What happens when your private beta get’s a little less…private? We’ll see, but so far - your users send praise, the gatekeepers send questions, and you find all the weird bugs that would have taken you weeks to see otherwise. Not so bad so far…
Note: If you come across Connect4Square, it’s in PRIVATE BETA. If you happen to be rebellious and sign up anyway, do send us any comments/thoughts on the app.
This is a draft post I’m writing for a startup blog. I’d love feedback…
We live in a technology world dominated by ‘lean startups’, ‘fast failures’, and ‘minimum viable products’. It’s a consumer-driven landscape that puts a premium on launching quickly and iterating on user feedback. A valid approach, to be sure, but not all businesses have these luxuries. Especially in the B2B world, startups are often working in stodgy old industries that have significant barriers to entry.
So what happens when the business you decide to build runs into gatekeepers and incumbents? When we launched Plaid a year ago, we set out to revolutionize the finance industry. One of the biggest barriers to creating innovative finance applications is that the transaction data and data processing infrastructure is 30 years old. We’re building a set of infrastructure tools to fix this - and that means dealing with a lot of gatekeepers. For us, it’s banks and credit card issuers - the epitome of a tech dinosaur.
Startups aren’t in the business of waiting, but often times that’s what dealing with incumbents requires. That said, there are definite ways to add value and speed up the decision-making process. In our case - we made it very simple for banks and card issuers to say yes. First, we built an innovative and robust technology platform that required banks to do absolutely no work. Then we sold it - we got applications to integrate our tools and built a userbase that was begging for access to their banking data. All the banks had to do was give the go-ahead - and they did just that.
Building revolutionary companies often means you’re working in industries that have had very little historical innovation - and that often means gatekeepers, incumbents, and regulations. With these barriers though, comes the opportunity to have a huge impact and build game-changing technologies where they are needed most. With the right mix of determination and innovation, it’s these industries dominated by dinosaurs that can be the most rewarding.
Every now and again, someone I know goes through a startup job search process. When this person is particularly impressive (and a particularly good friend), they can be of incredible value. They have a constant reason to be meeting with people, learning about their businesses - and if they are very often effective in making new friends & connections. On two such occasions in the past six months, friends who were job searching have helped me with new clients and/or high-value connections. Now when friends ask for advice on finding their next gig, it’s exciting - and these are meetings I always want to take.
The term ‘processor’ is often used loosely when referring to card-linked transactions, and can reference most players in the value chain. Here I’ve attempted to explain a bit
The Players
(0) Customer and Merchant (not discussed)
(1) Merchant Point of Sale (POS)
(2) Payment Gateway
(3) Payment Processor
(4) Network/Association/Interchange
(5) Card Issuer (Customer Bank/Acquirer)
(6) Merchant Bank (Merchant Acquirer)
The card payment landscape is difficult to explain - especially so as the large players have moved full-stack over the past 10 years. First Data and WorldPay are traditional processors, but now have strong gateways. Chase is a traditional card issuer, but their Paymentech division is also a gateway & processor. Wells Fargo is also now a processor (and has nabbed Stripe as a client). Visa and MasterCard have also become consumer card issuers. POS and Gateways are often integrated. First Data even makes cards - including the AmEx Centurion.
The Basic Steps for a Transaction
(1) A customer completes a transaction at the merchant POS. POS system then passes the transaction, card, and merchant bank info to the Gateway
(2) The Payment Gateway collects transaction, card, and merchant data from the Gateway and passes it securely to the linked Payment Processor
(3) The Payment Processor collects the Gateway data and identifies the correct Network/Association based on the card type. Processor then routes all the transaction data to the Network.
(4) The Network collects the transaction information and verifies the available balance with the Card Issuer*. In addition to the balance check, the network performs a security check to ensure the card is within normal spending patterns. If the transaction is approved by Card Issuer and passes the security check, the Network passes an affirmative response upstream to the POS and downstream to Card Issuer**. During Settlement***, network collects transaction amount from Card Issuer account and passes it to the Merchant Account.
(5) The Card Issuer is responsible for checking the available balance and passing the verified amount to the Network during settlement
(6) The Merchant Bank receives the value of the transactions less the fees deducted by the Gateway, Processor, and Network.
Player Details
(1) The Merchant POS is the in-store scanner or shopping cart. Often they will help to do the initial collection of payment data. Online examples include Shopify, Magento, Drupal, and Big Platform. The Brick and Mortar POS landscape is dominated by NCR, IBM, HP, and Verifone - and Square is quickly emerging. For the most part, merchants hold an ‘Approved Merchant Account (Token)’ however many e-commerce platforms are now providing this as a service. Fees are usually based on a monthly fixed cost, a per-transaction fee, and an overall percent of transaction fee. Generally the POS (or sometimes Gateway) charges the merchant a single fee that covers all the downstream costs.
(2) The payment gateway is a secure connection between a POS and Processor. Historically, processor connections required such high security that it was not economical for a POS or merchant to implement themselves. Of late, these costs have come down and we now see the integration of POS, Gateways, and Processors. Examples of e-commerce gateways include Authorize.net, Paypal, Stripe, and Braintree. Verisign, CICS (IBM), and Authorize.net are the dominant in-store players.
(3) Payment Processors are responsible for collecting and routing data from the gateway to the Network. The correct Network for each transaction is identified based on the first and last card numbers (did you know 10 of the 16 card numbers are non-unique and not considered personally identifiable information?). The biggest players in processing are First Data and TSYS, followed by WorldPay, Chase Paymentech, and Wells Fargo.
(4) The Networks (or Associations or Interchanges) do the real work. They interface with the Processors to collect transaction, customer, and merchant info; the Card Issuers to authorize purchases and collect payments; and Merchant Banks to pass settled payments. As such, they have the highest fees. Visa, MasterCard, American Express, and Discover are the largest Networks.
(5) The Card Issuers are the consumer-facing element of the equation - they issue consumer cards, collect monthly payments, and handle customer service. While they rarely charge a transaction fee, they make money from consumer lending, annual fees, and late fees. The largest US issuers are American Express*, Discover*, Chase, Citi, Bank of America, Wells Fargo, and Capital One.
(6) The Merchant Bank simply accepts transactions and deals with disputes (but that is a different post).
Notes
*The Network and Card Issuer are a single entity in the case of American Express and Discover. This is called a ‘Closed-Loop’ transaction. Transactions that use the Visa or MC Networks are considered ‘Open Loop’.
**In (4), once the transaction is approved, an affirmative message is passed via the Network, Processor, and Gateway to the Merchant POS. If a transaction is declined, a similar message is passed and the POS after which the entire process is severed and no settlement occurs.
***Settlement (as referenced here) is actually a three-step process. First is Authorization, where a customer is approved for a purchase. Second is Capture, which occurs when the merchant passes a batch of authorized transactions to the Network (often each night). Third is Settlement, when the captured transactions are actually pulled from customer accounts and moved to merchant accounts. Those $0.07 charges that appear in your ‘pending transactions’ are the authorization charges - they are subsequently cancelled and replaced once the final transaction amount has been captured.
Somehow, nobody has made a functional iPhone email application yet. iOS Mail was hopeless, Sparrow was close (now dying a slow death), Gmail 1.0 was worthless.
I was excited about Gmail 2.0 - push notifications, email alias support, a pretty new interface, and support for some powerful features (undo send, etc.). After using it for an hour, it replaced sparrow on my home screen.
Unfortunately, I jumped the gun. With more use, it feels like a bunch of pretty pieces stitched together with no overall thought to UX. The archive button half-overlaps the star so removing emails from the inbox becomes an exercise in precise tapping. There’s no way to switch recipients easily - moving from to/cc/bcc requires manually typing in a full email address. The address book sync is slow - so much so that it often freezes when typing a name. And then the small annoyances - it doesn’t port your signature, doesn’t auto-load messages to the app (even though it sends notifications), settings are tough to manage.
But it was fast, and it worked so I was ready to over look all these…
Then it happened. Double-send. On an email that went to all my investors.
