Much of marketing is social proof. You use products because you see other people that you admire using products. This is especially true in B2B marketing.
Social proof, when it works well, is a feedback loop. Actions create evidence which create relevance and then create consequences.
This is true in products you buy personally and products you buy for your business. It is true for homes, schools, medical procedures, and even political candidates. Social proof is the number one thing that convinces you to choose any product that is out there.
If you are a marketer, you need to acknowledge the power of social proof and use it to your advantage.
Social proof is a very good short-cut for people who are doing due diligence of a product. They want to understand who else is using a product and what they think of it.
In marketing, social proof is king, queen, and emperor.
Social proof looms large in B2B software
Is Stripe the best payment processor for your business? I have no idea. But I do know that many companies I respect use Stripe and like Stripe … so if I need a payment processor I am going to check out Stripe. I’ll likely check out Square too because many companies I respect use them.
I’m going to assume a LOT about Stripe and Square because of the social proof. I am going to assume they are reputable. I am going to assume they are technically proficient. I am going to assume they have good fraud protection. I am going to assume tons of positive things about these services (which might not actually be true) because of the vast social proof surrounding them.
Review sites and social proof
One of the reasons reviews are so important is because of social proof. Here the raw number of review is key for social proof. That charger review on Amazon, the database review on G2 Crowd, or the company culture review on Glassdoor. And marketers spend a lot of time managing these reviews and sometimes gaming these reviews.
Of course, when these reviews are too easily gamed, they are massively discounted.
Celebrity endorsements are so powerful.
This is why celebrity endorsements are so powerful. You might admire Denzel Washington and if he endorses Toyota, that might make you more likely to get a Toyota. Of course, if you know the endorser was paid for the endorsement you might discount the recommendation … but even then the endorsement can be powerful (because you know Denzel Washington has standards and does not just endorse every product).
One of the hottest things right now in marketing is influencer marketing (paying a popular YouTuber to talk-up your product). The more genuine the endorsement is perceived, the more likely you are engage with the product.
I particularly like the endorsements that Malcolm Gladwell makes on his podcast, Revisionist History. He talks so eloquently about his love for ZipRecruiter. I have no idea if ZipRecruiter is a good or bad product, but Malcolm Gladwell’s endorsement (even though I know it was a straight-up paid endorsement transaction) makes me want to check it out.
Picking a school to send your kids to
People that have achieved a decent level of wealth have a massive number of schools to choose from for their kids. San Francisco alone has hundreds of schools (public and private) — and many of them are extremely highly rated. Which one should you choose for your kids?
Most people use social proof. They look to people they admire and see where those people sent their kids … and then they make their choice accordingly.
It would take too long to do deep due diligence on 200 schools. In fact, it takes too long to do deep due diligence on even one school. A much easier short cut is to look to social proof.
If you a start-up, by definition very few people have joined your company. That means most candidates will not know anyone that has joined your company (or even interviewed with your company). So getting social proof is rather difficult). Larger companies like Google, Goldman Sachs, and McKinsey don’t have this problem — most top candidates will have known many people that have joined these organizations.
Summation: in marketing, focus first on social proof.
Rapid raise in stock prices result in some people in the company being overpaid. This can be very bad for the overpaid employee and also very bad for the company.
Many tech companies are going public right now and many tech companies have seen significant share price increases in recent years. We can expect that most of these are facing real internal motivational challenges that could be extremely hard to overcome. The weirdness of RSUs in public companies
Let’s say that a company gives you an offer of $100k salary and $500k in RSUs vested over 5 years. That essentially means that the company values you at $200k per year (as stock and salary are fairly fungible in public companies).
Let’s say the stock goes up by 20% after six months. The RSU grant (over 5 years) is $600k and your yearly comp goes from $200k to $220k (a 10% increase). No big deal for the company as you are probably worth more than 10% more than what they originally offered you because you now have been at the company for 6 months, understand the processes there, have grown your skills, etc.
But now let’s look what happens when they stock goes up by 300% after 3 years (which happens in the tech world). Now the original grant of $500k is now $2 million (over 5 years). So the stock alone is $400k per year. Add in the salary (with assuming some raises is now $150k/year) and you pulling in $550k per year.
This is when things get a bit hairy. Because likely the company only values you at $350k so you are making $200k more than you are worth. In fact, if you quit the company and went to work for its top competitor, you might have a hard time getting more $300k.
So now both you and the company are in a bind.
First, you cannot leave the company. In fact, your biggest fear is getting fired. So unless you are a big risk-taker, you are likely to “play it safe.” You are going to work on things that have a high chance of success. You are not going to rock the boat. You are not going to stick out your neck. So you are likely going to spend the next two years doing very average work, not push the envelop, not ruffle any feathers.
And if you are in this position, it means that many people in the company are in this position (because the stock went up 300%) so that means many people are going to start acting just like you. And that means things get ultra political (because people are going to try to point blame away from them).
