It’s a humbling and educating experience to raise money, whether you’re a volunteer, philanthropist, startup or VC. Hunter and I are thrilled to announce that we’ve concluded our fundraising process and closed Homebrew II, a $50 million seed venture fund. More details on the Homebrew blog. And now back to work.
“The difference between successful people and very successful people is that very successful people say “no” to almost everything.” – Warren Buffett
We’ve been spending the past few weeks at Homebrew helping several of our portfolio companies work through their planning for 2015. It’s no surprise that during these conversations incredible ideas for new products and features, partnerships, revenue streams, technologies, etc., emerge. So we and our founders all remind ourselves about the value of doing just one thing (or a very small number of things) exceptionally well.
Often times it’s easier for companies to choose to do lots of different things. New initiatives are fun and energizing and get lots of attention while the effort required be truly exceptional at one thing can be an exhausting grind. But being adequate at lots of things almost always comes at the expense of being excellent at the most important thing. Great companies are born of focused excellence. Google was the best at search before it expanded into new product areas and markets. Facebook was a powerful social network before venturing into mobile communications and virtual reality. Narrowing from lots of good ideas to just the most critical ones is the lifeblood of a successful company. We constantly remind our teams that startups rarely die from lack of ambition, only from a lack of focus. And we insist that there’s incredible power in saying “No” to the things that distract them from being best in the world at whatever they are doing.
So what are examples of things that startups should be saying “No” to so they can focus on what really matters?
- Settling for the good enough hire: It’s tempting to fill the hole on the team that seems like the obstacle to progress. But hiring people with enough aptitude but the wrong attitude is guaranteed to impede and even reverse progress in the long run. These kinds of early hiring mistakes can cripple a company.
- Building new products or more features: There’s that one customer that is willing to pay a lot for just one new feature. Or if you just add this small feature that will solve your user growth problem. Or you’ve got early customers that love your product so you want to give them more to love before growing the customer base. Do any of these help you deliver the simplest offering for the core use case you’ve identified? Are you sure that you’re not iterating toward a local maximum versus placing a bet that might unearth a global maximum?
- Short term revenue: Revenue can be found in lots of places, such as consulting contracts, project development work, one-time ad sponsorships, etc. But does generating revenue in an ad hoc way help you build a business that will scale and be sustainable? Is the revenue you’re generating the income stream you want to bet on long term?
- Potential investors: The dirty little secret about “coffee meetings” with investors is that even though they’re positioned as relationship building, you have to treat them like you’re actively fundraising. Because most investors are judging you and your business in every interaction (a few are genuinely trying to be helpful or to get to know you). So the easiest thing to do is politely pass on that coffee and stay focused on the business until you really want to be fundraising.
- Big company partners: Big companies offer the promise of distribution, revenue, resources and many other things. But the vast majority of the time you get stuck in a never-ending cycle of meetings, negotiations and more meetings. And if a partnership is struck, the likelihood of it amounting to anything is next to zero. In the meantime, you’ve taken up a ton of time, resources and mental energy that has a real opportunity cost. More often than not, these types of relationships can be all consuming for small companies and can distract them from your ultimate goals.
- Corporate development: See Paul Graham’s excellent post.
- Networking events: Just build a great company. Your network will grow because you’re creating something incredible, not because you drank beer and ate cold pizza with a bunch of entrepreneurs in a converted warehouse somewhere.
At Homebrew, our primary goal with Fund I has been to overdeliver on our brand promise to the founders who’ve chosen to partner with us. We prioritize our time and efforts such that the needs of our companies come first. We often choose to pass on meeting with new startups, speaking at conferences, attending happy hours, etc., because none of those are immediately and directly in service of our founders. And we’ve found that because we’ve made making these types of choice a habit, they get easier to make over time.
