into my friend Dan yesterday on the train, and we were talking about the state of the world, how active and exciting the markets are, and wondering where and how it’s all going to end. He asked me what I had been up to and I told him that my partners and I are finding ourselves in that rare but incredibly energizing circumstance of drinking from an absolute firehose of good dealflow, and starting to wonder what to do about it. Is this one of those waves that you should ride hard and long, doing all the deals that clear your hurdle so long as you keep that hurdle high? Is that true even if it feels like you’re taking on every bit as much as you can handle, and maybe more? It’s certainly tempting, and we know that there are ebbs and flows in this (and every) business. And we know that it feels a whole lot better to be stuck in an ebb if you were super-productive in that last flow. But maybe instead it’s time to take advantage of the high volume of quality stuff and just get super-selective, operate at a normal pace, but only pursue the very best stuff. How to know??
The venture market is remarkably frothy right now, like nothing I’ve seen since 1999. In some ways it’s even every bit as frothy as that period. Fortunately, though, while supply and demand are leading pricing to get a little out of whack in many situations, today is radically more grounded in reality than was the late 90s. Nobody’s talking about throwing out the fundamentals of Keynesian economics or anything. And the activity we’re seeing in our existing portfolio companies is incredibly encouraging – by and large, there’s a lot of firehose drinking there, too. So while the world feels pretty good right now, and the fundamentals of the things we’re excited about are all really interesting and positive, at some point you have to wonder when you’re running up against the end of a cycle. Timing markets is not advisable in this (or any?) business, for sure, but it’s awfully hard not to think about it.
Dan made me feel a bit better about the macro-environment, fortunately. He runs a large and very successful asset management firm, and is a former Goldman MD. His team spends a lot of time thinking about big market forces, and he had just been at a Goldman event yesterday morning where their economists were presenting their prevailing view of the state of the world. Fortunately, despite Japan’s crisis, the Middle East uncertainty, and our own national debt and political gridlock, I can report that both Dan’s team and the Goldman guys seem to think that this party isn’t going to have ‘last call’ for awhile – all the “tip of the spear” indicators they focus on are moving in the right direction.
So what to do? As I think through my twelve years of investing, I’ve never gotten in trouble for doing too many good deals at once. I’ve gotten in trouble when slow times have led to lower standards or loss of focus in the interest of finding things to be excited about. And when I think about our portfolio companies, they for the most part don’t get in trouble for trying to respond positively to too much good, on-target, inbound business interest. It’s when they’ve gotten off focus or stretched too far to make things work that they get in trouble.
The key, clearly, is to not let a lot of market momentum and excitement lead to over-exuberance and pursuing things that are off focus, even when so much looks so good. Keep standards high and focus consistent, and accept that higher volume at the top of the funnel will lead to more coming through the bottom. Within reason, I think we all have it within to surprise ourselves by dialing it up a notch and squeezing more out of ourselves than we thought possible. And if we do, we’ll be really glad that we had this super-productive period when things turn and the flow of exciting opportunities slows to a trickle, which it undoubtedly will.
So, comforted by Dan’s advice and our own experience, we’re pressing ahead. The sun is shining, and it’s time to keep making hay. And besides, it’s a hell of a lot more fun to be busy and productive than cowering in the corner, awaiting disaster.
March 16, 2011
I spent 48 hours last weekend at the regional children’s hospital with my youngest son, who was battling a severe case of pneumonia. He’s home now and is going to be just fine, fortunately. Through this experience, I was confronted with a frustrating fact about hospitals – a reality that got me noodling on a lesson worth thinking about in more everyday contexts.
As most of us have experienced, hospitals work at a plodding pace that can be gut-wrenchingly frustrating while you’re sitting there worried about your or a loved one’s health. If a nurse says “The doctor will be right in to see you,” near as I can tell that means not much more than you’re on a to do list of unknown length that will take an unknown amount of time to work through. Stressful and infuriating.
But I shouldn’t let myself get so frustrated by this. At this point in life, I should understand that for reasons I will never understand, let alone be able to change, hospitals just operate that way. From there, I should then do two things – (1) adjust my macro-expectations to the framework I’m operating in and (2) think carefully about identifying those few places where I can influence that timeline and selectively work to have a little bit of impact (polite-but-squeaky wheels do get somewhat more grease in hospitals, I’ve learned).
It’s like my first month living as an expat in South Africa, when I had to learn that if someone said they were going to do something “Now,” they only meant it was going to be amongst the next dozen or two things they would do, and almost certainly a couple days off. Only if a South African says “now-now” can you trust that they’re getting to work immediately. You can get frustrated when someone says “now” and it’s not done tomorrow morning (I sure did), but it’s far more productive to recognize that you’re speaking different languages, and learn to push for now-now when you need it (took me awhile).
