tech | growth | venture | 2017 August
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Nothing is more critical to a growing startup than pricing strategy, and all too often startups leave too much money on the table by not charging enough. This makes it difficult to take full advantage of the new value their product creates.  As Marc Andreessen recently said, if he could put one phrase on a billboard in Silicon Valley it would be “raise prices.”

My hypothesis on why startups currently have an issue with pricing is the recent (but now seemingly over) period of apathy towards negative margin growth. It conditioned startups to capture as much of a market as possible without thinking deeply, or at all, about pricing. While this gets a product into the hands of users, it does leave open the question of what buyers are willing to pay for it.

To answer this question, it’s useful to turn to Econ 101’s first lesson – supply and demand – and more specifically, consumer surplus.  Why is consumer surplus good?  For one, you always want your customers to feel as though they are getting a deal.  More importantly, it becomes possible to leverage that feeling to push out the demand curve for the core product, which is what any business really wants to accomplish.

 

Free or discounted complementary goods increase consumer surplus while shifting the demand curve

While perhaps unintuitive, one of the best ways to do this is by “giving away” complementary products or features.  The result pushes out the demand curve for the core product, selling more at a higher price, while simultaneously increasing the consumer’s perceived value (consumer surplus).

It’s easy to see the effect of this strategy in two of the most popular technology business models: Enterprise SaaS and Marketplaces.

  • Enterprise SaaS – Much like iOS and Android, Salesforce has an app store called the AppExchange. Consumers aren’t charged for access to the apps but instead the large selection combined with easy integration of popular applications pushes out the core product’s demand curve, allowing them to charge more than would otherwise be possible for the core product.
  • Marketplaces – There’s a reason almost every successful customer acquisition platform has a “tools” or “analytics” section on the selling side of the marketplace, the goal is help the
    supply side sell more.  Charging $10 for add-ons such as a pricing tool makes little sense in this case because the value is hard to quantify for a seller.  Yet, introducing it for free then subsequently raising the customer acquisition (i.e. booking or listing) fee by a few percentage points has little effect on diminishing the over supply.

Finally, it’s important to address the 800 lb. gorilla in the room: Amazon Prime.  Amazon has leveraged discounts on services that may seem arbitrary but actually create a large consumer surplus for the core product. Let’s take a look at a few of the discounts offered to Prime members on ancillary services.

Amazon Music Unlimited: $9.99 non-prime / $7.99 Prime

Amazon Digital Storage: (100 GB): $11.99 non-prime / 5GB and all photos free for Prime

Amazon Audible Channels: $60 non-prime / free with Prime

By including discounts on these complementary goods, Amazon has increased the demand (i.e. pushed out the curve) for Prime.  Furthermore, the consumer surplus created by including these complementary goods is less than the increase in unit marginal cost for Prime’s main service, faster shipping.

The next time you are thinking about your product pricing strategy, take it from these tech behemoths: it’s not only what you charge, it’s what you give away too.

Special thanks to Jonathan Crowder for helping me think through this post.

Recently, I crossed a passage in Let My People Go Surfing which deeply resonated with me because so few people seem to leverage the giving nature of others.

I had no business experience so I started asking for advice.  If you admit you don’t know something people will fall over themselves trying to help.  – Kris Tompkins

I love the humility and curiosity shown in this quote. It highlights an openness to feedback that is not regularly encouraged.  Often, entrepreneurs in early-stage, high-growth companies (like Patagonia was at the time) feel as though they are drowning in decisions that could make or break their company at a moment’s notice.

These situations create a strong need for honest, candid feedback on the tough choices that move a company forward.  The ability to deliver advice that is sometimes hard to hear relies solely on creating a relationship that is authentic and not artificially created.

The best mentors are able to challenge without being overbearing.  No one knows the business better than the founder, but the ability to have an open, fact-based debate with a mentor is always healthy.  Mentors should help guide when needed but the decision is ultimately in the hands of the entrepreneur.

