Monthly Archives: August 2016

My military service notebook

I performed my required military service for Turkey in 2011. We had about an hour or so to spare during the evenings before going to sleep, and I took that time to begin what is now a pretty regular habit. I would write my learnings for the day in a small notebook. I repeated the exercise during each day of military service.

I recently reread the notebook and noticed how much personal progress I had made since those days. I’ve executed on a lot of the goals in the notebook, and have also improved my character in the ways that I had hoped to as outlined in the notebook.

I wonder if I would have made the same progress if I hadn’t performed the writing. My best guess is that I would have still made progress, but it likely wouldn’t be to the same extent as what I’ve achieved as a result of the writing.

Writing helps crystallize your thoughts by forcing you to express them clearly. It also makes you more likely to remember those thoughts during the upcoming days. This makes it easier for you to internalize the learnings which you express in writing.

I must have had a good feeling about the positive impact which the writing was having on helping me achieve the goals I had outlined for myself. This is why this has developed into a regular habit that I try to perform each evening. Rereading the notebook from the days of my military service reinforced this hypothesis.

I look forward to rereading the current notebooks that I’m filling a few years from now.

Metrics in startup press releases

We recently completed a new funding round for one of our startups. The startup prepared a press release for the round and the founder shared it with me to get my feedback.

As is the case for most press releases around funding rounds, it didn’t contain any numbers highlighting the company’s absolute performance. Instead, it shared growth rates for specific performance metrics. So rather than say that the company achieved X on metric Y, it said that the company achieved a growth of Z% on metric Y during a specific time period. This is a tactic that startups often use to signal how well they’re performing without sharing their actual performance. However, unless we also know the base figure from which the growth rate emerged, it doesn’t carry much insight into the company’s actual performance.

I believe that companies shouldn’t fear sharing their high-level absolute performance metrics like their number of active users, transactions, and net revenue. The reason is that being aware of an opportunity and being able to capture that opportunity are very different things. Companies succeed because of their ability to capture opportunities, not because of their knowledge of the size of the opportunity in a specific market.

However, my feedback on this press release wasn’t about the use of growth rates rather than absolute performance metrics. Instead, it was on the specific performance metric which the company was using to demonstrate its performance. In particular, the company had chosen the growth in its valuation as an indication of its performance.

A startup’s valuation is simply the value which one investor, or a small group of investors who are strongly influenced by the lead investor, places on the company at a given point in time. While it is derived from the fundamentals of the company, it’s subject to the whims of a small group of people and market multiples at a certain moment in time. What ultimately matters is not an intermediate valuation but the valuation at exit. And that will be determined by a much larger group of people (if not the entire market in the case that the company goes public) at a point in time where market multiples may be very different.

So rather than highlight your company’s valuation in a funding round, if you want to show how well you’re performing, you should highlight a fundamental performance metric like your number of active users, transactions, or net revenue. That’s much more reflective of the underlying strength of your company than the valuation which one or a small group of people assign to your company at a given moment in time.

What valuation are you looking for?

A very common question which investors ask in their first meeting with an entrepreneur who’s raising money is what valuation the entrepreneur is looking for.

Answering this question head-on is very risky. If the valuation you’re asking for is deemed too high, the investor may think that you’re being unrealistic and therefore not move forward with follow-up discussions. If the valuation is deemed too low, the investor may conclude that there’s something wrong with the company. This may also lead them to not take a follow-up meeting.

An entrepreneur articulating an expected valuation for their startup is problematic because valuing companies, and especially startups, is an art, not a science. A valuation that you see as fair may easily be deemed to be too high or too low by an investor with a different perspective. Articulating an expected valuation opens the door to these disagreements at a time when you should instead be focusing on getting the investor to better understand your business and evaluating whether you’d want to partner with them.

As a result of this problem, I recommend that our entrepreneurs not articulate an expected valuation when fundraising. Instead, I recommend that they share how much money they’re looking to raise, describe what they’re going to use the money for, communicate the details of any prior funding rounds that the company may have had (milestones achieved, metrics, and funding terms), and state that they’re going to let the market set the terms of the current round. This gives investors who are interested in investing in the company all the information they need to come up with an offer.

Most of the time, this information is enough for interested investors to make an offer. However, sometimes investors continue to push the entrepreneur to articulate an expected valuation.

