Monthly Archives: December 2012

Why you want your VC to provide honest feedback

The new year is a time for reflection. By thinking about the events of the past year, we seek to learn from our experiences in the hope of a better future. The steps which we need to take to build this better future are traditionally articulated as new year’s resolutions. While each of our specific resolutions are different, they all share a common theme. We all write our new year’s resolutions with the goal of becoming a better person in an area of our life that is important to us.

As a venture capitalist, I was thinking about what a VC can do to adopt the values of a good person in their career. As I reviewed some recent interactions that I’ve had with entrepreneurs, it became clear that providing honest feedback is one of the cornerstones of being a good person in the VC industry.
Whether I’m working with an entrepreneur I’ve backed or am reviewing a new startup, I always pay careful attention to provide my honest thoughts. If I’m genuinely excited by what you’re doing, I’ll let you know. This is the easy part. All founders like to receive feedback which is aligned with their own thoughts and plans, so this makes it easy on VC’s to provide such positive feedback. The challenge is to be honest enough to provide negative feedback when necessary. In these cases, the easy approach is to avoid the issue altogether or point to a lesser evil as a scapegoat for the actual feedback that you want to give. For instance, if you try out a startup’s product but don’t like it, it’s much easier to say that the market is not ready for the product than to directly question the product’s quality.
Although it’s easier to avoid giving negative feedback, especially when you have yet to invest in a startup and therefore don’t have any money at stake, I simply don’t feel comfortable being insincere. The discomfort from avoiding the truth is much greater than the discomfort from getting a potentially adverse reaction from an entrepreneur. Most founders take negative feedback well because they understand that it is designed to help them address their weaknesses and improve in the future. Instead of sweeping issues under the rug, the intention is to deliver short-term pain for long-term gain. Most founders also take negative feedback with a grain of salt because they recognize that investors can be wrong, and in fact often are. If you don’t believe me, check out my earlier post on Venture capitalist misses and what they mean for entrepreneurs
However, some founders take negative feedback personally. This is despite the careful attention which I pay to focus my feedback only on what the startup is doing, not the people behind it. Although I understand this reaction as it can be hard to hear a newcomer criticize a product that you’ve spent months or maybe even years building, for a short while it makes you question your commitment to providing honest feedback. 
Ultimately, however, a VC’s role is to help entrepreneurs grow, not to keep them happy. The odds of a startup succeeding are already low enough. We don’t need to make them any lower by avoiding tough conversations. In fact, it’s our responsibility to increase the odds of success as much as possible. For every founder who gets angry upon hearing negative feedback, there will be another who uses that feedback to get even better. These are the entrepreneurs I want to be working with, so I’ll continue to provide honest feedback, in 2013 and beyond.

When to pull the plug

Turkey is experiencing a rapid rise in tech entrepreneurship. I touched on some of the most recent trends and the tremendous promise which the industry holds in posts including Istanbul’s potential as a regional hub for tech startups, Rocket’s departure doesn’t change the strong long-term fundamentals of Turkey’s internet sector, and Yemeksepeti’s opportunities for geographic and adjacent business expansion. The fast paced growth of the country’s tech startups has contributed to the emergence of another exciting trend: experienced entrepreneurs authoring books to share their learnings and encourage new entrepreneurs. “Kaldirac Etkisi” (The Leverage Effect) by Ekim Nazim Kaya, cofounder of Botego, and “Dijital Girisimcilik Rehberi” (The Digital Entrepreneurship Guide) by Serkan Unsal, cofounder of Dakick, are two excellent books released in 2012 that teach the fundamentals of tech entrepreneurship to aspiring Turkish founders. Encouraged by the success of their first books, both Ekim and Serkan have already started to work on their second ones. If you haven’t gotten your hands on copies of the first books yet, I strongly recommend all Turkish entrepreneurs to take the time to read them over the holidays.

Since Serkan’s first book taught the fundamentals of tech entrepreneurship, his second will focus on analyzing the contributors to a successful startup ecosystem. As part of his research, Serkan will be traveling to Silicon Valley in January to interview entrepreneurs, venture capitalists, incubators, and other members of the startup community. I also had the chance to catch up with Serkan last week in a lengthy interview to share my experiences in the US and the resulting learnings for Turkey. The book will cover the interview in greater detail, but I wanted to touch on what I think is the most important question we addressed here. In particular, in light of most startups’ prioritization of growth over profitability, we discussed how much sense it made for VC’s to continue investing in growing startups which remain unprofitable even several years after their launch. As an investor, how do you decide if you should pull the plug?

