LinkedIn is a very good company with a very good business. Trying to take LinkedIn head-on seems foolish to me. Whatever will compete with LinkedIn will have to chip away at the monolith by exploiting opportunities that seems small today but are likely to become valuable over time.
We get a subscription music service that we believe is the first subscription service that really got it right. They had the insight early on to know how important human curation is. That technology by itself wasn’t enough — that it was the marriage of the two that would really be great, and produce a feeling in people that we want to produce.
Data is the voice of your customer. Data is effectively a record of an action someone in your community performed, which represents a decision they made about what to do (or not) with your product. Data scientists can translate those decisions to stories that others can understand.
Revenue can sometimes be a Vanity Metric
In most situations, I’ve found the following startups cliches to be true:
“Nothing happens until you sell something”
or another favorite of mine:
“A contract is a great way to validate a customer’s pain”
However, sometimes revenue can actually become a vanity metric.
If you aren’t familiar with the concept of vanity metrics, the idea is that often startups will show numbers from their business that while impressive on the surface they are not actually predictive of the startup’s progress in developing their business. Caleb Wojcik explained them simply as “numbers or stats that look good on paper, but don’t really mean anything important.”
Examples of a few really common vanity metrics include:
- Showing compounding total users instead of analyzing customer interactions by cohort
- Number of followers on Twitter or likes on Facebook
- Total app downloads
Each of these may be helpful contextually in the early days of building a business, but ultimately they don’t really mean anything.
Getting to the point of this post, sometimes revenue (even when analyzed correctly) can also be a vanity metric. The easy example would be legacy service revenue. For example, if you had a consulting business that you used the revenue from to bootstrap your new startup. While it’s obviously great to have that non-dilutive source of capital as you get started and certainly that’s impressive, the amount of service revenue is really irrelevant to the valuation of the startup going forward given you’d stop doing services once you received investment to “focus on your product”
However, the more interesting example that I’ve encountered a few times recently is sometimes a business will generate revenue that isn’t scalable and isn’t part of it’s long term vision. In some cases, it wasn’t even from the market that they ultimately believed would be their primary source of revenue and instead was from intermediaries that the entrepreneur pitching me was quick to point out had a relatively modest upside and “wasn’t our long term customer.”
In either case above, those revenue numbers are simply vanity metrics.
The Paradox of the Future of Venture Capital
This is a topic I’ve been thinking about a lot over the last few months and having some really interesting conversations around. Most recently at The Atlantic’s Startup City event last week in Miami. What follows is a bit of a ‘thinking out loud’ post - any feedback is welcome.
It’s not even controversial to point out that venture capital is being disrupted. What’s interesting is that lots of industry experts have different impressions of how it’s being transformed.
In my opinion, the best explanation for what is happening is that venture is being unbundled and rebundled.1 Interestingly, this causes a lot of people to both over an understate the “death” of venture.
Historically a lot of different functions that a venture firm did made sense to be organized in one corporate structure.2 Today, we’re in the early stages of platforms and transparency creating efficiency and in some cases making it less obvious why all these functions need to live under one corporate structure.
More specifically, a combination of platforms (AngelList), legislation / regulatory changes (JOBS act), and structural changes to how we build startups (accelerators, cloud computing, open source software) have started disrupting the legacy VC model.
At the same time, firms are adding partners and teams around specific services and creating software platforms to support entrepreneurs in new ways.
The following are two slides from a deck I presented earlier this month at our Labs LP meeting which summarizes a larger set of these trends. The first slide sets up the changes to venture we observed before launching Birchmere Labs.
The second is some of the continued catalysts for change after launching Birchmere Labs.
So is venture dead? The answer is a bit of a paradox: Yes but long live venture capital!
Obviously, I am biased given that I’m focusing my career here, but I believe venture has a bright future even while being unbundled and rebundled. When I look at historical examples of other industries my optimism is reinforced. No example may be more poignant then the media industry.
I spent 2 years as the COO at ReadWrite through its acquisition by SAY Media immediately before joining Birchmere. During those two years the media industry shrunk dramatically and every week I saw a headline about the “death of journalism.”
Yet sites like ours, TechCrunch and GigaOM were able to build profitable media businesses. In the case of ReadWrite, we grew revenue significantly and remained profitable every month over those two years. Part of this was due to obvious facts like not having legacy print business. However, arguably more important was partnering with Federated Media for a portion of our ad sales and understanding our competitive advantages.
Certainly when an industry unbundles a number of new companies emerge - like ReadWrite, TechCrunch or GigaOM. In venture capital, that has definitely happened with great new firms emerging.
Historical Brands Remain Relevant
I however made a decision to join Birchmere, a fund with a great two decade history of creating multiple “unicorns” (FreeMarkets, Cvent) and consistently being ranked top decile by the analysts that benchmark the venture industry (ex: Preqin). Two years into this decision, I’m really glad I made it. My business partners Ned Renzi & Sean Sebastian have been amazing mentors to me.
To finish the analogy to media, it’s interesting to look at legacy media businesses that improved during the industry’s transformation. There are a few that jump to mind, but for me no example may be more dramatic then The Atlantic. It’s one of America’s oldest magazines founded in 1857 with a storied past .
