Monthly Archives: March 2017

Ininal’s e-money license

Ininal, a digital banking service where we’re investors, received its electronic money (e-money) license from the Banking Regulation and Supervision Agency (BDDK) of Turkey earlier this week.

What this means in practice is that Ininal’s existing digital wallet will be able to offer its users many new capabilities that it has so far been unable to offer due to regulatory requirements.

For example, Ininal wallet users will be able to make digital payments to individuals and institutions alike all from within the Ininal app. This effectively transforms Ininal into a digital bank which directly offers its users all banking services short of lending and investing. In the past, the Ininal app’s functionality was limited to creating new accounts, monitoring your balance, transferring money to other Ininal users, and seeing nearby top-up locations.

The e-money license also places Ininal on secure regulatory footing as it introduces new and innovative services to the market. The Ininal API is a great example of such a service.

Fintech companies bring new approaches to traditional services like banking and payments. However, like the traditional banks offering these services, they also deal with a sensitive asset like money. As such, it’s essential that they operate within existing regulatory frameworks while simultaneously working to adapt these regulations to accommodate the new services that their technologies make possible.

With its e-money license, this is exactly what Ininal is doing.

Carbon’s new round

Carbon is a digital healthcare system where we’re seed investors.

The company recently announced its new funding round which brings the total funding raised by the company across two rounds to $6.5M. We participated in both rounds.

We welcome this round’s new investors including its lead BuildersVC to the company, and look forward to continuing to watch Carbon’s CEO Eren Bali and his team execute on their ambitious vision.

How I’m able to write (publish) each morning

Earlier this week, someone asked me how I’m able to write a blog post each morning. Here was my answer:

1. I don’t actually write each morning. Probably about a third of the posts I publish are written that morning. I write the other two thirds at different times of the day when I feel like writing. I then publish them on a future morning.

2. I find meaning in sharing my learnings, both about startups and personal, with others. Hopefully these learnings help others in their personal and professional lives.

3. I enjoy writing to better articulate and structure my thoughts.

In other words, it’s a combination of planning, meaning, and fun that keeps me going.

Getting investors to act fast

When fundraising, the best way for an entrepreneur to get investors to act fast to complete an investment (and to get a healthy valuation) is to create demand for the company from competing investors.

However, this isn’t always possible. Especially in markets where capital is scarce, even very promising companies might not have many investors at the table.

When this is the case, some entrepreneurs resort to fabricating demand that doesn’t exist. They claim that investors who aren’t interested actually are, or they exaggerate the interest level of investors who have expressed initial interest. This often backfires because investors talk to each other.

Another approach is to set an arbitrary deadline. This doesn’t work because it doesn’t tell the investor what they have to gain from investing early and the investor knows that they’re the only party at the table. If the deadline were to pass it would simply be extended. In other words the deadline isn’t credible.

Rather than fabricate demand that doesn’t exist or set an arbitrary deadline, a better approach to get investors to cross the finish line is to show them the growth opportunities that the company will miss out on or have to delay due to the lack of funding. This also means that the investor who’s evaluating an investment in the company will miss out on them.

This includes highlighting the great team members that the company isn’t able to hire, demonstrating the foregone revenue or cost savings potential from not making a particular capex investment, and quantifying the opportunity cost of not conducting a specific marketing campaign, all due to delayed funding.

The reason why this works is two-fold. First off, unlike fabricated demand that doesn’t actually exist, it’s truthful. And second, unlike an arbitrary and uncredible deadline, it shows the investor what they have to gain from investing early.

Complex and simple systems

Simple systems have clear links between inputs and outputs. If certain knowable conditions are met, there’s a well-defined function that maps the inputs to the outputs.

Complex systems are different. They feature multiple actors that offer up a probability distribution of inputs which interact in context-specific functions with partially knowable forms and indeterminate weights. The outputs which are produced as a result are therefore impossible to predict with full accuracy. Our best bet is to develop increasingly educated guesses.

As a result of the different nature of simple and complex systems, the approach necessary to succeed when working with each is different. In particular, working with simple systems requires knowledge of the facts.

In addition to knowledge of the facts, working with complex systems requires an understanding of the incentives of different actors, an iterative approach to testing these incentives and how their interactions produce outputs, and a readiness to revise the form and weights of the context-specific functions you develop as you learn from experience.

Since simple systems are easier to solve, many people solve them. So you’re likely to get immediate positive feedback from someone after solving a simple system.

