177. Cram Session, Episodes 121-128 (Nick Moran)

177. Cram Session, Episodes 121-128 (Nick Moran)
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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:

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet.

0:22
Welcome back to TFR for another cram session. In these special releases, we have aggregated the takeaways and tips from previous episodes. If you’d like a focus refresher on previous topics covered, stay tuned for this cram session.

0:42
In the next segment, we have the takeaways and tips from customer centric startup investing down under with Nikki Shabak.

0:55
Okay, thanks again to Nikki for coming on the program. Let’s recap the key takeaways. key takeaway number one is called founder ideology. The first thing Nikki looks for in a startup is what he calls the two. Why does someone care? And can they get stuff done? He tries to understand what life story led the founder to solve this problem? Why are they going to put everything into building this company. He observes prior work and life experiences for insights into the elusive product founder fit. And recall that Nikki said that the team slide is not about nice headshots and logos. From his standpoint, the team slide reveals itself in the product. Everything from the design to the core function of the product will show the true capability of the team, much more so than any PowerPoint slide can. And it’s not just what they’ve put into the product, but also what they’ve left out. Nicky’s skeptical of those founders that may be too logical and outcome focused. Those that say China is a big market. And if I can only get 1% of the billion dollar Chinese market, then we’ll all be rich. He looks for strong opinions around seemingly small details. And Nicky believes it is those small details that hold the key insights and the magic to why he invests key takeaway number two is called Global Focus narrow target. Blackboard likes to see global SaaS products that can be located anywhere and can be scaled with marketing as opposed to sales. With SAS businesses. How do you sell to the worker user rather than selling to the CIO, they look for bottoms up adoption in engagement models, not the forced top down sales driven business models. And he added that sales driven businesses can sometimes misrepresent the true opportunity for the product. If you have a particularly charming salesperson, they may be effective selling the product to those that otherwise would not have purchased. So this can have the effect of distorting the data and making the business look more scalable than it actually is. And a global customer strategy does not mean a vague and generic customer definition. Nikki advises startups don’t target customer groups that are too broad and heterogeneous. He discussed SMBs and how it’s kind of a false category. An SMB, by definition is based on the number of employees a business has. By that definition, Blackbird ventures would be considered a part of the target market. Instead, Nicki suggests that one has a more fine tuned definition of the market segmentation, the types of customers being targeted, and the need profiles they’re in. In this case, he cited the example of dentists. It’s much more reasonable for an investor to assess whether early adopter dentists are going to be more representative of the mass market of dentists versus SMB early adopters being representative of all SMBs in the mass market.

3:54
Okay, and then key takeaway number three is called it’s all about engagement. When asked what key metrics Blackbird looks for, Nikki said had metrics that are much more engagement focused than acquisition focused. He’d rather see a small number of customers that are highly engaged and really passionate about the product, versus a huge number of customers with only a small percentage that are engaged. They look at Net Promoter Score. In SAS, they look for upgrade revenue and low churn. And with any business, they assess if the solution is truly addressing the problem. If the customer has x problem, what percentage of the time do they use the product to solve that problem? And he attempts to assess all metrics as a percentage, none are absolute values. During the interview, Nicky summarize the definition of a business and he defined it as the number of customers that come back again and again. He seen many businesses that skyrocketed to success with great escalating revenue that ultimately did not work out because they didn’t have stick Key happy customers that kept returning. He said Peter TEALS book zero to one, and the importance of building a small monopoly, where one should focus on a small number of people that care very deeply about the product before attempting to get to scale. Crossing the Chasm from a few innovators to a large majority is much more realistic with a raving fan base of evangelists leading the charge. Remember Nicky’s insight that there is no stronger forward predictor of success than a deeply engaged user that really, really loves the product.

