Musings

A great brand is like a great piece of writing. It’s a way of communicating an idea – an aspiration or secret, an insight or a fear – to an audience. It needs to be so obvious by the time it reaches the audience that all they can do is share it and copy it. 

Last weekend I flew to London with British Airways’s Ungrounded program. We were charged with a design challenge on the flight: to create products, programs, and processes to address STEM challenges around the world. The winning challenges were, really, the best ones. One, called InIt, was a simple “Nutrition Facts” stamp to go on any piece of hardware or software that shipped to a consumer, indicating how it was made, by whom, and where. Another, called AdvisHer, was a mentorship network for women to connect with others in STEM. The Sherpa was a travelling hotspot and some simple tools living in a backpack, enabling travelers to extend STEM to less connected parts of the world. All dead simple. And simple is hard to do well. All the greatest writers, from Twain and Kundera to Dostoevsky to Hemingway, speak of editing, and editing, and editing. 

My team’s idea, MagicBox, involved 3-D printing, Raspberry Pi, gamification, One Laptop Per Child rollout strategy, a new IDE, lots of arrows, and a cumbersome presentation. In retrospect, of course it lost. But the instinct to keep adding features, pieces of complexity, is deeply hard to avoid. Coco Chanel used to suggest, “before you head out the door every day, take one thing off.” As you put together your brand, and the product that manifests the brand, consider taking one thing off.

Setting the stage

Since well before the economic crisis of 2008, American consumers have been making purchase decisions under an evolving value system. The Google “Walk score” became popular among young people looking for apartments, indicating that urban density and efficiency were rising as criteria for where we lived. In 2007, Toyota Prius sales surpassed Ford Explorer sales, demonstrating increased eco-conscious consumers.  “Carbon neutral” was the Oxford University Press columnist’s word of the year in 2006, and “locavore” in 2007. After 2008, however, the attention shifted to economics. There was structural financial insecurity, and big, once highly-trusted institutions in the private sector were suddenly shrinking, going out of business, and permanently changing. While this changed the tone of the conversation around values, it helped the values among consumers move permanently away from hyperconsumption. Collaborative consumption rests squarely on this shifting value set – an old idea of sharing ideas, resources, and a peer economy, updated for the smartphone era.

Macroeconomic Drivers

There are important economic drivers to consider alongside this shift, and important challenges to acknowledge. In the United States, 17% of young people are unemployed. In Europe, that number is over 25%. Including underemployment, a full third of young people aren’t meeting their economic obligations with traditional work. The supply-side of collaborative consumption is being driven by the trend of underemployed youth around the United States and Europe. Opportunities to earn part or all of one’s living by working in the collaborative economy abound. One can rent out his room, sell handmade goods directly to others online, drive people in the city around for pay, and more.

But the same thing that makes this a driving force for collaborative consumption makes this a cause for concern. While being a Lyft driver, or AirBnB host, is certainly a great source of income, work, especially for young people, is not only an economic consideration, but also a way to form weak ties, gain valuable skills in a trade, and learn how to create a vocation. Unless people want to be professional drivers or operate hotels, is this type of work sustainable? What do we lose in training and preparing our young people for adulthood?

The efficiency case is another important economic driver that makes collaborative consumption appealing. There is millions of square feet of unused residential real estate in the United States that can be put to more efficient use using the likes of AirBnB and HotelTonight. In fact, there are billions of dollars of unused assets of all types which can be traded on and shared.

But not all sharing is created equal. While the ridesharing industry has been hugely viral and grows at an accelerating rate around the world, the car-sharing industry has been much more challenging. RelayRides recently acquired a young competitor who was struggling to increase their transaction volume, and Getaround has been growing steadily, but finding it’s a challenging road ahead. A number of companies have built horizontal peer-to-peer rental marketplaces around tools, appliances, clothing that have struggled. A few things to consider that represent the distinctions between the successes and the failures in collaborative consumption:

Microeconomic Drivers

– High transaction volume: ThredUP, a p2p clothing sharing marketplace, has grown quite effectively in part because they do an excellent job of maintaining inventory (creating an incentive for the supply side), but a big part of their early success is that they were dealing with an asset – kids clothing – that has a very short half-life for any individual consumer. Kids grow fast, and constantly need new sizes. As they outgrow clothing, it is unusable and available to be shared. Adult clothing sharing marketplaces have to rely on evolving taste preferences, which is less of an economic necessity.

