Five Things I Learned From Steve Jobs

On the heels of Steve Jobs’ announcement that he’s retiring from Apple (okay, I’m a little late for the heels, but there was a pseudo-hurricane),  I thought I’d reflect on the top five things I take from the single greatest entrepreneur in the history of consumer technology.

1. Know Your Customer:  When you start a business or step into an existing enterprise, it becomes easy to focus on operational or strategic issues.  It seems to me that having an almost religious obsession with the customer experience is the best bet you can make on where to expend your limited resources.

  • Jobs understood that his customers want their computing experiences to be seamless, and that they’re not interested in working through compatibility issues between manufacturers and software developers.  This understanding has allowed Apple to enjoy premium prices in a commoditized market for decades.
  • Remember what everyone was saying about the iPad before it was released?  Those who doubted the market demand for tablets spent months trying to catch up after the iPad’s initial success,  only to release products that felt like cheap knockoffs months too late.
  • An example from another successful tech company: when Google’s Page Rank algorithm was first created, the company’s first strategy was to license its search technology to existing search engine websites.  The issue, as the story is told, is that Google’s technology was too fast and, if users left the search sites too quickly it would hurt display advertising revenues.  Of course, users wanted fast search and that became the model that eventually won out.

There are a million other great examples of this approach paying off in big ways.  Know your customer and understand their needs.

2. You Cannot Replicate Culture: One of the reasons that Apple’s stock didn’t take a big hit following Jobs’ announcement is that investors have bought into the idea that not much is going to change at Apple.  The reason that nothing is going to change is because their culture is fully-baked.  One of the advantages of being a first-mover is that you can spend more time developing your product than your fast followers can.  Apple is a design firm first and that DNA shows in everything they release.  That type of culture is almost impossible to replicate; it will give Apple a competitive advantage for years to come.

3. Do What You Love / Follow Intuition:  Check out this quote from Jean-Louis Gassee.  I think that doing what you love means accepting that fact that a lot of people will be sure that you’re doing it wrong.   I’m finishing a behavioral finance class with a professor who spent all of 1999 shorting tech stocks.  He said that he became physically ill every night as the market continued to rise– that he didn’t sleep for a year.  But his intuition was right: doubling your market cap every month is unsustainable and it doesn’t make any sense.  When I think about Steve Jobs, I think about how difficult it must have been to get fired from the company that you founded.  The idea that ‘you’re doing it wrong’ can affect your decision-making if you let it and the contagion can eat you up, even if you were right in the first place.  Doing what you truly love helps you mitigate those downsides and it helps you trust your intuitions.

4. Think Big and Small: Apple’s products are a collection of seamlessly integrated UX details.  While Apple changed the world in a lot of ways, most of what they accomplished came through creating superior user experiences– the details.  For example,  while strategy played a roll with the iPod (iTunes music store), everyone bought an iPod because it was slick and it made digital music fun.  I think that the importance of UX / design cannot be overstated, especially in web and mobile products.

5. Fail: As Jobs himself said in his commencement address at Stanford,  “you can only connect the dots looking backwards”.  Creating and ideating are the only tools you have to build something great.  Failing is, for most people, an inevitable outcome for the majority of your attempts.   Don’t think Apple has had any failures?  Check out these five epic Apple fails (granted, not all of them occurred on Steve Jobs’ watch).  Aside from these more esoteric failures,  think about the battle for industry standard when the PC first came out.  Jobs and Apple lost in a glorious fashion to the Wintel model.  As a result of that failure, Jobs learned the importance of available software applications on any system– which is why we have the App Store today and why the iPhone and iPad have been such a huge success.  Early failures + great leaders = future successes.

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Building Networks

I had the privilege of hearing Albert Wenger speak this evening at the Entrepreneurs’ Roundtable in Microsoft’s New York office.  I met with him once before at Union Square’s open office hours a little over a year ago when I was working on a location-based service for live events.  Both then and tonight, Albert talked about the USV approach to investing in networks, the idea being that the only lasting competitive advantage on the web comes from establishing networks.

The web is generally a very fluid place for users.  The ‘next click is always free’ and attention is harder to capture than ever (and is being driven by different forces than just a few years ago).  Albert mentioned this evening that the scarcity of the web is attention, not publishing. In other words, it’s relatively easy to put something out, and content is in near-infinite supply as a result,  the real challenge is getting noticed.  A few years ago, one of the biggest solutions to the attention issue was getting up in organic search results, or paying for search in order to get traffic (attention) to your site. That’s been changed significantly as social media has altered the way we find and consume content on the web.  The Facebook stream is the new organic search result.