Saying “no” absolutely requires discipline and grit, because “yes” doesn’t disappoint someone or necessitate a difficult conversation. But there is real value in saying “no” because it orients startups towards spending their limited time and resources on doing just one thing incredibly well. And if you can do one thing exceptionally well, chances are you’ll have the opportunity to try another in time.
Any other things startups should say no to in the interest of focus and pursuing excellence?
Every day we meet amazing founders sharing their ideas for how the future will evolve. In fact, we see about 150 new companies each month. Where do these teams originate from? Roughly 65% are referred to us by other founders or people we know. 25% are introductions via investors – either angels or VCs. The remaining 10% are a combination of cold inbound/outbound sourcing, often based upon a specific area we’re investigating. So recently we asked ourselves a question “is there strategic value in keeping our list of interests to ourselves?” That didn’t seem like a very good idea if our goal is to connect with thoughtful founders or inspire conversation. And thus http://bit.ly/HomebrewWhatIfs
What Ifs will be an dynamic list of ideas, questions and technologies that we are curious about and specifically want to connect with entrepreneurs to discuss and learn. We’ll edit, add and remove items as appropriate and link to our longer blog posts when it makes sense.
This week I had the good fortune of attending a fantastic mentorship event for product managers organized by Josh Elman and Mina Radhakrishnan. In small groups, newer PMs had the opportunity to ask more experienced PMs questions about any topic related to product management or being a PM. One of questions in my group was, “What makes a great product manager?” I answered the question (hopefully helpfully!) by sharing what I look for when hiring a PM.
It begins with my firm belief that you need to hire PMs for attitude over aptitude. Product management done the right way is an unglamorous job executed with no formal authority. It requires PMs to accept that they need to be shit umbrellas and credit funnels. The job cannot be done without having as much EQ as IQ. And while many product management skills can be learned, I’ve found that attitude is something that can’t be taught. So hiring great PMs starts with attitude. But there are also four categories of skills that I believe are important for PMs to have in order for them to be great.
Product insight. Insight begins with empathy with the user. The best product managers are able to imagine themselves in the user’s situation and develop products that address the needs identified in those situations as simply and powerfully as possible. At the same time, they’re able to use data, ideas and feedback from many sources to inform and support the product decisions made in response to those needs.
Product execution. Potentially nothing is more important for PMs than the ability to just get shit done. No amount of insight compensates for an inability to help teams ship products. And that requires a relentless focus on doing whatever is necessary; to be the person who fills all the gaps and helps others to be successful. Great PMs are able to prioritize and do a small number of the right things incredibly well.
Over-communication. The best PMs establish trust with those around them, making themselves and their teams more effective as a result. I’ve found that the best of way of developing trust is not just by communicating, but by erring on the side of over-communicating. Great PMs need to be both willing and able to communicate clearly, concisely and often to make sure their teams have shared goals and that everyone impacted by product decisions has a shared understanding of why those decisions are being made.
Leadership. PMs need to lead without any formal authority. They inspire and motivate by articulating a compelling product vision and strategy. They establish credibility by setting clear objectives and roadmaps in partnership with their teams. And they earn trust by being honest and accountable. No PM accomplishes anything without a team that is willing to be led by him or her.
Because I believe that these “soft” skills matter much more than “hard” skills, I’ve sought out and been able to hire great PMs who come from all sorts of backgrounds. If you’re fortunate enough to come across the rare PM that has both the right attitude and demonstrated aptitude, definitely hire him or her. But if you meet a PM candidate with a stellar attitude yet only high potential aptitude, I’d encourage you to bet on that person. That bet will pay off in spades for both of you.
Ignore what you’re reading about the current investment climate. Yep, there is plenty of VC money out there and it’s aggressively looking for a home. But that doesn’t mean it’s so much easier to raise money than in prior years. The number of startups vying for those dollars is greater than ever. With so much noise in the market and so many companies in which VCs can invest their cash, raising money is still about the one thing it’s always been about: making a VC believe.
