How to be Different When What you Sell is a Commodity (Angel Investing 3)

When I started a company my co-founders and I thought and discussed and argued about how we were different from our competitors, how there was a hole in the market, how we were going to win by going where no one had gone before. We got potential customers, suppliers, employees excited by talking about how we were different.

If an entrepreneur were to map venture funds on a traditional 2x2 competitive matrix, using their two most important value propositions as the axes, it would look like this*:

In the things entrepreneurs care about most--price and control--VCs don't seem all that different from each other. That's not going to change and you're not going to change it. Venture capital is already a business which is, at best, on the edge of being uneconomic**. In the times when VCs have been sucked as a group into competing on price, the whole sector has done badly.

In the product world, if you are really good at something, you compete on price to take more market share. In the services world, where your expertise isn't that scalable, when you're really good at something you raise your price. VC is a service business and I often see the VCs with the best reputations offering a deal that is slightly worse than average and still being chosen as the funder. Conversely, I have often seen lesser known VCs or financial backers from outside the VC world offering much richer deals in order to be chosen. If you want to have price discipline (and you do) then you need to offer something besides price, and it better be good.

Ask yourself: how do I distinguish myself from all the other sources of money out there?

This seems like a ridiculous question to some. You, after all, have the money; shouldn't you be the one doing the distinguishment? When you walk into Tiffanys with a Hefty bag stuffed full of large bills, the salesman doesn't ask "Why should I do business with you?" He sprints across the floor and asks "How can I help you?" Thinking this is how it works in angel investing is a classic rookie mistake. The founder who is willing to take your money regardless of anything else you bring to the table is the founder who can't get money from anyone else. This means one of two things:

1. You are smarter than all of the other investors and see something they don't, or
2. The company is not a great bet.

The first situation happens. I've done a few of those, as has any venture investor worth their salt. But the majority of great investees are good enough bets to have many interested investors. If you want to be in these you need to offer more than just money.

There are many ways to add real value through the process. I'll talk about that in detail in a few posts. For now you need to think about positioning in general, about what you have to offer, both so you can generate the right kind of deal flow and so you can plan your investing strategy.

Here's a potentially scurrilous example of positioning among early-stage VCs.

Each of these funds has been very successful at being chosen by great companies to be their lead investor and they've each staked out different investing strategies. The x-axis is the amount of team, product and market risk they are willing to take (less to more as you move right.) The y-axis is how much operational help they offer, from incubator or incubator-like at the bottom to hands off at the top. The z-axis is how deeply they know a specific industry or technology***.

In reality, none of these funds fits as well into their box as this graphic makes it look. And each offers something that this box doesn't capture (not least, among this group, attitude.) But you should have a sweet spot, you should be able to articulate it, and, more importantly, it should articulate itself through your actions and communication. Entrepreneurs will find you if they know you are what they are looking for.

Anywhere you choose in this cube has its tradeoffs. If you spend more time helping your entrepreneurs you have less time for other things. If you spend less time helping you are less valuable (assuming your help is valuable.) If you take less risk you either aim for lower returns or you face much more competition for investing in the deals. If you're more specialized you need to work harder on finding potential investees but you are better able to evaluate the ones you do see.

Where you fit depends on what you know, how much time you have and your personality. It will determine how you spend your time, how you generate dealflow, how you filter deals, and how much you can help.

Next: Investing Strategy  Portfolio Construction

Previous posts in this series

1. Intro: Why I'm Not an Angel
2. How to spend your time: The Work-Work Balance 

-----
* For the VCs' real customers, the LPs, it probably looks more like this.

 

** In terms of risk-return.

*** The risk-return profile, all else being equal, gets better as you move from bottom right to top left. That's why most funds are in the top left box. Of course, If all else is equal, maybe you should go find some other business where you do have an unfair advantage. 

The Work-Work Balance (Angel Investing, 2)

The first question every prospective angel (and all my relatives) ask me is "What do you do all day?"

It's sort of a funny question. For any job more varied than working on an assembly line, the answer is either going to be pretty long or pretty vague. Usually I go with vague. Today I'm going with long.

Venture capitalists

• Find companies that need capital,
• Figure out whether they should invest,
• Convince those companies they should take investment from them,
• Negotiate terms, create syndicates of investors, and invest,
• Help build the company,
• Manage and protect their investment,
• Manage and protect their portfolio, and
• Exit--sell or shut down companies.

