Advice for incoming college students interested in building products/companies

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I was asked “what advice would you have for incoming college students genuinely interested in building products/companies?” on Twitter this summer, and stalled in my response, because I wanted to tell them “any advice I give you is, at least subconsciously, my way of either validating or repudiating my own random choices. My advice is take lots of advice, listen to none of it.”

But I couldn’t resist answering eventually. And here’s what I said.

1.  Read as many books (not blogs) relating to robots, cities, medicine, food, finance, etc. as you can.

Reading books is, in and of itself, a way to build discipline, no matter what the subject matter. It is also a way to learn how to write. But most importantly of all, it is a chance to ruminate, meander, and actually go deep in a given topic, even though the thesis could probably have been summarized in a snappy HBR or Medium post.

2. I’d relentlessly pursue the most passionate science students in your class, and I would invest in getting to know them.

Most business, if not all, is applied science today. And while you’re young and impressionable, building a foundation (or at least a network) of science training is invaluable.

3. Avoid fraternities (if you can), but don’t be afraid to be social. Practice it! You never know what you’ll learn from classmates.

For some people being social takes practice. But it’s so important, so work on it. Even if you do decide to join a fraternity or sorority, don’t let the comfort of a built-in social network limit you.Meet a new person, get good at small talk, break outside your comfort zone! 

4. Start writing, and try to write down an observation about the world every day. Share those with people who will engage you on them.

Reading and writing are the two great discipline-builders, and the most brilliant and successful entrepreneurs I know are prolific and expert at one or the other of these. But it’s also a way to do primary research, and to start to develop your observational skills. If you encourage your curiosity and build discipline, you will see 300 problems out there which could, and should be solved.

5. Save some money! Personal cashflow is a critical component of successful entrepreneurship, especially if your family or immediate network isn’t wealthy.

Angel investors who can write a $25,000 check here, or a $75,000 check there go a LONG way if you’re starting a company, or even joining a pre-funded startup. If you can be your own angel investor, all the better. Save that beer money you made doing alumni association calls.

6. Don’t worry.

You will sometimes feel like you have all the time in the world, and other times feel like you have no time left at all. Both are true.

The Founder’s Reality Distortion Field

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We have lionized Steve Jobs, and the set of characteristics that he brought to bear over his extraordinary tenure at Apple. I might go so far as to say we have internalized them as the archetype of success for a founder.

Fittingly, one description of him, coined by his colleague Bud Tribble in 1981, is his ability to create a “reality distortion field”. Described simply, it’s the way that really dynamic individuals can make listeners believe in things that otherwise should not be possible, or that tickle the edges of reason, by virtue of their storytelling ability. I have looked for that trait in founders, though describing it in somewhat different terms:


In either circumstance, but particularly in the latter, it is not the laws of physics that are bending, so much as the truth. And often those founders who can tell a superior story about the future; who can make the impossible sale, or convince the out-of-reach hire, measure truth in a different way than the average person. After all, a dataset can be interpreted in infinite creative ways.

And as I’ve reflected further on this, and discussed it among mentors, I’ve noticed the same thing, over and over again: the ability to use this superpower, which is certainly what it is, invariably cuts both towards the good and the bad, and in non-trivial amounts. To put it more specifically, creative interpretations of data allow for logic-defying moves, but they also result in logic-defying vulnerabilities, mistakes, and oddities. Strangely enough, however, in my conversations nobody has been surprised by this, and they take it as old hat. Moreover, many investors who specifically look for this trait in an individual founder have acknowledged that it comes with a big old bag of complicated. And others, to that point, have decided they would rather not engage with those types of founders, and believe they can drive returns and create huge success while avoiding them. And yet, it is well-understood – conventional wisdom, even – that many of the best entrepreneurs and most innovative companies of all time, were manifest in precisely this way.

So what’s the deal? As always, comments welcome and appreciated.

