Investor Stories 61: Why I Invested (Roberts, Struhl, Verrill)

Download_v2Nick Moran Angel List

On this special segment of The Full Ratchet,

the following investors are featured:

  • Bryce Roberts

  • Jonathan Struhl

  • David Verrill

Each investor describes a situation where they did

decide to invest, what the key factors were that led

to “Yes” and how that investment has worked out.

FULL TRANSCRIPT

Bryce Roberts Indie Reinventing VC

Struhl why i passed on a startup

David Verrill Startups Angel Public Policy

Read More…


A Thesis Begins with a Moat

Defensibility, Switching Costs, Barriers to Entry…
 
We hear these terms often when discussing startups.  It’s not only important to build something of value, but value that can be protected.  Many in venture capital, refer to this as THE MOAT. 
 
Renowned investor Terrance Yang was asked recently, “As an investor, if you could ask founders only one question before making a funding decision, what would it be?”
 
Terrance’s answer:  “How are you building a unbreachable moat protecting a very valuable castle?”
 
There are different types of factors that can create a moat… some internal, others external.  An external example is regulation.  In a previous life, I dealt with regulatory agencies including the FAA, while working in aerospace and defense, and the EPA, while working in the water industry.  In both cases, the regulations were so onerous that getting a product to market was a multi-year, process.  We even employed lobbyists to work on our behalf.  While this put a strain on our new product development efforts, it also created enormous barriers to entry; protecting the value of products in-market.
 
There are also internal factors that create moats.  These are factors that reside at the company or product level.  Union Square Ventures has a thesis to invest in companies with network effects.  Big surprise, central to their thesis is a moat.  Network effects drive more user value, raise entry barriers and increase switching costs.
 
The problem with external factors is they often do more to limit innovation, rather than promote it.  External factors favor the incumbent, whereas internal factors favor the innovator.  We can argue the merits of internal vs. external moats, but it’s certainly easier to exert control over those factors that are in-house.  If the moat exists at the product level, you own the moat.  If you’ve hired a band of brigands to build and manage your castle’s moat, you may own the customer; but the master of the moat owns you.
 
Now, as an investor, instead of looking for startups with a variety of different moats, what if your thesis had a built in moat?  What if the very category of startup you invest in creates enormous barriers to entry, brand equity, and high switching costs?  This is why I invest in smart hardware.
 
Today, Ben mentioned a quote from Brad Feld, “I don’t invest in hardware.  I invest in software wrapped in plastic.”  There’s a big difference between a dumb gadget that collects dust and a smart device that gets more useful over time.  Shelfware is to SaaS as the Gadget is to Smart Hardware.
 
There are a number of reasons why I invest in Smart Hardware. 
-I’ve developed a smart hardware product. 
-I love the business model. 
-I love the annuities.
-I love that there’s constant pressure to create more customer value. 
-I love that a sale is the beginning of a customer relationship and not the end.
 
But the thing I love most is that the smart hardware moat is incredibly wide and enormously deep.  Not only is it exponentially more difficult to do smart hardware than software alone,  thus raising entry barriers; but the connection and brand equity for physical products far exceeds that of virtual products.
 
The reason for this is that smart hardware benefits from many principles of behavioral economics and human psychology.  These principles serve to deepen their relationship with the customer.
 
A sampling of principles that are far more powerful for physical products, than virtual include:
 
All of these factors make the customer more likely to buy, to use, to promote and to convince themselves that they’ve made a great purchase.
 
Does a moat have to be hardware?  Absolutely not.  But should a moat be fundamental to startup strategy from day one?  You know my position.  And if founders must face this when designing their business, why shouldn’t investors when creating their thesis?

131. How Amazon, Fitbit & Snap Won; Where Apple, Pebble & Google Did Not, Part 2 (Ben Einstein)

Download_v2Nick Moran Angel List

Today we cover Part 2 of hardware products that have succeeded where others failed with Ben Einstein of Bolt. In this segment we address:

  • You’ve discussed Pebble’s inability to ‘cross the chasm’ and access the early & late majority, while Fitbit was able to. What were the key reasons why Fitbit succeeded where Pebble did not?
  • What are your thoughts on using hardware as a Trojan Horse?
  • Do you think these lessons are exclusive to hardware startups or do they apply to software as well?
  • You’ve been attending CES for 10 years now and seen the evolution of Eureka Park as well as the show at large… what are some of the key observations over that period?
  • Any other thoughts or advice you’d give to founders starting a hardware, IoT or connected device startup?

Read More…


130. How Amazon, Fitbit & Snap Won; Where Apple, Pebble & Google Did Not, Part 1 (Ben Einstein)

Download_v2Nick Moran Angel List

Ben Einstein of Bolt joins Nick to cover Hardware products that have succeeded where others failed, Part 1. We will address questions including:

  • To start off, can you talk about your thesis and approach toward investing in hardware?
  • What are your thoughts on hardware startups designing for one use case vs. building a platform?
  • You’ve cited the example of Google Glass vs. Snap Spectacles. Can you highlight the key difference in the approach for each of these products?
  • What two things has Snap done well w/ Spectacles that hardware startups can learn from?
  • Another example you highlight, re. broad vs. narrow scope, is Apple Siri vs. Amazon Alexa… what are the key differences you’ve noticed in these two approaches?
  • What are the key things that founders should take away from Amazon’s approach
  • Design iteration is easy in SaaS, not in Hardware. How do you advise hardware startups w/ regard to iterating and design improvements.
  • What’s your opinion of Kickstarter/Indiegogo as a way to validate customer demand?
  • Rather than a $1M in sales on a crowdfunding site, what validation would you like to see from hardware founders?