Institutional VCs also spend a good deal of their time getting investors for their own funds and then keeping them informed, but we're not institutional VCs, so we don't have to worry about that.

I have 23 companies currently in my portfolio. I invest in four or five new companies a year. I sit on five boards that each meet monthly or every other month, so one board meeting a week. I talk to another six company founders every week or every other week. I talk to an additional five company CEOs at least once a month. The others are further along and I talk to them once a quarter or so. On average each of my companies has a follow-on financing every 12 months so I evaluate a follow-on opportunity twice a month.

Given all that, here's how I spend my time:

• Two days a week generating deal flow,
• One day a week filtering deals that I see,
• One day a week doing due diligence/negotiating terms/reading contracts/building syndicates on deals I like,
• One day a week at or preparing for a board meeting,
• One day a week talking to other portfolio founders/CEOs to see how they're doing,
• One day a week looking at material/giving advice/making introductions for the other portfolio CEOs,
• One day a week networking with other VCs/corporate types/other innovation professionals and answering random email,
• One day a week keeping on top of industry developments and emerging technologies,
• Half a day a week looking at follow-on opportunities,
• Half a day a week making sure the i's are dotted and t's are crossed.

That's ten days a week. That's why I haven't answered your email.

Ok, maybe that's what I should do. Here's more like what I actually do:

• One day a week trying to make sure people don't forget I exist: blogging, emailing people I haven't seen in a while, tweeting, coding stuff I think is interesting and putting it on the web,
• A few hours a night trying to figure out what the hell is going on and trying to continue learning new things: reading everything I can get my hands on,
• One day a week going to board meetings and talking to my other portfolio companies,
• Half a day a week filtering the inbound deal flow,
• One day a week looking at companies I think are especially interesting,
• Half a day a week evaluating follow-ons, reading legal docs, keeping track of the portfolio as a whole,
• One day a week meeting new people--entrepreneurs, people in the industries I'm interested in, other investors, random people friends say I should talk to, etc.,
• One day a week prepping for, teaching, or doing follow-up for my course on entrepreneurship at Columbia.

That's six days. And that list is still a bit aspirational. I never get everything done. Tradeoffs.

Institutional VCs have to make tradeoffs too. For them a little bit of the stuff in the first list can be delegated (making sure the Is are dotted and Ts are crossed, some of the initial filtering of deals, some of the due diligence, a little bit of the helping portfolio companies.) And some of the stuff is made easier when you work in a team (filtering deals, evaluating follow-on opportunities, keeping on top of industry developments, networking.) But there's a reason most of the best VC firms--and all of the best early-stage VC firms--are partner-based, not hierarchical: almost all of these activities for any given investee or prospective investee need to take place inside the same brain if the process is going to be high function.

Angel investors don't have the advantage of delegating. And working in a team is usually pretty ad-hoc (unless you're part of an angel group, which then adds some overhead of its own) so trade-offs become more important. Angels (and super-angels and very small seed funds) choose different trade-offs. Some focus entirely on generating deal-flow but making sure someone else leads the deal: they do less evaluating and more networking. Some focus on adding a ton of value by knowing the industry they invest in extremely well: they do less deal generation (deals in their field show up on their doorstep) and more helping. But most fall somewhere in the middle.

I've made tradeoffs: I try to know the industries I invest in and so do more work on understanding specific sectors and a bit less work on generating deal-flow; I tend to invest as early as possible, so do more work trying to understand the founders and less work trying to understand what the company has done to date; I try to co-invest with people I trust so do more work talking to other investors and less negotiating terms and iterating legal docs; I'm an engineer so I spend more time building tools to do my work so I can spend less time doing the work; I'm not much of a schmoozer so I need to earn my keep by sitting on boards and helping founders. Luckily, this then cuts back on the time I need to spend networking.

Even so, it's pretty all-consuming. But if you hope to build a portfolio that gives you a reasonable chance of making money, all of the tasks in the first list are needed. How you spend your time getting those tasks done depends on your personality and your expertise. Figuring out what tradeoffs work for you is probably the most critical decision you can make.

*****

Next: Positioning How to be Different When What you Sell is a Commodity

Previous posts in this series

1. Intro: Why I'm Not an Angel

Why I'm Not an Angel

If you bootstrap your business it's your prerogative to make any stupid decisions you want--so long as you don't run out of money. But if you decide you want your bootstrapped business to be as successful as possible, you probably make pretty much the same decisions a businessperson backed by outside capital does. The process you use to grow a successful business does not materially change because of how you are funded.

