Author Archives: cankut

Term sheet making and taking

In venture capital, sometimes you have the luxury of being a term sheet maker. In other words, you get to have a strong say on the terms at which you’re investing in a company.

The conditions under which this is more likely to occur are when there is limited competition for the deal, you have a unique ability to add value to the company which is recognized by the founder, you’re investing a relatively large check size, and, better yet, a combination of multiple of these conditions.

But often, these conditions aren’t present. There are multiple bidders at the table, each of these bidders is in a position to add value to the company or at least this is what’s perceived by the founder, and your investment amount is relatively small.

When this is the case, you often have to take the term sheet that is put forth by the company. In other words, the company dictates most of the terms.

While this is suboptimal from an investor perspective, not doing these deals would mean missing out on some great companies. In fact, some of the conditions which produce an environment where you need to accept being a term sheet taker are the direct result of the quality of the company. For example, higher quality companies attract more bidders to the table and this gives the companies a stronger say on the investment terms.

When this is the case, if you really want to be part of the company, you have to take the term sheet on the table.

Rinse’s Series B round

Rinse is a tech-enabled laundry and dry cleaning managed marketplace where we’re investors. The company recently announced the closing of its $14M Series B round of funding led by Partech Ventures.

Now that Rinse has solidified its playbook for expanding into geographies and bringing these geographies to contribution margin profitability, it will be using the new funding to apply the same playbook to grow to 10 new US cities. Rinse is currently operational in San Francisco, Los Angeles, and Washington DC, and among the 10 new cities that it will expand to are New York, Chicago, and Boston.

We commend the Rinse team for their decision to achieve operational excellence with their existing model before rolling it out to new cities. This requires patience and this patience eventually pays off.

We also thank Partech and Rinse’s existing investors for continuing to support the company on its exciting journey.

Internalizing an outcome

I remember reading that visualizing what an outcome looks like makes you more likely to reach that outcome. For example, visualizing yourself after you’ve built a successful company increases the odds that you build a successful company.

The reasoning behind this line of thought is that visualizing an outcome places in motion the subconscious changes in your actions which are necessary to achieve that outcome.

The problem was that, after trying the approach on some small goals, I noticed that it doesn’t work for me. So I tried a different approach. Rather than visualize what the outcome looks like, I decided to write about it. My reasoning was that the general practice of internalizing an outcome might be right while the specific medium which I was using to internalize the outcome might be wrong for me.

Sure enough, when I began to write down what specific outcomes would look like, I began to achieve them much more readily. It turns out that I think through writing rather than images. Given the fun I have writing this blog, this isn’t surprising.

So if there’s an outcome you seek to achieve, it helps to internalize the circumstances of the outcome through whatever medium works for you. This could be by writing about it, visualizing it, recording yourself talking about it, or another medium specific to you.

The hype around initial coin offerings

There’s a new hype in cryptocurrency land these days. They’re called initial coin offerings (ICO’s) and they’re basically a way for aspiring services to raise money by issuing new digital tokens on the blockchain. If the services are successfully built and widely used, these tokens appreciate in value, thereby rewarding early investors.

People much more knowledgeable than I am on the topic have written about ICO’s at length elsewhere. I’m not going to repeat what they’ve said, but will point out one flaw in the arguments that ICO advocates are making.

In particular, advocates of ICO’s state that ICO’s are a great way to solve the chicken and egg problem when attempting to attract users to a new service with network effects.

A service with network effects is one which becomes more valuable for users as more other users use the service. This makes it difficult to attract users at the beginning, when there are few other users using the service. As a result, centralized service providers resort to offering incentives (financial and non-financial) for users to participate in the network. The discounts that car-hailing companies offer passengers and the bonuses that they offer drivers are great examples of this.

Since ICO’s offer investors the potential for appreciation in the value of the service’s underlying token, the argument is that they help solve the chicken and egg problem. They do this by giving early investors tokens which, since they will increase in value if the service is widely used, the investors are incentivized to use.

The problem with this argument is that, while centralized service providers traditionally give money to their users to use the service, services that perform ICO’s are requesting money from their users. In other words, the direction of money transfer is reversed. You will get a lot more people to use a service by giving away money than by requesting it. As a result, services built upon ICO’s appeal to a much smaller pool of potential initial users than services built by centralized providers. The solution which ICO’s offer to the chicken and egg problem is therefore not nearly as big as ICO advocates make it out to be.

In addition, if we think of the people which a service gives money to as its users, and the people which a service takes money from as its investors, services built upon ICO’s are currently claiming to create a new class of investor users. The problem with this is that the level of diligence required to be a user of a service is different than the level of diligence required to be an investor in the service. In the former, you’re consuming, and consuming is easy. In the latter, you’re producing or at least understanding how something is being produced, and that’s hard.

ICO’s are currently making people believe that it’s easy to do what’s hard.

This is an attractive value proposition. It explains why there’s so much interest in ICO’s, to the point where services are raising millions of dollars in minutes for a service which they often have yet to build.

The problem is that, in reality, doing what’s hard isn’t easy. As the services built upon ICO’s are built, or are not built, and are used, or are not used, reality will emerge.

Performing on auto-pilot after thoughtful preparation

My High school basketball coach always said that when you’re on the court, you have a single responsibility. And that’s to perform to the best of your abilities.

The alternative is to think about how you’re performing. While valuable in order to improve your performance, the right time to do this is when you’re off the court. If you do it while playing on the court, you end up second guessing your performance, and the resulting feelings negatively impact how well you perform.

In other words, when you step onto the court, your performance is already predetermined by the practice and thought that you put in up to that point. You’re effectively on auto-pilot.

The same is true for your non-athletic goals. You perform best when on auto-pilot after thoughtful preparation.

