[soundcloud url="https://api.soundcloud.com/tracks/188184000" params="auto_play=false&hide_related=false&show_comments=true&show_user=true&show_reposts=false&visual=true" width="100%" height="450" iframe="true" /]
Virtual Reality seems to be everywhere these days, showing up in demos and offerings from the world's biggest gadget makers along with the Hollywood and gaming crowd. All of which begs the question -- when do the rest of us get in on the fun? MORE
a16z Podcast: VR Goes Pro - With Chris Dixon and Peter Rubin
Virtual Reality seems to be everywhere these days, showing up in demos and offerings from the world’s biggest gadget makers along with the Hollywood and gaming crowd. All of which begs the question — when do the rest of us get in on the fun? a16z’s Chris Dixon is joined by Wired editor Peter Rubin for a dive into VR. The clearly obsessed duo discuss the direction VR is headed, what still needs to happen to get there, and the VR experiences that have them sucked into another world for hours on end.
We don’t invest in themes; we invest in special founders with breakthrough ideas. Which means we don’t make investments based on a pre-existing thesis about a category. That said, here are a few of the things we’ve been thinking about… …
We don’t invest in themes; we invest in special founders with breakthrough ideas. Which means we don’t make investments based on a pre-existing thesis about a category. That said, here are a few of the things we’ve been thinking about… We’re especially grateful to our founders and the entrepreneurs we meet with everyday for their insights here. [For other trends we’ve covered already elsewhere, please see our mobile eating the world, you bet your SaaS, and government x tech series.]
DevOps is more than just a methodology. It’s a must-have skill set for the modern programmer -- and is increasingly becoming its own department as well (the subject of much debate). And the growth of the DevOps movement coupled with complex cloud infrastructure has opened up many opportunities today... MORE
DevOps - Some historical context on this trend
In 2001, a group of developers met to debate and discuss a new set of “lightweight” methods for software development, and the Agile Manifesto was born. While the manifesto wasn’t necessarily a direct outcome of the new web/SaaS/cloud organizational meanderings, it struck a nerve by stressing the need for cross-functional collaboration, communications, and short release cycles. Essentially, it helped to codify the hodgepodge of learnings we independently discovered about what worked at Hotmail, Yahoo, and other first-generation internet companies. These learnings ultimately became the underpinnings for what we now call “DevOps” [adapted from Wikipedia]:
DevOps (a portmanteau of “development” and “operations”) is a software development method that stresses communication, collaboration, and integration between software developers and information technology (IT) professionals. A response to the interdependence of software development and IT operations, DevOps aims to help organizations rapidly produce software products and services — and to improve operations performance.
But DevOps is more than just a methodology. It’s a must-have skill set for the modern programmer — and is increasingly becoming its own department as well (the subject of much debate). The rise of the hyperscale cloud datacenter has made this job much harder as developers have had to hack together tools and complex scripts for pushing code to thousands of pancake servers.
The growth of the DevOps movement coupled with this complex cloud infrastructure has opened up many opportunities today, starting with helping developers and companies to manage the entire process to much more. – based on Scott Weiss
YouTube does a fantastic job of generating zillions of video views for its community. Yet it does a relatively poor job of helping their users earn money. There hasn’t been any serious competition that can deliver viewers at such scale… Until now. MORE
Online Video - It's only getting started now
YouTube does a fantastic job of generating zillions of video views for its community. Yet it does a relatively poor job of helping their users earn money. This is likely to due to a couple of reasons. Advertisers have been reluctant to pay premium rates for ads against user-generated content that they haven’t vetted. And YouTube can be stingy about sharing video revenue because there hasn’t been any serious competition that can deliver viewers at such scale… Until now.
Just like scores of entrepreneurs have hollowed out or unbundled Craigslist by building specialized marketplaces, entrepreneurs and companies are setting their sites on hollowing out YouTube:
…Many entrepreneurs are working to build businesses that target some of the larger YouTube categories, specializing the user experience within that category and/or sharing a higher portion of proceeds with their users. Some early examples focus on online video lessons, or unbundle a topic with a devoted community around it (as with makeup tutorials).
…Leading platforms are entering the market. Facebook and Twitter have both launched serious video efforts that appear to be targeting YouTube. Both have the potential to generate distribution and ad sales that can rival YouTube/Google. And in Facebook’s case, it could potentially change the video advertising game altogether and impact ad spend overall. (Remember the Thank You Mom ad by P&G? Or the Ice Bucket Challenge that took place this summer?)
…Other larger players could enter as well. Yahoo is reportedly working on a big video effort. Beyond its obvious video options, Amazon got into a new video platform game through Twitch. Meanwhile, other distribution and messaging platforms (like WhatsApp, which just announced a web-based version) are all viable contenders in the video space… And cable companies may soon enter the fray too. Online video will be very crowded soon.
Some implications of all this are that:
— There will be new business models for video beyond traditional advertising. The reality is that without the scale of a YouTube or Facebook, platforms will have to find more creative ways to make money, whether it’s through subscriptions, micropayments, exclusive previews, community benefits, or other methods.
