Skill or Luck: How Valuable is your experience & Where do you learn the most?

Chamath Palihapitiya formerly of Facebook, now running the very successful VC fund Social+Capital Partnership has said that he learned a lot of important business lessons when he was AOL.  Basically he learned what not to do because it was such a mess at that time.  He said that at a well known and super successful and high growth company like Facebook its “easy to conflate luck with skill”

I fully agree with this. I’ve learned to take a more critical view of credentials and people who have worked at “Academy” companies. You all know these companies, General Electric and in Silicon Valley it is Google. However, if you look at the success rate of ex-Googlers at very senior levels after they left Google (with some exceptions ie. Sheryl Sandberg) has not been that great. I believe greatness comes from being tested and where you get tested is when things are just plain messed up. I learned this at Yahoo!: when there was a period of time when things were going well (2002-2007) and I was glad to be part of this. But the great learning happened when things were falling apart (sadly), I was able to build a 2 different yet successful businesses while the larger company was suffering.

I have said it before, that the best entrepreneurs and programmers are ones who have had both successes and failures. They can draw the right conclusions from their mistakes & wins to build something great. The most dangerous entrepreneurs and worst ones in my view are ones who’ve had one big success. They draw the wrong conclusions from this success and frankly makes them overconfident. Think Steve Jobs: his NEXT company was a disaster because he took the wrong lessons from his first stay at Apple. But because NEXT did not go so well, he took these lessons to PIXAR and his amazing turnaround of Apple.

So the point: be careful with credentials and especially when you are hiring. Especially for a startup, sometimes better to hire someone local community college who is smart and hungry than the safe on paper, credentialed Harvard MBA.

Attacking Old markets or Building New Ones

I mentor at many startup tech accelerators in US & in Europe & Israel so I come across a lot of interesting startup companies. One of the most common discussions for early stage companies comes down to what problem they are trying to solve and what market/customers they are trying to tackle. I’ve found there are two types of businesses/markets and its critical to understand the difference.

There is the known customers & market where you are enabling behavior that is happening already. A great example is Instagram. There were always cameras phones and people using them to take pictures & upload them to social media sites. What Instagram did was to enable people to do this substantially easier and faster. This behavior could be offline or online behavior, the point is that the product or service allows them to do this faster, better & cheaper.

The other type of business/market is one where you are trying to go after a new market which requires customers to engage in brand new behaviors. It requires a lot of education and usually have a very long sales cycle or a long period of adoption. This is called a disruptive technology or service and it’s incredibly difficult to build. But at same time very lucrative and these are where the massive multi billion dollar businesses come from and many times in retrospective they seem very obvious. Ebay, Paypal, Amazon are ones that spring to mind.

Key to success of your startup is not confusing one type of business with the other. The strategies for success for each are very different. I hope this is learning more startups think about.

Ecommerce is Hard but sure is Exciting

I recall hearing the famous Oskar Hartmann of Russian ecommerce company KupiVIP say there is no such thing as a serial entrepreneur in ecommerce space. If you think about this its really true, ecommerce companies are a long term commitment. As a long time observer (and back during the late 90s participant, being an early employee at book etailer I know for a fact this is one of the hardest business models to execute on.

For a solid ecommerce business you need to get 4 things nailed down right. 1) Good marketing and unit economics (and it helps to have a brand)
2) Good shipping and logistics infrastructure
3) Good Inventory management
4) Great customer care
And you need to do all of these together well if you want to make it to scale. This is where you really reap the real benefits as a business.

Companies like Amazon, Rakuten from Japan & eBay started in the mid to late 90s so they have years of experience, well earned brand and immense global scale. And while they are definitely dominant players there have been some new areas of innovation in business models like Ventee Privee & Gilt Group flash sales models for luxury goods, focusing on specific vertical of well designed products to the subscription commerce models of Birchbox, Shoedazzle, Craft Coffee & Tealet etc.

