What Has Changed
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If you look at Fred's UVC portfolio for "Consumer Web" I would hazard that their three largest are Twitter, Tumblr, & FourSquare.
Each of these companies is currently making massive pushes to "monetize" their consumer web bases:
For example: FourSquare is only @ $2m/yr & hires first VP of Revenue (1), Tumblr hires new head of global ad sales & Fred Wilson defends rev model (2), Twitter infuriates developers, pushes new ad units (3)
That story is playing out all over the consumer web right now, including at Facebook.
Pulling from a GigaOM article "Wilson thinks sites should follow Twitter’s lead and ensure ad content is the form of an atomic unit that mimics the native content – a tweet on Twitter, a video on YouTube and so on."
Each of the portfolio companies he's involved in are embracing that model.
But as an observer it seems that while the inclusion of "atomic" ad units is certainly a good solution, they're not going to fetch anywhere close to the price of Google's search inventory - eg the Holy Grail of monetization - so there's got to be less excitement as VCs watch these #s unfold.
(1) http://www.businessinsider.com/foursquares-revenues-valuatio...
(2) http://gigaom.com/2012/11/07/is-tumblr-the-new-geocities-vc-...
(3) http://www.telegraph.co.uk/technology/twitter/9481987/Twitte...
btw - foursquare's VP Revenue hire was its first, not a new one.
With social the ads are always a distraction. At best its serendipitous.
Its the difference between selling vegetables at a farmers market vs a roadside stand. No matter how pretty the stand it will never beat the market full of customers who came there to buy.
To keep your analogy, Facebook to Google may be like TV advertisement to a local market.
From an ecommerce perspective I the difference in effectiveness is massive. I have found it very hard to really generate a lot of spending intent across the ads, retargeting, sponsored stories and offers. Whereas a good Adwords campaign across a large product inventory pretty much prints money and annoys users a lot less.
Tumblr, Twitter, Foursquare, they are building in-house sales teams but will eventually follow Facebook's lead and open up some piece of their inventory to outside demand. That's how they get the price of that inventory up.
This seems like a trivial true-ism, and utterly useless as a strategic guide, yet he cites it as their core thesis.
I read the whole thing, and I'm still not sure he said anything concrete. There were lots of bits that seemed concrete [1], but on pausing and thinking about it for a moment, they all seemed to be of the variety "There's more blue than red, but don't forget there's some green there too."
ETA: I don't intend to crap on the linked article; I'm sincerely struggling with my intuition that there's very little light for all the heat in VC pronouncements. During my startup experience I continually heard sage bon mots like "it's a move-fast environment." Okay, how fast? Are there move-slow environments?
[1] Cletus' post above does a good job singling out statements that appear concrete but are either literally non-sensical, or just trivial a=a observations.
if you think of etsy, twitter, lending club, workmarket, pollenware, and kickstarter, you might struggle to understand why they all fit our investment thesis
it is because they are all networks that are large and growing and disrupt big markets (twitter - news, etsy - sale of artisinal goods, kickstarter - the studio model in entertainment, lending club - consumer lending, pollenware - working capital finance, workmarket - contingent labor)
You're right that the thesis is a test. My question was because it wasn't clear that there was actually a way to fail the test, or at least I wasn't clear on what Mr. Wilson viewed as failing the test. I didn't ask why he didn't do something that hadn't occurred to him, I asked why we he didn't do something on which he makes a pretty deliberate decision.
As I mentioned, in my own experience I heard a lot of "it's a move-fast environment", and I realized that I had no idea what that meant. It's like saying "be tall"--meaningless without a baseline or a standard of comparison, and yet everyone kept throwing around the phrase like it was a concrete observation.
(1) a forward - must be falsifiable to filter
(2) a afterward - need-not-be-falsifiable cya (a/k/a rationalization)
Fred seems to be communicating a variant of (1) fairly credibly; although many VCs sgravitate toward variations of type (2).
More and more money is being thrown at an ever increasing amount of new apps, and many of which operate on huge losses as long as user numbers remain high. From the other side, entrenched players (twitter, facebook, youtube, big media) are scrambling for ever more aggressive ways to jam themselves into people's lives to hopefully extract revenue and meet the growth shareholders demand.
