Pitch Me Something Fanfuckingtastic

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Even though I’m a seed investor, I look at a potential investment with the eyes of a Series A investor:

  1. Team: Amazing, passionate, articulate, experienced, connected founding team with strong product, tech, business and growth experience and a track record of success, united by a compelling vision, mission and purpose.
  2. Product Market Fit: Product that has product/market fit, great traction, is growing at a very nice clip, has super happy customers with a positive Net Promoter score.
  3. Model: A killer market and model. Massive potential market. A repeatable business that can scale. Network effect properties where more is more for all. A natural moat that deters competitors. A sound business model with great unit economics.

This takes a lot of imagination and creativity on my part because no seed stage deal *ever* looks like this.

Companies are messy in the early stages. Teams, products and models are most often incomplete. I’m looking for something in each of the three areas — some part of the story that is…well…Fanfuckingtastic. And there are some non-negotiables.

Team: The earlier the company, the smaller the team so getting all those boxes checked is very rare. The most important thing is that the founder’s core strength is the secret sauce of the company. Jordan was the only full-time team member at Sktchy when I invested but had a truly awesome designer and developer helping out (part time). Jordan is a terrific community builder. It’s in his blood. It’s what he talks about when he talks about Sktchy. And that’s the secret sauce of the company. The founder has to be Fanfuckingtastic. At something. Period. Non-negotiable.

Product and Product Market Fit: Here is where imagination is required. Usually the further along the product is, the higher the valuation. I need to see a product with *some* consumer feedback. When I invested in OfferUp, the app had been launched in Seattle and there were something like 3,000 listings. Did they have $1M in monthly GMV and at least 10%+ liquidity (things Series A investors might look for in a marketplace)? Uh, no…just 3,000 listings in one city. Back in 2011 when Nick and Arean launched OfferUp the only way to sell your stuff was on Craiglist or Ebay and neither had mobile apps that made it 1-2-3 easy to photograph, list and sell your used baby stroller. OfferUp did just that. It leveraged all the new tech that made smartphones powerful computing devices (camera, geolocation, etc.) to make it super easy to sell. Users loved it.  It didn’t take too much imagination to see the potential right away.

Model: If imagination is needed for product and product market fit, then clairvoyance is often needed to see the business model. In the case of OfferUp, I didn’t have to do much market analysis to see a massive market, the potential for network effects and a great business model with terrific unit economics. It was easy to imagine a scenario where the boxes could be checked by Series A. And, indeed, they were. In the case of TheRealReal, this required more imagination. Julie had a great team when I invested. She had a great product with clear product market fit. Although she had a fast-growing business already, I had to do a bit of work to convince myself that a) affluent people would actually take the time to consign their merchandise, b) there were enough of them to provide the supply required to build a $1B company. I got there in about 24 hours and very quickly TheRealReal proved points A and B to the world. In the case of Twitter, it took clairvoyance. The app had just launched. There had never been anything like it. 140 characters to communicate a thought, idea or update? Via phone? It was abundantly clear the world was going mobile. I could just imagine 1,000 ways Twitter could be used by people, brands, press. I could just see the power of the status update. So tangible. So real.  I’m glad I wrote that check.

When you pitch, you don’t have to check every box.  But you do have to show me something Fanfuckingtastic.

Talking numbers or why valuation REALLY matters

Screen Shot 2017-03-28 at 9.20.16 AMIt’s time for my semi-annual blog post haha. I want to write more frequently, I really do. But I get caught up listening to pitches and whatever I’m helping a company with and it goes by the wayside. Excuses. Excuses. I know.

Valuation has been a big topic in recent years and two years after the mythical bubble was forecast to burst I have a few thoughts to share.

I’ve passed on a larger than normal number of companies recently over valuation. And that’s odd because we’re past the crazy frothy period of 2015. I don’t nit-pick over valuations typically and I’m not one to micro-optimize terms. I’m looking for fair deals that motivate the entrepreneur and come with a nice and clean cap table and vanilla terms so we have no objections when raising money in subsequent rounds. Pretty straight-forward stuff.