— Video advertising itself will change with new models for distribution. Which makes sense if you think about the fact that the most dominant online video platform is owned by a search giant. Something analogous to what is happening in the media world with native advertising should happen with video, given that many advertisers in video have been worried about the compatibility of their brand positioning against user-generated content.
— The age of platforms not taking care of makers may come to an end. YouTube “stars” generate tons of views for YouTube, but those views don’t translate into meaningful earnings for most of them. As the size of the entire pie grows bigger, there needs to be a piece for everyone. In most media businesses, rents typically acrue to the creators. And this is critical to the long-term success of any two-sided marketplace that connects providers and consumers.
None of this addresses what happens to the video landscape once new or newly popularized mediums (such as podcasts, animations, mashups) or entirely new platforms — VR, AR, and so on — become more popular and create new forms of content that live in different ways next to video.
What we do know is that online video is far from done… it will be interesting to see what even a little competition will do here.
Until now, crowdfunding has mostly been an occasional, desktop sort of experience. We might back a new gadget launch or a charity a few times a year, but it’s not an everyday thing. With a smartphone in our pocket, however, we not only have access to crowdfunding platforms whenever we want, but to the crowd that comprises the various social circles of our lives. MORE
Crowdfunding - Goes mobile and mainstream
When we’ve got a smartphone in your pocket all the time, we have a way to fund anything at any time via crowdfunding.
Until now, crowdfunding has mostly been an occasional, desktop sort of experience. Sure, we might back a new gadget launch or a charity a few times a year, but it’s not an everyday thing. That’s about to change. With smartphones in our pockets, we not only have access to crowdfunding platforms whenever we want, but to the crowd that comprises the various social circles of our lives — from family to school, work, and the region we live in.
And with the same ease-of-use, immediacy, and frequency of everything else on our phones, crowdfunding will increasingly be the way people turn their ideas — large and small — into reality. It will be how we flex our collective financial muscle.
With a tap on your phone you can help support a political campaign, assemble a school picnic, fund your honeymoon, or help pay for the surgery of a pet. In the last year alone, Snoop Dogg used crowd-funding to raise money to buy helmets and equipment for football-playing kids in Des Moines; Conan O’Brien used it to raise money for the Children’s Defense Fund by selling wooden emojis; neighborhoods rallied behind local retailers hitting hard times. The evidence is piling up.
Crowdfunding is going somewhere it never has — into the mainstream. And that will change all sorts of other things.
Everybody’s going to get hacked, and it’s just a question of how quickly we respond ... or go on the offense. MORE
Security - You've already been hacked
There are two things now driving the security industry:
1. The bad guys are already inside.
2. New platforms: cloud and mobile.
…Both are forcing a different set of technologies, and the creation of new kinds of companies.
If you take the second principle first, what it boils down to is this: What happens when we can no longer protect data with a firewall? How do we go about protecting data on a mobile phone or protecting data in the cloud? Old-line data security companies were all about protecting our data at our private data centers or protecting data on our PCs. (And when I say “protecting data” I mean protecting it from viruses that are trying to extract data.)
But as the threat environment moves away from individual PCs and private data centers to the cloud and mobile — as the computing platform shifts — a new set of companies are emerging. And when there’s a platform shift, there’s potential for new franchises to emerge.
The same is true when we start to wrap our head around the first principle.
The threat of people getting into our systems today is so great that every company in the world has to embrace the notion that not only are they going to get hacked, there’s a good chance hackers are already inside … and they just don’t know it.
So there’s a whole new class of companies that come into play during, and in the aftermath of, a hack. First by identifying that a breach has occurred and where it has occurred, and then in locking things down so the damage doesn’t spread.
Another class of company deploys technology that looks at what’s in our network and what’s the posture of our network. It’s constantly monitoring what normal network traffic looks like within the organization and generating a profile. When it notices an odd behavior, it will either lock it down or take some kind of action.
This set of companies comprise a very interesting category because everybody’s going to get hacked, and it’s just a question of how quickly we respond when we see odd stuff going on within the company.
There’s a final class of company that I’m focused on in the security space; I would describe it as a counter-measures company. In other words, how do we turn the tables on the attacker? How do we go on the offense? It’s another leg in the security stool, and one that we’ll see more of as hacks get ever more sophisticated and the losses grow ever larger. It’s part of the growing sense in the security industry that if we don’t fight fire with fire, we’ll just get burned.
Computer enthusiasts and science fiction writers have dreamed about VR for decades. But earlier attempts to develop it, especially in the 1990s, were disappointing. It turns out the technology wasn’t ready yet. What’s happening now -- because of Moore’s Law, and also the rapid improvement of processors, screens, and accelerometers, all driven by the smartphone boom -- is that VR is finally ready to go mainstream. And once VR achieves 'presence', we start to believe... MORE
Virtual Reality - A new creative medium where the default state is belief
In the VR community, “presence” is a term of art. It’s the idea that once VR reaches a certain quality level your brain is actually tricked — at the lowest, most primal level — into believing that what you see in front of you is reality. Studies show that even if you rationally believe you’re not truly standing at the edge of a steep cliff, and even if you try with all your might to jump, your legs will buckle. Your low-level lizard brain won’t let you do it.
