Musings

I overheard a team of startup founders pitching their company to a venture associate at a coffee shop this week. I didn’t listen for long because I felt bad, but one thing that jumped out at me, even over my headphones, was that the associate was doing most of the talking, which got me thinking.

The venture pitch is most commonly described as “person who needs money must convince person who has money to give it”. Sometimes a venture pitch looks more like “a person who has money must convince baller founder to take said money over another fund’s”. In both of these cases, it is a highly asymmetrical interaction. Power dynamics are always slanted in interactions between people, but in pitches it is made explicit, and often extreme. I have sat in a number of pitches, pitched a dozen times, and been pitched hundreds of times. The power dynamic manifests in amusing ways, andI want to share my perspective.

As an investor, I want to be a good listener. I want to properly understand the motivations of the founders, challenges and potential of the business, etc. but I also want to demonstrate my genuine interest in the business. After all, a pitch is a two-way audition, and the business and founder are performing, but the investor and firm are, too.

Sometimes, I have to fight the instinct to demonstrate my genuine interest in the business by talking about what they could do, or what they should do. Many investors say that giving business feedback in the pitch is a way to help the founders, but I can’t help but think it’s somewhat self-serving. It feels good to broadly expound on a go-to-market strategy in front of an audience that is trying to impress you. I know this because sometimes, when I’m talking about my own experience or opinion, I’m enjoying feeling and sounding smart, more than being helpful. Real talk. That said, some of the best pitches I’ve been in were filled with feedback in both directions. The founder was honest about how the firm was signaling to the market, and the investor honest about what she liked or didn’t like about the business. And a great way to build empathy is to identify with someone’s experience by sharing your own. But it’s a fine line.**

I got an opportunity to catch up with a great investor mentor a few days ago, and we were talking about all and sundry, and I was struck, as I was describing design consulting, how carefully he was listening, and how surprised he seemed by some of the conclusions I drew. He’s an extraordinarily smart investor with as many years of work experience as I’ve been alive. But he listened like an 8 year old learning about outer space for the first time. And it was so disarming, and I couldn’t help but share how I really felt about it all. It takes real expertise to develop a beginner’s mind, indeed.

** In starting the story with an associate who wasn’t listening and ending with a partner who was, you may want to conclude that partners are great listeners and associates aren’t. Couldn’t be further from the truth. There are plenty of experienced partners who love hearing themselves talk, and plenty of associates who give incisive thoughtful feedback while listening very carefully.

When I decided to join Craig and Collaborative Fund full-time, it was an incredible opportunity that he was presenting me, but a difficult decision. I was leaving behind an opportunity to build a business with two very close friends. We had been prototyping, had engaged some of our favorite investors, and were mapping out our business plan. I ultimately ended up not pursuing the startup in large part because of a conversation with my fiancee. She asked me: “why do you want to start this company? You have already pivoted a few times, so it can’t be because the idea has overwhelmed you?” In my conversation with her, I started thinking about why I wanted to do a startup, and why people do startups in general. I concluded that there are only two reasons to do a startup:

— There is a problem (or problem space) out in the world that, by virtue of your skills, network, and experience, you are uniquely well-suited to solve.

or

— There is a problem (or problem space) that you HAVE to solve. That you feel like you’ll go crazy if you don’t start working on solutions for immediately.

Neither of those was the case with the problem space I was tackling, so my answer was clear. And I couldn’t be happier with the decision that I made. It’s been a rollercoaster time with Collaborative Fund, and a great one. But over the past year and a half or so, I have met with hundreds of founders, tackling varying problem spaces with all-and-sundry relevant and irrelevant skillsets, and I’ve realized there is a third legitimate reason to be an entrepreneur: you are unemployable.

There are a few ways of “being unemployable”, and I’ve listed my favorites below:

— You tend to irrationally think your opinion is more right, and thereby hate having a boss.

— Your set of experiences and skills don’t translate to job openings at companies available to you.

— Your demographics make you an ‘unlikely’ candidate in your industry, so incumbent teams won’t hire you.

Among the pitches I’ve seen, there are as many entrepreneurs who started their companies under the ‘unemployable’ circumstances as they did under the “work on the right problem” circumstances. I’m officially adding “I’m unemployable” as a credible reason to start a company.