Additionally mobile is changing the game where we see interesting vertically focused companies like Modcloth and Poshmark in the fashion space. I expect we will be seeing a blossoming of new ecommerce businesses over the next half decade (although probably at the expense of offline retail). Watch this space closely as its going to get very interesting.

The Rule of 3 and the Dangerous Middle

Anyone who has read previous posts know my views on Big companies and Startups. As negative as I tend to be about large companies I still believe they have key roles to play in the economy and have strong hands to play competitively. They possess a lot of knowledge, scale, a brand name and frankly all these help them capitalize on the inertia & natural inclination of customers to resist change.

Little startups on the other hand may not have a lot of resources but their ability to change direction quickly, their sense of urgency and ability to find niches serves them well in this new fast changing economy (mainly because if they do not, they will run out of money and close). Sometimes these niches emerge to end up growing into very big markets (think Dropbox or Airbnb).

The question that comes up in many discussions about technology effects on society and business is what happens to the middle (i.e the number 4-10 player depending on the industry of course). I can point to my experience at Yahoo! which started out in the late 90s competing against dozens of other portals/search engines. By 2000 Yahoo! had emerged to become one of the more dominant players with many competitors falling by the way side.

This is a regular occurrence in almost every industry. After an initial start with dozens and sometimes hundreds of competitors fighting for business, the industry eventually consolidates around 3 big players and with still some smaller players owning niches at the edge. Everyone in the middle die out and that middle ground is what many business strategists call the “Killing ground.” I believe we will be seeing this occur with much more frequency and speed in the technology industry.

Understanding this phenomenon is going to be important for the CEOs of both large companies and Startups as well as their investors. You either get scale or own a niche otherwise you are going to get crushed (and fast in the tech biz).

20% Time, Little Bets and Exploring versus Exploitation

“When a tech industry uses terms like optimization, its a sign of the start of maturity.”—Jeremiah Owyang

The winter months at the beginning of the year is always a great time to read, think and prepare for the upcoming business year. Had the chance to stumble upon a few books that got me thinking about the nature of the tech business and the crucial role startups play.  Two of them are older books that I wanted to re-read 1) Clayton Christensen’s “Innovators Dilemma” and 2) Peter Sims “Little Bets”, both if you have not read them I strongly recommend you pick them up. The third one is a newer one by Mauboussin called the “Success Equation” which I think will be one of best business books of the year and widely read by Venture Capitalists in the valley.

Christensen’s book talks about just how difficult it is for established companies to stay on top of big disruption innovations that change the industry. This is the case even for well managed and dominant companies and the main reason for their lack of ability to adapt is legacy mindset and focus on optimization.  The key relevant concept of Mauboussin’s book is the elements of luck and skill in success and understanding where people & companies fit in the skill to luck continuum so you can learn to deal with it. An important concept of Exploitation of profitable markets versus exploration of new markets is also introduced in the book. Big companies tend to be very good at exploitation but not so good at exploration. Small focused startups on the other hand are excellent at exploring and building new markets because they have no core business to defend.

This leads us to the concept of Little bets which means that companies need to make a series of small experiments if you they want to explore and hopefully grow into new emerging markets or risk being left behind (especially in a fast changing environment like technology). If you think about one of best exemplars of this is Google and their 20% time, where Googlers are allowed to spend 20% of their time on their own or new projects. This has apparently worked well enough that it lead to Gmail, Gtalk, Orkut, Google News among others. A startup itself is in many ways a little bet on an idea or concept and most will fold with arguably minimal damage the economy (unlike when a large company of 10000 people folds as an example)

If startups that do make it aren’t disrupting the main incumbents of industries, they will at least become the exploration arm of big companies. M&A (mergers and acquisitions) is the new R&D (Research & Development) as large companies can focus on what they do best: exploiting large profitable markets while startups do the exploring of new markets for them and when they reach a certain stage they get acquired by the large company. This has happened in the pharmaceutical industry; the enterprise software space with Microsoft, Oracle, SAP & being very aggressive in acquiring hot new startups and Cisco more famously in the networking space for their regular acquisitions to fill gaps in their product lines. All this has solidified the view in my head that the world for startups is going to be very bright still going forward.