With presence, your brain goes from feeling like you have a headset on to feeling like you’re immersed in a different world.
Computer enthusiasts and science fiction writers have dreamed about VR for decades. But earlier attempts to develop it, especially in the 1990s, were disappointing. It turns out the technology wasn’t ready yet. What’s happening now — because of Moore’s Law, and also the rapid improvement of processors, screens, and accelerometers, driven by the smartphone boom — is that VR is finally ready to go mainstream.
Once VR achieves presence, we start to believe.
We use the phrase “suspension of disbelief” about the experience of watching TV or movies. This implies that our default state watching TV and movies is disbelief. We start to believe only when we become sufficiently immersed.
With VR, the situation is reversed: our brains believe, by default, that what we see is real. The risk isn’t that it’s boring but that it’s overwhelmingly intense. We need to suspend belief and remind ourselves that what we think we’re experiencing isn’t real.
You read a book; your brain reads letters printed in ink on paper and transforms that into a world. You watch a movie; you’re seeing imagery inside of a rectangle while you’re sitting inside a room, and your brain translates that into a world. And you connect to this even though you know it’s not real, but because you’re in the habit of suspending disbelief.
With virtual reality, you’re essentially hacking the visual-audio system of your brain and feeding it a set of stimuli that’s close enough to the stimuli it expects that it sees it as truth. Instead of suspending your disbelief, you actually have to remind yourself not to believe.
This has implications for the kinds of software that will succeed in VR. For example, a popular video game like Call of Duty ported to VR would be frightening and disorienting for most people.
What will likely succeed instead are relatively simple experiences. Some examples: go back in time and walk around ancient Rome; overcome your fear of heights by climbing skyscrapers; execute precision moves as you train to safely land planes; return to places you “3D photographed” on your last vacation; have a picnic on a sunny afternoon with a long-lost friend; build trust with virtual work colleagues in a way that today you can only do in person.
These experiences will be dreamt up by “experience makers” — the VR version of filmmakers. The next few decades of VR will be similar to the first few decades of film. Filmmakers had no idea what worked and what didn’t: how to write, how to shoot, how to edit, etc. After decades of experiments they established the grammar of film. We’re about to enter a similar period of exploration with VR.
There will be great games made in VR, and gaming will probably dominate the VR narrative for the next few years. But longer term, we won’t think of games as essential to the medium. The original TV shows were newscasts and game shows, but today we think of TV screens as content-agnostic input-output devices.
VR will be the ultimate input-output device. Some people call VR “the last medium” because any subsequent medium can be invented inside of VR, using software alone. Looking back, the movie and TV screens we use today will be seen as an intermediate step between the invention of electricity and the invention of VR. Kids will think it’s funny that their ancestors used to stare at glowing rectangles hoping to suspend disbelief.
Something often overlooked when we talk about all the shiny new connected gadgets emerging out of the ‘Internet of Things’ is what happens to all the old things when they're connected to the internet? MORE
Internet of Things - What happens when ordinary old things become connected
Something often overlooked when we talk about all the shiny new connected gadgets emerging out of the ‘Internet of Things’ is what happens to all the old things. I’m fascinated by the power of adding multiple sensors to old things and then connecting them to the internet.
Take a microwave. Despite all the bells and whistles that have been added to them over the years, they haven’t really changed much since the 1970s. But when you add all kinds of other sensors — a camera, an electronic scale, a bar-code reader, and so on — that microwave could ‘see’ what you put in the oven, recognize the brand and nutritional content of your food, and even weigh it. By querying a database in the cloud, it would come back with the time and intensity required to cook that item of food perfectly. Over time the oven learns how you like your food done. All we would have to do is add the ingredients and close the door. The internet-connected oven does the rest.
While this scenario is somewhat simplified, the interesting question is what happens when anything with an on/off switch gets connected to the internet. As with our microwave example, one consequence would be better outcomes: a house heated to the right temperature at the right time; garage doors that automatically open when we pull into the driveway and close when we pull out; saving power on all our devices; and so on.
We tend to focus on the glorified outcomes but the mundane ones are equally if not more powerful. Right now we have a culture of planned obsolescence. But the IoT could change things here, and create a new culture of repair. If you’re a small family-owned restaurant that can’t afford to constantly upgrade equipment or fix things, you can answer a whole new set of questions with the IoT: Is that freezer working extra hard because someone left the door open, or because its compressor is about to fail and you’re about to lose $6,000 in food? Power consumption patterns, audio waves, and more can be analyzed to determine whether, when, and how something ought to be running.
With the IoT we’re headed to a world where things aren’t liable to break catastrophically — or at least, we’ll have a hell of a heads’ up. We’re headed to a world where our doors unlock when they sense us nearby. All that, and a warm meal perfectly cooked.