From the company’s perspective, they are in a bind. They can’t fire all the overvalued employees because then no one would join their company in the future (as the promise of the stock going up is one of the reasons that high-performers join companies). But if they do nothing, they lead to a paralysis in their organization.
Of course, when your five year vesting is over, you are 100% going to leave the company. Because your new RSU grant is going to be a lot lower that the value of the current grant. You might go from getting $400k/year in stock to getting $250k/year in stock. And even though the new lower comp is still higher than your market worth, it is very hard for the ego to take a lower comp from the same company.
This presents lots and lots of problems.
From the company’s perspective, it is overpaying tons of people and those exact people are performing worse than the fairly paid employees (because the overpaid employees are “playing it safe”).
So the people who the company is paying the most are often just propping up the status quo and not moving the needle.
For the overpaid employees’ perspective, it might be worse. Sure, they are making a lot more money than they are worth. But they are settling. They are atrophying. They are made to be just mediocre employees and feel that they are preventing from reaching their full potential. And they could be in this state for 2-3 years — which is a really long time.
Summation: The companies with the fastest rising stock prices will also have a high number of employees who will want to play-it-safe (because their biggest fear is getting fired).
When you are evaluating a business (to invest in or join), one simple heuristic is to understand how easy is it for the business to get new customers.
In B2B businesses, the metric that companies track is CAC (Customer Acquisition Cost). But this metric in itself isn’t that interesting and companies typically track LTV/CAC ratio where LTV is the LifeTime Value of customers. The problem with this ratio is that many companies are constantly focusing on the numerator rather than on the denominator.
The cost of acquiring the next marginal customer should be less than the cost of acquiring the last customer. And you should see this cost decline over time.
The CAC itself should decline each month. If it does, it means you likely have a great business. If it doesn’t, the business is a good business at best.
Of course, CACs should be declining for a specific cohort of customer. If your business was only focused on small businesses and now you are selling to enterprises, your CAC will increase dramatically. In this case, the key thing is to track the CACs for SMBs and enterprise customers separately (with is why so many firms use the LTV/CAC ration to simplify this step).
The best way CACs will decrease over time is if you haver some sort of network effect. LiveRamp (my last company) is a middleware company … which means it is essentially a marketplace of buyers and integration partners. It is a classic network effect business that makes it easier and easier to acquire new customers over time. Once we hit about $10 million, the CACs started dropping fast.
One other way to think about this when selling to enterprise is to track the quota for a full ramped sales rep. Is the quota for an average sales rep going up over time? If so, you have a great business. If not, the business still has some work to get to great.
All platforms follow this logic. Companies like Plaid, Segment, Marqeta, LiveRamp, and Carta are classic platforms where acquiring new customers gets cheaper over time (disclaimer: I’m either an investor or friends with the CEOs of all these companies). These types of companies can take the savings (from not having to invest as much in sales and marketing) and put them into the product. So the product can get better and better over time (which is the double-edge flywheel that all great companies have).
Other companies that have declining CACs are ones with great brands. Essentially every time a company buys their service (and raves about it), other companies are more likely to use it. Twilio and Stripe have declining CACs because they have become the default go-to companies in their space. There is a LOT of power in being the default.
Summation: Once a business gets over $10M ARR and it has declining CACs, it has the makings of a great business.
When venture capitalists tell you “your TAM is not big enough” what they are really saying is “I don’t think your team is smart enough to move to an adjacent market once you dominate your initial niche.”
They are not really saying your TAM is too small. Great VCs invest in companies with small TAMs all the time. They might believe that the founders’ think too small or that the founders just are not very good.
Many great companies started in markets where the TAM (Total Addressable Market) is small. In some cases, the companies under-estimated the TAM (the TAM got way bigger over time). In other cases, the team was smart enough to move to other adjacent markets.
Of course, it is really hard for a venture capitalist to tell a founder “we do not think you are talented.”
Even when a VC truly believes that, they can never actually say it. But founders want to know why a VC is passing and the VC wants to preserve some optionality to invest in the founder in the future (in case the VC’s assessment about the founder was wrong) or in the founder’s friends. So VCs come up with another reason not to invest. A good one is that the TAM is small — that usually satisfies the entrepreneur (who thinks the VC is just not smart enough to see the bigger picture) and satisfies the VC (who wants to preserve the relationship).
Investing in companies that are initially focused on a smaller niche is actually easier to do than investing in companies that are going after a giant market.
If the company is going after a giant market, then there is usually massive competition in the market and you really have to spend a great deal of time understanding the market (and each competitor) before investing.
For instance, if we were thinking of investing in Ford Motor Company (which competes in the giant market of automobile sales), we need to understand a ton of things:
What are the future of of cars? Will demand increase in the short term? What about the long-term?
How does the rise of places like China and India change the demand curve for autos? Even if it greatly increases the demand for cars, will Ford be able to capitalize on it? What about auto tariffs?
Ford makes much of its income on selling trucks (like the F150 — one of the most amazing vehicles). How does the demand curve for trucks change in the future?