I was recently diagnosed with an ulcer and a Vitamin D deficiency. Neither of these diagnoses is necessarily chronic or life-threatening, so there isn’t any real cause for worry. But when I went to pick up my prescriptions from the hospital, I was a bit overwhelmed when I took them out of the bag.

I decided to distract myself with prices. For these medicines, I paid $29.36 at Walgreens. Curious to find out what the real cost of the drugs was, I looked for the fine print, and after a fairly significant effort, I found it: for four drugs, I paid $6.00, $5.36, $10.00, and $8.00. For those same four drugs, my insurance company paid $6.33, $10.90, $132.79, and $106.99. Completely random, right? One was subsidized by 51%, and others subsidized 90%. One cost $12.33, and another cost $142.79.

Now, I have a PPO health insurance plan with a well-known carrier, and I chose this policy after reading the fine print very carefully, so I would like to think I am at least above average in terms of my understanding of how my health insurance works, and in terms of my access to quality information. But I have absolutely no idea how much these drugs are worth, or should be worth. But here’s the thing – it’s not that I don’t know if they should be $4/gallon or $7/gallon, like the price of, say, unleaded refined petroleum. It’s literally orders of magnitude difference between two drugs, and no way for me to understand it. So where is the breakdown here?

As if this weren’t bad enough, I’m told by the folks at Oration that if I ordered the prescription to CVS, or if the pharmacist were to package a generic version of the same drug, in the same city, the price would change again – and I wouldn’t notice, because I would be paying the same amount I’d paid at Walgreens. The health insurer absorbs this price volatility and then charges the consumer a rate that they couldn’t possibly understand. In no other industry does the purchaser have as little price transparency as this. The amount of diverting, rerouting, absorbing, and subsidizing just in prescriptive pharmaceuticals is insane to me. I have to imagine that in-patient clinical services are similarly opaque. 

Apparently the pharmaceutical suppliers today operate much in the way travel agents did in the first era of commercial air travel. In healthcare, the big pharmaceutical companies make their pills, which are then sent by the million to suppliers, who then package them by the thousand in such a way that they can then sell them to pharmacies, who then package them by the dozen, or whatever the dosage is, until they look like the orange bottles you see above. In commercial flight, the travel agents managed all of the purchasing and reselling, and had full ability to price-fix as they saw fit, which is why one travel agent could be “better” than another. Today, of course, Southwest’s point-to-point and first-come seating coupled with Expedia/Kayak/etc has rendered the travel agent moot, and price transparency for air travel is at an all-time high, and the ways of differentiating oneself are manifest to the consumer.

In what other industries is a purchaser’s access to the cost of goods so thoroughly opaque as in prescriptive pharmaceuticals? I am genuinely curious. Imagine if a purchaser knew how much they were paying for a service in healthcare? You have to think that would go a long way.

Let me say a word about CVS, while I have you. In merging with Caremark, they became a prescription benefits manager. It’s a pretty unassuming-sounding phrase, but the implications are very profound on the industry. By aggregating purchasers (us), they negotiate discounts on meds from the drug manufacturers, and can ether pass those costs onto consumer, to the payer, or keep the margin themselves. CVS Health is of this writing the second-biggest PBM in the world. And as long as you continue to think of CVS as your go-to place for prescription drugs (and whatever less), their influence and ability to drive margin here only gets stronger. Demand aggregation!

The news of AngelList announcing their syndicates program coupled with this JOBS Act Title II press release is going to make headlines for a while.

It’s extraordinarily powerful, and many people will write at length about why. In brief, the most exciting piece for me is: it pushes the influence of investors even further down to the individual level. Put another way: it empowers the individual so much more. There was a point in venture capital when blue chip firms (of which there were only a very small handful) would gobble up all the good dealflow, and by virtue of their monopolistic networks, ability to take huge chunks of companies (Kleiner Perkins’ investment in Genentech was at a $800K pre-money, inflation adjusted), and the early nature of the ecosystem, would be able to concentrate value within firms opportunistically. These days, every single partner at every single firm has to fight tooth-and-nail for relevance, whether it is by constantly challenging, refreshing, and expanding their theses, hiring fresh blood to keep the dealflow current, or investing in deeper sets of services. All of this benefits the entrepreneur – gives them access to more transparency, freedom of choice, and agency in deciding their capital partners. Freedom, transparency, and the power of independence. Great for the world, right?