We can inform our answer to this question by considering the extreme example of when a startup has just launched. In this case, the startup almost always has negative operating cash flow. When you have a team developing a product, until that product is launched the team has expenses which need to be covered even though they don’t have any customers to earn revenue from. Why do seed stage investors back such a startup? Because they believe that it has a reasonable chance of building a sustainable business model which will eventually make money. Your business model is simply another way of saying how you make money. What value do you create and how much of this value do you capture? The behavior of later stage investors is no different than that of seed stage investors. As long as an investor believes that a startup is pursuing a business model with a reasonable path to sustainable profitability, it makes sense to continue investing. If this is no longer the case, you should pull the plug. But what constitutes a reasonable path to sustainable profitability?
The answer to this question is found in a discussion which we had at Romulus roughly two weeks ago. In fact, my response to Serkan which I outlined above was heavily influenced by the thoughts which I shared with the Romulus team when Sebastian asked the related question: “For how long can a business’ success be measured only in downloads and page views?” I’m directly pasting my reply here: “I like to think of companies in terms of their business model. If the business model makes sense there should be a path to profitability and the companies should be supported through investment … What defines a sustainable business model is in the eye of the beholder, and in the absence of market timing that’s what differentiates the good investors from the bad.” In other words, evaluating whether there is a reasonable path to sustainable profitability sits at the core of the VC business. As a result, deciding to pull the plug when this is no longer the case is among the most critical decisions that a VC must take.

What it really takes to be a great VC: networking

I was recently talking to a new venture capitalist. He started working in VC several months ago and wanted to know what it takes to be successful in the industry. There’s certainly no magic bullet to answer this question. However, there are some usual suspects. The first is a strong sense of pattern recognition gained through experience investing in several startups and monitoring their outcomes. The second is relevant operating experience to add value to the startups post-investment. If, in addition to these, you have a genuine passion for supporting entrepreneurs, rather than a desire to be in the limelight yourself, VC just might be the right career for you.

While these are the common answers to the question, and are all indeed correct, they avoid the most important contributor to a successful VC career: networking. I’ve seen great VC’s emerge as early as the second or third years of their career. I’ve also seen great VC’s with very limited operating experience, or only experience at startups that failed. I’m certainly part of this group. My first startup didn’t make it to launch due to team issues, and my second startup met with very little customer traction. Finally, there are many VC’s who try to capture more of the glamor which results from a successful startup than the founders. This is despite the fact that I’ve never seen a VC put more sweat into a startup than the founders. What I haven’t seen is a successful VC who isn’t also a great networker. 
Let me take you through the logic of why you need to be a great networker to have a successful VC career. A great VC is one who produces great returns for his limited partners. To produce great returns, you need to invest in great startups. And to invest in great startups, you need to know about them. Either they need to come to you or you need to find them. Both of these require extensive networking. The former is much easier than the latter, however it tends to come only after you’ve made several successful investments and built a name for yourself. Until you reach the stage where the best startups come to you because you’ve invested in successful startups before, you have to go to them. And this is more about shamelessness than social skills. I’m an introvert, so my social skills likely fall below at least half the readers of this blog. However, I also don’t hesitate to ask for introductions, cold call if necessary, stubbornly pursue leads, and not take no for an answer if I believe in something.
If you want further proof that great networking is about shamelessness rather than social skills, consider why the answer to how to be a successful VC very rarely includes networking. Networking has a negative connotation because it implies that you’re approaching someone for personal gain rather than a mutually beneficial friendship. This couldn’t be further from the truth, as once you start networking you soon discover that you eventually end up helping most of the people you initially reached out to. However, this doesn’t change networking’s negative reputation. Since networking is frowned upon, most successful VC’s, even though they’re great networkers, are ashamed to admit that this is the key to their success. Well guess what? If you want to be a successful VC, it’s necessary. So you should either get your shovel out and start digging, or play outside the sandbox.

How to launch a global market leader from an untraditional tech hub

Online education startup Udemy recently raised a $12M Series B. The startup has plenty of competition in the video-based learning market which includes players like the Khan Academy, Coursera, and Skillshare. However, Udemy is in a great position to be one of the ultimate winners in the space. It has recorded impressive growth in the number of students and courses on its platform, with four hundred thousand registered users able to choose from among over five thousand courses. Most important, Udemy is demonstrating its ability to monetize this user base. Students pay $20 to $200 per class, and some classes are taken by over 500 students. Udemy takes 30% of the total revenue generated by each class.

