Knowing your numbers

I regularly meet startups who don’t have a good handle on their core metrics like contribution margins, retention rates, and customer acquisition costs. When I ask them why this is the case, there tend to be two answers.

The first answer is “we’re growing”. Although Paul Graham wrote his Startup = Growth post with good intentions, unfortunately it now serves as an excuse for many founders to overlook other equally important metrics. While startups certainly need to grow fast, growth is just the tip of the iceberg. There are many different ways to grow and great startups have either found cost-effective ways to grow or have a good handle on why their current growth isn’t cost-effective but will be in the future.

The second answer, which is related to the first, is that it’s too early to optimize metrics like contribution margins, retention rates, and customer acquisition costs. While this is true for most startups, there’s a difference between measuring numbers and optimizing them. Although you may not need to optimize them now, you will need to in the future. And doing so requires that you understand their history so that you are familiar with their drivers and know which drivers to focus on when the time is right. You won’t be able to optimize in the future what you didn’t measure in the past.

In the end, the reason why you need to know your numbers isn’t because they determine your fate right now. It’s because they will determine your fate in the future. Although the numbers will change as your startup gets older, if you don’t get into the habit of tracking them and seeing how they change in response to different actions now, you’re unlikely to do so in the future, and even if you do, it may be too late.

You may have fallen into a goldmine of a market where the numbers work out without you even knowing them, but the odds are slim.

The heterogeneity in the homogeneity

AngelList recently shared the performance results of its 2013 vintage of syndicate investments. Although the results are unrealized, they’re very impressive, with a 2.4X return multiple in less than 3 years and a 46% IRR. Keep in mind that this is the return from all AngelList syndicates without any insight applied to select the best ones.

This reminded me of the reaction of many VC’s when they first heard of AngelList. Many VC’s believed that AngelList wouldn’t be able to achieve great returns because the great investors who invest in great startups wouldn’t share these opportunities on AngelList. This would leave AngelList with mediocre startups.

Fast forward several years and AngelList’s aggregate unrealized returns from its 2013 vintage signal that this hypothesis is likely to turn out to be incorrect. Why were so many investors wrong?

One reason is that AngelList is a partial substitute to traditional VC money. The more money that the best startups raise from AngelList, the less there is left over for traditional VC. So many traditional VC’s see AngelList as a risk to their business and dismiss it out of a combination of self-interest and fear.

The second reason is that groups of people are not homogeneous. In this case, the group of great investors is not homogeneous.

Those investors who initially dismissed AngelList took this position because they believed that great investors wouldn’t share their opportunities to invest in great startups with others on AngelList. Instead, they would attempt to take as much of the round for themselves as possible.

For most investors, this is exactly what happened. Institutions like Sequoia Capital, Benchmark, and Accel don’t run AngelList syndicates. However, these aren’t the only great investors out there. A few great individual investors who have access to great startups did end up running AngelList syndicates. They did so because AngelList gave them the opportunity to invest more money than they could do so on their own while also earning a carry on this additional firepower.

And what you need to make something work is not everyone, but a few people. In fact, if you try to serve everyone, you’re unlikely to succeed. There are very few needs and wants that are universal.

Most needs and wants are shared by subsets of people. In other words, most groups are not homogenous. Specific individuals within what looks like a homogeneous group at the surface are actually heterogenous when viewed across a specific dimension. However, it takes time and effort to discover the sources of heterogeneity in what initially appears to be a homogeneous group of people. And therein lies your opportunity.

Most people don’t want to share the best startups they discover. But some do.

Most people don’t want to wear used clothes. But some do.

Most people don’t want to buy their homes or cars online. But some do.

Most people don’t want to host strangers in their home or let them in their car. But some do.

Thoughts of a Navy SEAL

Jocko Willink is a retired Navy SEAL who participated in the Iraq war.

Former Navy SEAL’s are rarely public about their experiences but Jocko is an exception. He participated in a podcast interview with Tim Ferriss  back in September 2015 and, likely as a result of the positive experience, has been hosting his own podcast on leadership since December 2015.

I have yet to listen to the podcasts on Jocko’s website, but I found his interview with Tim fascinating. His views on life, which are largely defined by the cruelties he saw in war, help put everything else (like business and politics) in perspective.