Institutions are starting to ask “What’s your Bitcoin strategy?” in much the same way people once asked “What’s your social media strategy?" MORE
Bitcoin (and Blockchain) - 3 things to think about this year
1. Institutional acceptance
Patience, please — ‘legal’ Bitcoin is actually only one year old! That is, even though the Bitcoin source code was posted to the Internet in 2009, it was only clearly legal for American institutions to get involved with it after the IRS tax guidance was published in March 2014 (as late as December 2013, the New York Times had published articles predicting and/or calling for a ban). But just a few short months later, former and current officials now publicly laugh at such a thought and have openly embraced Bitcoin.
So the clock has just begun on Bitcoin’s acceptance more broadly. Crash or no crash, we should expect a significant increase in the level of institutional adoption this year. Specifically, a large number of companies will put together groups focused on what Bitcoin means to them — and as early as next year we’ll start to hear people ask “What’s your Bitcoin strategy?” in much the same way people asked “What’s your social media strategy?”…
2. As a new rail, Bitcoin enables new kinds of payment workloads
Bitcoin is as different from the wire transfer system as the modern Internet is from phone lines. You wouldn’t expect the phone lines of 1988 to easily accommodate hundreds of millions of tweets and likes per day, nor multi-gigabyte file transfers or P2P apps. Moreover, the primary use of Bitcoin may not be doing “better wire transfers” anymore than the primary use of the Internet was VOIP.
Instead we should expect totally new kinds of applications, because Bitcoin is good for transactions that are very small, very large, very fast, very international, and/or very automated — unlike the legacy payment rails. It probably starts with low stakes, digital goods that the dollar can’t colonize right now due to the requirements of credit card companies … basically business models that are just too low stakes, or too weird, or too international.
3. Bitcoin as infrastructure
Let’s define an intrinsic value app as an application of Bitcoin that does not include any explicit price dependency or reference to price. These are apps that typically use Satoshis to write data to the Blockchain, and work equally well whether the price is $1 or $1,000.
For example, one can use the Blockchain as an identity provider, or as a distributed database where you can log proofs of existence. Given their robustness to price volatility, I expect these kinds of apps to be among the first popular Bitcoin tools.
Think about what’s possible with smartphones today. The form and sophisticated functionality of smartphones has led to businesses we couldn’t ever have imagined. It’s made possible partly because of the “sensorification” of the landscape, coupled with mobile and a friendly UI. That same sensorification needs to move to the enterprise. MORE
Sensorification of the Enterprise - What comes after the consumerization of IT
A few years ago a bunch of consumer internet companies had an “Oh, shit” moment around mobile. They saw all their traffic coming in from mobile rather than the web. They redid everything to take advantage of mobile. Many still aren’t done doing so (and some have yet to make the shift).
Something similar is happening in the enterprise world, which is going to have its own “Oh shit” moment. But this is not just about bringing mobile to the enterprise. It’s much more than that…
Think about what’s possible with smartphones today. The form and sophisticated functionality of smartphones has led to businesses we couldn’t ever have imagined (ridesharing, to name just one example). It’s made possible partly because of the “sensorification” of the landscape, coupled with mobile and a friendly UI.
That same sensorification needs to move to the enterprise.
Enterprise UI is woefully behind. All those well-understood motions that have taken hold in our everyday smartphone behaviors — pinch, zoom, swipe, tap, speak, just moving stuff around with your finger — have yet to take hold in the enterprise. In the past, the user interface was always an afterthought, the last thing you did.
So where do the sensors come in? Think about what happened on mobile. You don’t have a lot of screen real estate or functionality on mobile, so you have to keep a really elegant UI. The sensors are essentially used as “shortcuts” to information and actions the user doesn’t have to perform. Instead of me manually typing my location in my phone every time, GPS more simply informs my phone ‘you are here’ so it can automatically load.
For enterprise, the value of the sensors is in being a shortcut for the user interface. They’re replacing your typing or other input so you can concentrate on the easy, fun, creative things.
Wearable devices are part of a new model of computer networking — what people are calling the personal cloud. The personal cloud will include both general-purpose and single-purpose devices. Apple is pursuing the general-purpose vision with the upcoming Apple Watch. Ringly is pursuing the single-purpose vision. There will be successful companies in both categories.
You might think that wearable devices like Ringly will make people even more obsessed with the internet. My experience has been the opposite. MORE
One of the major startup opportunities of the information age is: now that more than two billion people have internet-connected devices, how do we create systems to efficiently share and store their collective knowledge? Requirements for successful collective knowledge systems include: 1) users need to be given the proper incentives to contribute, 2) the contributions of helpful users need to make the system smarter (not just bigger), and 3) users with malicious intent can’t be allowed to hurt the ...
DevOps is more than just a methodology. It’s a must-have skill set for the modern programmer -- and is increasingly becoming its own department as well (the subject of much debate). The rise of the hyperscale cloud datacenter has made this job much harder as developers have had to hack together tools and complex scripts for pushing code to thousands of pancake servers.
The growth of the DevOps movement coupled with this complex cloud infrastructure has opened up an opportunity ...