In this case, I recommend communicating how much equity you’re looking to share in the current funding round. Since you’ve already shared how much you’re looking to raise, combining this information with how much equity you’re looking to share implicitly signals the valuation you expect for your company.

However, by focusing the conversation on the funding you need to succeed and the amount of equity you’re looking to share to remain motivated as a founder, you show that you’re optimizing for the success of your business. You’re not optimizing for valuation.

And since investors want to partner with founders who optimize for success, this approach makes them much more likely to want to invest in your company.

Freemium and open source

This Andreessen Horowitz podcast is about free pricing. It talks about both freemium and open source models.

Here are some takeaways:

  1. The basic difference between the freemium and open source models is that open source lets others see, modify, and distribute your product’s code while freemium doesn’t.
  2. Freemium and open source models set a lower barrier for users to try your product. They are therefore effectively marketing strategies.
  3. Having a freemium or open source product doesn’t mean that you don’t need sales and marketing teams. While freemium and open source models may help your product achieve initial traction, you need sales and marketing teams to reach more users, get these users to use more of your product’s features, and get more users to pay.
  4. For a freemium product, the free version of the product needs to offer enough features to show the user the value of using the product while also holding back enough features for them to want to switch to the premium version.

You can listen to the 33 minute piece here.

Car access network fleets or aggregators?

In an earlier post, I wrote about how the future of transportation is one where we access autonomous electric vehicles. However, I didn’t address the question of whether these car access networks will own their fleet of cars or aggregate the cars of individual owners when those cars are not being used. Here’s how I think about this problem.

A car access network that owns its fleet of cars will be able to achieve a lower unit cost per car due to its bulk manufacturing (if it’s an OEM) or bulk purchasing (if it’s not an OEM) volume. In contrast, a car access network which aggregates the unused cars of individual owners will be paying these owners a fee which takes into account the higher per unit costs at which these individual owners purchased their cars. It will also incur the additional cost of transporting the car to the owner’s location when the owner wants to use it.

As a result, the car access network with its own fleet will be able to serve passengers at a lower price point than the network which aggregates the cars of individual owners. And since passengers will flock to the network offering lower prices, as long as the network has the financial capital to fund the up-front cost of its own fleet and enough political capital to receive fair treatment when competing for the right to serve a specific region, it will win over the network aggregator.

Something legendary

I recently came across the following quote: “People are too eager to say “This legendary person had flaws!” instead of, “Wow, this flawed human being managed to do something legendary.””

At its surface, the quote points out that people are quicker to criticize than to praise. Rather than compliment someone for their accomplishments, most people prefer to highlight the person’s flaws.

However, I believe that we need to go one level deeper. It isn’t enough to simply claim that people are more willing to criticize than to praise. We need to understand why this is the case.

The answer also lies in the quote. As the second part of the quote shows, if we accept that human beings have flaws, then we’re able to focus on our achievements despite these flaws. However, if we believe that human beings are perfect, all we can see is those character traits and actions that show deviations from this perfection.

I believe that most people would agree that we aren’t perfect. We have shortcomings because of our humanity as well as shortcomings unique to our individual character. Although we each know this to be true at an individual level, when individuals come together as a group it becomes much more difficult to point out personal as well as group level flaws. This is because the social pressure within groups penalizes deviations from and rewards the appearance of the group’s view of perfection. And this incorrectly influences our view of what it means to be human.

Once we let go of our need to be perfect, an artificial construct imposed by group think that we personally know to not be true, we benefit in two ways.

First, we become much more tolerant of others’ shortcomings. We look to appreciate their strengths rather than condemn their weaknesses. In the context of startups, this can be very valuable for hiring decisions. I’m a strong believer that you should hire for strength, not lack of weakness.

Second, we come to terms with our own flaws. We accept what we’re not good at and find people to complement these weaknesses. We also recognize what we’re good at and where, if we work hard, we can be the best at. Only then can we do something legendary.

Entrepreneur blogs

Many entrepreneurs have started writing blogs to highlight the progress that their company is making in areas like product, hiring, management, and fundraising.

