Musings

I heard this advice today to some angel investors:

“Be careful not to become too enamored with the entrepreneur and their product”

Wrong. Painful. Couldn’t disagree more.

First of all, it’s very hard to stop yourself from becoming enamored with a founder or idea. It just happens to you. But second, most importantly, the only things worth investing in at the earliest stages are those where you are enamored with the entrepreneur and their product. Angel and early-stage investing isn’t about “traction” or about “metrics” or even frankly about “valuation”. It’s about if you love the founder and if you love what they’ve started to build! There is, yes, a functional question about whether they are either creating a sufficiently exciting market, or if they are building into a large enough TAM. But beyond that, it’s love! Sheesh. But the follow-up question to that comment was interesting:

“What about if an entrepreneur is too enamored with their technology, or their product?”

In this case, I actually agree with the premise. And to this point, I would advise you to identify the entrepreneur who is “obsessively committed to the problem, but not necessarily obsessively committed to the solution”, because great software and Internet companies often end up looking quite different than the wireframe, or v1, or blueprint the founder originally drew.

*Also this.*

I sometimes come across a question that founders pose in the context of fundraising, wanted to share my reaction and get yours.

One pair of founders are starting a really interesting, technically-sophisticated, company in a smaller (non-SF/Seattle/LA/NYC/Bos) market. They were able to cobble together $150K here, $25K there, and end up with enough runway to last them 18 months working as a duo, building the technical infrastructure that would underpin their product. As they started nearing the end of their runway, they realized they didn’t yet have the traction or story to raise a “Silicon Valley equity round”, so they started doing some consulting work on the side; they are highly creative hustlers, so were able to get a number of projects, which bought them another 6 months.

In a conversation with the CEO, he said to me, “while it may worry you that we are distracted on things outside of our business, we need accounts receivable to be greater than accounts payable. Hopefully it shows that we know how to balance our budget and be creative while getting stuff done. We’re not rich, so cashflow is king”

Honestly, my reaction surprised me. I felt total empathy, and appreciation for his honesty, but also was impressed by the scope, size, and type of consulting work they had done.

When we – or at least I – think about the successful startup archetype, there is an assumption that the founder put the business on their credit card (or savings account), and then seamlessly rolled that ‘bootstrapping’ into a friends and family round, and then rolled that into a seed round, with an uninterrupted ability to stay completely focused on the task-at-hand along the way. But in truth, it doesn’t always work that way. So my question is this: should I indeed worry that the founders are consulting on the side until they can raise? How is that different from evaluating a company while the CEO is still in business school, or hasn’t formally put in notice at her job yet? It’s easy to answer that question when the product is already taking off, or when there are other signals that there is some magic already manifesting in the company. But in most cases it’s still too early for that. Can a product get off the ground well if a founder doesn’t have complete focus on the company in the very early days?

In a meeting today* I was introduced to a new phrase which I loved, describing what I had always thought of as the ‘gravity well’ of a great founder. That is, someone who seems to have an incredible ability to attract other talented people, who can tell a story that soars above the common and conventional, and who you know will win at *something*, whether it is what they’re currently working on or not. As an investor, I am always looking for signals of momentum, and in the earliest stages these are almost never quantitative, as there is too little data to rely on. As a result, I look for signals that a founder has this:

“resource magnetism.”

Do you have that?

*Credit to Jacob at Ubuntu Fund.

Venture capital investors have long feedback cycles (as much as 6-7 years) and extremely unstructured time (one could justify almost any activity as being in furtherance of getting a deal or helping a portfolio company). So, we often look for signals that we are good investors along the way. Hunter Walk said wisely last month to Run Your Playbook, Not Someone Else’s, which got me thinking about this.

Many of these signals are external and qualitative: media coverage, social followings, ‘what people tend to say about you’, etc. Increasingly some of the signals are external and quantitative: Mattermark rankings, Pitchbook rankings, CBInsights rankings, etc.

