Betting on the Ponies: non-Unicorn Investing

Twenty fucking five to one
My gambling days are done
I bet on a horse called the Bottle of Smoke
And my horse won

- The Pogues

I have decided to angel invest. Any advice?

I spent some time decades ago in the horse-racing world, as a guest of someone who was actually in the horse-racing world. Two things: (1) it’s not as glamorous as it sounds, and (2) everyone has a system. Everyone. And, as you might expect if you thought about it for a minute, you can always tell the people who know what they’re doing: they’re the ones that don’t tell you about their system.

Everybody else likes to talk non-stop about their system and the sophisticated statistical modeling they’ve done on it on their laptop using Excel. Most of them have never ridden a horse. Most of them have not looked–really looked–at enough horses to know what a great horse looks like. In fact, they’ve probably only ever seen one or two great horses, because truly great horses are exceedingly rare.

You’re rambling, old man, I don’t care about horses.

Well, me neither. But I care about betting systems. And horse-racing is the ecosystem with the worst betting systems in the world. Ridiculous statistical models built by people who don’t understand statistics or models used as psuedo-rationalizations for rules of thumb and rabbit’s feet. In the end, the bets of 95% of bettors are a frantic attempt to avoid betting on any horse that resembles in any way any nag they’ve ever lost on before. But they need a win, they have to go home with at least one win if they ever want to be allowed to come back. So they spend all day making small, stupid bets, waiting to make the big bet on the sure thing, once it’s obvious it’s a sure thing. Yeah, it’s 1:10 odds because every other bettor at the track also knows it’s a sure thing, but that sure thing isn’t a horse, it’s a…


Yes, that’s right. A freakin unicorn.

As far as I can tell Aileen Lee popularized this term in a Techcrunch article last year. Some days I wonder why she hates us, and some days I thank the gods that she didn’t decide to call them Princesses, or worse. But there was in her analysis the rationale for The System as well as the reason for its absurdity.

Aileen looked at venture exits over the previous ten years, and found 39 companies that had been valued at $1 billion or more in the public or private markets (that number seems to have gone up a bit in the eight months since she wrote the article.) One in every 1,538 venture-backed companies passed this threshold. That’s not a lot. It took more than seven years on average from founding to exit. Also:

Facebook…accounts for almost half of the $260 billion aggregate value of the companies on our list…The 1990s gave birth to Google, currently worth nearly 3x Facebook; and Amazon, worth ~ $160 billion. The 1980’s: Cisco. The 1970s: Apple (currently the most valuable company in the world), Oracle, and Microsoft; and Intel was founded in the 1960s.

In other words, the returns on venture investments resemble a power law, where the most successful companies account for the bulk of dollars returned. If your venture fund didn’t invest in one of the most successful companies of your era you were not one of the top venture funds. You have two options as a venture fund, if you want to attract and retain investors in your fund: have consistently good returns year-in and year-out, or try to invest in unicorns.

What system would you choose if you’re a venture investor? Consistently good returns sounds like the better strategy, but it’s easier said than done. A friend who was a Wall Street trader made his bank hundreds of millions of dollars each year for seven years. In the eighth year he lost a couple of million dollars and was fired. Investors in investors believe in a hot hand and can be less than forgiving. It’s almost impossible to never have a bad year in venture.

So you try to invest in unicorns. The easy way to do this is to have the expertise, the network, and the reputation to be the one the founder chooses after it’s already obvious that they have a shot at the gold ring. It’s like betting on the sure thing but getting reasonable odds. In these cases the founders have their pick of VCs and they often pick the VCs who have backed unicorns before. Everyone believes in the hot hand. That’s why you see aggressive newer VC firms paying high prices to get into the late rounds of rocketship companies: once the unicorn goes platinum, you get to tell people you were an investor. No one asks if you made 2x or 200x. I’ve seen venture firms showing companies on their portfolio page when they bought the stock after the IPO1.

The less easy way is to index. That is, if you invest in enough good companies, one of them is bound to be a unicorn. Here, I’ll lay it out. One company in 1,538 venture-funded companies becomes a unicorn. If you invest in 1,538 companies you have a 60% chance that at least one of them is a unicorn. You’ll only get index returns, of course, which puts you square in the middle of the pack, but you can always point to your unicorn.

These are the two main VC strategies: (1) have a reputation of being the go-to investor in a certain type of company so you get first shot at investing in companies that are more likely to be unicorns; and (2) invest in enough companies that you have a decent probability of being an investor in the next unicorn.

There. Fixed your investing strategy for you.

Of course, being the go-to investor in any category of company is pretty hard. You’re competing with VCs who spend a lot of time and money on burnishing their brands. You’re competing with investors who built and sold the iconic last-generation company in that category. You’re competing with people who spend all day every day trying to make themselves more famous.

Investing in hundreds of companies is no cake-walk either. First off, you have to have the time and organizational skills to meet thousands of companies, the patience to cull them down, the fortitude to read all those legal documents, and, not least, the money to write the minimum-check-size check for all of them. Since the minimum-check-size is at least $35k, that means to just get 100 companies in the portfolio you need to lay out some $3.5 million. And with only 100 companies, your chances of getting a unicorn are between 6% and 7%. If you up that to 500 companies, your odds are 27%-28%. That would cost $17.5 million.

If either of these strategies is available to you, read no further, just keep doing what you’re doing.

Yes, well, I can do better than random, because I know what a good company looks like. So I don’t need to invest in 500 companies to get a unicorn.

Oh, you think you’re a picker. Those 1,538 companies that your unicorn is just one of? All of those were deals backed by professional VCs, whose job it is to think about how to make the right picks.

Well…VCs. They invested in Color.

And Twitter, and Facebook, and Uber. They all seemed like pretty stupid ideas. Until they weren’t.

Look, here’s what I know, after 17 years of investing and 13 years of lie-awake-at-night-thinking-neurotically-about-my-mistakes soul-searching: picking is bullshit. No one can pick.

What about Sequoia, or Union Square Ventures, or Andreesen Horowitz? Can’t those people pick? They probably can, a little bit. But that’s my point. Imagine going to a bar at 2am on a Saturday night and meeting a financial analyst who spends eight hours a week in that bar and 156 hours a week trying to figure out if AAPL is going to trade up or down over the next year. What do you think he thinks when you tell him you’re buying the stock because you really like Apple’s wearables strategy? He thinks you’re an idiot. He has to put up with armchair quarterbacking every time he glances away from his Bloomberg. He traded on that news 30ms after it was announced. He traded on the probability of that news four months beforehand. And even then, he probably only moved his odds from 50/50 to 51/49. That matters when you have half a billion dollars in the stock; it doesn’t matter to you. He spends his life doing this. He talks to Luca Maestri on the telephone, on a freakin landline probably. He has people stand on line at the Apple Store for him to get the new products first and then take them apart and test them for rare metals so he can corner the world supply of indium. And what do you have? You have a good feeling about wearables. Who do you think is selling the AAPL stock you’re buying? He is. Why is he selling it to you? Because you’re the greater fool.

Don’t compete with that guy.

What about the angels in Twitter or Uber? Can’t those people pick? How about that monkey that typed Shakespeare? Can’t that monkey write? Recognize survivorship bias. (That doesn’t mean those angels did it wrong, they probably did it pretty all right, but it wasn’t picking they did right.)