All of this is being pushed onto a market that has a limited attention span for all of this crap being thrown at them (and a lot of it is pure crap). The result is less and less consumer loyalty, dwindling revenues for everyone, increasing disillusionment on the part of investors, and ever more ridiculous expectations on the part of users: "$1.49 for an app I use every day and that cost at least $50K to develop? I dunno, feels like a premium price."
It's different from the first bubble in that there is actually a lot of non-immaginary value flying around this time, and eveyone is readily embracing the internet and related tech. But there's also more and more crap. There's just too much pollution on the web and in every app store, and it's starting to smell.
Strangely enough, I think there might be a startup idea somewhere in there.
I don't like to install a lot of apps on my Android phone and iPad so I may not accurately reflect the market at large.
Sometimes, it seems like we're back in the 90s, developing for three different platforms (browsers) simultaneously... except we've regressed even more, because even less code is shared between the platforms (and now the server logic may even need to be tweaked to support all clients).
The more things change, the more things stay the same....
If the app is just a crappy webview to their site, then no, but I tend to ignore those sites altogether.
I'd add: During tech bubble v1, the acquihire deals stopped as the many failures put significant amounts of talent on the market. For example: Salaries for IC designers quickly rationalized.
Take Chris Dixon's post [1] as an example. He's now a VC. He wants to diminish the stigma around talent acquisitions. Why? Because that's how VCs get paid in the vast majority of cases. Those big wins when a company goes public are pretty rare. Big acquisitions? Also relatively rare. Most are 1x-5x "bailouts" I would guess.
Paul Graham's most recent essay [2] was excellent but remember this site exists as a funnel for YC finding teams and companies to invest in.
So, to address Fred's points:
> 1) the consumer web has matured
This is a strange argument. It wasn't mature 2 years ago? 3? Twitter and Pinterest (which he mentions) did get a "standing start".
> 2) the consumer is moving from desktop/web to mobile/app
The trend in recent years has been for startup costs to be going down. $50,000 can buy you a lot of Web development and hosting these days. Labour costs (engineers) are probably going up. Everything else is much cheaper.
Mobile seems to buck this trend. I imagine the cost of developing a Web site plus apps for Android and iOS is significantly more expensive. Well it must be by definition because you still need the Web site (in most cases). It's partly why people will target one platform first (typically iOS).
> 3) the momentum/late stage investors have moved from consumer to enterprise
This is a symptom and it seems to be the elephant in the room that Fred isn't mentioning: the consumer Web space is crowded.
To draw from PG's essay, enterprise has both the "schlep" and "unsexy" factors going for it and it's an area that, depending your market, can be hard to penetrate but also far easier to get paying customers. It's hard to extract money from consumers except for three things: games, advertising and, to a certain extent, hardware.
I've thought for at least 2-3 years that if I were to start a startup it'd be somewhere in enterprise space. The fact that VC funding is, according to Fred, going there too just confirms that.
> But it is a tougher time for early stage consumer internet companies than I have seen since the 2001-2004 time frame.
This to me was the strangest point of all. 2001-2004 were on the whole terrible. But it's still way cheaper now making bootstrapping just that much more viable than it ever was 10 years ago.
To me this is just more evidence that we're not in a bubble because the VC "market" is acting quite rationally. For every Instagram there are a hundred failures and many more acqui-bailouts. Yet many people--too many people (IMHO)--are working on shit that just doesn't matter ("it's a social network... for cats!" as the cliche goes) in a very crowded space and most are going to be disappointed.
What I believe Fred is doing here is signalling that he (and by extension USV) are interested in non-consumer startups. They don't want to come out and say "we're not interested in consumer startups" as that'll put them at a disadvantage when it comes to funding hot startups/teams.
I agree: enterprise and even infrastructure (particularly cloud-related infrastructure) seem to have stronger opportunities than consumer web (IMHO).
Do you have any numbers to show that? I'm fairly positive you are wrong here.
I bet that every finance group has a magic Excel spreadsheet that someone built for them years ago. But no one in the office knows how to engineer it anymore, so they keep duct taping little bits here and there to make it adapt to the business years later.