Internally, investors have signals, too. Surprisingly, though each fund has a way of benchmarking success/failure, there is incredible diversity between the approaches.

One partner I spoke with said that they track every point in their funnel, from “meetings taken” to “follow-up meetings” to “term sheet given” and like to see consistency in their ‘admit rate’ over quarters or years. 

Another partner never looks at the top of the funnel, and only cares about the relationship between “term sheets given” and “investments made”. If they write a term sheet and the company *doesn’t* take it, that is a sign of failure.

Yet another partner doesn’t care about term sheets that are successfully accepted, and instead measures success as term sheets written where the company had at least one other term sheet from a ‘reputable firm’.

And another partner still measures term sheets written where the company, whether the firm invested or not, goes on to raise significant follow-on funding.

Each of these signals reflects the personality of the investor and of the firm, and I often learn almost as much about how a fund sees itself (and intends to fit into the future) from this than I do from its portfolio.

Our signal when I was at Collaborative Fund was: did a company that fit our investment thesis, where we loves the mission and brand, raise capital without us hearing about it first?

I’d be curious to hear other examples of how to create benchmarks, measure performance in venture firms.

Technology makes an inevitable march, and along with that, we tend to want to believe that we will at some point (perhaps) infinitely far away, uncover the true infrastructure of science, solve all of the world’s problems, and discover the root of it all. It’s Kantian, if you have any experience with transcendental idealism. And it’s attractive. The world is on a steady march to perfection. 

And yet, on the other hand, we tend to believe that markets are cyclical, that Ecclesiastes 1:9 holds true, and that certain aspects of our world won’t ever change. I think about how we improve life expectancy, but then Alzheimer’s and Parkinson’s afflict us in our old age; how we create higher education institutions to create access for all, but really the ‘minimum required qualification’ just goes up, still leaving people out; how we develop technology to enable us to build, consume, and grow more, but then break the very ecological systems that enable us in the first place.

We solve problems and thereby create new ones. It’s an interesting tension.

I see dozens of pitches a month, and so I tend to ask some questions over and over again. Among these, here are my favorite questions. I don’t always ask them (because sometimes it’s obvious) but when I do, I really enjoy the answers. I’ll present them without any additional comment.

– If this is massively successful, how will it make the world a *better* place?

– If you weren’t working on this, what else would you be doing? Not allowed to answer ‘nothing’.

I watched Interstellar over the weekend. It’s a fantastic movie, and I highly recommend it. As a sucker for film scores and dramatic filmmaking, the quality of those two alone made it fun to watch. But my favorite part was ultimately the exploration of the different aspects of theoretical physics and astrophysics. 

Without too many spoilers, it visually represents event horizons of wormholes/blackholes, pushing our imagination along the way. I was thinking, after the movie, about how plausible the more, err, fantastic elements of the movie were, and I realized that I had no idea. While some light reading of Kip Thorne’s more accessible publications and an enduring faith in Neil deGrasse Tyson’s tweets helped, I was still stuck. And then I caught Chris Dixon’s tweet, which helped me:

New ideas are almost always counterintuitive. Hence your intuitive reaction that it’s dumb/misguided/impossible/trivial is usually wrong.

— Chris Dixon (@cdixon)

November 6, 2014

Thomas Kuhn wrote a book in 1962 about the history of science, where he introduced the concept of the ‘paradigm shift’. While it’s a commonly used phrase today, its introduction, and the philosophy of science around it, was quite innovative at the time, and is still very important to understand. Let me explain:

Galilean model for the solar system wasn’t an extension on previous models. It utterly invalidated them. Newtonian mechanics, and its model of gravity, wasn’t *expanded upon* by Einstenian mechanics and that model for gravity. It was debunked – proven *wrong*. f=ma (only at low speeds) means f != ma. Plain and simple.