What about Paul Graham, who said you shouldn’t spend your time thinking about price, you should spend it trying to get into the best companies? Doesn’t that imply that he thinks you can pick?

You mean Paul Graham of the incubator that backed 630 companies, each at a $225,000 pre-money? Oh, ok. If you convince 630 companies started by Stanford engineering grads to take a $225,000 pre-money, then you can go telling other people they should be pickers too.

But don’t confuse this with reality. You think you’re an amazing picker. But that’s mainly because you think picking is ridiculously easy. But for that to be true it would mean that all the other VCs out there can’t pick because they’re idiots. And that, my friend, is just not true. VCs may not know lots of things you know, they may not always be valuable as business partners, but they do know one thing very well and that is how to invest in startups. And that’s what we’re talking about.

So you’re saying it’s all just luck.

No. Go back and read it again. All I said was that picking is bullshit. Investors do a lot more than pick. But let’s drill down on picking first, because there’s more to picking than just picking a company. When you land in Vegas you can head to New York-New York to play the slots or you can head to Casino Royale to play craps. You can’t pick the outcomes in either game, but you’ll come out a lot better in the latter case. Pick the game with the best odds over the long run.

So you have a system.

Yes, I have a system. The system is not guaranteed to improve your outcomes. But I guarantee it will improve your odds.

I thought you said that you could tell the people with working systems because they didn’t talk about their systems.

Touché. But this isn’t parimutuel. I’m not betting against you. In fact, you working with a bad system hurts me.

I was working with a lawyer on a deal 15 years ago. The lawyer on the other side of the deal was newly minted. I said to my lawyer “we should be able to get pretty good terms, since he’s new.” My lawyer, who was one of the top ten deal lawyers in the world, according to American Lawyer magazine, sighed and said “we’ll get the exact same terms we would have gotten if he was an experienced lawyer, but it will take three times as long and he’ll convince his clients you’re trying to screw them.” That was exactly what happened. And that’s what happens in deals I’m in with newly minted angels who think it’s all so easy.

There are enough angels out there who will make my deals three times as painful while convincing founders that every venture investor is blood-sucking scum. I don’t want you to be one.

Well, that was mildly insulting.

Let’s move on.

Here’s my system for investing when you don’t plan on having 500 portfolio companies and you’re not the person that every entrepreneur thinks of when asked “who would be your dream investor?” This is not an avoid-the-unicorn strategy; I think several of my portfolio companies could have $1bn+ exits. But my strategy is not predicated on that. It’s a guide to getting great returns when targeting unicorns will not work.

1. Don’t look for unicorns

Michael Moritz once said “I rarely think about big themes. The business is like bird spotting. I don’t try to pick out the flock. Each one is different, and I try to find an interestingly complected bird in a flock rather than try to make an observation about an entire flock.”2

Sequoia has a reputation not for turning lead into gold, but for turning gold into platinum. They can get a great company an awesome outcome. This means that any entrepreneur who has a great company, who can raise money from any VC on earth, raises it from Sequoia. Pretty sweet for them, eh?

You are not Sequoia. Don’t take Michael Moritz’s advice. It will not work for you.

You should look for a flock. You should invest in markets you know. The two things you need to check off before you invest in any company, because they are the key difference between viable and non-viable, are (1) does the problem the company is solving cause their prospective customers great pain? and (2) can the team build the proposed solution with reasonable time and money?

People screw up on how painful certain problems really are all the time. They mistake problems that are slightly painful to a lot of people with problems that are excruciatingly painful to a few people. Solving the former is not a VC-backable company; the latter might be, depending on how many those few people are and how much they have to spend. Knowing which type of problem you’re hearing about is hard. The only way to know it is to know the customers really well. Eat with them, drink with them, work with them. Know what they love, know what they hate, know what will get them to get the checkbook out. Know what will get the to get the checkbook out today. Be the customer, Danny. If you are, you will not invest too early, you will not invest too late, and, most importantly, you will not invest in companies that launch products no one wants.

Knowing the customers is not easy. It is time consuming. And I’m not going to give advice on it here. But knowing the customers is an incredibly valuable asset, and if you have it you should husband it for all it’s worth. That means investing in many companies that address that same group of customers.

The second one, being technically viable, seems like it’s rarely screwed up by investors. How many companies are funded that can’t build their proposed technology? The straightforward fact of being able to build a technology or not is pretty easy to determine beforehand, so companies that can’t build their product are often the victims of not being able to hire enough developers, not of trying to build something unbuildable. This sort of technical viability, whether the product can be built or not, can be due diligenced.

But in a larger sense, building the product is often the least of it. Getting the product to work means effectively interconnecting it into the ecosystem. If you were trying to build a better bank, say, you had best know not just what you need to build in-house, but what systems you have to connect to and what they can and can’t do. Knowing this often requires a pretty in-depth knowledge of the ecosystem as a whole, who the players are, what their products do, and what it will take to get them to do what you need. Knowing this is, again, a valuable asset. Using it just once is a waste.

2. An entire flock

When Edison invented a viable light bulb he knew that for the viable product to become the mainstay of a viable business, the country needed to be electrified. He knew his customers did not have electricity at home. Electrification was more than a product, it was a whole ecosystem of products. People like Edison did not build companies around single products and then forsake all they learned for some other technological field, they built many companies and many products based around a fundamental secular technological shift. As an investor, you should do the same.

We should be so lucky to see another tech movement like electricity or mass manufacturing or the internet again in our lifetimes. The really big ones come once every couple of generations. But the big-but-not-enormous ones come all the time. Mobile, programmatic advertising, big data, and 3d printing are all examples of technological movements that are big enough to sustain an ecosystem of companies; that is, many groups of companies where the groups are not competing with each other, even though the companies in each group compete with each other.

A few advantages to this. These companies may sell to the same customers, or to each other, and so if you know the customers of one, you know the customers of many. The people who run all these companies will know each other, at least by reputation. The tech advances of one company will affect the other companies, the industry news will be filtered through a few sources, the business models will tend to depend on similar KPIs, etc. In other words, the knowledge you need to effectively invest in these companies is all overlapping: if you invest in one company in the sector you will be much more knowledgeable about other companies in the sector (even when they don’t compete); you will be much more able to help your investments with advice about their industry, their business, their competition, future fundraising, and potential exit opportunities; you will have a higher profile in that industry; and you will be much more likely to see promising entrepreneurs in that sector because you will be known to be interested in it.

In addition, your support of any company in the sector will help the sector as a whole. The biggest challenge for any new sector is not competition from within the sector, it’s getting the sector itself taken seriously enough to compete with whatever it’s replacing. Your support of a company in the flock increases the value of the flock, including any other investments you have in the flock.

3. Let people know you’re investing

This is good advice for pretty much everyone doing anything. People don’t often show up with opportunities unless they think you’d be interested in those opportunities, because people don’t like to waste their own time. Let people know what opportunities you’d be interested in. Early on in my angel investing I’d ask founders, as a favor, if they’d include me in the press release about the financing. It wasn’t an ego thing, it was marketing. Other entrepreneurs and VCs read press releases or the news stories based on them and they are the best source of dealflow.