Investor blogs like this one make sense because they serve two main outward purposes. The first is to share the investor’s thinking with potential entrepreneurs in order for these entrepreneurs to reach out to the investor, and hopefully accept his money at the time of their fundraise. The second is to promote the investor’s companies to other investors and potential users. There are also inward purposes like helping an investor structure their thoughts, but the outward purposes are why an investor writes a public blog rather than keeping private notes.

The value of entrepreneur blogs, on the other hand, depends on the stage of the company that the entrepreneur is running. If the company has achieved product-market fit, blogging makes sense to promote the company to new users and potential employees. The founder of a company that has achieved product-market fit is relatively less pressed for time than the founder of a company that has yet to achieve product-market fit, so spending some time on blogging can make sense.

Blogging also makes sense if the entrepreneur is a repeat entrepreneur who has built a successful company in the past. This positions the entrepreneur as a thought leader who can use the combination of his reputation and a written online presence to showcase his company and attract talent.

But if a company has yet to achieve product-market fit or the entrepreneur isn’t a repeat founder with a successful previous company under his belt, the founder’s only goal should be to get to product-market fit. And blogging doesn’t help you reach this goal.

Casting a wide net when fundraising

We currently have 33 companies in our Turkish portfolio. Of these 33 companies, 24 have received follow-on funding from at least one other investor.

When our companies start to look for follow-on funding, we help them think through investors who are likely to be interested in the company. Most investors have specific geographies, sectors, business models, and/or company stages that they focus on. So, in the past, for each of our companies I would go through my list of investors and advise them on which specific investors to target so as to not waste their time on those that are unlikely to invest in the company.

Over time, I’ve come to realize that this approach isn’t always the right one. It tends to work for those companies for which there’s very strong investor interest. By prioritizing their investor outreach according to who they want to work with and putting an end to fundraising once they’ve reached an agreement, such companies save a lot of time.

However, for companies whose fundraising success isn’t all but guaranteed, which is most companies, it’s better to cast a wide net. You just don’t know who’s going to be interested. There have been multiple instances where an investor who I thought would be very interested in a company didn’t end up showing any interest. There have also been multiple instances where I didn’t include an investor in my outreach recommendation list because I didn’t think that a company fit their investment profile, the company spoke with that investor through another channel, and the investor ended up funding the company.

There could be two explanations for this. The first is that I don’t know the investment profiles of our co-investors. I don’t think that this is the case because that’s one of the first questions we address when we first meet. And I have a spreadsheet where I record what each investor I meet is looking for immediately after I meet them.

The second explanation is that, although investors have investment profiles, these reflect general preferences rather than strict guidelines. If the circumstances are right, exceptions can be and often are made. Given our own investment profile and the deviations which we sometimes make from it, this is the explanation that makes sense to me.

As a result of this insight, I now recommend that our entrepreneurs who don’t have their next round all but guaranteed knock on the doors of as many investors as possible. You should still keep this within reason. For example, reaching out to an angel investor who is known to invest between $100K and $250K to lead your $5M round probably isn’t the right approach. But, as long as you act within reason, the wider a net you cast the higher your chances of landing an investor. You just don’t know who might be interested.

Reducing uncertainty or seeking perfection?

Our educational system grades students on a scale of 0 to 100. If you know everything and do everything well, you can get a score of 100. And that’s a perfect score.

Operating in this paradigm, intelligent and motivated students seek perfection. Perfection is attainable and the path to reaching it is clear. There is a certain right answer to each problem, and you just have to provide it for each problem on the test. You train your mind to pursue certainty because you know that if you discover certainty repeatedly, you’ll reach perfection. And since perfection is attainable, if you don’t reach it, you’ll be left behind someone else who does.

This paradigm doesn’t extend to life or business. In life and business, there is no certainty. There are only probabilities of particular outcomes which you can influence by taking particular actions. Taking actions to change these probabilities leads to the reduction of uncertainty, not its removal. Uncertainty is always there, and perfection is therefore not attainable.

The move from education to life and business represents a big paradigm shift. It requires changing your mindset from one that accepts certainty as default and therefore seeks perfection to one that accepts uncertainty as default and attempts to gradually reduce this uncertainty.

Because of the different paradigms which govern the education world and the life and business worlds, success in one doesn’t necessarily translate into success in the other. Knowing which paradigm you’re operating under and whether it’s the right one for what you’re doing is the first step to achieving success, and the resulting happiness, in what you’re doing.