[soundcloud url="https://api.soundcloud.com/tracks/186851886" params="auto_play=false&hide_related=false&show_comments=true&show_user=true&show_reposts=false&visual=true" width="100%" height="450" iframe="true" /]
Is coding the new literacy? As software infuses all our lives and every industry, there are those that know how to create it and those who just use its seemingly magical powers. So how much ought we all know about how a favorite app works under the hood? Do we all need to ...
a16z Podcast: Coding as Literacy - With Jamie Brandon, Tracy Chou, and Chris Granger
Is coding the new literacy? As software infuses all our lives and every industry, there are those that know how to create it and those who just use its seemingly magical powers. So how much ought we all know about how a favorite app works under the hood? Do we all need to start writing code? And how can we bring everyone who wants to play in the software sandbox into the fun? Tracy Chou from Pinterest, and Chris Granger and Jamie Brandon from Eve join the discussion. As Granger puts it, “coding is a superpower.” So are we all about to put on the software cape?
Chris Dixon has been both a founder and a VC. He has empathy for both venture capitalists and founders on this set of issues. He is most certainly correct that this type of situation creates tension. The wave of discussion about this topic is proof of that. The question is: what is the best way to resolve the tension in ways that are mutually beneficial? MORE
12 Things Learned from Chris Dixon about Startups - by Tren Griffin
1. “If everyone loves your idea, I might be worried that it’s not forward thinking enough.”
Anyone thinking about starting a business should be searching for mispriced opportunities. While markets are mostly efficient in eliminating opportunities for extraordinary profit, there are always areas of an economy in which there are significant uncertainty. These areas are excellent places for a startup to look for opportunities.
The best entrepreneurs have learned that large businesses are investing huge amounts of capital in areas in which extensive information is already available, and that it’s most advantageous to create new businesses where information is not available. In other words, the best opportunities for startups tend to be in areas that are overlooked and less well-known by others. What Chris Dixon is saying is that if everyone loves your idea, this may be a “tell” that there will not be opportunities for extraordinary profit. The venture investor Peter Thiel has said: “The best startups are good ideas that look like bad ideas. Good ideas that look like good ideas are already being worked on by big companies.”
Dixon also says in this insightful post that “you shouldn’t keep your startup idea secret.” He identifies a range of positive benefits that flow from sharing the idea and getting feedback, while pointing out “there are at best a handful of people in the world who might actually drop everything and copy your idea.”
While most businesses do not require a result that generates extraordinary profit to be a success, this is not the case for a startup that seeks to raise venture capital. Venture capitalists invest in a portfolio of startups, knowing that only one to three in every fund could likely be a massive success. Chris Dixon’s partner Marc Andreessen describes the approach of a venture capitalist more technically as ‘buying a portfolio of long-dated, deeply-out-of-the-money call options’. Entrepreneurs are in the business of creating those options and selling some of them to investors to fund the business.
Like a startup or any other investor, a venture capitalist is seeking a mispriced opportunity. All intelligent investors seek mispriced assets and if you want to explore this topic you can do no better than reading Howard Marks. Why do large businesses and others leave this opportunity in areas with significant uncertainty available for startups? Howard Marks traces the source to bias and closed mindedness, capital rigidity, psychological success, and herd behavior. Markets are not fully efficient. Private, emerging and obscure markets are especially inefficient.
2. “How do you develop a good idea that looks like a bad idea? You need to know a secret — in the Peter Thiel sense: something you believe that most other people don’t believe. How do you develop a secret?(a) know the tools better than anyone else; (b) know the problems better than anyone else; and/or (c) draw from unique life experience.”
“Founders have to choose a market long before they have any idea whether they will reach product/market fit. In my opinion, the best predictor of success is whether there is what David Lee calls ‘founder/market fit.’ Founder/market fit means the founders have a deep understanding of the market they are entering, and are people who ‘personify their product, business, and ultimately their company’.”
Chris Dixon is saying that the people most likely to know the “a secret” about a business opportunity are people who have deep domain expertise. In other words, it is not nearly as likely that someone without deep domain expertise will be successful without understanding the technology, the best methods to create the product, the best ways to bring products to market or the needs of the customer. Another way to think about this point is in terms of a moat or sustainable competitive advantage. Founders and employees of the startup are themselves contributors to the moat of a company, both directly and indirectly.
People who work for the startup who have deep domain knowledge are a likely source of what is called “optionality” which I have explained in a previous blog post. When a team of people in a startup have what Dixon called “secrets” as a result of deep domain expertise, their ability to adapt and innovate gives the startup and the investors optionality. Teams that do not have this optionality usually can’t adapt to changing environments, and fail more often.
The other skill that people with deep understanding have is the ability to see a phenomenon that is emerging within a complex adaptive system. When something bigger than the sum of its parts is emerging in an economy, some people with deep domain expertise are going to see the potential (the secret) before other people.
3. “[The] business of seed investing, and frankly, early-stage entrepreneurship, is so much about getting good information. And almost all of that information, unfortunately, is not published.”