If you’re investing in a sector, find some way to talk about the sector in public. Get the news out about the technical innovation that’s going on. And always mention that you’re an investor in the sector. Write about the sector, on a blog or in the trade press. I wrote pretty frequently for AdExchanger, the programmatic adtech industry’s trade magazine. This got my opinions about where the industry was going in front of some pretty influential people, got my name out, and let me support AdExchanger, who I felt was helping the programmatic industry get taken seriously.

At some point the fact that you invest in a sector becomes well-known enough to be self-sustaining through word of mouth.

4. Things other people are confused by

It’s sort of pointless to read the New York Times restaurant reviews. Once a place gets a good review it’s impossible for you or me to get in. You need to find things before everyone else knows about them. If you’re in a room with more than 20 people, you’re in the wrong room.

With a few noticeable exceptions (Foundry Group, for instance) VCs like to invest in things that other VCs like. This makes some sense: to the degree that new industries can be analyzed, VCs who analyze them will generally come to the same conclusions. It also reduces future financing risk. This can seem like herd behavior, but it’s not really. Not any more than a line of cars is herd behavior. They’re not following each other, they’re following the road.

The problem is, if everyone wants to invest in the same types of companies it makes it hard for us angels to get into the best companies and put enough money to work in them. (Unless it’s a sector you’ve already been investing in and it suddenly gets hot and you’re the go-to person because you know so much. Then you’re in hog heaven.) Sometimes too many competing companies get funded, making it hard for even the best of the bunch because the customers are confused by the noise.

You need to find a sector that not every VC wants to invest in. But it needs to be for the right reasons. If VCs tell you they don’t like a sector because they don’t know how big the market can be or the sector is too crowded, that may be an interesting sector. If they tell you they don’t like the sector because there is no customer pain or the market is not big enough, you might want to do some more due diligence. The key difference is whether the VC doesn’t like the sector because the facts are against it or because the facts are unknown. VCs are good at analyzing situations, they like reading research and sizing markets and talking to customers. VCs hate going off the edge of the map.

But some of the best investments of all time were in companies where the size of the ultimate market was completely unknown: Apple, Intel, Google. The whole Christensen-ian idea of disruption rests on the creation of a completely new market, after all. If you can size the market beforehand, then the company isn’t disruptive, by definition3.

VCs know this, of course, but most of them have as investors people who are certain that the VC is in fact a charlatan and are just looking for some sort of proof so they can stop funding them. Risk is measurable, so rational expected value decisions can be made. Uncertainty is impossible to price. Overcoming uncertainty requires believing in an idea, an arational act and, as such, one that is impossible to defend if it proves to be wrong. Unless the VC has really outstanding returns they need to defend their decision-making every time they raise a fund. Angels don’t. We can be wrong with impunity.

This is not to say that it is the shying-away-from by other investors that makes an investment good. You can’t invest in companies that everyone shies away from and will for an extended period of time. You will need to convince other investors to invest in the syndicate, and you will need to convince follow-on investors (with the help of some traction) when it’s time to raise the next round. If you’re way too early and not able to show progress towards de-risking with the seed money, you’ll be on the hook for the Seed-2.

Knowing whether the skittishness of other investors is a good thing or a bad thing is something I worry about whenever I look at a new sector. Knowing the customer and how quickly they will adopt something new helps, but you’ll also need real conviction to take the plunge.

That’s your advice, put all your eggs in one basket? Really?

As an angel, you are constraint driven. You don’t have enough money, time, or help. The one thing that sets great venture investors apart from competent venture investors is their position as a hub in the informal information trade. Great venture investors know everything that is happening in the venture world. They know how private companies are faring, they know deal terms of financings they weren’t involved in, the know undisclosed exit values before the deals are done, they know revenues and margins of private competitors of their portfolio companies, they know which executives are secretly willing to entertain job offers, they know about a startup’s fundraising before the startup is even started, they know which companies have secretly filed to go public.  They need to know this stuff, and they spend a very large proportion of their time having the right relationships to know it. They spend their money, time, and help on it. They couldn’t be great if they didn’t.

How do you, as an angel, get this information? You need to have a network of people who trust you, and you need to give them a reason to talk to you. You can see how that works for a Michael Moritz, but how could it work for you? What reason do people have to tell you things?

This is where targeting a sector helps. The people with the most information about a specific sector are the founders and venture investors in that sector. The venture investors are easy: the primary thing you can trade with them for information they have is information you have. And while you may have generally poorer sources of information than VCs who are paid to have information, you will have better information about the sector you specialize in because you spend more time in it. A professional VC will know a good amount about ten different sectors; you will know a ton about one sector. This makes you valuable to them. They will talk to you.

Founders have a different sort of information. They have the information that comes from working in, living in the sector 24/7 for years. They know about achievable revenues and margins, they know competitors’ products and strategies, they know which people at other companies are most valuable, they know about companies just starting that have valuable and useful products, etc. They hear from their salespeople, who hear from their clients what other companies’ salespeople are saying about their competitors. They know more about their industry than anyone. They are happy to share this information with you, if you are helping them. This help usually takes the form of advice or introductions. They want advice when the company is just starting and they need to figure out price and product features and how they pitch themselves versus their competition. All of this advice is sector-specific. They want introductions a bit later when they are looking for customers, partnerships, employees, and further funding. All of these things benefit from being sector-specific.

This all makes sense, right? You fit into the network of people because you add value to your part of the network, and you add value because you’re thickly connected to your part. This is best achieved by picking a very specific part of the network to specialize in.

Why does sector investing deliver better returns? Because if you really, deeply know a sector, you not only see the best deals, you might actually see all the deals. You will know all the people in the sector, and be able to judge who knows what they’re doing, who is truly visionary, and who is just a good salesman. You will know all the VCs who become interested in the sector and which ones are willing to make the bets that require some belief. Because you’re an expert, your investment in a company will be considered social proof. You will give good advice to founders. You will be contacted by the media to find out what’s going on in the sector and they will tell you what they have learned from others about the sector. You will know who is looking at buying companies, who is not looking at buying, and which buyers are willing to pay what. You will know what is working and what is not so that if a company has to pivot, you will know where to pivot to. You will be able to do what every investor promises: add value.

So why don’t all venture capitalists do this?

Some do. Many venture firms have a “thesis” and some even stick to it. The thesis is sometimes the sector they specialize in. Look at Union Square Ventures (“large networks of engaged users…”) or IA Ventures (“big data.”)4 Other firms are conglomerations of partners, each of whom specializes in a sector or two. These firms mitigate the risk to their partners by diversifying.

And this is the rub with this model. You are putting your eggs in one basket. When my portfolio was primarily adtech companies, someone asked me what would happen if the government banned third-party cookies. The answer was, of course, that I’d be screwed. But even though this was a single point of failure, it was a knowable risk: I could put a weight on it. And this risk was far outweighed by the benefits of knowing the sector the way I did. I put the probability of the government passing legislation at less than 10%, and I felt that knowledge of my sector gave me a much larger advantage than that.

