When I was growing up I was lauded for being ‘smart’ because I excelled at maths, played a mean game of chess, and partook fully in the political debates that our family used to enjoy over Sunday lunch and at other family occasions. My cognitive intelligence was high. Since then I’ve come to believe that raw cognitive intelligence is great, but pretty useless unless combined with emotional intelligence (EI). Cognitive intelligence and EI contribute equally to a person’s general intelligence and it is only general intelligence that offers an indication of a person’s potential to succeed in life.
Wikipedia has these two definitions of emotional intelligence:
- The ability to perceive emotion, integrate emotion to facilitate thought, understand emotions and to regulate emotions to promote personal growth. – Salovey and Mayer
- Emotional intelligence is concerned with effectively understanding oneself and others, relating well to people, and adapting to and coping with the immediate surroundings to be more successful in dealing with environmental demands.
Emotional intelligence is challenged as a theoretical construct because it is hard to measure, but from a practical perspective it is easy to recognise in people and I think very useful.
I’m writing this today because Bill Gross tweeted an article titled Apply EI to the stages of innovation. This is the first mention of EI I’ve seen for some time. The central point of the article is that people with higher emotional intelligence will generally be better innovators. There are two reasons for this – one they are more self aware and better able to ‘let go’ of problems and get the unconscious mind working on solutions (e.g. by going for a long walk), and two they are more likely to form high EI teams with an atmosphere of trust where people are willing to make themselves vulnerable by coming up with creative ideas.
The area I think about the most that benefits from emotional intelligence is leadership. Looking back to the definitions above it is pretty easy to see how high EI managers will be better at leading and motivating their teams.
There is a good post up today on Segment.io describing how they used Kickstarter as a lean startup tool to validate demand. First the background:
Kickstarter is the perfect way to validate an idea. By definition, a successful Kickstarter campaign has a ton of people who’ve already put their money where their mouth is.
It’s really similar to the popular suggestion of “throwing up a fake landing page” and letting people sign up, or to the strategy of running AdWords before you have a product. Except Kickstarter is even better because you gain a devoted following and the funding you need to pursue your idea all at once
Segment.io’s Kickstarter campaign was for a Python web development course. That’s great, but Kickstarter is especially powerful for hardware startups where production costs are higher and cashflow more of an issue.
But there is more to running a Kickstarter campaign than making a nice video and watching the pledges roll in. You need to hustle:
That’s where my next tip comes in: hustle as much traffic to the site as humanly possible (believe me, you need all the manpower you can find). I hired a virtual assistant from Zirtual named Shea, and she was amazing. She literally doubled my marketing reach!
Together, we worked daily to hit all of the low-hanging marketing opportunities we could find. Here’s an incomplete list of some of the techniques we used:
Day 1 - We lined up tweets from web2py.com and PythonAnywhere.com as well as an email blast from original Real Python course mailing list.
Day 3 - We combed through and responded to Python-related questions on Quora and posts on Reddit.
Day 8–9 - We sent out a guest blog post to lots of different, Python-related blogs.
Day 16 - Our campaign made the front page of Hacker News, driving tons of traffic and resulting in lots of pledges.
Day 24–26 - Pledges remained high after we got another round of tweets from web2py.com, PythonAnywhere.com, Gun.io, PythonforBeginners.com, and another email blast from Real Python. Not to mention the longer-tail traffic from Hacker News hadn’t subsided yet.
Day 27–28 - We did another large push on StackOverflow, Quora and Reddit.
Day 30 - We got a tweet from Heroku, and finally finished our campaign having raised $26,044. It was a good day.
You can see from their graph of pledges per day below shows that they were bringing money in for the whole 30 days of their Kickstarter campaign, implying that promotional activity through the campaign had an impact.
Finally, in a neat twist, when the campaign became over-subscribed they introduced stretch goals to validate demand for new features – saying they would add Flask, video, and Django to the course if they reached $10k, $15k, and $20k in pledges.