There are many perceived reasons for why VCs make investment decisions. But the reality is that it’s actually emotion that leads most VCs to invest. A VC only invests when she finds a quality in a startup that touches upon something personally meaningful or important to her; a quality that creates an irrational belief in the startup’s ability to succeed. I refer to this feeling as “emotional resonance”. There are only three qualities that enable a startup to create emotional resonance with an investor. If you don’t create “belief” based on one of these things, take your pitch and go home because there’s no term sheet coming your way.
People: The best way of creating emotional resonance is through your team. Despite popular opinion, VCs are people too! Just like entrepreneurs and employees, they also want to surround themselves with people they love to work with and can learn from. They want to support founders who they deeply feel deserve tremendous success or who compel them to believe in the likelihood of their success. Belief might spring from any number of team characteristics, including the team’s story, chemistry or insights. Given this, it’s no surprise that most VCs will tell you that they invest in people first. And that’s true. It’s the emotional connection to those people that leads to the investment.
Potential: The second way of building an emotional connection is via the potential of your business. The potential might be captured by the mission or the market opportunity or the product. But somehow you need to leave the VC feeling that he or she absolutely wants the problem you’ve identified to be solved or what you’re doing to exist in the world and that it will be big. This is why VCs have a hard time investing in products and companies that aren’t targeted towards them. Something that’s not relatable is impossible to connect with emotionally. It’s the promise of an early stage startup that can help a VC make the emotional decision to ignore the difficult reality that most startups fail.
Proof: If you’re an early stage company, you don’t have it. Move on.
So have only one goal in your pitch to VCs. Make them believe. Create emotional resonance with your people or your potential. If your story doesn’t do that, rework it so that you focus on establishing one of those connections. Present the opportunity in a way that reinforces the excellence of the team or the enormity of your potential. Because the only path to a VC’s money is still through emotion.
In the VC business, there is a running joke about the “Oh shit” board meeting – the first one that takes place after an investment has been made. That’s when all of the bad news that was hidden during the diligence process gets uncovered and the VC is faced with the reality of the business for the first time (and the founders are faced with the reality of the partner they just “married”!) At Homebrew, when we partner with a startup in support of the founders’ vision, we expect to share in the good, the bad and the ugly. And we expect to share in it well before we invest. After all, startups aren’t all rainbows and unicorns (see what I did there? :) ). Bad hires get made, product releases fall flat and revenue doesn’t materialize. These challenges are not the exception, they are the rule, particularly at the seed stage. So we believe that the key to successful relationships between founders and their VCs is one simple rule: No Surprises. And the application of that rule starts well before a formal partnership is formed between VCs and a founding team.
Accordingly, when we evaluate potential investment opportunities at Homebrew, we try to make the diligence process beyond the first meeting feel like a series of working sessions, which in part help expose potential surprises for both sides. We find that this approach provides us with both a better understanding of how the founders think and a deeper appreciation for the nuances of the business. Most importantly, it helps both sides get a feel for what it would be like to work together. In these sessions, we tend to be pretty open and direct about what we find compelling and concerning about the startup. We ask the entrepreneurs to be equally honest about not just their business, but also about the possibility of working with us. What questions or concerns do they have? What kind of help are they seeking from investors? Are they concerned about forming a board and having board meetings? Nothing is off limits in those sessions, because the last thing we want is for either side to go into a long-term relationship based on misinformation or misaligned expectations. We build the relationship on No Surprises.
On an ongoing basis, information needs to be shared openly and in a timely manner. As major investors in your company, it’s failure if we’re hearing significant news for the first time in a monthly email update or at a board meeting. No Surprises means that everyone has the same information at the same time so that they can react as a cohesive team. And the No Surprises rule should apply to both sides. Entrepreneurs should never be surprised by their VC, whether it’s related to personnel, business metrics, follow-on decisions or anything else. Trust is fundamental in startups, but it’s possibly even more important in an effectively permanent founder/VC relationship. And living by the No Surprises rule helps keep that foundation of trust pristine.