And then there’s the gambler’s ruin. Even with a positive expected value for each bet, you can still go broke if your bet size is too big. You have no less than zero, but the market has an effectively infinite initial stake. The classic techniques to ward this off apply. Some portfolio management tips:

  • Keep a standard bet size. No matter how much I like the company my initial investment is always the same5 Don’t increase your bet size because you’re feeling flush after a win;
  • Re-up in your winners. Almost no other game lets you do this, take advantage of it. Reserve money for follow-on investments: they may not have the same cash-on-cash returns as seed investments, but because you’ve been helping the entrepreneur, you have a much better idea of whether the follow-on is a good investment or not. My best cash multiple investments have been seed, my best risk-return investments have been Series A, my best IRR has been Series B;
  • Bet size should be small enough to allow you to get to thirty companies or more in your portfolio, assuming you follow-on at an average of 1.5-2.5x. Remember that if you invest seed-stage, you should assume you don’t get the bigger exits for 5-8 years. At least in the sectors I have invested in, the early exits are not that big and the big exits take time;
  • Don’t keep betting a strategy that has stopped working. This is a true of all investment strategies, they only work for a while. The world changes. In venture a thesis usually only works for 3-5 years. Plan to change the sector you specialize in every 3-5 years. My investing in programmatic adtech exposed me to the big data technologies my portfolio companies were using so when seed-stage adtech stopped being as exciting, I started investing in big data companies. Much of my knowledge and network were transferable.

So, does it work?

Oh, right, I’m supposed to credential myself.

I’m probably one of the few people in the world who started with not very much cash (I had a barely-six-figures net worth thirteen years ago and have made negligible earned income over that time) and have managed to make a good living from my gains as an angel investor. I guess that means it’s working, but humility is in order. As a former boss used to say, “money’s not money until it’s cash.” In that sense, I don’t know if it will work. There’s a chance I’ll be wiped out tomorrow because of some macro-event that I can’t control. Then I’ll be sending you my resume, at which you will laugh.

But that’s not what working means, in a betting system. Even with the worst-case scenarios weighted in, my expected value IRR is much, much higher than would have been available to me in other investments, and top-quintile of venture over the same period. And not because I’m some super-genius6 but because I haven’t tried to emulate what venture firms have to do to win, I’ve played my own game. In that sense, it’s definitely working.

All these articles about “How Reid Hoffman Invests” or “The Secret Venture Wisdom of Sequoia Capital” or “Seven Amazing Things Fred Wilson Does Before Breakfast” are worthless to you. They are entertainment. If you go toe-to-toe with Reid Hoffman or Fred Wilson or that Sequoia partner whose name I can never remember, you will lose. Play your game, the game you can win.

  1. Just looked and it seems they removed it. You see some funny things when you run a VC portfolio page tracker

  2. I can’t find the original source for the quote. It’s reprinted all over the place. 

  3. Because someone is certainly going to argue this, I’ll point out that Christensen flat-out says this in The Innovator’s Dilemma: “Markets that don’t exist can’t be analyzed.” Page xxi. 

  4. I don’t think it’s a coincidence that these are both East Coast firms. There’s a certain density of network that makes you viable; if the network itself is less dense, you create density by having a more specific thesis. 

  5. OK, I’ve had a couple of exceptions, but not by much. 

  6. Or are I

The Lewis and Clark Business Plan Competition

Jefferson sat in his office, looking out the window towards the Potomac. In the distance he imagined he could see Alexandria, though the heavy swamp air on a hot day–they were all hot in this swamp!–certainly made that impossible. It was a pleasant house, though it sat forlornly in a vast empty field. He imagined that someday the government might grow a bit and some of the space, though surely not all, would be used for other buildings.

The view from the window was beautiful. “A wild and romantic view,” he heard Abigail had called it, “albeit, in a wilderness.” But this small wilderness did not concern him. He was thinking of the other one.

There had been some debate about his purchase of the Louisiana Territory, and he had some misgivings himself. But he knew that allowing France to think it controlled the land that Americans would inevitably expand into would eventually lead to conflict. So he bought it. For whom and under what authority he did not really know, despite what he said in public. But it was done and those questions were no longer worth thinking about. Now he wondered what owning it meant for the country.

Many men had explored the lands west of the States. He had read of expeditions up the Missouri, and up the western coast of the continent. He knew about the mighty Columbia River and about the natives that lived along its banks, and the banks of the Missouri. But these tales of exploration were stories and anecdotes, they were not science. And Jefferson knew himself to be a man of science. He needed to know the land he had purchased, the people who lived there, the resources it contained. And he badly needed to know if there was a water route through the territory to the Pacific. If there were, the destiny of the country–to inhabit the lands from the Atlantic Ocean to the Pacific–could be fulfilled.

Meriwether Lewis, his personal aide, came in from the adjoining office. Jefferson had known Lewis’s father back home in Albemarle County before he passed, and the young man had proved himself an able officer and a patriot in the intervening years. Jefferson knew Lewis would be the right person for the job he had in mind.

“Merry,” he said, “the Louisiana Territory is of inestimable value. We need to determine how best to exploit its potential. It could be the key to the future of our nation.” Jefferson paused and looked at Lewis. Lewis waited patiently; the President’s pronouncements were never so short.

“We are a young nation and must avoid conflict if we are to survive. Only the grace of the gods has let us prosper as the great powers fight amongst themselves. We must make real our claim to these lands before others do.” He looked out the window. “We must know what is there, to serve science, and the great United States of America.” He banged his fist on his desk, “Meriwether! You shall organize and lead it! We will create a Corps of Discovery!”

“An expedition, sir!” said Lewis.

“No. No, of course not,” said Jefferson. “A business plan competition.”

Lewis hesitated. The President did not like others to offer opinions. But Lewis was a man who believed that to do things one must, well, do things. “Sir,” he said, “an expedition is the only way to find out what is truly there, on the ground. We must organize a troop of explorers. We must get out of the building.”

“Our Federalist opponents in Congress would have a field day with an actual expedition. They would seize on any failure for political gain. No, we will have a business plan competition, with a prize, we can only fail at that if we do not get enough entrants. It is quite certain that whatever plan is grand enough to win this competition will be so accurate and detailed that the troop who has written it will find they will merely need to follow it to the T. Any failure of the plan will be on the troop and their failure to execute, not on us. If they follow the plan as blessed by the judges there will be no risk greater than that of walking from this house to the Potomac.” Lewis looked over Jefferson’s shoulder out the window and recalled hunting gators in the swamps of Georgia, and his beloved dog, may he rest in peace. He shuddered.

“Sir, an expedition…” he said, but Jefferson cut him off, showing him his palm. “Go, organize it. I write to Congress for the authorization of prize money now.” Lewis knew not to argue further.

The event was held in Philadelphia, being a more civilized city than the capital. It drew teams from several of the states, though none from the settlers across the Appalachians. This was deemed a shame, since they were the ones with first-hand knowledge of the territory. The official line was that it was too difficult to travel all the way back to Philadelphia. But more cynical, probably Federalist voices whispered that perhaps they were busily circumventing the President’s wishes by actually exploring the territory itself.

It did not matter, though, because the business plan presentations were glorious. The judges were distinguished men who Jefferson had appointed from Congress and the faculty of the Colonial Colleges, each and every one a credit to the nation. On the stage, large diagrams–the wags called them slides because of the way the assistants would slide the easels on and off the stage–were presented. These showed what lay out there in Louisiana based on second-hand reports, the scrawls of illiterate outdoorsmen, and the powers of imagination the teams had forged and finely honed through years of dragging a plow behind a mule.