The fact that information about a business is hard to get is actually a great thing for a startup, since it can help create the mispriced opportunity they seek. Uncertainty in the early stages of a startup is the friend of the entrepreneur. As the team pushes forward to reduce technology risk, find product/market fit and discover methods to scale the business, uncertainty is retired and value is created. The job of a great venture capitalist is in no small part to provide entrepreneurs with an entry into networks that allows them to quickly and cost-effectively find this private information. The same principle applies to the venture capitalists themselves. Great venture capitalists are always trying to find good sources of information, particularly information that is not published.
4. “Ideas …matter, just not in the narrow sense in which startup ideas are popularly defined. Good startup ideas are well developed, multi-year plans that contemplate many possible paths according to how the world changes.”
“Characteristics of the best ideas: (a) powerful people dismiss them as toys; (b) they unbundle functions done by others; (c) they often start off as hobbies and/or (d) they often challenge social norms.”
“The best ideas come through direct experience. …When you differentiate your direct experience from conventional wisdom, that’s where the best startup ideas come from.”
My deepest exposure to what Chris Dixon is talking about immediately above (direct experience) came during the time I worked for Craig McCaw, who without question is a savant when it comes to ideas that can be developed into great businesses. In the very early days, the “cell phone” only offered enough value to be a commercial success to a very small number of users. In the beginning, the device was so big it required a suitcase or a car installation to be useful. I remember real estate agents and construction sites as the biggest users. On the infrastructure side, a city like Seattle could be served by radios on only three very tall towers.
Eventually mobile phones appeared, but they were very expensive, analog, heavy and large. During that time period, McKinsey famously predicted that no one would ever use a mobile phone if a land line phone was available. McKinsey placed little or no value on what Craig McCaw called the ability of people to be “nomadic.” The mobile phone had each of the attributes Chris Dixon noted above. Some people thought of the mobile phone as a toy. Since my first mobile phone cost more than $4,000 dollars I actually felt awkward using it in some social settings. Talking into a mobile phone in some pubic settings would cause people to frown at you.
To continue my example, Craig McCaw was also an enthusiastic personal user of what we then called “cellular” phones. Craig McCaw loved working out of the ‘mobile office’ – meaning cars, planes, boats and ships. Which meant he was a natural enthusiast for the product. When the time came to sell his cable TV business in order to double down on the mobile phone business, the choice was made easy by his love of the mobile phone.
5. “There is a widespread myth that the most important part of building a great company is coming up with a great idea.” “What you should really be focused on when pitching your early stage startup is pitching yourself and your team. Of course a great way to show you can build stuff is to build a prototype of the product you are raising money for. This is why so many VCs tell entrepreneurs to ‘come back when you have a demo.’ They aren’t wondering whether your product can be built – they are wondering whether you can build it.”
Great ideas matter, as the previous quotations noted. But the ability of a team to execute is a more important consideration than a clever idea. Most everyone has said more than once “I thought of that idea first” when they see a new business being formed. The best idea in the world without a team to make it happen, won’t amount to a hill of beans. Chris Dixon is saying that the best evidence that a team can actually execute, is actually executing on something like a demo. The best evidence that you can do something like create software, is actually creating software. As the old proverb points out, the proof of the pudding is in the eating.
6. “What the smartest people do on the weekend is what everyone else will do during the week in ten years.” “Hobbies are what the smartest people spend their time on when they aren’t constrained by near-term financial goals.”
Chris Dixon is not referring to smart people who play ping pong in their garage or pay fantasy baseball in their dorm rooms on weekends. He is referencing the smartest people that are building things like the first PCs, drones, or a better search engine. The Homebrew Computer Club, an early hobbyist group which had it first meeting on March 5, 1975, is just one example. The critical element here is an advanced technology that is useful to very smart hobbyists but does not yet have obvious financial returns associated with its use. Inevitably, technologies driven by phenomena like Moore’s law drive costs to lower levels and performance to high enough levels so that what was once a hobby becomes a thriving business.
As an aside, it is easier to understand Moore’s law now. But I will say that although I am probably in the top few percent in the US who understand its power, I underestimate that power every single year.
7. “This era of technology, it seems to be the core theme is about moving beyond bits to atoms. Meaning technology that affects real word, and transportation and housing and healthcare and all these other things, as opposed to just moving bits around. And those areas tend to be more heavily regulated and, this issue is only beginning to be significant and will probably the defining issue of the next decade in technology.”
I include this quotation since it is an example of something that I value, which is an ability of a person to make a genuine non-consensus prediction about the future rather than predicting the present. Too many venture capitalists are camp followers. They are moving into a trend when others have long since moved on to other opportunities. To outperform, a venture capitalist must think like Howard Marks described here: “To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.” Deviating from a consensus view for its own sake is suicidal, but doing it occasionally and being very right is what makes a great venture capitalist like Dixon.
8. “Anyone who has pitched VCs knows they are obsessed with market size.” “If you can’t make the case that you’re addressing a possible billion dollar market, you’ll have difficulty getting VCs to invest. (Smaller, venture-style investors like angels and seed funds also prioritize market size but are usually more flexible – they’ll often invest when the market is “only” ~$100M). This is perfectly rational since VC returns tend to be driven by a few big hits in big markets.”