5:37
Okay, let’s wrap up with a tip of the week and this week’s tip is called What makes SAS so special. Many articles are written every week about how to succeed in SAS. But less often do people write about why SAS is so special? It’s a business model applied to a product type that has become a massive focus area. Venture has not seen a category of startups like this before, some investors create an entire thesis just focused on software as a service. So rather than spending this week’s tip on another top 10 list of how to win in SAS. Instead, let’s explore why the category itself is so special. From my standpoint, it all boils down to three simple reasons proximity to customer measurables and value focus. So the first point was proximity to customer. Part of the brilliance of SAS is that businesses develop a direct relationship with and users, they often sell directly to them and have an ongoing feedback loop with them. While this provides numerous product and versatility advantages, maybe the biggest advantage is in what this eliminates proximity to the customer disintermediate traditional channel players, wholesalers distributors, resellers retailers, what intrinsic value do these players provide? None. They reduce margin for the value creators and they increase price for the value consumers by removing layers upon layers of mouths to feed. The only transaction necessary is the one between creators and the customers. Plus all the value resides with them. Okay, the second point here had to do with the fact that SAS is measurable. When I think of metrics, I recall Peter Drucker’s famous quote, you can’t manage what you don’t measure. Or you may remember this one from Dwight Eisenhower, plans or nothing. Planning is everything. The set of standardized metrics available in SAS makes the category much easier to assess. The problems are more easily uncovered. Best practices are readily transferable. This gives both the founder and the investor a playbook to work from. It helps each identify the root cause of issues and take actions against them. The forecast itself may be terribly inaccurate, but it drives the right discussions and allows for fast reaction. Okay, and then the third point here on why SAS is so special is due to the value focus. SAS businesses typically charge upfront and ongoing, strong value must exist for customers to pay for the product. And this value must sustain or the customer will select out. With many businesses, the value transacted ends after the initial sale. With SAS, it’s the opposite. The first transaction is the beginning of a long, healthy annuity. This puts pressure on the startup to provide real and increasing value. And as I wrote in a post called the customer volume value curve, the startup can share in this value, as they expand it over time. It’s no secret that my strategic focus area is not SAS. I’m a hardware investor. I hunt for compelling startups developing IoT with a recurring revenue stream. For now, I’ll refer to this as IoT are standing for Internet of Things with recurring. So why would I knowingly choose something other than SAS? When I’m aware of its massive advantages over other types of businesses, we can talk about the merits of IoT are another time, but fundamentally, this category shares the same three value drivers as SAS, proximity, measurement and value are key strengths for this business model as well, and it’s far less overheated than SAS. Remember the trappings of herd mentality in venture capital. In this industry, it often pays to be the contrarian. Many other investors have a sector specialization, which provides them an advantage during startup evaluation. They should be able to pick better due to their strong knowledge of the sector success factors, but that sector must also be positioned to outperform other sectors. Over the investment time horizon to make it worth investing in. Fred Wilson and USV understood this Well, they didn’t limit themselves to one sector, but rather develop a thesis on network effects, a factor that gives every startup leveraging them an unassailable advantage. So to finish this point, startup investing is not just about great teams with great products in great markets. at the company level, those may be the key factors. But if you zoom out to the industry or category level, once thesis should present advantages. If you zoom out further, there are macro economic factors that come into view, sector technology, thematic and business models, specializations can all offer investors an edge, some short term, others sustaining whatever the case one shouldn’t just have an edge as a picker, they should also be playing a game that’s rigged to win. In the sports industry. The most valuable hockey franchise is the New York Rangers, and they’re valued at 1.2 5 billion. The least valuable NFL franchise is the Buffalo Bills, and they’re valued at 1.5 billion. It did not focus on SAS or IoT are what What game are you playing? Why is your category giving every startup within it an edge over the rest? If you can answer these questions, you’re way ahead of most.

11:31
In the next segment, we have the takeaways and tips from space tech investing with David Cowen.