That’s why I’m disappointed when founders come forward with absurd, crazy, eye-popping seed-stage valuations. Why don’t I pay up and shut up? Well, beyond the very obvious fact that high early valuations affect future returns, they also set up a very high hurdle the company has to cross before raising a follow on round at a commensurately higher valuation. They create unnecessary execution risk and can lead to Hail Mary behaviors.

Last year an interesting company came to me (pre-product, pre-revenue, interesting team but they weren’t 3x entrepreneurs with decacorn exits – just good, solid entrepreneurs). I liked the concept. I liked the space. I liked the team. All good. But the valuation was breathtaking…and we’re not talking AI or another flavor-of-the-month here. Wow. I told the founders the valuation was extraordinarily high but I’d love to hear what they thought justified it. I was prepared for some hustle and a good back-and-forth about their genius business model or the secret sauce in their brilliant algorithm or the insurmountable moat their technology ensured or how they crushed it in user tests. Instead the answer was “We’re a San Francisco company so we feel we deserve this valuation.” Pick me up off the floor. That was such a deflating answer.   No hustle. No insight. No passion or conviction. Just entitlement. Needless to say I didn’t write a check. Yikes.

I found another great company recently that ended in a #fail for a different reason. I loved the founder. Super high hustle. Smart. Scrappy. Great UX chops. All the things I like. The product is brilliant. It is. But there was no customer feedback as of yet so it’s a big bet. But I was willing to take the gamble until the conversation about valuation.   The number was big. I gulped and asked nicely why he felt it was justified. The answer I got? “Well we raised our friends and family round at a very high valuation of X and only gave away a small amount of equity. So we need the valuation to be Y because we don’t want to disappoint our early investors. Plus we have a lot of interest.” ARGH. Friends and family are not usually valuation sensitive. Many probably don’t know what’s reasonable. They’re investing because they believe in you. But don’t take advantage of that and command an absurd valuation to minimize your dilution. One of two things will happen: you’ll have to go back to them and explain you’re doing a “down round” or you’ll face the risk of not being able to raise money because you’re trying to get the valuation up.   If you are able to defy the odds and raise a nice up-round then you’ve set yourself a BIG hurdle for the next fund raise. You’re going to have to have a super duper home run to get there. And that could lead you to do ill-conceived Hail Marys. I’ve seen that movie and have never liked the ending. See above. Read Good to Great. Be sensible. Take it step-by-step. Yes, reach for the stars, but climb a ladder to get to them.

I had a third #Fail around a cap table. The founder launched his app and it took off like a rocket. Totally broke, out of desperation, he took a very small check that felt huge at the time but gave up an enormous slug of the company to get it. That’s just a terrible burden to carry forward. In a situation like that, I could get actively involved, meet with the initial investor and try to work out something that’s a #WIN for all while not polluting the cap table but that’s a big expenditure of time.

So founders, please think sensibly about initial valuations. I know this sounds self-serving but I think it serves your interests best. Oh and if you are going to go big, then have a fantastic story (product, IP, traction – SOMETHING!) to back it up.

Two More in Miami!

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It’s been a busy Q4 in sunny SoFla!  I invested in two new Miami-based startups and tripled-down on an existing investment.  I think of myself of a contrarian in that I make picks others don’t.  With these two picks I contradicted my own investment philosophies (no MarTech,  no Media).  Go figure!

Gramercy.io solves a big problem I see in my portfolio companies.  And that’s growth through referrals.  Fab.com — which did this brilliantly — saw huge growth from friends referring friends.  I was fiendish about racking up referral wins on Fab.com.  I wish Jason had productized his toolset.  Why are referrals a problem?  Developing a great refer-a-friend program with clear attribution, easy but detailed metrics and flexible campaign-building tools is a lot of work developers simply don’t want to do or don’t have time to do.  Too many growth hackers hit this wall and opt to do Facebook or Google ads instead because its easier.   Alex Nucci, the founder, learned all about this in his growth hacking job ClutchPrep and set out to build tools that make it easy to develop and manage word-of-mouth marketing programs.  During the pitch, Alex told me his story and showed me what he’s built so far. I was impressed.  But I couldn’t get there.  SAAS is tough.  MarTech SAAS is even tougher and I’ve been avoiding MarTech for awhile.  Plus Ambassador is a well-funded competitor.  So how did Alex get me to write a check?  He showed me how scrappy and hungry he is by doing a very detailed referral program assessment of one of my portfolio companies.  He went through every touchpoint that could be used to increase referrals and described how the company could do better at each point.  It was a fantastic piece of work and it showed me how Alex gets his hands dirty tearing apart the UX to really understand where the impact points are.  It also showed me he has that magic and rare trait called initiative.  His assessment could be the basis for a very effective consultative selling approach.  He got me “there” and I wrote a check.  I’m in!  A big thanks to Shawn Convery for the intro.