A Few Observations About Consumer Hardware

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Everybody says hardware is hard. But here is why. If you can spend a bit of time getting ahead of these challenges ahead of time, maybe your road will be a little less hard. If you have experienced other similar hardware challenges, please share them in the comments!

– There is an unhappy tension between demand and defensibility. If you build something for which there is either proven demand, or for which the demand is demonstrated in a very exciting way early on, you must recognize that there IS a manufacturer who can run your script with more efficiency and at lower cost than you can. Your gorgeous design and product will be reverse engineered and bootlegged in no-time, and sold in a market either where your patents are not operable, or frankly on-top of your existing protected IP (more on patents below). And if it’s a product for which there isn’t proven demand already, you will have to sell your product first, which requires retail relationships (where you can expect 15% to 75% of your gross margin to vaporize) or other paid acquisition. Consumer hardware is sold, not bought, because the cost of ‘trying it out’ is way higher than an app on your phone, which is way higher than trying out a new web service.

– Your crowdfunding campaign is not a proxy for your ability to sell the product at scale. Kickstarter and Indiegogo heavily over-index in forward-thinking early adopters who are interested in new sleeping pads, wireless charging stations, and vibrating sneaker insoles. Your ability to raise a seven-figure crowdfunding campaign should be used as a way to raise some non-dilutive capital, but not as a proxy for demand.

– Protecting your IP is not a launch strategy. It may deter start-up competitors from entering the market, but frankly, start-up competitors are never your start-up’s biggest risk. Cofounder disputes and running out of money before you figure out your unit economics are your startup’s biggest risks. And as for the big, very well-funded players. If one of them decides to enter your market, please explain to me how your provisional filings will protect you? The big players have litigated to the tune of tens and tens of millions against each other over stolen IP. Do you have the cash, or the guts, to fight that battle? File them, but recognize that that won’t save you until you’re big enough that you can buy patents anyway.

– Managing cashflow, if this is your first hardware startup, is going to be your most unpleasant surprise. The contract manufacturer will come back with a higher estimate than you expected. The design for manufacturing phase of your startup will require 4-5 trips to Shenzhen, or to Mexico, which may require visas, flights, hotels, that will run you thousands more than you have budgeted. You will find that the right materials are too expensive, the affordable materials are not durable enough, or that something doesn’t look right, and these critical decisions will burn critical months of runway. Raise more than you think you need.

Patents and Purchasing Power

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How many of these have you heard of: Express Scripts (by Medco), CVS Health, Prime Therapeutics (by Blue Shield), United Health, Catamaran Corporation? 

These are the top five pharmacy benefit managers in the United States.

PBM’s are demand aggregators for insurers, creating local monopsonies for drug manufacturers. They do this so that the insurance payers can have uniformity among their patients about which medications they cover, and so that they can negotiate discounts by playing the drug manufacturers against each other.

In a world where there are patents protecting certain pharmaceutical formulas, the PBMs can still list a set of generics for a certain treatment that might not be the same formula, or even the same type of treatment, but still be clinically approved for a given ailment. In that way, PBM’s yield an extraordinary amount of influence. They are like a “group buying” program that most patients don’t even realize they are a part of. What’s more, PBM’s often interact directly with government, as well. Medicare, one of the biggest payers in the healthcare industry, is perfectly fine with working through intermediaries to negotiate discounts on big pharma. And if it means that the pharmaceutical companies have less negotiating power, because they have a more limited set of buyers, then that saves taxpayers money, so from the government’s standpoint, that’s great! And when the patents expire, prices plummet, because the generic drug manufacturers are competing against each other to get listed as one of the PBM’s “covered drugs”. In this circumstance, the PBM’s can wield even greater authority over how drugs get priced, and what revenue flows to the drug manufacturers.