What will happen to emissions policies? Is Ford investing in enough green vehicles to take advantage of potential policies?
While Ford is a big company, its market share in the auto industry is really low (because there is SO MUCH competition). So now we need to know about ALL the other car companies (and even potential car companies like Apple) to understand the future competitive dynnamics.
And many, many more things (like the financial profile of Ford, its labor contracts, its capitalization structure, and more).
It is much simpler to invest in smaller businesses that are tackling a smaller niche. We can get our head around the niche faster. We can assess the competition faster.
The essential questions we need to answer when investing in a niche business are just four:
Will this company be able to dominate the niche? Sometimes the company is already dominating the niche. Sometimes there is a network effect reason to dominate the niche.
Is this niche more important than other people realize? Maybe most people think the niche caps out at $50M/year in revenues but you believe it is five times bigger. Sometimes the niche gives the business a jumping off point to other niches because of its centrality. In general, niches that are more central (have more adjacent niches) are more valuable than niches that are less connected.
Is the team capable enough to move to adjacent niches once it dominates its first niche? Some teams find themselves in a good position but cannot take advantage of their position. This is actually why most VCs pass on companies. Of course, they cannot tell the founders that they passed because they do not think the founders are smart enough. So they make up another reason (the “market is not big enough”) which is just code for “we do not think you have an excellent team.”
Is the price of the investment reasonable? This one is hard to understand but if the first three are yes and only a few investors think they are all yeses, then the price is probably reasonable.
LiveRamp’s niche dynamics: dominating onboarding
One interesting example is LiveRamp (NYSE:RAMP). (note: I was the founder and CEO of LiveRamp for its first 9 years … so I am incredibly biased). LiveRamp launched its initial product at the end of 2010 going after the “onbooarding” niche. At the time, the market was less than $3 million worldwide! (Now that is a really small niche).
LiveRamp’s first year revenues from on boarding was $1 million and we ended the year with about 25% market share. But there were a few things that made the niche interesting:
We believed the niche was a total of $50M year. (Turned out we underestimate the niche by 4-6 times). So there was room to grow.
We thought there were network effects in the business — it made sense (for a bunch of reasons we will not go into now) for one company to be the winner — essentially it was a winner-take-most market. Ultimately we were proven correct as LiveRamp quickly got to over 70% market share.
We understand the capabilities of all the competitors and figured that they would not invest appropriately to dominate the onboarding market. Each competitor was already in many other markets and it did not make sense for them to continue their investment.
We believed that onboarding, while a small niche, had significant centrality to other markets in the marketing ecosystem. We assumed we could use our position to move into those other niches. This ultimately turned out to be true in some cases and more difficult than we hoped in our cases.
We had a lot of confidence in our team. Even today, almost nine years later, LiveRamp is known for having an extraodinarily talented team. Of course, most start-ups think they have a great team (and many overvalue their talent). But in 2010 our team was extremely young and inexperienced — so one could forgive an outside investor for undervaluing it.
Carta’s niche dynamics: dominating cap table management for start-ups
Carta, formerly known as eShares, is a great company. (another disclaimer: I am an investor in Carta and also a customer across many businesses).
Carta helps companies manage their capitalization table. If you have invested in a bunch of start-ups, you almost surely have gotten some of your stock certificates via Carta. In fact, of the 130+ start-ups I have invested in, Carta is the ONLY forward-facing cap table management system that I have ever interacted with (except for mergers and acquisitions where I have seen many different systems).
Carta, even from its early days, dominated the cap-table management for start-ups. And yes, it was a small niche (one that many VCs underestimated). But even today, most start-ups run their cap table on Excel — so there is still a lot of growth in the niche.
If you were an investor when Carta was starting, the first thing to understand was do you think Carta could dominate its niche. Surprisingly, many investors that passed on investing actually thought Carta WOULD dominate its niche. Given Carta’s huge current success, the investors either made one of two errors:
They underestimated the power of owning the niche of cap table management in start-ups.
They underestimated the talent of Carta’s team and its CEO (Henry Ward).
My belief is that any VC that passed for Error #1 should stop being a professional investor. That is not a good mistake to make.
However, my guess is that the vast majority of VCs made Error #2. That error is much easier to make as it is extremely difficult to evaluate people (especially after just spending a few hours with someone). Henry Ward has turned out to be an excellent CEO. But everyone has vastly underestimated people before. And everyone has vastly overestimated people before.
What you should do when a venture capitalist tells you that your TAM isn’t big enough
Obviously you should spend time evaluating the TAM. But you should also take solace that many, many great businesses (from AirBNB to Zoom) were passed by talented VCs who underestimated the team.
Summation: When VCs tell you “your TAM is not big enough” what they are really saying is “I don’t think your team is smart enough to move to an adjacent market once you dominate your initial niche.”
Also, the tax rates can change substantially between regions and cities. The top income tax rate in California is 13.3%. The top income tax rate in the State of Washington is zero (the seven states with zero income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). So even though Seattle is getting really expensive, you can save a lot of money by taking a job there instead of San Francisco.