– Appreciating assets: When an individual stays in my home, the value of my home doesn’t change, assuming they are a suitable guest. In fact, if you take a snapshot of housing prices over the last 50 years, or rental prices in major cities over the last 5 years, my home is undoubtedly an appreciating asset. Along those lines, making better use of the asset only helps me economically, whereas when I let someone use my car, it accelerates its depreciation (which is primarily a function of years I’ve owned it), meaning I have to get significant economic value out of sharing it for the experience to be worthwhile.

– Capitalizing on existing behaviors: Collaborative consumption is being largely driven by young people, who naturally share everything on the internet, are less concerned about privacy and safety than older generations, and are constantly on their smartphones. But for collaborative economy to be sustainable and for these marketplaces to reach liquidity, they have to extend far beyond early adopters. In certain cases of collaborative consumption, like ridesharing, new behaviors have taken hold in the zeitgeist and taken off as a result, but for the majority of the early successes, either the supply or the demand side of the marketplace is a very well-understood paradigm, which lowers friction for adoption.

– Overinvesting in trust, safety, and community Again, for collaborative marketplaces to take off, they have to appeal to non-early adopters, who are less likely to be comfortable with transaction with strangers. The marketplaces that have succeeded have overinvested in trust, safety, and community. Lyft has created an experience that my fiancee feels safe using, despite it being getting into the car with anonymous strangers, because they go out of their way to filter for warmth, personality, and develop a community among drivers. AirBnB has built significant trust tools, now including offline identity verification. RelayRides pioneered peer-to-peer insurance models which provide liability protection for up to $1M for drivers of cars on their marketplace. These tools are all critical.

I was meant to fly to London next week to participate in the British Airways Ungrounded program, presenting a proposal about access to STEM education for underserved and emergent populations to members of the G8, who are convening in Dublin for their Summit. The British consulate said I couldn’t go. Below is why, verbatim. Note that I provided emails, websites, articles, and all and sundry manners of electronic evidence alongside my application. If this system isn’t broken, I just don’t know.

You state you are currently employed as a venture capitalist for Collaborative Fund. However, I note you have provided no evidence to support this claim. On the evidence available it appears you have yet to establish yourself in terms of property, assets, career or family commitments. In view of this, I am not satisfied that you have sufficient ties to the US that would prompt your departure from the UK at the end of your proposed stay.

And more…

You have stayed in your application form that the main purpose of your visit is for a business conference. You go on to state that you have been invited by British Airways who will cover your travel to the UK as well as cover your expenses while in the UK. However, I note you have provided no evidence to support this claim. Consequently, I am not satisfied the activities you propose to undertake in the UK as permissible as a business visitor.

I have therefore refused your application because I am not satisfied, on the balance of probabilities, that you meet all of the requirements of the relevant Paragraph of the United Kingdom Immigration Rules.

For all of my Silicon Valley and tech community friends who go on about the gross inefficiencies and broken policy of immigration and naturalization services, this is what it feels like. It feels like I’m a second class citizen and a liar. It sucks. Thank you for focusing on this problem for people trying to enter the United States. If we can effect policy change that makes this system more sensible here, perhaps other countries will follow, and talent and information will flow properly around the world, as one would expect of 2013. The world is shrinking, but not for everybody. Not quickly enough.

I had the opportunity to spend last week in Las Vegas, visiting the Downtown Project. Wow.

Tony Hsieh, founder and CEO of Zappos, had headquartered the company in Henderson, NV, because of convenience with logistics, and an ability to set up the world class customer service center they have built. Inspired, I have to assume, out of an effort to create a community in Las Vegas that supports Zappos, Tony decided that his next project would be the “city-as-a-startup”, so he created the Downtown Project. 

The Downtown Project is a $350 million investment in the downtown Las Vegas area: 200M in real estate, 50M in tech, 50M in education, arts, culture, and 50M in small business development. Many people assume downtown Las Vegas means Caesar’s Palace and the Bellagio, but the Strip actually was an unincorporated piece of land outside of the city of Las Vegas, a small desert town in Nevada. That small desert town, with an urban density of ~15 people per square mile, is rife with deserted lots, high crime-rates, and the among nation’s worst-performing education systems. The Downtown Project hopes to revitalize the region, measuring its success with a new metric: “Return on Community”.