The point is that too often in life we set ourselves up for at best frustration, and at worst potentially disastrous decisions about resource allocation, by failing to understand the differing perspectives on timing and urgency on two sides of an interaction. I see this all the time with startup companies working on big, ‘elephant hunt’ sales or business development deals with large companies. Startups work at a pace that is exponentially faster than big companies. That’s not a judgment against the big guys, it’s just a reality of startups being so much smaller and nimbler. To do lists that would take a quarter to get worked through at a $1B company get worked through in a week at a startup.
Given that you can’t change that difference, as a startup you have to operate with an acceptance of it, not unrealistically expect to get a big company to drive at a speed it’s not built for. Fail to be realistic about this and you’re setting yourself up for disaster.
So you have two choices, and they’re like my choices at the hospital last weekend (only potentially more damaging if you choose poorly). You can get frustrated by how slowly the big guys move, keep banging your head against the wall, and waste your company’s precious resources trying to move something that just isn’t going to move any faster. Or you can be realistic, have frank conversations with the other side, listen carefully to the signals they’re sending, and then adjust your organization’s resources accordingly.
At the hospital, with a child breathing through an oxygen mask, decisions are easy – that situation is your whole world and all that matters. That sort of focus will breed frustration, but it is what it is. Let a big deal become your whole world as a startup and you put your whole company at risk. If you don’t understand timelines and expectations appropriately, you will stay over-resourced in pursuit of the “company-making” deal that just isn’t going to move any faster. Yes, you should listen closely and work to find the places you can influence their timing, but usually things just take time to percolate through those organizations. If you’re smart about this, you’ll separate the things you can influence from those you can’t and redeploy your resources to a collection of other, smaller opportunities where you can actually move the ball forward. When the big deal comes through, you’ll be thrilled that you’ve also achieved progress on a number of other fronts. And if it doesn’t (and they so often don’t!), you’ll have some other baskets with eggs in them, thus avoiding starvation.
It may be nerve wracking to not throw everything you’ve got at that one big deal, but orchestrated courageously, the whole experience will save you from immeasurable frustration, be more motivating for your team, put a number of wins on the board, and substantially reduce risk for your business.
March 7, 2011
I made reservations over the weekend for my annual spring long weekend, no kids getaway with my wife. The experience of making the final booking provided a great illustration of the importance of simple pricing for any consumer offering.
One thing I’ve learned about resorts that have a lot of services and options – golf, spas, multiple restaurants, nature activities, etc. – is that they can confuse the hell out of you with their pricing. When talking to our first choice destination about their various ‘special packages’ I was completely overwhelmed by choices and options as I tried to figure out the best deal. The number of pricepoints and packages seemed endless. Would I do better a la carte or with a package? And which package?
After about 10 minutes sorting through the options with the reservationist I told her I’d call her back. I hung up the phone and literally started building an excel spreadsheet to figure out which package offered the best deal given what we wanted to do. And then I realized just how asinine that was, and I called our second choice. Still more complicated than it should’ve been, but simpler than Resort #1. Resort #2 got our business.
Resort #1 had the setup and services that we most wanted, but I just couldn’t get past the fact that it was impossible to understand the pricing – was I getting a deal or getting hosed? It seemed crazy to have to build a spreadsheet to figure it out. How many customers are they losing this way?
If you have a pricing model in your business that requires people to do complex math, you are without question going to hurt your conversion of prospects into customers. It’s bad enough in high dollar b2b sales, where you’re likely selling to a manager who is armed with all the tools and incentives to make complex choices. Even then, decision-makers get bogged down by spreadsheets and analysis. But in consumer applications, you can trust that the smallest bit of complexity in the user experience will cause big numbers of people to drop out. People just don’t want to force their brains through analyzing how much of a deal they’re getting or trying to ensure they’re not actually getting hosed. It’s hard enough to design beautiful, seamless user experiences – don’t add to the complexity by obfuscating your price-value equation.
I’ve been thinking about this a lot recently in the context of one of my favorite recent investments – VillageVines. VV has built a fantastic service for helping discerning diners explore new restaurants by offering them discounted tables at places that have unreserved tables. Think Hotels.com, but for the restaurant world. No coupons, no cards, just savings. I wrote a detailed post explaining our excitement about the deal a couple months ago.
VillageVines is doing incredibly well – growing 40% month-over-month for the last six months. But I also know that we’d be doing even better if we didn’t require our customers to do some up front math. You see, the core VV offer is that you pay $10 to book dinner reservations through us, then get 30% off your entire food and beverage bill (that $10 fee is our revenue model – no money moves between VV and the restaurant, a key feature of the model). It’s a pretty phenomenal deal. All you have to do is have a $33.34 pre-discount bill and you’re definitely coming out ahead. With our focus on fine dining restaurants, that’s a given. The more you spend the more you save, as they say. As an example, I took a close associate (and big time foodie) out for a very, very nice dinner a couple weeks back at Le Circque in NYC, paying him back for a HUGE favor he had done me. Booked through VillageVines and saved $120. Pretty good return on a $10 investment, and an awesome experience all around.