So what would happen in there was a law that stated that all salaries need to be quoted in post-tax PPP-adjusted dollars?
Imagine that there was a law that forced every employer to quote both the absolute salary (like $120,000 in SF) and the after-tax PPP-adjusted salary (would transform to probably $50,000 in SF).
What would happen?
First thing that would happen is that many fewer people would want to work in places like San Francisco and New York City. While everyone intuitive knows that these places are high-tax and high-price, seeing the stark different on the job offer would make a significant number of people pause before taking a job.
The second think thing that would happen is that many employers would need to react to this. One way to react is to increase salaries. But the salaries in places like San Francisco are already much higher than most places and would likely need to go up another 50%+ to compensate. The more likely reaction is for employers to hire more people outside high-tax and high-PPP areas.
Long term, more people are going to start thinking about their income in “real” dollars — which means the dollars they have left over after living their life.
Summation: Older people (over 50) are getting more advantages from computers than younger ones. We should expect to see a huge renaissance the productivity of older business people in the future.
In business, there are advantages of being younger and advantages at being older. And historically there has been tensions between the two.
Many advantages of Being Younger
Fearlessness: Youngers people have less fear of older ones. They have less to lose, less social status, no mortgage. If they fail, they will not be lower on the status ring. The best soldiers are usually those in their 20s.
Older people have much more to lose and that means they are often quite poor at calculating risks.
More time: The older you are, the more time commitments you gather. You eventually get married and have kids. You volunteer at a non-profit. You get involved in your church. You pick up golf as a hobby. You go to the Sundance Film Festival and Burning Man every year.
When you’re younger, you have not yet accumulated the debt of these commitments. That allows you to spend more time working. Of course, not every young person spends a great deal of time working (many spend an equal amount of time socializing) … but those that do concentrate on work have a massive advantage because working hours compound. Almost all super-successful people worked insane hours in their 20s. In fact, people who do not work insane hours in their 20s are at a massive disadvantage for the rest of their lives.
More raw brainpower: Younger people have better working memory, they have more stamina, and they have more calculations per second. They have a much faster CPU. It seems unlikely that we will have a 55 year old chess champion. And most Physics Nobel prizes went to work that was done by people in their 20s or early 30s.
More ignorance of “what works”: Older people are more likely to get stuck in their ways. They have a hard time seeing that the Emperor really has no clothes. So they are more likely to do things the way they have been done before. The old saying “science advances one funeral at a time” applies to business innovation as well.
But there are also many advantages of Being Older
Money: Older people are a lot richer than younger ones. Many older people gain leverage by hiring younger people and telling them what to do. They are often able to rent the time, fearlessness, and brainpower of younger people.
Cunning: Cunning is the ability to work with people and also work against people. It is something one gets better at over time. It is not something people are just born with. A 55-year-old can often play two 25-year-olds against each other.
Wisdom: While young people benefit from ignorance, older people benefit from wisdom (which is the opposite side of the coin). Older people have had more time to read, learn, and compound knowledge.
Connections: While “What-You-Know” is now more important than “Who-You-Know”, who-you-know is still important. Older people have had more time to develop meaningful connections. And many of those connections will be other very successful people. I did not know any major CEOs, U.S. Senators, world-renowned authors, etc. when I was 22 (but many of the people I met when I was 22 turned into these people).
Stature: Older people have a history and a brand. And while that history can work against them (like a voting record for a member of Congress), it gives comfort for others to work with them. People with a brand have an advantage in recruiting talent, raising money, etc. If an entrepreneur sold their last company for $300 million, it will be a lot easier for her to recruit people to her next company than a first-time entrepreneur.
Less competition: Weirdly, older entrepreneurs have a lot less competition than younger entrepreneurs. At least in Silicon Valley, it seems there are 100 times more entrepreneurs in their 20s than entrepreneurs in their 50s. Most successful people in their 50s have no desire to go through the rigor of starting a company again. They usually opt for less stressful lives (like deciding to be a venture capitalist or running a winery). That means that those 50+ people that do decide to start companies have a pretty big advantage because there are a not a lot of wise, well-connected, monied people who they are competing with.
Young vs Old: Who Wins?
To summarize the post thus far:
Ability to buy brainpower and time
The advantages of being young seems to equal the advantages of being old … at least when it comes to starting companies.
Historically young people have a way higher failure rate … but they also have a much higher rate of creating an iconic company (Google, Facebook, Microsoft, Apple, etc.).
In the past there was a tension between young and old. The young having big advantages in some societies and the old having big advantages in others. If I had to pull a number out of my butt, I would say that the best age to start a company has been 34 (not exactly “young” but definitely not old).
The best age to start a company will get much higher as computers are becoming a bigger part of our lives …
How the age advantages shift with computers: advantage to the older
Computers significantly change the advantage calculation.