I think this thesis is what has driven new startups towards the user acquisition model in the web. Most new consumer-facing web businesses have focused less on ‘traffic’ and more on ‘users’.  The smartest businesses are leveraging a new user’s social graph in order to get their friends in on the experience, which creates value that cannot be replicated by a competitor.  Users don’t buy into a new service on the web based on feature sets, the stickiest users are actually buying into being a part of a network.

In the world of Facebook and Twitter, very large horizontal networks that have captured massive user bases, this probably means creating vertical networks that are still big enough opportunities to make them worth the effort and risk.  These opportunities can be identified by analyzing groups that have high-intensity shared needs and interests that cannot be satisfied by the larger players.  For example, AirBnb has built a network for people with apartments and people who need to rent for short durations.  Craigslist wasn’t doing this in a way that facilitated any trust, and Facebook doesn’t offer a place for these transactions–  so now Airbnb is on its way to becoming a billion dollar business.  I think there are still an incredible number of industries that haven’t been disrupted by the new way that we organize and consume information.  Even industries with existing players on the web, like tutoring or test prep, tend to replicate the real-world model online without considering the fact that the same assumptions that are required to make a real world business work are not the same assumptions required to make a web business work.

Building A Thesis

Investing in startups is a phenomenally risky business. True, when compared to the current machine-driven equities market the asset class may not seem as crazy as it did last Thursday, but it’s risky nonetheless.  At the early stage there are very few corporate finance tools that will work for potential investments, which is why the industry typically puts money into team, market and idea, leaving the financial engineering for the later stages.  It’s not out of a desire to do so, it’s out of necessity because most of these companies have a prototype and a thesis and not much else.

Last week I wrote about why VCs may tell you no,  so this week I thought I’d talk about a few places where I think there is tremendous opportunity in the near and mid-term future.

1. Taste Graph and Real-time Data

This “sector” represents the convergence of two trends:

  1. The web is quickly shifting from search-friendly to social-friendly.  Any web user’s online behavior in Facebook, Google+, Twitter and on various web and mobile applications provides a tremendous amount of information about their likes and interests.
  2. Massive amounts of data: web clicks, social posts and other points, are now available in near real-time.  This makes the web a more dynamic environment than it was a few years ago.
I think these two trends present opportunities for startups in the following:

  • Digital Advertising Arbitrage: I wrote an earlier post about this, but it bears repeating because I’m really into it!  I believe that real time data can be used to improve inventory.  Current network CPMs are somewhere around $1-$2, but retailers will often pay very high prices for conversions or acquisitions (CPA, CPL).  I believe that wedging social graph data into the equation creates an opportunity to sell expensive CPA inventory and deliver it by purchasing inexpensive CPM inventory.  There are companies working on this, but I believe that the playing field is still open because media buyers have not adopted this model yet, but they will soon and it will scale.
  • Social Media Marketing:  I may eat these words, but I think this opportunity is less attractive than social advertising.  Analytics is becoming increasingly commoditized as social media monitoring vendors continue to pop up offering cheaper and cheaper solutions. There are also good free options out there for most SMBs.  The same goes for managing social publishing.  I think there are inexpensive options out there that are “good enough”.
  • Content Optimization: Publishers have not utilized social for optimizing content for visitors.  Using link-sharing and application data, publishers should be getting closer to building custom experiences for visitors based on their interests.  I believe there is room for companies that can help publishers bridge this gap and increase time on site and page views per visit.

2. Mobile Social Networks

I wrote about these earlier in the year, but I think that there is a big window that has been left open by Facebook and Twitter.  The mobile experience for these platforms leaves something to be desired:  they’re not addressing mobile experiences.  Instagram and Foursquare are the first success stories to come out of the mobile social network space, and I think that there will be others.  For example, why hasn’t a mobile dating application worked for the straight world yet?  Any solution needs to present a UX that makes people feel safe and that’s clearly been difficult to achieve, but when the straight version of Grindr comes out, it’s going to be a bit of a “duh” moment.  Of course, meeting new people isn’t the only opportunity here, but it’s definitely an obvious one.

3. Mobile Games

People have downtime in life and like playing games: simple premise.  I think the benefit (and risk) of the mobile gaming market is that its largely hit based.  Zynga was able to leverage its scale to create its own ecosystem in Facebook.   I have a hunch that mobile gaming is still in its infancy and that there is a tremendous amount of opportunity here.  The Zynga model of collecting payments in exchange for experience (virtual goods) is going to continue to win in mobile.  I think pay-for games with no trial won’t last and micro-transactions will be the way to monetize mobile games moving forward.

