Author Archives: cankut

Selling and reality

In an earlier post entitled “The nuance of reality”, I wrote that “Our tendency is to draw conclusions and then look for evidence to support those conclusions. Reality, however, is much more nuanced. Most good things have bad characteristics and most bad things have good characteristics.”

The underlying assumption of that post was that you’re operating in a context where your goal is to understand reality to the greatest extent possible. This calls for evaluating evidence to draw conclusions rather than drawing a conclusion and then looking for evidence to support it.

However, in a different context, the opposite approach is necessary. Specifically, when you’re selling something, your goal is to highlight those pieces of evidence that support the product you’re trying to sell while overlooking or downplaying those pieces of evidence that could be barriers to the sale.

In other words, selling is the practice of constructing reality by carefully selecting and presenting pieces of evidence which, while short of being comprehensive, hopefully remain individually accurate.

Defensibility

Entrepreneurs are doers by nature. They have ideas for what customers want, build teams to execute on these ideas, and execute.

Assuming that the entrepreneur has correctly identified a real customer want, this approach will likely produce a business that makes money in the short term. However, this isn’t enough for the business to survive in the long term.

The reason is that, if the customer want is really there, competition will either already be there or it will soon emerge. The bigger the customer want the entrepreneur identified, the greater the competition.

And for a business to survive in the face of competition, it needs to be defensible. In other words, it needs to have a characteristic, or a combination of characteristics, that stops its customers from moving to the competition.

Defensibility comes in many forms. It could be a very strong brand that has perhaps even given its name to a product category, like Coca Cola. It could be the lowest price provider due to a combination of economies of scale and the leveraging of an intrinsically low cost customer service channel, like Amazon. Or it could be a business with strong network effects that prevents users from having the same experience on an alternative network, like Facebook. Or it could be a combination of these characteristics.

Without a source of defensibility, a business’ initial growth will soon taper off and may even reverse into decline, thereby threatening the company’s survival.

As a result, you need to think about the defensibility of your business before jumping into execution. Your company’s survival, and thereby your return on the years of work that you’re going to put in, depends on it.

Health and happiness

I spent a lot of time with our son over the last 2 days. He’s 5 months old.

As I was playing with him, I found myself hoping that he’d have a healthy and happy life.

I then realized what I didn’t hope for him. I didn’t hope for him to be powerful, wealthy, famous, handsome, or for him to have other externally visible measures of success.

If he also has one or more of these externally visible measures of success, that will be great. But they are only valuable if they’re built on top of a healthy and happy life.

What I know to be true for this person who I care so much about is true for each of us.

Toys R Us’ bankruptcy

I remember how I used to always look forward to going to the local Toys R Us store when I was a child. I was therefore suprised, and disappointed, to read the news that Toys R Us is filing for bankruptcy earlier this week. I imagine that many adults who relied on the retailer for their childhood toys felt the same way.

Most of the stories covering the bankruptcy have focused on Toys R Us’ inability to pay off its debts as the source of the bankruptcy. While that is indeed the final manisfestation of the problem which led to the company’s bankruptcy filing, this final manifestation of the problem is actually the result of the company’s profits not being large enough to cover its debts.

And the shortfall in profit is the result of the primarily offline toy retailer losing sales to two alternatives. The first is online toy retailers and the second is smartphone and tablet apps that offer children an alternative source of entertainment to toys. These are the core problems, and both of these core problems are examples of technological progress.

As tough as it is to see Toys R Us go, the fact that technology is responsible both for the company’s departure and as an alternative to the products it sold, is a small consolation.

Hummingbird Ventures III

My friends Firat Ileri, Barend Van den Brande, and Pamir Gelenbe are partners at Hummingbird Ventures, a VC fund that invested early in companies including restaurant delivery marketplace Deliveroo, cryptocurrency exchange Kraken, and mobile gaming company Peak Games.

Hummingbird recently announced the closing of its $95M third fund, Hummingbird Ventures III, which Barend wrote about here. Having co-invested with the Hummingbird team in female fashion marketplace Modacruz and listened to several of the entrepreneurs they’ve backed share their thoughts on the team, their success is very well deserved.

Congratulations guys.

Execution

I recently went back over the pitch decks of two e-commerce companies from 2013. Fast forward 4 years and one of the companies is doing well while the other has closed shop.

What’s interesting is that the 2013 pitch decks of the two companies are very similar. Among other similar strategies, both companies planned a combination of content building to inform their customers with the goal of driving purchases, the introduction of private label products to increase product margins, offline community building to strengthen their brand, and the development of mobile apps to serve their customers through the medium of their choice.

In other words, both companies knew what to do. One company simply did it well while the other didn’t. In other words, execution was the difference.

So to pick the right company in 2013, looking over their pitch decks wasn’t enough. You had to develop an informed view on the execution capabilities of both teams.

