Pricey readers,

I lately hosted an AMA on Quora the place of us requested a bunch of actually improbable questions. Due to Adam D’Angelo and Alecia/Adrienne for getting this arrange.

Wished to share a couple of probably the most upvoted solutions beneath:

  • What do you look for in an funding?
  • How long should a founder be without wage?
  • What distribution channels should a new shopper web startup contemplate in 2019?
  • What funding have you made that’s the most on the market?
  • Which commonly-discussed progress metrics in shopper tech companies are probably the most meaningless and/or deceptive?
  • What is your recommendation for startup CEOs?

Get pleasure from!



1. What do you look for in an funding?

This one is tough to reply generically — it’s straightforward to say, nice group! Or large market! Or expertise differentiation! Or one thing generic like that. Nonetheless, being in enterprise capital is about being within the “exceptions” enterprise.

There have been tons of of cellular picture apps previous to Instagram and Snapchat, and they’d have been money-losing investments. Similar for social networks earlier than Fb, or there have been greater than a dozen investor-backed search engines like google and yahoo earlier than Google.

My job is to search out the exception to the rule, and decide an particular person firm that can stand out, and I don’t should be bullish about an complete class of firms. In apply, this occurs additionally as a result of individually, I’m targeted on doing 2–Three investments per 12 months, and don’t have the capability to, say, spend money on each single firm engaged on XYZ.

All of that stated, past the plain issues (group, market, product, and many others.) there are a few issues that make me lean into understanding a firm, specifically.

First, it’s fascinating when a startup utilizing a new platform or a new expertise in a intelligent manner. For instance, Instagram Tales and Snap Tales are a large new short-form video format, and an app which may work together with these tales in an fascinating manner may be compelling. Or as a result of esports is so large, if somebody builds on the concept maybe video games content material might be streamable-first, then that’s intriguing too. Making the most of a new expertise helps reply the “Why now?” query and explains why it’s a contemporary alternative that should be tried. In case your new startup might have been constructed 15 years in the past, maybe the concept’s already been tried and simply isn’t that good.

Second, expertise modifications always however individuals keep the identical. And their motivations — specifically, to spend time with mates, thus far, to be capable of earn extra, to search out higher work over their careers, to maintain their pets, and many others., and many others. — additionally keep fixed over time. So when a new startup purports to create new shopper conduct, I’m generally skeptical. But when a product permits individuals to faucet into a pre-existing motivation however in a new, contemporary manner, then I’m .

Third, I prefer to see a robust perception round how the product will develop. For instance, it’s essential if a new video streaming startup, for occasion, has deep relationships with the YouTube/Instagram influencer group to get it off the bottom. Or if a new office collaboration device is constructed to faucet into calendars and be inherently viral by means of cal invitations. The rationale for that is that we’re in an fascinating period of latest expertise merchandise the place on the whole constructing the expertise is just not all that arduous. Startups sometimes don’t fail due to expertise points, given open supply, AWS, plenty of collaboration instruments, a community of good individuals, and many others., and many others. This used to be the case a long time in the past, however today, startups fail as a result of they don’t get traction out there. As a end result, I prefer to see one thing intelligent and insightful in how the product will get off the bottom — particularly if it’s pushed by viral progress, or some type of natural, versus paid advertising and marketing.

Normally on the stage the place I’m seeing firms, one of many large issues I’m evaluating for is “it really works!” I normally look at their progress metrics, cohort charts, acquisition combine, engagement knowledge, and many others., and attempt to be sure that it’s sticky now and can stay so over time. As soon as I validate this, then I transfer onto a few of the greater qualitative questions like those above — what’s the trick that makes it develop? Why now? What new expertise does it exploit? What basic human motivation does it faucet into?

And lastly, I wish to reiterate that it’s all about discovering the exceptions. You’ll be able to spend as a lot time as you need analyzing a house, but it surely’s nearly choosing the person startup you like most.

[PS. Here’s also a deck I published a few months back that is the more visual, longer-form answer to this question]


2. How long should a founder be without wage?

I’m a believer in free markets, and likewise in pondering long-term.

When founders first get their firm off the bottom, they usually take danger and go without wage. Nonetheless, as quickly as they increase a actual amount of cash — both from institutional seed funds, a massive group of mates/household, or with a VC — I feel the founders should pay themselves mainly market fee (inside motive)

The rationale for this, particularly if there are cofounders, is that beginning a firm is already exhausting sufficient. Your clients are leaving you, recruiting is tough, workers will sometimes give up. It’s exhausting to assume long time period, about all of this when you’re anxious about your paycheck.

If on high of all of this stress, the founders are paying themselves manner beneath market, to the purpose the place they’re burning their financial savings, that’s simply not a good factor. It creates a lot of stress, and undesirable conduct from the attitude of an investor.

Clearly if there’s a case the place the founders had been extremely compensated earlier than and it could affect the runway, OK, then nice, there’s an alternative to commerce off a longer runway by capping the money compensation. If the group needs to do that, nice.

However on the whole, I imagine in market charges for everybody, together with the founders and the staff, inside motive.