The winner was a team lead by a retired army commander named William Clark, who Lewis had personally recruited into the competition. The judges approved of Clark’s plan primarily based on the benefits to the young country it would bring. These benefits included the exploitation of the fine farmland along the Missouri enabled by the willingness of the natives to peacefully move somewhere else, like Canada or the Spanish territories to the south; the plentiful game at the headwaters of the Columbia; the bountiful fruit orchards along the border of the Spanish territories; the numerous and easily accessible gold mines abutting the northern reaches of the Missouri; and the convenient fact that, according to Clark’s deductions, the navigable headwaters of the Missouri were a short 15 minute portage to the navigable headwaters of the Columbia, allowing a quick and peaceful transcontinental boat voyage. This last was, of course, based on Antoine-Simon Le Page du Pratz’s published account of the travels of Moncacht-Apé across the continent in the late 1600s. Although there was some dispute as to Moncacht-Apé’s veracity and no one in the intervening century had followed his route, it was the best information available and so was considered “cutting edge.”

Jefferson personally awarded the Presidential Medal to Clark’s team, along with the $1000 prize. (Due to Jefferson’s aversion to Hamilton’s central bank, the prize was awarded as a sack of 100 Eagle coins, specially minted for the occasion.) Clark’s men spent the next six months using the money to outfit their expedition, though he came to feel the Corps might have been more adequately equipped with twice or three times that amount. They set off to execute their business plan with great fanfare in 1804, with Clark vowing not to deviate a single iota from the plan the esteemed judges had blessed. Jefferson smiled, the future of the nation secure.


Meriwether Lewis died in 1809 knowing only that Clark’s troop had disappeared in the wilderness. It was not until 1817 that word came from the British troops who had taken the opportunity of the War of 1812 to occupy the lands that the “colonists” had left idle. Skeletons which could only be the remains of Clarks’ troop had been found dead of dehydration at the bottom of a deep hole they had been digging. This hole was at the very spot their business plan had described as the site of the Fountain of Youth. Apparently they had, in their certainty, neglected to spend the time leaving a way to dig themselves out.

Automated Ad Buying is Already Mainstream, Whether Most Marketers Understand it or Not

The Wall Street Journal has the startling news that “Most Marketers Don’t Understand Automated Ad Buying.” Ten years into the programmatic revolution and most marketers don’t understand it! ANA Chief Executive Bob Liodice is quoted, saying “confusion about how the technology works might be slowing its adoption.” Are we failing?

It’s almost certainly true, as Liodice says, that confusion about programmatic is slowing its adoption. I believe this because it has also been true of every non-lethal technology in history1. It takes time for new technologies to win the market, and different customer sets adopt them at different rates. Everett Rogers wrote about this back in 1962. In an idea made famous by Geoffrey Moore in Crossing the Chasm (required reading), he argued that it takes a certain amount of time for innovations to spread. Every business person has seen the pictorial representation of this idea, distilled into the chart on the cover of Moore’s book. It shows how innovations spread: from Innovators to Early Adopters to Early Majority, etc.


Back to the WSJ article. The WSJ based its argument on a poll.


The poll shows that only 23% of CMOs are using programmatic and that only 33% understand it well enough to apply it. In contrast, 44% don’t understand it or are not even aware of it. I know that sounds bad, but before we worry, let’s compare the self-reported to the theoretical–let’s see where on the diffusion of innovations curve we are.

Here are the poll results superimposed on the Innovation Adoption Lifecycle curve.


In the adoption of programmatic ad buying, we’re past the innovation stage, we’re past the early adoption phase, and we’re well into the early majority phase. That we’re in the early majority phase is important, because these are the customers that are using the technology not because they like the new new thing and not because they are willing to take big risks to get big rewards, but because they are pragmatists: they make business decisions based purely on what is best for their business. As such, they are trusted by everyone else in the market, and what they do carries enormous weight as others make their decisions about whether to use the technology or not.

Getting to the point where the early majority is using your product is the “Crossing the Chasm” that Moore wrote his book about: going from meeting the expectations of the early adopters to meeting the very different ones of the early majority. Moore says that the late majority will eventually, automatically–albeit somewhat begrudgingly–follow the early majority into using an innovation2. Getting from the early adopters to the early majority is the place where innovations are made or broken:

Just as the visionaries drive the development of the early market, so do the pragmatists drive the development of the mainstream market. Winning their support is not only the point of entry but the key to long-term dominance.

We don’t have to worry about the late majority, if we serve the early majority they will come.

While it’s true that there are people who don’t understand programmatic ad buying, we are past the point where that matters to our chances for success. We may not be satisfied until everyone is a customer, but once we’ve gotten the early majority we know we’re already on that road.

Radical change creates reactionaries. And the media loves the story that reactionaries tell, it creates the appearance of conflict without the discomfort of real conflict: it’s entertainment, pure and simple. In the real world the conflict is over, programmatic has won.

If you answered the poll with “need to learn more”, you probably mean that you want the technology to be a bit more mature before you implement it. And that’s okay, your business may punish mistakes more than it rewards success, so waiting until programmatic is how the majority buys is better than sticking your neck out, career-wise3. But if you’re one of the people who “don’t have a clear understanding”, or is “unaware”, take some time to remedy it. This technology is on its way to long-term dominance. Marketing is about creating and embracing change, time for you to do some embracing yourself.

  1. Nobody buying lethal technologies cares how they work, they just care that they do. 

  2. And that the laggards… well, who cares? They’re a small market and will probably retire or be fired before they willingly adopt anything new. 

  3. Although maybe you might want to work somewhere that rewards doing things well? 

Midas List Feeder Angels

Like the feeder firms, but with angels. I used AngelList’s API to figure out which angels invested in the companies that the Midas List firms invested in. The list is ranked by what percentage of the firms these angels reported to AngelList are also Midas List investments.

Some caveats on this list. The data was a bit noisy. Most of the people the algorithm returned are actually venture capitalists. It is unclear how many of the companies they report as investments are actually their own angel investments and how many are someone else’s money. So I took out all people who work for or have recently worked for a venture fund. Except I left in the people whose venture fund is, I’m pretty sure, actually a vehicle for their own money. That may not be fair in some cases and I may also be wrong. I also tried to leave in people who run accelerators but where it seems like the companies they’ve invested in are with their own money. Also a bit apples-to-oranges perhaps.

To avoid the law of small numbers, I only counted angels who have at least ten companies that overlap with the Midas firms. I picked ten because it is a nice round number. It’s arbitrary.

I cross-checked the algorithm’s results against Crunchbase. There were a couple of changes. And I took out Carolyn White, whose existence I can’t seem to verify. Let me know if that was a mistake and I’ll put her back in.

There are probably also people reporting some of the companies they advise as investments. And all sorts of other problems. Because of that, I left off the percentages and just rank-ordered everyone.

I used the first location the angel used on AngelList as their location. Except for one or two that I changed because I happen to know where they live. That the Bay Area dominates is no surprise. How much it dominates was a little bit surprising.

Last, this should not be taken as a list of either who are the best angel investors or who are the most helpful. Some of both of these things probably play into this, but so does a whole lot of other stuff. In NYC alone, some of the most helpful angels I know (Joanne Wilson, say, or Mark Kingdon, who are both notably helpful investors in NYC, according to what entrepreneurs tell me) did not come up on this list for whatever reason.