Then again the next day on an email to my co-founder. And I started getting double-sends from friends and advisors who also used the app. Somehow there have been few public complaints about this bug (though you wouldn’t notice you’re double-sending unless you cc’ed yourself).
Ah well, here’s to waiting for mailbox…
Update: Apparently this is a known issue.
A medeval version of Notorious BIG’s ‘Big Poppa’:
To all the wenches in the tavern with aesthetics and elegance,
Please allowest me to intertwine these dactylic cleaning mechanisms in your netherregions.
Who harmony creates and speaks innuendically with all the trollops?
The rear of the tavern imbibing upon port is where you may encounter my presence.
The rear of the tavern, wooing wenches with a plethora of apprentices flanking.
Many inquires I make, fine herbs I imbue, lute songs I enjoy,
But oh Zeus, I cannot retire.
For one of the trollops I must enchant.
Fornicate with, yet tallest nobody, whyfore?
Why cause questions of my morality for such a lighthearted ruckus.
I haveth much greater execution than Craig, and in the hay-filled sack,
Trust, wench. I haveth the power to create bread and fish for the beggars.
One needeth not hoard, for I have a plethora of acquaintances with chariots.
Pence and shillings, true men of wealth.
Climbeth aboard my steed with me, inviteth your friends to board their chariots
For I haveth herbs a-plenty.
I enjoyest when thou callest me Large Patriarch.
Elevate your hands if thouest enjoyeth victorious game-playing.
Original:
To all the ladies in the place with style and grace
Allow me to lace these lyrical douches in your bushes
Who rock grooves and make moves with all the mommies?
The back of the club sipping Moet is where you’ll find me
The back of the club, macking hoes, my crew’s behind me
Mad question asking, blunt passing, music blasting
But I just can’t quit
Cause one of these honies Biggie gots to creep with
Sleep with, keep the ep a secret, why not?
Why blow up my spot cause we both got hot?
Now check it: I got more mack than Craig and in the bed
Believe me sweetie, I got enough to feed the needy
No need to be greedy, I got mad friends with Benzes
C-notes by the layers, true fucking players
Jump in the Rover and come over, tell your friends jump in the GS3
I got the chronic by the tree
I love it when you call me big pop-pa
Throw your hands in the air, if you’s a true player
Hello. Its louis here. I’m clacking this to you on my phone in my dressing room here at studio 8H, right in 30 rockefeller center, in Manhattan, new york city, new york, america, world, current snapshot of all existence everywhere.
Tonight I’m hosting Saturday Night Live, something I zero ever in my life saw happening to me. And yet here it is completely most probably happening (I mean, ANYTHING could NOT happen. So we’ll see).
I’ve been working here all week with the cast, crew, producers and writers of SNL, and with Lorne Michaels. Such a great and talented group of people.
And here we are in the middle of New York City, which was just slammed by a hurricane, leaving behind so much trouble, so much difficulty and trauma, which everyone here is still dealing with every day.
Last night we shot some pre-tape segments in greenwich Village, which was pitch black dark for blocks and blocks, as it has been for a week now.
Its pretty impossible to describe walking through these city streets in total darkness. It can’t even be called a trip through time, because as long as new york has lived, its been lit. By electricity, gas lamps, candlelight, kerosene. But this was pitch black, street after street, corner round corner. And for me, the village being the very place that made me into a comedian and a man, to walk through the heart of it and feel like, in a way, it was dead. I can’t tell you how that felt. And you also had a palpable sense that inside each dark window was a family or a student or an artist or an old woman living alone, just being int he dark and waiting for the day to come back. Like we were all having one big sleep over, but not so much fun as that.
This is how a lot of the city is still. I know people in queens, brooklyn, Staten Island, new jersey, all over, are not normal yet. And not normal is hard.
And here at 30 rock, these folks are working so hard this week. There are kids in the studio every day, because members of the crew and staff had to bring them to work. Many people are sharing lodging. Everyone is tired. But there’s this feeling here that we’ve got to put on a great show. I’m sure it feels like that here every week. But wow. I feel really lucky to be sharing this time with these particular good folks here at SNL.
In about 5 hours we’ll be going on the air. I’ll do a monologue. And we’ll show you some sketches that we wrote and try to make you laugh. I’m gonna look really dumb in some of this stuff. But I don’t care. Its awfully worth it. And I’m really excited.
Anyway. I just wanted to let you know. If you watch the show tonight, when Don Pardo says my name and you see me walking out, all the shit in this email is what ill be thinking. I’m a pretty lucky guy. I hope you enjoy the show.
Thanks.
Louis C.K.
Live. From new york. Its saturday night
A medieval translation of Jay-Z’s 99 Problems.
If thou’st presented with female conundrums, I doth not envieth thou child.
For I have one less a hundred conundrums, though a wench be not one.
I haveth the sherrif’s men searching for my quivers bows,
Foes who desireth my final rest occurs in a sealed tomb.
The bard critiques enumerate me as ‘Galleons, Pence, Trollops’.
Yet I’m from the Shire (lunatic). From whence do those assertions stem?
If thou was’t reared with perforations in thou’st turnshoes,
Thou rejoyeces’t near the moment thou procures’t many sovereign.
Dismiss the naysayers, for thou can’st kiss the entirety of my netherregions.
If thou not enjoyes’t my bardly musings, thou may increseth the speed by which time passes until the fin.
They at the music box haves’t pause with me if I neglect their engagements,
Yet they nary include my cansons, and thus I cares’t not.
The recanters ascribe to utilize my tanned hindquarters,
Such that shopkeeps may purchase more advertisements. Fornicators!
I knowes’t not how they percevies’t my persona,
Nor comprehend the intellectual prow ice that I haveth.
For I hath grown from burlap to satin, fellows. I am not a serf!
I haveth one less a hundred conundrums, though a wench be not one. Attack me!
Original:
If you’re having girl problems I feel bad for you, son
I’ve got 99 problems, but a bitch ain’t one
I’ve got the Rap Patrol on the gat patrol
Foes that wanna make sure my casket’s closed
Rap critics that say he’s “Money, Cash, Hoes”
I’m from the hood stupid, what type of facts are those?
If you grew up with holes in your zapatos
You’d celebrate the minute you was having dough
I’m like fuck critics, you can kiss my whole asshole
If you don’t like my lyrics, you can press fast forward
Got beef with radio if I don’t play they show
They don’t play my hits, well I don’t give a shit, so
Rap mags try and use my black ass
So advertisers can give em more cash for ads, fuckers!
I don’t know what you take me as
Or understand the intelligence that Jay-Z has
I’m from rags to riches, niggas I ain’t dumb
I got 99 problems, but a bitch ain’t one, hit me!
From Ben Horowitz:
As CEO, there will be many times when you feel like quitting. I have seen CEOs try to cope with the stress by drinking heavily, checking out, and even quitting. In each case, the CEO has a marvelous rationalization why it was OK for him to punk out or quit, but none them will ever be great CEOs. Great CEOs face the pain. They deal with the sleepless nights, the cold sweat, and what my friend the great Alfred Chuang (legendary founder and CEO of BEA Systems) calls “the torture.” Whenever I meet a successful CEO, I ask them how they did it. Mediocre CEOs point to their brilliant strategic moves or their intuitive business sense or a variety of other self-congratulatory explanations. The great CEOs tend to be remarkably consistent in their answers. They all say: “I didn’t quit.”
A longer version is here.
“You do not need a password if you do not log out. Only ask for things you need.”
-Diego Zambrano, Bondsy
The complexity of signing up for many mobile apps astounds me - I noticed again today trying out Kuapay. It required my ‘Name as it Appears on Card’, email, password (with a capital and number), email click through authentication, pin creation, and pin input before I got to the application. All that, and I still had to enter my credit card information before I could use it.