A paradigm shift, then, is when a new integrated system of thinking *replaces* the prior one, thereby introducing a new theory of everything. This is especially relevant in physics, where axioms are applicable to all motion, or all matter, or all time. And the history of science is *filled* with examples of paradigm shifts.

To that point, the fact that an idea that seems stupid, even those that are met with: ‘this is actually scientifically impossible’ does not have any positive correlation with the likelihood that it is *actually* a bad idea. In fact, there is likely a slight negative correlation.

Just a nice reminder: for those who wants to find *true innovation* to embrace the ridiculous.

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TL;DR: we invested in a company called Buffer and I start to ponder radical transparency in business.

The more I think about it, the more strongly I believe that there are a few ways to think about the social impact of any given business. This question weighs heavily on us at Collaborative Fund, given our stated bias towards pushing the world forward through innovation.

The impact all of us normally think about, of course, is *what* a business does. We tend to be a narrow form of consequentialists. Does it sell something that we can reasonably agree is good for the world? Does it empower individuals in a way that makes our society more equitable and humane? You get the picture.

But what about *how* a business does that *what*? If a really successful social enterprise fibs to its investors, cheats its competitors, and mistreats its employees, does it still pass the ‘impact’ filter? Surely, we figure, *how* a business does its work is part of the equation, too.

When we met Joel and Leo at Buffer, we had been thinking a lot about this particular concept — doing *good* business — and had heard about their commitment to transparency. We went through a diligence process, asked them some tough questions, asked around about the team, market, and business model, and ultimately agreed to lead their Series A. I am very excited to be a very small part of the Buffer story, which has put us on a very interesting road, which I expect us to be on for quite some time.

Buffer posts all of their equity calculations online. Salaries, too. In fact, Buffer posts all of their KPI’s (key performance indicators) on a public website that anybody can see. They have a distributed team, highly flexible work policy, and a culture that puts the primacy of authentic motivation at top billing. One of their employees was reported to have chosen to move to Hawaii for a month, just because. And not only did the Buffer executive team allow it, they encouraged it. As a result, they have what I can only describe as a *very* passionate team of thirty-odd people. It’s a fascinating experiment to watch, because it turns the notion of ‘social enterprise’ somewhat on its head for me. How many companies (of any type) would be willing to post their kpi’s to the public? To say nothing of equity and salaries? And what would that do to the organization’s performance, habits, and behavior?

Over the course of our negotiations in constructing a venture round with the Buffer team, they indicated to me and Craig that they didn’t plan on a traditional exit — or, at least, that they certainly weren’t ready to exit any time soon. With our Alignment Holdings initiative, we have been working hard on financial solutions to this situation, where the pressure to sell a company, or even to hold an IPO, is not always aligned with the executive team, or in Buffer’s case, with all of the employees either. Our thinking was that if we could write a term sheet with sufficient downside protection, that we could justify *knowingly* investing in a firm with incredible potential, but creative plans for creating liquidity. We proposed high-level terms which made me fairly nervous. After all, particularly today, the average term sheet has far less protection than they did 5 or 10 years ago, and far less protection than we were asking for. After a series of very productive conversations, and some creative thinking, we finally landed at a term sheet which looked unusual. It has a cumulative dividend, and a redemption right, more like a mezzanine debt or middle-market deal, but also buys a much smaller percentage of the company, and allows them to retain their board control. We felt good about this. Once we had both signed, and were feeling rather dandy about the state of the negotiation, Leo asked Craig and me: “How would you guys feel if we published the term sheet and some of our email conversations?”

He said so in a joking tone, as if allowing us to laugh it off by way of escaping the question. But I knew he meant it. And it scared me. Could I stand up to public scrutiny for the moves we had made? Was the realization that our supposedly private conversations were going to be made public a positive one, or a negative one? At any rate, we said yes, after looking at each other with a bit of a “holy shit” face. And what I can say is this: my tone, perhaps subconsciously, markedly improved in subsequent email interactions.” Which then made me wonder: if my actions were fully transparent, like government emails, surely my behavior would change for the better, right? Do I think that I can privately get away with misdeeds here and there? And, more broadly, to wit: is transparency in business an objectively good force?