And finally, you get what you pay for; happy to make changes to egregious errors, but don’t take this list as any more authoritative than it is: something I hacked up at 4am because I couldn’t sleep.

1 Elad Gil SF
2 Jeremy Stoppelman SF
3 Ashton Kutcher LA
4 Sam Shank SF
5 Ralph Mack NYC
6 Max Levchin SF
7 Bill Lee SV
8 Tikhon Bernstam SF
9 Raymond Tonsing SF
10 Michael Parekh NYC
11 Dave Morin SF
12 Josh Stylman NYC
13 Hadi Partovi Seattle
14 Ariel Poler SF
15 Julia Popowitz SV
16 David Sacks SF
17 Othman Laraki SF
18 Kal Vepuri NYC
19 Joe Greenstein SF
20 Matt Cutts SV
21 Matt Wyndowe SV
22 Jack Altman NYC
23 Pejman Nozad SV
24 Tim Ferriss SF
25 Joshua Schachter SV
26 Scott Belsky NYC
27 Alexis Ohanian NYC
28 Bob Pasker NYC
29 Joi Ito Boston
30 Mark Sugarman SF
31 Gary Vaynerchuk NYC
32 Kenny Van Zant SV
33 Dave Goldberg SV
34 Troy Carter LA
35 Naval Ravikant SF
36 Peter Hershberg NYC
37 Jeff Fluhr SF
38 David Popowitz SV
39 Georges Harik SV
40 Auren Hoffman SV
41 Jared Kopf SF
42 Josh Spear NYC
43 Jeff Hammerbacher SF
44 Rick Marini SF
45 Karl Jacob SF
46 Matt Mullenweg SV
47 Peter Lehrman NYC
48 Michael Birch SF
49 Erik Moore Berkeley
50 Kevin Moore Dallas
51 Thanos Triant SF
52 Howard Lindzon LA
53 Roger Dickey SF
54 Nat Turner NYC
55 David Tisch NYC
56 Mitch Kapor Oakland
57 James Hong SV
58 Lance White Ohio
59 Gil Elbaz LA
60 Scott And Cyan Banister SF
61 Jason Calacanis LA
62 Jerry Neumann NYC
63 Dharmesh Shah Boston
64 Jim Pallotta NYC
65 Peter Kastner Boston
66 Matt Coffin LA
67 Ed Zimmerman NYC
68 Farzad Nazem SV
69 Zach Weinberg NYC
70 Michael Lazerow NYC
71 Gil Penchina SF
72 Esther Dyson NYC
73 Don Hutchison SV
74 Anthony Saleh LA
75 Richard Chen Oakland
76 Tom Peterson San Diego
77 John Landry Boston
78 David Beyer SF
79 Adrian Aoun SF
80 David Cohen Colorado
81 Thomas Korte SF
82 Ben Smith SV
83 Peter Read London
84 Michael Liou SF
85 Paige Craig LA
86 David S. Rose NYC
87 Joe Caruso Boston
88 Fabrice Grinda NYC

Midas List Feeder Firms, 2014 Edition

It’s that time of year again. Midas List time of year. I bet you’re out right now, buying drinks for your nine favorite Sequoia partners (and the two who got away.) Cheers!

Wait, what? You don’t know any of the nine Sequoia partners that made the list? You don’t know any of the Midas List people? Well, you’re in luck, because the fine data science team at Neu Venture Capital has scoured the Crunchbases looking for other firms that invested in the companies that the Midas List firms invested in, either before them or with them.

The list is below. They’re ranked by deals they did before or with a Midas List firm as a percent of all their deals. At least, according to Crunchbase. I know there are some mistakes here (mainly because my CB page is missing at least one company that a Midas List firm invested in.) But because the data science team has to go to bed soon, I just used the CB data as is. If you don’t like it, fix your CB data. Or go get the code and run it your own way.

1 Harrison Metal Capital 69%
2 Red Swan 69%
3 Worldview Technology Partners 68%
4 Lerer Ventures 68%
5 Founder Collective 66%
6 Freestyle Capital 66%
7 Collaborative Fund 64%
8 Draper Richards 62%
9 Accelerator Ventures 62%
10 Crunchfund 57%
11 Lux Capital 57%
12 Integral Capital Partners 56%
13 Nextview Ventures 56%
14 O’Reilly Alphatech Ventures 54%
15 Sherpalo Ventures 54%
16 Softtech VC 54%
17 Star Ventures 54%
18 BoxGroup 54%
19 Data Collective 53%
20 Aol Ventures 52%
21 XG Ventures 50%
21 Morado Ventures Partners 50%
23 Flagship Ventures 48%
24 Promus Ventures 48%
25 Thrive Capital 48%
26 Kapor Capital 47%
27 Google Ventures 46%
28 Learncapital 46%
29 Grandbanks Capital 45%
30 Advanced Technology Ventures 45%
31 Neu Venture Capital 45%
31 GSR Ventures Management 45%
33 Webb Investment Network 44%
34 Rothenberg Ventures 44%
35 Labrador Ventures 43%
36 Firstmark Capital 43%
37 Signia Venture Partners 43%
38 Bay Partners 43%
39 Gemini Israel Funds 43%
39 Highland Capital Partners 43%
39 Walden International 43%
39 Allegis Capital 43%
43 Morgenthaler Ventures 43%
44 Harris Harris Group 42%
45 New Atlantic Ventures 42%
46 Quest Venture Partners 42%
47 Frazier Healthcare Ventures 41%
47 Zelkova Ventures 41%
47 Vulcan Capital 41%
50 Innovation Endeavors 41%
50 Boldstart Ventures 41%
52 Foundation Capital 41%
53 RRE Ventures 41%
54 Mobius Venture Capital 40%
54 Sutter Hill Ventures 40%
54 IA Ventures 40%
54 RPM Ventures 40%
54 Eniac Ventures 40%

The Immediate Future for Adtech Startups

I spoke at the AppNexus Summit a couple of weeks ago. Brian O’Kelley read my post on adtech investing trends and asked if I could expand during the session. The video is online (my part at 1:48), but I thought I’d write it up also.

I figured in the AppNexus audience of 600 that there was quite a bit of overlap with the few thousand people who read the post. Because, really, who else would read it? So I didn’t want to just talk about the post. I started from a couple of the slides and went into what it means for us, adtech entrepreneurs and investors.

These, to me, are the two key charts in the previous post[1]. The first shows that VC investment in adtech companies is down. The second shows that, even more alarmingly, the number of companies founded is way down.

DataHero Investments by Round, Companies founded 2006 and afterDataHero Companies Founded

Now these numbers are from Crunchbase, so they are skewed, incomplete, and there is an evident selection bias[2]. And, of course, I chose which companies were considered adtech and which were not, so there’s that. But everyone I showed the second chart to disputed it. They were all certain that more companies than Crunchbase was showing had been founded in 2013.

And, if you think about it, it’s pretty odd. The programmatic industry has finally attained widespread acceptance. It is now an accepted part of the media-buying landscape. Nobody asks why you’re buying programmatic anymore, now they ask why you’re not. And you better have a pretty well thought-out reason. We’re finally at Step 3: Profit and company formation seems to have died. Common sense would suggest there would be a lot of startups, where are they?

