Category Archives: Web/Tech

Venture Capitalists are MUCH LESS ambitious than their private equity siblings

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.

Big Ambitions: Robert F. Smith, CEO of Vista Equity Partners

review of “How the Internet Happened” by Brian McCullough

How the Internet Happened is a history book chronicling the Internet from Netscape through the launch of the iPhone.

If you are old and have been intimately involved with the Internet since 1995 (like me), then this is a good book that will rehash many things you have forgotten.

great book: especially if you have not been in the Internet biz since 1995

But if you are newer to the Internet, younger, or not in the business of the Internet, this is a GREAT book.

The author, Brian McCullough, also is the host of the Internet History Podcast where you can get a lot of the same content of the book.

There have been surprisingly few books written about the Internet’s history (most of the best ones are biographies that focused on just one character). This book does a good job chronicling the major Internet events over 13 years (1994-2007). While it is a book about the Internet, it is also a great history book (and no history book from this era would be complete without walking through the Internet phenomena which has truly changed society).

While McCullough spends some time diving into technology, the main contribution to this book is really distilling down the core events that matter and giving a good business overview. I highly recommend reading this (it is also a very fast read).

McCullough also does a great job reminding us about the 1990s mania, the IPOs, and how all the 90s investments lead to the boom in the 2000s.

Summation: read “How the Internet Happened” (I’ve also started following Brian on Twitter (@brianmcc))

self-driving cars will cause the Rich to Get Even RICHER

When self-driving cars come (and I’m skeptical they will come in mass in the next 20 years … but that is for another post), everyone’s commute will be much faster. That is because cars will be able to coordinate with each other and rarely need to go below 80 miles/hour on highways (even during the busiest of times).

But once self-driving cars happen, the next thing is to allow cars to pay up to go EVEN faster. There is no reason a car can’t go 160 miles per hour and get you there in half the time.

Cars that don’t pay up for the privilege will be forced to yield to cars that do. Essentially expect to see surge pricing to get to places faster.

Would you pay an extra $100 to get from San Francisco to Los Angeles in 100 minutes by car? An extra $300?

Note: I’ve been thinking a LOT about transportation recently because of all the transportation-related companies that use SafeGraph Places.

Summation: while self-driving cars will be good for everyone, they will be GREAT for people with lots of money (especially in capitalist societies like the U.S. and China).

Waymo self-driving car

the poor position of car companies in the next two decades

The car companies (like Toyota, GM, Ford, Honda, BMW, etc.) have a tough business.

First: it is SUPER competitive.  It is one of the most competitive businesses around.  No one car company is even close to dominant.  The competitive nature means it is very hard to make money (and even harder, though not impossible, to really invest for the future).

Second: auxiliary revenue streams are going away. For a while, car companies were able to sell a suite of additional services like OnStar (subsidiary of General Motors), SiriusXM, navigation, financing, and more.  Fewer of these services are value-add today (than just 5 years ago).  The smart phone has taken over these services and is generally 10x better.

Third: Car companies are not capturing good data.  Presumably car companies could capture maps of cities (from the cameras), traffic, breaking, driving habits, tire pressure, and more.  Presumably they could use the data to give the drivers better experiences.  They could even have additional revenue streams selling the data (like TV manufacturers do).  
But very few car companies take advantage of this data.  It is not clear WHY they don’t collect it.  Collecting the data is easy.  Sending the data to a central system is easy.  This is not hard stuff.

Yes, Tesla does this.  But Tesla does a lot of things incredibly well.  It is unfathomable why ALL the car companies do not collect this data. And they are not ceding their position to Tesla.  It is not Tesla they should be worried about.  They are ceding their position to the smart phone OS (like Apple and Google) and to some of the great apps on the smart phone.  And while the driving data collected on the smart-phone is massively inferior to what could be collected by the car, it is much better than tiny data.  And tiny data is what most car companies are collecting today.  It makes no sense, but a lot of things in business make no sense.

Fourth: Car ownership is declining due to the abundance of new transportation options.  Uber and Lyft are amazing.  So are the new scooters.  And electronic bikes are becoming bigger for the suburbs.  Forget self-driving cars (that may not be a reality for 50+ years).  Declining car ownership is happening now.  It is like cord cutting … it starts off very slowly but then picks up steam rapidly.

