Tag Archives: Fred Wilson

Crabgrass Theory of Tech Startups

Economics, Entrepreneurship, , ,

I’m fascinated by Fred Wilson’s recent post he called The Darwinian Evolution of Startup Hubs, on his AVC blog from late last month. This is so much like my own sense of how it was, beginning with the first semiconductor companies appearing in what was then called the Santa Clara Valley in the 1950s. I was in elementary school then, in Los Altos, CA, where all this was happening. His summary:

In my mental model of Silicon Valley, the first ‘tree’ was Fairchild Semiconductor (founded in 1957) which begat Intel (founded 1968) which begat Apple (1976) and Oracle (1977), which begat Sun (1982), Silicon Graphics (1981), and Cisco (1984) which begat Siebel (1993) and Netscape (1994), which begat Yahoo! (1995) and eBay (1995), which begat Google (1998) and PayPal (1998), which begat YouTube (2005), Facebook (2004), and LinkedIn (2003) which begat Twitter (2006) and Zynga (2007), which begat Square (2010), Dropbox (2008), and many more.

I’ve compared this phenomenon to crabgrass. One plant generates others nearby. I think it must have been like this with auto makers in Detroit and steel in Pittsburgh, but that was well before my time. This is certainly what we saw in the Silicon Valley:

If you drill down a bit deeper, you see that the founders, investors and early employees generate a tremendous amount of wealth from these big successes. The later employees don’t make as much wealth but they do learn a ton and make enough money that they don’t need to work for someone else and so they strike out on their own and are often funded by the folks who made the big money in the prior startup. That’s how the seed drops from the tree and starts a new tree growing. This continues on and on and on.

Tree, crabgrass, seeds, and seedlings; sort of the same thing. And I’m seeing what he describes in the growth of other hubs too:

This darwinian evolutionary model of startup hub development is not limited to silicon valley. We have seen it play out in other places, most notably Boston, and increasingly in NYC. It is also playing out in markets like Boulder Colorado and Austin Texas and many other parts of the US and many parts of the world.

Fred Wilson’s VC firm is called Union Square Ventures, and Union Square, in Manhattan, is right in the middle of the growing New York high tech startup hub around Soho and the Garment District. Some call it Silicon Alley. And I’ve also seen this happening in Austin, and, although I don’t know Boulder, I do see Brad Feld’s Boulder influence spreading.

The big follow-up question is what can anybody do to break the cycle and speed it up and get some other location onto the same path. What starts it? What are the factors? 

And how do we get that here (wherever here is)?

(Image: bigstockphoto.com)

Do You Have What Investors Want?

Angel investment, Starting a Business, Venture Capital, , , ,

What do investors want? I’ve read more than 100 business plans in the last two months. Entrepreneurs are overwhelmingly predictable on this point. Investors want disruptive. Investors want game changing. 

But not just saying it. Being able to believe it. Two of every three plans says it. Only a very few make it actually believable. 

And believable, in this context, is still a matter of huge uncertainty. Nothing in startups is fully believable. The closest you get is an interesting market story about solving a real problem and doing something important differently, and a team that seems to have experience and background that indicates it can execute the idea. 

The best thing I’ve seen in a while on what investors want — at the high end of venture capital — is this one on The Anatomy of a Successful Entrepreneur, that appeared on TechCrunch about a week ago. Post author Rip Empson digs into the recent Kaufmann data on venture capital, adds some analysis by Fred Wilson, Chris Dixon, and others, and comes out with the short list shown here. 

 

 

Is There a Tech Bubble? We’ll Know If It Pops

Business Financing, Economics, Technology, Venture Capital, , ,

Earlier today I posted disruption vs. revenue and the tech bubble on the gust.com blog. I’m suggesting in that post that some special-case web-based startups have to choose between disruption or revenue, because they can’t have both.

That may or may not be true, but I’ve been guilty of suggesting it is to a couple of startup software companies recently. I think both were special cases. They had a real chance to go really big and generate spontaneous buzz based on the product itself.  But locking their wares behind pay walls might slow their growth and dampen their success. 

That may or may not be true. After the tech crash in 2000, I never thought I’d see that happen again, much less me recommending not covering expenses with revenue. Still, though, there’s Facebook and Twitter and Instagram and, oh my.

Bubble? Las Sunday the NYTimes’ bits blog published Disruptions: With No Revenue, an Illusion of Value. Author Nick Bilton says yes there’s a bubble and tells why he’s sure.

When this next bubble pops — and it will pop — the idea to make no money can finally pop, too. Then investors can start working with companies to build businesses that have long-term financial goals, instead of just building a short-term mystery.

But on the same day Chris Dixon (smart person) asked Is It a Tech Bubble on his blog and answered with some convincing analysis, “no.” And the second comment on that post is Fred Wilson of AVC (another smart person) saying: 

[Zynga price] certainly doesn’t seem like a bubble valuation either. I do think there is more money sloshing around the tech/internet/mobile sector now than there has ever been. and that is impacting valuations across the board. The question is if this is temporary or the “new normal”. I guess we will find out.