WhereBy.Us  builds experiential media for the world’s curious locals. Huh?!  WhereBy.Us puts an email (yes email!) in your inbox, daily, with great local news — what to do, what to don’t, where to eat.  They encourage readers to “live like you live here.”  If you live in Miami and you’re reading this, you’re probably a millennial, one of their 30K subs here and you know the company as TheNewTropic. You’ve come to rely on it for great stories like Nine Tips For Surviving The Art Basel Traffic Nightmare.  They just raised a round to fund their expansion.  Their newest market is Seattle where they launched TheEverGrey with a coloring book.  The team is building local brands you just love and because you love them, advertisers love them.  When I think of WhereBy.Us I think of Refinery29 (I’m an investor) and Thrillist (I wish I was an investor) — both properties that have a unique voice demonstrating a very tangible “feel” for their readers’ needs/desires.  While I’m a big fan now it took me a while to get there.  Media is hard.  And Local is really hard so I had to hear the pitch three times before I got there.  Chris, thanks for your patience! And a big thanks to AGP for the initial introduction !

 

 

Catching Up

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I’ve been remiss.  Very remiss.  I haven’t touched this blog in 2 years.  You might think I’ve spent the past two years on the beach.  But no.   Since my investment in SKTCHY two years ago, I’ve invested in seven companies in ecomm/ecomm enablement and social media/social media enablement:  Everypost, HomeLight, SellBrite, Bezar, HYP3R, Blackbird and Revivn.  It’s definitely time for a portfolio update.  Here’s a quick overview of each company:

Everypost — a mobile-first app — makes it easy to curate visual content from a variety of sources, customize and schedule posts, and take greater control over your social pages.

HomeLight analyzes millions of home sales to find the best performing real estate agents so you as a seller, or buyer can chose the best agent to handle your transaction.

SellBrite makes multichannel listing and inventory management simple.

Bezar — acquired by AHALife —  is a curated marketplace for creative and inspiring objects.  Bezar was founded by Bradford Shellhammer, who also co-founded Fab.com (one of my earlier investments).

HYP3R is an engagement platform for venues which helps businesses and brands identify influential customers at their locations and engage them in real-time, when it matters most.

Blackbird leverages recent advances in image recognition and natural language processing to deliver superior search relevance and recommendations.

Revivn is an enterprise electronic recycling company.  They remove outdated technology from your office, clear your data and dispose of it by reselling or recycling it.

Introducing SKTCHY — my first investment in a Miami company!

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Shortly after I arrived in Miami, Wifredo Fernandez — one of the founders of TheLab Miami (the coworking space I work out of) — introduced me to Jordan Melnick.  Jordan’s a native Miamian, a blogger and journalist, a regular around Wynwood and now a purveyor of inspiration.  He and his team created an app called SKTCHY.  I think of it as instagram for artists but it’s actually much more/different than that. You can post photos of yourself on Sktchy to inspire artists to draw you, paint you, maybe even sculpt you. And of course you’re welcome to choose someone else’s photo to draw yourself. There are no drawing tools in the app. The Sktchy team decided to leave the creating up to the experts — the artists — and instead focus on becoming an ever-growing source of inspiration and a place for them to share their creativity with the world. The community enjoys the artwork with wows. Relationships form.  It’s the give-to-get principle in action. Inspire me and I’ll do a portrait.  The concept and indeed the UX is simple, arresting, engaging.  I saw it and loved it.  Why? I believe there is an underserved market here. More on this in a bit. Jordan and team did a great job with the UX, they’ve got some early traction and there is very good engagement among users.  It’s an early bet because I’m the first investor but I feel great about Jordan and the team and love the app.