Summation: the car companies are in a tough spot.  Some great ones will innovate but many are going to be in more and more trouble in the years to come.  

(thank you to Evangelos Simoudis for helping me think through this topic)

Non-obvious guide to finding a great job

Last week I published an article in BusinessWeek entitled an Insider's Guide to Tech-Job Hunting.  Here I try to expand on this article to summarize all my advice for job seekers in one big post.   I look forward to your thoughts and comments…

Think like
an entrepreneur and be proactive in your job search

Like many
employers that are hiring in this market, Rapleaf receives a ton of
resumes.  Here are some observations and
advice for people looking for a job in the technology industry (but I warn you
that I’ve never actually looked for a job so my perspective might be a little
warped).

 

A jobseeker
is going to more successful finding a position that will be truly satisfying if
she is proactive rather than reactive. 
Reactive job seekers diligently scan job openings and send their resumes
to HR.  Proactive job seekers research
the companies (or teams) they want to work for and send a message directly to
the hiring manager looking to create a position for themselves.  More on this as we go further …

 

Below are
the ten non-obvious steps to finding a great job.

 

1. Look for companies you want to
work for … not jobs you want

When you
start your job search, don’t go first to job listings.   Instead, first figure out what you want to
do and where you want to work.  I’m often
surprised how few job seekers have any idea what they want to do next.

 

Maybe you
want to work in a certain industry, a certain location, or only places that
have a vegan cafeteria.  Whatever your
reason, you should narrow a list of actual companies you want to work for (ideally
to 10-100 companies).

 

2. Don’t apply to the job … apply
to the company

When you
find a company you want to work for, do your research on that company.  Understand the company and where it is going.  If you are a great candidate, they might
create a job for you.   Don’t worry that
they have or don’t have a job opening that fits your resume perfectly.  Companies often are looking for people that
kick-butt.

 

3. Send your resume directly to the
hiring manager (not HR)

When
introducing yourself to a company, you want to contact the hiring manager
directly (and not go through the careers web site for the company).  In a really small company, the hiring manager
might be a VP or the CEO.  At a bigger
company it could be a whole host of people. 
It might take some research to figure out who the best person to contact
is and what their email is.

 

One friend
of mine heard a CEO speak at an event and was really impressed with what he
heard.  So my friend sent the CEO an
email to every permutation (firstname.lastname@, firstname@,
firstinitial_lastame@, etc.) he could come up with.   The next day he got an email from the CEO:
“I got your five emails last night. 
Seems like you are very interested in working here …”   And three weeks later my friend had a job at
the new company.

 

4. Dumb down your resume

In today’s
market, companies are looking for perspiration, not inspiration.  In other words, most companies are looking
for doers that kick butt and get stuff done. 
They are going to pass on “strategic thinkers” (as they may have fired a
bunch of “strategic” people already). 
Big companies need to do more things with less people – so they are
looking for people that are super productive. 
Small companies looking to grow need doers.

 

So retool
your resume to show off that you are a work horse who gets stuff done.  And reference this in your cover letter.  Get rid of the “strategy” sounding verbs like
“empower” and “process.”  Let employers
know that you don’t just make PowerPoint slides all day but that you actually
can either create products or drive revenue. 

 

5. Send a very targeted email to
each employer

Send a
short and targeted email introducing yourself to each hiring manager.  A good email would be just a 4-6
sentences.  Include a very brief blurb
about yourself (1-2 sentences) that quickly tells them why you are
special.  Also include one really
interesting idea for the company – if you are an engineer you can maybe give
some scaling ideas or if you are a salesperson give a better idea on how to
acquire customers.   Really understand
the company so you can give them a relevant idea.   And, of course, attach your resume (in PDF
form).

 

One company
I know got an unsolicited email from an engineer detailing the scaling problems
the company was likely experiencing and giving two ideas for a solution.  The engineer’s resume was one where the
company would normally not interview the person.  But the targeted email eventually lead to the
company giving an offer to this candidate.