As Andy White of the Vegas Tech Fund described it, return on community is counterintuitive to most perspectives on investment. While we tend to think of a commercial interest making stakeholders happy, they assume their stakeholders are happy, and operate from there. Under those conditions, commercial interest is a likely upside, but not the only one. And the only stakeholders that are drawn to this model are the ones who align with their value set, and will help them with their goal. It draws on lessons from the Zappos Culture story, where they focus on the values first, and trust that the upside will be a natural byproduct of the right values. It works well with a service-oriented e-commerce business, so why not with a city, right? Well, we’ll see.

TechCocktail, the organization that hosted me during my stay, has brought a fascinating group of thinkers and dreamers from across the spectra into the fold, and the Speaker Series, where I was very pleased to share some thoughts, was an audience of life-long Las Vegans: true community members, working on problems from their city, for their city. Tony Hsieh reminds me of Elon Musk in a way. They both have what I describe as Howard Hughesian ambition: they see a problem, no matter how big, and say why not? When met with “that’s impossible” they become more insistent, and they are pioneering models that others have no choice but to follow. And actually “returning community” might be the only thing that’s as difficult and worthy a goal as putting a man on the moon. Hats off. 

I’ve always been a fan of Minority Report. The technology felt accessible but futuristic. It planted itself into my imagination, and that of many of my peers. When Spielberg wanted to create a cinematic but realistic 2054, he assembled a group of technology experts and futurists to help him design the interfaces on Minority Report. What came out of it were iconic images, indelible in my subconscious: self-driving cars, touchscreens, gesture-controlled devices, personalized, cookie (or retina)- driven advertising. And wow! We have all those things now!

As this article points out, we were misled. All of those concepts were more like 10-15 years out than 50-60 years out. And by aiming low, it actually ended up framing our expectations of future innovation incorrectly. Science fiction frames future innovation. Nathan Shedroff gave a great talk last year at Creative Mornings at Chronicle Books in San Francisco about how the kids who loved sci-fi books and movies when they were young ended up becoming the technology nerds whose imaginations were framed in the context of Philip K. Dick, Orson Scott Card, and Isaac Asimov and Star Trek. While imperfect, the course of future imagination in art and culture has a profound impact on what interfaces technology pioneers end up creating. Technology creators all, on some level, expect to one day remark, “we’re living in the movies.” It’s romantic, really.

But are we doomed to a future of Pictures Under Glass? Bret Victor excoriates us for our conventional wisdom around interaction design in this brilliant article, describing all touchscreen interfaces as “pictures under glass.” We have hands with opposable thumbs, and we use depth perception, weight assessment, gravity, balance, and the sense of touch to manipulate our environments in extraordinary ways. Why don’t we do the same with computing, rather than these 2-dimensional and ultimately limiting interfaces?

I wonder if the word “interface” is the problem, in and of itself. In “The Best Interface Is No Interface”, Golden Krishna describes cars, fridges, thermostats, tables, and lights that are programmed to act on our behalf, and with us seamlessly, through computers, but without UI. In the late 1980s, Mark Weiser proposed “ubiquitous computing”, well before the personal computer was even truly ubiquitous. By 1998, The “Internet of Things” had appeared in articles, and at the most recent CES, it seemed as though every other presentation was about putting brains into all sorts of devices, ideally without a need for a screen. So there’s progress. But if you look at the headlines about the tablet race and listen to the trends about mobile device adoption, it’s clear that the the focus is on touchscreen devices, and innovation in interaction design may be stuck, at least for a while. Perhaps the Minority Report trap will be harder to shake than I had hoped.

Today I had the opportunity to go to the Apple Store in Palo Alto while waiting for a meeting. Given that I bought my last few Apple devices either online or from friends, I haven’t actually been in an Apple store in a while. It was kind of an eye-opening experience.