Computers give younger people more access to wisdom through easy access to knowledge. The compounding advantage that older people have had in the past is going to be less important in the future. Computers also make it easier to find people and get in touch with them — so the Who-You-Knows are going to be less valuable in the future — and younger people, while still having less access to connections, are at less of a disadvantage here.
But computers help older people IMMENSELY.
Computers are the world’s best way to get access to raw brainpower. And as more brainpower tasks are getting taken over by computers, people with money (older people) will have a significant advantage over those that don’t (younger folks).
The proliferation of tech services also advantage older people. You can get access to the best APIs and services with dollars. Of course, most people (especially older people) will have trouble selecting and managing vendors. Most people (especially old people) are going to be trapped in the 20th century paradigm (one that rewards hiring and growing people). The most important business skill in the 21st century is the ability to select and manage vendors. But the older people that can successful navigate the new world will have an advantage.
As computers get stronger, it gets easier and easier to buy time and brainpower. We already have compute-on-demand (AWS) and people-on-demand (UpWork).
The biggest disadvantage that remains for older people is being trapped in an old way of thinking. If science really advances one funeral at a time, innovation could be significantly slowed as older people have more advantages (and are living longer).
One of the advantages that older people have that seems to be not going away is lack of competition. It used to be that very few 24 year olds ever thought about starting a company (especially those that had lots of opportunities). Even when I started an Internet company in college in the 1990s, it was really strange to have a student entrepreneur. Today it is becoming easier and easier to for 24 year olds to start companies — easier to get training, knowledge, and seed capital. YCombinator and other institutions have significantly promoted entrepreneurism among the young. My guess is that the number of amazing twenty-somethings starting companies has gone up at least 5 times in the last decade … and that trend is happening all over the world.
But people over 50 are still not starting companies in large numbers. It never was big, and I see no anecdotal evidence that it is growing. People that have been successful in the 30s and 40s are rarely opting to get back “in it” in their 50s. Instead, they are opting for easier and less stressful lives. So the few 50-somethings that do start companies could have increasing advantages. Especially those that still put in the long hours. (Even Bill Gates, one of the best entrepreneurs ever, hung up his business cleats before he turned 50).
More people in their 50s SHOULD start companies. It is actually a great time to start a company. Many people in their 50s are empty nesters (or at least no longer have super young kids). They can actually travel more and work harder than those in their 40s because they have fewer family obligations. They are usually more financially secure (maybe have paid off their mortgage already) and potentially more willing to take some sort of financial risk. And people in their 50s have so much more energy today than in years past — people live healthier, are more active, etc.
What are the societal implications of computers giving older people advantages?
The most obvious implication is wealth inequality. If older people get more advantages as they age, their wealth will compound faster. Coupled with living longer (and being active longer) means more wealth inequality.
Since the person in their 50s is more likely to build a one-to-N business than a zero-to-one business … it could mean less innovation for society and more incrementalism.
But it also could give hope to millions of people who are over the age of 50 and still have big dreams and ambitions. Ambition shouldn’t end at 45. Computers can keep ambition going way longer than in the past.
This also means that MORE 50-year-olds should start companies. However, I don’t think they will. So the few 50-year-olds that do should see very big advantages.
Summation: They advantage of getting older is growing. Computers are getting better at doing what young people do.
Venture capitalists rarely take their own advice when it comes to their own businesses.
There’s a common narrative that venture capital doesn’t scale. That narrative is so well accepted as truth that venture capitalists themselves don’t bother taking the advice that they generally dole out.
Here are some common truisms that are often passed down by VCs but aren’t applied in their own business:
Establish dominant market share and become the very best. VCs advise companies to find a niche and exploit it — and do not enter a super competitive space. But the venture capital industry is crazy competitive — often competing with 100 firms (that are usually staffed with super-smart people).
Have one CEO. VCs advise companies to have one core decision-maker. In the rare case, maybe there is a co-CEO. But many VC firms are run as a partnership with 3–8 equal partners (though some partners may be more equal than others). They’d never invest in a company run by committee.
Founders should demonstrate deep commitment to future value creation by taking low salaries. But VCs do not usually trade some of their short-term salaries for long-term upside. Most VCs pay themselves salaries out of their typical 2% management fees. If VCs took their own advice, they would be using most of that 2% fee to build systems and invest in the future. Or they would trade the bulk of the management fee for greater carry.
Companies should invest in growth and market dominance over profitability. But VCs themselves are extremely profitable. They do not hire aggressively, invest in technology, spend time on automation, or make any of the other investments in themselves that they would expect their portfolio companies to make.
Leverage existing advantages to expand into adjacent markets. VCs want companies to hire great people and continually level-up the management team. Yet the VCs grow their own businesses very slowly and do not take risks. VCs rarely move into adjacent markets, expand their brand, etc.
Keep expenses low — spend less on rent, fly economy, and generally be frugal. Yet most VCs do the opposite with their own expenses — often spending lavishly on rent, travel & entertainment, and more.