4. Online Education

It seems to me that there’s still a gap between how far the consumer web has come and how little the education industry has changed.  Last fall, I worked on an online tutor marketplace with a few entrepreneurs and in the research process we discovered that there seems to be a general consensus that the way we teach and learn in this country is ripe for disruption. Skillshare, Knewton and Tutorspree are all great startups in the space.  I think that there’s still room for new innovations and intend to learn a lot more about the business this year.  With that in mind, if any of you are in the education sector, I’d love to buy you coffee and learn from you!

5. Healthcare

Aside from energy, the $2.5 trillion healthcare industry in this country is the probably the biggest fish in the sea.  The information asymmetries in the U.S. healthcare system create inefficiencies that cost billions of dollars and thousands of lives every year.  New legislation is driving a change in the incentive structure of the business, the intention being that a payment structure can be built to incentivize value over volume (if you want to know more, check out this guest post from Dave Chase on Techcrunch). New legislation often opens up new opportunities, and this space seems ripe for disruption.  I look froward to seeing new startups in this space.  As with education, this is an industry that I’m interested in learning more about.

That’s about it for now.  Regarding education and healthcare, I believe that much of the opportunity still exists because the sales cycle in these industries is long enough to make the most well-funded company with the best idea run out of money.  As Keynes said, “markets can remain irrational a lot longer than you and I can remain solvent”.  I think this holds true in early stage investing, especially when you’re dealing with industries with large leaders that make plenty of profit keeping things as they are.  However, I believe that the impending  federal spending reform will wedge some opportunities in these industries,  making investments in startups more attractive.

Five Reasons VCs Say No (aka “Team, Market, Idea”)


As my Summer at Softbank winds to a close, I thought I take an opportunity to relay a few insights that I will take with me from my time with the incredible team up in Newton.

I started out learning about investing from Jerry Neumann, who at the time was a professional angel, before he launched NEU.  Angels and VCs have different investing criteria, usually because venture capitalists need to put more money to work, tend to have a more formal process and try to stick to a thesis.  One difference that I learned about in Newton is how VCs look for a fit, and it’s something that I hadn’t fully considered before I arrived at Softbank.

There is a limitless number of reasons that venture capital funds will pass on opportunities, but these are five reasons that entrepreneurs can work to mitigate:

1.  Addressable market is too small:  One of the first things you have to do as a VC is convince yourself that, if the planets align and everything works perfectly, your company is going to be OMG huge.  That means that you are building something that can potentially be a billion dollar company, or at least worth something north of $100M.  There just aren’t a lot of these types of successes, so if you’re going to swing, swing big.

2. Conflict with an existing portfolio company:  This is a very avoidable mistake that entrepreneurs sometimes make.  If there’s a conflict with an existing portfolio company,  you’re not going to get an investment from that fund.  In the early stages companies pivot.  There are also companies that might be close and not compete, so this one is admittedly a grey area.  With that said, look at a fund’s active investments and determine if you think there might be a conflict before you have the conversation.

3. Doesn’t fit the focus: Venture capital funds have Limited Partners who sign on to invest based on criteria that’s not unlike the method VCs use to look at companies:  team, market and idea.  The VC version of “idea” is a thesis, which forms a guideline on how a particular fund will invest, and the types of companies it will look to invest in.   If you don’t fit in the thesis, you might be outside the scope of what a particular fund is comfortable investing in.  That does not mean that you should skip a conversation if you can have one.  Good VCs make introductions all the time, and if you’re not a fit for one fund it doesn’t mean that there isn’t a fund that your idea would be perfect for.  Try to get an idea of what a firm’s thesis is before you reach out.

4. You scale with bodies: This is a bit of an extension on reason 1.  Companies that can scale are the only companies that can hit $1 Bn. valuation.  There are a lot of very profitable, very big businesses that don’t scale very well.  Examples of  companies that “scale with bodies” are law firms, agencies or consulting firms.  If the value is 100% in the people and their relationships, then the value walks out the door with employees. That’s not the type of businesses that VCs are usually interested in.

5. Team: Saving the most important reason that VCs say yes or no: the team.  In valuations class,  we learned how to value companies using knowable metrics like revenue, cash flows and leverage.  In early-stage investing, there are no metrics to value a company on.  The real asset that venture capital firms invest in is the founding team.  Do they know the business?  Have they done this before?  Have they considered the risks and designed ways to minimize them?  If you have an idea that’s in an industry that you don’t know anything about, you are going to have a very dificult time getting funding.  Typically, it’s the little things that make a an industry unique.  You can learn 80% about an industry in a few days of research.  The other 20% requires practical knowledge, and that usually requires experience.  If you don’t have experience in the business,  get someone who does on your team.