I often see two entrepreneurs executing on similar opportunities, but with two very different capital efficiencies. First, there’s the aggressive one who spends money very quickly, building a large team, buying early growth through aggressive marketing and sales, and hoping for a large upround in the next financing round. Then, there’s the bootstrapping entrepreneur who hires carefully (sometimes too little, too late), trying to get as much runway with the current money as possible and build a “real” business.
Finding the right balance between investing in growth and focusing on capital efficiency is one of the toughest challenges for entrepreneurs and early-stage start-ups. It can be particularly tricky as investors are usually looking for growth and evaluating start-ups as defined by growth.
Here are a few observations and pieces of advice to help you navigate which spending model is best for your start-up:
1. Don’t invest in marketing and sales until you have found product-market fit:
Marc Andreesen once categorized start-ups as before product-market fit (BPMF) and after product-market fit (APMF). When you are BPMF, you should be doing everything you can to get to product-market fit…whether that’s changing out your people, tweaking the product, moving to a different market. However, there’s no point in spending on marketing and sales at this point; until you’ve found the right product for your market, you’d simply be wasting your money.
2. Revisit product-market fit from time to time:
Don’t assume that what worked in the early days will continue to work for years to come. External changes in the market can impact your product-market fit, as may your own growth path. For example, as a SaaS company scales and targets larger enterprise customers, its initial product-market fit may no longer be as strong.
3. Evaluate your market: is it winner-takes-it-all?
If you’re targeting a winner-takes-it-all (or almost all) market, then focusing on saving money makes no sense. You’d be sacrificing market leadership. Think about it. Nobody remembers Ryze, or Spoke as early LinkedIn competitors. But if you’re operating in e-commerce or other non winner-takes-it-all markets, then you don’t have to be overly aggressive in the early stages. In this case, you can take your time to fine-tune your model before aggressively scaling up.
4. Get your metrics under control:
Putting the “pedal to the metal” makes the most sense if you understand your LTV (lifetime value) per customer and CAC (customer acquisition costs). As you scale, you should also have early warning systems in place to see if your new customers and acquisition channels are performing at least as well as the previous ones (weekly LTV/CAC cohorts are the best measure for this).
As an investor, nothing is more impressive than meeting an entrepreneur that has built a great business in a short amount of time and with very little money. Being frugal and knowing how to spend money is one of the most important entrepreneurial traits – as long as it doesn’t come at the expense of growth. Jeff Bezos/Amazon is probably the best example where the right balance of frugality and growth is engrained in their DNA.
I recently started to spend some more time on the Bitcoin ecosystem and while I have not yet fully wrapped my head around all of the opportunities and challenges (or even developed an investment thesis), I wanted to write down some early thoughts and observations.
Thoughts on the current ecosystem
The recent Bitcoin rally might be just the tip of the iceberg, as the crypto-currency may rise to even higher prices driven by destabilized national currency systems, greed and speculation, as well as illegal activity (i.e. the best way to get money out of China). Simon Winder has an interesting analysis how high Bitcoin can go.
While the majority of mainstream attention has focused on Bitcoin as a currency, Bitcoin may have a more interesting future as a protocol (see Albert Wenger’s post “Bitcoin as a Protocol”). At its core, Bitcoin provides a digital ledger that’s continually updated and synchronized in real time. Any participant can make an entry in the ledger, recording transactions from one participant to another participant. In this way, Bitcoin provides an unalterable framework for Proof of Ownership that can be used not only as currency, but also in a range of interesting applications like voting, property, contracts, domains, and securities.
It is still very early days for the platform but the two biggest opportunities for Bitcoin seem to be right now:
- Disrupting traditional institutions that we used to rely on for trust-related services, such as banks, registrars, etc. The app Proof of Existence uses the Bitcoin network as an ultra-secure notary service. But imagine even broader use cases (as outlined here) such as:
- A will that automatically unlocks (without attorney intervention) when the heirs agree that the parent has passed away
- A wire escrow that goes through when any arbiter agrees that the seller sent the goods to the buyer
- A wallet that is socially secured by friends or family
- A crowdfunding project that pays out after reaching various milestones, based on the approval of the backers
2. Drive down transaction fees: This infographic compares the cost of sending $1K from the U.S. to Europe (for example, as a down payment for a vacation rental). Here’s the breakdown on transaction costs: Bitcoin – $15, Credit card – $50, and bank wire – $40-80.
The future of Bitcoin
Numerous questions are yet to be answered surrounding Bitcoin’s future as a currency and as a platform. The speculative and volatile nature of Bitcoin currency might be good for the short-term as it has generated tons of awareness in the mainstream media. However, will this volatility ultimately hurt the adoption of the overall Bitcoin platform in the long run? Bitcoin might only succeed if people start using it for daily transactions and a high volatility of the underlying currency would hurt that adoption.
Likewise, will heavy-handed regulation make it hard for Bitcoin start-ups to survive in the U.S. and will there be new Bitcoin ecosystems emerging outside of the Valley? We’ve already seen several new start-ups setting up shop in Canada to escape U.S. regulations, including the world’s first Bitcoin ATM in Vancouver.
I also wonder if the virtual/crypto currency space is a winner-takes-it-all market, or will we see many other alternatives emerge? Already today there’s Litecoin, Peercoin, and Primecoin, to name a few. Will we see numerous virtual currencies co-exist, perhaps segmented along geographical/regional or industry/markets? In a recent post, Simon Winder compared Bitcoin to Friendster – a first mover, but imperfect. The question then is, who will be MySpace, who will be Facebook?
The most successful online marketplaces today facilitate relatively simple transactions. There’s eBay and Etsy for buying/selling goods, AirBnB for short-term accommodations, and Uber for local transportation.
