Red vs. Blue in VC

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Based on the title, you’re probably thinking this is a post about politics. It’s not.

This reference is to red oceans and blue oceans as discussed in the book, Blue Ocean Strategy, from authors Mauborgne and Kim. And I touched on this concept previously in a post called “Finding the Whitespace,” but I’d like to put a finer point on it here. And there is no topic that applies more directly than disruptive innovation.

In the interview, Mark mentioned that goal for disruptive technology is to compete against non-consumption. His position is that startups should focus on developing inferior products that can access a much larger number of customers across new applications. And this point was also discussed in detail in the book. A red ocean, is one where the market is set. There is a certain volume of customer that purchase a product at an average price. The market is well established and does not fundamentally change. Thus the strategies employed by large players in these marketplaces are one of share gain. Every player is trying to take market share from their competitors. It’s a competitive, bloody, fight for more market share… hence the ocean is red. Blue Oceans, on the other hand, are emerging markets. They’re not yet fully established. The number of customers and the price a product can command are both in flux… and there are no direct competitors. The fight is not one of competition but rather awareness. Companies fortunate enough to be playing in a blue ocean have the only product of their kind. By introducing non-consumers to their product, they grow the market itself.

This is why, at New Stack, we talk about companies that are creating new markets or fundamentally redefining the market they’re playing in. Every market is price * volume. If you’re familiar w/ Mekko Maps, imagine a Mekko. If not, think of a stacked bar on a chart. Each stack within the bar represents a competitor with market share. With a red ocean, the size of that bar is fixed. So, if you want more revenue, you’ve got to take it from others. With a blue ocean, the market is completely redefined along both price and volume. Price is significantly lowered, allowing access to a huge volume of customers that previously didn’t purchase a product for this problem. The original target customer is now only a small percentage in relation to total customers accessible. And, in addition to new types of customers, you get to add application adjacencies as well. So, you take a narrow customer that uses a product in a limited way. And you allow masses of customers to use a product far more than they had previously. Mark’s example was the Sony Walkman. A software example that just popped in my head is Read More…


119. Economic Theory in Venture Capital, Part 2 (Mark Suster)

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Download_v2Nick Moran Angel List

Today we cover Part 2 of Economic Theory in Venture Capital with Mark Suster of Upfront Ventures. In this segment we address:

  • What are your impressions of what Bryce Roberts is doing at Indie VC?
  • How have your thoughts on investment psychology and economics been influenced by The Black Swan by Nasim Taleb?
  • What other principles of economics, that we haven’t touched on, have informed your investment philosophy?
  • In light of today’s topics, what are the key things you’re looking for in startups?
  • Can you talk about Defy Ventures and your experience visiting California State Prison and the impact that Defy is having?

Read More…


118. Economic Theory in Venture Capital, Part 1 (Mark Suster)

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Mark Suster of Upfront Ventures joins Nick to cover Economic Theory in Venture Capital, Part 1. We will address questions including:

  • You’ve written about a major lesson from Clayton Christensen’s book, the Innovator’s Dilemma, which was one of ‘deflationary economics.’ Can describe what this means and why it should be a focus for startups?
  • In light of deflationary economics, what are the key questions that a founder should ask him/herself about the business?
  • Why is it that incumbents have such a hard time responding to startups w/ this approach?
  • What should new market entrants focus on when it comes to price vs. functionality?
  • At a high-level what are your thoughts on the trade-offs between growth and profitability?

Read More…


Investor Stories 55: Why I Passed (Roberts, Heymann, Eakman)

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On this special segment of The Full Ratchet,

the following investors are featured:

  • Bryce Roberts

  • Maia Heymann

  • Lindel Eakman

Each investor highlights a situation with a startup that

they decided not to invest in and why it was that they

passed.

FULL TRANSCRIPT

Lindel Eakman Venture Capital Limited Partners

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Investor Stories 54: Why I Invested in Regroup Therapy (Moran, Cohn, Saunders)

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On this special segment of The Full Ratchet, we explore

the story behind  Regroup Therapy with founder David Cohn.

And we also discuss the seed round investment in Regroup by

Bob Saunders of OCA Ventures and Nick Moran of New Stack Ventures.  