You can listen to the full interview between Jocko and Tim below.

Emre from Tapu

Emre Ersahin, co-founder and CEO of our online real estate auction marketplace investment Tapu, was recently on Bloomberg HT.

In the interview, Emre talks about how Tapu works, the advantages of its online auction model for both buyers and sellers, and the company’s recent expansion to begin serving individual sellers.

You can watch the full interview in Turkish below.

Creative time

Those of you who know me know that I’m an early riser. I wake up at around 6 AM. Meetings rarely begin before 9 AM so this gives me 3 hours of free time.

I spend about a total of 45 minutes showering, dressing, and getting to the location of my first meeting. I spend another 45 minutes catching up on urgent emails from the night before. It’s now 7:30 AM and this leaves me with a good 90 minutes of time. Since everyone else is busy waking up, having breakfast, and driving during this time, there are rarely any interruptions.

These 90 minutes are when I’m most creative. I don’t have any particular agenda during this time and I just see what I feel like doing.

Sometimes I choose to think about the market and use cases for a new startup I’m evaluating. This isn’t the structured and rigorous investment checklist review, financial and KPI analysis, or reference checking which are also part of a startup’s evaluation, but rather an unconstrained journey where I let my imagination roam. I try to picture how different people might use a startup’s current product and how the product may evolve in the future.

If I have a learning from a meeting, a product I used, something I read, or another source that I want to articulate better I might choose to write a blog post about it. Writing helps me structure my current thoughts while also helping my future thoughts arrive in a more structured manner.

And sometimes I pick one of our existing startups and try to place myself in the shoes of the founder. I imagine what the top 3 pressing issues they must be thinking about are, and how I can help them address these issues. Sometimes I shoot them an email with an idea, or identify a potential business partner and ask them if they’d like to meet.

Although these 90 minutes aren’t my most productive in terms of the number of things I get done, they’re very productive when I measure the long-term value generated by the thoughts that I have during this time. If you’re looking to be more creative, I strongly recommend that you set aside at least an hour of uninterrupted time each day and just let your mind roam.

A startup’s edge in hiring over big companies

When startups compete with big companies for talent, they’re often unable to match the cash salary offers made by the big companies. The reason is that startups have less money than big companies.

However, startups have two big advantages over big companies which they can use to attract talent. The first is equity (or options on the underlying equity; I’m going to use equity to cover both equity and options throughout this post). The second is the offer of responsibility and the ability to have an impact which this responsibility brings.

Big companies rarely offer equity to their employees. In theory, they could, but in practice they don’t. I think this has to do with the fact that most big companies need most of their employees to execute on their existing operations. They don’t see the need for people to come up with and execute on creative new projects. And the former employees don’t demand equity.

And even if big companies did offer their employees equity, this equity doesn’t carry as much upside as that offered by a startup. The equity upside potential of a startup is much greater than that of a big company.

So startups can gain an edge over big companies by offering equity to their employees. As a result, startups need to frame their compensation discussions with employees around the value of the total package they’re offering rather than just the cash component. While they’ll likely fall short on the cash component, the expected value of the total package will be greater if the candidate believes that the startup has the potential to be a great company. And you want to work with employees who believe this.

In addition to emphasizing the value of the total package it’s offering, a startup can give its employees more responsibility than that offered by a role at a big company. And with more responsibility comes the ability to have a greater impact. Not every employee wants this. But, once again, you want to work with employees who do.

So, if you believe you’re a great startup but are having difficulty winning talent over big companies, keep emphasizing the total package you’re offering and the responsibility and ability to have an impact that the role you’re looking to fill provides. It’s a great way to filter out the talent that isn’t a good fit for your startup and attract that which is.

Insider’s new round

Insider, a customer acquisition and optimization software provider where we’re investors, recently announced its new funding round. The round was led by 212 and also included participation from Wamda Capital, Dogan Holding’s investment arm Oncu, and existing angel investors Melih Odemis, Emre Kurttepeli, and Erinc Ozada.