Lastly, the best mentorships eventually become two-way streets.  I’ve been on both sides of the mentorship table, and it’s always exciting when I can do something to help one of my mentors.  It takes a great person to donate their time to invest in your success, and one of the most fulfilling aspects of the relationship is when you can turn the tables and return the favor.

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Most of my last few weeks have been tied up in various meetings.  The unique part has been that in those meetings my role has been quite different depending on the topic and the participants.

After one of those meetings, I reflected on how I’ve changed my personal interactions over the years and how I’ve had to adapt based on the topic or individuals involved on the other end.

For me, the intriguing part is this process never ends; the topics and people involved are always evolving. After some thought I believe the cycle looks something like the following:

Step 1: Internally feeling a low level of confidence.  In this case, it’s likely you are in the room with several subject matter experts or professionals who are more experienced than you. The best course of action is to be an avid listener and note taker.  Learn from those around you.

Step 2: Demonstrating externally that you belong, but not quite feeling the same assurance internally.  If you listen and take a lot of notes, the odds are you’ll begin to understand the problem and ask the right questions.

Step 3: You begin to engage with the answers. Instead of just asking questions, you are now able to build upon answers given to the questions you ask and build your own internal insights.

Step 4: Giving others the confidence they need to feel as though they belong.  This skill can be broken into two different parts. The first is explaining a complicated subject in a way where others feel as though they’ve became an expert just by listening to you speak. The second, helping others see their own insights but had not yet realize it.

Very few people make it to step four and it’s one of the skills I feel is needed to lead a company or large team.  It is a truly special strength to instill confidence in others especially when the topic is complicated or the stakes are large.

One of my favorite sayings is “if you’re the smartest person in the room, you’re in the wrong room.”  Get in the right rooms, listen, take notes, engage, and help others see they belong in the room too.

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Yesterday, Capital Factory CEO Joshua Baer announced a partnership with The Dallas Entrepreneur Center to bring Texas’ biggest accelerator to Dallas.  In his post, The Texas Startup Manifesto, Baer proposed a “Texas startup Megatropolis” combining Austin, Dallas, Houston, and San Antonio.

The vision is exciting and highlights many of Texas’ obvious strengths:

  1. Growing at a rapid pace
  2. A low cost of living
  3. Diverse both in people and jobs
  4. Full of business and tech talent
  5. Home to great universities
  6. An energy and healthcare hub

It also highlighted many of the weaknesses:

  1. Underfunded
  2. Competitive, not collaborative
  3. Lack of mentorship

The combination of Capital Factory and the DEC will begin to address these issues and increase the diameter of the Texas ecosystem flywheel.  But to take advantage of the work done by Joshua and his partners, we’ll need do to even more to make sure the larger flywheel gets the momentum it needs to keep accelerating at an even faster pace.

We still need a few key ingredients in order to make our ecosystem comparable to the best.

  1. Operators that have scaled AND exited
  2. Density fueled network effects
  3. Follow-on capital

My favorite pieces of reading are those that say a lot without saying much.  It’s a skill of which I am always envious and explains my addiction to Twitter.  Last night, I came across one such tweet:

The more time I spend in startups, the more I’m impressed by those who scale than those who start. Many can start, few can scale. @mosbacher

My partner Jonathan recently wrote about the 80/20 problem being more right-skewed than perceived, specifically in startups. (I.e. the  difference between great and exceptional is bigger than the one between good and great)  CB Insights recently published a report using a cohort of 1,098 companies who raised seed capital from 2008-2010 that illustrates his point. The funnel below puts into perspective the increasing difficultly of each subsequent round.

According to Crunchbase, 184 companies headquartered in Texas raised seed funding last year. Let’s round to 200 for easy math.  Using the successful exit criteria above ($50M+), 8% of companies exit for a desirable valuation.  That leaves Texas with potentially 16 companies from a cohort of seed rounds in 2016 that have operators with both scale and exit experience. Assume each company has 5-10 rockstar employees (potentially more for the companies that truly scale rapidly) that experienced the entire company lifecycle and we’re left with 80-160 people.