They have a half-dozen sections of non-Apple products, including cases from Incase, Speck and others, some branded by Marc Jacobs and Kate Spade; handbags by Marc Jacobs, Michael Kors; Harman Kardon headphones, Jawbone speakers, other tablet-type devices that are apparently meant to go along with desktops; smart keyboards and stands; and a shelf for fitness and wellness devices, thermostats, LED lamps. I was struck by two observations while browsing the myriad items:

1. Apple is more than a technology brand. It is a luxury brand, who seems to be working on a luxury empire not so dissimilar from LVMH. The Stanford Apple Store is directly next to Tory Burch. While you can also buy an iPhone at Walmart, it still costs hundreds of dollars. And for their retail experience, it is clear: nerdy glamour is real. Amanda Peyton is right. I wonder if they intend to acquire any of these companies, or just built a moat around their brand by offering luxury retail distribution for device makers. The iPad and iPhone are still their bread and butter, after all.

2. On that note, I also read that Apple accounts for 20% of all consumer technology revenue*, followed by Samsung, HP, Sony, and Dell. The big three** – phones, tablets, and computers – dominate the consumer technology landscape, and based on the growth trends, it looks to soon become the big two. I have to suppose that other technology outside of mobile devices will rise into the categories where computers and TV’s once were: will that be thermostats? Lamps? Wristbands? Watches? If Apple thinks that’s true, then I wonder why they are selling others’ products, instead of building them themselves. 

These things aren’t new, it’s just surprising and exciting to me how quickly this luxury technology space is growing. I’m increasingly leaning into brand-name technology, not only for functionality, but as a form of cultural expression. We all will, soon. I wonder if haute matériel – haute couture for technology – will move consumer electronics purchasing power permanently away from the 18-35 male. Some suggest it already has. For the better, if you ask me. If the technology community has to acknowledge that it’s building the future for women, then one hopes it will do better to embrace and celebrate more women as the builders. Well, I wasn’t expecting my train of thought to go this way, but heck: not mad at it.

*Nasty.
**TV’s are toast.

Many people think of seed funding just as “before Series A” — somewhere in between “back-of-the-napkin” and “company-with-employees-and-monthly-revenue”. And, technically, they are right. Under $2M, a company tends to raise debt, a Series Seed, or perhaps a Series AA. But in the context of seed, there is wide variation in both the size of the round, and the type of seed investors which an entrepreneur can choose. The nuance between these is important, so I’ll describe my understanding of it below.

Friends and Family—
When people in the startup community refer to “cobbling together money from your friends and family” they are referring to this category. It is usually between $10,000 and $100,000 for the whole round. Not everyone has access to this amount of money (or credit). Anyone who claims that anyone can do a start-up, or that it’s a meritocracy, likely has access to rich family and friends. It’s sad, but it’s still true.

The people in this category are not necessarily professional investors, nor are they always accredited. They may not understand that startups are extremely high-risk, or that they take a long time.

Angels—
The angel is a professional investor in your industry, and so understands more detailed nuances of the transaction than, say, your uncle. She may double as an advisor, and in fact the best angels bring more than capital. And she may not be someone you’ve known your whole life, but only professionally. She comes in very early, does a fair amount of diligence, and often likes to come in with a bigger, more substantial partner. Some angel investors can write big checks, but most angels write checks between $10,000 and $250,000, not unlike friends and family. These investors are very helpful advisors early in the business, and as you grow, are often your biggest fan and loudest advocate.

Dedicated Seed Fund (Small Seed)—

Once a professional investor in technology has been at it for a while, she may decide to either raise or join an institutional fund. This happens more often than not, because if your main career function is making investment decisions with your money, why not make it with other people’s money, too? The smallest type of institution is a dedicated seed fund, usually representing pooled capital in a Limited Partnership. At this stage, A firm may decide to invest a relatively small amount of capital, but build a portfolio, offering a thin set of services relevant across that portfolio. Those firms who take this strategy tend to invest between $50,000 and $350,000 in companies. Some of these may ask for equity, so that they can negotiate pro rata and other investor’s rights. In asking for equity, they may offer more in the way of services. The smaller ones may just hope to find dealflow early, or invest in friends and former colleagues who are likelier to provide them with friendly economic terms. Another class of firms at this stage provide a robust suite of services; their resources extend far beyond capital and advisory. Depending on the dynamics, these firms invest only a small amount for a relatively large stake, justified by the fact that they accelerate a business substantially over a short, concentrated period. Many incubators and accelerators follow this model.