In this case, Kulpay is a mobile payments app - so I appreciate the security - but the overall signup process is incredibly difficult. This seems to be the case for more apps I’ve seen of late - trading perceived security (because it is only that) for signup flow. I wonder what will win long-term: I suspect simplicity.
Over the past few weeks, there have been a number of posts about feature decoupling (unbundling) in consumer applications - in part driven by the difference in mobile vs. web consumption behavior. Whereas a feature may not justify a full consumption experience on the web, they can be treated as products on mobile - where attention spans are shorter and efficiency is at a premium.
Of particular interest to me is the possibility of decoupling discovery from a larger product on mobile. History has shown that decoupled recommendation systems have difficulty standing alone on the web. The core question is whether recommendations alone are valuable on mobile
The use case for place recommendations in cities is clear - I’m here, I want to do X - where do I do that? This is the premise of 4sq Explore, Ness, and many others (remember Urbanspoon’s shaker?). The looking at app usage though, the common use case amongst all of them is discovery - recommendations are second. And the most common complaint is that the discovery quality stinks. With the sheer number of app downloads (»50M across the three mentioned), I think the use case for decoupled discovery on mobile is becoming as clear as the case against decoupled recommendations online. And now the question of quality & personalization is coming to the forefront.
In every startup (and probably every job), there are a set of invisible hurdles. “We can’t do X until Y happens.” In most cases, Y is something that appears out of your control - you’re waiting on an input, a permission, or a funding round. These hurdles cause us to play mental games - “If we’re waiting for Y, then it’s pointless to do A, B, and C input to task X.” In most cases though, tasks A, B, C and often X can be accomplished without the completion of the hurdle Y - the hurdle is an invisible one. Funding is not necessarily a prerequisite for hiring. Access to an API is not a prerequisite for building. Hearing from one party is not a prerequisite for negotiating with the next. Even if the hurdle turns into a concrete one, completing the prior steps will not only make execution on the final task faster, but also will inform how you approach and speed up the hurdle itself.
Working for someone is not a difficult task. Have a boss, know the outcome. GET ORDERS, COMPLETE ORDERS … do 5% extra and get a big bonus. Maybe hours suck, bosses suck, coworkers suck, clients suck, pay sucks - turn them off. It’s a game to get recognized for your 5%. GET ORDERS, COMPLETE ORDERS … pretty simple. You know there’s more, the daydreams creep in. New job? NO. Promotion? DEFINITELY NO. Quit? BORING. More daydreams … they’re getting in the way of COMPLETE ORDERS … but completing orders is getting easier so more time for daydreams. And now they are getting consistent - it’s the same subject, the same escape. You see the button. START.
Once you press it, you can’t go back. It’s a rabbit hole, a blue pill, a new reality. Maybe you succeed, well done. If fail - go back to the boss. GET ORDERS, COMPLETE ORDERS. But you’ve been there before, the daydreams repeat, you’ve already turned off the hours, bosses, coworkers, and clients. Now it’s only pay: More orders = more pay. More pay = more runway. Efficient work = more time for daydreams. Daydreams + runway = START.
And then it happens again. It’s an addiction - not being the boss, not giving the orders - no orders, no ground, no reality. It’s you, totally and completely. It’s exhilarating. And you can’t live otherwise.
Push the button.
START.
From Stephen Cohen:
We tend to massively underestimate the compounding returns of intelligence. As humans, we need to solve big problems. If you graduate Stanford at 22 and Google recruits you, you’ll work a 9-to-5. It’s probably more like an 11-to-3 in terms of hard work. They’ll pay well. It’s relaxing. But what they are actually doing is paying you to accept a much lower intellectual growth rate. When you recognize that intelligence is compounding, the cost of that missing long-term compounding is enormous. They’re not giving you the best opportunity of your life. Then a scary thing can happen: You might realize one day that you’ve lost your competitive edge. You won’t be the best anymore. You won’t be able to fall in love with new stuff. Things are cushy where you are. You get complacent and stall. So, run your prospective engineering hires through that narrative. Then show them the alternative: working at your startup.
A longer version is here.
One of my favorite analogies for early-stage companies is desk building. As a startup grows, it is building desks for new employees - quite often literally.
The reference this statement most often accompanies is hours. It is tough to demand the same hours from those sitting behind the desk as those that built it - basically, later employees almost never work as hard as the founders. I find this generally true, though excepted with some junior/young employees - those with the most to prove are the ones willing to work the hardest. For founders, building desks is a rewarding yet risky process - the empire is expanding, but you’re now responsible for the livelihood of (at least) one more person. It is the rare but exciting case when these people are as driven to build the next desk as you were to build theirs.
One of my favorite metaphors of late has been the ‘flywheel of innovation.’ Not sure where I heard it first, but Kal Vepuri uses this frequently when talking about startup metrics. The basic idea is that innovation and technology building functions like a flywheel. It takes great effort to get a flywheel turning, but it is tough to slow down once it has momentum. Similarly, startup technology building takes significant up-front effort but should reach sustainability 2-3 months into the process. Often it is the late nights of the early founders that start this technology flywheel - creating version one in just a few weeks. While theoretically the hours slow down a bit, the speed of technology building should not - as money is raised, new employees are hired and building continues at-speed (though scaling is obviously different).
Interesting metaphor for a monday morning.
When the foursquare redesign came out, I didn’t love it. But I could never really put my finger on why. Sure, there were the minor points - checking in is significantly more difficult, the simple check-in without comment or photo was undervalued (in terms of screen space at least), and the friend filters largely disappeared. But there were redeeming qualities - the stream was better, explore was awesome, and everything was … pretty.
One month later, I’m starting to realize the effect that I couldn’t name - New4sq switches users from content creators to curators and simple consumers. Fred Wilson has posted many times on the 1-10-89 breakdown between content creators - curators - and consumers - and while I think this ratio is a bit off, I largely agree with the concept. Across all my networks (primarily twitter, tumblr, instagram, and foursquare), I almost always fall into the content creator category - it’s the most fun for me.
The redesign changed my category, and I suspect it did so for many others. Prior to #allnew4sq, the service had something like 10M users actively checking-in. I would guess this number has dropped, but the number of curators has increased - liking things is now fun and social. I enjoy the newsfeed aspect - and who knows, maybe more curation increases monetization in the long run. But for me now, I’m losing interest. Maybe it’s temporarily or I’m an outlier, but disincentive content creation makes it way less fun.
The idea of a theory-based angel investor is an oxymoron. Angels are in the business of writing small checks out of small funds - certainly not enough to move markets. This is especially true for younger investors trying to build a seed-stage reputation - they have to follow the deals. Success (or at least the removal of failures from a website) might increase demand and allow for a more defined scope, but this isn’t theory-driven. Large funds often define the theories, of which KPCB and USV are some of the most public. While angels may blog their favorite verticals or post ideas they’d like to fund, voting with money is still for funds.
The Dunbar number is an approximation of the maximum group size in which an individual can remember and maintain relationships - generally between 140-180. Applied to social networks, the Dunbar number roughly matches the number of friends/followers that a user can entertain and derive value - upward variation washes out aggregate value.
Using twitter as an example, following/follower counts are a measure of group size. I find that most users fall into three categories:
For the upper limit of Frienders (2) and all Socializers/Publicists (3), the Dunbar number is exceeded and alternate measures must be taken to maintain value (both for themselves and their followers). For Facebook (avg US friend count >300), this is accomplished with a relevance filter (Newsfeed). Path caps your friends at 150. Twitter does neither natively, causing a problem as average tweet quality degrades (due to autotweets, publicists, and bots). Continued individual value from twitter requires increased contextual & relevancy filtering, either native or external.
There’s been some recent activity around DuckDuckGo’s traffic hockey-stick this week. Commendable growth of a fantastic team building a great product for a dedicated user group. While other draws exist, the core of this group are users who care deeply about protecting their search data.