So I’d like to answer this tech bubble question here, but as I was writing this, on Sunday, those other interesting and contradictory posts, from smart people, kept rolling onto the web. I ended up tweeting my conclusion to this post last Sunday, with the following tweet. 

5 Non-Traditional Ways to Get Startup Money

Angel investment, Business Financing, Starting a Business, , , , ,

So you want to start that company but you don’t have enough of your own money to do it. Most people think you either borrow the money or find investors, but neither of these are always possible.  You won’t get investment if your company isn’t investible.  And banks can’t lend you money on faith, you need a credit rating and some collateral. But there are some other ways to get that startup money.

  1. The absolute best startup financing is prepaid sales. Get a company that knows and trusts you to prepay services, or product development. Give one or more key customers an attractive discount for betting on you early. When I started on my own I sold a year’s worth of consulting, in advance, to the consulting company I was leaving; I accepted only half a year’s money, but it worked. It got me started. Later  I got large buyers to prepay software development in order to influence the product features they wanted. I know it’s hard, but it happens.
  2. Innovative non-traditional borrowing. Even though banks can’t lend you money if you don’t qualify, other people – angel investors, for example – can lend you money if they want to take a risk on you that way. Usually they’ll do it only for additional benefits to compensate for additional risks. That could be a high interest rate, or an “equity kicker” (a small percentage of ownership that they keep even after the debt is paid), or some portion of the debt that converts to equity (ownership). Look into convertible debt and warrants.  Fred Wilson had a very good post yesterday on Venture Debt, which isn’t usually applied to startups, but still, an interesting option.
  3. Percent of revenue, or royalties. This worked beautifully for me in the middle 1990s when I needed professional programming to help turn my business plan templates into Windows applications. I found a company that would work for a small fixed fee per month plus a small percentage of future revenue. Just last year I helped a friend find a fair way to pay a co-author without sharing ownership in her startup. She and her co-author were both happy with a long-term royalty arrangement.
  4. Do-now pay later. Offer somebody a contract for services paying a bare minimum now and then twice as much later on, as a balloon payment or a series of payments. Say you get a consultant to help you with your business plan and she’d normally want $5,000, but you offer her $10,000 if she can take it in 10 monthly payments starting on the third month. It can happen.
  5. Lease equipment. Leasing works best when a new business depends on relatively big equipment purchases: the trailer truck, the espresso machine, the dry cleaning equipment, for example. If you can qualify for the lease contract, you turn that big purchase into a long series of monthly purchases.

What Does Creativity Have to Do With Business?

Creativity, Reflections, Technology, Web/Tech, , , ,

What does creativity have to do with business? Business is about dollars and deadlines and suits, while creativity is about nerds and long hair and artsy-fartsy. Or is it?

As the digital technology revolution matures, it is becoming more about creativity and less about engineering.

That’s quoting Fred Wilson, venture capitalist and thought leader, in The Creative Phase last Saturday on his excellent A VC blog. This seems important to me:

Why the distinction between engineering and creativity? Can’t engineers be creative. Of course they can and are. Maybe there is a better word to use. But what I am trying to delineate between is the hard work of designing and building systems and the more abstract efforts to entertain, educate, and emote with these systems.

Looking over New York’s technology scene, he quotes an analysis that notes that New York University’s Interactive Telecommunications Program (ITP), a two-year graduate program in technology, is part of NYU’s Tisch School of the Arts, not the corresponding school of engineering, much less business.

Was it accidental or intentional the ITP was located in an arts school? I don’t know. I should find out. But regardless of why it was done that way, the result has been impactful. ITP churns out talented people who are half engineer, half artist. And the things they build reflect that view of the world.

Of course generalizations are dangerous, Success isn’t creativity vs. engineering; it’s different for every case. There’s also showing up, luck, hard work, and of course marketing and so many other factors. But I think it’s important to jar our assumptions a bit. Fred Wilson’s nod to “abstract efforts to entertain, educate, and emote”  reminds me on my favorite quote about software, from Stuart Alsop: “Good software feels like silk. You know it when you see it.”

And this all reminds me that some serious portion of what we now call the great works of art – all of Shakespeare’s plays, for example – were created by people who were doing it for the money.  It wasn’t the business of art, it was that good art was good business.

I think about some of my favorite tech products: software I use, websites … isn’t Google Earth, for example, more art than engineering? The original Macintosh? Even – and you’ll have to forgive me for this one, but I do love spreadsheets – the first VisiCalc?

On Fred Wilson’s 10 Ways to Start a Business

Advice, Starting a Business, , , , ,

Hooray for Fred Wilson, a VC (Union Ventures) with a blog named A VC, for this brilliant 20-minute talk called 10 Ways to Be Your Own Boss, posted on his blog as online video. Fred calmly and carefully blows apart the way-too-common assumption that starting a business is about finding investors. He does this with a simple list of examples, each of which is a happy healthy business, most of which started and grew without outside investment.