11:43
Very fun to finally get a chance to go deep on space. Let’s recap the key takeaways. key takeaway number one is called the segments within space. David talked about the sub sectors within the space category, and which areas VCs have invested in. The first category was aerospace contractors. These are companies that are supplying NASA with completely one off custom components and systems. The second category includes defense contractors, similar to aerospace, but these contractors serve government’s National Security. The next category is commercial satellites and constellations. This is the most active area for startups. Hundreds of startups have been founded in the segment over the past three years, and many entrepreneurs are not experienced aerospace people. More often they are software developers. And a key focus area here is on the data, making this sub sector more data science than material science centric. The next category is mining. There is a new sector that’s emerging around mining operations, with plans to mine the moon and or asteroids. The next sector is commercial tourism and exploration. These companies are focused on taking travelers to space and potentially other planets. The next is satellite subsystems. This includes equipment such as antennas, solar panels, and propulsion. And finally, the last segment is the ecosystem of support services for space operators. This includes companies with ground stations satellite tracking, collision and launch. Okay, let’s move on to key takeaway number two, which is the death of space 1.0. Recall David’s comments that we’ve been operating on space technology that was developed for the Apollo program. This Tech was designed to be really long lasting, militarized, redundant satellite equipment. And by the 1990s, satellites were costing billions of dollars taking 10 years to build in could weigh many tons. Meanwhile, terrestrial based telecommunications costs were dropping precipitously, causing the entire commercial satellite industry to collapse. So all the major space 1.0 companies started filing for bankruptcy, including tele Disick Iridium GlobalStar, terrorists are and others. And NASA continued to be defunded by Congress over the years leading up to 2008 when they defunded even further and canceled the successor shuttle program, then to further exacerbate the problem, the available space for satellites in geosynchronous orbit became exhausted, there was no longer room to launch satellites with new tech and capability. So ultimately, space had all the ingredients for a market primed for disruption, which is just what happened in key takeaway number three, the birth of space 2.0. With the proliferation of mobile devices, components in the devices increased in capability and dropped in price. And it just so happens that cell phone components are the same as what you’d find in a satellite. There’s power management, battery, antenna, radio, accelerometer and camera. So founders with fresh eyes asked, Can we make a satellite out of the cellphone components? And can we put it in low Earth orbit where there’s plenty of available space? It was at this time that a physical spec called the CubeSat was created, and Skybox imaging put up their first satellite in December 2013. Many different teams of entrepreneurs could now leverage a standard for developing space tech. Coincidentally, advances in 3d metal printing had allowed companies like SpaceX to develop much better rockets into it much faster. So while a completely new approach to satellites had emerged with the CubeSat, a completely new way to address launch had emerged with the SpaceX rocket program. And David believes it was the convergence of the CubeSat innovation and launch technology that has caused this renaissance in space today, which leads well into our tip of the week. And this week’s tip is called vertical integration and the space stack. Despite advances in recent years, the space industry has had its major challenges, namely, launch remains the biggest challenge. There’s the cost of launch, including the payload, the risk that your payload blows up, and the timing of launch, many have to wait long durations to get their payload into a launch queue. Another challenge has to do with the human biological hazards of space. David thinks that this may be one of the hardest problems to solve. And finally, there’s the ideological challenge of the space stack so to speak. The leader in the sector, SpaceX has found success by adopting a vertically integrated model. Similar to what he’s done with Tesla. Elon aims to build the components, subsystems systems, integration, and assembly, all in house. And it’s this approach that is driven much of their success, allowing them to rethink and redesign rockets from the ground up. But it also can be limiting. David discussed the technology ecosystem required to achieve objectives like interplanetary travel, and asteroid and Moon mining. These are not easy challenges. And as with any industry, it’s unrealistic to think that one company can solve them all. I’d imagine that many tech companies grapple with the choices of vertical integration, and ask the question, do we bring things in house? Or do we leverage services and or components that allow us to focus on our strengths? It’s common for leadership to consider this when building a solution that addresses a specific problem. What’s more unique is a company asking themselves this question about an entire sector. And Elon is mission to Mars is much bigger than solving the problem of launch. To illustrate the scope of the mission, we did an entire interview about it with Tim urban. So in a way, David believes that Elon is approach is limiting the advancement of space 2.0. While Elon attempts everything in house, David roots for technologists anywhere with both his voice and his wallet, it is reasonable to believe that regardless of what Elon does, creators will continue creating, building solutions to both narrow and broad problems. And regardless of how this plays out, I couldn’t be more excited to see how the space stack evolves, and what the frontier holds.

18:13
In the next segment, we have the takeaways and tips from sector and niche focus funds with Jordan NOF.