So why do angel investors invest so differently than institutionally funded venture capitalists? Angel has come to be a bit of a pejorative, connoting a certain hobbyist nature, an unseriousness, amateurism. When entrepreneurs tell me they don't want venture firms in their seed rounds, just angels, my antennae go up: what are they afraid of, competence? I stopped calling myself an angel investor some time ago; I try to think about myself as a bootstrapped venture fund, doing the same job with the same professionalism on a smaller scale.

Every would-be angel I've met takes pride in their day job, they would never settle for stupid or unprofessional in their work. Even in their hobbies they would not be satisfied with sloppy or half-done. They are serious, successful people who have made their way by putting in the work to do their jobs right. So why, when they think about angel investing, do they impatiently jump right in with only half-assed attempts at learning how to do it right? Why do people who would never sit at a high-stakes poker table with hard-eyed strangers unless they had spent countless hours at lesser tables put tens of thousands of dollars into a startup without bothering to learn the rules, the odds, the other players?

Venture investing looks so easy from the outside. The public faces of VC--Fred Wilson, Mark Suster, Chris Dixon--are encouraging and open, willing to give pithy advice on the dos and don'ts. People like to talk about what they've done right and how more of that needs to be done. They don't tell the stories much about bad times, hard decision and all the work they did to create the few bright spots they write about. They like to make it look easy. If you read the VC blogs, you must wonder how they manage to fill their days when all they do is wander Union Square bumping into top-notch entrepreneurs, writing them checks on the spot, and then flipping the companies to Google or eBay for hundreds of millions of dollars. Union Square Ventures only invests in a handful of new companies each year--with five investing partners. Each partner only does a deal or two per year? It must be like a tropical vacation. Right?

In the New Yorker's recent portrait of Bruce Springsteen the author makes this distinction: "Keith Richards works at seeming not to give a shit. He makes you wonder if it is harder to play the riffs for 'Street Fighting Man' or to dangle a cigarette from his lips by a single thread of spit. Springsteen is the opposite. He is all about flagrant exertion." Many VCs are trying hard to be cool as Keith Richards. And hey, why not? If you can convince people that you invested in a billion dollar outcome by ignoring the dismissal of all of your peers and the common wisdom and instead just trusting your gut, or that you found the next big thing just walking the floor of a tech company occasionally glancing over engineers' shoulders at their screens, well that's probably about as cool as you can pretend to be if you're a financial intermediary.

But playing the guitar like Richards actually takes a ton of work and an enormous amount of repetitive practice, whether he acknowledges it or not. I'm here to tell you that Springsteen is being more honest than Richards: VC swagger is pure BS. Writing a check is easy; creating a decent chance of getting a bigger one back down the road is hard, damn hard.

Prospective angels ask my advice all the time, as one of the few people on the east coast who has made a living as an independent venture investor lo these many years. I'm happy to answer their questions, but I don't think any of them has ever taken any of my advice. Ben Franklin said "wise men don't need advice, fools won't take it." But I'm an optimist, so advice will follow.

This will be several posts, broken up into bite-size chunks. I will do my best to suppress my usual rambling ranting. Nothing I write in any of these posts is new. If you did your homework, all this would be old hat. That's part of the point: I'm going to lay out a score of pages to convince you that to be a successful venture investor you don't have to be a super-genius, you just have to actually do the work. The main take-away should be that there are no shortcuts.

Some caveats. I'm talking about a specific type of venture investing here, the kind I engage in. Investing in people that can use some modicum of cash to attempt to build a world-class company in a fairly brief period of time. I'm not talking about funding your cousin's restaurant or your buddy's bar. Those worthy endeavors have a different logic.

I'm also talking about aiming for a positive return on your investment. If your primary goal is to help out friends, give back to the community, or support a worthy idea then you don't necessarily care about how much money you make. I'm not going to give advice on how to manage for a non-monetary outcome. I believe in positive returns, not least because if you run out of money you no longer have the wherewithal to fund worthy ideas.

How would professional venture capitalists invest in super-early companies with small amounts of money if they didn't have the huge amounts of cash potentially needed to single-handedly fund the company through to exit and didn't have gigantic well-known brands? Because that's what angel investing is.