The ‘end users’ in the healthcare system, the care providers and their patients, may not realize that when they are, respectively, “checking whether a drug is covered by my insurance” or “choosing which pharmacy to pick my prescription up from” they are participating in a flow of hundreds of billions of dollars that represents a power struggle between insurers and drug manufacturers. Caremark, the PBM that CVS owns, did over $70B in net revenue in 2013. Yes, you read that right. The other PBMs in the top-five are between $50B and $100B in annual revenue as well. If the power of these PBM’s derives from their ability to aggregate ‘end users’ and create an efficient database and coordination network among them, is it any surprise, then, that CVS is the biggest health company in the country? The consumer brand matters.

(Thank you to Gregory Rockson of for introducing this world to me. So interesting.)

Double-sided Service Business

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Venture capital occupies a strange space in finance, where *real* financial services people don’t consider it finance, largely because a lot of the diligence, assessment, and dealmaking is substantively less quantitative than you might see in middle markets private equity, or mezzanine debt. And that is right, but I don’t think that’s why venture capital is so different. After all, there are plenty of venture capitalists who bring substantive quantitative assessment to their work, even at the seed stage, where we invest. Venture capital is different, in my view, because of ‘client services’. Most buy-side investment management firms have one set of clients (the LPs), and one set of assets (the portfolio). Venture capital, on the other hand, has two sets of clients – the LPs *and* the portfolio.

In public, on Twitter, and in pitch meetings, many venture capitalists speak eloquently and boldly about “serving the entrepreneur” and how we sell them our capital as a business model, and thus need to keep our customers happy. This is eminently true, and there are many venture capitalists whose reputations have been built, and kept intact, simply on the basis of their ability to put entrepreneurs first, and to treat them well. After all, the entrepreneurs are the ones actually building the companies; putting their careers and the livelihoods of their colleagues behind the outcome of one great effort to change the world. But without the Limited Partnership – those institutional investors who believe in general partners’ ability to deliver returns – venture capital doesn’t exist. And LPs look for, and judge partners on the basis of, venture returns. To that end, a curious aspect of venture capital reputation that I have been wrestling with lately is the fact that there are a number of very successful venture capitalists, whose reputations are thoroughly intact, who are also known for being notoriously founder *unfriendly*. That means, in moments of conflict, they are known for putting the protection and control of the financial security ahead of the relationship with the founder, or the management, in the name of fiduciary responsibility.

One way to think about it: success (or luck) investing in the right brands / driving early returns creates a snowball effect where someone’s dealflow has dramatically more to do with their past success than it has to do with their current actions, and may not correlate with being ‘founder friendly’… Another way to think about it: in the transparent, low barrier, entrepreneur-friendly environment that we are living in, and where I have been learning this business, the going mantra is ‘put the entrepreneur first and everything else will follow’, and frankly that being ‘founder unfriendly’ is a legacy, anachronistic approach to venture capital that will phase out in time.

It’s my view that the most sophisticated CEOs understand that venture capitalists serve multiple customers, and must keep a balance between their needs as they deploy capital and manage their portfolio. Indeed, without LPs, there is no venture capital. But without great innovators, there is also no venture capital, so neither can exist without the other. As such, the best venture capitalists strike a delicate balance, twisting the knobs on either end of the marketplace to drive the best outcomes over time.

The answer is likely that both of these views have truth to them, and a good mix of the two will represent the next generation of VC leaders. The ‘nice guy finishes first’ angle, however, seems to be both new and gaining momentum.

This is a good thing!

What do you think?

As with everything, I’m not sure.

Wait, Does the “Influencer Strategy” Ever Work?

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I posed this question on Twitter this week:

Has a consumer software or internet startup that launched with an “influencers strategy” ever ended up successful?
— Kanyi Maqubela (@km) August 18, 2015

To be honest, it was a slightly cheeky post, as I expected the answers to look like “Of course there aren’t any. All successful consumer internet communities launch with a small, mostly-fringe set of early adopters that start solving their own narrow, niche need, and only then do the unwashed masses – including influencers – follow as the community takes hold and goes viral.“ 

The answers were surprising and led me to a totally different line of thinking. 