A social networking website can be down for a day for a few users and nobody will care. With enterprise software, that could be a deal-breaker. If engineers have to be woken up at night, then they will be.
You're right that enterprise is about sales, whereas consumer is about marketing. It actually affects the company as a whole more than you might think. Heavily marketed consumer-focused companies never seem to stop marketing themselves. Even in the cafeteria, you're bombarded with the marketing about how this is the best company EVAR and all the cool people are here, etc. Sales is more about relationships and building trust. There are some bad aspects to both, but on the whole I think I prefer a sales-focused company.
Generally speaking, I think enterprise apps are simply easier to deliver than successful consumer apps (most consumer apps aren't successful and nothing is easier to deliver than an app nobody uses). There's a bunch of reasons for this:
(i) famously, the person making the purchasing decision for most enterprise apps isn't the eventual user, so to make sales and achieve usage you need please only during demos;
(ii) the bar is much lower in the enterprise because you are generally solving money problems (increasing revenue or decreasing costs/headcount); most enterprise software is clunky, and the software virtually never delights, but for the most part the line-of-business software deployments I've worked with tend to make lots of money;
(iii) the fit/finish and scale problems that HN people hyperfocus on simply tend not to be problems enterprises pay to solve; also, once a firm verifies for itself that it'll realize a return on a deployment, it'll tend to be happier to simply scale up its Oracle deployment rather than trying to be clever with how it persists data.
(iv) a six figure pilot deployment pays for a whole lots of hardware, and successive purchases, which tend to happen after the firm verifies that the software is worth something to them, are even more expensive.
(iv) relatedly: the financial metric most enterprise software is benchmarked against is "fully loaded headcount cost", which, wow, is a much nicer benchmark to have than "$5/mo" or (worse) $2.99 "premium" app store app.
I think these things tend to add up to enterprise software being much, much easier to build and deploy, even if you want to believe that there's some countervailing cost of additional testing (I actually don't buy that enterprises really demand a higher standard of testing, either).
Things like Yammer and Salesforce are practically the exception that proves the rule; the very rare app that needs to scale multitenant across every company in the world. And a gargantuan swath of the entire Fortune 500 could care less about salesforce management.
Businesses will often refuse to buy from companies they regard as likely to disappear in a few years-- unfortunately, most startups tend to get lumped into this category by default. The burden of proof is on you to prove otherwise. (This is rational behavior on their part, by the way.) Managers are naturally conservative. They know that signing a slightly too-expensive deal with, say Oracle (to pick a random example), won't get them fired-- but signing a deal with some startup that fails to deliver surely will end their career.
Finally, there's the problem that because sunk costs in existing systems are often high, it can be hard to break into a market. This is what keeps COBOL and even FORTRAN chugging away in corners of the world. Costs might be lower a few years after replacing these systems-- but then again, they might not. It depends on who you get to put in the replacement, and if you have trouble telling the good developers from the bad, maybe you are better off not touching it. Building and deploying is one thing. Selling is quite another, and it's not easy or cheap. Forget about word-of-mouth and friends-of-friends.
Do enterprises demand a higher standard of testing? I think it depends on what your product does. I work in enterprise storage, so for us there absolutely is a higher standard of testing. I can't speak for other applications, though.
Things like Yammer and Salesforce are practically the exception that proves the rule; the very rare app that needs to scale multitenant across every company in the world.
Yeah, but that's where the fun is for engineers. And in time, companies like these will reduce the need for so many companies to build custom solutions.
I've never met a VC who was excited about a talent acquisition. Maybe a very early angel, but this is not what most VCs are looking for.
If your downside is now 1x rather than losing everything, that's a major win for investors. Eliminating downside does not suck.
That said, I think there may be room in this space for some competition. What if you had groups of friends that wanted to work together, but not necessarily take on the risk of a startup? What if you could have some sort of way to develop side projects together in a blatant attempt to market the team, not the product?
The convention wisdom says this is important to understand for at least two reasons:
(i) You aren't going to make a compelling pitch to a VC by focusing on the likelihood of a 1x-2x return, since you'd essentially be pitching a failure to them.