Next: The Life of an Angel. The Work-Work Balance (Angel Investing 2)

On being an asshole

Here's something you didn't know about me: I'm vaguely claustrophobic. It doesn't mean much in practice, but when I was at the last TechStars demo day at Webster Hall, I watched the presenters from the same place I watched the Beastie Boys in 1985, the Mountain Goats in 2008 and every concert in between--the back left, right near the door, the stairs, and close enough to the outside to make it tolerable.

It's a little different in the back. Fred Wilson and Brad Feld are right up there in the front row representing, while us riff-raff are standing by the bar wishing it was open. I like the back row. My best friends from college are the ones I met sitting in the back row. When David Soloff came to talk to my class at Columbia, he paused a few minutes into his profanity-laced tirade about entrepreneurship to poll the class: who was uncomfortable with his swearing? Several hands in the front row went up. Who thought it added to the discussion? Several hands in the back row went up.

Some of the people in the back row are the studied cool. But some others are the actually unenthusiastic. The back of demo day was no different. On one side were people like Andy Weissman, Chris Wiggins and Taylor Davidson, all trading notes on which founders we found particularly awesome, who already had funds committed, the amazing amount of progress some teams had made during that session of Techstars, and, in general, gratefully soaking in the condensed learning of months of hard work by talented and smart people.

On the other side of me were a group of people loudly telling each other how ridiculous the ideas were, how the companies were going to crash and burn, how stupid and sheeplike the investors were for giving them money, etc. You know what they were saying, because our ecosystem is flooded with this type of talk. We see it every week in the tech press when some formerly high-flying company starts to falter. We see it every day in the comments on Hacker News. We hear it when we have coffee or drinks.

And it's not just envious wannabes saying these things. I've heard venture capitalists, big company executives, startup employees, lawyers, angel investors, students, and professors bash entrepreneurs. Every sort of person except other entrepreneurs.

Chris Dixon said there are two types of people in the world: people who have tried to build a company and people who have not. This ruffled the feathers of people I know in the innovation community who have never been an entrepreneur because it implies that those who haven't been entrepreneurs should just shut up and sit down. That's not exactly right, but it is true that people who have been through the process of trying to start a company do not, as a rule, engage in destructive and pointless criticism of other entrepreneurs. Not that non-entrepreneurs all do, just that entrepreneurs don't.

There's a difference between criticism and critique. One is destructive, the other constructive. Entrepreneurs who have been through the grinder, who have been "dismissed by arrogant investors who show up a half hour late... having pundits in the press and blogs who’ve never built anything criticize you and armchair quarterback your every mistake" (as Chris puts it) don't then turn around and do that same thing to other entrepreneurs. Because they know from experience that it's pointless and results in pointless pain.

The people who call entrepreneurs stupid, who bludgeon them with their mistakes and try to humiliate them in public rationalize it by saying "we're being direct, open and tough--just like the real world." They are egregiously wrong. That's not the form that either education or motivation takes in "the real world." Unless by real world you mean our schools or government where the highest goal is creating the conformity needed to staff middle management at our large industrial age corporations. Entrepreneurial zeal does not survive that.

I once asked a Swedish founder what the difference between starting a company in Sweden and in the US was. He said that in Sweden there is a saying: "the tallest poppies have their heads cut off." Those who are outstanding will be cut down so they no longer stand out. He believes this attitude prevents many Swedes from deciding to strike out on their own. I wish this were particular to Sweden (no offense)--or to any one place that wasn't here. But it isn't. It's not even a Swedish saying, it's a universal one. It's first recorded use is in some of the first recorded history, Herodotus. The context then was to enforce a more homogeneous community in order to better control it. This is still its use now. This attitude is the absolute antithesis of what we are trying to do in the entrepreneurial community. We are not cutting the heads of the tall poppies, we are letting a thousand flowers bloom, praying that one of them will be taller than all the rest so we can then plant its seeds and someday all the poppies will be tall.

If you've been through the pain of starting a company, you know that criticism is entirely useless. If you haven't, and you find yourself in the back of demo day wanting to cut down the people brave enough to have made it up onto the stage, you need to think hard about it. Think about the difference between criticism and critique. Think about the difference between extrinsic and intrinsic motivation and how entrepreneurship is predicated on the latter--the carrot, not the stick. Think most of all about whether what you are doing and saying is helping founders succeed, even if their success is not something you will be part of. Because if you don't believe that their success helps us all, no matter whether we are involved in it or not, then you are in the wrong room.

At least you're near the exit.