In doing my due diligence, I was looking for a sizable market and good, early engagement and I found both.

Way back in the days when MySpace was still something and FB was opening up the platform, I came to believe social networks would go vertical and niche.  In fact, I wrote two ClickZ articles on the topic in 2006 and 2007. [I am afraid to re-read them but you can here and here.  No ridicule please — I wrote those almost 8 years ago!]  Fast forward several years, and under that thesis I invested in a gay social network called Fabulis.com (which later pivoted to become Fab.com).  Today there is an endless array of niche and or vertical social networks. In looking at SKTCHY I recalled Richard Florida’s controversial thesis about the rise of the creative class.  In 2002 Florida said that there were 40 million workers in the US engaged in the creative class.  The figure stuck with me.  You don’t have to walk around the Mission in SF, Wynwood in Miami, or Williamsburg in Brooklyn to see members of the creative class at work.  They’re in every town.  In the US alone, you have more than 1.5 million professional artists, architects and designers (very narrowly and traditionally defined) and many more who create beautiful things. Using the 1:10 to 1:20 ratio of content creation to content consumption, you can extrapolate yourself to an audience in the US that is easily in the tens of millions.  If you extend that worldwide, you can see a potential audience in the hundreds of millions. Oh, and remember DrawSomething?  It was downloaded 50 million times before Zynga finally bought it.  OK, that’s not a great analogy…but you have to admit it was a phenomenon!

The early engagement on SKTCHY is very good.  The app has been downloaded nearly 90K times.  There are 30,000 original artworks in the archive from artists in 60+ countries and 1,000 or more are being posted every week.  In the last week, there have been 25K “wows.”  A popular work can get 300+ likes.  People are creating and interacting with the content.  

And user feedback is superb:

“Not including my “free draws” or works in progress, this is my 100th Sktchy-inspired portrait!  Thanks again to Jordan and the entire Sktchy staff and community for not only an amazing app, but a seriously life-changing experience… I am so grateful for all of you.  This has been hands down the most productive year I’ve had art-wise in my entire life… And it’s not even over yet!  Thank you!!”  Artist: Krystal Figueroa

 

“I didn’t even know I could draw until I downloaded this app”  I didn’t draw AT ALL!  But I felt bad people drawing me and me not returning the favour and now I have almost 100 people tagging me to draw them and a couple of people on Facebook want to commission me!  Me?!  My silly little doodles!!! X”  Artist:  Doodle Swan

What’s next?  A better on-boarding experience.  Easier sharing.  Faster load times.  Richer analytics.  And a few things the team is keeping under wraps.

Download SKTCHY, post an inspirational photo and enjoy some art.  You’ll get hooked like I did.   

TheRealReal: From Sparkle Pony to Unicorn. Really!

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TheRealReal is a luxury marketplace for high-end European luxury brands – and now art.  The luxury goods market is a $300+ Billion market worldwide (original sale not re-sale).  I guess that qualifies as a rich niche.

TheRealReal solves two real customer problems.  Let’s say you regularly buy the latest Loubies at $1000+ a pop. You wear them a few times to parties or a benefit then what do you do with them?  You can let them gather dust in the closet, give them to charity for a tax write-off or sell them on TheRealReal and recapture some of the original value.  If you’re a savvy shopper, you do the latter.  That’s the consignor story.  For the consumer, TheRealReal makes luxury accessible — great brands at discounts up to 90% off original retail.  You can find a (pre-owned) Chanel dress on TheRealReal for the same price as a (new) Diane Von Furstenburg wrap at Bloomingdales.  Great value!  If you’re a dude, it’s kind of like buying a Ferrari 458 for the price of a BMW 5 series.  Get it?  Plus all the product has been vetted by experts so you know it’s the REAL deal (this is a big market differentiator by the way).

Last month, Julie Wainright (the founder and CEO of TheRealReal) walked the board through her three-year plan outlining a huge and achievable future.  It wasn’t just a walk, it was a joy ride. We applauded loudly and often; then resoundingly approved the plan.  As an investor, there is nothing more gratifying than a company with all metrics dramatically up and to the right. #itsabeautifulthing   (VC investors include Greycroft, Canaan Partners, e.ventures, Novel TMT Ventures and Interwest).