Traction, Metrics and the OKM (One Key Metric)

As we go into 2013 there is a lot of talk about the Series A crunch, basically the inability of many startups who got seed capital to raise follow on VC funding ie. A Round. The joke here in Valley is that VC firms doing A rounds should just be called Traction capital as they only invest in startups that have it and this totally makes sense as traction is the only real signal that a company will make it and is differentiating one firm versus another at this point.  The challenge for VC firms now is finding interesting companies because there are so many startups in so many very interesting and promising industries (whether mobile, apps, consumer health, fashion, enterprise, ecommerce etc). Lots of potentially good companies and ideas in a sea of a lot of really bad companies and ideas and traction is sometimes the only way one can tell the difference.

`            What is Traction? It could be user growth, engagement or revenue that shows users or customers are really taken with the companies service <coincidentally there was a great article well worth reading that came out by Semil Shah in Techcrunch ( which covers this topic. He is one of keenest observers of scene in Silicon Valley>.  And these need to be real metrics that  show the true drivers of the business not “Vanity Metrics” that Eric Ries of Lean Startup fame decries….ie. metrics that make you look good but do not really help move the business forward (like new features or pageviews when u are not an ad driven business)

Which leads to another interesting development and common topic of discussion which is the OKM or One Key Metric raised by Mixpanel CEO Suhail Doshi. There is starting to be common view by many entrepreneurs here that all businesses have and need to have One Key Metric that everyone in the company watches and focuses on.  I understand how and why this view has come about because there is sometimes one key metric that is core to a business.

However as an operator who has run both small and large sized revenue businesses I think this is a dangerous and wrong view. You need to be looking at a set of key metrics (usually 5-10) which is the only way to get a full picture of state of business. These will depend on the business of course whether ecommerce (average order size, number of customers, new customers, LTV, order returns) or ad revenue driven businesses (user growth, time spent, sell thru rates of inventory to average CPM rates). For a startup which do not have a lot of time or resources, I usually recommend looking at 4-5 metrics minimum, anything more than that is probably unnecessary. As the excellent Nir Eyal (highly recommend his blog says, its about driving and measuring growth and engagement: this is the only way to build a sustainable business.

Updates from the Valley

So I had a chance to meet up with an old friend from Hong Kong last night who has spent the last year working on entrepreneurial venture which ultimately failed. He was visiting Silicon Valley for some inspiration as he was jumping into his next startup. We got to talking about what was happening in tech and got to trading ideas and experiences from this last year. As I was pondering this weeks post I figured this would be a good framework to update folks on the outside about latest developments here in Silicon Valley.

Regarding Venture Capital (VC) Funding trends, so we are definitely seeing some big shifts and changes here in Silicon Valley. The A-round crunch is definitely here, I firmly believe a lot of the startups that have popped up over the last 2 years or so will be having major issues raising additional funding beyond their seed funding rounds gotten from the rapidly proliferating number of angel investors (most who are what is classified as “dumb money”, people who have no understanding or experience in tech business or even what they are investing in). Additionally, we are seeing the big shift in VC investing away from consumer focused startups (social media, gaming, mobile apps, e-commerce) to more B2B Enterprise and Big Data plays. I also see a big move towards Education tech as well as even Financial tech startups. The one thing these spaces share are big incumbents, long sales cycles, lots of bureaucracy and legal legacy but all being huge markets that are somewhat broken; so very ripe for disruption and big opportunities.

As my friend and I were talking, he shared with me his issues with his co-founder. I had discussed this in a previous post on the importance of finding the right co-founder for your company, just as important as spouse when it comes to a new venture. Complementary skills are critical but there is also the element of chemistry involved. Its definitely something that is hard to measure but just as important as you are going to be spending a lot of time with that person.