Medium was invitation-only, and they curated those voices who had already demonstrated cultural influence on another platform as the seeds of their community. 

LinkedIn started with Reid Hoffman, a PayPal Mafia member, opening his rolodex of VCs, business executives, and strategic partners. 

AngelList was, indeed, invitation-only as well, focused only on those angels or investors who had demonstrated good dealflow or track records. Product Hunt, even today, has limited posting capabilities to those who will ensure a “high bar” of quality postings.

Instagram purposefully targeted users with big Twitter followings to see the launch of the product. Quora, of course, splashed onto the scene with well-known experts in a variety of fields, though starting with the startup and venture capital community, answering questions themselves. 

Even Pinterest, the darling of the “new type of early adopter” conversation, found influential bloggers, with big audiences, to start collections in the early days as a way to generate audience.

To wit, *many* digital communities started with influencers, and in fact leaned heavily on them as a way to seed their networks. So many did, in fact, that I started to wonder if *most* had? Facebook famously went viral organically, among people who were just connecting with their friends. But are they in the minority, unlike I had previously considered? My advice to startups has almost universally been “influencers will be artificial acquisition, and are not the smartest way to seed a community. Start with your friends, seed random networks, watch their usage (or lack thereof) and build from that; you must let the community grow that way.” Was my advice wrong?

Why has SEO/SEM persisted?

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I’ve been surprised to learn how many companies today are still using SEO/SEM as a primary acquisition tactic, in fields as varied as local services like HVAC repair and plumbing to party supply rental and finding a medical specialist. This surprised me because of three trends I have been following.

– As our collective internet time moved further and further to mobile, there was once a question as to whether mobile web would be an effective channel to access applications and services, or if native apps would dominate. Today, the verdict seems clear that app usage is by far the dominant driver. We primarily use native apps, not the mobile browser.

– Verticalized/single-purpose applications launched over the last half decade focused on apartment search, on-demand transportation, food delivery, telemedicine, and so on seem to have proliferated, in every category that you might once have found on Craigslist (h/t Parker’s original graphic) suggesting that instead of having to go to an all-purpose “find me X” experience, there ought to be a vertical platform that does that.

– As social overtook search as the primary traffic driver of the web (for example, Facebook has now passed Google as the biggest referrer of traffic for digital publishers), thus would very quickly follow applications which would monetize using social as the traffic driver.

So why would a new startup rely on SEO/SEM, and how have relatively young startups like Thumbtack built such resilient businesses using that acquisition strategy? A few of the conclusions I draw:

– Google search has been overtaken in traffic, but is of course still enormous.

– Lower-frequency activities (I need a plumber. I need a podiatrist) are very hard to build single-platform experiences for without using SEO/SEM, because intent capture aka “I need X” is the very best moment to acquire a new user, not when you see your Facebook friend post about it, or when you get invited by your friend. 

– Since SEO/SEM is largely based on relevant links, building a supply of organic inbound links at scale is no different than building any other marketplace, where you create a network effect as more long-tail providers get their leads by being linked to you, thereby your search results improve, and so on and so forth. 

What might replace Google-dominated SEO/SEM?

The ‘concierge’ services that have launched recently – Magic, Operator, Alfred, etc. – have a great opportunity to aggregate demand in a new mobile experience that takes some of the juice away from Google, but they are fighting against a few things that make their road less obvious. The cold start problem: “OK great, I can get anything done. But I don’t really need anything. Annnnd I forget about the app.” Google search habit, and indeed single-purpose applications in the given verticals. But nonetheless, they do show promise at massive scale if they can overcome these challenges.

There are other applications, either created by messaging apps like WeChat, LINE and business communications apps like Slack, or running as third-party applications on top of them, who have daily eyeballs at massive scale, and are starting to experiment with “intent generation” over a few of the use cases that might otherwise have been more appropriate for Google.