He begins this talk with a couple of absolutely great quotes. The first, from a comment on Fred’s blog:

“Entrepreneurship exists in the tiny space between madness and genius; and its journey requires a few cross border violations across both madness and genius to get to the final destination.”

The second, from a tweet, shown here on the right, highlighting addiction to a monthly salary.

What I really love is the point he makes with the list. All 10 of these start-your-business instances seems perfectly understandable.

  1. The one-man show. He uses Matt Druge of the Drudge Report as an example.
  2. The two-man show with a partner.
  3. The husband and wife team. You already have a partnership. Assuming your marriage works, you already have a partnership that works. Designer and programmer, marketer and programmer. I know this one very well. Palo Alto Software started like that.
  4. The small office boutique. Fred says Union Ventures is one of those; six people. Small and happy.
  5. A federation of small businesses. He mentions Allen & Co., a New York investment bank. A lot of independents sharing a name and overhead. This works for professional services, like architects, attorneys, consultants.
  6. Projects: films, books, recordings … be an entrepreneur going from project to project to project. A good model for people with unique skills, if they can get work whenever they want.
  7. A cool website, as a small business, He mentions The Hype Machine at hypem.com, which started as a one-person website, remains small, but also profitable. It works as a one-person business, with some freelance resources, managed via laptop from places around the world.
  8. The small team bootstrapped startup. He shows redstamp.com, virtual cards that can be physical cards. This is a small-group quintessential startup, moving fast, flexible, having fun.
  9. The eventually-got-funded startup that started out as a few people working for free. Get it going, get it funded, then make it right.
  10. The startup that was spun out from another company. Twitter is an example. It was a piece of a business that got split apart.

That’s just 10, he says, and he limited his list to 10 only because he had only 20 minutes. He implied he could have gone a lot longer.

The point, made very powerfully in a delightfully cumulative way, is that only two of these 10 raised outside investment money. And one of those two got well on its way first, with people working for free, believing that the future would repay them.

One small detail that bugs me here is the “be your own boss” description of starting a business. I decided to put that into the 140-character tweet format as I was writing this. Here it is:

Is Your Startup Fat or Lean?

Back to Fundamentals, Starting a Business, Venture Capital, , , , , ,

When two clear big winners in the high-end startup world disagree on something as basic as lean vs. fat startups, I’m fascinated. First, because both of them have a lot to say to the rest of us. Second, because it illustrates, once again, how much of startups and entrepreneurship defies rules of thumb and generalizations.

measure the appleIn The Case for the Fat Startup, Ben Horowitz tells how he burned hundreds of millions of investor dollars while building up Loudcloud/Opsware  for a stunning $1.6 billion exit in 2007 when it was acquired by Hewlett-Packard. Clearly, this was a huge win. It’s a hall of fame story. And he makes raising a ton a money one of the keys to success (I’m quoting):

As you listen to the virtues of the lean start-up–lightweight sales, light engineering, and so on–keep the following in mind:

  • If you are a high-tech start-up, your value is in your intellectual property. Don’t stare at your spreadsheets so long that you get confused about that.
  • You cannot save your way to winning the market.
  • The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition.

Thin is in, but sometimes you gotta eat.

Fred Wilson, founder of Union Ventures, a big winner as professional investor, and an eloquent blogger, answered that post with Being Fat is Not Healthy. He says:

The very best investments that I have been involved in established product market fit before raising a lot of money. That’s how Geocities did it. That’s how Twitter did it. That’s how Zynga did it. That’s how every single one of my top twenty web investments in my career did it.

I have to admit, I like the lean option better, but then most of the companies I’ve built or helped to build were bootstrapped. And times have changed, too, so what Horowitz is calling “fat” isn’t really an option very often. But the dialog doesn’t stop there. Horowitz came back and responded with The Revenge of the Fat Guy. He makes two points back:

  • Product market fit isn’t a one-time, discrete point in time that announces itself with trumpet fanfares.
  • My experiences [with Loudcloud/Opsware] are highly relevant to other entrepreneurs. In fact, they are more relevant than Fred’s pattern matching.

Ouch? Pattern matching? Really. Read the Fred Wilson post, see if that’s fair. Also ask yourself whether he’s really guilty of underestimating the time it takes to get the product-market fit. I can’t resist adding this quote from the Fred Wilson post favoring lean. It rings true to me:

In short, since I started investing in the web in ’93/’94, I have invested in about 100 software-based web companies. And the success rate of fat companies versus lean companies is stark. I have never, not once, been successful with an investment in a company that raised a boatload of money before it found traction and product market fit with its primary product.

The rest of us, meanwhile? I think we have to admit, the debate is pretty much moot for the rest of us. There might be a few dozen people around who can still raise hundreds of millions of dollars based mainly on their name and track records. Ben Horowitz and his partner Marc Andreessen are two of them. But I’m not; and, no offense, but the odds are you aren’t either.