In order to reach our full potential at the fastest pace possible, we need those operators to start, fund or mentor companies. This will create an exponentially increasing pool of talent to help new founders scale.  For new companies, the chances of success increase when it’s not your first time down the road. To paraphrase Michael Seibel, partner at Y-Combinator, it’s easier to climb on the shoulders of others to get ahead.

Another point to consider is the density of the nodes (Dallas, Austin, Houston, SA) in the network. Texas has the distinct advantage of having several major cities within a 3-5 hour drive or 45min flight from each other, but what happens inside of those cities will be just as important.

The effects of startup density are obvious.  When talented people who share a passion for startups interact on a regular basis it’s more likely that successful companies will be founded. The Kaufman Foundation defines density as:

entrepreneurial density = (# entrepreneurs + # people working for startups or high growth companies) / adult population

Since that number is almost impossible to easily obtain, Brad Feld asked the team at CityLab to use another indicator of density, deals per capita (100,000 people). I pulled similar data from Crunchbase using findings from 2016.

Unsurprisingly, the cities & metros you’d expect rank well with this metric, but a a few of the top cities may surprise you. College towns Boulder, Ann Arbor, and Austin are more dense with startups than cities like Chicago, LA, and NYC.

City Deals Per 100,000
San Francisco 616 71.2
NYC 521 6.1
Boston 113 16.8
Seattle 704 14.6
Chicago 105 3.9
LA 136 3.4
Ann Arbor 13 10.8
Boulder 37 34.2
Austin 96 10.1
Dallas 33 2.5
Houston 33 1.4
San Antonio 8 .5

 

While this data is certainly not perfect, (# of deals can be skewed by the fastest growing companies raising more than one round annually and Crunchbase only let’s you search by cities, not zip or metro) it illustrates the work Texas cities have left to do to achieve a saturation close to other metros and perhaps further illuminates the need for more venture funding in Texas.

Lastly, Texas is sorely missing the big checks.  While seed stage investors from outside of Texas are beginning to invest more in the state, the evidence is still clear the follow-on capital is hard to come by.

This map by the Martin Prosperity Institute shows the per capita investment of venture dollars. Austin is the only city in Texas to find it’s way into the top 20 at $252.

To be seen as an ecosystem ripe for more institutional follow-on investment we must inject more risk-tolerant capital into promising seed-stage companies to increase total deal flow and subsequently support them with the talent and resources needed to scale. These steps will increase the number of rapidly growing startups and make Texas more attractive to those who deploy growth-stage capital.

Overall, the partnership announcement is a huge win for the Texas entrepreneurs.  The ingredients are here for a vibrant and successful startup landscape.  However, we have to take this momentum and run with it to reach our full potential as an ecosystem.

Since our work is primarily focused in areas where the startup ecosystems are just beginning to grow, we often get questions that have been answered by more veteran investors or founders in more established markets.  Inspired by John Gannon’s blog and instead of finding them one-by-one in my bookmarks, I’ve decided to start compiling them here in order to make sharing easier.

The resources I post are ones that have helped me throughout my career or have been recommended several times over by established founders or VC’s.  Much like John’s blog above, I’ve posted resources that are also geared to VC only because it’s impossible to sell to anyone whom you don’t understand well.

If I am missing anything or you’ve found a resource you’d like me to add please comment below. I’ll be editing the list regularly as I come across interesting content and subtract the outdated ones.

Must Read Books

Venture Deals by Brad Feld – considered by most to be the bible of startup fundraising

The Hard Thing About Hard Things by Ben Horowitz – a16z partner and co-founder Ben Horowitz discusses the ups and downs of running a business

Founders at Work by Jessica Livingston– a collection of stories about the day-to-day activities of startup founders

Venture Capitalists at Work by Tarang and Sheetal Shah – a collection of stories about the day-to-day activities of venture capital investors

The Lean Startup by Eric Reis – the book that codified running a startup in a way that is nimble and able to learn from customer feedback quickly

Shoe Dog by Phil Knight – memoir of Nike founder Phil Knight, a story of pure hustle and perseverance

The Business of Venture Capital by Mahendra Ramsinghani – similar to Venture Deals, but more in-depth (Brad Feld wrote the foreward)