The implications of Amazon buying Whole Foods

Amazon announced yesterday that it has reached an agreement to buy Whole Foods for $13.7 billion in cash. Here are my thoughts on the implications of the deal:

1. A few days ago, Amazon was rumored to be interested in buying enterprise messaging platform Slack for $9 billion. The alternative for Slack is a $500M funding round at a $5 billion post-money valuation. Independent of which path Slack takes, the fact that a single company is in a position to realistically bid for a grocery chain and an enterprise messaging platform in the same week shows the extent of Amazon’s past ambitions and current cross-market dominance.

2. Amazon is paying $13.7 billion in cash for Whole Foods. This is 64% of the $21.5 billion of cash on Amazon’s balance sheet as of the most recent quarter. Amazon has recently been eeking out small profit margins thanks in large part to the financial performance of Amazon Web Services. In addition, the deal will likely attract debt financing without much difficulty given Amazon’s size and the health of its businesses. However, this is a very large transaction, even for Amazon. In fact, it’s the company’s largest acquisition to date, considerably ahead of its second largest acquisition to date of Twitch for $970M. This signals the importance of the move.

3. Amazon’s move is consistent with the omni-channel strategy that it has recently begun rolling out, for example by opening physical bookstores to complement its core e-commerce book sales. As fairly commoditized products, both groceries and books are categories where the benefits of physical stores are lower than those for non-commoditized product categories like furniture and clothing. However, after an e-commerce company acquires its initial online native customers, physical stores remain an essential part of growing the business due to the fact that the majority of customers in product categories like groceries still shop offline. There will come a day when this is no longer the case, but we’re not there yet. The end game is different than the approach necessary to get to the end game and Amazon’s move shows that it acknowledges the latter fact.

4. Whole Foods’ premium customers are a great match for the Amazon Prime subscription service as both customer groups are high spenders. Adding Whole Foods deliveries to Amazon Prime will make the latter service much more valuable to existing and new customers, while Whole Foods locations will help expose the supermarket’s high spending customers who don’t use Prime to the service.

5. Amazon’s logistics capabilities make it likely that it will take over Whole Foods deliveries from Whole Foods’ existing delivery partner Instacart. I don’t know what fraction of Instacart deliveries are from Whole Foods, but Whole Foods is the grocery chain that is said to have had the biggest contribution to Instacart’s early traction. This is why Whole Foods invested an estimated $36 million in Instacart. Instacart currently faces the real risk of losing one of its biggest partners, if not the biggest.

6. Whole Foods’ more than 460 locations across the US and Canada will serve as a great testing ground for, and enable the mainstream rollout of, Amazon Go checkout technology. This will further improve Whole Foods’ premium customer experience.

7. Since Whole Foods only operates in the US and Canada, companies that face the risk of being displaced by Amazon making similar moves in other countries have the opportunity to prepare their defenses and preempt these moves. These companies include horizontal e-commerce players, offline grocers, and logistics companies. Given the scale and scope of Amazon’s ambitions and demonstrated execution, it’s likely that what these companies don’t do, Amazon eventually will.

Getting accepted, formally and informally

There are two ways to get accepted into an institution. Examples of such institutions include companies and schools.

The first is to apply using the institution’s formal application process, and the second is to offer up your candidacy through informal means, by getting directly in touch with people at the institution.

If you take the first approach, you’re competing head-on with thousands of other candidates. It’s hard to differentiate yourself.

The second approach makes you stand out. It shows that you want the position more than the thousands of people who applied through the formal process, and that you’re entrepreneurial in getting what you want.

Desire and entrepreneurship are important predictors of success in the eventual role, so most people respond positively to seeing them in a candidate. If they don’t, you might want to question whether you want to be part of an institution where these qualities aren’t valued.

This doesn’t mean that you don’t need to be qualified for the position. I’m not advocating for cronyism or nepotism. Although these unfortunately also often produce results, these results are hollow as you haven’t earned the position.

But the formal process has so many qualified people that you need to do things to stand out. You need to do the informal.

Modacruz’s new round

Our preowned female clothing and accessories marketplace investment Modacruz recently completed a new $2M funding round.

The round was led by new investor Middle East Venture Partners (MEVP), our co-investor in Volt, and also included the participation of existing investors Hummingbird Ventures and Nevzat Aydin.

We welcome MEVP to the company, thank Hummingbird and Nevzat for their continued support, and look forward to Modacruz further growing its base of buyers and sellers as it brings the use of preowned clothing and accessories to women across Turkey.

Amazing teams and great teams

The Golden State Warriors won the NBA finals yesterday by beating the Cleveland Cavaliers 4 games to 1. I had a feeling that the Warriors might close the series when it returned back to California so I woke up at 4 in the morning in Turkey to watch the final game.

The Warriors and Cavs faced each other in the NBA finals for each of the past 3 years. The Warriors won in 2015 as their team effort overcame the star effort of LeBron James. The Cavs won in 2016 as the combination of LeBron James’ increased humility and the resulting increase in his teammates’ output was just enough to overcome the Warriors in 7 games.

LeBron James was once again humble and the Cavs played a great team game in this year’s series. Six Cavs scored more than 9 points at least once during the series. Although not as good as last year’s performance where six Cavs scored more than 10 points at least once during the series, it was pretty close.

The difference wasn’t in the Cavs’ performance but in that of the Warriors. Specifically, Kevin Durant joined the Warriors this year and immediately gelled with the team. Kevin Durant isn’t LeBron James but he’s pretty close. And that turned a great Warriors team into an amazing Warriors team.

In 2015, the great Warriors team beat the best player in the world.

In 2016, the great Cavs team led by the best player in the world beat the great Warriors team.

In 2017, the amazing Warriors team beat the great Cavs team led by the best player in the world.

Congratulations to the Warriors.