(ii) A 1x-2x return may be lifechanging for you, but since it's essentially a failure for your investors, they will tend to tack your company away from those returns and towards much riskier strategies.
If you think 1x is a major win, you should consider avoiding VCs.
This is wrong. Remember the power law! The vast majority of the value of a VCs portfolio will be represented by their 1 or 2 most successful investments.
(This is probably a violation of their fiduciary duty to represent the shareholders, but who is going to sue?)
†(most of those incidents started with the company encouraging departing employees to purchase their shares)
I am having trouble seeing how this could even mathematically be true. Even given how much easier talent acquisitions are to do, most of the companies in a portfolio won't even get that far. The majority still fail outright. Many talent acquisitions don't even recoup dollars invested; how could they possibly pay for the losers?
So if those numbers still hold true then the bulk of a VC's portfolio (by investments, not dollars) is boosted by the availability of talent acquisitions.
On a side note, Fred Wilson has responded to this thread below[2,3,4,5].
[1] http://www.danshapiro.com/blog/2010/08/vc-insanity-economics...
[2] http://news.ycombinator.com/item?id=4828933
[3] http://news.ycombinator.com/item?id=4828936
http://uncrunched.com/2012/08/26/investors-dont-like-acqui-h...
-- FYI [2x to 5x] are ~wins, not bailouts.
Portfolio returns in the aggregate of 20%+ are fine. A 2x on 1 year investment, for example, is outstanding performance. But overall, HR acquisitions are "operational failures" for the founder and the VC, and nothing to boast about. You're startup has only proved it can out-perform the HR department of a Big-Co. Not hard to do with a pile of cash, really.
This isn't true. Consumers happily pay for a lot of other things that web companies / tech startups offer: - content & entertainment (hulu, netflix, nytimes) - personal finance (lending club, esurance) - dating (match, eharmony) - ecommerce (bonobos, zappos) - gifts (FB, redenvelope)
In fact, I'd guess there are probably a lot of offline consumer spend buckets that will come online in the next few years if they haven't already.
Perhaps we're quibbling over semantics on how "hard" it is... but trends seem to indicate it is becoming far easier.
Getting enterprise customers to pay serious money is somewhat of a pain. It's a costly and long sales cycle. Not to mention the margins are increasingly getting worse (both from software vendors, i.e. SaaS, and service vendors, i.e. outsourcing). Then couple that with increasingly changing buying behaviors and pricing models (consumerization of IT) and it's not all roses.
However, looking at USV's latest investments[1], posts as well as Fred's posts especially this one, it is appears they prefer enterprise startups[2] BUT they are still interested in consumer startups as long as they have a transactional or high intent ad business model.
[1] Pollenware, DuoLingo, DuckDuckGo, Dwolla, Funding Circle etc
[2] http://www.usv.com/2012/08/networks-and-the-enterprise.php
Or maybe (he writes, donning his HN-proof flamesuit) having genuinely innovative ideas actually does matter.
There are plenty of people around here who keep saying it's the execution that counts, launch with a MVP because you need data so you can pivot, what matters is having a great team, and all that. I'm sure there is some element of truth in all of those things, but most of the "businesses" based on that philosophy seem to build something obvious that a thousand other people thought of and any 15 year old geek could do in a weekend, and then act all surprised when they don't become the next Facebook.
If these are the kinds of people who are approaching VCs with a view to serious funding, it's hardly surprising that most of the ones that don't have literally the best execution in a market with hundreds or thousands of plausible competitors will fail.
To me, it seems crazy today to even try going after mass-market, low-level consumer services. There's far more money in B2B unless you really make it to the top in B2C, which you are extremely unlikely to do even with a fantastic offering. And if you are happy to settle for a business that is merely very lucrative rather than the next Facebook/Google, you can do very well in B2C with a good idea in just about any specialised field, where the market is not every consumer in the world but the people in the market really want what you're offering because it genuinely benefits them in some way that nothing else did before.
[Edit: I see Fred is posting here, so I'll mention that it would be interesting to know how many of the companies VCs take on tend to be in that latter category these days. Is specialist B2C just too small for VC-style deals to make sense most of the time?]