Deep Work by Cal Newport– strategies about how to focus your day and keep control of your schedule, very important for anyone who will be pulled in a million directions

High Output Management by Andy Grove – considered the Silicon Valley handbook for organizing, directing, and developing employees

Zero to One by Peter Thiel – the PayPal and Palantir co-founder discusses how to create enough value and more importantly how to capture it

Contagious by Jonah Berger – how do you make things catch on and go viral? Berger takes a systematic approach to the process of virality

The Outsiders by William Thorndike – 8 different stories on CEO’s who were great at capital allocation using rational blueprints

Predictably Irrational by Dan Ariely – insights on behavioral economics and consumer tendencies

The Everything Store by Brad Stone – the story of Amazon’s creation and what makes it great

Creativity Inc by Ed Catamull – leadership book by former Pixar CEO whom Steve Jobs credited with his growth as an executive

 *full transparency, the links for books are affiliate links from Amazon*

 

Blogs / Medium Posts

HaystackVC – Semil shares why he made each investment + several interesting insights on markets outside the Bay Area

Fred Wilson’s MBA Mondays hint: you should be reading Fred every day, but this particular tag discusses everything from fundraising, hiring, strategy, etc..

Elizabeth Yin – one of my favorite blogs, Elizabeth does an amazing job with transparency from all angles of the startup world

Feld Thoughts – author of Venture Deals, Brad has been investing since 1987. Look for a lot of thoughts on the mind of great founders and what questions they should consider

Above the Crowd – Bill Gurley is one of the best VC’s ever, and THE resource if you are building anything marketplace related

50 Things I’ve Learned About Product Management – how you manage a product, and the product that makes the product matters

John Tough – my mentor, Chicago based, great perspectives on the Midwest and the path from VC to operator and now back to VC

Thomas Tunguz – data-driven approach to issues facing startups, from product to fundraising and everything in-between

Hunter Walk – VC at Homebrew, previously a Product Manager at Google where he led YouTube, great perspectives from an operator turned VC

First Round Review – one of the best, if not the best, seed stage investors in the country takes a look at management, fundraising, product and other topics from an operational viewpoint

 

Fundraising / Pitch Decks

Alexander Jarvis Pitch Deck Collection – widely considered the original pitch deck guide with the biggest collection assembled

Dconstrct– company looking to build upon Jarvis’ work to create a searchable database of pitch decks

Why You Should Have a Data Room – the team at Kiddar Capital looks at why you need a data room for fundraising and what should go into it

How We Raised $7M from Foundry – Adam Healey, CEO of Borrowed & Blue provides a 7-step guide to fundraising from a major VC

First Round Review – Fundraising – the fundraising section of First Round’s blog above

Great Story = Great Pitch – all great pitches are actually great stories, it’s not only about what you do but it’s why you do it and why it’s important that counts

Getting Your Head in the Fundraising Game – Mark Suster from Both Sides of the Table offers 10 tips on how to be a more effective fundraiser. His blog is another great resource.

How to Communicate with Investors – Reza Khadjavi, CEO of Shoelace walks founders through the process of taking dots and turning them into a trend line.  A great, execution focused look at raising capital

Font Series A Deck – Mathilde Collin, co-founder and CEO of Front, shares their series A deck, a few thoughts on the process and best of all critiques her own deck

 

Business Models / Strategy

Financial Modeling For Startups: The Spreadsheet That Made Us Profitable – Startups.co provides a great starting point for building a financial model and even better it’s one that comes with an execution story behind it

Metrics that Matter – Part 1 – Jeff Jordan, Anu Hariharan, Frank Chen, and Preethi Kasireddy provide 16 (and then 16 more) metrics that matter for growing startups.  It’s impossible to raise if you don’t know which of these metrics are important to your business and how you are going to improve upon them.

Metrics that Matter – Part 2 – a continuation of part 1

How to Analyze Your Startup – Tunguz takes a look at how to evaluate your startup from a VC’s perspective. Additionally, he’s right, frameworks rule:

Product Canvas

Business Model Canvas

Porter’s Five Forces

 

Podcasts

This Week in Startups – Jason is one of the first investors in Uber and got his start as a VC scout.  His new book is Angel.  And as the podcast description says, “Need strategies for improving your business of motivating your team? Just want to catch up on what’s happening in Silicon Valley and beyond? Your journey begins here.”