I am not one of them. I find value in having services tailored to my history and preferences. I see noticeable user-side speed differences in my well-documented chrome browser with google vs. a brand-new browser with DDG - I’m faster because it knows me. As much as I dislike/ignore marketing, I prefer getting tailored ads for carabiners & running shoes vs. generalist sidebars. Advertising sucks and data can fix this - I think personal tailoring is the next wave. Until then I’ll trade you browsing data for a better UX. As long as you promise to fix the ads soon…
Since graduating college in 2010, I’ve spent the majority of my time working in private equity & technology consulting with Bain. Aside from a few months with a startup and a more extended period with a seed-stage investment fund (as well as a month as a bartender), consulting has been my only experience in the workplace. And it’s been a pretty fantastic learning opportunity. From gaining a deep understanding of due diligence processes to simply understanding the way I work most effectively, I’ve gained a huge amount - and the majority of this was due directly to my colleagues and mentors. I’m a believer in choosing based on people, and Bain couldn’t have been more perfect in this respect.
One of the other lessons I learned was that I am not a consultant. I enjoy the process of building things far too much to be content simply helping others optimize their own empires. Consulting is ultimately a recommendation business - and one in which execution (and the underlying responsibility) is often handed off before completion.
In terms of my next stop, I’m going to work with TechStars in NYC during their spring cohort. It’s a fantastic group with a great reputation and I couldn’t be more excited about the opportunity. The first two weeks have been fantastic, and I’m excited to continue working with the teams and the fund over the coming months.
Over the past 5 months, I’ve been making an active effort to post more on this blog. I even went through a >20-day period in which I submitted a post each day. When I first launched, I assumed that nobody was reading - and I was (and still am) largely right. Comments were thus an unnecessary hassle - time spent policing spam starts as a non-negligible constant with value-added comments close to zero, and both ramp with a similar slope. WIth this in mind, I launched as a comment-less blog. It was just my musings, and anyone who wanted to comment had to email or guest-post.
In light of a number of recent emails & personal comments, I’ve been rethinking my view on comments. While the median value may be low, especially as few care to post, the average value is higher than the cost of policing (especially as policing tools have gotten better). Others have spoken at length on this topic, even as early as 2003, and I largely agree with the value of an open community.
From now on, comments are turned on. I will do my best to police and respond as appropriate, so please speak your minds.
Over the past two years, I’ve spent significant time visiting campuses and recruiting on behalf of my consulting company (Bain). While I enjoy these trips and meeting everyone, I often find myself answering the same questions many times over, particularly in reference to case interviews. As the one outlier of the consulting interview process (compared to any other field), case interviews are seen as a black box, yet the holy grail to getting a job. This is certainly not so, and upon practice I found most cases to be relatively formulaic - as I will discuss here, I used the same framework for every interview I had.
Before I take my final step out of the consulting world (to be discussed later), I wanted to leave behind my take on case interviews. While far from comprehensive, I wanted to share how I approached the questions and what my sticking points were. This is my attempt to avoid answering these questions in a future - please feel free to plagiarize, copy, and generally steal at-will.
Consulting interviews are focused on answering two questions: 1- Are you smart? 2- Do I (and will clients) like you? Cases are designed to answer the more difficult first question, and usually take up 70-90% of interview time. These types of interviews generally (95% of the time) follow a highly-structured cadence that both interviewers and interviewees look for:
The key to succeeding in the case interview is to build a highly-structured approach to answering the question at hand - the more structured your thinking, the easier to follow, and the better you will do. To build an effective structure, one must develop 2-4 focal areas that are mutually exclusive, yet comprehensively exhaustive (MECE). As I said previously, I did this by using some combination of the exact same four branches (sometimes omitting one) in every interview, and tailoring the sub-categories to the given question. I’ve listed these branches below, as well as some exemplary sub-bullets.
Market
Market size
Competition
Market stage & lifecycle
Regulation
Product
Product mix and product line profitability
Pricing
Differentiation & substitutability
Bundling & sales strategies
Innovation/R&D
Company - this one is most malleable to add points not applicable elsewhere
Leadership, culture & history
Ability to win in marketplace
Growth strategies & potential acquisitions
Financing - comes in two flavors
Profitability (use in profitability cases)
Internal financing (use only if you understand - very valuable in PE cases)
As I mentioned previously, these are only exemplary sub-topics within each category - the key is to tailor the sub-topics to the question at hand. I usually chose the three highest-priority categories, wrote 2-3 sub-bullets and then just summarized the rest from memory.
Once you get the structure is down and run through the cadence, the best way to differentiate is by being creative - come up with a new product bundling strategy, draw from personal experiences & stories, suggest an interesting acquisition target. An interviewer is unlikely to forget you if you can say something that is intelligent, on-point, and totally off-the-wall.
My only other recommendation is repetition - do lots of cases. Get your friends to interview you, use the prompts in Case in Point or Vault, and practice writing out structures & doing market sizings.
Good luck!
Part II: How we find new music.
I wrote recently about how music listening and consumption has changed, today my focus is on how we choose the music that we do consume. It’s no secret that I’m a huge music lover - being raised by musicians does that - but like any 20-something, I am easily bored when what I’m listening to starts getting repetitive. While there are some favorites I’ll never let go, I’m always on the search for new (or new to me), different artists, albums, and styles - and I’m often willing to expend a meaningful chunk of what freetime I have looking for it.
Within the universe of listeners, there exists a continuum between those who actively seek out new music and commit time to doing so (some call these “crate diggers” and they function similarly to Gladwell’s mavens) and those who are content to have music simply delivered to them (“radio listeners”). Jon Irwin of Rhapsody describes this as lean back vs. lean forward consumption. Within the digital realm, this continuum starts with those who spend time reading about music on websites/blogs (Pitchfork, PMA, and many more), followed by music discovery players (MOG, HypeMachine), then social music sites (Spotify, Rdio) and finally tailored internet radio (Rhapsody, Pandora). Of course, the example sites have some overlap across the spectrum, but I think they roughly move from high-effort/extremely new music downwards toward fully curated consumption. A similar spectrum exists outside the digital realm starting with live performances, passing through music publications/articles, friend recommendations, and ending with broadcast radio & TV.
As I mentioned previously, many of these services extend across the continuum I described. In particular, I find that Turntable.fm (my favorite player) is unique in the way it plays across the value chain. While its core is inherently social - users play music they think others will like and get points for doing so - its open, ubiquitous nature extends social circles that many services often limit to Twitter / Facebook connections to an entire sphere of musically like-minded individuals. Further, it’s addictive - TTFM is fundamentally built as a game. Because of this, it brings all types of music discoverers together in a context that those lean-forward users can DJ, play the game, and share new tracks with the world and the leaners-back can simply listen to an awesomely curated playlist. What’s more, once turntable has perfected their affiliate music sales/download model, even radio listeners will be able to easily and efficiently collect their favorite new tracks.
How the model evolves remains to be seen - currently there are links to Amazon & iTunes for music downloads and last.fm, spottily, & rdio for subscription track-adding (along with soundcloud/youtube in the queue for some users). For those willing to fiddle with settings, there is the ability to export song lists and enable/disable songkick integration. If you’re hacker-minded and willing to do some work, the turntableplus extension is pretty great - also Turntable Tube, Turntable.fm extended, and Turntable playlist manager are pretty cool. For the international users, TTFM radio is an easy way to circumvent the non-US blockages - no interactive features, but it’s a decent band-aid until international is re-enabled. For those looking for billboard-style lists, ttdashboard.com is a fine resource.
However turntable decides to execute on its affiliate potential, the fact remains that it is one of the more forward-thinking music discovery engines. Across all the solutions mentioned, those that can increase the efficiency and quality of discovery while building a large base of engaged users will have a clear advantage. I think turntable is winning this game in the short-term, but the fact remains that music discovery as a whole is poised to make a big jump in the next few years. Gone are the days of mining through record stores to find the diamond in the rough. We haven’t yet fully capitalized on the power of the web as a music discovery engine, but rest assured the future is coming.
