Monthly Archives: January 2016

Numbers in startup updates

We’re currently invested in over 60 companies across Turkey and the US. With such a large number of startups, we receive anywhere between 30 and 50 emails each month where the founders of our startups share their latest progress and future plans with us. Not all companies provide an update each month.

Some update emails are short and some are long. The length of the update tends to depend on the founder’s personal style (some prefer to talk in person or over the phone rather than communicate through email) and how much of a deviation from the norm there is in a company’s performance or plans in a particular month relative to earlier months. The greater the change in course relative to prior months, the longer the founder’s explanatory update. If the startup is simply executing against a predetermined plan, the update may simply include the latest month’s numbers without any additional explanation.

This brings me to an important point. Numbers. I’ve noticed that there’s a positive correlation between the use of numbers in updates and the performance of a startup. When things are going well, founders want to show that they’re going well and numbers are a great way to do this. When things aren’t progressing, there’s a tendency to replace quantitative metrics (which would show the lack of progress) with a qualitative discussion about the great opportunities which the startup is working on.

Perhaps unsurprisingly, among those startups that continue to share their numbers even when their performance is stagnating, most are able to recover in the future. Those that don’t share their numbers when times get tough overwhelmingly end up closing shop a few months down the road.

This is likely because founders sharing their numbers even when things don’t seem to be moving forward signal that they believe that the actions (recruiting, product, marketing, …) they’re taking right now will improve the company’s future performance. It also shows that they’re holding themselves accountable for the company’s current performance, and this is the first step to changing it.

Volt’s new round

Volt, a ride sharing startup where we’re investors, recently completed a new funding round. We participated in the round together with Wamda Capital and Middle East Venture Partners, two of the leading venture funds in the Middle East, as well as angel investor Ali Cebi. Volt’s founder Ali Halabi worked hard to pull together a group of regional investors with knowledge of ride sharing practices in different markets. We’re fortunate to be able to partner with each of Volt’s new investors.

In the run up to its funding round, Volt has been focusing on getting its product in excellent shape. The Volt app now includes features like real-time traffic information, favorite destinations, and trending destinations which make it easier for both drivers and passengers to use the app. This is on top of features like communities, ID verification, and ratings which are used to establish trust, and a miles program for drivers to earn rewards whether they’re driving solo or with a passenger (more rewards if they’re driving with a passenger), which existed in previous versions of the app. If you had tried earlier versions but haven’t checked the app out recently, I’d encourage you to take a look. I think you’ll be impressed with the improvements.

The round comes at a good time because, now that the product is in great shape, Volt can focus on filling the top of its funnel with new users. If we’re right, the new product features will improve match rates between passengers and drivers, ensure that each side has a positive experience using Volt, and get both types of users to return to the app. podcast is one of Europe’s leading sources for tech news. They also host a weekly podcast where Roxanne Varza and Nick Murray discuss the week’s most interesting stories from the European tech scene. The podcasts also feature specific individuals in the European tech ecosystem and they featured me in this week’s podcast.

As mentioned in the podcast, I wasn’t interviewed for the session. So the session is based on publicly available information.

Although there are some small corrections (like the pronunciation of my name as Johnkoot rather than Cancut, the number of investments we’ve made being over 60 rather than 20, and the fact that my undergraduate degrees are in economics and management science, not engineering), it’s a great take on what we do and my background. Roxanne even got it right that my habit of daily blogging was inspired by Fred Wilson.

Thanks to Roxanne, Nick, and the team for covering Turkey, and to Naz from Atomico for the referral.

Unfortunately I wasn’t able to embed the podcast in this post so if you’d like to listen to it you can do so from 11:53 to 15:12 at this link.


Intrapreneurship has become a hot topic in Turkey recently. Large companies are feeling the impact of tech innovations on their core businesses. They want to defend themselves against disruptive innovations, and enjoy the financial rewards which these innovations bring, by creating these innovations themselves. They therefore encourage their employees to practice intrapreneurship.

Here’s how Wikipedia describes intrapreneurship: “Intrapreneurship is the act of behaving like an entrepreneur while working within a large organization. Intrapreneurship is known as the practice of a corporate management style that integrates risk-taking and innovation approaches, as well as the reward and motivational techniques, that are more traditionally thought of as being the province of entrepreneurship”.

It makes sense for large companies to promote intrapreneurship. In addition to the theoretical defense which it provides against disruption and the potential it holds for very large financial returns, it’s an important hiring and employee retention strategy. Employees want to work for companies that give them the freedom to take risks and innovate.

Unfortunately, I don’t believe that being part of intrapreneurship efforts makes sense for aspiring entrepreneurs. Even if you want to take risks and innovate, the fact is that large companies attract a lot of people who don’t.

Most people prefer to get their steady pay check rather than expose themselves to the risk and variable rewards offered by entrepreneurship. There’s nothing wrong with this. It’s just how most people are.