Private information

I spend a lot of time consuming and processing information to inform my thinking. This thinking is what eventually informs my investment decisions. I believe that success in VC is determined at least as much by the quality of your investment decisions as by how much value you add to the business post-investment. So the time I spend consuming and processing information is very important.

There are two types of information that one can access. These are public and private information.

Public information, by definition, is information that everyone has. And since everyone has access to this information, it’s difficult to gain a competitive edge when investing based on public information.

A great example of public information is news articles. By the time something is covered by the media, the action has already taken place. As a result, any returns to be gained based on acting on the information in the article have already been taken by others.

The fact that public companies need to make most of their information public is why it’s much more challenging to generate outsized returns in public markets than in private markets. In the public markets, you’re making investment decisions based on information which is accessible to everyone willing to put in the time to research, read, and understand it. Trading based on insider (in other words private) information is illegal. To produce a return, you need to have an insight that others who have access to the same public information don’t have. That’s challenging and rare.

In private markets, however, having an insight that others who have access to the same information don’t have is just one way to make money. And it’s the difficult way to do it. The second and relatively easier way is to have access to information that others don’t have.

This private information comes largely from personal connections. Whether it’s an entrepreneur you’ve backed who shares the new business idea that their friend is working on, another investor who tells you about a company that they’ve decided to invest in for which they can’t fill the entire round, or another opportunity that you discover because of your local network in a particular geography, it’s these personal connections that give you an edge when investing in private markets.

This is also why being able to make follow-on investments in your winners is so important. As an existing investor in a company, you have private information about what’s going well at the company and what isn’t which others don’t have, and you’re able to use that private information to inform your investment decision.

You want to act on opportunities before they hit the news. You want to be front-running and helping create the news. And having a unique insight is just one way to do that. Having access to private information is the second and easier way.

Building a network

There are two ways to build a network.

One is to set networking as a goal and to go out and meet people. The other is to do things that are interesting to you, in which case your network builds naturally as a result of the people who you reach out to in order to progress in what you’re doing, and the people who reach out to you because they find what you’re doing interesting.

The first approach results in a random network, while the second produces a network that is aligned with your perspective on and what you want to get out of life.

In addition, the probability of building strong connections is lower in the first approach because people recognize that your goal is to meet them rather than to learn from and contribute to them. This produces a less positive response.

As a result, doing things that are interesting to you produces a more valuable network of stronger connections than when networking is your end goal.

Interests and emotions in negotiations

When two parties first begin to negotiate, there’s a blank slate. Each party focuses on the issues in an attempt to, in light of their negotiating power, trade away those issues that are less important to them in exchange for getting what they want with regards to those issues that are more important to them. The exchange is primarily interest-based.

However, as a negotiation progresses, emotions emerge.

If each party is respectful of the other, they may feel good and continue the negotiation even if their ranges of acceptable outcomes seem unlikely to overlap.

On the other hand, if one party is repeatedly conceding ground, they begin to feel bad. Similarly, if a party feels like their good intentions are being abused, they also begin to feel bad.

The negotiation develops an emotional history which becomes an important determinant of the negotiation’s outcome, beyond that suggested by a purely interest-based approach.

Depending on the emotional history of the negotiation, one or more parties may take actions contrary to their own interest in order to prevent their counterpart from getting what they want. In other words, they might trade away their interests in order to not trade away their perceived fairness of the eventual outcome.

They may also refuse to budge on what is actually a relatively less important issue to them in order to get back at their counterpart for their actions on a more important issue.

At the extreme, since a party’s negotiating style is a signal for how they will act post-negotiation, a party might leave the table due to the emotional layer of the negotiation, even after securing an outcome that is otherwise in line with their interests.

In order to not let the emotional layer of a negotiation get in the way of an otherwise mutually beneficial partnership, it’s useful to keep two principles in mind:

  1. Treat your counterpart as you would like to be treated
  2. Communicate kindly

Acting in line with these maxims isn’t easy in the heat of a negotiation. And they don’t guarantee that you’ll reach a mutually satisfying outcome.

However, if you’re able to act in line with them, they go a long way in ensuring that the outcome that you do reach reflects the interests rather than the emotions of both parties.

Succinct communication

Succinct communication is the practice of using as many words as necessary, and not more, to make your point.

Succinct communication, whether written or verbal, is a signal of understanding. The other ends of the spectrum, which are not communicating at all or communicating with too many words, often suggest a lack of understanding.

The ease with which written content can be created on the web, and the resulting content explosion, make succinct communication increasingly valuable. The desire to communicate succinctly is one of the reasons behind the length of my blog posts which are often shorter than most other written web content. However, I know that I still have room to improve.

Here’s a succinct piece on the benefits of succinct communication.