While they are the bad guy these days, unions were a critical stabilizing force in the 20th century. They gave the working class a voice in politics, which protected society from creating a permanent underclass, as the majority of employees were not equity holders in their companies, therefore not fully invited into the wealth creation. Changes like the above and the unionization of entrepreneurs through accelerators makes me feel better about startups having a stabilizing voice against VC as the entrepreneurial ecosystem explodes into the mainstream.

Running parallel to that is an interesting trend being driven by the same group of people, which some refer to as techno-utopianism. When I first entered the tech industry, George W. Bush was president. I (perhaps narrowly) saw the U.S. political system was divided around the axis of ‘9/11 and the Iraq War’. Once the 2008 crash hit, the axis shifted precipitously to ‘regulation and spending’ for some, and ‘jobs and healthcare’ for others. I have a sneaking suspicion, and this was inspired by a tweet I read a few weeks ago (forgive me for not remembering where it came from) that there is a new emergent political axis, particularly among the tech overclass, around “freedom, privacy, and security”. SOPA/PIPA, the NSA spying revelations, and government regulations around collaborative consumption and virtual currencies suggests that libertarianism is the de facto moral high ground among the tech literati. And it gives me pause.

California has persistently high unemployment, and San Francisco’s home to the “most visible homeless problem in the country”, and there have been two public transit strikes in the city of San Francisco, the beating center of the technology industry, in the last 3 months. I live in SoMa, and so that means I am often stepping over human feces left by homeless, waking among tourists en route to Union Square, and also in what increasingly feels literally like an urban campus for tech geeks and their funders. There is a new high-rise condominium going up in every micro-neighborhood of SoMa, and judging by Avalon, Beacon, and Rincon Towers, one can assume they won’t be wanting for occupancy. There are 1.3 million unemployed in California, and almost every company founder I know is struggling to hire, for lack of sufficient supply. If San Francisco, the new center of the Silicon Valley, with a mayor very close to the tech community, is in this position, then geez. And this cognitive dissonance seems to be just starting, and the rule, not the exception. I am thrilled about the JOBS Act II and rise of individualism in investing and entrepreneurship, but I’m just, well, worried about what we’re ignoring along the way. Monday musings…

I’m reading George Dyson’s Turing’s Cathedral. The book chronicles the time between 1930 and 1960 when Alan Turing, British mathematician, launched a movement amongst a small group of thinkers that resulted in the creation of the computer. It’s fascinating, if fairly technical, and I highly recommend it. Dyson describes the founding of the Institute for Advanced Study at Princeton, which housed Kurt Godel, John Von Neumann, Freeman Dyson, and Albert Einstein. During World War II, all of the world’s most brilliant scientists were tied up in the race to build the biggest bomb. In a world before computers, this race came down to the ability to calculate differential equations and integrate over extremely large sums to estimated how certain reactions would propagate given understandings of physics and chemistry. Before the computer, “a computer” was simply “one who computes”, usually a student, or someone else who could be hired for relatively cheap. These computers would manually — with pen and paper, or with very basic calculators — work their way through these summations in groups and in shifts, often going through the night, in a race to produce the set of numbers that were needed to meet the needs of the engineers on the front lines designing weapons. There needed to be a better way to do it. And slowly, innovations in cathode ray tube technology, where you basically move an electron from one end of a vacuum tube to another, allowed for sets of signals which you could encode as binary digits, so that you could write instructions to a machine, instead of by hand. You see where this is going.

After the war, the Manhattan project and a lot of the military work slowed significantly, but these scientists kept up their momentum, in part because the funding kept coming, and in part because the spectre of the Cold War was looming, and the race to continue to produce bigger bombs carried forward. By hook or by crook, the computing was going to happen faster. And in the process, we made the leap from analog to digital, and haven’t looked back since. Before this book, I didn’t know that the computer came out of a process like this, but it makes sense.

