Category Archives: Entrepreneurship

What matters? SKILL OR LUCK – a thesis paper summarized

In 2013, I read a paper by Credit Suisse – Alpha and the paradox of Skill. In the podcast “How I built this” – the host Guy Raz interviews successful entrepreneurs and ends with the question “Do you believe your success was luck or skill and hard work”? If you look at summary of answers to that question, successful people attribute 60% to luck and 40% to skill – on average.

Back to the paper on paradox of Skill. The summary of the paper in one quote:

In investing, as in many other activities, the skill of investors is improving on an absolute basis but shrinking on a relative basis. As a consequence, the variance of excess returns has declined over time and luck has become more important than ever.

Credit Suisse, 2013

To be clear there are opportunities for skill to shine. Those are opportunities where “game” is played by people with lesser skill.

The main lessons are that sometimes it’s more important to worry about the game you’re in than the skill you bring.

Summary of the REMITTANCES market Worldwide and key players

The WSJ has a piece today about the worldwide remittances market. It is roughly $554 Billion worldwide with the top recipient countries (no particular order)

  1. India $46B (from US, Dubai and Saudi Arabia), 3% of GDP
  2. Mexico $38B (from US primarily), making up 3% of GDP
  3. China $24B (<1% of GDP)
  4. Pakistan $11B (8% of GDP)
  5. Philippines $20B (10% of GDP)
  6. Guatemala $10B
  7. Vietnam $12B
  8. Bangladesh $15B
  9. Ukraine $11B
  10. Egypt $9B
  11. Nigeria $8B

The market was largely owned by Western Union, but now a host of startups are in the space including:

  1. Transfer Wise
  2. Xoom
  3. Remitly
  4. Money Gram
  5. Ria

What is force Majeure and why is it trending on google search?

The impact of Covid19 on several businesses is catastrophic. Many businesses entered into contracts with vendors, suppliers and partners for their business.

In legal terms, “Force Majeure” means a clause that has an “out”, caused by an event or effect that can be neither anticipated nor controlled. You may no longer meet the obligations of the contract since the events (e.g. Covid were beyond any parties control.

A force majeure clause in a contract would typically include an exhaustive list of events such as acts of God. War, terrorism, earthquakes, hurricanes, acts of government, explosions, fire, plagues or epidemics or a non- exhaustive list of events wherein the parties narrate what constitutes these events and thereafter add “and such other acts or events that are beyond the control of parties”.

Can Covid19 be a reason for Force Majeure?

You most certainly should consult your lawyer, but there are multiple startups I know that are reducing their ongoing costs of systems and technologies, by invoking this clause.

So how do we get back to the “new Normal”? #AFterCovid

1 in 10 Americans believe economy will never return to normal from ...

The biggest bottleneck with Covid19 right now is rapid testing and centralized reporting. If we can fix that then we can start to reopen “parts of the quarantine”.

Most data points to the fact that people who are suffering or dying from Covid19 are those who have preexisting medical conditions or poor immunity (old, infirm, etc.).

That is likely between 5% to about 15% of the population. (source)

The rest of the people would likely suffer mild to no symptoms from CoVid.

Instead of allowing them to go about their lives, everyone’s life is being disrupted to ensure the 5-10% dont die.

In no way am I implying that the 5-10% be dammed. In fact we should take more precautions to ensure they are safe. Quarantine them, provide extra medical attention, support and safety.

If we had a quick (say < 15 minutes) way to test Covid and an easy way to aggregate the data and report it to local, regional or central authorities, then those who dont test positive could be allowed to go on with their lives.

So how does this play out?

Imagine 5-10 startups that are all innovating on “rapid test” with reagents from your home. They send you a kit (pack of 12 test kits), you take the test and test results are uploaded to a service via your phone. If the test is positive, you have to quarantine. If the test is negative, you can go to “work” or elsewhere. Assume the tests will be valid for some short period – maybe a day if you are in a high exposure role (e.g. nurse) or once a week if less so (e.g. software developer). This sounds simpler than it is, but bear with me for the sake of argument.

Each kit comes with its own app to upload results, and they are all reporting their aggregate and specific data to local government.

Now public health and other officials know who is and who is not infected and can provide “discerning guidance”, instead of a diktat for the entire population.

Now to the next question: How do we ensure that those that don’t test positive infect those who are old / infirm / or with poor immunity?

More than ever we need the strong and able bodied to help those who are unable.

So the precautions that are recommended by physicians and medical professionals apply more to those that are infirm that those for who this is “like a flu”.

Wash your hands, use masks are all good recommendations regardless of whether you test positive or not. Everyone should take those recommendations.

Having everyone have their lives upended is hard for 85% – 90% of the population.

Only rapid testing can solve that for now.

Thanks to Bal for helping me think through this.

The Great Mobile App Migration of March 2020

Over the last few weeks as many in the world have been in lockdown, there has been a temporary “mobile app migration” happening. There are new apps downloaded and they replaced existing apps on the “home screen”.