Steve Denning, one of my new favourite writers recently wrote on Forbes about Leadership in the three-speed economy. This concept of a a three-speed economy is powerful, although I think ‘three-sector’ would be more accurate. For a while now I’ve been struggling to reconcile vibrant growth in parts of the tech industry with lack-lustre growth at the macro-economic level, and the best explanation I’ve come up with is that some industries are declining whilst others, most notably tech, are growing quickly and that they are balancing each other out. Denning makes a similar, but more sophisticated argument, backed up with an explanation of why we have different sectors of the economy growing at different speeds.
He rightly thinks of financial capitalism as a distinct sector of the economy, giving us three segments overall
- The traditional economy – a real economy with many large firms providing real goods and services, but their hierarchical management and focus on shareholder value are preventing them from responding well to the challenges and opportunities of the 21st century. The traditional economy is much larger than the creative economy but it is in decline and faces a grim future. Good examples of firms are GE, Walmart and HP.
- The creative economy – a real economy that generates real products and services. It’s companies are different to traditional economy companies because they are focused on delighting customers and rapid innovation. Creative economy companies typically enjoy fast growth. Good examples of firms are Apple, Amazon, Whole Foods and Costco.
- Financial capitalism – comprised of firms primarily focused on generating profits from trading financial instruments that are often disconnected from the real economy. These firms have had a significant impact on growth over the last 20 years through the bubbles and crashes they create – e.g. the Long-Term Capital Management crash of 1998, the Dot-Com crash of 2000, and the housing meltdown of 2008.
The creative economy has emerged because the increasing pace of change is rendering 20th century management techniques ineffective. The time taken for information to filter through companies to the centre and then for policies and decisions to filter back out to the rank and file limit the speed at which these firms can respond to new opportunities and customer demands, and creative economy companies employing radically decentralised management techniques to react more quickly are having a field day. Moreover, decentralised management is so different from hierarchical management that few traditional companies are able to switch to the new paradigm. It is simply too hard for managers who are used to having detailed workplans and clear schedules that show when everything is supposed to happen to switch to an environment which values flexibility over knowing what will happen when.
As much as I seek to empower our portfolio companies to do what they think is right and to avoid over-planning I sympathise with these ‘traditional managers’ in the sense that when you switch from operating with a detailed operating plan to operating without one it feels like you are flying blind. When our companies started switching from ‘waterfall’ to ‘agile’ development methodologies we went from having detailed pictures of how products were going to evolve (albeit with delivery risk) to little visibility of what new features would emerge and when. Budgeting became more difficult because we could no longer tie marketing and sales efforts to major release dates, assessing dev teams became more difficult because they were no longer accountable for long term deliverables, and, probably most importantly, reporting within DFJ Esprit and to our LPs became harder because there was less we could say to get people excited about the future.
Much of the comfort with plans was, of course, based on the illusion that they wouldn’t slip, and in even if the plans were good the difficulties listed above are more than offset by the improved productivity and flexibility that comes with agile, but they are real difficulties none-the-less. Creative economy companies have, in effect, adopted agile methodologies across all their business areas and it isn’t surprising that most traditional companies find it impossible to copy them.
One very interesting question which I don’t have an answer to yet is ‘how much planning is optimal in a creative economy company’? Different departments need to be co-ordinated and raising money requires projecting success over a timeline so some planning is still necessary. Just less than before.
CRM startup close.io just blogged about how they sweat the small stuff when it comes to UI and UX design. They gave four examples:
- Updated the contact entry form so it parsed details entered and automatically identified them as emails, phone numbers etc.
- Made it so pasting email addresses always produced a simple email address ‘[email protected]’ and never “John Smith” <[email protected]>
- Enabled zero configuration sending of emails from within the app that appear to come from your native email client
- Enabled automatic tracking of emails sent from any of your email clients so your CRM records stay up to date with zero hassle
These examples all result in a minor improvement in ease of use for the customer and they are all relatively trivial to build. They are also the sort of thing that people often fail to get round to.
I remember once sending some feedback to Graham Bosher, founder of our portfolio company Graze. It was a comment on a minor piece of functionality and I phrased the email to show understanding that fixing it might not be his top priority. I forget what the piece of functionality was, but I remember the reply very clearly – Graham came back saying ‘thank you, I’m incredibly focused on getting every aspect of the user experience to be as good as it can be’. Since then Graze has gone on to enjoy huge success and now has hundreds of thousands of subscribers.