Masters of Scale – Silicon Valley investor / entrepreneur Reid Hoffman tests his theories of growth with famous founders.  Hoffman is most well-known for PayPal and LinkedIn.

The Pitch – A show where real entrepreneurs pitch to real investors—for real money.  If you are going to pitch investors there is only one way to learn, by doing.  But this show is a close second.

The Official Saastr Podcast – Jason Lemkin and Harry Stebbings host operators from various SaaS companies focusing on scale and hiring. They host the occasional investor as well where the focus turns to the metrics that matter for capital raising.

The Twenty Minute VC – Venture capital’s youngest star, Harry Stebbings, interviews VC’s from across the country.  Here you learn what VCs are focused on, how they invest, and the traits that make entrepreneurs succeed or fail. You can also find Harry at Mojito VC.

a16z – a16z’s partners discuss the biggest trends in tech with industry experts, business leaders, and other interesting thinkers and voices from around the world.

Other Important Resources

Y Combinator – the original Startup Library with tons of great resources dating back to 2008

Crunchbase – easy and free place investors often glance at to check high level business info

Angel List – you should absolutely have one for recruiting and fundraising

Product Hunt – great place to get your product featured at launch

 

Recently, I decided to take a “themed” approach to my book selections.  The first theme has been centered around a new approach to my work habits.  I asked myself three questions (selected book):

  1. How can I learn more effectively and efficiently? (Make It Stick)
  2. How can I spend time in a deeper state of concentration so the most important tasks always get my best work? (Deep Work)
  3. How can I prioritize my day around getting the most important tasks done? I.e. owning my schedule instead of letting it own me. (Essentialism -thanks, JT)

As I engaged with these books and started applying their lessons to my day-to-day workflow, I wondered where else could their principles be applied in a startup setting.  For the latter two books, the answer soon became clear, meetings.

Why do some teams leave meetings without accomplishing their goals and how can they apply the theses of the books above in order to walk away from meetings feeling ready to execute?

Deep Work = (Time Worked x Intensity of Work) – Distractions

How many meetings have you been in that include a “brainstorming” session? The validity of brainstorming has come into question in recent years due to the increased propensity for social-loafing, regression to the mean, and production blocking.  While brainstorming is meant to increase creativity, we are actually at our most creative when our work is done in solitude.

Without great solitude no serious work is possible. – Picasso

Instead of asking everyone to express several ideas all at once, encourage (or perhaps require) members of the meeting to spend 1-2 hours beforehand working through the topic of the meeting individually in order to allow them to achieve a state of deep work on the problem at hand.  The results will be of higher quality and buy-in can still be achieved since everyone will have something to contribute during the meeting.

Essentialism = Less but Better

While leaving any meeting with a plan of attack is a must, it is a partial completion of the actual requirement.  Great meetings end with a prioritized list of to-dos and deadlines.  We all have the tendency to want “more” and to chase shiny objects.  This is especially true early on in a company’s life when there are many things to do.

However, leaving a meeting with ten top priorities is, as Greg McKeown puts it, “ironic.” Make it a practice to prioritize what can be accomplished in the time period given.  In my experience the following limits have worked well:

  • Quarterly: 3-4 priorities
  • Monthly: 2-3
  • Bi-Weekly: 1-2

Additionally, encourage your team to say “no” when they feel overwhelmed or that a task is unimportant to the greater goal at hand.  Healthy debate will lead to an even clearer list of priorities on which to execute.

Leaving a meeting with no clear direction (decision maker, execution plan, priorities) is one of the biggest wastes of company resources imaginable. We often think about tangible costs but almost never compute the costs of pulling multiple team-members into an hours long meeting.  If you’re having the issue of multiple, yet unproductive, meetings I encourage you to try some of these tactics geared toward the individual to make your group sessions more effective.

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