This steady pay check is exactly what large companies offer, so risk-averse people overwhelmingly self-select into large companies. And since entrepreneurship is a team effort, even if you’re entrepreneurial yourself, you’re unlikely to be able to surround yourself with the team necessary to build a successful venture inside a large company. Our best entrepreneurs couldn’t operate successfully as employees inside a large company. Knowing this, they don’t take these roles.

This doesn’t mean that large companies aren’t valuable training grounds for entrepreneurs, especially at a young age. They teach you many skills, both functional and with regards to building professional relationships. However, if you have an exciting idea for a new venture, you’ll be more likely to succeed if you pursue it outside of a large company.

The same reason that makes intrapreneurship an unpromising path for aspiring entrepreneurs also makes it an unpromising path for large companies. Although it gives a short term PR boost to the company’s hiring activities, without true risk-takers and innovators on their teams, large companies are unlikely to be able to build sizable ventures that disrupt their core business, or generate great financial returns for the company in adjacent businesses.

Rather than promote intrapreneurship, large companies will produce much better returns by investing in VC funds that back entrepreneurs, and attempting to buy those startups that threaten to disrupt their core business once they reach a certain maturity.

I know this sounds self-serving, but it’s the way things are.

Fundamental research

I watched the movie The Big Short on Friday. The movie tells the true story of four people in the finance industry, including three investors and one salesperson, who benefited from the 2007-2008 subprime mortgage crisis in the US. Not only was the movie entertaining, it also carried an important takeaway regarding the importance of performing fundamental research to arrive at your own conclusions.

In the movie, the first investor to bet against subprime mortgage backed securities (MBS) is Michael Burry who runs hedge fund Scion Capital. Michael combs through the thousands of underlying mortgages that make up a MBS in order to arrive at his conclusion that MBS’s are overvalued. He then determines when they are likely to fall in value by researching the percentage of mortgages in a MBS that need to default in order for banks to begin marking down the value of the MBS.

The second investor, who goes by the name Mark Baum in the movie but actually represents Steve Eisman in real life, also runs a hedge fund. Steve and his team gain the conviction to bet against subprime MBS’s by visiting the individual homes on which the mortgages have been taken out. They discover that many of these homes have been vacated, and that the ones that haven’t are occupied by residents who have taken out mortgages on multiple homes using the same single source of income. They also discover that some mortgages were even given to people with no income, no job, and no asset verification. These are called NINJA loans.

The salesperson and the third investor hear about the research and the bets placed by Michael Burry and fact-check his analysis to arrive at the same conclusion. Although they take Michael’s signal as their starting point, they also perform their own research to sanity-check his research.

The reason why the movie resonated with me is because fundamental research is equally important when investing in startups. One way to invest is by participating in party rounds where you perform little research of your own, and instead rely mainly on the signal and information being provided by other investors. The other way to invest is by really understanding a founder and their startup. This requires repeat interactions with the founder, reference checks, talking to the team, using the product, developing a thesis for where the market is heading and where in the market the company needs to position itself to capture value, speaking to suppliers/customers/users, and arriving at a reasonable valuation for the company based on how big you believe it can get and the risks that remain along the way.

We’ve invested in both ways. Most of our investments are the result of performing fundamental research. However, we have also invested in companies by doing less fundamental research and relying instead on the signal of other investors. Unsurprisingly, our results show that the first approach produces much better returns than the second.

The reason for this difference is simple. Anyone with money can do the latter. This excess supply pushes down returns. On the other hand, it takes skill and effort to do the former. Fundamental research is in short supply and this pushes up returns.

Nazim from Bitaksi and Getir

Nazim Salur, the founder of Bitaksi and Getir, two of Turkey’s most popular on-demand mobile apps, was recently on Bloomberg HT. Bitaksi, where we’re investors, lets passengers hail taxis, and Getir delivers a selection of 340 consumer products to your door in less than 10 minutes.

In the interview, Nazim shares his views on the mobile app ecosystem. I really liked two of the points he made.

The first was his belief that we’re still scratching the surface of what’s possible on mobile. Nazim believes that 20 years from now, we’re going to look back and see that in 2016, we were only using 3% of the kinds of apps that are available in 2035. 97% have yet to be created. No one can know the exact percentages, but I think that Nazim is directionally correct. The mobile space remains a big opportunity for both entrepreneurs and investors.

Second, Nazim compared the job of a mobile app developer to that of a jeweler. A great jeweler delivers something very valuable that’s packed into a small space by paying a lot of attention to detail. Similarly, successful mobile apps deliver a lot of value to their user through the small screen of a smartphone. This requires thoughtful and meticulous design so as to use the limited number of pixels available on a smartphone screen to produce the best possible user experience.

You can watch the full interview in Turkish below.


Knowing when to not respond

We’ve all come across them. Whether in person, over the phone, or over email, some arguments simply cannot be solved.

Sometimes you can see the other side’s perspective, but don’t agree with it. At other times their perspective just doesn’t make sense.

I naturally enjoy solving problems. So when faced with this situation, my natural inclination is to continue to explain my rationale, evaluate the other side’s reasoning, and try to resolve the disagreement by attaining the objective truth.

