Professor Richard Thaler just gave his Nobel lecture. He is a pioneer in behavioural economics. Often times, behavioural economics flies in the face of classical economics. However, there are some pieces of behavioural economics that are really interesting to think about when it comes to startups.
Here is his lecture.
In the lecture, he talks about a few things that I think could really help startups. The Endowment Effect is particularly powerful. This bias occurs when we overvalue a good that we own, regardless of its objective market value (Kahneman, Knetsch, & Thaler, 1991). It is evident when people become relatively reluctant to part with a good they own for its cash equivalent, or if the amount that people are willing to pay for the good is lower than what they are willing to accept when selling the good. Put more simply, people place a greater value Continue reading "Create An Endowment Effect"
This week, the FCC rolled back the Obama regulations on “net neutrality”. The deeper we get into the 21st Century, the more different pieces of legislation proposed by both parties start to resemble Ayn Rand’s descriptions in Atlas Shrugged.
Net Neutrality is a convenient way of saying “one price fits all”. Whether you agree or disagree, I’d encourage you to open your mind up to both arguments.
One thing that nobody really knows is if and when a new technological solution will be on the horizon that will leap over existing infrastructure and deliver the internet to us in a whole new way that is more efficient, faster and cheaper than it is done today. HFT traders used to use broadband pipes but now use microwave technology now because it is faster.
One commonality I see in a lot of seed stage companies is a mistake immediately after closing fundraising. I have heard and read it from other VCs as well so I suppose it’s not new. However, it’s something that cannot be stressed enough.
Focus on activities that bring you revenue at an early stage.
I know the old way was “build the network, worry how to monetize later”. For some businesses that can be true. They are few and far between. In the spots we invest, B2B Fin Tech, a focus on revenue is paramount.
Because you are generally solving a problem that people will pay for. It’s a big enough problem that you can do over and over again. If it’s really big, you can build a gigantic valuable business out of it.
Free markets are a rarity today. I mean truly free markets. The stock and commodity markets are about as close as you get. If you haven’t read Professor John Cochrane’s blog post about The Hard Road to Free Markets you should. He starts off,
The fundamental reason so many markets are not free, and so dysfunctional, is that the voters of our democracy don’t really want freedom. Freedom will come when we want it, when we insist on it, when the average voter sees a free market solution rather than endless controls as the answer to real-world problems. The sad paradox of free markets is that free markets do not need people to understand them to work. But democracy does require voters to understand how things work.
When I read the Techcrunch article on the early stage finance drop it resonated with me. It is where we invest in as a fund, and it’s what HPA did when I co-founded it way back in 2007. Virtually all of my investments since 2007 that haven’t failed are still in process. Most are doing quite well, but you don’t ring the cash register until they actually exit. Fred Wilson blogged about it and his points also hit home with me. Especially this,
When I talk to my friends who do a lot of angel investing, I hear that they are being more selective, licking some wounds, and waiting for liquidity on their better investments.
When I talk to my friends who started seed funds in the past decade, I hear them thinking about moving up market into larger funds and Series A rounds.
Yesterday I had a conversation with Rajiv Nathan. He is a marketing consultant and does a lot of work with startups. It would be worth your time to reach out to him if you are thinking about marketing. We talked about a lot of things but one thing we zeroed in on was how really tightly focused a startup has to be at the beginning to be successful.
I started reading Tren Griffin‘s book, “A Dozen Lessons for Entrepreneurs”. The first chapter is about Steve Blank. He says that startups go through phases,
A startup is a temporary organization designed to search for a repeatable and scalable business model.
A company is a permanent organization designed to execute a repeatable business model.
If you don’t know who economist George Stigler is, you should. He received a Nobel Prize for proving the concept of “regulatory capture”. We see it again and again and again in all industries. Finance is where some of the most regulatory capture is practiced. Dodd-Frank is a textbook example as it made regulations so expensive only the big banks could afford to compete. The George Stigler Center at Chicago Booth discusses economy and state. How does economic and public policy intersect and what should we be doing? What are mistakes to avoid?
When I was in Torino, Italy at the i7, we talked about a lot of different issues. At one session a very well respected computer science professor from an Italian university asked, “Should Google and Facebook face some sort of regulation that limits their ability to compete?” It’s a compelling question.