I was puzzled, so I did what any self-respecting data hack would do and scraped AngelList for adtech startups. The story here was different than what I found on Crunchbase. There are scores of companies I deemed adtech listed on AngelList that were launched in 2013. [Edit: Steven from Crunchbase pointed out that some of the companies that AngelList has as 'launched' in 2013 are noted in Crunchbase as 'founded' prior to 2013; I stopped counting the AngelList companies at one hundred, so I can't stand by my previous assertion that 'more than 100 companies' were launched in 2013. It does seem, however, that scores were. My point: that founders are more optimistic than VCs by a long shot still stands, I believe.]

So, on the one hand, you have a ton of companies being started in adtech, according to AngelList. And on the other, you have only a handful, according to Crunchbase[3].

slide 4What is going on?

I think the answer is actually in the Crunchbase bias: Crunchbase is far more likely to notice a company if it is funded by a VC or well-known angel and is covered by the media. The small number of companies on Crunchbase is a measure of VC pessimism. AngelList allows founders (and would-be founders) to list their ideas themselves. The large number of companies on AngelList shows founder optimism. So now we have to ask: why the gap? Why, if entrepreneurs see a market opportunity enormous enough to throw everything else aside and devote themselves to it, are VCs shrugging their shoulders?

I may well be the most prolific adtech startup person of all time. Between my time at Omnicom, starting an adtech company myself, advising both buyers and sellers of adtech companies, and doing more adtech rounds in the last five years than any other angel, I’ve been involved in more adtech financings than anyone else I can think of. So this may be the appropriate time to interject that I have not added an adtech company to my portfolio in two and a half years. I know why there’s a gap, I’m part of it. The purpose of the talk is not an investigation of the gap, but an apologia for it.

I am an adtech believer. If you’re reading this, you probably already know that. I’m a believer because–at the risk of sounding grandiose–I think the programmatic innovations have the hallmark of being a technological revolution[4]. The hallmark of a technological revolution is a technological system–a set of interlocking innovations–that creates lasting and important change.

Is RTB lasting and important? Of course it is. I’ve argued this elsewhere, and I am probably singing to the choir here, so I won’t belabor it. The main technological systems that allowed the programmatic revolution were the exchanges, big data, and RTB. These were augmented by ancillary innovations, as below.

slide 5

And, as these things overcome initial market resistance to change, and the innovations reinforce each other, the familiar up-and-to-the-right curve appears. Beloved of entrepreneurs and investors alike, this is the optimism.

slide 6

Of course, what the pitch-decks never show you is the rest of the curve.

slide 7

The innovation spurred by any technological revolution can’t last forever. Once the largest and most radical innovations are out there, it’s a race to discover and commercialize the most promising ancillary innovations. At some point the innovation space starts to become exhausted and the newest new things provide less benefits to the users. When this happens, users insist that new innovations fit into their schema, not a new schema being pushed by the entrepreneur.

In other words, when the innovation is big enough, the client will allow new categories–new buckets–to be created (despite how much they resist the extra work a new bucket means for them, the benefit outweighs it.) But at some point, as Eric Franchi put it, “customers need to put you in a bucket.

Now, in adtech, we have a lot of buckets.

Screen Shot 2013-11-23 at 3.15.42 PMRight now, if you have something new, you need to fit into an existing bucket. And if you are in an existing bucket, you need to be better than what is already there, probably a lot better. When this happens, when customers won’t accept anything except the kind of innovation that makes existing products perform better–incremental innovation–you are pretty far along the S-curve.

Venture capitalists, meanwhile, are thinking not about how big the market is today, or even how big the market will be tomorrow. They are thinking about how much growth the innovation they are backing might drive–how much innovation is left in the market they are investing in. They weigh that against risk. Early-stage investors look at the world like this first chart: there is a lot of potential value to be garnered, but also a lot of risk.

slide 12

VCs with a bit more sanity wait for the market to be proved out a bit. They have less potential upside, but much less risk.

slide 13

But VCs are generally not interested in a market where there’s not much innovation left, even though there may be lower risk. Low risk, low reward investments are not what VCs do.

slide 14

You might dispute that we are late on this curve. And it is certainly true that big innovations can be found late in the cycle, it’s just more unlikely. And more than unlikely, whether a radical innovation will be accepted by the market is unknowable, so the entrepreneurial team needs to be able to explore the market-space they have staked out. If the initial idea is not viable, and exploration is unlikely to find a new one, it’s hard to invest.

The pace of innovation is generally pretty obvious from the outside. It can be hard to see when you’re in the middle of it. The typical objections investors have to companies started in different parts of the cycle are a good tell. When we were first raising money for Root Markets almost ten years ago, VCs consistently pointed out that no market existed for what we were building. We pointed out that we were building that market, but that just elicited smug cynicism and disdainful dismissals.

Later in the cycle, the excuse is that the market is too crowded. Michael Walrath, the founder of Right Media, in a video interview a few years ago, said that he doesn’t invest in adtech companies, it’s too easy to build one. Of course, the problem is not that it’s easy to build a company, the problem is that since it’s easy, too many people have or will build competitors[5].

And then, late stage, investors ask the dreaded “how will you compete with…” question. This is a valid question: if you are building something that is incrementally innovative, what’s to prevent an incumbent company from building the same thing, and then putting more muscle into selling it than you have? On the original post, Chris Dixon commented “The perception is that it’s almost impossible to create a stand-alone successful company because it’s so hard to build a moat against other startups and even more so giant incumbents like Google.”

slide 9slide 10slide 11

Frustrating as this attitude is to founders, it’s rational. Maybe that’s why it’s so frustrating. This is the classic VC catch-22: “1. You’re too early. 2. You’re too early. 3. Why are you so late?” But it is what it is. The last question is the one we hear now. We are late in the cycle, and that’s why VCs aren’t investing. It’s not that they don’t want to take risk. It’s not that they don’t understand the market. Those excuses made some sense a few years ago, not anymore. VCs want to take risk, but they understand the market well enough to know that the kind of risk they are looking for is no longer there. There are very, very few companies being started today that are doing something radically different that could change the market. (And before you email me and tell me that your company is doing something radically innovative–I got quite a few of these after the Summit–ask yourself if it really is; I’m not going to believe it just because you say so: you first need to believe it yourself.)

So what do you do if you are an entrepreneur in adtech? If you have a company that is not one of the top three in your bucket or is not in any of the buckets? The three obvious solutions are: lead, follow, or get out your checkbook, as Tom Paine said.

slide 15

Leading in this market is going public. We’ve had a couple of great adtech IPOs this year and when Wall Street comes back from the holidays, we’ll see a few more. I made a list, from publicly available data, of companies that–either from press reports or from the patterns evident in their funding and growth numbers–are ready (or their last investors believed when they invested they would be ready) to go public.

slide 16

Just to caveat this list: it is from public data. I have private data that says that several of these companies are, in fact, raising rounds right now, that a couple of them are already in private registration, and that a couple are actively making themselves available for sale. But that’s private info, not mine to share, so I used an objective outsider’s process to make this list. Not all of these companies are lined up to IPO (and there are some that are not on the list.) But the list is long enough to say that, markets willing, there will be a few adtech IPOs next year.