While reputation mechanisms (i.e. user reviews) play an important role on these platforms, the price tags involved are typically low enough that customers are ready to deal with strangers over the web. But, it can be a different story when someone is looking to spend $10,000 vs. $100.
There’s an enormous opportunity for marketplaces to emerge that handle high-value, complex transactions. However, to find success, they’ll need to make customers feel comfortable reducing the high-ticket purchase and/or complex deliverable to a few clicks.
Today, we already see marketplaces for more complex transactions… for example booking a location and photographer for your wedding (www.weddingful.com), hiring a web designer to create your next mobile app (www.ooomf.com), or finding short-term rentals for pop-up stores (www.storefront.com).
However, many of these sites currently work more as a lead generation engine than an actual marketplace and / or the platform needs to act as a hands-on broker to facilitate these transactions between participants. To realize the full potential of the opportunity, marketplaces for complex transactions will need to move virtually all of their transactions online by taking care of a few things:
1. Provide more information upfront: If you’re buying a book online, the ISBN and a rough description of the condition is usually enough information for you to feel comfortable making the purchase. But what about booking a wedding photographer? In this case, you’d want to see his/her portfolio, numerous reviews for previous clients, and possibly a write-up of the photographer’s approach and style.
2. Standardize traditionally unique transactions: Professional services companies are increasingly looking to create boxed offerings that include pre-defined scope, pricing, duration, deliverables, results, and other relevant parameters. The “productization of services” helps speed up traditionally lengthy sales cycles, and enables customers to complete complex transactions in a few clicks.
3. Provide more help to the inexperienced buyer: In many cases, buyers will be considering certain purchases for the very first time. In these cases, a marketplace will need to help guide buyers through the decision-making process. For example, oomf offers a project planner/cost calculator to help first-time buyers understand how much it will cost to make an app.
4. Reduce risk: Just like online retailers have found success via free shipping/free return models, transactional marketplaces also need to reduce risk for the buyer – such as by offering full money-back guarantees with purchase.
We still have a long way to go before complex transactions will completely move online, but I’m optimistic that some savvy companies will figure it out. In the meantime, consumer trust in the Web and online transactions will continue to grow. We don’t know who the major players will be, but this will be an interesting space to watch.
It was my first day at Version One when I realized that finding “VC-fundable” startups would not be easy. Aileen Lee, founder of Cowboy Ventures, posted a brilliant analysis on why VCs have to look for billion dollar companies (“unicorns”) to deliver acceptable returns, and how rare it is to invest in one: “The odds are somewhere between catching a foul ball at an MLB game and being struck by lightning in one’s lifetime.”
However, despite these kinds of odds, I’ve learned there are several things we can do to improve our chances of finding the elusive unicorns:
1. Data helps filter through the noise.
With nearly 30,000 startups on AngelList, there’s a lot to sort through. Nowadays, we can learn virtually everything about a company online, from its tagline to founder backgrounds, fundraising history, current investors, and social media traction. However, while data is ubiquitous and free for the most part, it is also fragmented, inconsistent, and seemingly disparate. This makes it laboriously difficult to identify rising stars and make comparisons within a specific vertical.
Fortunately, web apps like Mattermark, DataFox, and PitchBook wrangle, clean and organize the data so that we can focus on analyzing it. We can whittle down those 30,000 companies to a more manageable number by filtering for business models, regions, state, co-investors, Twitter mentions, Facebook likes, LinkedIn connections, iTunes downloads, unique website visitors, and/or other criteria that align with our investment thesis.
2. Be thesis-driven.
We are often asked what industries we invest in, but it is more important to have theses on business models that serve as strong filters. At Version One, we have 6 investment themes (and more to come – stay tuned):
- Vertically integrated commerce. Controlling the entire supply chain brings unique product lines directly to the consumer at lower prices and better margins.
- Vertical SaaS. This approach helps capture the market more quickly with lower CAC and capital requirements.
- Online education. Mobile and social product experiences are making learning more affordable, efficient, engaging and effective.
- Hardware renaissance. Numerous innovations (e.g. Raspberry Pi, Arduino, etc.) are making it easier to develop hardware products. We are interested in platforms that power this space.
- Mobile marketplaces. The ubiquity of mobile makes it quicker and cheaper to connect buyers and sellers.
- B2B marketplaces. There has been a lot of focus on B2C marketplaces, but there are still tremendous opportunities left in the B2B space.
3. Manage your time wisely.
We challenge ourselves to think about tools that we can use to organize and manage our meetings, events, pipeline and readings. To reduce redundancy in deal flow, for instance, we collaborate online as much as possible with web apps like RelateIQ. To consume content quickly, I am a power Feedly user and Twitter discoverer.
4. Be kind and generous.
When most of your time involves working with others, perhaps the most important thing you can do is build genuine relationships. Because every meeting is a learning opportunity, I make the effort to thank others for their time by being generous with my own. With entrepreneurs, I try to provide thoughtful feedback, always remembering that they are hardworking individuals with the courage to build a company. With colleagues, I take note of their interests and share articles or startups with them.
Also, in a world dependent on introductions, I often thank those who make them on my behalf. For example, in addition to writing the common email line, “Thanks for the intro to Cassidy, David (moving you to bcc)”, I follow up with the “Davids” after meeting the “Cassidys” with notes like “Hi, David. Thank you for connecting me with Cassidy. I learned about x, y, and z from her.” This is a tangible display of appreciation that helps keep me in mind for future connections and deals.
Since writing my blog post on “Why VC is a perfect fit for me” on my first day, I have enjoyed every moment of this work. I owe this to everyone who has contributed to my learning. Thank you. Now to get back to looking for unicorns…