 

6. Follow-up at least twice with
everyone you do not hear from

Send
follow-up emails to the person after one week and after two weeks.   Don’t call (calls are just annoying … most
tech companies have an email culture).  
And if you don’t hear back from one hiring manager, contact additional
people in the company until they clear say they are interested or not
interested.

 

7. Don’t be discouraged if they
don’t respond

Many
companies are not right for you.  Often
they are doing you a big favor by not getting back to you.  

 

8. Do something nutty and unorthodox

Scott Bonds
really wanted to get into the gaming industry in 2003 (when jobs were really
sparse).  After doing a bunch of research
on the industry, he decided that Electronic Arts would be a great place for
him.  But there were no jobs at EA at the
time.  Scott started a lobbying campaign
to work at EA.  He started a blog called
I-Want-To-Work-at-EA.com (now defunct) and blogged about his quest to find a job
at the company.  The blog became so
popular that tons of hiring managers at EA invited Scott to interview with them
just so that they could meet him.  And he
eventually got a great job at EA and worked there for five years.

 

Vivek
Sodera became one of my colleagues at Rapleaf by showing up to his job
interview in a gorilla suit.  That’s
right, a gorilla suit.  And he had made a
“Rapleaf” t-shirt that he wore over the suit as he commuted via BART to the
interview.  It was classic.   He was applying for a marketing job and he
was relaying to us that he would do anything to promote the company.   It worked and he got the job.  

 

Vivek_and_manish_job

(Rapleaf cofounder Manish Shah with
Vivek Sodera (in gorilla suit) on Vivek’s interview.)

 

Today you
can start a Twitter campaign praising the company, do something on a social
networking site, or even bake the team cookies.   

 

9. Get in the door for a company you
want to work for

If you want
to work in a company or an industry, get yourself in the door. If you have to,
take an unpaid internship.  Regardless,
don’t focus on compensation.  If you
prove you are a rock star and valuable to the company, they will take care of
you as great talent is really hard to find. 
And if you don’t end up a good fit, better to use an internship to get
into the door quickly and fail fast.  

 

10. Interview the company

I’m always
surprised at the number of job seekers that don’t have questions for the
interviewers.  As a job seeker, you want
to make sure you are picking the right company. 
Come to the interview armed with questions (write them down so you do
not forget) and learn everything you can about the company, the employees, the
environment, and more.  Good things to
understand is the detailed company financial situation, its customer relationships,
the corporate culture, how you are expected to work, and more.

 

 

A proactive
job seeker will not only be more likely to get a good offer, but she will also
be happier with the company she ends up working for.


netflix values “we are a professional sports team, not a family”

this is one of my favorite descriptions of a company.   it is from Netflix and came to me via Matthew Monahan (CEO of People Search Media):

We're a high-performance team, not a family.

A strong family is together forever – no matter what. A strong company, on the other hand, is more like a pro sports team: it is built to win. Management at every level has the responsibility that professional coaches have – to recruit the players and forge the teamwork that makes great performance possible.

To accomplish this, we seek to fill every position in our company with exceptional performers. In many companies, adequate performance gets a modest raise. At Netflix, adequate performance gets a generous severance package.

For us, the cost of having adequate in any position is simply too large, when we could have extraordinary. Extraordinary performance means excellence in the nine values described below. Plentiful extraordinary talent makes for a high-functioning company.

The benefit of a high-performance culture is you experience the exhilaration of working with consistently outstanding colleagues. You do your best work, you learn the most, and you achieve the highest professional satisfaction, when you're surrounded by excellence.

A great workplace is not how many perks are offered; it is how stunning are the colleagues.

Productivity gains in software engineering are powering innovation

Engineers are the best deal – so stock up on them

Everyone is more productive these days. This has been a consistent trend for at least the past decade, where productivity gains have been particularly strong within the business sector.  According to data from the U.S. Bureau of Labor Statistics, today’s business industry workers are on average 30% more productive than their 1998 counterparts (productivity growth of roughly 2.6% per year).

Growth chart  
(Source: U.S. Bureau of Labor Statistics)

Within the technology industry, productivity has increased more.  Thanks to smartphones, improved search engines, better CRM software, and ever-increasing bandwidth, salesmen and marketers can find, receive and process information faster than ever. 

The most dramatic gains, however, have occurred within software development.