While some of these apps are likely temporary use, for e.g. I have 6 “conferencing apps” – Zoom, Uber Conference, Webex, Google Hangouts, Blue Jeans and Goto Meeting. That is because of the many people I have conference calls with – each company seems to have chosen a different web conference solution.

Other apps seem like they will have staying power – Houseparty, for e.g. which has games, networking and video conferencing all built into one app to keep in touch with friends and relatives.

Houseparty

The apps that have moved away from my “home” screen, which I expect will come back once the crisis will be behind us include – Uber, Lyft and all the airline apps from Delta, Alaska and United.

What is Flexfacturing: Response to covid19 from Manufacturers

Over the last 2 weeks multiple companies in many regions have started to re-purpose their manufacturing to support new requests due to COVID19.

Flexfacturing is “flexible manufacturing” – the ability to use a production facility and assembly to “easily” move to manufacture another product based on demand.

Here are some examples:

  1. A textile manufacturer has started making masks in Gastonia, NC.
  2. Anheuser-Busch, a maker of beer will start to make and distribute hand sanitizer – the same for LVMH & Zara
  3. Distilleries in New York are making hand wash soap and anti-bacterial detergent

This is the transformers meets manufacturing. Companies finding out (for altruistic reasons or otherwise) that what they are building has low demand, and something else has high demand.

I believe this trend will continue to happen after Covid19. More manufacturing facilities will be spawned in multiple locations that are built from the ground up to be flexible.

That is Flexfacturing.

Why Visa bought Plaid for $5.3+ Billion

This morning  Plaid, a fintech (finance + technology) company that had raised about $350M so far and was valued at about $2.7 B in its previous round, 1 year ago in Dec 2018, was acquired by Visa for $5.3B.

The company itself is about 6+ years old and provides APIs to help companies such as Venmo, Robinhood get API level data access to their users Bank accounts, credit cards etc.

If you have been around for a bit think about companies such as Yodlee and others.

I remembered when Mint was acquired by Intuit. Yodlee powered Mint, but Yodlee was B2B and Mint was the consumer facing app. They got the huge value.

In this case, there is no doubt that the fintech companies (59 unicorns) that depend on Plaid are valued richly, but the infrastructure provider – Plaid, also deserved the huge valuation.

In looking at why Plaid was acquired, there are 5 reasons given by Visa. (pdf file)

  1. Over 75% of internet consumers use at least 1 fintech app and Plaid provides the underlying plumbing to all / most of them – meaning, there are more customers to get.
  2. Plaid provides data and network access, which is fairly similar to Visa’s business model – making it an easy to justify acquisition
  3. Developers are driving new fintech app adoption and Plaid provides solutions to developers – a new audience for Visa to target
  4. As opposed to old banks (yesterday’s fintech companies), the new fintech companies depend on Plaid
  5. Plaid can help Visa with international API driven access to other fintech organizations beyond the US where this is just beginning.

Overall, a super impressive story. I am not sure this is worth $5.3 Billion, but who am I to question or value it. It is worth that and more to Visa and they are paying.

Controversial: “Many entrepreneurs take plenty of risks—but those are generally the failed entrepreneurs, not the success stories.”

I am reading a book Originals – How non conformists move the world. It is about folks that challenge the norm. In it, the author quotes from Malcolm Gladwell

“Many entrepreneurs take plenty of risks—but those are generally the failed entrepreneurs, not the success stories.”

This is not new and very controversial at the same time. He mentions multiple examples of highly successful entrepreneurs from the founders of Warby Parker to Bill Gates, as folks who had a side-gig in their venture before they plunged into something.

On the other hand, my experience has always been that when you commit to anything full-time you get a lot more success, as I have seen in my own case.

I am curious, how many of you are doing a side-gig or a project that you hope someday turns into a full-time opportunity or startup?

I’d love to also hear if you think that committing full-time versus doing it on the side will get you to your goal.

As an investor I never invest in any entrepreneur that’s seeking investment for an opportunity they are doing part-time. Should I be changing that perspective?

Before and after an angel investment; stories about why angels are once bitten, twice shy

Outside of Silicon Valley it is extremely hard to raise any financing for a startup. It is not unusual to hear about a $250K – $500K round taking more than 2 or 3 months to close. If the entrepreneur is a first-time founder, without any pedigree (top tier school, well known previous employer) expect it to take longer. In fact according to the data shared by Mar Hershenson (slides below) angels now are not investing until you have some traction.

There are many reasons why angels take so long to invest and insist on multiple meetings, due diligence and more data before they invest relatively small sum of money such as $25K – $50K. Besides the usual reasons such as “hard-earned money”,  “better investment options elsewhere”, etc. there is one issue that rarely gets discussed outside closed rooms or in private messages.

The lack of information sharing by entrepreneurs once a round is closed.

I dont think it has anything to do with if the company is doing well or not. Some entrepreneurs just don’t keep their investors in the loop – writing that off as “busy work”, “don’t have time – building the business, gaining customers”, etc.