Read More…


Investor Stories 60: Why I Passed (Triest & DeMarrais, Tsai, Larkins & Galston)

Download_v2Nick Moran Angel List

On this special segment of The Full Ratchet,

the following investors are featured:

  • Jonathon Triest & Brett DeMarrais

  • Christine Tsai

  • Stuart Larkins & Ezra Galston

Each investor highlights a situation where

they decided not to invest, why they passed,

and how it played out.

FULL TRANSCRIPT


Read More…


129. Cram Session, Episodes 73-78 (Nick Moran)

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:

 


What’s Your Gateway Drug?

In today’s interview, Jordan talked about how there are two kinds of startups.  Those that are solving a real problem and those that are addressing something that customers are totally unaware of and, in the process, changing their behavior.  I wanted to attempt to connect these two concepts and illustrate a pattern that I’ve observed with many founders.  And this pattern has revealed itself to me, in the form of two different startup types.  Without question, every pitch I come across can be categorized in one of these two groups.
 
Type 1:  We’re solving a narrow problem for a specific customer.
 
Type 2:  We’re building a platform that will change the way consumers behave.
 
There are problems with each of these types.  In the case of startup type 1, solving a narrow problem, often the problem is too narrow and the market is too small.  So even if their solution is incredible, the opportunity size doesn’t justify investment.  In the case of startup type 2, the market sizes are typically massive, but they can’t get adoption.  In the pursuit of boiling the ocean and creating a whole ecosystem, they’ve confused and overwhelmed users.  In the absence of addressing a real problem, there is no business.
 
To provide a quick example of each… let’s consider smart watches.  On one hand, you have GPS-enabled smart watches.  They perform a targeted function and solve a real problem.  I’d imagine the majority of the customer base is runners that are using the device to track splits and distance.  This would fall into Type 1.  Real business, real value, niche market.  On the other side of the spectrum, you have the Apple Watch.  This product attempted to recreate all features of the mobile device in watch-form.  Apple took a new use case and went from zero to 100 on day one.  The jury is out on success or failure of the Apple watch but clearly it has vastly underwhelmed vs. their expectations.  So, while it has massive capability, consumers don’t quite understand the value.  And the behavioral changes required are too significant to be comfortable.  Recall that the apple phone did not launch with thousands of apps and immense capability.  It was, quite literally, a mobile phone with beautiful industrial design.  The user experience was unrivaled, resulting in fast adoption.  Apple iOS and the “platform” we know today was a gradual development.  Consumers learned how to use the enhanced capability, app by app, version by version.
 
The best pitches that I see, have a Type 1 mandate and a Type 2 vision.  They are solving a real problem with a narrow customer-base, like type one startups.  But they are doing this as a Gateway Drug, so to speak.  The initial solution is a means to a much bigger opportunity.  The gateway drug gets customers in the door, using the product.  This allows the business to grow with the customer and become a type 2 startup.  If I were to have made a suggestion to Apple, it would have been to roll out the watch as they did the phone.  Find the single, most visceral problem to address w/ the watch… and create a product that is far better than anything else for that use-case.  Then, over time, they can become a platform, with many additional features, just as the iphone did.
 
So, today I facetiously recommend to find that Gateway Drug.  Use it to build something much bigger.  Founders that do will have real business and may have the opportunity to build a household name.

128. Sector & Niche Focused Funds, p2 and Driving Value with a Regulatory Focus (Jordan Nof)

Download_v2Nick Moran Angel List

Today we cover Part 2 of Sector & Niche Focused Funds with Jordan Nof of Tusk Ventures. In this segment we address:

  • Given the current regulatory environment, are there specific verticals that you find particularly compelling?
  • Do you expect more micro VCs, niche and sector focused funds to launch in the coming years?
  • Tell us more about the various ways that you specialize at Tusk.
  • When is the right time to start interacting with regulators?
  • What are your thoughts on working with regulators at the federal vs. the local levels?
  • Do you have any advice for founders and/or investors re. today’s topic?

Read More…


127. Sector & Niche Focused Funds, Part 1 (Jordan Nof)

Download_v2Nick Moran Angel List

Jordan Nof, head of investments at Tusk Ventures, joins Nick to cover Sector & Niche Focused Funds, Part 1. We will address questions including:

  • Jordan Nof Sector Niche Regulatory Focused FundsToday we are talking about Sector/Niche Focused Funds. First off, at a high level, what categories and in what ways have you seen funds specialize?
  • What are your thoughts on thesis, thematic and horizontal driven focuses vs. sector, geo or other vertical focuses? 
  • Do you think specialization is a new trend or one that’s always existed?
  • I’m in an area with a lot of generalists. Why do think we are seeing the emergence of so many specialized investors?
  • What are the benefits of niche/sector focused funds?
  • What are the drawbacks?
  • Is it more appropriate to specialize at early or later stages… or is stage irrelevant?

Read More…


Investor Stories 59: Lessons Learned (Olsen, Collett, Sanwal)

Download_v2Nick Moran Angel List

On this special segment of The Full Ratchet,

the following investors are featured:

  • Chris Olsen

  • Mike Collett

  • Anand Sanwal

Each investor illustrates a critical lesson

learned about startup investing and how

it’s changed their approach.

FULL TRANSCRIPT

chris olsen drive capital midwest venture capital

Mike Collett Why I Passed on a Startup

Anand Sanwal What's Next Startup Trends

Read More…


Listener Feedback

Andrew Bogle

One of the best podcasts in terms of being insightful and helpful; thank you! twitter.com/TheFullR…