[PS. I tweeted this out and my friend Suhail Doshi responded with a pretty cool rule of thumb:

My rule of thumb is…
– seed funding: what you’d pay your lowest paid employee
– when you’re growing a bit: your lowest paid engineer
– scaling: mid level engineer
– successful: market for ceo pay
– not growing: cut back to your previous comp until you are / helps survive

This is pretty great. Thanks Suhail!]


3. What distribution channels should a new shopper web startup contemplate in 2019?

First, let me begin with the detrimental. It’s been stated (and written) that we’re type of in a funky shopper web winter, in comparison with 2007 after we had the Fb platform and the iOS/Android platforms and so forth. As a end result, the conclusion is that there’s a normal business malaise and all the pieces sucks and we should all go residence, and many others., and many others.

It’s my conclusion that that is a vastly overhyped POV about shopper.

Final 12 months, when Fortnite went from zero to 200M+ customers, how might you not be enthusiastic about shopper tech? Or the place we see Kylie Jenner constructed a multi-hundred million greenback income stream promoting stuff on Instagram? Or you have a content material creator like Ryan, the child that makes unboxing movies, producing $20M+ per 12 months?

There’s a lot of thrilling alternatives on the market. In my first few months at a16z, I met tons of of firms in my first Three months. A whole lot! There’s a lot of innovation and entrepreneurs on the market attempting to do nice issues.

Sure, it’s true that you can’t simply construct well-designed social picture apps and nonetheless anticipate to succeed. You need to do one thing completely different, and evolve with the time. However IMHO there are nonetheless improbable alternatives.

OK, now going previous the preamble and answering the query instantly:

The very best distribution channels for your startup are those that solely make sense for your product to make use of — which means it’s proprietary, and other people can’t simply faucet into the identical channel straight away. The issue with Fb advertisements as a channel, for occasion, is that if you’re a mattress startup shopping for advertisements, you’re not simply competing in opposition to all of the other mattress firms however you’re additionally competing with the cool new protein shake firm. Distinction that to Dropbox, which has primarily grown utilizing shared folders contained in the office — they personal that channel, and the one others who might compete on which are of us who’ve some type of shared folder performance. The efficiency of the channel is unlikely to degrade over time by way of competitors as a result of it’s proprietary.

If you agree, then the plain query is, if I’m a startup trying for a proprietary channel, which one do I take advantage of? That’s exhausting to reply generically, so I received’t try and do so. Nonetheless, the higher statement is that if you are beginning a model new firm, then you have the chance to each decide the concept — and have a speculation about product/market match — in addition to to choose its progress technique on the similar time. If you can take into consideration each at its inception, then you can begin serious about a proprietary channel from day 1.

I feel this isn’t the reply the one that wrote the query wished to listen to, so let me additionally attempt to give some extra trend-driven concepts too.

I like video. There’s a lot of video being created and consumed, and I like the concept of a “video-native” product that’s designed to create a lot of video as a part of person engagement. Or create a lot of alternatives for streaming.

I like social knowledge within the office. If you are constructing a office collaboration device, whether or not it’s horizontal like Slack or extra vertical like Figma, many of the recordsdata and methods you contact perceive who all of the customers are inside the corporate. Specifically, the calendar is a very wealthy knowledge asset full of individuals and their relationships, and I really feel that’s underleveraged by startups looking for to develop. I like the sample of placing, say, ZOOM hyperlinks, inside calendar requests, and assume extra startups may find yourself discovering alternatives to do the identical.

I additionally like “in-real-life virality.” If you stroll round and see a bunch of lime inexperienced scooters, and persons are utilizing them, then you will wish to strive it too. Magically, no buyer acquisition value! Or if you see individuals strolling round enjoying Pokemon Go, then you may wish to strive it additionally, since they’re out and about, and having fun with it a lot. I feel that is an underrated channel.


4. What funding have you made that’s the most on the market?

Sooner or later I used to be within the Mission district of San Francisco, and noticed a large line of individuals. I questioned what they had been ready for, and naturally, the curiosity bought the very best of me and I bought in line too. As I appeared round in line, I learn the signal for the place. There was a large aardvark icon, and lettering that stated BOBA GUYS.

I had heard of Boba Guys earlier than, and keep in mind that each time I noticed certainly one of their shops, I’d skip it as a result of the road was too long. Enterprise was that good.

Whereas ready, I attempted to google to determine who their founders had been. No luck. Ultimately I discovered a Kickstarter web page with some data, for a retailer they’d opened close to Union Sq., and located their names. Simply my luck, they had been already following me on Twitter. I DM’d them, ordered my boba — hong kong fashion with pearls — and waited.

Every week later, they replied. We met for lunch close to Hayes Valley, and I didn’t know what to anticipate. Perhaps I might make investments cash into this factor? Did I even wish to? It’s simply milk and tea, proper? However so was Coca Cola, or Starbucks, or Blue Bottle.

To my shock, each Andrew and Bin had been improbable. That they had nice shopper packaged items expertise, had labored at Timbuk2, and got here with a 20-slide deck ready. The deck had retail comps versus other high-end shops, monetary projections, and extra. It blew my thoughts. These had been very clearly probably the most gifted bubble tea retailer operators on the planet.