But still, as good as the offer is, we’re requiring people to stop and think about the experience. “Hold on, so I start by paying $10 to make the reservation, then how much do I have to spend at dinner to make that a good deal? And if I spend $150 on dinner, how much will I have actually saved?” When you get through the math, you get to some pretty clear and compelling answers. But it’s driving me crazy that we make you do that math at all, and I know we’re losing some would-be customers along the way.
I’d love to hear any thoughts or suggestions for how we might improve the VillageVines model. We know we’re making consumers and restaurants very happy – filling empty tables for restaurants, and offering great deals for diners – but we’d like to spread the love even further, and with less confusion. So share your thoughts liberally!
And as you’re thinking about pricing in any business, especially in consumer services, do your very best to avoid turning consumer choices into word problems. Keep the math out of it and your conversion rate will soar.
March 1, 2011
I’m struggling this morning, thinking about the importance and challenge of reference checking the entrepreneurs that we consider working with. I’m struggling in particular because in twelve years in this business, having invested in over 25 companies, I’ve only had reference checks on an entrepreneur materially impact my decision to invest or not invest in his company only once. Four years ago, solely because of highly questionable references on the CEO from his prior investors, I passed on a deal that I would otherwise have done. Yesterday I learned that the company was being sold in a transaction that, had I led the Series A (as I was close to doing), would have returned more than 2/3 of my fund in one deal and put the fund squarely and irreversibly into the black. It would have been the best investment of my career.
Consideration of this outcome was further colored by reading my friend and occasionally co-investor Roger Ehrenberg’s thoughtful post on investing in “quirky.” As Roger points out, an important skill in successful early-stage investing is being able to relate to the quirky and occasionally downright maddening traits of the entrepreneurs we choose to work with. As Roger points out, sometimes these are people with whom we are not innately comfortable. But we need to grow up and find ways to see through our discomfort, as often it is the most “quirky” of these folks who are working on the most transformational opportunities.
Thinking back to my decision to pass on the aforementioned rocket ship, I think in reality I may have just misread what I was hearing in the CEO’s (let’s call him Pat) references. While I liked the company, I had a nagging, uncomfortable feeling about Pat going into the references, and those references seemed to validate my discomfort.
Bottom line, Pat is indeed a complicated guy. Quirky, even. His prior company was at best a so-so outcome, and one with which his prior backers were understandably frustrated. Pat had done an OK job, they said, but not a great one. He was consistently overly optimistic and at times very difficult to deal with. Now Pat was embarking again on attacking that very same industry with a new strategy and solution. And none of his prior backers were coming along with him for the ride.
But his entire senior team was, and that’s where I think I blew it. His investors hadn’t made any money with him, so they weren’t coming back. You’ve no doubt heard VCs say, present company included, that we like to back entrepreneurs who’ve failed before and learned from it. While that’s a broadly held belief, it takes unusual courage to apply that convention to backing a guy who’s failed before on your dime (fool me twice. . .). So it shouldn’t have been surprising to hear these guys trashing Pat. What I should have paid more attention to, and probably should’ve let trump the questionable reviews from prior backers, was the fact that his key lieutenants, the guys who had been into battle with him every day for five years prior, wanted to work with him again. These were talented guys – seasoned executives with very marketable skills. They had plenty of options for what to do next, and they were following Pat into battle again. That says a lot about Pat, no?
I was talking about this last night with another friend who summed up the challenge of evaluating entrepreneurs quite elegantly:
“The people who do the really big shit are complex.”
Amen. If we think of the four hottest private companies in the world right now – Facebook, Groupon, Zynga and Twitter – at least three of them were founded and are run by individuals who are notoriously difficult and/or have been accused of fraud or malfeasance. They produced mixed references at best, I’m sure. Heck, anyone who’s seen the Social Network is savvy enough to recognize Mark Zuckerberg as a difficult, complex guy. But man is he doing some big shit.
At the end of the day, I feel fine about having passed on Pat’s company. Hindsight has exposed it clearly as a mistake, though given the information I had available at the time, my decision was not unreasonable. But it also did not consider the available data as thoughtfully as it might have. The important thing now, as with any mistake, is to try to learn from it. So I’ll be thinking carefully about how to read entrepreneur references in the future, and making sure to carefully consider them as only one element amongst a broad set of critical data.
As he celebrates his success today, I’m truly happy for Pat and his team. As for me, hopefully I’ll make a more nuanced read the next time a Pat walks in my door.