How to kiss your elbow

Even before Paul Graham's Growth post the recent VC meme was that entrepreneurs just aren't as ambitious as they used to be. They are too careful, husbanding their cash rather than boldly investing it in growth. I've heard this kvetch four or five times since Labor Day, each time from a smart and well-respected VC. They blamed the ease of raising seed money compared to the relative difficulty of Series A and B money, the incubators and angels corrupt the entrepreneurs.

I've had this conversation with many of my entrepreneurs over the years: the market's going to pass you by, carpe diem, etc. But I never really thought of it as a trend, it was just the usual learning opportunity for first-time entrepreneurs--there's no starting gun, no one is going to tell you when to start seizing the day, just do it. This has always been a conversation in the fifteen years I've been investing in early-stage. Is it really now a wider phenomenon?

I don't know, but I heard it enough that I ran the idea by a couple of my entrepreneurs. The entrepreneurs sighed and rolled their eyes. You advised me to raise just the money I needed to get to the A, they said, Paul Graham says I should "not need money." Which is it, they ask? Do you want me to not need money or do you want me to get aggressive and raise my next round sooner, maybe without the metrics I need to get a good valuation?

Fair enough, the world is full of conflicting advice. And I understand how annoying it can be when it's the same person giving you both sides of it.

And let's be clear: the dichotomy is not necessarily between the lean startup and "go big or go home." Suster makes the case that the latter is not always the best route. No argument. This is more along the lines of when to hit the gas, not if. I only invest in entrepreneurs who tell me they can and want to go big and then I try to get them to stick to what they told me. My favorite question when these conversations happen is "what's the bottleneck?" What can we do, who can we hire, who do we need to partner with or talk to or get in front of to make what we both think can happen actually happen, now?

When I ask this, the entrepreneur always knows the answer. In fact, they've usually been thinking about it night and day. But they also usually want to take it more slowly than I do. They want to take less risk. Once you've spent the money, that money is gone, and if you're too early it's gone for good.

So how do you know when it's not too early?

Christensen tells a story in The Innovator's Dilemma about Honda's entry into the US motorcycle market. Honda's entry strategy, after much examination, was to give Americans what they clearly wanted: large bikes to ride long distances at highway speeds. Honda's expertise was in designing small, efficient engines, as in their Supercub delivery bike. But Honda designed a big, fast bike for the American market and in 1959 sent three reps to live in LA to begin marketing it.

The bikes sucked. At highway speed they leaked oil and burned through clutches in record time. The cost of sending replacements for the warrantied bikes almost put Honda out of business.

To burn off steam the Honda reps used to go out and ride their Supercubs--small, zippy, 50cc bikes--in the hills east of LA on the weekends. Over time people started asking where they could buy one of these 'dirt' bikes. The reps special-ordered Supercubs from Japan for people. After a couple of years of this a buyer from Sears tried to place a bigger order. Honda ignored him. Finally the Honda reps convinced Honda to change direction, that the big bike strategy had failed but a small bike strategy would work. Innovative distribution channels were forged, sales took off, market entry was achieved.

But if Honda had been more aggresive with their strategy in 1959, if they had sent reps to Miami and Seattle and Dallas and Atlanta and Denver and Las Vegas at the same time as LA, there's an excellent chance Honda would have not only failed to enter the market but actually gone out of business. By taking it slow until they had found a product that fit the market, they bought the time they needed for success.

Bit of a buzzword that, product market fit. Mark Andreesen says "you can always feel product/market fit when it's happening." Unfortunately, this is simply not true. Honda took a couple of years to feel it and even longer to properly trust it. In B-to-B startups you can have a lot of buzz and a few amazing clients banging your door down and still have a product that doesn't really do much. Or you can have a product that is absolutely amazing that great clients are beta-testing but that no one is paying for. In B-to-C you can have a hundred thousand users and still be serving nothing but tech industry curiosity seekers. Or you can have millions of members and few users. These are not product-market fit.

There is a case for going slow, to a point. Your product has to provide real value to your users. You need to have a viable business model, know the metrics you need to make it work, and be on the path to meeting those metrics. And then you need a way to get to customers and convince them to sign up and/or pay. You need all these things before you can feel comfortable ramping up the spend. But if customers love your product, if those customers are profitable customers, and if those customers start presenting themselves, either directly or by making themselves extremely easy to get in front of, then you should let them become customers. And if there are more of them than you can get in front of personally, then you should hire a salesperson. If there are more of them than your salesperson can get in front of, then you should hire more salespeople. If you have a product and you have a market for that product, you should stop worrying and start scaling.