Although Udemy’s funding announcement is a clear indication of the immense potential of online education, it also stands out on another dimension. The co-founders of the company, Eren Bali and Oktay Caglar, initially tried to build Udemy from their home country, Turkey, back in 2006. As Eren states in his personal blog, they failed. Fortunately, they were able to move to Silicon Valley where they secured $1M in funding to launch Udemy in 2010. 
While the example of Eren and Oktay shows that great entrepreneurs can come from anywhere, it also draws attention to how many similar entrepreneurs are unable to build their startups in their home countries because they do not have the supporting resources necessary to do so. The ability to move to Silicon Valley is not available to everyone, and if Eren and Oktay hadn’t been fortunate enough to make this move, Udemy probably wouldn’t be the company that it is today. For every example like Udemy, there are tens of other startups that never get the support they deserve because the entrepreneurial ecosystem in their home country is too limited. 
Fortunately, Turkey’s entrepreneurial ecosystem has come a long way since 2006, when Eren and Oktay first tried to build Udemy. Led by the success of e-commerce, marketplace, and gaming companies on a local and regional scale, both Turkish and foreign investors are showing an increasing interest in the country’s tech startups. However, what’s necessary for Turkish startups to succeed is more than just capital. Especially for startups like Udemy who are attacking a market with global competition, the most important value add of a potential investor is their global connections. Although a startup targeting a global market may certainly launch in Turkey, it is very likely to soon find itself needing to move to a global startup hub to build on its success. Global startup hubs provide a greater concentration of venture capitalists with relevant experience scaling tech startups, repeat entrepreneurs to learn from, and customers who are likely to be early adopters of your technology. All of these factors significantly increase a startup’s chance of success.
As Udemy shows, entrepreneurs from countries that are not global startup hubs can certainly build world-class companies. If Udemy had been supported in Turkey when it first tried to launch in 2006, it could have likely built its product and made the move to a global startup hub like Silicon Valley by 2008 at the latest. This is two years in advance of when it actually secured its first funding. Perhaps this head start would have made it the online education market leader by now. However, to expedite its move it would have needed to partner with a local investor who not only has global connections, but also recognizes that it needs to let go of its baby so that the startup can surround itself with those resources that will make it most likely to win in a global market. If you’re an entrepreneur pursuing a global vision, it is these investors that you need to find and convince to be your partner.

The team is a startup’s DNA, a startup which emerged from the MIT Media Lab, recently raised a $6.5M Series A led by Khosla Ventures. The round also included follow-on participation by Romulus and True Ventures,’s seed investors. As an original investor in, it’s great to see our confidence in the team and what they’re doing shared by some of the leading investors in the Valley. However, the reason why I’m writing this post is to share how radically different’s current activities are from what the team was originally planning to do. is a great example of the value of pivoting to meet a greater customer need. It also shows how, in the context of tech startups, it’s far better to back great people pursuing an undefined idea rather than average people pursuing what appears to be an incredible idea. Ideas change much more easily than people.

In its current form, uses passive and active data from patient smartphones to give physicians vital information about how their patients are doing. Patient behavior, including who they talk to, for how long, from where, and at what time, is a strong predictor of the progression of many illnesses. The value of this passive data is enhanced by the active responses which patients provide to specific questions asked by their physicians. So far, has focused on illnesses like Alzheimer’s, depression, and diabetes. However, this is just the tip of the iceberg.’s vision of using mobile analytics to improve healthcare outcomes has the potential to change the lives of patients with a much wider range of conditions in the future.

If this is what is doing now, then what were they doing when we first met them? Although the idea still involved mobile analytics, the application was very different. In its original form, the team was looking to use your smartphone data to improve your social life. By looking at similar data like who you call, how long you talk for, and at what time of day, the application would give you recommendations for your social life. For instance, perhaps it’s time that you call a certain friend who you haven’t spoken to in a long time, or perhaps the fact that someone has been calling you repeatedly over the weekends is a sign that they’re interested in you.

Although your social life is very important, with several studies showing that it even impacts your health, most people would agree that directly improving their health is more important to them. This is especially true for the serious illnesses which is focusing on. However, since has yet to become the go-to tool for physician-patient communication, the jury is still out on whether made a winning pivot. Even if is wildly successful, we won’t know for sure whether it would have been less successful in its original form. However, the early signs suggest that it is indeed on a better path than the one it started on.

As has experienced, it’s possible, although certainly not easy, for a startup to change its path. After all, the team is responsible for choosing the startup’s path. If one path doesn’t appear to be working, it can pivot to a better one. There will certainly be costs, largely in terms of lost time and money. However, as long as the investors still believe in the team, the startup won’t be allowed to die.  Rather, it will learn from the experience and embark on a strictly better path. To borrow an example from’s domain of healthcare, the team, and not its original idea, is a startup’s DNA. To build a winning startup, you don’t need the right idea on day one. You simply need the right DNA.