In this installment, the following individuals are featured:

  • David Cohn

  • Bob Saunders

  • Nick Moran

 

FULL TRANSCRIPT

Nick Moran Why I Invested in Tovala

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Hubs and Spokes… Product AND Channel Innovation

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I speak with many investors and entrepreneurs every week. Most investors get in touch because they want advice on how to differentiate. While I love to connect with others in the industry that are investing, I can save us all a lot of time right now… I can not tell you how you’re special. What I can do is talk you through the thought process of how one differentiates. In our business it’s simple…

1) How do you provide unique value that others don’t (ie. what’s your product)?
2) How do you connect with promising startups before they’ve closed a raise (ie. what’s your channel)?

That’s it. Value and Dealflow. Galen and Brian get it. While you can criticize the index approach as much as you want, it’s clear that they do offer value and they see a lot of dealflow.

The big issue I see is that folks often neglect one of these two things. And, more often than not, it’s number 2. There is a parallel here with the startups we are investing in. Every startup has a product strategy and a channel strategy. And the best startups are just as innovative on the channel-side as they are on product.

Let’s consider an example… Were Dropbox and Box the first companies to attempt file storage, sharing and access from the cloud? Of course not. But it’s clear that they were the big winners. While I think they both did a nice job on the product side, it was their channel marketing strategy that really accelerated their growth. Dropbox on the consumer-side, an early pioneer in viral marketing, and Box on the enterprise-side, employing a hub and spoke strategy.

I’ve spoken many times on the program about the innovative water analytics product that I launched. The existing water testing process was a 30 min, 15 step chemistry procedure, requiring expert precision. And we developed a product that allowed an unskilled worker to perform four procedures, in less than 5 minutes with just one step. And while the product is to thank for creating incredible customer excitement, it’s not what got us to $100M of revenue in the first year. It was the channel strategy that led to a fast, furious revenue ramp.

While conducting 500+ customer meetings during development, I learned a great deal about users… and not just what they buy but also how they buy. A customer at one of the largest water municipalities in California casually mentioned that they’d require around 100 units, but their network would need more than a thousand. It turns out that if you look at a map of large urban water treatment facilities, it looks very much like a series of hubs and spokes. The largest facility in the area exports their water to smaller facilities that export their water to the consumer’s tap. And, unbeknownst to me, each of these constituents “follows the leader” so to speak. Whatever processes and products the Hub is using, is then Read More…


117. Index Investing, Mastering Dealflow & Seeing Everything at Series A, Part 2 (Galen Mason & Brian Axelrad)

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Download_v2Nick Moran Angel List

Galen Mason & Brian Axelrad of Service Provider Capital join Nick to cover Part 2 of their unique approach to using service providers to source high volume dealflow, LPs and to employ an index investment fund strategy. We will address questions including:

  • Their concerns about adverse selection and not receiving allocations in the most competitive deals
  • More on their process of collecting and vetting dealflow
  • How much dealflow they are actually seeing
  • How they help portfolio companies post-investment.
  • And, as always, we’ll wrap up w/ some standard questions, key takeaways and a tip of the week.

 

2016-11-16_1531Guest Links:


116. Index Investing, Mastering Dealflow & Seeing Everything at Series A, Part 1 (Galen Mason & Brian Axelrad)

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Download_v2Nick Moran Angel List

Galen Mason & Brian Axelrad of Service Provider Capital join Nick to cover Part 1 of their unique approach to using service providers to source high volume dealflow, LPs and to employ an index investment fund strategy. We will address questions including:

  • How did your experience as attorneys reveal an opportunity in startup investing?
  • Can you tell us the story of how you first began thinking of the SPC model and implementing it in the midwest?
  • Can you explain the basics of the Service Provider Capital investment model?
  • So are LPs primarily made up of service providers?
  • What is your investment criteria?
  • Do you consider this an index strategy… why or why not?2016-11-16_1531
  • What are the top 10 categories of service providers and which types of service provider have made the best partners?

Read More…


115. Cram Session, Episodes 50-54 (Nick Moran)

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Download_v2Nick Moran Angel List

Welcome back to TFR for another Cram Session. In these special releases, we have aggregated the takeaways and tips from previous episodes. In this installment, we will be recapping the following episodes:


Investor Stories 53: Lessons Learned (Heltzer, Larkins & Galston, McClure)

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Download_v2Nick Moran Angel List

On this special segment of The Full Ratchet,

the following investors are featured:

  • Jason Heltzer

  • Stuart Larkins

  • Ezra Galston

  • Dave McClure

Each investor illustrates a critical lesson

they have learned about startup investing and how

that has changed their approach.

FULL TRANSCRIPT

Heltzer Thesis Full Ratchet

Dave McClure What's Wrong with Venture part 2

Read More…


Listener Feedback

Richard Oliver

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