Neu VC

Put up a website. Took down the robots.txt today. Thought I'd tell you all first.

Now before you inform me--as Josh Reich did when I asked him to take an early look--that I should get a new designer, I'll let you know that I designed it myself. With help from my five year old.

Between being an investor and being an entrepreneur, the grass is always greener. I meet plenty of entrepreneurs who want to be VCs. I always ask them why. I love helping people start companies, but it's not the same as starting a company yourself.  That said, I think I add more value investing that I do founding, so investing is what I plan to do for the next fifty years of my professional life (or as long as anyone will let me, whichever comes first.)

While I have resisted describing myself as an 'it' rather than a person, it's definitely still true that people attribute more permanence to an entity than an individual. Thus Neu Venture Capital, where 'we' invest. We is just me (ever since Softbank hired my awesome intern away from me by offering him actual money to do the work rather than just scintillating conversation.) Consider it the royal We, without the royal part. The Neu came from a conversation with a friend in which she insisted that my children preface everything they like with a subtle 'neu.' I scoffed at this until one morning when my youngest informed me that the White House was where President Neubama lives. I will not require all future investments to prefix their company name with neu, but I won't promise it won't influence my decision either.

I looked at a lot of VC sites while figuring out how I wanted it to look, and the one thing that was an absolute requirement was something I learned from my Omnicom days: the operating companies are what it's all about. So the home page--in fact the only page--is the companies I've invested in. There is a box of information about me (with my real picture, not my avatar: bonus!) and an entirely uninformative box about what I am looking to invest in (I'll work on it) but it's primarily about the companies I've invested in. I'm good with that in lots of ways. But mainly because if you're known by the company you keep, I'm in great company.

The client does not care if you are intellectually stimulated, Kendall, they just want the goddamned sales curve to start moving up

Every revolution has its reactionaries. I was going to respond to Kendall Allen's article The Math State, but didn't, for a few reasons: it wasn't convincing enough to need a response, I've stated my answer to the objection elsewhere, and Joe Zawadzki is a better writer than I am.

I want to note, though, that when I accepted an offer to work at Omnicom, some 15 years ago, I was handed a copy of Peppers and Rogers.  This was the future, I was told, One to One Marketing. Some six years later the Economist wrote that "the marketing department is the last part of the modern corporation to resist automation." It's interesting that after so many years of wishing for it, the industry starts to object as soon as it becomes plausible.

This new math state is not new. It is a stage in a journey that some of us have been taking for more than a decade and one that will take another decade to reach its apotheosis. For those who don't like it, I'll trundle out the old Rosser Reeves quote that everyone in the agency world says they believe but that few really do:

What do you want out of me? Fine writing? Do you want masterpieces? Do you want glowing things that can be framed by copywriters? Or do you want to see the goddamned sales curve stop moving down and start moving up? 

- Reality in Advertising, R. Reeves, 1961.

Almost a license to print money

Advertising, in time, proved almost a license to print money, and the effects on broadcasting of the revenue model it introduced can scarcely be overstated. It gave AT&T, and later the rest of the industry, an irresistible incentive not just to broadcast more but to control and centralize the medium. To see why, compare the older model: When revenues came from the sale of radio sets, it was desirable to have as many people broadcasting as possible--nonprofits, churches, and other noncommercial entities. The more broadcasters, the more inducement for the consumer to buy a radio, and the more income for the industry. But once advertisements were introduced, radio became a zero-sum game for the attention of its listeners. Each station wanted the largest possible audience listening to its programming and its advertisements. In this way advertising made rivals of onetime friends, commercial and nonprofit radio.

This is Tim Wu in The Master Switch*, describing the beginnings of commercial radio broadcasting.  When AT&T (who was competing with RCA to dominate radio broadcasting) started using its 'long lines' to carry programs to transmitters across the country, they discovered that advertising to a mass audience was far more profitable--and could support professionally produced, higher quality content--than any other business model available to them. This, in turn, lead the industry to successfully lobby the government to allow only a few, high-power 'clear channel' broadcasters (instead of allowing many lower-power ones.)