Buffer is asking that question of us all, and I think it requires serious investigation. My current instinct on it is: yes.

I was at a talk a few weeks ago where an educator was speaking about the state of the contemporary education system. In an anecdote, she spoke of a colleague who hated the concept of transparency in her classroom: “I don’t like the feeling that my curtains are pulled back and the whole world has their noses pressed up against the glass, evaluating my every move.” I found that statement powerfully evocative, and ultimately surprising. I have always thought of *transparency* as the opposite of secrecy, rather than the opposite of privacy. And secrecy carries with it an assumption of illicit activity (illicit and secret almost feel like synonyms, right?) so surely transparency is the force for good standing on the opposite end of it. But what of privacy? Privacy is, itself, a good too, right? Do I not have the right to privacy over my taxes, over my property, my family affairs, and so forth? And so under those circumstances, transparency is less of a good, right? So how do we make sense of this in the context of business, which is individual dealings in the name of organizations?

In publishing a few of our email exchanges to the press, my only request was that my email be blurred out, out of respect for my personal privacy.

‘Transparency breeds trust’, to crib a thought from the Buffer team. And I feel an incredibly high level of trust going into this relationship. And their transparency value is a big part of why. Buffer’s grand transparency experiment hit a cultural bullseye for us, and it is already so fun, and a great challenge to us as a firm (and the great partners who we are working with in this investment) to hold ourselves to a high standard. And it has already invited some real discomfort, and I have to imagine it will invite even more. But that is good. This is only the tip of the iceberg…!

Unions were a fixture of the 20th century, serving as a stabilizing force against corporate and investor interests in business, creating deeply influential voting blocks for elections, and creating community among individuals who otherwise might not have known each other, or been close.

In modern times, the labor union is at its lowest ever approval rating in the United States. 2009 represented the nadir, when the population may have been reacting to the first national democratic victory since the 90s. But it’s stayed low. One wonders if the laissez-faire liberalism that won the Cold War is what precipitated this trend, or the accompanying period of relative prosperity in the 90s. Even now that wages are stagnant, inequality is persistent, and the topic du-jour is very much the ‘haves’ and ‘have-nots’ the unions are still unpopular. I suspect that is very soon to change.

There are a few prominent industries today where the need for a 3rd-party arbiter is particularly pronounced, where one class of participant does a lot of heavy-lifting, is* much* more likely to end up broke and alone, where the ability to connect with peers creates outsized value and influence, etc. The first is our industry: venture-backed entrepreneurship! Venture capitalists, even if their investments go badly, are protected, in part by their fund cycles, in part by the amazing willingness of LPs to fund managers who don’t have results, and mostly because they tend to have money to begin with. Failing entrepreneurs, on the other hand, end up broke, sometimes friendless, often really alone, and so forth. As for valuations and deal terms, the venture capitalists had incredible control and agency over these for the first 30 years of venture capital. While the Series Seed documents by Ted Wang at Fenwick and AngelList have done extraordinary things in rebalancing the power in negotiation, one organization has done far more: that’s why I think YCombinator is the first truly successful 21st century union.

Once you’re a YC alum, there is a community, a 3rd party who will arbitrate disputes on your behalf (with muscle, if necessary), and peers who will provide resources in the form of proprietary information, as well as safe landings in the event that things don’t go well. When Sam said that he specifically wanted more women and people of color to apply to YC, I couldn’t help but applaud, because entrepreneurs who are already marginalized need the added protection the most. 500 Startups, AngelPad, Techstars, and others are working hard, with varying degrees of success, to create a similar effect. I think the wake of YCombinator’s efforts will create a rising-tide-lifts-all-boats, rather than a winner-takes-all. The incubators will be the unions for the entrepreneurs.