The lesson from Graze is that attention to the minor details of products is a big driver of success. The close.io guys instinctively get that point too (if you doubt me, read the post explaining why they made the changes). Some founders get this more than others, but as product quality becomes an increasingly important determinant of company success I think we will see more and more people sweating the small stuff.
In 2009 AirBnB’s revenues were stuck at $200 per week. This quote from a blog on the First Round Capital site explains how they got back to growth:
At the time, Airbnb was in Y Combinator. One afternoon, the team was pouring over their search results for New York City listings with Paul Graham, trying to figure out what wasn’t working, why they weren’t growing. After spending time on the site using the product, Gebbia had a realization. “We noticed a pattern. There’s some similarity between all these 40 listings. The similarity is that the photos sucked. The photos were not great photos. People were using their camera phones or using their images from classified sites. It actually wasn’t a surprise that people weren’t booking rooms because you couldn’t even really see what it is that you were paying for.”
Graham tossed out a completely non-scalable and non-technical solution to the problem: travel to New York, rent a camera, spend some time with customers listing properties, and replace the amateur photography with beautiful high-resolution pictures. The three-man team grabbed the next flight to New York and upgraded all the amateur photos to beautiful images. There wasn’t any data to back this decision originally. They just went and did it. A week later, the results were in: improving the pictures doubled the weekly revenue to $400 per week. This was the first financial improvement that the company had seen in over eight months.
Growth hacking is a heavily used and poorly defined term these days, but this is a great example of what I consider to be true growth hacking – inspiration based and with the sole aim of getting growth moving rather than be part of a beautiful, scalable system. It’s amazing how many successful startups have a moment like this in their early history where they found a clever hack to scrap themselves up to the next level knowing that it wouldn’t scale them to the level after that. And that’s ok. It’s usually a little hairy at the time, but simply getting to the next level often unlocks resources and customer understanding that make it much easier to build the scalable processes that will underpin fast growth at scale.
Inn0vation Matt3rs have analysed jobs listings by European VC backed companies by looking at the data on Ventureloop.com. There were nearly 1,500 jobs posted in the last seven weeks, which would mean c11,000 over the course of the year if that rate was maintained. These are jobs listings which I guess are a little higher than jobs filled, but the order of magnitude should be right.
To put these numbers into context, job creation schemes in Wales target 4,000 new jobs per year in the region, and the flagship English scheme expects to create 41,000 jobs over a number of years at an average cost of £33k per job.
I think that means the venture industry, and therefore the entrepreneurs we back, are making a meaningful contribution to job creation. I’m proud to be a part of that.
A couple of weeks ago veteran Benchmark VC Bill Gurley posted a typically excellent and thorough analysis of pricing for market places and platforms. Bill calls the money that platforms take from transactions the ‘rake’ and you can see from the table above that there is a wide range out there. Rakes comprise a mix of straightforward take from transactions and other fees imposed upon merchants and/or consumers. In the case of eBay the rake comprises listing fees, fees to make listings more premium (e.g. more photos) and Paypal fees.
Bill’s central argument is that setting the rake too high is often a mistake. Short term revenues and profits will be maximised, but if the rake is too high marketplace participants will be constantly on the look out for other places to transact making the business will be vulnerable to competitors, and many potential customers may simply choose to avoid the platform altogether. He quotes Jeff Bezos’ famous saying ‘Your margin is my opportunity.’. To hammer the point home he quotes management guru Peter Drucker:
Number one on the list of Peter Drucker’s Five Deadly Business Sins is “Worship of high profit margins and premium pricing.” As Drucker notes: “The worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow…”
Bill cites the example of oDesk stealing the market from Freelancer and others because their rake was 10% rather than 30% to argue that the optimum headline rake is around 10%. He also cites Apple’s 30% take and how that forced Amazon and Facebook to adopt non-IOS strategies as further evidence that 30% is usually too rich.
Finally, low headline rakes can be increased with mechanisms like additional fees for premium listings. The real trick, he says, is to have a model which makes people think ‘the marketplace is fair, but competitors activity on here makes me spend more than I would ideally like’. That way competitors get the blame and nobody leaves the platform. Google Adwords is a great example of a platform that is thought of in this way.