It's interesting to see how advertising, because it pays for attention, a resource too easily divisible, caused media to agglomerate. The media industry, in protecting itself from competition, has to limit the number and variety of voices that are heard.  Mass media is, by its nature, homogeneous media.

Two things:

1. Mass media, as it is today, is not the only way things can, or should, be. There was a vibrant radio culture before it became a mass medium, with a more democratic voice.

2. Our adtech allows advertisers to reach small audiences. The advertiser no longer needs mass media. Mass media will, however, fight to maintain their current market position. In almost all of the other media this book chronicles, the government was eventually enlisted to regulate out weaker players. The fight over net neutrality was one of these efforts, but certainly not the last.

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* Required reading. This is the first book in twenty years that, as soon as I finished it, I started reading again. A history of the rise, consolidation and disruption of the telephone, radio, motion picture, and television industries, it elucidates the history that can inform scenarios of the possible future of our industry better than any other analysis. It's a good read, too, with wonderful descriptions of the people behind the inventions and companies and how the culture of their times influenced them.

Advertising, the Fallacy of Perfectibility, and the Best Minds of My Generation

Between men and brutes, there is another very specific quality which distinguishes them, and which will admit of no dispute. This is the faculty of self-improvement... perfectibility... It would be melancholy, were we forced to admit that this distinctive and almost unlimited faculty is the source of all human misfortunes; that it is this which, in time, draws man out of his original state, in which he would have spent his days insensibly in peace and innocence; that it is this faculty, which, successively producing in different ages his discoveries and his errors, his vices and his virtues, makes him at length a tyrant both over himself and over nature. 

- The Social Contract and Discourses, Jean-Jacques Rousseau

An entrepreneur I'm working with on an adtech company asked me recently "does any of this make any difference?" It's a good question.

Here's something you probably didn't know about me: when I ran venture capital for the world's largest advertising agency holding company back in the '90s, I refused to invest in internet advertising companies*. I did not think banner advertising was useful. I have not come so very far from that view.

* * * * *

There is a sometimes infuriating disdain of advertising among those who wear Northface and Converse, drink Starbucks and Horizon Organic milk, and find out about the farmers' market from drop cards in the local organic grocery store. But that they can hate advertising while being avid consumers of it isn't irrational, because advertising has two faces.

Before World War I in America, a belief in perfectibility was widespread.  Not just human perfectibility, but technological. Businessmen created and grew businesses based on a belief in perfectibility. All success required was creating the best product at a fair price, driving competitors out of business and cementing a permanent monopoly, all for the betterment of society. Competition, to people like Henry Ford and Theodore Vail, was a waste of resources. Creative destruction would have seemed like madness.

In this no-nonsense model, advertising was product news, an attitude typified by the Bates agency in New York in 1904, who viewed anything more as "bad copy--too literary and too general, lacking prices and good information." John E. Kennedy, the head copywriter for Lord & Thomas in those years thought that "instead of general claims, pretty pictures, or jingles... an ad should offer a concrete reason why the product is worth buying."  One of the students of this method said this method of copywriting "aimed at an appeal to reason and intelligence rather than the time-honored assumption that the public was a mass of dumb, driven sheep, who could be swayed with mere picture-and-catch words."**

This approach, though it was itself a reaction to an earlier character-and-jingles driven approach (Aunt Jemima, the Uneeda slicker boy and the Arrow Shirt man were all products of this earlier approach) finds its intellectual rationalization in the Chicago School. George Stigler described it: advertising provides information to buyers, allowing them to make better choices.  Because the Chicago school believed that economic actors were rational, and that economic activity must have some underlying sense, this was the only coherent explanation... even if the facts on the ground at the time did not bear it out (Stigler published his seminal Economics of Information [pdf] in 1961.)

By that time, advertising had changed. Many times. The War to End All Wars itself may have been the catalyst. At the beginning of the conflict, fact-based ads played well to a righteous population. But later, when war-weariness had taken hold, patriotic advertising showed that appealing to the emotions may be even more powerful, especially when the facts aren't all that pretty. Advertising can persuade. Posters of Uncle Sam pointing his finger and saying "I Want YOU for U.S. Army" worked.