Over the past few months, I’ve been in high connection-building mode. One of my pet peeves, and something that I always try to avoid myself, is offering immaterial connections. In a given conversation, there is always a temptation to imply more knowledge of a subject than one has - when talking about people it usually comes through in describing stronger relationships than actually exist. I used to find myself in that trap often - saying (or more often, implying) that I was closer with someone than our true interactions dictated. From there, it is easy to say “on yeah, you’re doing something similar - you guys should definitely talk” and therein offer (or again, imply) a connection you may not be able to deliver.
Over the past couple years, I’ve made an active effort to stop this and to really press friends & acquaintances when they make such offers - do you really mean what you say, or will you back down if (or more likely, when) I ask. This isn’t a personal attack, but it’s just level-setting my assumptions (and hopefully encouraging them not to offer more than they can deliver).
From a personal perspective, I’ve also worked to be more clear in the descriptions of my relationships and also to worry less about the impact my introductions will have on me. While I make it clear to the introductee that their actions will reflect directly on me, I also word my emails/calls such that it is clear the introducer has the axe - if the latter doesn’t want to talk to the person I’ve introduced, or has totally forgotten who the hell I am, than so be it!
I’ve written a number of posts highlighting the bands that I’m listening to, but I’ve recently been thinking more about how I listen to music. As such, I’m writing a couple posts on the business & distribution side of music. My first two topics are below, along with post 1 - I may follow these up with more depending on interest.
Part I: How we listen to music.
Part II: How we find new music.
Part I: How we listen to music.
The way that consumers listen to music has drastically changed over the past 10 years - since the advent of Napster in 1999 and Listen.com (now Rhapsody) in 2001, the stage has been set for a drastic shift in how music is consumed. This shift includes changes from analog to digital, albums to singles, bands to artists, physical to cloud ownership, and label-driven to third-party distribution to name a few.
When thinking about the ways in which we listen to music, the most obvious change has been the digital shift. IFPI reports that 2011 worldwide digital music revenues total ~$5.2B, and account for >50% of US record company revenues (32% globally). While the vast majority of this revenue came from download sales (3.6B downloads in 2011), subscription services account for a meaningful (13M 2011 subs) and growing (65% YoY growth from 2010) number of listeners. Key components of this growth were Spotify’s US expansion and consistent growth from other industry players (Rhapsody passed 1M paid users), along with the Facebook integration of many services.
Outside of the digital realm, Arbitron reports that >70% of Americans are weekly radio listeners, averaging >5 hours of listening time per week. Of non-digital radio listening, broadcast radio accounts for ~95% of listening time. As a testament to the remaining impact of broadcast radio, the most highly correlated driver of both overall and iTunes music sales are radio & TV airtime. While the formats that this airtime is composed of have undoubtedly shifted in the past 10 years (see music video popularity as one example), the fundamental drivers are pretty similar.
When thinking about the next steps in music, the current focus on increased mobility and decoupled ownership/listening will continue. As mobile devices & networks continue to rapidly improve in terms of connectivity and processing power, so too will services that cater to higher-music availability and simpler discovery. While this is the topic of my next post, we can all agree that finding new music (outside of mainstream radio) is a time-consuming process. Collecting it and making it available on-demand is even worse. As a listener who has encountered this time-sink far too much, I would gladly pay for services that automate much of this process for me - I may never assume that a service can find better music than i can on my own, but I’m all for them trying and, importantly, making any new music I do find immediately available to me whenever & wherever I want to listen.
It’s been a while since I’ve done one of these. This week, I got a blast from 2009 when a friend started playing Coconut Records. It definitely fit the mood at the time, and ‘West Coast’ got stuck in my head. Great listen if you’ve missed it.
Also, Jack White’s new single “Love Interruption” is pretty great. The background clarinet gives it this haunting style that gets stuck in your head. Love the prose from PrettyMuchAmazing:
…The trio weaves a lovely track for White and duettist Ruby Amanfu. Yeah, it should have been Meg, but bitching is for ingrates. “Love Interruption” is as good as White gets…
Ok, so I’ve missed blogging for a few weeks - busy with some awesome projects that I’ll hopefully share in the next few weeks.
Over the past month, I’ve been thinking a lot about the way data is connected and how companies are starting to bridge the gap between browsing/online data and non-networked purchases. While it’s a problem that is inherently obvious, the first paragraph of this article does a fantastic job articulating the issue.
There is a clear divide between that data that is generated online based on browsing, social everything, online purchases, etc. and the goings-on within physical stores. There have been a number of services that are trying to take the next step to bridge the gap (specifically location-based services, a-la foursquare, Groupon Now, Loopt, etc…) but none of them have yet targeted an entirely data-driven approach. For as much talk goes on about “big data” (I prefer “data monetization”), the monetary return on data simply isn’t there yet - my hypothesis is that the full integration of purchase data is the final frontier in this process.
While CardSpring seems like it is trying to take this step, my biggest hangup is that the incentive structure is backwards. As a user, I don’t like advertising. Deals are fine (if they are truly a convenience), but I’m not willing to trade my data for more ads. While the ultimate consumer goal of the data monetization industry is to make advertising better & sell more products, the average person has little desire to give up his/her data in many of the current models. If my purchase data is the final frontier, I want advertisers to pay big (via data collection companies, of course) - give me something I want and maybe I’ll consider letting you spy on me in exchange.
I didn’t like my last post on resolutions. So I’m rewriting it here.
In 2012, I’m going to:
Think more. Write less. Post better. In reading my posts, I realize I’m too verbose and sometimes write about crap. To fix this I’m not going to write while tired (ideation is fine) and I’m going to be more selective about what I post publically.
Sleep more. Be less tired. Sleep less. If I sleep consistently around 5 hours, I’m at my best. If I spike up on weekends and down on weekdays, I’m more tired than if I stay flat. Be more consistent.
Work more on what I like. Work less on what I don’t like. And most of all, figure out a way to integrate ‘work’ work with “work” work.
Code more, code better. There were too many coding resolution meme’s this year. Just go here. Also, learn more than just javascript.
Eat better. Eat more consistently. Drink less. Self explanatory.
Since I decided to take a shot at more frequent blogging in late November, I’ve written 28 posts, averaging ~6 per week. I’ve written about a number of topics - primarily technology, but also on finance, medicine, music, and some more personal matters. The goal of creating a blog was threefold when I decided to create this site. The first was to become a better writer. This hasn’t happened yet, and is something that will only come with more practice - hence writing. The second goal is to be a better communicator - hence writing publicly. You might say that this coincides with the first (and it does to some extent), but I find that good writing and relevant writing are not mutually inclusive. The third goal is to build an online reputation - hence writing publicly about things I care about. In technology-related fields, LinkedIn has become the resume and Twitter the business card. Having an online presence is now not encouraged, but required.
I’ve also found that there are two types of people that tend to read this blog. The first (and largest) set is relatively quiet - they are the ones who will occasionally send a thought-provoking email or start a conversation based on something that I have written. It is also these type of people (and the ideas that spending time with them brings) that are often inspiration for new writings. The second type of people are less constructive, but equally insightful. These are the ones that tend to be loud about their feedback, often in a mocking manner. I write a blog. I made it public. It’s my content, and I stand behind it. I have thick skin and I expect people to poke fun at me (it’s boring if they don’t). What these people bring out are my inconsistencies, foibles, and (especially) areas where I have been less than humble. These people especially are the ones who let me know if I’m just writing boring personal monologues or something that people care about. To everyone that reads this - I’m extremely happy to have you, whichever side you fall on. Please, continue writing, talking, and making fun of me - and when I turn comments on soon, I hope you won’t be afraid to do so more publicly.
I like mashups - as long as it isn’t too heavy on the dubstep, I’ll listen to most anything that is well-mixed. And because I like mashups, I’m interested in the economics that incents DJ’s to produce great work. Because not much innovation in mashup economics has come since GirlTalk, I wanted to put down a few (albeit primitive) ideas for better incentivizing the art form.