Since complex systems are harder to solve (in fact you can’t fully solve them and have to be content with getting gradually closer to solving them), there are fewer people solving them. This means that there are fewer people there to give you immediate positive feedback on your progress.

Making progress towards solving complex systems also takes more time, so the frequency of feedback is lower than that which you get when solving simple systems.

However, the intrinsic and extrinsic rewards from making progress in understanding how complex systems work are much greater than the rewards from actually solving simple systems.

Investor involvement in moderation

My parents used to tell me that I should do everything in moderation. The reason why they said this is because my tendency is to do things at their extreme or not at all. So the recommendation was correct in light of my starting conditions.

However, over the years, I’ve discovered that the right approach actually depends on what you’re doing and what outcome you hope to achieve. In some contexts, getting the outcome you want requires doing things at their extreme. In others, it requires moderation.

For an investor, getting involved with the startups you invest in is an example of the latter.

If you do it too often, you become a hassle for the entrepreneur rather than a source of help. And because you’re intervening all the time rather than when it matters, the interventions that you attempt to make when it matters become less impactful.

However, if you don’t do it at all, you’re not able to help out when it’s necessary because you don’t know what’s going on at the company and the entrepreneur doesn’t think you care.

Investor involvement in moderation produces the best outcomes.

Sharing articles

When I started investing, I would frequently share articles covering what other companies in the same sector as a company we’re invested in were doing. With tens of new articles emerging every day, there’s no shortage of content to share.

However, as time passed, I realized that there was little informational value in the majority of the articles I was sharing. The articles tended to fall in two categories. They were either highlighting a financing event for a competitor, or talking about a specific product development that a competitor had made.

Sharing news about financing events produced two results. First, they would highlight the size of the opportunity in the sector. However, since the entrepreneurs decided to build a company in that sector, and since we decided to back the company, we shouldn’t have any doubts about the opportunity. We wouldn’t be in the sector if we didn’t believe in the opportunity.

Second, they would make the founders feel like they were behind. No one publicizes the smaller financing events so the ones you read about in the press are the big ones. This makes founders question why they haven’t been able to raise as much money and this often creates unnecessary stress. How much money you raise isn’t necessarily a proxy for how successful your company is, and even when it is, founders need to focus on building their product, not worrying about how much money a competitor has raised, in order to catch up.

Sharing news about product developments also rarely serves a purpose. There are two types of product developments. The first category are the ones that a company doesn’t share in public because they represent a unique insight that they don’t want competitors to copy. These are a minority and since they’re non-obvious, you won’t read about them in the press.

The second category, which are shared in the press, are those obvious features that everyone agrees on the value of. A personalized product recommendation engine for an e-commerce site, or a signup campaign to build up interest prior to launching in a new geography, are good examples. Everyone agrees that they’re useful, but they’re also obvious. Knowing that a competitor built these features isn’t that valuable. What matters is actually building them yourself, and ensuring that they work better than those offered by competitors. A founder’s time is better spent sweating the details of the execution of these obvious product developments than reading about the obvious developments that others are making.

I’ve outlined the types of articles that I don’t think create value when an investor shares them with a founder. This doesn’t mean that there aren’t articles that contain valuable information. For example, the global market leader in your sector may have just bought a competitor in another geography, and this may be a signal that they’re looking for similar acquisition opportunities in other geographies. However, such valuable articles are the minority, not the majority.

I therefore no longer share the majority of the articles that I read about a sector with our founders operating in that sector. Only in the rare case that an article contains a non-obvious and meaningful insight is it worth sharing.

Repeated vs single stage games

As an investor, do you let a startup implement an employee option pool that dilutes you in order to retain and attract talent?

Do you forgo exercising an anti-dilution clause in a down round in order to lower the dilution suffered by the team?

Do you forgo part of your liquidation preference at the time of exit so that employees receive more of the exit proceeds?

Do you help a company closing shop pay off its liabilities even though you have no obligation to do so?

Do you let a founder who has worked hard on a business with a low salary for several years perform a small secondary sale to meet their personal needs?

Do you invite other investors to an attractive deal that you have the funds to do on your own?

In a single stage game, the optimal strategy is to not do any of these as they make you strictly worse off.

In a repeated game, however, your long-term outcome depends on your ability to play future games. You miss all the outcomes from the future games in which you don’t play. And to play the game, you need to be invited to the game.

So the optimal strategy in a repeated game often produces actions that are quite different than the optimal strategy in a single stage game.

The corollary to this is that our actions reveal whether we want to play a repeated game or a single stage game.