But the creator of that image, James Montgomery Flagg, had misgivings: "A number of us who were too old or too scared to fight prostituted our talents by making posters inciting a large mob of young men who had never done anything to us, to hop over and get shot at... We sold the war to youth."***  These are the poles advertising swings between: providing information so people can make better decisions about which products to buy, and persuading people to do things they might otherwise not have done. This is why people can hate advertising while listening to it closely, both of these approaches are at work, sometimes in the same ad.

The carnage of WWI had another effect: the idea of perfectibility itself fell out of favor. There was no one after that war that could still believe that those in power were infallible or even that doing the right things leads to the right outcomes. A belief in the universal power of reason now had a powerful enemy in American culture: pluralism. I'd argue that the battle between openness and control that we see happening to the internet now (cf. Google v. Apple) is a battle between perfectibility and pluralism, between one person knowing what is best and the belief that progress proceeds from chaos.

* * * * *

Productivity growth has made our lives enormously better. And it is one of the keys to making the lives of our offspring better than ours. If there is one guiding principle in my work, it is trying to help nurture innovations that create productivity growth.

Productivity is not just doing more with ourselves, it's also preventing waste, and guiding resources to their best use. This last is what Hayek called "the economic problem." Hayek said that the solution was the price system, the "invisible hand" that put resources where they are needed. This is an astonishing insight, but it falls short. Hayek, I have to assume, never bought a car.

The price system may be the best way to make sense of decentralized knowledge when the resource being apportioned is tin, as in Hayek's example. But when we go to buy a car, we have many choices at any given price point. The cars, although similar in most regards, are different, and we can't choose on price alone. Choosing the car that is best for us requires more information. Some of this information (mpg, how it looks) we can find out ourselves, if we know to look. But in many cases putting the onus on the potential consumer to discover all possible choices is inefficient. When looking for a place to buy produce, I will not know to look for the farmers' market that I do not know exists. Advertising is key here.

I believe that after an efficient price system, an efficient matching of people with the provider of a product or service that is most appropriate to them is the economic problem.  When Jeff Hammerbacher laments that "The best minds of my generation are thinking about how to make people click ads," I think he's falling for a technocratic idea long discredited, one that only engineers still believe: perfectibility.  Jeff is young, and very smart. He may believe that there is a single best product or service in each category that can be found using the appropriate Google search. And perhaps he believes that he himself should be the person who can decide what people really want, as Theodore Vail did, or Henry Ford tried to do, or Steve Jobs tries to do. Because if he didn't believe in his own omniscience, and if he personally would prefer not to have some other person making his choices for him, then he would have to agree that each person needs information to make the right choices for themselves. In that case, if I put an ad in front of someone, and that person decides to click it, then I must be solving a very difficult problem indeed.

Getting a click means that you have shown the clicker something valuable to them. If you don't believe in perfectibility--in making peoples' choices for them--then the click is a win.

* * * * *

I make a sharp distinction in my ad-tech investing between better matching and persuasion.  I only invest in the former (although sharp lines can not always be drawn.) The data-driven media buying and ad placement companies that are a large part of my portfolio are all clearly aimed at putting the appropriate information in front of the right person****.  I see companies that I think will be successful persuaders, but I don't invest in these; they make me uneasy. I suppose you could say that I'm not very businesslike in that regard, that I don't appreciate the art of selling, that I don't appreciate the art of advertising, that I don't appreciate the cultural value of advertising, that I don't have a sense of humor. I guess that's all true.  But, in my opinion, the companies that make the biggest difference to their customers are the ones that make their lives better.  While I recognize that the customer of the ad-tech company is the advertiser, not the potential consumer, and that the advertiser's life is certainly better if it sells more product, I'm not buying it. While being once-removed from treating the consumer like a mark may ameliorate the ethical considerations, it does not make it good business, not in the long-term.

[Edit, five hours later: I will revise something I wrote forever. So, on the blog, I try to finish and then hit publish. This time, as soon as I did, I realized I had not closed the loop on the argument.