Bill Janeway, investor and economist, speaks eloquently about how bubbles are a good thing. In his mind, a bubble is a period of significant price insensitivity around a certain type of problem, either ‘downstream’ or ‘upstream’. The upstream direction is a case like the creation of the computer, or the internet: a government is enmeshed in geopolitics that lead policymakers and politicians to believe that at all costs a certain problem must be fixed. War tends to be a good example of that. The United States had to build a better bomb. And if that meant creating a new way of crunching numbers quickly, then they would spend and deploy as many resources as necessary to ensure that outcome. The downstream direction, on the other hand, is when speculators fall in love with a space: like tulips in the Netherlands, gold at plenty of moments in time, or dot-coms in the late nineties. In these cases, private investors, with increasing (and often alarming) indifference to price, drive the value of any individual object in the ecosystem through the roof temporarily. In Janeway’s words, it took $100 billion dollars of price-insensitive investing to create Google and Amazon. And, well, he’s right. After all, innovation happens through trial, and error, and error, and error, and error. Errors are expensive; somebody needs to underwrite them.

When I heard Peter Thiel describe the types of views as to what drove technology innovation through the 20th century (and, ostensibly through history), I was almost offended by the neoconservative perspective, as it seemed silly: that wars and arms races are the reason for the computing and information eras. But maybe that thinking is not wrong, just incomplete. It’s not just wars, but any price insensitive trial and error processes. This explains why the most successful design practices encourage ‘radical brainstorming’ and a space for lots of trial and error. They are trying to create little innovation ecosystems at their desks; little Tulip manias, if you will. As an individual investor, I fear bubbles like the plague. But as a techno-optimist, and believer in innovation, I see their value.

Last week, I read this tweet: 

Three fastest growing (at least in US) consumer mobile apps are all from Los Angeles based companies

— Andrew Weissman (@aweissman)

September 5, 2013

He was referring to Whisper, Tinder, and Snapchat. It got me thinking. Consumer applications increasingly rely not on crazy venture financing, expert technical human resources, and a deep infrastructure (though they always seek all of those). Global distribution can happen really quickly for free, and while many mobile entrepreneurs are working on strategies to hack ranking higher on the App Store and to create more virality within their UX, these days it’s youth culture that drives adoption. Every kid has a smartphone, so they can just decide among themselves what’s hot or not. Marketers and growth hackers be damned. And youth culture is unpredictable.

I know this because before hearing about my brother’s experience using Snapchat, it hadn’t even *dawned* on me that it was something used for anything other than sexting. And most adults were the same way. Tinder is more intuitive to adults, but who could predict that the interactions they designed would take over urban dating culture the way they have? It’s crazy. I will admit I don’t even know how Whisper works, and I’d like to think I’m still fairly young.

*update* My friend Adam Besvinick (biz + partnerships at Wanelo) noted an extra confounding factor to the changing landscape. The “early adopter” audience that grew AOL, Facebook, and even Twitter isn’t the audience that seeds consumer platforms today. Pinterest, Wanelo, and Snapchat all grew outside of the “traditional” early adopter audience. Pinterest in the midwest, Wanelo and Snapchat, among all manner of teenagers, democratically spread across the country.

What this suggests to me is that it’s open season for consumer and mobile entrepreneurs. You don’t have to be from the Silicon Valley, you don’t have to be a graduate of Stanford or Harvard, and you don’t need venture financing to start. If you touch something in the zeitgeist, you can succeed big. And this means that breakout growth in consumer-based applications will happen wherever there are young developers/designers. And that is everywhere. Exciting times.

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This post should be obvious. But this realization surprised me, so it might be useful for you, too. ‘Scale potential’ drives a lot of successful fundraising, non-profit and for-profit. To successfully win a grant from a foundation or donor, a non-profit often has to demonstrate not only the ability to spend efficiently, but also that the solution to problem they are solving is systemic or sustainable, and has scale potential. The ideal impact is both vertical and horizontal. In the vertical sense, each action the organization takes has a lasting impact, and helps to remake the system to be more humane, and to allocate resources more effectively. In the horizontal sense, the types of actions the non-profit engages in can be carbon-copied and exported, thereby multiplying the horizontal effect. In for-profit startups, it’s the same: venture firms ask “how big is the market” to get a sense for how far and wide the solution, assuming its a good one, can reach.

As a result of this conceit, ‘scale potential’ has been lionized, to the point that in both of these circles, “is it scalable?” is often deployed as a moral question as much as a structural one. And I think it’s dangerous, if not dead wrong.