CityAM reported today on research from Barclays:
Research from Barclays shows that firms that sell their products or services mostly online have seen revenues grow by on average 11.4 per cent in the last three years, over 50 times faster than GDP growth of 0.2 per cent over the period.
The research shows that the expansion is being driven mainly by small and medium-sized firms. Most high-growth businesses have fewer than 100 employees, while average revenues are £8.9m. Almost a quarter of firms – 23 per cent – are based in London, despite the capital accounting for just one-eighth of the UK’s population.
The dominant macro-economic story at the moment is one of ‘stagnation’ and ‘low growth’ which accurately reflects the headline statistics and situation at many of the world’s largest companies, but it fails to convey that there is a lot of volatility in the markets that add up to the flat headline figure. This data from Barclays illustrates the point well – average growth is flat, but UK online companies are growing at an average of 11.4%.
When we look around us this isn’t surprising. Some markets are collapsing – e.g. newspapers, much of high street retail, broadcast TV – and therefore for the headline figure to be flat some others must be growing fast – e.g. online retail.
This, of course, means that even in these difficult times there is opportunity for investors who are able to get money to work in those growth markets.
The other interesting thing about the Barclays research is that it shows much of the growth is located in small companies based in London – the sweet spot for venture capitalists.
Fred Wilson has a post up this morning title Return and Ridicule which talks about the dangers of herd investing. Fred quotes Bill Gurley saying that ‘you can only make money by being right about something that most people think is wrong’ which I think is spot on. If lots of people share your idea about what is right then they will all want to invest, the valuation will rise and it will be much harder to make money. The same goes with starting companies – if lots of people have the same idea competition will be fierce and success will be harder to come by.
In a nutshell this is the case for contrarian investing, and it is a driving force in my investment decisions. I look for companies that can be the winners in new markets and investing in those companies before everyone else wants to usually means believing that their new market is emerging when other investors still aren’t sure. Our 2011 investment in Conversocial is a good example. As I blogged when we made the investment our thesis was that they would become the leader in social customer service, but at the time most people thought that social customer service would only be a subset of the established social media software market and there wasn’t space for a new entrant. In the two years since then founder Josh and the team have done a great job establishing social customer service as a category and it is now getting recognised by the major analyst groups, but we all had to endure a lot of doubters along the way.
The problem with contrarian investing and believing in things that most people think are wrong is that those people generally think you are stupid. Fred Wilson wrote:
I have found that return and ridicule are highly correlated over the years. We have made more money on things that were highly ridiculed than any other cohort. When I see people laughing at ideas and companies we have backed, I smile. It means we are going to make a lot of money on that investment.
I hear this, but it is only true if the belief you have that everyone else thinks is wrong is actually correct. As I’ve said, I think finding projects you believe in which others don’t is a great way to make money, but it is critical that you remain open to your investment thesis being wrong, or in need of tweaking. When people ridicule my investments I want to know why it is they don’t believe what I believe, and to make sure that they haven’t got a point. When they laugh I look forward to the day when they’re not laughing any more.
Netflix announced Q1 results yesterday, and they topped 1bn in quarterly revenues for the first time and reached 33m subscribers. No mean feat. But the numbers that really caught my eye are that Netflix will spend $350m this year delivering its service, and a further $2bn on content rights. Those are some punchy expenses and respresent a significant barrier to entry for anybody else looking to get into the TV streaming game.
I think that leaves the opportunities in TV squarely in the discovery space. Alongside their quarterly results Netflix published a paper on the future of television and one of their predictions is that we will soon see the end of linear TV. I buy into that for lots of reasons, not least the impact that Netflix had with House of Cards because the whole series was available to watch from day 1, but it begs the question of what experience will replace the ‘hit the couch, put your favourite channel on and sit back’ mode of engagement that is so prevalent with TV today. The obvious answer is a clever combination of playlists, social inspiration and algorithmic recommendations.
Netflix, Amazon, Google and Apple will try to own this layer as well, but there maybe space for a startup here, particularly given that consumers may want their discovery service to cover more than just one silo. In the long run it makes sense to me that these discovery services will link directly to the content owners, maybe handling billing and rights management. In that view of the world Netflix’s emerging content business will be much more important to them than their distribution business, which would be cut out of the equation.