Monthly Archives: April 2016

Keith Rabois interview

Keith Rabois from Khosla Ventures was a guest on Re/code Decode last week.

During the interview with Re/code co-founder Kara Swisher, Keith shares stories from his days at PayPal, Slide, and Square, as well as his thoughts on the current tech startup market environment.

Keith also provides some insightful thoughts on:

  1. Finding and hiring undiscovered talent
  2. How each of us is successful because of the people around us
  3. The importance of having a high velocity of learning which produces a high rate of improvement

You can listen to the full talk here.


Limiting the length of SHA’s

I was recently reviewing the shareholders’ agreement (SHA) of one of our startups. It’s over 40 pages long.

However, I noticed that I wasn’t actually reading the entire document. I was actually skimming through most of the parts to focus on those key clauses that really matter. These include the investment amount, any privileges or limitations associated with the shares (like liquidation preferences, anti-dilution rights, dividend preferences, and vesting clauses), the cap table, the structure and decision-making responsibilities of the board, drag-along and tag-along clauses, pro-rata rights for future fundraising rounds, and restrictions and rights of first refusal on share transfers. Although this SHA didn’t include them, put and call provisions are also important.

All in all, I read less than 10 pages in great detail.

I then looked at the SHA’s of some of our other companies to see how long they are. The shortest one I found was 25 pages long. The longest one was over 100 pages long.

I know that 100 page SHA’s aren’t necessary. I also doubt that 25 page SHA’s are necessary. I think that the key terms could be addressed in less than 10 pages. If we allow for 5 more pages to allow for case-specific additions and standard clauses like information rights and reps and warranties, that’s a total of 15 pages.

I think that promising to stick to this 15 page limit would be a strong differentiator for a law firm. Done right, it would help the law firm win a lot of customers.

Eksisozluk and Product Hunt for common sense feedback

When making an investment decision, it’s challenging to set aside your detailed perspective gained from research and analysis of the operational complexities of a company in favor of taking a bird’s eye view of the company’s performance.

As a concrete example, you may be intimately familiar with an e-commerce business’ attempts to lower its return rates and optimize its shipping and payment processing terms. This can cause you to overlook how many more potential customers exist in the company’s target market, and how it can most cost-effectively reach these customers. The latter should be much more important factors in your investment decision than the former.

At times like this, I find it useful to review the comments about a company on Eksisozluk in Turkey, and Product Hunt in the US. Product Hunt lets anyone share their views about a specific product. Eksisozluk has the same approach but also allows for entries in other categories like people. Eksisozluk has a more informal tone so some of the comments there can be abusive, and Product Hunt often has comments that don’t add too much value, like “this is a great idea”.

However, many of the comments are well intentioned and thoughtful. They carry common sense insights that get to the core of what the company is doing well and what it needs to improve. This makes them valuable assets to achieve the bird’s eye perspective that contributes to successful investment decisions.

Universal basic income

I read a post on universal basic income (UBI) yesterday, and it got me thinking. Basically, a UBI guarantees all citizens of a country a sum of money from the government or another public institution. This sum of money is designed to be enough for each citizen to cover their basic necessities so that they don’t have to hold a job.

Proponents of a UBI argue that, since people will no longer need a job to cover their basic necessities, this will give them the freedom to focus on doing what they want. By taking money out of the equation, we will be free to spend more time on creative activities where we don’t necessarily earn much or any money. For the purpose of this post, I define a creative activity as one which produces a benefit for at least one person other than the person performing the activity.

While the arguments of the proponents of a UBI make sense in theory, I think that there’s a fundamental problem. The people making these arguments are self-driven people with an energy which they have been able to channel to be successful in their field. If everyone were like them, a UBI would make sense as it would indeed let individuals be productive in areas of interest to them rather than forcing them to try to be productive in areas that they don’t find interesting.

However, everyone isn’t self-driven. In fact, most people aren’t. And I don’t think that people are this way because of the lack of a UBI. It’s not because of the lack of a UBI that most people don’t channel their energy to creative activities. Most of us are lazy. If given a choice between doing something and sitting around not doing much, we would choose the latter. And if you do the latter, it doesn’t benefit anyone but you, so it can’t be a creative activity.

This isn’t a judgment, but a statement of reality.

The resulting loss in human productivity created by a UBI won’t necessarily be a bad thing. We’re likely going to live in a future where robots are able to perform a lot of our work for us much more effectively than we’re able to, and these robots will be able to more than make up for the loss in productivity of humans.

However, we need to call it like it is.

A UBI may indeed work. It may indeed be part of a stable form of government where humanity continues to make progress and most people are happy. But it’s unlikely to achieve this by enabling a majority of humans to direct their energy towards creative activities. For a UBI to work, robots will need to make up for the mass of people sitting around doing nothing.

Going down fighting

Seed investing is a dangerous game. There’s a long road from a company’s launch and it taking its first investment to its eventual success. While some make it, many more don’t. Of the roughly 30 companies whose first funding round we participated in, 3 of them have already closed shop. And that’s in the 3 years since we started investing. From a statistical perspective, we know that there will be other casualties along the way.

The ultimate reason why a startup shuts down is most often because it runs out of money. There are rare cases when a startup decides to shut down and return money to investors even though it still has runway, but most often the founders try to make something happen as long as there is money remaining in the bank. All the other reasons commonly stated for why a startup fails, like slow growth and poor economics, aren’t fatal as long as investors are willing to continue financing the business.

The first step in a startup running out of money is often when an existing investor states that they’re no longer willing to finance the business. Founders usually speak with existing investors first and try to secure a term sheet for the next round before speaking to potential new investors because the vote of confidence signaled by having a term sheet in hand from existing investors makes it easier to get alternative offers. So if an existing investor isn’t willing to at least make an offer for the company’s next funding round, this may signal the beginning of the end.