At the end of August, I spent some time at Uncle Bill’s Farm, run by my dear friend Sarah and her partner Alex. I learned a lot over a short evening and morning. They grow tomatoes, leeks, onions, chard, kale, cucumber, basil, beets, watermelon, potatoes, and much more on a farm that covers only a few easily-walkable acres.

She explains growing science. To be a good farmer they have to be precisely tuned to weather and seasonality. If the summer is colder and rainier than usual, crop yields will be lower, and margins thinner with some of the crops that grow in hot, dry climate. She grows ‘cover crops’ over certain parts of the soil to keep the soil rich for growing potatoes. They don’t have livestock, because being a livestock farmer is basically being a grass-scientist (because of the incredible amount they consume). As a result, however, she has to compost heavily and buy cow manure, to naturally fertilize the soil. She knows an extraordinary amount about chemistry, and how crops and processes leave more nutrients in the soil than others, and how certain plants grow more easily than others. They rotate crops, as overworking the soil depletes it of nutrients, and without using pesticides and fertilizer, the plants need excellent soil. Michael Pollan says that you can tell a healthy farm just by closing your eyes, because of the sound. You’ll hear bees buzzing, birds chirping, chickens squwaking after butterflies, mosquitoes and fruit flies issuing a steady hum over the land, and so on.

She explains farming business. Her CSA has 80 people, and they won’t let it go above 100, because they will then have to hire, and to pay salaries for the team, they’ll have to clear a greater profit margin, which means they will either have to use more land, or be more efficient in their process. And certain parts of their process are necessarily inefficient. One area of their farm, fenced off, is never touched by a tractor or any machine, and is what they refer to as the “high-intensive” unit. They grow vegetables in there that require a lot of attention and care. That land would be better used for other, easier crops, if they were to scale. They know each of their customers by name, and these customers often bring their kids to the CSA pick-up, so they might learn about where their food comes from.

Sarah and Alex work all day every day, never toiling brutally, but always working, always thinking about the next thing they should do. Their lives are thoroughly full, and while they aren’t easy or narrowly pleasurable lives, they are always full of Zadie-joy. They will have to think deeply about how to grow their business if their family grows, but they will know where and how, and will do it patiently, purposefully, properly. We always talk in the Silicon Valley about whether or not something can scale, and something about that always rubbed me the wrong way, but now I think I understand. Some things aren’t meant to scale. And those things which don’t scale tend to be what life is made of. Love doesn’t scale. Raising kids doesn’t scale. Sleeping and exercise don’t scale. Eating doesn’t scale. No matter how much you do today, you’ll always have to do it tomorrow. My friend Rob Spiro says that food is a “negotiation between man and nature on a daily basis.”

Now I am guilty of the very same mentality that I seem to be exhorting others against: I’ll only make a living if I find things that scale. That’s how my job works. Our obsession with scale created agriculture, which created the city, which created the networks of hypercreativity, with both incredible magic and vast swaths of collateral damage in the process. None of this is all-bad. But none of it is all-good. It is simply powerful. And so in response, I just hope you’ll take a moment to remember how powerful that which shouldn’t scale can be, too. I hope you’ll celebrate, and nurture, those moments in your work, and in your life, too.

Nobel-winning economist R.H. Coase passed away yesterday. When the crash of 1929 hit, Ronald Harry Coase was an undergraduate student at the London School of Economics, working on a Bachelor’s degree in commerce. Thanks to his professor Arnold Plant, he decided that markets were fascinating, but that he did not want to study the mathematics driving them, but the frameworks – the legal structures. He spent his senior year in the United States, touring companies like Ford Motor Co., Union Carbide, and General Motors, trying to understand how these firms were organized. Radio, electricity, and steel contributed to raising living standards across large swaths of the globe, and new models of mass production and distribution had taken hold. By 1937, at only 27 years old, he wrote ‘The Nature Of The Firm’, one of the foundational essays describing how the 20th century organized commerce.

In ’The Nature Of The Firm’, a pretty short essay, he described why business seemed to be evolving away from a distributed marketplace of individual actors exchanging contracts, and into a system where entrepreneurs had full-time employees, and formed firms. As Coase explained, the firm was the most efficient way of meeting supply and demand, given the new ability to mass produce items, syndicate supply to wide audiences, and save on overhead by centralizing both the inventory creation and the distribution channels.