“If you are arguing market size with a VC using a spreadsheet, you’ve already lost the debate.” For early-stage companies, you should never rely on quantitative analysis to estimate market size. Venture-style startups are bets on broad, secular trends. Good VCs understand this.” “Startups that fill white spaces [areas where there is latent demand without supply] aren’t usually world-changing companies, but they often have solid exits. They force incumbents to see a demand they had missed, and those incumbents often respond with an acquisition.”
It is not possible to make silk purse out of a pig’s ear. For a startup to generate the necessary financial return for a VC, the potential market being addressed must be massive. The entrepreneur who pulls out a spreadsheet and tries to make the case that the market is large enough based on fake quantitative assumptions does little but destroy his or her credibility. Venture capitalists hate to see hockey stick shaped distribution curves based on unrealistic assumptions that don’t map to reality. Chris Dixon is saying that what they do want to see for markets that can’t be defined with much certainty is a strongly argued narrative which explains that the market has or will attain the required size. Yes, they want to see as many related facts as possible that support the narrative. No, they don’t want to hear wild guesses presented as facts.
9. “There are two kinds of investors: Ron Conways who try to create value by finding good people and helping them create something great, and others, who want a piece of someone else’s things. The builders and the extractors. Avoid the extractors.”
“Founders too often view raising capital as a transaction, when it is actually a very deep relationship. They think of money as money, when there is actually smart money, dumb money, high-integrity money, and low-integrity money.”
Particularly in the United States, money is not the scarce resource in venture capital. The scarce resource is fundable startups. The outcome for any startup will increasingly be determined by access to networks of people and resources. If a startup has a choice between (1) just money and (2) money plus access to these networks, is it wise to choose the latter. Because startups most compete in an Extremistan environment (i.e., winner-take-all or winner-take-most-all) even the smallest advantage can end up topping the balance of success and cumulative advantage to one company. Perhaps some founders are cheered up by a venture capitalist who is mostly a cheerleader, but the smart entrepreneurs want someone who can directly help with tasks like recruiting and problems like pricing and distribution.
10. “VCs have a portfolio, and they want to have big wins. They’d rather have a few more lottery tickets.. while for the entrepreneurs, it’s their whole life, and let’s say you raised five million bucks, and you have a fifty million dollar offer, and the entrepreneurs are like, “Look, I make whatever millions of dollars. I’ll be able to start another company.” And the VCs are like, ‘Wait! We invested billions of dollars.’ That is usually where tension comes.”
Chris Dixon has been both a founder and a VC. He has empathy for both venture capitalists and founders on this set of issues. He is most certainly correct that this type of situation creates tension. The wave of discussion about this topic is proof of that. The question is: what is the best way to resolve the tension in ways that are mutually beneficial? First, a brief note about what is at stake. The economist Harry Markowitz called diversification the only free lunch investing. Warren Buffett discussed the issues involved as follows:
“Of course, some investment strategies require wide diversification. If significant risk exists in a single transaction, overall risk should be reduced by making that purchase one of many mutually-independent commitments. Thus, you may consciously purchase a risky investment – one that indeed has a significant possibility of causing loss or injury – if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities.
Most venture capitalists employ this strategy. Should you choose to pursue this course, you should adopt the outlook of the casino that owns a roulette wheel, which will want to see lots of action because it is favored by probabilities, but will refuse to accept a single, huge bet.
Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.
On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices – the businesses he understands best and that present the least risk, along with the greatest profit potential. In the words of the prophet Mae West: ‘Too much of a good thing can be wonderful.’”
The wisest outcome on founder and employee liquidity issues will depend on the facts and circumstances of each case. There is no connect-the-dots-formula that is right in all cases. Fred Wilson has written a very thoughtful post on this issue. He points out that even from the view of the VC there is an incentive to create some liquidity: “providing some founder liquidity, at the appropriate time, will incentivize the founders to have a longer term focus and that will result in exits at much larger valuations because, contrary to popular belief, founders drive the timing of exit way more than VCs do.”
In addition to what Fred Wilson notes, it is one thing to concentrate your investments if you have a net worth measured in millions and quite another if you have little financial cushion if the business fails. The important point that Chis Dixon raises is that there is an issue here, and it can create tension if not dealt with intelligently. Founders are smarter and better informed than ever before and they want a venture capitalist who is empathetic and thoughtful.
11. “If you aren’t getting rejected on a daily basis, your goals are not ambitious enough. The most valuable lesson I had starting out in my career was when I was trying to break in the tech world and I applied to jobs at big companies and at startups, at VC firms. I got rejected everywhere. I had sort of an unusual background. I was a philosophy major, a self-taught programmer. It turned out to be the most valuable experience of my career because I eventually developed such thick skin that I just didn’t care anymore about getting rejected. And, in fact, I kind of turned it around and started embracing it. I eventually — that sort of emboldened me. Through those sort of bolder tactics, eventually landed a job that got my first startup funded. So every day to this day I try to make sure I get rejected.”