Software engineers today are about 200-400% more productive than software engineers were 10 years ago because of open source software, better programming tools, common libraries, easier access to information, better education, and other factors. This means that one engineer today can do what 3-5 people did in 1999!

3589792404_65192f9038 The advent of open source software makes engineers particularly efficient.  One VP Engineering that I talked to gave me an anecdote about one module where they used open source files with about 500,000 lines of code and then wrote 7,000 lines of code to stitch it all together.  Open source software is also free.  In the company I was running in 1999, “software” was a huge budget line item – we had to buy databases, testing suites, libraries, and more.  Today all that stuff is free … a start-up might spend more money on sodas for the office than it does on software. 

We’re all familiar with Moore’s Law – that the power of computers doubles every 18 months.  In my 15 years of software development, I’ve seen 5x-10x productivity gains in engineers.  Which could mean that the productivity of a well-trained engineer doubles every five years.  (note that this Law is much harder to prove than Moore’s Law – but potentially just as profound).  That would mean that the productivity of an engineer is growing at roughly 14.9% per year!  That’s fast … really fast … much faster than the 2.6% yearly gains the population as a whole is making. 

This means that today’s companies are able to do more software engineering and build more stuff with fewer people.  But should they do more with less? It could be much more prudent for a company, especially for a small company, to do the opposite … and to double-down on engineering.  You can use the productivity gains in software development as a strategic advantage and invest aggressively in engineers. First, doing so contributes the most to progress and also increases the chance for breakthroughs in innovation. Second, engineers – as opposed to salesmen and marketers – can often hit the ground running (assuming you have a good on-boarding system) and have a positive impact within a few weeks. 

Alternatively, many large traditional companies might be able to get by with FEWER but DIFFERENT engineers.  These companies might need to change their approach to engineering to take advantage of the new tools.  The companies that can benefit from fewer engineers are likely ones that haven’t changed their technology platforms radically in the last ten years.

Although engineers contribute more to an organization than ever before, their pay – relative to other functions in a company – hasn’t followed suit.  I’ve polled a few dozen companies and have found that over the last ten years, an engineer’s pay has held the same relative salary to marketing and sales.  This is odd behavior … usually when something outputs more, its cost goes up.  So why have engineers’ wages in the U.S. stayed constant relative to salespeople and marketers?  Here are two contributing factors that lower demand:

1.    Off-shoring.  Because of new technology and higher bandwidth, more companies are off-shoring their software development.  But this does not fully explain the flat salary phenomenon since firms are also off-shoring sales and marketing (though to a lesser degree).

2.    Need for software engineers has decreased.  Because software engineers are so much more productive than they were ten years ago, many firms are opting to hire fewer of them.  If a company is not doing hard-core engineering, it actually needs fewer engineers as a portion of its total workforce than it did ten years ago.  (I personally think this could be a big mistake … but I will get to that later). 

Both the off-shoring and the decreased need for engineers has led to a lowering of the demand which has likely put a check on wages. 
 
One problem, of course, is that measuring “output” of an engineer is a really hard thing to do (as opposed to the output of a salesperson) … so it is really hard to quantify the productivity gains.  And even if you can measure output in engineering, it is sometimes hard to tie that to an increase in profitability.

And, like sales, the quality of engineers varies wildly.  A great engineer is potentially 2-4 times more productive than a good engineer.  Ben Ling from Google pointed out to me that some great engineers are massively compensated – because they tend to be the early hires at a company and get lots of stock (most of Google’s first 50 employees were engineers). 

Let’s recap:  The productivity of a software engineer has increased 2-3 times that of a marketing person in the last ten years.  Yet their relative compensation has remained about the same.  That means if you are a savvy company, you should stock up on engineers.  In fact, you would want as many great engineers as you can get a hold of. 

This engineering productivity boom will only increase and continue to create dislocation and creative destruction.  While the extent of growth and industry makeover are hard to gauge, what is certain is that corporations relying on technology and engineering paradigms from the 1990s or before will find themselves hard-pressed to compete with the new and nimble movers. 

(special thanks to Jonathan Hoffman, Michael Hsu, Ben Ling, Jeremy Lizt, Naghi Prasad, and Dave Selinger for their feedback and edits).