As a fast segue, I had been going to pitches for high-end eating places with a few mates previous to that, however had by no means invested. Going to a restaurant pitch was extraordinarily enjoyable, as you went with a group of mates, met the chef, they usually made your complete meals menu and all of the drinks too. You frolicked and will make investments after. However I by no means favored the mannequin as a result of it felt prefer it might by no means scale. It’d be a enjoyable passion, but it surely’d be exhausting to make cash. However it helped put together my thoughts for investing in retail, and a beverage play like Boba Guys.

Again to bubble tea, I spotted after the pitch that though it wasn’t a tech firm, I should determine a technique to make investments. Andrew, Bin, and I had a nice dialog — the primary of many, after which I rallied a few of my mates to place a syndicate collectively to take a position.

The bonus to all of that is that I now have a Boba Guys Black Card. That is a particular investor card that lets me get my every day bubble tea repair for free. It’s superb, and the funding was price it simply for the bragging rights with that.


5. Which commonly-discussed progress metrics in shopper tech companies are probably the most meaningless and/or deceptive?

These are the plain offenders:

  • Cumulative charts for something. These can solely go up and to the appropriate
  • Registered customers. Completely ineffective, though generally I prefer to ask about this as a ratio to energetic customers to get a sense for how effectively the person acquisition is going on
  • Any retention metrics that aren’t standardized into cohort curves. Typically individuals will give a single snapshot quantity, like a “Three months later, X% nonetheless use the app!” and that’s not that useful
  • Set up numbers, without signups or activated signups or one thing extra significant
  • For market firms, “income” that’s really “gross bookings” or GMV. Or GMV that counts in bizarre issues, like safety deposits or one-time setup prices
  • ARR which means, “annual income run fee” versus “annual recurring income.” Please, let’s simply follow ARR for recurring, not run fee. Thanks.
  • Taking the height income of any single day and annualizing it because the headline quantity
  • Unlabeled X and Y axes in charts
  • Cohort curves which are some advanced subset of customers that make the retention look higher
  • Displaying “CAC” that’s really blended CAC, and when you simply look on the Paid CAC, it’s manner above LTV
  • Really LTV. As a result of who actually cares concerning the lifetime of a person — startups should simply handle to margin earned by a buyer you purchase over the primary 6–12 months, not the lifetime. That’s how you will make your advert spend selections
  • Any deceptive ratios the place the denominator and numerator are completely non-obvious. Keep on with actives, please.
  • Lively person definitions which are sophisticated (should have visited Three classes within the final week, and carried out one motion out of a checklist of 5). It makes all of the downstream calculations on retention, engagement, and many others., deceptive since you’re throwing away all the information for the much less energetic customers
  • If you have a desktop app, and internet, and cellular, break down the metrics for all three. Don’t mix, please

There are numerous, many extra… however that’s a fast begin.

6. What is your recommendation for startup CEOs?

I’ve a lot of recommendation, however perhaps I’ll share the highest 10 that come into my head:

  1. You’re not doing this alone. You have got mates, household, your traders, and workers rooting you on. Discuss to them
  2. Every thing looks like it sucks — metrics go up and down. Prospects depart. An worker quits. Product/market match might be a lot higher. However that is the way it feels even when it’s a rocket ship. Vital to place into perspective
  3. Your job modifications dramatically over time. Your first job is to construct the machine — the product that draws the purchasers, and generates the income. However finally it turns into a job the place you’re constructing the machine that builds the machine. It’s all about hiring, main, managing, and many others., and many others. Put together for this to really feel bizarre when it transitions — particularly spending 25%+ of your time hiring
  4. Everybody’s gotten very data-driven today, which is nice, however you should set your technique, after which your metrics should observe. It’s to confirm that your technique is working — having a lot of dashboards isn’t any substitute for robust product perception and technique.
  5. Some individuals say to remain off Twitter and neglect the distraction. I say the other – discover fascinating, educated individuals from social media, and DM them to satisfy in individual. Keep outbound. Use it for recruiting, networking, fundraising and extra.
  6. Elevating cash is a actually, actually essential factor. It could really feel like a nice milestone, but it surely’s only the start.
  7. Ben Horowitz’s e book The Arduous Issues About Arduous Issues is the very best e book about being a CEO and managing your individual psychology as you got down to do this loopy exhausting factor. It’s improbable. Learn and re-read it.
  8. Additionally learn and re-read Excessive Output Administration by Andy Grove.
  9. Construct long-term relationships along with your workers, traders, and other people within the ecosystem. Hopefully your startup thrives, however perhaps it received’t — and you’ll nonetheless wish to construct a long-term community as a result of there’ll be extra to do sooner or later
  10. Don’t fear about generic startup recommendation — together with lists like this one 🙂 Be sure you discover recommendation that’s tailor-made to your startup’s stage, business, and particular state of affairs. Discuss to consultants who’re prepared to dig in. Lists like this are enjoyable to learn however there’s a large hole in making use of them

OK that’s my first 10 🙂

The publish What do you look for an investment? How long should a founder be without salary? And other Q&A can also be revealed on andrewchen.


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