However, I’ve been in such situations enough times to know that there’s a point beyond which this problem solving approach doesn’t work. An easy way to determine whether you’ve passed this point is to ask yourself whether continuing to explain your reasoning will make you more likely to solve the problem. After a certain point, this is no longer the case. More explanations will have no impact at best, and deepen the rift at worst. And deep down, you already know when you’ve passed this point.

At times like this, it’s best to not respond and leave the problem unsolved. Sometimes the problem naturally takes care of itself with time. Either the facts change or the sides’ perspectives change. At other times both sides recognize that it isn’t worth arguing over and agree to move forward despite the disagreement. And at other times it’s an irreconcilable difference that causes each side to go their own way.

Whatever the eventual outcome, you know when you’ve passed the point where explaining your reasoning is going to contribute to solving the problem. You know when to not respond.

Offering investors their money back

I was recently speaking with the founder of one of our seed stage startups. The company has yet to launch its product, but we invested in the company pre-product because we know and like the founder, and we like the space he’s targeting.

The reason for our call was that the founder has decided to change the company’s business model. The company built a beta product based on the original business model, tested it out with customers, and didn’t get the positive customer feedback or traction it was looking for. Rather than continue investing in the same model, the founder decided to change the company’s model with the majority of the seed round funding still in the bank.

During our talk, the founder shared the reasons for the change, the details of the company’s new model, and how this new model naturally overcomes the problems inherent in the original one. The new model is much more ambitious than the original one, and I welcomed the change with excitement.

What happened next got me even more excited. The founder shared that since we had invested in the company based on the original model and since this model was changing, he’d be glad to return our money if we didn’t believe in the new model. This was important for two reasons.

First, it’s the right thing to do. We invested in his company when it was doing A, and now it’s going to do B. Although he had no legal obligation to do so, the founder placed himself in the shoes of his investors and decided that we may not want to be part of plan B. Since what we signed up for changed, he volunteered to return our capital if we requested it. Acting in this way in the absence of any legal obligation shows the integrity of the entrepreneur.

Second, this action shows the confidence which the entrepreneur has in what he’s doing. If he didn’t believe that he could raise funding for the new model, he likely wouldn’t have offered to return the capital of existing investors. An unshakable conviction in what you’re doing is the signal of a great entrepreneur.

In addition to these two signals, we were also more excited about plan B than plan A. So we decided to move forward with our investment intact.

However, even if we believed in plan B less than plan A, we would have still not asked for our money back. Business models change much more easily than people. I believe that an entrepreneur with integrity and conviction will eventually find the right model.

Drafting email intro requests

I’ve recently started applying a new approach when requesting an introduction to someone from a mutual contact. I used to simply request the introduction, stating why I wanted to talk to the person I was requesting to be introduced to.

Now, in addition to explaining why I want to talk to the person, I let our mutual contact know that I’d be glad to draft an email intro for them to forward along. This saves them the time of drafting such an email from a position where they have less contextual information about what I want to talk about. Since I know this, it takes me less time to draft the email than it would take them.

More important than the efficiency perspective is the fact that writing the email intro is the right thing to do for someone who is helping you by making an introduction. They’re placing their reputation on the line by performing the intro. In exchange, it makes you feel good to be able to save them some time.

A final benefit of stating that you’d be glad to draft the email intro is that it makes it more likely that your mutual contact accepts to perform the intro. By showing your positive intent, you make it more likely for that positive intent to be reciprocated.

So drafting your email intro request is the right thing to do, it’s more efficient, and it makes it more likely that your intro request is fulfilled. It makes a lot of sense.

Economic mobility

I recently read the conclusions of a report on economic mobility in the US. The report shares two important statistics:

  1. Over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives
  2. Over 71 percent of the 400 wealthiest Americans and their heirs lost their top 400 status between 1982 and 2014.

The first statistic looks at economic mobility in terms of annual income, and the second in terms of wealth. Annual income fluctuates more than wealth. However, no matter how you slice it, these two statistics show that there is a lot of economic mobility in the US. Starting off poor is a disadvantage, but you have a strong chance of getting rich. And starting off rich doesn’t guarantee that you’ll stay that way.

A high degree of economic mobility is very important for the progress of entrepreneurship. Entrepreneurs and early stage startup employees need to believe that their work will be rewarded in order to engage in it. Great entrepreneurs and startup employees are often driven by more than money, but money is also an important reward. Very few would do it if there were no money involved. So the high degree of economic mobility is an important contributor to entrepreneurship in the US.

A low degree of economic mobility is likely an indicator of barriers to entrepreneurship. These include formal barriers like the costs (financial, paperwork, time) of setting up a business, a high cost of firing employees, and personal liability in the event of corporate bankruptcy, as well as informal barriers like nepotism and cronyism.

It would be valuable to perform and review the results of the same study in other countries, and to compare each country’s degree of economic mobility with the strength of its entrepreneurial ecosystem and the degree to which there are formal and informal barriers to entrepreneurship in the country. I think we’d see that countries with higher degrees of economic mobility have better addressed the formal and informal barriers to entrepreneurship and produce more successful startups.