We take it for granted today, because the world of the 20th century was driven by firms, but until this essay was written, nobody had actually considered why everyone wasn’t just contracting from each other, and why the firm was such an efficient mode of organizing commerce. Coase was amazing for that. And we’re at another inflection point that looks, in many ways, similar to Coase’s time today.

We also had a major economic crash on the heels of rampant deregulation. We also are looking at an economy that is being transformed by a series of inventions that have fundamentally changed the way we create products and communicate. And, amusingly, the set of inventions brought along by the computer and the internet are slowly undermining the processes that made the firm necessary in the first place. Communication costs go to zero, creation becomes co-creation, and networks become the default mode of creating and sharing value. In this economy, the individual contractor, the prosumer, the node in the network, is a buyer And a seller. He is a creator And a producer. Commerce organizes around these nodes of individuals, and creative capacity rules the day.

We organize our thinking at Collaborative Fund around these trends, and we are not alone. Union Square Ventures has noticed it with their focus on networks. Marc Andreessen says “all markets will liquify”. Sara Horowitz of the Freelancer’s Union writes eloquently about the fact that 1 in 3 working Americans today is a freelancer, and that the proportion of gig workers is rising precipitously, and indefinitely. My very wise friend Sam notes: the online and offline worlds are increasingly connected, and the way we co-create products, distribute products, and communicate with each other are more fundamentally collaborative. GitHub, Twitter, Quirky, and Uber are just the beginning.

It is fitting that we recognize R.H. Coase’s passing at this time in our economic evolution, as we pass the torch to the new economy. I hope he rests in peace.

The unit economics in carsharing are extremely challenging. I had an interesting conversation with Ezra Goldman yesterday, who made the case that the costs are as follows, in order of cost:

– Parking
– Insurance
– Inventory

I’ve heard arguments that Zipcar’s challenges in unit economics resulted from cost-prohibitive insurance. I’ve heard others claim that it was from holding inventory. But apparently a fleet of cars involves high startup costs, but maintenance costs (holding inventory) are actually low, and ROI on the inventory is not that bad. In fact, all major rental companies are actually used-car salesmen on the side. And the maintenance is a pain, but it’s not prohibitive. By timing when to buy and sell the cars they have figured out the way to minimize the depreciative aspects of car-ownership.

And insurance is expensive, but usage-based insurance (UBI) models in the incumbency (particularly Progressive), alongside some very interesting startups (MetroMile as a notable example) are creating underwriting practices that will ultimately change how we think of car insurance. It’s a race to the bottom with UBI, and as the practice is more widely adopted and the model gains traction, insurance costs will drop.

But in the places where carsharing works best — cities — parking is a central piece of the puzzle, and a particularly challenging one. For the demand experience to be a positive one, the supply needs to be close enough to any given user that it’s worthwhile for as a viable mode of on-demand transportation. This means that at scale a platform needs to invest in parking spaces that are accessible during reasonable driving hours at least, if not 24 hours. It means that these parking spaces need to be permanently assigned to a car, so that the experience is sufficiently convenient to beat alternatives. In a large dense, city, that is requires an enormous amount of (inefficient) capital because on the weekends, the Financial District cars are sitting unused in parking spots that cost a fortune, while at 2pm on a Tuesday the residential parking spots are similarly unused. This is the beast, and until this nut is cracked, the industry will have a tough time.

The newer peer-to-peer carsharing platforms don’t hold inventory, and only deal with parking in limited amounts, so one would think there is an opportunity for them to capitalize there, but in the case of a Getaround or a RelayRides, the problem is less with the unit economics (which are very challenging, in and of themselves), but with the sheer volume of supply that is required to service an on-demand experience on the scale of Zipcar or CityCarShare. Since it’s hard to know when I’ll want to use my car, you have to create a model that has a statistical buffer for when people use their own cars. And with revenue promise on the supply side being somewhat limited, it’s unclear how you get that much supply quickly.

It’s clear to me, though, that intra-city transportation and shared mobility are going to continue to explode. I eagerly await the self-driving overlords, who will solve the parking challenge, and probably a few others.