Micro VC (Big Seed)—

After a certain size, the hurdle rate rises such that a firm has to make bigger investments in each company it supports, so that they can deploy their capital more quickly, and especially so that they can get bigger allocations in the investments. The range of investment in this category is between $250,000 and $2,000,000. These firms often purport to offer even more services than a small seed fund, though still less than an accelerator. In some cases, they aim for 20% of a business, which what  a lifecycle venture fund might aim for in a Series A investment and beyond. Based on their allocation, these firms sometimes take a board seat, and may maintain pro rata through a company’s early funding rounds. 

“Opportunity Fund” Seed—

Two factors drive this category of investment. First, big funds are getting increasingly competitive, with the value concentrating in a power law distribution, and the few winners vastly outperforming the majority of funds. Second, realizing that start-up companies are able to approach escape velocity earlier and earlier, many big lifecycle funds now invest in start-ups at the seed level, as well. These funds will invest $100,000 to $1.5M in a start-up company, often as a convertible note, as a way of starting the relationship with the entrepreneurs early, and maximizing the opportunity for choosing the right companies to invest in at the life-cycle stage, where these funds will invest $10,000,000 to $25,000,000 over the life of a fund. These investments are very small for a big firm, so they usually devote substantially fewer resources to each investment than they would for their traditional, bigger deals.

Why these nuances matter:

For entrepreneurs:
Not all seed firms will work well with each other. You may already be wise to the fact that big funds with seed investment may be bad signaling (though that is unclear to me) in case they don’t lead your Series A. But it’s worth noting that many Micro-VCs can’t work together on a deal if you’re raising below a certain amount. When you put together your syndicate, it’s worth considering how the needs of each firm line up with the size of your round. Of course, start with the amount of money you you’ll need (more than you think), but keep in mind that as you hone in on your wishlist of advisors and supporters, that they are operating under their own constraints. Try to understand those constraints early.

For investors:
First of all, know what your peers are working with. More experienced investors have developed an instinct for who they tend to fit with in syndicates, structurally, versus not. But when you’ve raised a new fund, or have just raised a second fund that moves you from one category to a next, be mindful about which category you fall in. Start with your needs, but measure those needs against your strengths. Do you know a ton of angels, who can fill out syndicates that you lead? Or are you looking for other seed-focused institutions to join you in rounds? How can you optimize these channels, not just for your venture economics, but for the benefit of entrepreneurs you want to support?

Biometric keystroke analysis interprets the rhythm and styling of a user’s typing to identify who the user is. Coursera, the Palo Alto-based online education company, has begun offering this technology, coupled with photo verification, as an authentication tool for its users. This will enable the company to offer course certifications for sale through partner institutions. Earlier this month, a few journalists covered this release. They pointed to this as early signs of Coursera’s business model, which has to this point been a free service. Harvard, Princeton, Stanford, and other top flight institutions who offer free classes on Coursera are noticeably absent from this pilot, a detail not lost on those who have described the launch. But this commentary misunderstands the significance of Coursera’s new product feature. If you ask me, online education is still being held back. And the number one problem is cheating.

The reason online education of the modern ilk – the MOOCs and the sexy collaborative businesses – have yet to take off is because they still lack accreditation of the robust, government-certified, culturally approved form that a B.A. or B.S. affords. This accreditation has driven applicants to traditional and vocational schools in record numbers, has created a number of extremely profitable online businesses whose value is debatable, and has left the United States sitting on $1 trillion of student debt. A future where education is lifelong, part-and-parcel, a mix between vocational training and learning out of interest, and delivered dynamically from a mobile device, a web service, and in person, relies on accreditation moving across the services. Startups like Degreed look to solve this problem by offering a credit that reflects the dynamic set of educational experiences available today. But how do you prove who is sitting behind a computer while submitting a block of code, or writing an essay, or completing a calculus derivation for an economics problem?

Of course, cheating is not a new phenomenon, nor is it restricted to online education. Every higher learning institute in the country has some version of an Honor Code and an anti-cheating policy. Plagiarism is a capital offense, in school language. But we all acknowledge, if reluctantly, that there’s a fair amount of cheating that happens anyway, and that the best defense against it is to impose cultural taboos, which have developed over 1000 years. These taboos don’t exist in the same way online, and are in many ways the opposite. The most celebrated developers, designers, and engineers copy, remix, and edit from across the internet throughout their days. And the best online students are doing the same. In a study conducted at Ohio State University, 72% of students reported cheating on one of the tests administered online during an Introduction to Psychology class. The concept of an individual’s ability to recall and create in a vacuum – which I question as the best form of testing, anyway – is not relevant to an internet era of work. We are constantly retweeting, attributing, sharing, and collaborating. But as long as testing is an individual sport, certification needs to be, too. And the masses care about certification.