18:25
Awesome chat there with Jordan. Let’s recap the key takeaways. key takeaway number one is called types of specialties. The first type of specialty that Jordan mentioned was corporates. These are venture funds created within large organizations with a focus on taking equity positions with early stage companies that may pose a threat to their existing p&l or create opportunities to expand and grow their business. specialty group number two was vertical or sector. These included funds that invest exclusively in a sector or vertical that could be real estate insurance, healthcare, biotech, or any other industry sector. The third category was niche focused funds. These are funds with a horizontal strategy that offers some strategic value add, that may be bridging a gap or filling a need that hasn’t existed across the funding landscape. The example here that Jordan cited was bullpen where they’re providing that pre a financing need. In some cases, you will find firms specializing based on geography stage or strategy, and the key distinguishing element has to do with the value that they provide. Investors and founders alike should ask, is the firm investing in this niche because the GP can drive unique value? Okay, key takeaway number two is called benefits and drawbacks of niche focus funds. First on the benefits, Jordan talked about how this allows investors to gain access to deals that may be highly competitive. If you have a focus area you can provide strategic value that other generalist investors cannot. This can help a small firm earn an ALEC Question in some of the most competitive deals. The next point here is that a tighter mandate can reduce a lot of the deal flow noise. This creates much better efficiencies over generalist investors. The third point was that there is tremendous opportunity for knowledge sharing between niche focus Corcos. Some of the best value exchange happens between founders operating businesses with distinct parallels. The next thing that Jordan cited were the benefits of information asymmetry. And he gave the example of an LP base that can provide strategic value and insight during startup evaluation. Also, in some cases, the LPS may be potential strategic acquirers. And finally on benefits, we discussed messaging in developing a brand. When an investor has a distinct mandate, they can message clearly to both founders into upstream or downstream investors. This creates a brand association for the firm, allowing for much more targeted partnerships. And then we transition to drawbacks. Jordan talked about a lack of diversification. When one invests in the same area over and over again, they will not have the same degree of diversification as generalist investors. There’s also the risk of conflicting yourself out. So I’ve heard many investors reflect on having to pass on investments in great opportunities, because the timing was wrong, or they believe there’s another solution that will be created to better address the problem. Imagine being an early investor in MySpace and having to pass on Facebook. The next point on drawbacks is that a lack of noise that we cited as an advantage can also result in a lack of opportunities. One could miss out on the biggest and best deal that comes their way because it was not in their focus area. Next, Jordan discussed how sectors can get hot and cold. When sectors get overheated competition for allocations and valuations increase. While when sectors cool there can be a lack of institutional LP capital interested in investing. And Jordans final point on drawbacks related to the lack of track record. That is often the case with niche focused funds. Because most specialized funds are new micro VCs, that also typically means that there’s little to no track record for the GP. It could also be a thesis on a new area that hasn’t fully matured. So LPS have to take a risk on not only a new fund manager, but also one that’s in an emerging area. And this can present too much uncertainty for them to get comfortable. And Jordan reminded us that a firm need not restrict itself to much preventing high potential opportunistic investments. In his example, if Travis Kalanick came to him with a new startup, regardless of the circumstances, Tusk would not hesitate to invest. So even the best niche focus funds build in some flexibility for situations outside of their mandate. Okay, and key takeaway number three is suggestions for sectors with significant regulatory exposure. Jordan said that regulation always lacks innovation. And in light of that he had a number of wise points to consider with regards to regulatory including study the regulatory risks that exist in your vertical focus area. Risks can present opportunities if one is knowledgeable and prepared for those risks, but it’s not advised to be investing in a sector without an awareness of the regulatory climate. His next point here was to get involved early. Jordan talks about the importance of working with regulatory officials to establish guidelines for areas that aren’t currently addressed by the regs. When both sides understand each other’s needs. He found that strong progress can be made toward a common goal, the regulators do not exist just to maintain the status quo. The next point Jordan mentioned was that many of the regulatory battles are fought at the state and local level. While the perception is that most issues are federal, from Jordan’s experience, he finds that much of the time these issues are played out in smaller jurisdictions. Next, we talked about some of the industries that Jordan thinks are really interesting from a regulatory standpoint. These included the insurance industry, the cannabis industry, and sectors with 1099 workforce exposure. And finally, where there is significant regulatory exposure, it may be best to partner with another investor or an agency that has real expertise in managing the reg environment. Okay, let’s wrap up with a tip of the week. And this week’s tip is called 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 use this week’s tip 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 into one of these two groups. First is type one, where the start Rep says we’re solving a narrow problem for a specific customer. And then there’s type two, where the startup says, we’re building a platform that will change the way customers behave. There are problems with each of these two types. In the case of startup type one 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 to 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 smartwatches. On one hand, you have the fitness GPS enabled smartwatch, a perform a targeted function and solve a real problem. I’d imagine the majority of the customer base is runners and they’re using the device to track splits and distance. This would fall into type one, a real business with real value in a 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’s out on success or failure of the Apple Watch, but clearly it has vastly underperformed 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 iPhone did not launch with 1000s 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 in the platform that we know today was a gradual development. consumers learn how to use the enhanced capability app by app version by version. The best pitches I see have a type one mandate and a type two vision. They’re solving a real problem with a narrow customer base like type one startups. But they’re 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 two 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 with 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 a real business from day one, and may have the opportunity to build a household name.

28:17
That will conclude this cram session installment jump on the TFR website at full ratchet dotnet today to sign up for the newsletter and receive all the info on special content episodes and the best articles written on startups every week. Until next time, over prepare, choose carefully and invest competently. We’ll see you next time.