Yet, it had lost money for over a decade before turning it’s first profit in 2010. This is year at SxSW, The President of the Atlantic Scott Havens gave a presentation titled Can Great Journalism Make for Great Business? Not surprisingly he argues that the answer is yes.
Yet his prescription is interesting. He went through a number of “core beliefs” that shaped his transformation of The Atlantic.
We’ve tried to do this transparently at Birchmere via the publishing of our manifesto and ensuring our interaction with entrepreneurs and investors is consistent with those principals.
What do think? Too optimistic on venture’s future? Again, I’d welcome any reaction in the comments below.
By the way, this is not unique to venture capital. Other interesting examples of industries going through this at the moment include education, telecommunications and the video game industries. ↩
2. These roles included:
- Fundraising capital from limited partners to invest
- Deal sourcing
- Deal selection
- Helping investments grow (strategic advice, helping with recruiting, etc …)
- Providing corporate governance for investments (serving on boards)
- Exit management ↩
Most interesting numbers from Box S1: Negative Net Churn & Cohort Based LTV
I quickly scanned the Box S1 yesterday before going to teach my Lean Entrepreneurship course. After a busy 24 hours, this afternoon had a chance to spend more time reviewing the document.
When I scanned the doc quickly yesterday, the P&L numbers jumped off the page to me. (From the coverage I wasn’t unique) Specifically:
- The significant & accelerating losses ($168.8M last FY 1/31/2014)
- The relatively low cash balance (if they hadn’t raised $100M in December would be sitting on a cash balance of $9M — obviously this would never happen but makes the point)
- The significant Sales & Marketing expenses - ass Paul Kedrosky commented they were “gobsmackingly amazing”
However, this morning there are two numbers that I think are important to keep in mind given it is a SaaS business.
1) Negative Net Churn
As David Skok has eloquently explained, Negative Churn in a SaaS is a powerful growth metric. In the case of Box, they are doing a great job generating negative churn across their accounts. Directly quoting from the S1 (pg 48 & 49):
We calculate our retention rate as of a period end by starting with the annual contract value (ACV) from customers with contract value of $5,000 or more as of 12 months prior to such period end (Prior Period ACV) and a subscription term of at least 12 months. We then calculate the ACV from these same customers as of the current period end (Current Period ACV). Finally, we divide the aggregate Current Period ACV for the trailing 12-month period by the aggregate Prior Period ACV for the trailing 12-month period to arrive at our retention rate.
Over the last 3 Fiscal Years, they have had retention rates at the end of the period of 129% 144% and 136%
2) Life Time Value / Cohort Analysis
One really helfpul way to look at Lifetime Value is to do time-based cohort analysis. In the Box S1, they do the math on their FY 2010 cohort. What follows is their explanation (bold emphasis mine) pg 52:
To provide an understanding of our customer economics, we are providing an analysis of the customers we acquired in fiscal year 2010, which we will refer to as the 2010 Cohort. The 2010 Cohort includes every customer we acquired in fiscal year 2010, including customers who at one point did not renew their subscriptions but are customers today. We selected the 2010 Cohort as a representative set of customers for this analysis because 2010 was the first year since our inception during which we acquired a material number of customers across a diverse range of industries, and we think the perspective of time is important to help investors understand the long-term value of our customers. In fiscal year 2010, we recognized $2.8 million in revenue and incurred variable costs that resulted in a negative contribution margin for the 2010 Cohort. In fiscal year 2014, we recognized $14.4 million in revenue from the 2010 Cohort, representing a compound annual revenue growth rate of 69.2%, and incurred variable costs that resulted in a positive contribution margin of 34% from the 2010 Cohort.
Unless, I missed it I don’t see the LTV broken out from the other cohorts included in the S1.
The sales & marketing expense is still a concern to me, but the LTV is more promising then I originally realized when scanning the doc yesterday.
People of all ages and abilities use GitHub for code, sometimes as their very first introduction to the open source community. That’s why it’s important to make it welcoming for everybody.
“For ReadWriters past and present, this picture was a bit of a catharsis, putting behind us years of comings and goings, good times and bad.” (via How I Learned To Separate The Benefits From The Babble At SXSW 2014 – ReadWrite)
These rankings remind me of business school rankings. Truthfully not sure one list / methodology can be applied for all startups but this is directionally correct with what I have experienced looking at most these accelerators recent classes.
From TC post, summarizing the research, here are the best:
1. Y Combinator (Gold)
2. TechStars (Gold)
3. AngelPad (Gold)
4. Launchpad LA (Silver)
5. MuckerLab (Silver)
6. AlphaLab (Silver)
7. Capital Innovators (Silver)
8. Tech Wildcatters (Silver)
9. Surge Accelerator (Silver)
10. The Brandery (Silver)
11. Betaspring (Bronze)
12. BoomStartup (Bronze)
13. Entrepreneurs Roundtable Accelerator (Bronze)
14. JumpStart Foundry (Bronze)
15. DreamIt Ventures (Bronze)