Speaking to an office full of YCombinator founders this week, I was struck by how they described what they imagine to be the future of YCombinator. As they noted about the most recent graduating class, many of the top performers in the class had months of recurring revenue, with double digit month over month growth and significant traction. YCombinator is getting more and more mature, and companies are graduating from the three month program with traction, customers, and revenue. This is largely because, according to the founders I spoke with, applicants are getting stronger and stronger. Lately, companies are incorporating, building their alpha, and even beta, and then applying to YCombinator.

By this argument, the rising valuations of YC companies on Demo Day have less to do with the improving brand of YC and cult of PG, or with the mentorship within the program (which I hear has been diluted with size) but instead speaks to the fact that companies are applying to the incubator later in their cycles. 15 years ago, venture capital fundraising was once a matter of relationships and a PowerPoint presentation, but has since moved way upstream. Startup costs dropped, thanks to cloud computing and Moore’s law; today, by the time you’re raising venture capital, your product likely has at least tens, if not hundreds of thousands of users, sustained growth, and revenue.

This created a gap in the funding ecosystem which brought on what seems like a glut of angel investors, seed investors, and super seed investors. It also brought YCombinator. But that seems to be changing. This funding ecosystem once provided people with “just an idea” a place to get mentorship, infrastructure, and a chance to grow before the big show. In the case of YCombinator, it seems like they’ve moved upstream, too. By the time you’re applying to YC, your product is much further along today than it was when YC first interviewed the likes of Loopt and Reddit. Yes, pg pioneered the accelerator model to respond to the gap, but may be creating a new gap in his wake. I wonder if there will be another generation of programs fitting in the space YCombinator leaves behind.

I want to re-define it. Chris Dixon points to this post, which defines “scaling” as:

dealing efficiently with events that occur with a predictable frequency.

This refers to the type of scale that is described in freshman economics classes. It unpacks the law of large numbers, and has important implications for the way computer scientists design systems. By that definition, a scalable business is one that can be organized in such a way that when its purpose is repeated with increasing frequency and scale, things don’t break.

Paul Graham defines a startup as:

a company designed to grow fast.

By this definition, the question of whether or not a company is scalable makes a lot of sense. It refers to a product’s natural capacity to get a lot of users very quickly. The successful start-up is the one that can make something lots of people want, and reach and serve all of those people. And “scalability” is the litmus test for that success.

But “can get to a lot of people” is the wrong litmus. Facebook, for example, makes something lots of people want, and it reaches and serves all of those people. And it got there without its core technology breaking. It is scalable, and it is “at scale’. But the Facebook experience is broken for me. It broke somewhere in between the Dunbar number (150 friends) and my current number (3,000 friends). I wanted a way to keep in touch with people I love, and to share things that are important to me with those people. But "at scale”, Facebook actually stops working. Flooding the system did not break the technology, but it broke the experience.

Scalable should be defined in different terms, then. If a startup is “Scalable”, as I see it, the optimal user experience is the “at scale” experience. Well-designed cities are scalable. When they achieve maximum density, the services rendered work great – you can walk and bike to places, you can interact with a diverse set of people, and have a wide range of activities available to you. Your immediate radius becomes a hub of intellectual and creative capacity. A dense city optimizes the experience. A dense Facebook, however, breaks the experience. Scalable, in this sense, not only means that the system can grow fast without breaking, but that a system will work well, and even better, once it’s grown.

Marketplaces tend to be more naturally scalable, by this definition. At scale, the buyers and the sellers both get happier as there are more of the other, and there is a virtuous cycle that drives growth at liquidity. Getting to scale requires delicate knob-twisting of supply and demand AND user momentum. It’s a labor of love, and it requires a clear and constant feedback loop between the product designers and the users. Entrepreneurs and investors both tend to focus much more on the momentum aspect of scalability: can it GROW. This makes sense, but is incomplete. To create lasting businesses, equal attention must be paid to the question of what happens if it grows?