Looking at my investments alone, 3 of the companies have founders who were referred to me by friends have founders in this bucket. Before my investment, I would get an email or WhatsApp message every 2-3 days with a request for follow-up meetings. One of them was very persistent, following up with me for 5 months before my investment.

After the investment however, radio silence. Now, I have to reach out to them every 6 months or a year to find out how they are doing. While previously I would get a response to an email in a day, now 50% of emails are not being responded to.

To be honest, I understand that entrepreneurs are busy. Unlike VCs who have information rights and have an ongoing cadence with the CEO as part of the board, angels rarely do. Angel investments are mostly passive, with a promise to help with “network” and “connections”. In many cases these are marginally relevant to the entrepreneur.

I have however now developed a new set of checks to ensure I don’t go down the path of an incommunicado entrepreneur.

I ask to be sent their weekly / monthly update to investors or the team for 2 months. The quality, timeliness and consistency of the emails gives me a clear indication about if the entrepreneur is even going to keep others in the know or in the dark.

This is only one of several checks but, if you are an entrepreneur, having a frequent (monthly) update on highlights, low-lights and insights about your business, key milestones and next steps helps you and the investors find ways to help you.

Always hire Marketing people first over Sales

I have a friend who started a new SaaS company for larger (1000+ employees) organizations. The product is aimed at enterprises and must be “sold”, not bought, meaning while some of his potential customers have this problem, they are not actively looking for a solution. Instead they have used a band-aid to provide short-term fixes for the problem. There are no opportunities for a self-service solution, where someone can “try” then “buy”.

After the initial 5 beta customers (all paid, $120K ARR), and terrific feedback from them, he started to think about raising a $1-$2M round of funding. He had previously raised $300K from angel investors.

The approach to raising his round began with a discussion with his angel investors who each made 1-2 connections to other follow-on investors.

Many of those follow-on conversations turned into “we will wait until you are further along” passes or “you still need more traction for us to get involved” meetings. The company is in Seattle, so the number of investors in the target list was less than 10. A few meetings were in Silicon Valley as well, with similar feedback. None of them mentioned the market was small, but a couple did mention that it was likely a bigger company might be able to build this.

In search of traction, he started to think about hiring a sales person to increase ARR. His website is functional, mostly informative and has the basics. He is spending $1-2K per month on Google ads, getting 4-5 inbound requests from those efforts, but the pace of customer acquisition was slow.

He did connect with a BD / Sales person who he knew from his previous company and started to talk about having her join the startup. She was making $200K all in (base + commission) and wanted some assurances that she will be able to make that in a year. After realizing that it won’t be possible to give her that confidence, he looked at trying to get “commission only sales reps”. No luck there as well.

He finally got a friend-of-a-friend to recommend a young, sales person in New York who wanted to explore a career in technology after selling electrical equipment to large companies for 3-4 years. He was able to get the sales rep for $120K (60K base) all in, a jump of $20K for the rep from his previous position, if he hit his targets. The rep was to generate $500K in initial revenue from large companies in the New York / New Jersey area.

The first 2 weeks of the sales rep’s time was spent in demos and learning, while my friend helped him build a target account list. Then the rep started to build his “email list” of IT directors and managers with the titles that fit the company’s profile. That took 7-8 hours a week to research, collate and build over 2 more weeks. The rep also went back to his connections to ask for referrals to the right person in their organization, which resulted in 3 follow-on meetings.

They built a list of 250 targets with names & email addresses after combing through LinkedIn and another “IT database” from a vendor (DiscoverORG). After 1 week of emailing and cleaning email addresses, some of which bounced, trying different messages and subject lines (A/B testing), they got 2 emails back – both asking them to “remove me from your email list”.

2 months into the process, my friend realized his company was not ready for a sales person.

They did not have content, enough inbound traffic or interest to make the sales person effective. While he identified a few marketing tools – whitepaper, videos that he needed to get done, they were in the works, and he was using contractors and his own time to focus on those, which slowed things down.

He let go of the sales person 3 months after he hired him.

His angel investors provided bridge financing for another $150K for him to hire a marketing person instead and my friend eliminated 1 developer to make room for the marketing budget.

He hired a freelance marketing director for 3 months on contract and is the primary sales person, with a vastly improved website, whitepapers, 3-4 blog entries each month and has appeared in a conference as a speaker as well.

Results:

Sales person for 3 months – total spend ~$18K ($15K salary, plus travel expenses, LinkedIn navigator subscription, email tool – Outreach, database subscription – Discoverorg), etc.

> 23 meetings, 3 follow on discussions and no sales.

Marketing person for 2 months – total spend – $23K ($15K monthly retainer, plus whitepaper content, blog content, travel for conference, etc.)

> 32 meetings and discussions, 5 inbound inquiries, 3 initial pilots, 1 sale for $28K.

While not definitive, I see this consistently with SaaS and enterprise sales startups. The return on marketing dollars over sales is higher, more immediate and sustained.

Most technical founders think they only want a “sales closer” not marketing guy that “creates content” and does some “google ads”.

They dont realize that to make the sales person effective, they need marketing in the first place. Thoughts?