Having invested in the first funding round of roughly 30 companies, we’ve been in a situation where we weren’t ready to continue financing a business 6 times. This number is higher than our 3 failed seed stage investments. The reason is that sometimes founders are able to raise money from other investors even if we’re no longer willing to fund the business.

The reactions of founders after their existing investor tells them that they’re no longer going to finance the business fall into two buckets. Founders either continue to fight for new funding or they give up without a fight. Of those that continue to fight, some are able to raise money from new investors and some aren’t.

Even if they ultimately fail, how founders go down says a lot about their character and their belief in their business. There’s a big difference between going down fighting, while leaving no stone unturned, and going down without having done your best to keep your business alive. I like the former.

Taking this a step further, asking how a founder will go down if things don’t work out is a valuable input into an investor’s original investment decision. You can’t predict this with full certainty, but you can develop an informed hypothesis. And backing a founder who you believe will go down fighting is a great way to make better investments.

Predictive bots

This post is going to be a short follow-up to last week’s post on bots. In the earlier post, I basically shared the following thoughts:

  1. For bots to be widely used, it needs to be easier for people to perform an action by interacting with a bot than to take the action themselves in an app or on a website.
  2. Among the four use cases currently possible for bots, which include alerts, search/inputs, support, and bookings, I believe that the first point only holds true for support.
  3. The reason why I see support as the most suitable use case for bots is because it requires two-way communication. The other actions are examples of one-way communication and are therefore easier for someone to execute themselves rather than by interacting with a bot. For two-way communication, however, interacting with a bot can be more accurate and faster than interacting with a human agent.

The underlying assumption behind these thoughts is that a human is initiating each action. If a human decides to receive an alert on a particular topic, perform a particular search, or make a particular booking, it’s very effective for the human to do so themselves. They don’t need a bot.

However, what if an intelligent bot were the one initiating the action? By taking into account your profile, past behavior, and contextual information, an intelligent bot could alert you on a topic that you didn’t know you would be interested in, share the results of a relevant search that you would eventually be performing before you identified the need to perform it, or recommend that you buy a good or service that you didn’t even know you would enjoy.

In each of these cases, an intelligent bot could use its predictive power to push you to take an action before you decided to do so yourself. This effectively transforms what were once examples of one-way communication in use cases like alerts, search, and bookings into examples of two-way communication. And as established in my earlier post, bots can be very useful for two-way communication.

So, to summarize, in the absence of predictive intelligence, I think that support is the one use case where bots are likely to be widely adopted. But, together with predictive capabilities, intelligent bots could gain widespread usage across virtually any category including alerts, search, and bookings. The greater their predictive capability, the more we’ll use them.

Children’s Day

Yesterday was National Sovereignty and Children’s Day in Turkey. It’s a day when Turks recognize and celebrate the role of children for the future of the country and the world.

Here’s a short video explaining how the day came to be, what it means for Turkey, and what happens on that day.

I wish children all around the world a belated Children’s Day.

Stowaway Don’t Throwaway

Our investment Stowaway Cosmetics is a direct-to-consumer right-sized cosmetics brand. While most cosmetics brands sell products in large packages in order to justify higher prices (this lets them achieve higher margins because the cost of the incremental fill is actually pretty low), Stowaway sells them in smaller packages which are designed to be finished and easier for women to carry around. This results in lower prices.

As a direct result of this strategy, Stowaway products are finished more frequently than those of other cosmetics brands. And this produces many empty packages.

In order to make sure that these empty packages don’t harm the environment, Stowaway recently launched its recycling program Stowaway Don’t Throwaway. You simply have to send your finished products back to Stowaway using their prepaid shipping label, and you get $5 in Stowaway credit for every 3 products you send.

Stowaway Don’t Throwaway helps the environment while also encouraging repeat customers. You can learn more about the program here.


LendStreet, where we’re investors, is a debt consolidation and refinancing service focusing on people in financial distress. Founded by Jerry Nemorin, the company uses its technology platform and credit scoring algorithms to help customers pay off their old debts at a discount and refinance them at better terms through LendStreet. For the company to be successful, it needs to accurately assess the loan repayment likelihoods of financially distressed applicants. This isn’t an easy job.

Despite the challenges of serving its target customer segment, LendStreet has achieved low single digit charge off rates on its portfolio thus far. Since the initial results are promising, the company’s next challenge is to replicate these results at scale. And this is where its new $28M loan facility from FLOCK Specialty Finance comes in.

Together with the $28M in additional capital, LendStreet is going to be able to refinance many more loans. And the more loans it’s able to refinance, the more data it’s going to have about what parameters make an applicant worthy of refinancing, and how LendStreet can educate its customers to increase their likelihood of sticking to their new payment schedule after they’ve been refinanced.

LendStreet’s end goal is two-fold. The company’s profits depend on its ability to get financially distressed customers out of debt. If it can do the latter, the former will follow. And the latter is a goal worth pursuing.

Rinse’s Series A round

Tech-enabled dry cleaning and laundry service Rinse, where we’re investors, recently announced its $6M Series A round led by Javelin Venture Partners. The round, where we also participated, was completed a few months ago but the announcement took place this week.

Rinse was co-founded by my friend and former classmate Ajay Prakash and his co-founder James Joun. Since its 2013 launch in San Francisco, the company has also expanded to Los Angeles. I wrote about Rinse’s learnings from launching a new city in an earlier post.

Together with the new funding round, Rinse has the opportunity to apply these learnings to launch more new cities in the future. We’re very fortunate to be onboard, and look forward to following the company’s progress.