The ability to handle rejection in a sales process is something that has always fascinated me. Why can some people knock on door after door and suffer rejection and after rejection and still maintain a positive attitude long enough to generate the eventual sale? For some people a single rejection turns them into a nervous wreck, while others power through to close a sale. It seem to me to be explained by a combination of innate personality and a learned skill.
In any event, starting a business and even building a successful career involves way more selling than people who have never done it before imagine. Entrepreneurs are constantly selling themselves, their business and its products to potential employees, suppliers, distributors, investors and customers. If you can’t sell, starting a business is probably unwise.
12. “Before I started my first company, an experienced entrepreneur I know said, ‘Get ready to feel sick to your stomach for the next five years.’ And I was, ‘Eh, whatever.’ Then later, I was, ‘Shoot, I should listen to the guy.’”
“You’ve either started a company or you haven’t. ‘Started’ doesn’t mean joining as an early employee, or investing or advising or helping out. It means starting with no money, no help, no one who believes in you (except perhaps your closest friends and family), and building an organization from a borrowed cubicle with credit card debt and nowhere to sleep except the office. It almost invariably means being dismissed by arrogant investors who show up a half hour late, totally unprepared and then instead of saying ‘no’ give you non-committal rejections like ‘we invest in later stage companies.’ It means looking prospective employees in the eyes and convincing them to leave safe jobs, quit everything and throw their lot in with you. It means having pundits in the press and blogs who’ve never built anything criticize you and armchair quarterback your every mistake. It means lying awake at night worrying about running out of cash and having a constant knot in your stomach during the day fearing you’ll disappoint the few people who believed in you and validate your smug doubters.”
I was the third employee of a company founded by Craig McCaw, and although I wasn’t a founder it was nevertheless a life changing experience. It was a particularly notable day since I received two job offers the very same day. One job was a very safe position with an established company. The other was with the startup. What tipped the decision was that I wanted to have the life experience of being part of a startup. I wanted the experience more than the immediate monetary rewards that the other position offered.
From a post by Chris Dixon on climbing the wrong hill in your career: “People tend to systematically overvalue near-term over long-term rewards. This effect seems to be even stronger in more ambitious people. Their ambition seems to make it hard for them to forgo the nearby upward step.”
There were lots of times I thought that I had made a mistake in not taking the safer and better-paying job. I experienced all the things Chris Dixon talks about in that post, including attacks from armchair critics. I worried often about other employees and how my family would cope with failure if that happened. The tale of this startup is actually one of the great untold stores in business history. It resulted in a 4X return for early investors which was not terrible, but not great either. That’s a story for another time.
This post was reprinted with permission. You can see the original on 25iq.
About the author: Tren Griffin’s professional background has primarily involved areas where business meets technologies like software and mobile communications. He currently works at Microsoft. Previously, he was a partner at private equity firm Eagle River (established by Craig McCaw) and before that, a consultant in Asia. Griffin is the author of five books.
I was chatting with John Borthwick a few years ago and he said something that struck me. He said he was interested in companies that appear to be focused on selling X but are really online communities that happen to make money selling X. This helps explain why many investors are confused by the sustained success of these companies ... MORE
Soylent is Not Just a Food Company - By Chris Dixon
I was chatting with John Borthwick a few years ago and he said something that struck me. He said he was interested in companies that appear to be focused on selling X but are really online communities that happen to make money selling X. This helps explain why many investors are confused by the sustained success of these companies … MORE
There is a scenario where the Internet of Things is nothing more than just Things on the Internet. All those fitness bands, lights switches and refrigerators are "connected" in some sense, but without the utility and smarts that the elevated notion of IOT encompasses. Of course, there are people working hard to make sure the IOT meets its promise. IFTTT CEO Linden Tibbets is definitely one of those ...
Putting the Internet to Work - With Linden Tibbets and John O'Farrell
There is a scenario where the Internet of Things is nothing more than just Things on the Internet. All those fitness bands, lights switches and refrigerators are “connected” in some sense, but without the utility and smarts that the elevated notion of IOT encompasses. Of course, there are people working hard to make sure the IOT meets its promise. IFTTT CEO Linden Tibbets is definitely one of those. Tibbets discusses the promise and hurdles of IOT with a16z’s John O’Farrell in this interview from the Web Summit in Dublin. WATCH: 21 Minutes
CES 2015 was another amazing show. Walking around the show one can only look with wonder at the amazing technologies being invented and turned into products. Few things are as energizing or re-energizing as systematically walking the booths and soaking it all in. I love CES as a reminder of the amazing opportunity to work in this industry.
Taking a moment to share what I walk away with is always helpful to me -- writing is thinking. Every day we have ...
CES 2015 Recap for Makers and Product Managers - Steven Sinofsky
CES 2015 was another amazing show. Walking around the show one can only look with wonder at the amazing technologies being invented and turned into products. Few things are as energizing or re-energizing as systematically walking the booths and soaking it all in. I love CES as a reminder of the amazing opportunity to work in this industry.
Taking a moment to share what I walk away with is always helpful to me — writing is thinking. Every day we have the chance to talk to new companies about products under development and ideas being considered and CES provides a great cross-industry context about what is going on … MORE