The other part we discussed with the importance of the market a startup was targeting, its pretty important to go after a big and growing market and hopefully one that you had some experience or edge in. But I think many people miss one additional component to this equation, do they really even care or have some interest and passion in it. This is the catalyst that gives you the edge to stick with something and get good at it. With my own example, I have deep experience in e-commerce and Advertising/Ad technology but it also really helps that I really enjoy working in these industries (to the point that I read everything I can, go to every related conference and talk with everyone in the space….for fun). I’m definitely interested in enterprise and big data or even the Local space but I can’t say I’m either experienced or deeply passionate about these areas.

The lesson then is that these are probably not areas I should be even spending much time in. And whether it is fashionable or not from a VC investing perspective, its irrelevant because there is nothing worse than working very hard everyday on something you don’t really care about (something I see many startup entrepreneurs doing which is why most of them will fail).

Additionally, the way to look at VC funding is the same as market timing investing, the reality is very few people can time markets right.
If you are starting something for an industry that is already widely recognized as big or a sure thing, its too late. Just focus on doing something that is personally interesting to you, and hopefully has a big growing market irrespective of whether it is cool or not. VC money is like the tide, it goes in and goes out on a regular basis and the smarter ones of them will recognize a good thing regardless of whether it’s fashionable to invest into the sector.

5 Year Cycles and Change Coming to the Valley

As a longtime participant and watcher of Silicon Valley, I’ve come to the conclusion that at least while I’ve been here (14 years) the place seems to move in 5 year cycles. Like all emerging industries there are a multitude of players at the start but in the end of the cycle you end up with just a few dominant players.

So 1996-2001 was arguably the Age of Portals where the AOL, Yahoo! came to the fore. 2001-2006 was the Age of Search when the internet was finally recognized as a mass media & where Google became the dominant player. 2006-2011 is definitely the Age of Social with the rise of Facebook, Twitter and Linkedin. 2012-2016 in my view as stated in a previous post is the Age of Mobile. A big driver of this as widely stated in Silicon Valley is Moore’s Law where the computing/processing power doubles every 18 months which means there are brand new companies emerging every 2 years to take advantage of this.

I think its helpful and important to think in these cycles both from a company and investing perspective. From a company perspective, whether you run one or work at one as employee does your company have the ability to change quickly or is it well positioned to thrive in the new emerging competitive space. This is a very important question to ask as many formerly dominant companies fell by the wayside during these cycles(just ask anyone at Yahoo!, AOL, Myspace, the list can go on).

The same goes on the investing side. While there are some VC firms that seem to be able to stay on top thru these changes (Sequoia, Greylock, Bessemer, Charles River, Accel, Union Square Ventures and arguably Kleiner Perkins….i stress arguably) we see many Venture Capital funds unable to raise new funds due to them not being able to get the returns. Additionally we see many new competitors like Andreesen Horowitz which have come from nowhere in the last few years to dominate deal flow. There are also many new players in the early stage space from super angels like Ron Conway’s SV Angels, Y Combinator Accelerator program (which now has a fund) to Dave McClure’s 500 Startups. What these new players signify are a big shift from MBAs and purely financial experts to former entrepreneurs and experienced operators on the VC side. Money has become a commodity so the only value add and differentiator from Smart Money and Dumb Money are the skills the VC brings to the table.

I believe we are just starting to understand and recognize the implications of these changes as we go into the next 5 year cycle. But this is what makes the Silicon Valley game so exciting and thrilling and whoever jumps on the opportunities that come out of this is going to do well (or at least learn a lot and prepare for the next cycle).

Amazing Amazon and Why They are the Company to Watch

“I believe you have to be willing to be misunderstood if you are going to innovate”—Jeff Bezos

No surprise that Jeff Bezos has been voted by Fortune as 2012 Business person of the year, the founder of Amazon, one of the famous 4 horsemen of the tech world (Amazon, Facebook, Apple, Google). Amazon in my view is underestimated by everyone.