While Julie was mapping out the future, I looked back at her 2011 pitch deck to see how the business is tracking against her original plan. (The company launched mid-2011 and I invested in January of 2012)  Often the pitch plan is super ambitious (why shouldn’t it be?) and few companies hit or even exceed it.  [Look at Fab.com.  I invested in Fabulis – a gay social network – and 18 months later it became a super fast-growing ecommerce site.  Bigger and better, most definitely — but very, very different from the original plan.  That’s early stage investing.  Roll with the punches.  Flex with the pivots.  Hope for the #win.]  In 2012, TheRealReal exceeding its original revenue projections by almost 50%. In 2013, the company really popped – blowing through Julie’s original revenue projections by 350%.  2014 looks to be another stellar year.

Back in ’11 when she was raising seed capital, the investing community didn’t – uh — fully value Julie’s background.   She had to hustle, bootstrap and hustle some more to get the company going.  Why?  She fails the pattern recognition algorithm that (too) many investors use today:  She’s experienced.  She’s not a technical founder. She didn’t work at Google.  She’s a woman.  She’s over 50.  Those things can count against you in the Valley.  Beats me as to why.  I found the company on Angelist, met Julie for breakfast (loved her instantly), did a due diligence check the next day at the company’s tiny office/warehouse in a seedy Marin strip mall and quickly pulled out my check book.  Julie is super smart, scrappy and determined.  She’s an operator.  I knew she’d kill it and I couldn’t wait to see investors pounding on her door when she got the company going and that’s precisely what’s happening now.

So what’s the magic formula for TheRealReal?

In addition to a wide selection of luxury products vetted by experts, a great UX and terrific service, it’s three things:  1) Excellent leadership;  2)  A great business model;  3) Superb execution.

Leadership:  Julie is a seasoned leader.  She knows ecomm cold.  This is not her first rodeo.  I like that in a founder although most of the companies I invest in have first-time — maybe second-time — CEOs.  She has disaggregated the business into all the important economic drivers and has developed metrics for each one.  She holds her team (and herself) accountable for every metric.  If there’s a miss its clear why it happened, who’s responsible and what’s going to be done to fix it.  Julie has built a culture about delivery.  Set a goal.  Deliver.

Business model:  TRR brings in merchandise from consignors, vets it to ensure authenticity, styles and photographs it, writes descriptions, loads the product up on the site, collects and fulfills orders then cuts consignors a check when an item is sold.  The average transaction size is about 6x a typical ecommerce company (you read that right) and the annual customer value is off the charts. Take Zulily — which is a good public market comp — and add a zero to the annual customer value reported in their S1 and you have the TheRealReal.  Really.  How the hell?!  Look at the brands (Chanel, Hermes, Louis Vuitton).  Look at the average price point (couple of hundred dollars). Look at the target customer (well-heeled women).  That’s your answer.  Plus many buyers are also consignors — which creates a virtuous cycle of consumption and consignment.  There is NO working capital tied up in inventory (it’s a consignment model).  Last year, I visited the new warehouse and saw very little merchandise.  I said, “uh, Julie, where’s all the product?”  Her reply, “Mark we often sell through 80% in the first 24 hours a sale is live on the site and we have to pick and pack from the photo studio.”  That’s called inventory spin, not inventory turn.  With a *huge* average order size, efficient customer acquisition and little working capital, the unit economics are…well…luxuriant…maybe even decadent.  Julie is building a powerful brand in the luxury segment and she’s taking the top off Ebay.

Execution: Everyone knows and says ecommerce is all about execution.  It’s true.  Everyone is assigned goals and they deliver.  When there’s a problem it gets fixed.  Quickly.  The company has scaled nicely without major hiccups – remarkable in ecommerce.

I predict (humble brag?) that this company will pop out of the shadows soon and you’ll see it for the unicorn it’s becoming.

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PS The Hermes bag and the two pieces of art presented are available on TheRealReal.com at the time this post was published.