Here's my point: if you believe in perfectibility, that your product is the best one for everybody, you probably also believe that all you need to do is buy mass media ads telling everybody about the existence of your better mousetrap. If you have lost the belief in the perfect, then you will feel the need to compete for the attention of people on other than the facts, because the facts don't differentiate you. Competing on facts is better for society, and for the regular person who sees ads.

The people who are thinking about how to get people to click on ads are of two types: those who just want you to click on the ad, and those who want to put an ad in front of you that would be valuable for you to click on. Saying that the latter is somehow of ephemeral benefit is misunderstanding what is economically worthwhile. By matching the right ad to the right person, we can provide information even while allowing everyone to have their own individual tastes.]

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* OK, that deserves some caveats.  I did invest in an ad network... two weeks before their IPO. I sold in the IPO. There was free money like that in 1999. I also heavily invested in the interactive agencies but, and this is my point, none of them would stand for being characterized as purveyors of advertising or, in many cases, any sort of marketing at all. Jeff Dachis' infamous difficulty in describing what Razorfish did on 60 Minutes being a case in point. It wasn't until Agency.com acquired iTraffic that any of the companies I worked with became involved with display advertising in any meaningful way.
** The Mirror Makers: A History of American Advertising and Its Creators, pp. 49-51.
*** Ibid, p.76.
**** While these technologies can also be used to put a persuasive ad in front of the person most liable to be persuaded, I don't think this use provides as much lift, and I hope it will be squeezed out.

Innovators can come from anywhere. VCs, not so much.

It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions.

- Machiavelli, The Prince

I put the kids to bed and started reading Forbes' Midas List, their list of the top 100 tech and life sciences VCs.  As I browsed, looking at where they went to college, I started to notice something:

Number of degrees by school, for the schools who issued more than one degree to a top investor.  Many of the investors got more than one degree, so the numbers sum to more than 100.

See the pattern? That's right, they all went to the same schools*.

I have to admit to being surprised. Not by the ordering of the schools, but by the sheer lack of diversity. The top four schools issued more than half of the degrees. The top ten more than 70% of them.  The top 15 schools include the ten bastions of the establishment: the Ivy League, Stanford and MIT.

It's striking that in a field where us gatekeepers are supposed to be spending our time finding and backing unusual people--those willing to take inordinate risk, come up with world-changing ideas, and generally just think different--we all went to the same few schools, the schools whose graduates would have done well under the old conditions, as Machiavelli had it. I wonder what VC would look like if its top practitioners were more different.

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* And, to avoid the appearance of hypocrisy, I should disclose that while I'm not on the list, I also went to one of these schools, Columbia.

Kicking Quora

I am now one of the top answerers on Quora in both online advertising and Zen Buddhism. This is a problem.

I read once that Tetris' addictiveness is an unfortunate side-effect of the human brain's built-in desire to learn.  Learning something results in positive stimulus.  This is usually offset by the actual need to work hard to learn something. Tetris short-circuits this by mimicking learning without the work. Gamification is a double-edged sword: it can convince people to do things they should do but don't, but it can also convince people to spend their time in ways that aren't productive for them. It clouds decision making.

I need to create. At times in my life I've done this by writing, at times by coding, at times by designing (hardware, that is, I have no eye.) When I'm not regularly doing one of these I have a nagging feeling of dissatisfaction. When I hit 'publish' I feel a mental weight lifted. Sometimes I write something so close to the edge of my analytical envelope that I feel smarter than I actually am.

That doesn't happen often. But like that freak perfect fairway shot, it keeps me coming back.

I don't write to amuse. I don't write to educate. I don't want to be an entertainer or a teacher. I want to learn, to create. My favorite posts are the ones where I start with a question I don't know the answer to and write an answer. I am forced to think.

Quora, unfortunately, is like Tetris. It feels like thinking, but it's not. By pushing answerers to create a 'definitive' answer Quora discourages conversation and encourages writing things you already know. It's easy to write there, you answer questions you have answers to. And that's good: sharing knowledge is valuable. But it's not creative.

It's harder to blog. It takes me time to think through a problem, and I often run into a dead end. It's a rare occurrence when I think one of my posts is actually insightful, and I don't really know what I'll end up with until I'm done writing. But when it works, it works, and that's what I'm looking for.