In the old hockey-stick curve there is a flat part and there is a steep part. That transition, the elbow in the curve, is hard to see, especially when you're spending all your time trying to run your company. Here's a question to ask yourself: if you think you can double revenue next year, what's holding you back from increasing revenue by 10x? If the answer is that there's no market yet, then keep grinding away at it. If the answer is not enough people or hardware for scaling, then start spending the money on hiring them, today.

The best possible Series A story: "we don't really need your money, but if we had it we could grow ten times faster starting tomorrow." Term sheet before you get home, guaranteed.

Your personal data is not worth anywhere near what you think it's worth

I see a lot of Root Markets-like businesses. Companies creating a way for people to own their own data and profit from it rather than letting someone else profit from it. The idea is appealing: other people are selling your data, it's your data, why shouldn't you sell it yourself?

But most of the people I talk to don't have a good answer to the basic business question: can you sell your product or service for more than it costs you to buy or make it? In this case, can you sell personal data for more than it costs to garner it?

Well, can you?

The IAB says that in 2011 there was $31.74 billion in US interactive ad spend [pdf]. There were 245.2 million internet users in the US in 2011 according to Statista.com, using data from Nielsen and the ITU. That works out to slightly less than $130 in ad spend per internet user per year in the US.

Here is a breakdown of this per capita number, by channel, and a guess as to how much is potentially available for third party data sellers:

		$ per	Addressable
Channel		User	Market
Search	47%	$60.84	$0.00
Display / Banner	22%	$28.48	$7.12
Classifieds	8%	$10.36	$0.00
Digital Video	6%	$7.77	$1.55
Lead Generation	5%	$6.47	$3.24
Mobile	5%	$6.47	$1.29
Rich Media	4%	$5.18	$1.04
Sponsorship	4%	$5.18	$0.00
Email	1%	$1.29	$0.97
Total		$129.45	$15.21

The $130 needs to pay for several different functions. The $28 for display, for instance, pays for account management, creative, media planning, targeting, media buying, ad serving, analytics, verification, and--not least--the actual inventory the ad is placed in. I'm guessing that the maximum amount available to a company selling data to target display ads is 25% of the ad revenue*. The opportunity to use data to optimize lead gen is potentially larger, while the opportunity in sponsorship, classifieds and search is pretty much nil**.

If this is right, and given the fuzziness of the IAB numbers, it means that there is maybe $1.00 to $1.50 per person's data per month available to data sellers.

But keep in mind that Google does not need your data. Nor does Facebook. They are a large part of the market. Your data is competing with everyone else's data--first, second, and third-party data--for this $1 per month. And some of the data you are competing with is so closely tied to the awareness generating process that it can't be pried away and placed in a 'wallet' somewhere.

Take context. The context of an ad can account for somewhere between 50% and 90% of its effectiveness. Context correlates to demographics, purchase intent, state of mind, and behavior. If you are looking at a review of the new Mac Book Pro I don't need any personal information to make an educated guess that you are in the market for a new computer. I can confidently put a computer ad next to that article without any other data, and the only way someone else can intermediate my guess is by blocking the content or ad entirely. Same argument different data for Facebook, and for much mobile usage.

This means that of the $1 per month much less is actually available to you as a collector of the data.

The original Root business model was to allow users to own their data and rent it out to people who wanted to market to them. The problem: users think their data is worth far more than $1 per month. But $1 per month is all that is available, on average. To a single company, it's maybe $0.10 at best. And then there has to be a commission paid to the new intermediary--the Root-like company. The user ends up with maybe a dollar a year. Nobody cares about a dollar a year. There's no business model. I could even imagine a world where each user was worth $0.20 a month, but that price is still nowhere near where it has to be to have users take it seriously.

There is a business model for businesses that gather data very efficiently. There are several pretty large companies that do this. But they have figured out a way to gather the data for much less than $0.10 per person and to collect data on hundreds of millions of people. The Root model simply costs more per person than the data is worth.

I spent several years of my life trying to build a business that lets people take control of their own data while still leaving a way for marketers to find them. I believe in privacy. And I believe that marketers finding customers is key to economic efficiency. I would love to see someone square this circle, but the Root model is not the way to do it.