Currently, mashup DJ’s are primarily paid through live performances and the occasional album sale, though the latter is tricky as it breaks copyright laws. There were huge debates when GirlTalk was growing in popularity around the legality of profiting through sampling others’ work. In hip-hop (and elsewhere), labels required that you get an artists’ express permission to sample their tracks - a practice that often leads to revenue-sharing agreements between artists. In the mashup world, this doesn’t work for two reasons - first, mashups are 100% dependent on the work of others (and getting permission would take too much time); second, mashups don’t make much money right now. Creating a great mashup is fundamentally an art and a skill whose medium is pop - simply because the producers draw from others’ art to do so does not mean they shouldn’t be compensated.
Affiliate compensation
Many artists complain when their music is sampled, claiming copyright infringement. I take the opposite viewpoint - there are many artists that I may never have loved as much as I do if I had not come across their mashed works (Ellie Goulding is one example). My biggest problem with this method of music discovery is poorly documented release tracks - DJ’s have little incentive to cite their sources. Thus, one option for mashup compensation is affiliate marketing-style returns. In my opinion, this can extend both to consumers (like me) and to other DJ’s who want to mash similarly - artists could even consider releasing lossless acapela/instrumental tracks to appeal directly to DJ’s.
New releases
As I mentioned, I sometimes find new tracks and artists in mashups. If recording artists were to take a proactive stance towards this practice, they could turn mashups into hype machines for new releases. We have yet to see an artist do a mashup-targeted (pre-)release, but with the rise of non-studio music distribution platforms (turntable.fm, soundcloud, even youtube) I think this is inevitable.
Formalized mashup creation
Reminiscent of the 80’s and 90’s live hip-hop DJ’s, I can foresee the incorporation of mashup artists more formally into performing acts. Xaphoon Jones of Chiddy Bang is one example of this - I’m sure there are others. As mashups become more and more mainstream, studio artists will be more likely to bring them into their work proactively.
Overall, I think the possibles for mashup DJ compensation are real, and will work out naturally over then next few years. I’m excited to see the progression of the art form, and look forward to finding many new (and old) songs & artists through listening.
In my post on Landing Pages yesterday, I spoke about my desire to have more informative, tailored landing pages for pre-alpha/beta companies. Though I was not referring to them in my post, a friend of mine is building a site called Frequentr (personal food & hotel recommendations) that is currently using a LaunchRock landing page. Because comments are not enabled (an upcoming discussion topic), Nick asked if I’d post his response here, so I did.
We recently used Launchrock to quickly create a landing page for Frequentr…one that I think looks pretty good and serves our goals. I’ll start of by saying: Zach’s not wrong. But decisions like ‘should I make a custom landing page or use an ‘off the shelf’ service like Launchrock?’ - and a number of other decisions new companies, tech and otherwise, face early on - aren’t so black & white. There’s no ‘right’ answer.’ There’s only a ‘right for your company’ answer.
I think we can all agree that a custom landing page is objectively better. It’s custom by definition, meaning it should allow for a better representation of your brand. It doesn’t show the branding of an ‘off the shelf’ solution like Launchrock. It allows for more creative expression/demonstration of your product’s value (i.e. longer text, video, illustrations, etc.). And most importantly, you have complete control over the user flow and the information you gather with a custom page.
But is better necessary? Not always. Custom pages take time and (in some cases) money to create. If you can explain your value proposition and hook consumers within the limitations of a service like Launchrock, a custom page isn’t a no-brainer. If you have a non-technical founding team, non-custom is a superior option when considering time & money. And depending on your company’s goals, custom might not be necessary.
In our case, we considered custom vs. ‘off the shelf’ and decided that the latter offered a free solution that accomplished our goals: to provide a quick summary of the value our product will offer to users, collect future user emails, send an automated email response, and allow users to tell their friends about Frequentr on social networks. It’s not perfect. But it gets the job done, and we’d rather spend our time and money on other aspects of the business. Will we keep the current landing page forever? No way. But it’s the right solution for now.
Debate aside, Zach really isn’t arguing that custom pages are a necessity; he’s arguing that landing pages that accurately describe the value of the business to the consumer, or provide a “digestible appetizer that leaves (him) wanting more” are a necessity. He’s right.
So: if a company can accomplish that using an ‘off the shelf’ solution, why not use it?
For more info on Frequentr, you can see their landing page or blog. You can also follow Nick on twitter.
In the past month, I’ve gotten around 10 emails or redirects promoting one startup or another that ask me to check out their ‘launch’ page. Always hungry for new technologies and happy to support the friends that send them, I click through and am directed to an empty page with a logo and maybe a one-line description. I hate this.
Often the ‘launch’ pages of pre-alpha/pre-beta startups are far too simplistic and give me no idea what the company does. When I first signed up for Movenbank and Simple (then BankSimple), it was a tale of two launches. While Moven’s page was pretty, there was only a pithy description. When I searched through to their unlinked blog, they spoke in generalities and appeared unfocused. Simple was clean – not too many pictures and just enough text to let me know what they did, why, and where I could get more info – digestible appetizer that left me wanting more.
Some of the launch pages I’ve seen recently have a one-line description and (maybe) a blog link. They have as much branding for MailChimp or LaunchRock as they do for themselves. Building a page with your own branding, a meaningful description, and some embedded links is simple (and cheap) – and promoting a startup without one seems amateurish. I like you and I like your startup. Give me something I can get excited about!
I had a discussion this week with a friend who is trying to launch a site to share new release tracks. There have been a ton of services out there that try to do this, but I’ve never stuck with one - mostly because they’re focused on blogging/text over streaming music. I’ll post a bit more on OKDJ in a later post, but wanted to share a bit of new music that I’ve been listening to this week. I came across S-Preme (aka Supreme the Artist) on Turntable a few weeks ago, and Popular has been stuck in my head ever since. Not sure how big he will be, but I get the feeling this song is going to have a rise like similar to Chiddy Bang’s ‘Opposite of Adults.’ Check it out…
I’ve written a lot about what I term ‘new retail.’ Today I had an experience that was decidedly the opposite. I grew up in a fantastically artistic family and have always enjoyed painting & drawing. Today I realized my sketch book was full and because I have some downtime and did not want to wait the 24 hours for Amazon to deliver, I decided to take a trip to a local crafts store (iit’s rare that I go into commodity hardgood stores).
I’m not generally one to complain about service experience, and I won’t do it here. However, I was truly surprised at the amount of time my trip took. Aisle descriptions were simple and I knew exactly the book I wanted so I didn’t have to engage any salespeople (I also succumbed to cross-sell and picked up a bit of canvas to work on this week). Until entering the checkout line, everything was smooth.
In line, each customer before me took an average of 6 minutes (there were 4 and I timed the last 3) and left with somewhere between 1 and 3 feet of printed receipts. Many had clipped receipts that had to be typed in manually. Most used credit cards that had to be manually typed in with the total and then wait for approval. I myself had a price check (my canvas rang up as twice its listed price - turns out the store had some internal database error). Though I ultimately completed my purchase, I left thinking I never wanted to come back. While many of the customers were on the older side and appeared used to such slow checkouts, I can’t imagine that this store does well retaining younger or busier customers. I know this store isn’t alone in its processes, I’m just surprised that they have not made significant efforts to streamline and update.
Over the past 2 months, I’ve been reflecting a lot on how location plays a role in day-to-day life in the context of my next steps. Some friends know that I’ve been thinking about this for a while, but it’s been more front-of-mind lately as moving approaches on the horizon. Jobs aside, I wanted to talk briefly about the aspects of cities and the people themselves that appeal to me.
I came to Atlanta for many reasons, the biggest which was proximity to my family. As I’ve written previously, my need for this proximity has recently subsided and I recognize that Atlanta is not an end-state. While I love my friends and co-workers here, the city lacks the robust startup community (and the change focus, engineers, and capital to incent one) that I’m looking for.