Companies should be long-term focused and should be doing things that outlast the founders. But many VCs set up their firms in a short-term oriented way. VCs often have much bigger key-man risks than the companies they invest in. And VCs, even successful VCs, rarely outlast their founders.
Governance structure in portfolio companies is a high priority. VCs think it is wise to have investors and independents on a company’s board. But VCs themselves often have much less oversight. Many thrive on potential conflicts of interest.
Companies should go public and being a public company is very good for the long-term. But venture capital firms themselves rarely go public.
Acquisitions can be accretive and strategic. The growth of a synergistic merger often can outweigh the dilution that comes from growing the firm. VCs rarely acquire other firms.
Venture Capitalists, as a class, are much less ambitious than one would expect.
Almost no venture capitalist would fund themselves. They are looking to fund people that are essentially the opposite of themselves. They are looking to fund outliers because their returns come in power laws. But for their own business, they are looking to play it safe and be conservative.
VCs generally do not want to rock the boat. They don’t want to do something different. They don’t want to change the industry. In fact, for many VCs, their biggest fear is that the industry will fundamentally change. They want to keep collecting their two and twenty.
That’s not to say there are not ambitious venture capitalists. There are. Many people are looking at changing the game. Naval Ravikant’s AngelList is a full frontal assault on venture capital. Tim Draper invented the venture capital franchise model. Masayoshi Son’s Softbank Vision Fund is changing everything in the late-stage venture capital (as did Yuri Milner’s DST before that). Sequoia’s amazing work ethic and competitiveness to be number one. Peter Thiel runs four large venture capital funds, a global marco hedge fund, and many other investing vehicles. Chamath Palihapitiya’s Social Capital is taking a long view on venture capital. Chris Farmer’s SignalFire, while yet unproven, is attempting to automate venture capital through data (like Renaissance Technologies and Two Sigma has done in the hedge fund world). Marc Andreessen and Ben Horowitz create a full-service firm which aims to have the best marketing, best recruiting, best conferences, etc. And the most ambitious people in Silicon Valley may well be Paul Graham, Jessica Livingston, and Sam Altman from Y Combinator.
Many readers may have an adverse reaction to some of the people above. They may think these people too bold or too reckless. And some of them may well be (time will tell). They will not all succeed with their grand ambitions. But their ambition is exciting. It is refreshing. And these individuals are acting more like the entrepreneurs they fund than the classic VCs that are the funders.
Most venture capital firms are surprisingly less ambitious than the entrepreneurs they fund. And they are also much less ambitious than their siblings who run private equity firms and their cousins who run hedge funds.
Private equity firms are run significantly differently from venture capital firms. As a recap:
PE firms have 1 or 2 CEOs. VCs have 3-8 CEOs
PE firms make large investments in back-office, consulting, and data science (Vista Equity has been so successful with this model). VCs usually don’t.
PE firms create new products and become international fast (Blackrock spun out of Blackstone … and Blackstone also built up an incredibly successful real estate practice). VCs rarely create new huge products.
PE firms focus on having succession plans. VCs have trouble making the transition.
Many PE firms are public. It is extremely rare for a VC to be public.
PE firms are generally much more ambitious than VCs. They are often 10-100 times larger in size (both in the number of people they employ and in the dollars under management). And they generally have much larger dreams.
The most successful PE titans are more wealthy than the most successful VCs. And while wealth does not equal ambition … it is correlated. There are an order of magnitude more PE billionaires than VC billionaires. And many of the most successful VCs made more money founding companies before they became VCs than they did as VCs.
Lack of ambition among VCs could be feature (not a bug).
Many entrepreneurs like the idea that venture capitalists are less ambitious. A founder might not want want someone on their board that is crazy ambitious … because that VC might not be able to make time for the new founder.
So there is definitely a possibility that perverse thing could happen: a less ambitious VC might actually be more successful because it might allow them to get into the best deals. (Yes, this is a weird theory and there is a 58% chance I will disavow it in the future … in fact, there is a 38% chance I will disavow this entire post in the future).
Of course, there is nothing wrong with only wanting to be worth $200 million and not $2 billion. That extra zero is not going to change their lifestyle much. So why rock the boat for that extra zero? Why get everyone to hate you to get that extra zero? Why take huge risks for an extra zero that is not going to change your life?
Venture capital can think bigger.
A few random thoughts that an ambitious venture firm might think more about:
Instead of ruling by consensus, VC firms could have a designated CEO (or co-CEO). While many firms do have this in practice, making this more explicit would add clarity.
Fund-by-fund equity really creates short-termism and creates lots of conflicting incentives. Imagine if Amazon gave out equity in each of product lines (AWS, Prime Video, e-commerce, Alexa, etc.). Ultimately an evergreen fund (like Berkshire Hathaway) will lead to greater ambition.
Passing the baton to a new generation should not completely wipe out the equity of the older VCs that founded the firm. But the older VCs can’t keep running the firm while spending most of their time at their winery either. Being a good VC should be intense and take over 60+ hours a week. The older VCs could maintain equity in the evergreen company while issuing new equity to new employees (and new LPs).