Why do I think that? Several reasons: most ecommerce companies need to do a few things very well. 1) Have amazing customer care 2) Have great logistical expertise & inventory control 3) Great brand and unit economics (ability to be great at customer acquisition at an affordable cost. does this incredibly well and has been at this game longer than most companies, having started service in 1995. They have logistic centers across the US and globe as well as operations in over a dozen countries and services customers across the globe which proves out their Huge scale. Huge scale leads to their ability to compete on price, as Bezos had once said “Your Margin is my opportunity.”

The fact that they are the biggest ecommerce player on the planet means they have access to tremendous amount of data that most companies would kill for. This is also why I am very bullish on their new initiative on getting into digital ad space where data on users are critical for better ad targeting. Better ad targeting leads to higher performance and hence higher yield on inventory. Add Amazon’s scale to this and it’s incredibly powerful.

They are also one of the biggest if not the biggest player in Cloud space with their Amazon Web Services, leasing computing power and servers to hundreds of thousands of businesses across 190 countries (Source: Next advantage is their growing Kindle/Kindle Fire tablet platform which in my view is a potential challenger to Apple’s iPad tablets as they slowly add features and functionality at a low price. This is a classic Innovator’s Dilemma strategy (of Clayton Christensen fame). Tying this up we have Amazon Prime which started off as a membership service that started off giving customers free 2 day service but as evolved into additional services like free instant videos and kindle book rentals. The key to Amazon Prime is that it starts to tie customers in closer to them and customers begin ordering regular day to day products more regularly. It’s the closest thing to a subscription commerce model, if think of Software as Service regular recurring revenue, you will begin to see why this is a potentially huge advantage (cashflow and direct customer contact) they will have over the other Horsemen.

So if you put all the mentioned advantages together, Amazon in my opinion seems to be the best positioned company to thrive over the next decade.

Design is the New King of Tech Businesses

One of the most common and prevalent themes this year in Silicon Valley is the importance of design. If you go to any major conference Design is major topic of discussion, talk with recruiters or senior managers of startups or large companies and you hear that one of the hardest roles to fill is User Experience Designer. I remember back when I moved to SF Bay Area back in late 90s for the first dotcom boom, design was not a critical part of any major discussions at the startup I was at. Even when I was at Yahoo! the UED (User Experience & Design) team which played a critical role was sometimes an afterthought. How things have changed over the last decade and I think Apple was a key driver of this.

Apple showed that design thinking, which I define as melding art and science: building an amazing customer experience by thinking and connecting the retail store to building seamless software and hardware products to customer care to marketing and even packaging. Every part of the chain was considered and designed specifically to entrance the customer and I believe this has been the key differentiator for them versus their competitors and THE reason for their dominance over the last decade. Competitors have noticed, Microsoft, Samsung and others are fast on their tail. And this has not just influenced large companies but startups as well.

Square the hot new financial payments company is fully design driven, every little piece from the dongle device, to the credit check process as well as the simplified fees structure (as compared to other players which are just plain unfriendly). The fast growing and by all standards, successful AirBnB was started by Rhode Island School of Design graduates and just by visiting their site you can see the strong influence of design thinking. Tumblr which is a visual marvel that has strong roots in design as well. And money always follows success, there is even now The Designer Fund ( which is focused on investing into Designer founder startup companies (great idea by the way!).

Design thinking puts humans and human experience at the center. And while this was always important even in desktop driven world, it becomes even more critical as we move into the Age of Mobile. Instagram and Path are both high growth mobile startups that started with a mobile first strategy and designed explicitly for small screens. You can see why many of the desktop giants are floundering during this transition to mobile world as taking the desktop experience and reducing it to mobile never works. On the other hand, having a mobile site and then expanding it to desktop world probably is just plainly easier. I think you will be seeing more examples of this in the next few years. As the Mobilebeat conference motto last June said “Design is the New Battlefield.”