I'm kicking the Quora habit and trying to start blogging more regularly again.

Don't let the dumb money lead

When I don't invest in a company it's because (a) I didn't like the company, (b) I didn't know enough about the company's business to actually add any value, or (c) I didn't like the terms of the deal.  But I recently said no to a company where I liked all three of those things. What I didn't like was the lead investor.

Because of the way this company's process unfolded, they ended up with a wealthy financier as the lead investor. And even when a professional venture investor later offered to lead, they decided to stick with the original lead.   I think this is a big mistake for both the company and the investor.

Throughout my startup-related career I have repeatedly run into very successful hedge-fund operators, investment bankers, real estate magnates and big company executives who wanted to invest in startups.  I think supporting startups is an excellent use of money and I have always encouraged them... to follow experienced venture investors in deals.  None of them have ever taken my advice*.  They all thought that since they were so good at doing the exceedingly complicated deals they had made their mark with, doing a simple startup financing would be a snap.

Finance is a set of disciplines separated by a common language. What is complicated in your public market/LBO/distressed debt/M&A deal is not what is complicated in a startup deal (and vice-versa, I should think.) Just because you can navigate a DCF, a shareholders' agreement, and Delaware law doesn't mean you can do successful venture capital deals.

For several years an acquaintance who was one of the top people at one of the most successful private equity shops in... I don't know... the world, ever** would call me up about some startup or other he planned to back. He's sharp and invariably had very good reasons for backing the company. But these conversations always made me uneasy. He didn't know what competitors were doing or planning (or even who the competitors were, other than what the entrepreneur told him), he didn't know what valuations were and why, he had zero idea what customers wanted, and the terms he asked for were far more onerous than standard venture capital terms.

This last one is what bothered me the most, even though onerous terms may seem as if they are in the investor's favor***. The problem is that he had dictated these onerous terms because he intended to use them. And it wasn't even the terms themselves that bothered me, it was the attitude that ownership is a zero-sum game, that the pre-investment negotiating tension between investor and entrepreneur continued unabated after the investment. This dynamic should be very different in a startup than in, say, a LBO. In much non-startup finance, for instance, missing your annual plan means a renegotiation of control and ownership. In a startup a plan is just that, a plan. Things never go according to plan, and good entrepreneurs anticipate that and adjust. Your investors need to know this. And more than know it, be comfortable with it****. When investors and company executives start to fight, value is destroyed. Someone who sets up and expects this dynamic even before making the investment is poison.

Smart people who know nothing about the startup world besides what they've read in the Wall Street Journal should not be your lead investor or a control person on your board of directors: there's an excellent chance that they will not only not help your company but will actually harm it.

So who should lead your deal? Founders of venture backed startups know both startups and venture capital; they are great. People who have lead deals for many years and seen the cycle from startup to exit a few times are ideal, of course. People who have learned the trade by following professional VCs in many deals and being very involved from startup to exit can fit the bill. And, finally, non-venture backed entrepreneurs can be valuable, so long as their journey wasn't too easy: having empathy for the founder when things don't go according to plan is critical in remaining constructive.

Now I've been all of the first three at some point or another (and vicissitudes, I've had a few) so you could accuse me of self-promotion here. But the beautiful thing about being me is that I'm not a professional venture investor right now, so I have no particular reason to be self-serving; I invest because I want to see a particular startup succeed, not because anyone pays me to do it. So here's my advice: if you have no other choice, take the money; but if you have a choice between non-venture investor money and venture money, take the latter.

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* There is obviously a selection bias here.  If they were willing to take this advice, they probably would not have ended up talking to me in the first place.
** My not knowing the pecking order of PE shops or hedge funds is kind of part of the point. Your typical PE guy probably has no idea of the differences between, say, RRE and Venrock. And knowing these things is pretty important when you go to do your next round.
*** I don't believe this, but that's another post.
**** This isn't license to go missing your plan. If you miss your plan, you need to know why and what you're going to do about it. That's a big part of the point of a plan, after all.