Run the firm with the aim to go public. That’s how you run a company. Think about how to get big.
Look to acquire other firms. And yes VC is a services firm — but services firms can be run well at scale. Think of Accenture which has $41 billion in revenues and market cap of almost $100 billion at the time of this writing.
Defer more cash payments to equity. While layering fees has been a great way to get rich in the last 15 years, it does seem like this model is very fragile.
Look to dominate a niche (rather than competing with the smartest people in the world). Look to build a moat and some sort of network effect. That might mean significantly changing the game (like AngelList or Y Combinator).
Summation: Venture Capital firms rarely take their own advice when running their own firm. Private Equity firms (like Blackstone, KKR, Vista Equity Partners, etc.) are actually much more like venture portfolio companies than VCs are.
This is modified from a Feb 2018 Quora post. Special thank you to Tod Sacerdoti, Jeff Lu, Tim Draper, Will Quist, Joe Lonsdale, Bill Trenchard, Ian Sigalow, Villi Iltchev, and Alex Rosen for their insights, thoughts, and debates on this topic.
Deadlines for offers should be extremely short. Ideally they are under 36 hours. There is even a good argument for deadlines to be under 20 minutes (as long as the employee knows it is coming).
Beside the obvious criteria for a great employee (smart, gets things done, etc), the number one (less obvious) criteria is that they REALLY want to work at your company. They will be so much more effective if they really want to work for you.
They need to have a REAL attraction to your company. Maybe is is because of the company’s mission. Maybe is is because of the culture. Maybe it is because of the people (or their direct supervisor). Maybe it is because of the technology. Maybe it is to get rich. … there could be MANY reasons … but that reason has to equal a genuine excitement to join your company that is beyond the rational pros and cons.
This is why you should give offers with a really short deadline. If someone needs a lot of time to make a decision whether to join your company or not, they probably are not super excited about your company. They still could pick your company and be a solid contributor … but my experience is that they rarely turn out to be amazing.
The a phrase in romance “he’s just not into you” applies in recruiting as well. You want people that want you. If a candidate, after the hours and hours of interviews, projects, reference checks, etc. still needs more time to decide to join your company or not, you should move on.
Summation: to most optimize for a 10Xer, keep deadlines for offers short.
When selecting software vendors, besides for just doing the usual (feature analysis, price, compatibility, ease-of-use, etc.) look for one core x-factor: rate of improvement of the product.
The faster the product has been improving in the last year, the more likely it will improve in the coming years.
Look for products that get better quickly. Look for products that fix bugs and performance issues quickly. Look for products that add new features. Look for products that keep delighting customers.
One way to do this is note your evaluation of the product when you first see it and then in subsequent times that you see it.
Look for companies that publish change logs
Reward companies that publish clear change logs on their product and show how the product is getting better over time (which means they are honest about past bugs). We’ve been experimenting with publishing change logs at SafeGraph and it has significantly helped our sales cycle and ability to gain customer trust. In addition, it is helpful for current customers to keep track of our ongoing changes. We would love for other companies to copy us.
Summation: a great way to chose a vendor is to look for the rate their product is improving.
Many companies have strong alumni networks. The most famous of which is the PayPal Mafia which includes Peter Thiel, Reid Hoffman, Elon Musk, David Sacks, Jeremy Stoppelman, Luke Nosek, Keith Rabois, Reid Hoffman, Max Levchin, Roelof Botha, and many others. It is a truly astonishing alumni network.
The best predictor of having a strong alumni network is a company that: (1) had a successful outcome but not crazy successful (like a Facebook or a Google); (2) the company went through a bunch of trying times (and almost went out of business); and (3) the employees built a company that was super enduring and even prospered post-exit.
PayPal fits all three of these criteria. It had a strong exit (but not Google-like escape velocity), it almost went out of business multiple times (highly recommend reading PayPal Wars by Eric Jackson), and it continues today as an independent company (NASDAQ:PYPL) that was spun out of eBay (its original acquirer in 2002).
I often get asked why the LiveRamp alumni have been so successful. While the exit was only 20% of PayPal, it had many of the exact same characteristics. (1) The exit was good; (2) the company almost went out of business multiple times (and like PayPal, we had to pivot hard from “Rapleaf” to “LiveRamp”); and (3) we built a company so enduring that it ended up being the crown jewel of the acquirer and now is an independent public company (trades at NYSE:RAMP).
At the time of announcing our exit (in May 2014), LiveRamp was around 50 people. It is amazing how many of those original LiveRampers are now doing super interesting things.
So without further ado, I list the notable LiveRamp alumni and what they are doing at time of writing (Jan 2019) … please let me know if I missed anyone.
Caitlin MacDonald Bartley – CEO at Cred
Ryan Buckley – CEO at MightySignal
Eric Chernoff – CEO and cofounder at Retain.ai
Phil Davis – Chief Business Officer at TowerData
Ken Dreifach – Member, ZwillGen
Bryan Duxbury – Chief Technologist at StreamSets.