But nonetheless, I am still excited about SEO/SEM driven lead generation marketplaces. I think those strategies still have much life in them yet.

Investing In Bubbles, Pt. II

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Two years ago I read a great book describing the creation of the computer. The period between 1930 and 1960 was one of war, paranoia, and frenzied product development. At all costs, the government would spend on the necessary resources to win. It reminded me of Bill Janeway’s description of bubbles, which I want to spend a few minutes on again this morning. 

By my understanding of Janeway’s framework in “Doing Capitalism in the Innovation Economy”, downstream price insensitivity happens when speculators fall in love with a category, from tulips to gold to beanie babies. I’ll excerpt my past post* to save a click:

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 a brilliant application of design-thinking, he concludes that there are opportunities for fantastic creation in these moments, as innovation happens through trial, and error, and error, and error, and error. Errors are expensive; somebody needs to underwrite them. 

I’ve been thinking about this a lot lately, as have we all. But I want to make note of something important. Many readers know this, but not all: a lot of the on-demand economy companies that are growing the fastest — the startup household names in grocery, logistics, delivery, and transportation — lose money not just on a monthly or annual basis, like a software company. A number of these companies lose money *on every transaction*. That is, they are selling a service or a product today at an economically irrational price. The faster and the bigger they grow, the more money they *lose*, not make. While I recognize that no-revenue high growth startups have a similar challenge, I find it particularly pernicious in a space where the gross margins are negative, because the revenue suggests cashflow – it’s like having a lemonade stand where you *pay* .5¢ per glass on a hot summer day, and then when your stand takes off, you are hailed for it. Let that sink in for a moment.

There are a few conclusions worth drawing from this. 

On the one hand, if the market turns, even in the slightest, and the later stage venture financing starts to require positive gross margins (not contributing margins, or even EBITDA), the question of how to reward, retain, and protect the supply side of these marketplaces, the worker classes who act as couriers, drivers, and deliverers will become painful.

On the other hand, consumer demand can be a *very* powerful driver. And even for Uber, the biggest company in this category, growth is still utterly astounding. Most people in the world still haven’t heard of it. And the magic of getting a cab delivered to you, pushing a button to have someone take your junk, or clean your apartment, or deliver you a hot meal, may be sufficiently magical as to actually change conventional wisdom at scale. And once conventional wisdom turns, then there’s no stopping those services that can continue to execute. The consumer may be willing to keep going, while the unit economics stabilize, because our behavior will be locked in. This is quite possible. It’s still incredibly early days on the demand side.

Both of these things can, and likely will, happen simultaneously. Just like it took the dot-com bubble to create Google and Amazon, perhaps it will take a massive wave of dramatic price-insensitive negative gross margin growth to create the mobile central nervous system of the future. But many shirts will indeed be lost along the way.

*Investing In Bubbles, Pt. I

Our Diversity Numbers —

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After seeing StartupLJackson’s tweet today, I was inspired to look inward and take stock of how we are performing today at Collaborative Fund on diversity. By virtue of being a vocal and relatively politically active young black man, I spend a lot of my time and energy thinking about diversity, social justice, and racial equality; when it comes to my day-by-day, it is constantly humming in the back of my mind, but I shy away from getting into the numbers and actually measuring it. I admit this is, at least in some part, out of fear of what I will find. But enough of all that.

This information is available on our website with some mild forensic work, so it isn’t groundbreaking, but counting, doing so publicly, and benchmarking against peers and the industry are an important piece of the puzzle, and I badly want to contribute from all fronts.

So, on women founders. According to Crunchbase, by 2014, 18% of tech startups they measured had a woman founder. Curiously, in New York the number was 21%, making it the better than all of the Bay Area. Las Vegas, at 26%, stood as the regional leader.

Collaborative Fund currently has 28.6% female-founded portfolio companies.