And this is good. Because that little green wedge up a few paragraphs? The lower risk, lower return one that VCs are not interested in but is where we are today? That’s the one public markets investors are interested in. If you layer in money raised by adtech companies in the public markets to the very first chart in this post, it doesn’t look like adtech funding is slowing. In fact, it’s just moved away from VCs to the public markets.

DataHero Investments by Round, Companies founded 2006 and after(3)

So that’s option one. Option two is follow, and that means be acquired. We’ve been talking about consolidation in the adtech space for years now. It makes rational sense for there to be fewer companies, fewer point solutions. Customers would appreciate having fewer touch points into RTB and not having to do any integration themselves.

But just because it makes sense to customers doesn’t mean it will happen. In fact, the number of adtech acquisitions has fallen the last two years from its high in 2011. (2013 is a partial year as of beginning of November or so; there have been a couple of acquisitions since then, but I assume we are almost done for the year.)

slide 18

And to put an even finer point on the “just because consolidation should happen doesn’t mean it will,” let’s look at consolidation in the last adtech wave, ad networks. Here’s a chart of data I have from 2007 on ad network reach. Well after the end of ad network innovation there were still several hundred ad networks. All but the top few were at a significant disadvantage in the marketplace, but they still existed. Customers would have preferred fewer, and both the big ad nets and the small ad nets would have preferred a less noisy market. But consolidation still did not happen. Consolidation is not inevitable.

DataHero Ad Network Size circa 2007(1)

The third way to go is to buy your way into getting big fast. I’m not going to name names, because I figure I’ll piss off enough people with this post already, but there are companies that have raised big rounds based entirely on VCs looking at the existing size of market and a team of experienced people. They figure that if the people are good and the market is big and the existing companies in the market are run by new entrepreneurs or have products of marginal quality, they can build a better (or equivalent) product and simply outcompete the incumbents. Back in the late ’90s, some of my portfolio companies–Razorfish,, Organic–went public and garnered multi-billion dollar market caps. Companies like Scient and Viant were formed with management teams from established consultancies and raised large private rounds under the assumption that the experienced team could build a better business very quickly by spending money on hiring and selling to clients. While cynical, this sometimes works. I expect it to happen more in the near future.

slide 20

So, those are three options. The problem with those options is that if you have one of them, you almost certainly already know it. If you are able to IPO, or you have suitors knocking on your door to acquire you, or if the people who can write $50 million checks like the cut of your jib, you already know that. If you don’t think you have one of these options, you probably don’t. Then what?

The way innovation works, each S-curve is preceded and followed by another. If, in the below, programmatic is the middle S-curve and ad nets were the left-bottom S-curve, there is another S-curve waiting in the wings. Right Media, which could arguably be said to have kicked off the growth of the middle S-curve[6], was originally an ad net. When that didn’t work, they looked around for some other way of having an impact and started their exchange. And remember, this was when ad nets were still the big thing in adtech.

Programmatic is the big thing in adtech now. Perhaps we are at the same place in the programmatic S-curve that ad nets were when Right Media started. If so, you should expect that there is some company out there right now or will be in the near future–probably viewed with the same opprobrium that Right Media was in 2004–that has started the next S-curve on its way. Being that company is now an option. Investors that have given up on programmatic because it’s too late in the cycle are itching for that company to appear so they can put their money to work. I know I am. If you have none of options one to three, being the radical innovator needs to be your option. It’s all that’s left.slide 21

I got some applause when I was done speaking, but I assume that was from the people who weren’t listening. I mean for this to be a wake-up call. Starting more companies like the ones that were acquired in the near past is a fool’s game. If you want to win, you can’t just go out and do the same thing but better. You need to do something different.

[1] I tried very hard not to digress in the talk, despite digressing being one of my favorite hobbies. So I didn’t use this slide, because it was simply the sad social commentary on how easy it is to appear smart and how many ignorant plaudits one can win by pretending to predict or recommend something that the market as a whole has already realized and implemented.

slide comments

[2] I repeat this caveat so often it should have an identifier. I shall refer to it henceforth as Caveat CB-1.
[3] My personal challenge in this slide deck was to communicate only with pictures. I did not succeed, but I did pretty well, if I do say so myself. When I told Noelle that this was my aim, she rolled her eyes.
[4] And, at the further risk of sounding… well, being pretentious, I suppose, since I am mere laity in the academic world… this is the language of the neo-Schumpeterian innovation theorists.
[5] This is not, in fact, a good reason not to invest. But if you do the management team needs to be top-notch at marketing, selling, and operations and not necessarily top-notch engineers. I personally like to invest in companies where the technology is really difficult to build and understand, but that’s because I feel like I have an advantage over other investors when that’s the case, not that the company is always a better investment. A cursory review of the successful ‘technology’ companies of the last twenty years will quickly show that both ways have worked.
[6] It wasn’t the first, certainly. I remember trying to get into a round in the late ’90s of a company called AdAuction that was trying to build an ad exchange. I did not get in the round, luckily, because it was way too early; the other pieces were not in place, and the existing wave had not run out of net valuable innovation.

The aim of marketing is to make selling superfluous

I was preparing to teach my entrepreneurship class about marketing last week and ran across an old blog post of Fred Wilson’s*.

A very experienced and successful entrepreneur came into our office a week ago to pitch his latest company. At the end of his pitch he showed us some numbers. Normally for a raw startup we see almost all product and engineering expenses (headcount). But his plan had a monthly budget for customer acquisition. After he left, we talked about his plan and my partners focused on the customer acquisition number. It bugged us. It felt wrong.

The first comment on the post was from ex-entrepreneur Seth Godin, who said

Marketing ≠ Advertising.

If you redo the post with Advertising throughout, I won’t argue much.

Marketing is the name we use to describe the promises a company makes, the story it tells, the authentic way it delivers on that promise.

Fred didn’t defend his assertion, but he should have. He made an important point that shouldn’t be swept aside: customer acquisition in an early-stage startup needs to cost minimal dollars. And that’s true whether customer acquisition is done through advertising or any other marketing method. Seth Godin is right, but Fred is not wrong. And how could Fred be wrong? He is interacting with companies in the real world, and a good number of them: his assertion is data-driven. The distinction here is primarily semantic.

But the semantic difference is important. Nobody wants entrepreneurs to assume they shouldn’t pay attention to marketing, because they should. But what is marketing? In my class I try to expand the students’ minds beyond thinking marketing is no more than advertising. I teach them the classic Four Ps and add customer relationship management to bring them up to date**. But Peter Drucker, in his Management: Tasks, Responsibilities, Practices, explains it better:

There will always, one can assume, be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself. Ideally, marketing should result in a customer who is ready to buy. All that should be needed then is to make the product or service available.

Selling here means the company reaching out to persuade. This might be a salesman making a sales call, or it might be any form of marketing. Drucker is distinguishing the marketing that listens to the customer and makes a product they want from the marketing that tells the customer they want the product that is already on offer. If you think about it this way, Fred is absolutely right: the job of a pre-product market fit startup is to listen to their customers. This is not a budget line item, it is something the founders do (and spend a good chunk of their time on.) After product-market fit, when there is a scalable, repeatable sales process, is the time to start budgeting for it.

* I emailed him asking him about it, not noticing it was written two and a half years ago and he responded in kind. Everything is now on the web. Or, he thinks I’m senile and was too nice to point it out.
** I’ll blog that class in a few weeks, when I reach it in my class-blogging series.