Dayo Esho – CEO and cofounder of TravelJoy. Dayo was a cofounder of LiveRamp.
Greg Fodor – fmr CTO and cofounder at AltspaceVR
Auren Hoffman (that’s me) – CEO of SafeGraph. Previously CEO and cofounder of LiveRamp.
Thomas Kielbus – cofounder at RideOS
Chris Kline – cofounder at CTO at TravelJoy
Ron Johnson – Vice President Sales Analytics at Workday
Anders Jones – CEO at Facet Wealth
Jeremy Lizt – on the beach taking a much needed break. Jeremy was cofounder of LiveRamp and ran engineering from founding (2006) until Jan 2018.
Nathan Marz – founder of Apache Storm
Travis May – CEO and cofounder of Datavant. (Travis succeeded me in running LiveRamp in 2015)
Luke McGuinness – President & COO at TVision Insights
Patrick McKenna – Founder, HighRidge Venture Partners
Bryan Morris – CFO at Kinetica
Brent Perez – President and cofounder at SafeGraph
Mike Safai – Founding Partner at Dexterity Capital
Armaan Sarkar – CTO at Wove
Dan Scudder – CEO at Highland Math. Dan is the person responsible for coming up with the “LiveRamp” name.
Pete Schlaefer – VP Business Operations at AppLovin
Justin Schuster – Head of Marketing at Blend
Manish Shah – CEO of Peerwell. Manish was cofounder of LiveRamp.
Mohammad Shahangian – Head of Data Science at Pinterest
Vlad Shulman – cofounder and CTO of Retain.ai
Eddie Siegel – CEO and cofounder at Wove
Dan Stevens – cofounder at VP Data at Windfall Data.
Vivek Sodera – Co-Founder at Superhuman. Vivek was cofounder at LiveRamp.
Nikhil Sud – CTO at CoWrks
Chris Taylor – CRO at Wove
Michel Tricot – cofounder at RideOS
Alex Wasserman – cofounder at Wove
Takashi Yonebayashi – CTO at SafeGraph
In addition, many of the best people at LiveRamp are STILL at LiveRamp. That includes:
James Arra – President and Chief Commercial Officer at LiveRamp
Sean Carr – VP of Engineering at LiveRamp
Anneka Gupta- President and Head of Products and Platforms at LiveRamp
Joel Jewitt – VP of Strategic Operations at LiveRamp
Allison Metcalfe – General Manager of LiveRamp TV at LiveRamp
Rebecca Stone – Head of Marketing at LiveRamp
and many many others at the company
Summation: while LiveRamp was a company chock-full of talent. Its alumni success was due to being a company that: (1) had a successful outcome but not crazy successful (like a Facebook or a Google); (2) the company went through a bunch of trying times (and almost went out of business); and (3) the employees built a company that was super enduring and even prospered post-exit.
One of the hardest things to figure out is how to improve. How do you get better and what should you focus on.
The best improvement strategy is to focus not just on your strengths … but on just 1 or 2 strengths. Focus, focus, focus on making your strongest traits even stronger. Especially once you are over 30 and you have more of a clear assessment of your skills and abilities.
How do you know what your strongest traits are? A good exercise is to ask the twenty people closest to you (friends, colleagues, spouse, parents, siblings, etc.) a simple question: “what are the 3 things that you think I am excellent at.” While you will get a lot random answers that will be just noise, you may find some super consistent answers (especially if you are focusing more on work colleagues). Gather that data and investigate those strengths.
The strategy most smart people use is to get good at lots of things at the same time. They spread their improvement time like one might spread peanut butter on toasted Wonder bread. This strategy does help you improve and you will notice the improvements really fast (because you are often focused on things you are bad at where just a little work will go a long way). And that feedback loop of getting a bit better and seeing the progress is addicting (especially to smart people) so they spread the peanut butter even more and get better in more diverse areas. This is improvement and it is growth and it is positive … but …
you could grow much greater by focusing on just 1-2 strengths and getting even stronger.
The most successful people in the world (think Bill Clinton and Steve Jobs) have glaringweaknesses … and it is unclear if they ever seriously worked on those weaknesses. Would they be better if those weaknesses went away? Of course. But then they might not have focused as much effort on their strengths.
If you are a terrible public speaker but great at communicating by writing, then focus on getting even better at writing. Strive to become the clearest writer in the world. Take really hard concepts and clearly state them. Don’t succumb to pressure from your coworkers, friends, etc. to get a speaking coach and spend hours becoming a better public speaker. Focus instead on what you are already naturally talented at go from good to great.
That said, there ARE certain weaknesses that are so debilitating that you need to focus on them if you have them. For instance, someone addicted to daily heroin use should probably spend all their time defeating that addicting (rather than focusing on their strengths). But most people’s weaknesses are not nearly as pronounced as being a heroin addict … and most people should instead focus on their strengths.
Summation: focus on getting better at your strengths and mostly ignore your weaknesses.