In thinking about the next place I want to live, I know I want to be surrounded by smart (and not afraid to show it), energetic, excited people. I’m looking for a strong start-up ecosystem, and a place with real mentors. Until a few weeks ago, I was convinced that Silicon Valley was the only such place, however some people have recently made me reconsider New York as a possibility. Whether through the direct convincings of a good friend and another potential mentor, or simply through getting lost in conversation over a glass of wine, I’m realizing that the people in NYC are pretty incredible. While its startup community can get overshadowed to an outsider by the hubbub of the rest of the city, it is strong, energetic, and (most importantly) rapidly growing. I certainly have not made any decisions (yet), but my experiences of late in New York make it extremely appealing.
I grew up as a very independent person - in thoughts, actions, and ideals. While my family has always been close, we are all similarly introverted and driven - and that’s the way we work best. Since turning 18 and leaving for college, the longest period that I’ve been home has been 8 days. Whether staying at school to working in the lab, living abroad, bumming around with friends, or executing under the pressures of a first job, I’ve lived on the road for most of the past 5 years.
In the last year-and-a-half, my family and I have gone through a darker period. Through the illness and loss of loved ones/friends and the personal struggles of those closest to us, my family has persisted and grown closer than ever. About two years ago, I made the tough choice to move to Atlanta following college in order to stay close to home during this rough time. Though my friends (and future) likely lie in the northeast & west, I put off that proximity for the time being. This was a fantastic decision, and one I would never take back. I often re-evaluated my choice to move south during my bi-weekly car rides home & back over the first few months, and once regretted it. My family is incredible, and being close to them these past 18 months has been special.
Looking forward into the next few years, I realize that I will not stay in the South much longer. My family and I are closer than ever, but the need to be in physical proximity is subsiding. I recognize that my life is better suited in bigger cities (a post that I’m writing right now) and I will make that transition in the near(ish) future. In coming home for Christmas this year, I realize how strong and tight our family has become and I’m struck by what amazing people they all are. Michael, mom, dad - I love you all and am so happy to have you all in my life.
Over the past ~6 months, I’ve been using the Reeder app as a part of my morning routine. Though I have it for both iPhone and iPad, I’m partial to the latter due to its appearance on a larger screen. Upon waking up, I grab my iPad from my nightstand (or in my bed as happens too often), where I left it from reading the night before. After opening Reeder, it’s a simple tap of ‘Refresh’ to pull up the latest from the blogs I follow. The app itself is well-designed and quite easy to use, however a few of its features leave something to be desired.
Adding/removing feeds: The Reeder app pulls feeds directly from a users’ Google Reader account. While this makes for easy conversion, adding/deleting blogs requires exiting the app, opening Google Reader, and modifying therein. A cumbersome process for something that should take 30 seconds or less.
Favorites: Though Reeder has an inbuilt ‘Favorite’ option, this does not link outside the app. The only result of starring a post is to save it for longer on your device. I’m a fan of favorite aggregators (specifically, Stellar.io) and I’d like my Reeder favorites to auto-sync with my Tumblr, Wordpress, and even Twitter/G+ favorites.
Update speed: This may be due to user error, but I sometimes find that posts don’t pull to the app in a useful timeframe. While I can log on to Google Reader and get the most up-to-date versions, my app sometimes takes 30-60 minutes to pull down data.
Overall, Reeder is a fantastic addition to my mornings. After trying other similar products, I can say that this is definitely the best I’ve used. Aside from the favoriting, each of these issues can be resolved with a little patience - and I’m working on that. Now if only I could get bloggers to upload prior to 7AM, I could stay fully up-to-date each morning…
Per my post three weeks ago on what’s coming up, this is my first post on VC fund economics. I realize I’m a bit delayed in posting these, but I’m working on LP economics now and should have that one out shortly.
Venture fund economics can be viewed from two perspectives: that of the fund’s investors and that of the partners. Investors (or LP’s) have a fairly straightforward investment and payout structure involving an up-front commitment, gradual capital calls over 3-5 years, and intermittent distributions over 3-10 years. There are some nuances that make this type of investing quite interesting for the LP’s, but I’ll go more in depth on that in the next post.
From the VC side, there are two forms of compensation: management fees and carry. A reference that some may have come across is “two and twenty,” referring to how many PE shops structure their funds: a 2% annual fee on committed capital and 20% of profits.
Management fees:
The primary way that VC’s fund their day-to-day operations is through charging a fee on all committed capital (inclusive of uncalled capital). This fee generally ranges from 1-3 percent, where small, early-stage funds charge at the top end (typically 2.5%) and larger, growth-stage funds may charge less. The goal of the fee is to support the fund’s salaries and operational costs while the committed capital is being invested. Because the work of investing ramps down over the life of the fund, so do most management fees – often dropping towards to 1% after year 5.
For a $200M fund over 5 years, a standard fee structure of 2.5% per year will net $25M, or $5M per year. Assuming overhead of ~$1.5M (typically composed of admin, a community manager, and office expenses), there is ~$3.5M per year to pay out partners, principals, and associates. With 4-5 partners and maybe 1-2 associates per fund, that leaves significant yet relatively modest salaries for the VC employees – the real money for VC’s comes from carry (or carried interest).
Carry:
Beyond the salary paid via management fees, venture investors receive a percentage of the profits that the fund returns. Typically this amount is 20% of gross profits, assuming the fund clears a specified hurdle rate (not all funds have these). The hurdle rate (usually around 8% IRR), is a minimum amount that must be returned to investors prior to carry being enacted. Hurdle rates are added protection for LP’s to limit low IRR’s on poorly-performing funds.
Let’s assume that the aforementioned fund has a 4x gross return on a 10-year timeframe where fees are 2.5% for years 1-5 and 1.5% for years 6-10. On a total base of $200M, that gives $40M in total management fees, $160M in net investments, and a total return of $640M. After returning the LP’s original investment ($200M), one is left with $440M in profits (which easily clears the 8% IRR bar). Assuming a 20% carry, the VC fund ends up with $88M split between the GP’s. I’m holding off on showing IRR numbers until my later LP post because I need to explain the frequency of capital calls to truly calculate these numbers. Rest assured that with the 4x gross and 2.76x net returns shown here, IRR’s will be in the 25-35% range depending on investment/payout timing.
Note that this analysis excludes any co-investments that the GP’s and other fund employees make – usually 1-5% of committed capital, though it can be substantially higher.
In going through my last few weeks of posts, I realize that I’m a bit behind on my promises to follow-up. I mentioned that I’d been listening to too many mashups lately, largely as a product of Turntable - it’s great work music, and a service that I treat almost as a free version of Spotify/Rdio (also more to come on this…). The Mashup.fm room there is incredible, and a location in which many of the top DJ’s release new tracks. If you can get over the repetitive Avicii and Ke$ha remixes, it’s great cranking music.
Some of the most played artists are 3LAU, Mitch-Mash, and Kap Slap, all of which have a number of downloads available on SoundCloud. It makes for a fun playlist.
“From anywhere in Lesutu, you can see a cell phone tower - usually more than one. The cell phone signal there is better than it is in Atlanta.”
A good friend of mine and I had a (brief) conversation this week about the emergence of the African mobile ecosystem. Though she was born and has lived in southern Africa her entire life, she remains surprised at the robustness of its infrastructure. When thinking about the implications of such network availability, I continue to come back to the potential to revolutionize healthcare in the developing world. In my mind, this can be done in two flavors: teaching and testing.
In dealing with varied diseases in areas where transportation and access to care is difficult, simple exercises can extend and improve patient conditions until care is available. With the proper content and distribution in place, it is possible to turn everyone with access to a phone into a short-order nurse. Smartphones are already used in Lesotho to teach languages and take notes, and it is a simple step to transition to on-demand patient care instruction. (I’ve heard of existing services in this vein, however I don’t know names.)