When we originally invested in Insider 3 years ago, over 90% of the company’s revenue came from Turkey, with the remaining coming from the recently launched Russia office. Since then Insider has tripled its revenue in Turkey while also beginning to serve several new geographies including the Middle East, Poland, and most recently Asia Pacific. The majority of Insider’s current revenue comes from outside of Turkey.

I congratulate the Insider team on their capital efficient growth which laid the foundation for this round, and welcome Insider’s new investors to the company.

Investor communications done right

I was recently reading the investor update email of one of our startups. The startup’s founder pays a lot of attention to keeping investors in the loop and requesting their support. I really appreciate that, and I’m sure most of the other investors do as well. From the 3-5 investors that the founder highlights in each update for having helped her out, this seems to be the case.

One consequence of the founder’s emphasis on having healthy communications with her investors is that the update emails can be pretty long. And the most recent update was even longer than usual. The founder recognized this, and prefaced her update email by stating that she’d be very glad if we would read it all. But just in case we weren’t able to, she also wrote a summary of the most important points.

There are two important takeaways from our founder’s actions.

The first is the value of keeping your investors updated. As shown in this case, doing so makes it more likely that your investors find ways to help you out. It also makes your investors more likely to continue to invest in your company in the future. Our founder’s approach serves as a great example of investor communications done right.

The second takeaway is that, if a founder spends the time to keep you updated on the progress of their company, and you’ve invested in that company, the least you can do is to fully read their updates. The update is the result of the thousands of hours of work that the founder and their team have put into the company, and the multiple hours that they have spent summarizing the outputs of that work for you. The least we can do as investors is to spend the 30-60 minutes necessary to read the update and think about how we can help out.

When you don’t know what’s going on at a company you invested in

From the outside, one might think that venture investors know about all of the important developments at their companies before those developments are made public.

Very often, this is the case. For example, when you’re the largest investor in the company’s most recent funding round, you know about most of the company’s financials and key metrics, the important product features that the company is working on, and the important hires that it’s looking to make. It also helps if the entrepreneur believes that you’re likely to invest in their next round as this gives them a greater incentive to share this information with you.

However, if you’re a smaller investor in a specific round, or if you were the largest investor in an earlier round but new rounds have taken place such that the new investors have a greater financial stake and rights in the company, and the entrepreneur believes that you’re unlikely to lead a future funding round, you may no longer know about what’s going on at the company before the public does.

As an investor, this takes a while to internalize. After all, even if you invested just a small amount in a company in an earlier round, you could readily make the case that you expect to know about what’s going on at the company in near real-time because of the impact that these developments will have on the value of your investment. However, that’s not how things work.

If an investor doesn’t have information rights (which are usually round-specific and go only to major investors), an entrepreneur running a private company isn’t obliged to share information with that investor. And even if the investor does have information rights, there’s a wide range in the extent to which entrepreneurs actually share information.

Given that that’s how things are, you need to operate with that reality in mind. Whenever you’re making an investment, you need to foresee that there may come a time when you don’t know what’s going on at the company any more than the public does.

And that’s why an entrepreneur’s ethics and judgment are so important. If the time comes when you don’t know what’s going on at the company, are you still going to be comfortable that the entrepreneur is acting ethically and making good decisions? Or are you going to have trouble sleeping at night?

Answering that question before making an investment makes you a better investor.

Nassim Nicholas Taleb

Nassim Nicholas Taleb is a student of probability and the author of The Black Swan and Antifragile.

In The Black Swan, Nassim shows that we consistently underestimate the probability of occurrence and resulting impact of extreme tail events, yet readily come up with rational explanations for them after they’ve occurred.

In Antifragile, Nassim shows how some things are resilient to and even benefit from these tail events, and recommends that we construct our lives and the things around us to take advantage of this property.

Nassim recently gave the 2016 commencement address at the American University in Beirut and shared the text version of it online. It’s a great read and I encourage you to read it all.

Here are some excerpts:

“For I have a single definition of success: you look in the mirror every evening, and wonder if you disappoint the person you were at 18 …”

“If something is nonsense, you say it and say it loud. You will be harmed a little but will be antifragile — in the long run people who need to trust you will trust you.”

“If I had to relive my life I would be even more stubborn and uncompromising than I have been.”