Monthly Archives: September 2016

Knowing and breaking the rules

I have a checklist of rules that I review before making an investment.

The checklist has three categories of rules. These include rules about the founders, product-market fit, and the investment terms. There are about 50 rules in total and the number is growing with time.

However, in each of our great investments (the jury is still out on their ultimate cash return because they have yet to achieve exits, however these are the ones that have a combination of the highest paper returns and subjective future promise), we broke at least one if not several of the rules on the checklist.

There are cases where the the founder wasn’t working full-time on the business, a CEO had single digit percentage equity, there wasn’t a technical co-founder, I couldn’t justify the company’s valuation no matter how I looked at it, and there was a clear weakness in the business model. But we invested anyways. And the results so far look good.

You have to know the rules. But sometimes you also need to have the conviction to break them.

Avoiding traffic in Istanbul

Nearly everyone in Istanbul complains about the city’s traffic. If you happen to be traveling at the wrong time and on the wrong road, a 15 minute journey can take over 2 hours. It’s happened to me a few times in the past so I’ve learned to take precautions which I’d like to share here.

The first solution is to travel during times of low traffic. I wake up around 6 AM and am out of my home before 7 AM. This way I avoid the morning’s rush hour traffic which begins at around 7:30 AM. I arrive at the destination of my first meeting before 7:30 AM and work from there.

The same is true in the evenings, where I try to end my meetings by 4:30 PM. This allows me to get home before 5 PM and traffic usually begins after then. If a meeting runs later than 4:30 PM, or if I have a dinner meeting, I wait until at least 8:30 PM to head home. This way I avoid the rush hour traffic from 5 to 8 PM.

The strategy above requires that you be able to set your own schedule so while it’ll work for some people it’s not for everyone.

However, there is a second solution which everyone can use. It’s called Yandex.Navigator. Yandex.Navigator is a mobile app that offers street by street traffic information based on the speed data that it collects from vehicles where someone in the vehicle has the Yandex.Navigator app open. The taxis on the Bitaksi platform are one of Yandex.Navigator’s main data sources.

Simply input your destination into Yandex.Navigator and the app shows you the fastest route to get where you want to go. Competing app IBB CepTrafik only offers traffic information for the city’s main highways without street level data, Waze has a much smaller installed base in Istanbul which gives it less data from which to make recommendations, and I’ve found the traffic data on Yandex.Navigator to be more accurate than that on Google Maps.

Even if you’re not able to set your own schedule, there’s no reason why you shouldn’t use Yandex.Navigator. Given how much it helps me, I’m surprised how few people do. Hopefully this post will help.

Outsiders and insiders

I recently read Y Combinator co-founder Paul Graham’s essay entitled The Power of the Marginal. It’s a long read but well worth it.

The essay uses examples to highlight the advantages and disadvantages of being an outsider versus an insider. Paul defines insiders as eminent people who have achieved success in the eyes of a large audience. While this gives them an advantage in terms of their social status, this same social status brings disadvantages. For example, they feel forced to continue to cater to the needs of that audience. There is a constant demand for their time and this makes it difficult for them to work on what may appear to be obscure projects that would otherwise make them much happier.

The fact that insiders need to balance their internal expectations of themselves with the external expectations that society imposes on them creates an opportunity for outsiders. While outsiders may not have the same resources as insiders in terms of wealth and social status, they don’t have the pressure of external expectations. This gives them two very important advantages. The first is free time, and the second is the freedom to spend that time tinkering on those projects that they find genuinely interesting.

They have the opportunity to do things that insiders, and those working at insider organizations, don’t have the time to do. While the project they’re working on may appear marginal at first, the fact that it attracted their interest suggests that, if their intuition is right, it has a high potential value. And since outsiders don’t have a lot of resources to pursue their project, they learn to do a lot with little. For example, they work in small teams. There’s less delegation and this lowers the costs of information transmission, coordination, and monitoring. This allows them to focus on getting things done. Because of the natural advantages of being an outsider, startups can succeed despite their financial and social disadvantages relative to much larger insider organizations.

Interestingly, venture investors help outsiders become insiders. We identify outsiders and equip them with the two advantages of insiders: financial resources in the form of our investment and social resources in the form of our connections.

If the founders do their job as outsiders, and we do our job as insiders, then the startups we back also become insiders. And this creates opportunities for new outsiders to emerge.

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.