All of the numbers, including ours, are woefully low. Among those companies, too, the majority of them (>60%) had a male co-founder, as well. This number is also interesting, because it means that the total ratio of male founders to female founders is even more skewed, so that is the best possible number I could get us to from the data.

And let’s talk about racial diversity. For the sake of simplicity, I used Black and Latino as the relevant underrepresented minority, but I acknowledge that certain Southeast Asian, Middle Eastern, and of course Indigenous Americans are terribly underrepresented, as well. Here, the industry number is a bit harder to find, but I got to 1% (!) of VC-backed companies as having a Black or Latino founder. That is a terrifying number which makes me want to jump out the window. But such it is. Beyond that, UNH’s Center for Venture Research calculated that 8.5% of startups founded in first half of 2013 had a Black or Latino founder.

Collaborative Fund currently has 8.33% Black or Latino-founded portfolio companies.

I won’t even begin to muse on this number, because it is too frustrating.

I present these numbers without additional context, with no particular desire to justify or defend them, because they aren’t defensible nor are they justified. But I present them in the hopes that others will, too. In the hopes that we, the VC’s, can start keeping track of these things, and holding each other accountable.

At Collaborative Fund, our mission is to invest in companies that help push the world forward, impact culture in a positive way, and reflect our love for one another. Diversity is a critical component of that, and I am motivated to do more.

So I’ll conclude with this: if you’re working on a startup that fits our mission, has a cool brand, and you want to help us improve these numbers: email me today.

Why the Collaborative Economy is an Impact Economy

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Reflecting on the passing of R.H. Coase a few years ago, I noted that his theorem was being undermined from all sides. For the uninitiated, “The Nature of The Firm” was published as an essay in 1937 by Coase, then a young British student of business who wanted to understand why the American companies were producing so efficiently and profitably. He concluded that it was because they were developing mass production, consolidating resources for distribution and communication – creating the firm. Of course, the Internet and Moore’s Law have dramatically lowered costs of production, distribution, and communication. As a result, the firm is no longer the most efficient mode for many – and soon most – industries. What has replaced it is a distributed, decentralized mode of communication and exchange. 

In The Decoded Company, the authors refer to the recent history of military strategy as an analogy to this trend. In the 20th century, generals and admirals in command centers would determine military strategy, to the minutiae of where ground forces would move on a daily basis. It was the most efficient way to ensure that the information flows were optimally organized. Today, IEDs and insurgents are notoriously hard to beat (when was the last time a war was reliably won against them). The same trend applies in product creation and business strategy. Node-powered network models beat hub and spoke models, where each of these nodes is its own microfirm.

Thus, individual agency will become a primary driver of resource allocation, in a way that it never has before. This picture tweeted by Lisa Gansky tells a very elegant story of this reality. 

We can communicate globally and are all connected, but we are decentralized, for the first time ever.

This is the main reason why political systems are more fragile than ever before, where the larger the body, often the less effective they are. But it is also why intimacy is the new aspiration; why a local AirBnB or handmade bag may be a higher form of luxury than the Ritz or Prada. And it’s why transparency, sustainability, and defensible social impact are *inexorable* characteristics of a successful 21st century business. A company can be railed across the coals because of an individual’s off-color tweet. A government’s security program exposed because of a rogue disillusioned employee. A $19 billion tech company can be created and grown to massive scale on 35 employees’ efforts. Each of us has wildly powerful agency in this moment.

As Mary Meeker’s talk earlier this week demonstrated, Millennials, the biggest generation the global workforce has ever seen, cares about meaningful work and recognition. We are nodes who want to be acknowledged as independently valuable, and want to enmesh their work and their values. (Tellingly, our managers tend to think we are motivated by money while we are motivated by meaning far more.) A decentralized, collaborative economy is ultimately one which is yours, and mine. It is one that leads with sustainability, promotes healthy living, gives the underserved access to Maslow’s needs, is mission-first. We own it, and thus we must care for it.