The tally of sexual harassment offenders that have been outed in the past few months is too long to name. High profile journalists, venture capitalists, businessmen, and politicians all have been implicated. I am sort of surprised we haven’t seen anything in reverse where a powerful woman does something to a man. When I was in college I had it happen to me once. I put an end to it. Had a male teacher in high school do the same thing. Not cool.
Everyone has a blind spot. When I work with entrepreneurs, it’s sometimes easy to see what their blind spot is. It’s harder to recognize it in yourself. You have to work to uncover them. It’s important to do that, because you can round out your team with people who are strong in things you are weak.
Often when I ask entrepreneurs who are engineering focused what they are going to do next they tell me about all the different engineering things they will be doing. New websites. New features inside a product. A new engineering wrinkle that is cutting edge or current in the main stream VC world. They think that will increase their valuation and allow them to raise money easier.
What they forget about is the customer might not need or want it.
Have been reading Jason Calcanis book, Angel, lately. I haven’t finished it. I plan on finishing it in the next couple of weeks and will write a review then. Today, I caught the end of a Facebook Live gig, This Week In Startups, that he did. Jason has an enviable track record of investing in seed stage startups.
One thing that Jason talks about when discussing the process of angel investing is wealth accumulation. By the way when I describe it as a process, I want to be clear that it is. If you aren’t using some process, you are throwing dice. Being a successful early stage investor is a lot of work. It’s also a little bit of luck. You never know who is going to hit it big and who is going to go down.
Jason and I might differ on wealth accumulation as it relates to early stage Continue reading "Do You Seed/Angel Invest For Wealth Accumulation? Or Not?"
There was no way that I was ever going to law school. It just wasn’t for me. In high school, I thought about it but knowing the lawyers I know I don’t think I would have enjoyed the occupation. Some friends of mine tell me to tell people never go to law school.
I am pretty good friends with some law professors who teach at top schools. It’s interesting speaking with them and listening to them. Glenn Reynolds has opined quite often about how law schools are but one part of the education monolith that will implode.
Law school remains. It’s a skill. It’s a certification.
My wife drew my attention to a couple of articles about law school that were really interesting. One is from Stanford. Stanford is immersed in Silicon Valley and innovation. One would think that the startup culture would rub off on Stanford Law and Continue reading "This Law Is Going to Change"
I have a lot of spinning plates in my life right now. I am rehabbing a place 10 hours away. I bought a small place in Lincoln Park and I am moving. All at the same time. Over the past several years, I have acquired a bunch of storage lockers. The goal for this summer was to go down to 1.
Yesterday was crazy. My new Lincoln Park place had a cruddy stove in it. I found a beautiful used Dacor but it was up in Milwaukie. I rented a trailer in Milwaukie and drove it down to Chicago. While I was driving, I got an email telling me a person wanted to meet me in Winfield, IL to buy an antique shuffleboard I had been storing. There is also a lot of outdoor furniture in that locker that is going up north.
This shuffleboard had been in my wife’s Continue reading "Schlep.it A Pretty Cool App"
One of the things that people trading Bitcoin think is that it’s a huge market. They look at all the notional volume, the ICO’s and all the press and confirmation bias skews their thinking. I got news for you, it’s teeny. Not just teeny. When it comes to bigger markets out there, Bitcoin is a pimple on their ass.
I want to be clear. I am bullish bitcoin long term. I was a part of one of the original blockchains. A commodity clearinghouse was a private blockchain. The other day I blogged about how CME should do an ICO.
Here is some data. One Bitcoin is worth $2700. It got hit a bit yesterday. If I want to move a billion dollars worth of bitcoin, what will happen? Suppose I want to move a billion euros? I know I can do that with nary a ripple. How about Eurodollars? 1
Our mayor in Chicago is starting a program to offer cheap office space to startups in order to entice them to locate here. The co-work spaces participating are great spaces. If you are a startup, you’d like working there.
I remember an interview I saw with Social+Capital VC Chamath Palihapitiya about the rising fixed costs of startups in Silicon Valley. Chamath said, “I don’t want to invest a bunch of money just so real estate brokers get rich.” Funny, but there is some truth behind that statement. Real estate costs in the Bay area are painfully high.
In Chicago, the cost of real estate is pretty reasonable compared to both coasts.