I've been calling bullshit on the "execution is everything" meme for a while now, but I hadn't thought of it as maybe a cause of increasing difficulty in the startup ecosystem. That is an interesting hypothesis.
The trouble is, that doesn't really say much either. "Finding market fit" essentially means producing something good enough that people will pay for it, so arguing that execution is all that matters for success with that definition is a circular argument.
On the other hand, if we contrast "execution" with "idea", as is often the case in HN discussions where the "ideas have little value" argument is made, we're effectively comparing having a good idea that we can make money from with having an arbitrarily bad idea and assuming that it can be incrementally adapted (<ahem> pivoted) into a good idea that we can make money from. I simply don't accept the premise that you can start from anywhere you like and always wind up making money as effectively as someone who started from any other point.
Is anyone saying that? I believe it's a strawman. What people say is "ideas are worthless" which is quotable hyperbole used to club stubborn NDA wielding entrepreneurs over the head. What people mean is: ideas are effectively worthless because until you start executing you don't have a good way to know if the idea is good or not.
So yes, starting point matters. Unfortunately, until you start to execute, you only have the an extremely hazy understanding if your starting point was good. Sure you can weed out absolute loser ideas, and you can get an idea of the risk profile of the venture, but not much more.
That is surely how it started, but I'm not sure everyone on the start-up scene today got the memo.
Unfortunately, until you start to execute, you only have the an extremely hazy understanding if your starting point was good.
I still respectfully disagree. Some of the most successful small businesses I'm familiar with started out with a disruptive idea in a specialised market that was so far beyond what was available at the time that there was never really any doubt that it would be viable and a successful company would result, the only question was how successful.
The common factors in each case were founders with a shared interest in/understanding of some specific field, often an existing support network in that field, a solid combination of general technical and non-technical skills, and most importantly, going where no other team with those combined strengths had been before. If you stop trying to appeal to the entire planet and start looking into niche areas (which does not necessarily imply tiny markets, just smaller than "everyone"), it's amazing how many opportunities there are to apply modern technology to do things qualitatively or at least order-of-magnitude quantitatively better, and how many real problems you can solve for businesses and private individuals alike.
Many of those businesses are also counterexamples to the popular wisdom that if you have no competitors in a market then that's a bad sign because there isn't really a market there. Sometimes you really are just that much better than everyone else, because if your market isn't full of geeks who build their own hardware or write software just for fun, even applying quite basic (by geek standards) skills can put you far beyond old school, manual ways of doing things.
I think we agree on the basic situation, just perhaps have a different idea of the scale.
To me, having a business that has merely millions of potential paying customers, but where those customers have a particular interest in what you're offering and there is relatively little competition because you really are doing something new, is worth more by any metric I care about than having a business with billions of potential paying customers who have no particular interest in what you're offering and dozens of competitors offering something similar. About the only metric where this doesn't come out on top in B2C world is "probability of hitting it out of the park", which is of interest to VCs and serial entrepreneurs playing the long game, but possibly not so relevant if you're just trying to start a successful business for yourself.
Your comment about "in an efficient world" is interesting, because I think this is where the received wisdom breaks down: the real world is nowhere close to an idealised efficient economy. Many people have the skills to use modern technology effectively, but a lot of them are working for someone else in some large business, and the overheads of that large business make many of these smaller projects commercially unappealing. The "correct" economic response for the people with the skills to take advantage of the market that would pay for them is for those people to break away and set up their own small, efficient businesses that can then make a very tidy profit by genuinely helping a lot of people who are below the radar of big business.
Of course, that requires skills other than technical ones, and an awareness of the possibilities, and a willingness to take a risk with your income when perhaps you have a mortgage to pay and a family to support, and all of those things influence what actually happens. But that is why there really are still a lot of very lucrative (by individual/small business standards) opportunities out there for those who are willing and able to make that jump.
Mixed in all of the fluff is the real answer, though worded vaguely. What this means is that Zynga, Facebook and Groupon tanking in the stock market is the reason. That is What Has Changed.
I mean seriously. This is what's wrong with capitalism, where undeserved windfall gains are the norm. Companies we invest in have to show they are able to make money! Wow, how revolutionary.
I'm still learning and I really appreciate guidance like this.