The collaborative economy is the other big one. Let’s just take the drivers of Uber, Lyft**, Sidecar, Hailo, etc. To-date, they are a big and *very fast* growing population, who have no ability whatsoever to set their own wages, to ensure benefits (health insurance, actual property-and-casualty insurance for their work) or to get access to proprietary information about the work they are doing, or that their peers are doing. Sounds familiar, right? There was an interesting piece in New York Magazine last week about the “contract worker problem” referring to the math on being a supplier in a peer marketplace, and how the economics work out. I was far from convinced, but it did remind me that this is a community that is heretofore not fully organized, and needs resources to protect the participants, far beyond the current status quo. The drivers, as an example, are already doing it themselves. The subreddit** for ridesharing drivers is lively, and a great resource for any new driver. Follow along this forum to see that that Uber drivers are hacking community in absence of somebody creating one for them.

Freelancers Union, who were probably the first organization to identify the trend of moving toward the gig economy has created tens of millions of dollars of revenue offering health insurance to its members, the freelancers of New York City, and with their national benefits program will expand even further. Peers.org is doing a great job as an advocacy organization, as well, launching internationally, and focusing on supporting the platforms’ right to operate in cities. But a crop of startups recently has taken a purely for-profit approach, which I find very interesting: Hurdlr, Benny, SherpaShare, Guevara, and others have appealed to the participants in the collaborative economy to provide resources for them. In my opinion, the organization that wins the trust, and the network, of the people powering the on-demand economy will represent the next great 21st century union. And that organization will be best-poised to win the next generation of influence in business, policy, and technology.

**AngelList, Reddit, and Lyft are Collaborative Fund portfolio companies.

Today we announced an investment in Placemeter, alongside some great partners. Very exciting.

What they do, in short:

They have this crazy cool computer vision software that enables them to get really specific data from the most ubiquitous cheap sensors you can find anywhere: closed-caption television. Think about it. How many retail store security cameras, speed trap cameras, urban planning cameras, Shake Shack line cameras etc. are there in New York City right now? A lot, right? Now imagine adding all of the cameras on our old mobile devices, sitting unused in our kitchen drawers. Imagine if you got paid to take your device, turn it on and stick it on your window.

Google changed the world by indexing the digital world. What if you could index the physical world, in real time?

Now, a couple observations that are very interesting to me:

– Obviously, one wonders about Big Brother implications… That was my first thought, after all. To that point, humans never watch the video, ever. They never save the video, period. They don’t collect data from within homes, no matter what. And finally, most importantly, they are very committed to using this tool for good.

– In the spirit of using this tool for good, imagine if you were a software-oriented urban scientist? If you had realtime data about traffic, walking speeds, busy intersections, etc., what could you build? How could you make your city smarter, safer, and more humane? Placemeter is working on a platform so that anyone, from a neighborhood association leader, to an environmental pollution researcher, could build on Placemeter.

– The consumer applications are there, too. Want to know when to go to your favorite no-reservation restaurant? How about whether Dolores Park has any free spots this afternoon? Is the local court running fives while the weather is still nice? You get the picture.

There is something crazy about everyone having a meter on their window. It makes me wonder about all the iPhone photos I have accidentally photo-bombed over the years. There is a live video feed, or audio feed, covering more and more of the world, whether or not I like it. Of course, the sanctity of my privacy is very important, particularly in today’s Snowden/Assange-era, but the technology is there, and working. And lately, it’s often seen as working against us, not for us. This is one of the more interesting experiments about culture, technology, and the crowd, that I can imagine. Insight, well-collected data, and transparency are so powerful. And as with anything really powerful, the tools have no morality, just power.

And so I am so happy that we at Collaborative Fund are backing founders like Alex and Florent who are committed to using technology, creativity and, yes, power to make the world better.