-----
* This takes into account the fact that I think the IAB/PwC revenue number is the amount paid to publishers, not the amount spent by marketers. The amount spent by marketers may be 50% to 100% more than that paid to publishers on average. Hard to know. This is an important point though: marketing is much, much more than advertising. The amount that companies spend on marketing in total is far higher than the amount that publishers make from selling ads. There are companies selling data that sell into this marketing market that are worth billions, they are not the focus of this post.
** The best businesses are the ones where everyone else thinks you're wrong. My saying there's no opportunity means that if you have a way to use data to optimize these channels, you may have an opportunity that no one else has seen. I like those.

Great Riches and Low Theft

In early 1998 I walked the open plan floor of what was then one of the largest web development shops. The founder was giving me a tour so I could see the scores of web developers working diligently. They looked the part, the founder looked the part, the place had good energy. I liked it.

The founder was looking for venture capital to expand internationally. He was a much more experienced businessperson than I was and he knew it. At one point he gave me a sly look and said "How do you know that I didn't just hire a bunch of extras to fill an empty office building floor for the day so I could impress you?"

Now I had done my due diligence and some of the people who would have had to be in on that sort of scam were people who had more to lose lying to me than they could possibly gain lying for him. I trusted my due diligence and I knew the company was real. But I no longer trusted him. At the end of the tour I told him we were passing on investing.

He was pissed. He went over my head to the CEO of my company, directly and through common clients. When I was called on the carpet to explain myself I said only that I did not want to work with that founder. I did not say why. The CEO did not give me a soul-searching stare, he did not grill me, or even ask why that would be so. He knew me well enough to let me have my reasons. He just waved me out of his office.

It's an odd fact that our capitalist system--our brutal, unsentimental, Darwinian, sink-or-swim system--relies almost entirely on its protaganists' ethical behavior to function. Our entire economy relies on trust. You probably don't think about this much. Most people don't think about it at all. I think about it a lot. What I do--what all VCs do--would not be possible without the honest behavior of an overwhelming majority of founders. If even 10% of founders decided to start cannily lying the entire startup ecosystem would come tumbling down shockingly quickly.

I hear objections. Let me distinguish between transactions and relationships. Many transactions are entirely caveat emptor: you need to know what you are doing and what questions to ask. Transactions have a simple API and learning how it works is your responsibility. But a business relationship is different: it is too complex, there are too many ways to be dishonest. It is not possible for both parties in a business relationship to verify everything the other side has told them; if they had to the cost of doing so would make it infeasible to have business relationships at all.

There are many gradations and steps between transactions and relationships; navigating through them requires experience. But if you do not trust a person you should not have a business relationship with them.

Some of the oldest business advice in the world: "A good name is better than great riches."* What happens to those of ill-repute? "The sons of men of no name, they were driven out of the land."** In our community a bad reputation results in being driven out of the land. If you're known for not being trustworthy your career amongst the highly interconnected venture capital community is probably at an end***.

The flip-side has always been that our community hesitates to accuse other people of certain types of ethical lapses. I can only think of one time in my fifteen years of venture investing that I have gotten a third-party reference from a venture capitalist that called someone's ethics into question. The closest a VC will come to saying something bad about someone is to refuse to say anything of substance at all. If you don't like someone, you don't have to do business with them. But impugning someone's character can put their life's ambitions at risk. You need to be extremely sure of what you're doing and cognizant of the effect your words might have before you do this. If you don't, you can do a great amount more damage than your dislike of that person deserves.

I won't do business with someone I don't trust. When someone I worked with has turned out to be a liar I have ended my business relationship with them. Luckily I have not had to do that often and not in almost ten years. But likewise I won't have anything to do with someone who puts someone else's life's work in jeopardy by carelessly judging their ethics in public. These offenses--breaching trust and baseless accusations--are two sides of the same coin. The ignominy of the offenders should be likewise the same. If a good name is better than great riches then heedlessly sullying someone's reputation is low theft, and leaves the perpetrator, the victim, and the rest of us equally impoverished.

-----
* Proverbs 22:1
** Job 30:8
*** Every field has different standards for trust. With startups we expect baseless optimism for instance, where in academia this would be frowned on. With startups we expect confident predictions of the future as if it has already come to pass, while in banking this would be looked at askance. People in the community know the norms. And, in our community, are willing to give allowance for the fact that many entrepreneurs were not part of the community before starting their company so may be unfamiliar with our ways. Mistakes made with good intentions are not ethical lapses, they are mistakes.