I am always encouraged when local politicians lend their vocal support to the startup community. They can be the best salespeople sometimes. Mayor Emanuel has been a big backer of the local tech community. Mayor Emanuel’s retiring
One of the companies I invested in when I was doing angel investing was Build Truss. They have an awesome team. They are tackling a thorny problem. CRE agents have no interest in leasing out spaces less than 20k square feet. Just no money in it. Building owners that have smaller spaces have trouble leasing them.
They have an amazingly efficient platform for search. Already in Chicago and Dallas they dominate. The cool thing is they help the CRE brokers by putting everything in one place along with paying commissions. They make it so no one wastes time.
For businesses looking at space, it’s super frustrating. It takes time. It takes negotiation skill. It is just a royal pain in the ass. I know from experiences with different startups I have been exposed to, the market for space just isn’t very efficient when you are looking for small Continue reading "Need Some Office Space?"
My friend and fellow former trader Alan Matthew of Tribal Ventures alerted me to this. It’s a good opportunity for fin tech startups to get some exposure to potential customers. I don’t think this is a good opportunity to get investors.
But, customers are way more important than investors.
Here is a copy of the announcement.
FIA seeking innovators for Expo 2017
FIA invites all fintech startups to apply to be featured in the Innovators Pavilion at Expo 2017! We are looking for leading edge companies that are creating innovative products and services for any aspect of the global securities and derivatives industry. These innovations can include blockchain, machine learning, big data, cloud computing and social trading.The Innovators Pavilion is an integral part of FIA’s Annual Futures and Options Expo. The FIA Innovators program celebrates innovation and entrepreneurship in financial markets technology. Nearly 40 companies have participated in Continue reading "Calling All Fin Tech Startups!!!!"
Yesterday the Senate which is barely controlled by Republicans failed to repeal and replace Obamacare. Too bad. To be honest, it had a hard time getting through the House.
This shows you how hard laws are to repeal once installed. Especially laws that come with lots of free benefits you don’t pay for until later years. It also illustrates something else. Leadership is hard. Being a true leader can be lonely.
It is easy to be in the minority. You can take potshots at the leaders with little or no consequence. When you are out front leading, you take the hits.
Today there has been a trend toward emotional intelligence in leadership. I am a big fan of it. However, that’s codifying a leadership style. It’s a process. There are other parts of leadership that don’t have anything to do with emotional intelligence.
That’s putting out big ideas. You use Continue reading "Leadership is Hard"
Initial cryptocurrency offerings are the rage. Don’t get caught up in the hype. Listing a coin and raising money doesn’t do anything by itself. Everyone can pat themselves on the back but without any meaning or use case behind the coin, it will eventually be worthless.
Speculators are driving up the prices of coins because they are looking for the next Bitcoin. A corollary, just because a stock is cheap doesn’t make it good. There are a lot of crappy penny stocks out there.
The only way an ICO works is if it is tied to a business strategy or function. Period. I don’t think an ICO can take the place of an IPO. It might be a replacement way to raise startup capital. I think that there can be two asset classes on a companies balance sheet, equity and crypto. But, the value of the crypto is not really Continue reading "Is An ICO Right For You?"
There was an article in Techcrunch yesterday on SAFE notes and how they were surprising entrepreneurs. The headline is a bit of clickbait. I read the article and then emailed it to some attorneys in Chicago that really understand venture. Their responses were pretty uniform.
Here is the premise of the article. SAFE’s are unsafe for entrepreneurs because of the dilution hit they take in succeeding rounds of financing. Presumably, this also includes early investors. Here is a quote I lifted from the article.
We have observed the following in our own recent direct experience investing in SAFE and convertible notes: that many founders have a tendency to associate the valuation cap on a note with the future floor for an equity round; that they further assume that any note discount implies the minimum premium for the next equity round; and that many founders don’t do the basic dilution math associated with what happens Continue reading "SAFES, Convert Debt, and Startups"
When WLV pitches to potential investors, they always ask “Why Seed?”. It’s a great question and one we love to answer. Most investors we know prefer to invest at Series B, and some are filtering down to Series A. Some investors started out investing in seed and have stepped back to become primarily Series A investors.
Remember, we live in the Midwest where the bulk of investors are Private Equity and Real Estate investors. They are very uncomfortable with things like “burn rates”.
In places like Silicon Valley, there are more Seed stage investors because the competition is a lot greater among funds to get into deals. If you wait, it’s going to be a lot tougher.
There are a few reasons we invest at Seed stage and follow on at Series A. Our fund passes along Series B and later rights to LPs for free. We also set