More interesting to me though is the possibility of removing diagnostics (and eventually care) from hospitals entirely. The existing solutions in mobile diagnostics are fantastically innovative, and (if executed correctly) have the potential to drastically reduce diagnostic hospital procedures. By moving diagnostic medicine to the field, mobile devices have the potential to shrink hospitals and allow physicians to focus on care as opposed to testing. Beyond the developing world, such innovations can impact the cost and efficacy of care in richer nations - while the burning platform is less evident at home, the future of healthcare is undoubtedly focused on personalization, mobility, and DIY tools. In this case, I think we will be the ones drawing our lessons from the (former?) developing world in 5-10 years…
It’s the weekend, so it’s time to recap what I’ve been listening to this week. It’s mostly been mashups, and I owe a good description of which specifically (along with a few links). Turntable was on fire Thursday and Friday, so I’ve got a couple new favorites.
For now though, I wanted to post an oldie that came up on my iPod this evening. Two Coins was one of the first songs I learned to play on the guitar. This version, from their live Gut the Van CD is absolutely amazing - check out the acoustic solo around 2:05. Great memories, and a song that will always be in my top-10.
PS - This is my first time embedding SoundCloud. Awesome interface and easy to do. Hopefully it looks good!
One trend that I’ve been following over the past few months is the emergence of mobile data collection used for medical diagnostics. Around 2008, a group of researchers at UCLA published some interesting research pointing to the use of cell phone add-ons capable of diagnosing dengue fever and malaria. Combined with the ongoing emergence of a surprisingly robust internet and mobile environment throughout much of the third world (primarily Africa), the door of mobile diagnostics has opened. A number of groups have emerged focused on this problem - some of my favorites are MedicMobile, LifeLens, and FrontlineSMS (not purely mobile diagnostics).
While I’m admittedly still learning the field, it’s one that that strikes close to home for me. Having a background in both healthcare and photonics, I find this stuff awesome. I’m planning to delve in a bit more, so hopefully I’ll write a follow-up to this.
On a slightly unrelated note, check out the TRILLION frame-per-second camera announced by MIT today. It’s like PChem nerd porn.
I’ve gone back-and-forth on note taking systems over the past 3-4 years and none of them have really stuck. I recognize that my need for such devices as the number of projects I work on increases - when focused on one or two verticals, it’s easy to keep track of everything; past three and I start to lose details. I’ve experimented with Things, OneNote, RememberTheMilk, and even pen-and-paper GTD systems, however they all fall apart when I don’t have my device (or paper) when I need it. Evernote wins here - it’s on my iPhone, iPad, MacBook, and work laptop. Because I’m rarely more than 3 feet from any of these (a depressing realization in itself), I always have my notes handy.
One of my favorite features is the live-sync - I can be editing a note on my iPhone, realize I need to write more faster, and switch over to my mac with a one-button save. Even better, if I’m offline or have poor service when I switch devices, it saves a copy so that I can version-control later.
I’m three months into using Evernote, and I’m a big fan so far. I do wish they would add some additional checklist functionality, preferably that integrates with Reminders (which deserves a separate post in itself). Also, some of the text formatting is quite funky, especially for building bulleted lists and creating section headings. This isn’t the end of my search for note-taking software, but it’s definitely a satisfying plateau.
I had a ‘caveman’ experience this weekend. I’m not a big television watcher - I’ll occasionally fire up Netflix or Hulu+ on my iPad if I’m having trouble sleeping; otherwise, my TV experience is limited to the occasional Duke basketball or Carolina Panthers game. As such, I had an ‘oh yeah’ moment this weekend when I went over to a friend’s to watch a movie. In about 30 seconds, she turned on the box, popped open amazon, rented the movie and pushed play. Granted she was routing everything through her Blu-Ray player where I may have used AppleTV or Boxee, but the experience showed me that I’m behind in my knowledge of the world of streaming video. Similar to the way I use iTunes/Spotify/Airplay/Sonos/everything-but-the-kitchen-sink for audio, I realize that the technology for video is almost as robust. I have some serious catching-up to do - who knows, maybe more control and a better system would incent me to keep up better with pop culture, whose references I never seem to get.
It’s going to be a long week and last night is already taking its toll, so this post is more about what is upcoming rather than what is. Looking back over my last few posts, the one that generated the most discussion was my Cap Table example. While finance may not be my favorite subject to pen, it is both relevant and straightforward so I’m going to push ahead with a set of finance-oriented posts over the next two weeks.
I’ve read countless pieces trying to explain venture finance from the entrepreneur’s perspective, however few speak about it from the VC side. While the startup side of the equation is quite relevant, having an understanding of VC funds helps to understand their motivations, timelines, and funding structures.
So far, I’m working on posts on the following subjects:
If there are any other topics that you’d find interesting, feel free to drop me a line.
Out of necessity, I am a regular user of the messenger service of the Good for Enterprise software package. My company mandates that all iPhone and Android users route their work email through this app to give an additional layer of AES encryption, as well as a secondary alphanumeric password. I’m a big fan of this technology’s existence in that it allowed me to forever spur my Blackberry, however its execution leaves a significant amount to be desired.
Specifically, there are a few features that seem like no-brainers:
Has anyone else found fixes for these Good issues? What other ‘work appropriate’ technologies exist in the market? I’m quite sure that someone somewhere in our compliance department thought this was a good idea, but I’m still having trouble determining if such apps are even necessary.
I spent a few hours over the past week reading the early days of a number of my favorite technology blogs. Aside from the sheer entertainment value that looking back on the ‘future’ holds, I was reading for writing style, content, and audience interaction. A week into my experiment in daily blogging, I wanted to learn from their mistakes - I love these blogs now and want to know how they got there. I’m sure I’ll never have their readership, but I needed both as a lesson in personal communication and a breadcrumb for those (few) who read this.
A couple things that I’m trying to focus on:
If anyone has feedback, I’d love to hear it. Keep me honest - let me know which rules I need to add and which I’m breaking. Also, I highly recommend doing some digging in old blogs if you have a chance. Reading about the future of social: Friendster vs. Tribe.net is quite entertaining.
This week’s New Yorker has a great article (paywall) on Peter Thiel, in which he goes into detail on his belief that the entrepreneurial community today is missing the mark and focusing too much on consumer and social technology. Written more pointedly, his Founder’s Fund Manifesto conveys a similar message, with the subtitle, “We wanted flying cars instead we got 140 characters.” These documents raise an interesting question - has the broader entrepreneurial community focused too narrowly on the internet and ignored broader, more far-reaching technological change? Says Thiel, “The internet - I think it’s a net plus, but not a big one.”
I’m a fan of the internet. I think its potential is far from tapped out and there are significant innovations in the pipeline that will change the way we go about our day-to-day lives. That said, I’m always wary of technologies that exist only for the good of the internet - without a connection to people’s physical reality, I find it difficult to justify their existence. The importance of innovation focusing on space, greentech, and medicine is indisputable; however, the internet cannot be discounted as an enabler of all these. Many advances in internet technology will make future breakthroughs in other fields faster and easier by improving our interconnected communication, educational, and computational systems.
That said, justifying something like Color in comparison to SpaceX is a bit hard to do…
As most of my friends know, I’m a bit of a nut when it comes to music. Having grown up in a musical family, I had a lot of exposure to live shows early on. Since then, I try to make it to a varied mix performances whenever possible (though never often enough).
A couple weeks ago, I had the chance to see Feist at Atlanta’s Tabernacle. It was a great show, with a mix of indie pop/soul and what a friend called “grown-up lullabies.” In part due to this concert, I’ve been on a slower acoustic/indie/soul kick over the past few weeks. Highlighted by Kings of Convenience (‘Quiet is the New Loud’ is a great album title), Belle and Sebastian, Sufjan, Arcade Fire, Feist, Wilco/Billy Bragg (a constant), Band of Horses, Head and the Heart, and a smattering of Blitzen Trapper (go listen to Furr if you haven’t heard it), Avett Brothers, and the Shins. Maybe it’s the cold weather, but this slower playlist has been right on recently.
As a side note, if you’re in Atlanta and have never been to the Tabernacle, I highly suggest you find an excuse to visit. Music was created for a venue like this.