So do yourself a favor when talking to investors. Establish the No Surprises rule for both sides. You’ll avoid the “Oh shit” board meeting and have a great long-term partnership as a result.
Local offline-to-online marketplaces are just beginning to impact the lives of individuals and small businesses, enabling them to save time and money and generate new revenue streams. Where there was previously friction, opacity or scarcity, local marketplaces are providing convenience, transparency and abundance. Homebrew is focused on supporting seed stage companies like these that are building the Bottom Up Economy. Our prior experience working with and investing in companies such as OpenTable, Angie’s List and several less successful marketplaces has helped inform how we evaluate and support investments in this segment. Here are some of the other key things we look for in startups employing a local marketplace model.
Focused use case: We believe that scale is the outgrowth of doing one thing really well. Accordingly, we prefer to see local marketplaces that nail a specific, focused use case rather than take a broad platform approach from the outset. Homejoy is a great example of a company that has had relentless focus on a single use case, cleaning your home. An early competitor, Exec, offered a platform where all kinds of services, including home cleaning, could be requested but suffered as a result. One of the primary benefits of focusing on a narrow use case is that customers don’t need to think about how or why to use the marketplace. Focus makes that abundantly clear.
Premium experience for sub-premium price: Great local marketplaces enable customers to have a new experience that is magnitudes better than the old. But the best marketplaces deliver that new, better (i.e., premium) experience for a sub-premium price. Uber and Lyft are the prime examples of delivering infinitely better experiences than hailing taxis and typically at only modestly greater costs (even cheaper in an increasing number of cases). One of our Homebrew family companies, Shyp, is similar in that it delivers an incredible shipping experience at standard retail rates.
Necessities over luxuries: There are local marketplaces for all kinds of products and services, but we prefer marketplaces that are focused on necessities rather than luxuries. Necessities tend to have higher transaction frequency, greater word-of-mouth and less susceptibility to economic downturns. Everyone needs to eat, wash their clothes and get to work. But not everyone needs to fly in a private jet, rent a yacht or hire a Michelin star-winning chef. Those can be wonderful services and they can be delivered in compelling ways, but our view is that products and services that are truly need-based lead to more vibrant. liquid marketplaces.
Organic distribution: Word of mouth is the best marketing. But there are other forms of organic distribution that can be just as powerful and cost effective. For example, when Uber launched, taking a ride with a friend introduced many others to the experience. When Shyp sends a package, the recipient is exposed to the delightfulness of the service. Many of the most compelling local marketplaces have dynamics where the same person can be both customer and supplier over time. Dog owners on DogVacay can be hosts in one transaction and customers in the next. We love to see marketplaces that have these types of organic distribution opportunities embedded in their services.
Few emerging replacements: While we always tell startups not to fixate on competitors, in today’s world where switching costs and barriers to entry are often low, we prefer to invest in local marketplace startups that are solving problems that few others are addressing with new solutions. For example, for better or worse, we’ve avoided investments in the various types of food delivery companies because while frequency is high, there are many replacement products available. This makes it hard to to acquire customers cost effectively, to protect margins and to maintain significant market share over the long term. Many markets have room for more than one “winner” but very few have room for more than two or three.
The above characteristics may be unique to Homebrew, but we also like to see things that others have recognized as important to marketplace businesses. Many of these are well-documented by Bill Gurley in his excellent posts on marketplaces and platform transaction fees. In the past year, we’ve seen local marketplace startups in countless areas, including tech support, parking, home services, cleaning, laundry, food, labor, property rental and transportation. We’ve made investments in several verticals, including shipping with Shyp, legal services with UpCounsel and property management with an unannounced investment. But we believe that there are many more use cases for which compelling products and services can be delivered via a marketplace model. If you’re starting a local marketplace company, especially in specific labor verticals or providing B2B services, please contact me at satya at homebrew.co.
Additional posts on Homebrew investment themes: