The Founders’ List: “Status as a Service (StaaS)” by Eugene Wei (Former Product Leader at Amazon, Hulu, Flipboard, Oculus)

Eugene Wei NFX

Eugene Wei NFX

 

This is The Founders’ List – audio versions of essays from technology’s most important leaders, selected by the founder community.

A Must Listen for all Founders – audio version of Eugene Wei’s hugely popular essay on the role of status in product development. Eugene was a product leader at Amazon, Hulu, Flipboard, and Oculus.

CLICK HERE to read the full article.

Nominate Your Favorite Essay

Each week, we’ll be releasing a new audio essay or memo selected by the Founder community. Nominations are rolling, and can be submitted below:

Calling Bio Startups Who Want To Raise Capital (Final Deadline July 17)

SynBio Beta Draft NFX

SynBio Beta Draft NFX

The deadline to apply is July 17th.  When VC’s compete, you win.

The Bio Draft is a way for Bio startups to quickly get in front of 10’s of top VC’s to raise capital.  We ran the first Bio Draft within 2019 with SynBioBeta, and it worked so well, so we’re doing it again this year.  The idea is that like the NFL or NBA teams draft top athletes to their teams, VC’s draft top startups into their portfolios.

It’s not a “competition.”  Theoretically, all companies that are accepted into the Bio Draft could get funded. Founders get to choose which VC’s they present their Company Brief to.  Participating in the Draft is private, and will never be public until you want it to be. And you don’t need to present on stage unless you want to on Investor Draft Day, Sept 1st.  The Draft is designed to heavily favor founders so that top founders are encouraged to use the Draft to accelerate their fundraising.

Who should apply:  Top teams that are looking to fundraise in the pre-seed, seed, and series A stages.  Some teams have already raised seed, and others are teams that are just forming out of industry or out of academia.  It’s a good way to test the waters.  You might be better than you think.

Here’s how it works:
1) You create a private Company Brief; uploading a deck, answering 12 questions, and recording a 1-minute video of you and your team.
2) If selected for this year’s Draft, you will receive a list of VCs that will compete to Draft you (i.e. invest in your startup). You choose which VC’s see your Brief.  You will have the choice to present at the SynBioBeta Summit Investor Day on September 1, 2020.
3) The VC’s will have 4 weeks to review your brief and conduct research, perform diligence, and negotiate their investment.
4) You might have more than one VC Draft you, just as you would in any fundraising.

The FAQ is here. https://startupdraft.org/bio

Spread the word.  It’s a new way to get funded that really favors the founders.

The Product Frameworks Behind Superhuman

The Frameworks Behind Superhuman - NFX Podcast

by Pete Flint (@PeteFlint). Pete is a General Partner at NFX, a seed-stage venture firm based in San Francisco.

The Frameworks Behind Superhuman - NFX Podcast

Disclaimer: NFX is an investor in Rahul Vohra’s angel fund.

While most companies are focused on building a beautiful machine — a 100% tech-driven, algorithmic, human-free experience — by contrast and even by name Superhuman is oriented in the opposite direction. The email company is known for its personable, high-touch onboarding, requiring significant human interaction. When others talk about automation and breakneck scale, Superhuman talks about spending time with customers and launching small.

It’s a counterintuitive approach to building product. My experience at Trulia was similar. While our initial vision was full automation, when we combined great software with human touch, our conversions skyrocketed.

I wrote in a recent piece on 28 Moves to Survive and Thrive in a Downturn that the only way to break through in a crisis — or to beat the competition under normal circumstances — is to 10x your product by offering a dramatically better product experience. 10x product outcomes are a result of how you as a Founder think, and it’s almost always counterintuitive to the conventional approach. It’s a matter of conviction.

Rahul Vohra is one of the rare Founders and product builders with this conviction. He is the Founder and CEO of Superhuman, where he and his team are building the fastest email experience in the world. Rahul was previously the Founder of Rapportive, acquired by LinkedIn in 2014.

I recently spoke with Rahul for a special NFX “keynote” podcast. His strategic thinking on product-market fit is verging on legendary.

In this NFX podcast episode and essay, Rahul shares the frameworks he wants every Founder to know about:

  • Customer Onboarding
  • Product Development
  • Positioning
  • Pricing

 

 

1. Don’t Launch. Onboard.

With any email client, task manager, or calendar app, you have an especially massive surface area for bugs, because you have wide variability in how users want to use the product.

If you run a traditional Launch and sign up tens of thousands of users quickly, they will find thousands of bugs and quickly overwhelm your team. You won’t be able to fix the issues fast enough. Your users will then be disappointed and churn out of the product — and tell everyone about their poor experience.

Instead, do a measured, rolling, Founder-led launch in 4 distinct phases that involves onboarding your earliest users:

  • Phase One: Testing Readiness — The product Founder (ideally this is the CEO) should do the onboardings to test whether the company is even ready to do onboardings. The Founder should be able to do them best because she or he holds the most integrated and comprehensive view of the product. You should be doing at least five to six onboardings a week. You know you are ready for phase two when you have great metrics (retention, user engagement).

 

  • Phase Two: Testing Limited Scalability — Another senior member of the team, who is not a Founder, should take the lead. The primary goal of this phase is to show that somebody other than the Founder can do onboardings and still produce great metrics. (In our case, it was the Head of Growth.) The secondary goal is to move onboarding toward something that can scale. We reduced onboarding time from two hours down to one hour, and ramped to 20 onboardings per week, still keeping great metrics.

 

  • Phase Three: Testing Wide Scalability — Build a full-stack growth team. Everyone on the growth team does demand generation, lead qualification, customer support, and onboarding. The primary goal of this phase is to show that somebody other than a senior member of the team can do onboardings and still produce great metrics. Secondary goals are to further evolve the onboarding experience towards something that can scale, and create training plans for the next phase of growth. Expect the growth generalists to be doing 20 onboardings per person per week alongside other responsibilities. This phase usually lasts a few months. We reduced the onboarding time from one hour to 45 mins without a degradation in metrics.

 

  • Phase Four: Scaling Revenue — Build a team of onboarding specialists that should be able to do onboardings better than anyone in previous phases. The primary goal of this phase is to scale revenue while maintaining everything that makes the experience delightful and magical. During this phase, we got onboardings from 45 minutes to 30 minutes.
    • On Training: It’s super important to run a comprehensive training program for each new onboarding specialist. They are now the front line of the company. Our training program runs for 8 weeks. Once fully ramped, each onboarding specialist is able to do 35 to 45 onboardings per week.
    • On Finding Onboarding Talent: Founders often ask me the ideal background of an onboarding specialist. Sales backgrounds can work well but we’ve found that other backgrounds — teaching and hospitality to name two — also work very well.

 

Caveat: By all means, do a traditional launch if you need one of the three Cs quickly: capital, candidates, or customers.

Superhuman's Product Frameworks - Founder Resource

 

Superhuman’s Six-Step Onboarding Approach

I myself did the first 200 new user onboardings in Phase One. I wasn’t concerned with how long each onboarding took; many took two hours. Each onboarding had six parts.

  1. Give the new user a detailed demo of Superhuman, and share what makes it magical and delightful.
  2. Reminder that Superhuman is a paid, premium product and test price sensitivity with the Van Westendorp Test.
  3. Ask how they currently do their email and take notes on all the Superhuman features they would benefit from.
  4. Show them how to get through email in Superhuman twice as fast as they were doing before.
  5. Insist that they do email with you, live, for 30 minutes. Doing it with them is crucial because every time, I would find 5 to 10 bugs that I would send back to my team. We would make sure to fix them within a week. If we didn’t, we wouldn’t be able to surface the next set of bugs that we should address.
  6. Send them a personalized gift (I would send a bottle of wine or whiskey) to show them how much you valued their time. This obviously slows down as you get out to scale with many thousands of users.

 

2. To 10x Your Product, Study Game Design.

We have a product philosophy of using game design to make our software more fun to use and help our users move faster.

Here’s how it works. We start with a philosophy that is different from most of Silicon Valley. Rather than focus on features that users need, we focus on how software makes a user feel.

Business (and most productivity) software feels like work. We design our products to work and feel like games; this is the core of why people fall in love with it. Nobody needs a game to exist. There are no requirements. For that reason, when you make a game, you don’t worry about what users want or need. Instead, you obsess over how they feel.

When your product is more like a game than work, people don’t just use it. They “play” it, they find it fun. They tell their friends, they fall in love with it. Game design turns out to be an altogether different kind of product development.

I learned to code to make games and worked as a game developer. It turns out there is no unifying principle of game design. We are building those principles, drawing upon the art and science of psychology, mathematics, storytelling, and interaction design.

We’ve identified 5 key factors to consider:

  1. Goals
  2. Emotions
  3. Toys
  4. Control
  5. Flow

Across these, we further identified many principles of game design as we built Superhuman.

For example, “Are toys the same as games?” We play with toys, but we play games. A ball is a toy, but football is a game. And as it turns out, the best games are built with toys. Because then they are fun on multiple levels, the level of the toy and also of the game itself.

As a single example, consider our autocompleter which you use to snooze emails:

a) You type whatever you want. It does its best to understand you. For example, “two d” becomes two days and “three h” becomes three hours. It is fun because it’s a playful exploration. Users find this feature — this toy — and start to ask,“What can it do? When does it break? How does it work?” This becomes a game for them.

b) They might ask “I wonder what happens if I keep typing 10?” It turns out that is October the 10th at 10:00 PM. Or how about a sequence of twos? That’s February the second, 2022 at 2:00 PM. And then we see people start trying more complex inputs like in a fortnight and a day.

c) Users keep finding pleasant surprises. For example, time zone math happens without you ever thinking about it. You can type in 8:00 AM in Tokyo that turns out to be 8:00 PM Eastern time. We weave the surprise through the product.

d) Sometimes the surprises have no real purpose. For example, you can snooze emails until never; you can literally type in the word “never.” Then that email will never come back. If you are thinking about this from a “feature’ mindset, why would you have that option? It’s the same as deleting an email. But from a game mindset, it’s fun and playful so it makes users happy and keeps them engaged.

Consider all the features of your own product and ask yourself these questions:

  • Do they indulge playful exploration?
  • Are they fun? Even without a goal.
  • Do they create moments of pleasant surprise?

If so, you have a toy and you’re on the way to building a great game… even if it is productivity software.

Superhuman's Product Frameworks - Faded List

 

3. To Nail Your Pricing, Start With Positioning.

We first started by thinking about positioning. We were heavily influenced by Madhavan Ramanujam and his book Monetizing Innovation. For those who don’t know Madhavan, he’s a partner at Simon-Kucher & Partners, the preeminent pricing firm in the valley. The thing that I got from that book was before you figure out pricing, you must first figure out your positioning.

Then we talked to Arielle Jackson who was the first Product Marketing Manager on Gmail at Google. She advises using a simple but effective 6-part formula to determine positioning:

  1. For (target customer)
  2. Who (statement of need or opportunity)
  3. (Product name) is a (product category)
  4. That (statement of key benefit)
  5. Unlike (competing alternative)
  6. (Product name) (statement of primary differentiation)

Then we started to ask ourselves questions. Are we the Ford of email? No, not really. Are we the Mercedes of email or the BMW? Maybe, but not quite. Are we the Tesla of email? We’re getting there, but it’s not quite right.

In 2015, we came up with the following positioning for Founders, CEOs, and managers of high growth technology companies who feel like their work is mostly email.

“Superhuman is the fastest email experience ever made. It’s what Gmail could be if it were made today instead of 12 years ago. And unlike Gmail, Superhuman is meticulously crafted. So that everything happens in a hundred milliseconds or less.”

The positioning makes it clear Superhuman is a premium product. From that, we moved on to pricing.

We asked 4 questions:

  1. At what price would you consider Superhuman to be so expensive that you would not consider buying it?
  2. At what price would you consider Superhuman to be priced so low that you would feel the quality could not be very good.
  3. At what price would you consider Superhuman to be starting to get expensive? (So that is not out of the question, but you would have to give some thoughts to buying it. This is the question we paid most attention to.)
  4. At what price would you consider Superhuman to be a bargain and a great buy for the money?

Since we were building a premium product we paid most attention to the third question. The median answer to this question actually turned out to be $29 per month. A few conversations with some pricing experts later, we rounded up to $30 per month.

Rounded prices signal quality; prices that end in a 9 signal a bargain.

That’s how we picked our price.

Founder Resources mentioned in this podcast:

 

To learn more about Superhuman, visit www.superhuman.com. Subscribe to the NFX podcast for more insights from top Founders on how they built iconic companies.

Connect with Pete Flint

The Great Reset: How Reid Hoffman & James Currier See the Path Ahead for Founders

The Great Reset: How Reid Hoffman & James Currier See the Path Ahead for Founders
Reid Hoffman NFX

Guest Bio:

Today Reid Hoffman & James Currier discuss the path ahead for Founders in a post-COVID world. What you need to learn and unlearn to get your company through a crisis, frameworks for the tough decisions Founders are facing today and the way they see the world changing forever – opening new opportunities for savvy founders. Reid is the co-Founder and was the executive chairman of LinkedIn, and is now a partner at Greylock.

In this episode, we discuss:

  • How to be human first
  • The VC landscape post-COVID
  • How to make decisions around risk
  • The mental patterns Founders should unlearn
  • Founders & frugality
  • Silicon Valley’s involvement in COVID-19
  • Zero-sum thinking

 

Transcript:

James Currier (00:00):

Reid Hoffman, you need no introduction. You and I have known each other for almost two decades now. You and I are both members of Henry Crown Fellows program where we’re really big fans of combining tech with humanities and humanism, basically, and philosophy. One thing you said recently I wanted to start talking with you about is, in this time of change, you said, “Be human first.” And since our stuff at NFX is about early-stage founders, when you think about being human first, what does that mean for early-stage founders during this time?

Reid Hoffman (00:30):

Well, part of the reason I said that is because the normal and very appropriate way for founders thinking about their businesses is to be thinking you’re all in. You’re at a 150, 200%. It’s the organization and the business first. And part of that’s because there’s this expression that I use that’s now widely attributed, which is, “A startup is like jumping off a cliff and assembling an airplane on the way down.” You need to be totally focused on, “Yeah, there isn’t balance in my life. I’m really making sure that this entity starts going.” And nothing like integrity and all the rest of the stuff matters. But just turn the rheostat up to 11. Put all your energy and all your sweat, all your tears, all your blood, make it happen. And then the people you’re recruiting on board, you’re basically asking for the same kind of commitment, the same belief in the mission.

Reid Hoffman (01:20):

And that is by and large the exact right way to be an early-stage founder. On the other hand, when you get to unusual circumstances like this, you say, well actually it’s not a question about like whether, or not you’re relaxed on a Friday evening. It’s not a real question about whether or not you’re maintaining your hobby while you’re doing your business. It isn’t a question about like, “Well, in a couple of years when I get this going, I can take a mini sabbatical, or a little bit of downtime. And I got to be all in seven days a week now.” Now the question is, “Well, what’s going on with public health? What’s going on with disease?” Your family is probably under unusual stress, right? Kids, your partners, what’s going on with your grandparents, your parents. All these things that are going on that that are like, “Okay.”

James Currier (02:04):

The network that has normally supported you now needs your support because you’re the one who’s the founder who’s got the strength and the knowledge and the energy to do these things. People around you now need you.

Reid Hoffman (02:15):

Exactly. And so part of the thing that is the setback from this normal reflex, which is the right thing to be in, and say, “Look, look. As I go to each day and as I get to each decision, I go, what’s the thing that I should do as a human being first?” And yes, maybe I’m taking a little bit of extra risk with the company. A little bit of extra risk with a startup. That’s fine. In these circumstances, you make that decision first. And it could be anything from, everyone’s trying to work, when they’re sheltering in place, work from home. But it’s like, look, they’ve got kids, the kids interrupting them. You make sure, are you trading of with your partner well, and managing kids? Are the kids doing okay in this stressful thing? And how do I help you be as productive you can, but while I know that you’re going to be spending time on these other things?

Reid Hoffman (03:02):

And you should be. And if you’re not, I’m going to be encouraging you to spend time on it, because that’s what matters in these times.

James Currier (03:08):

That’s the human thing to do.

Reid Hoffman (03:10):

Yeah.

James Currier (03:10):

And do you think it extends to how you might reduce your force? A lot of these companies are having to do layoffs.

Reid Hoffman (03:19):

Yes. In a couple of different ways. So one is how do you make decisions around RIFs? Now sometimes you just have to, it’s full stop. One thing is, the question is, is there some industries which are just slaughtered by the staying in place.

James Currier (03:34):

Travel.

Reid Hoffman (03:35):

Travel’s an obvious one. Sometimes it’d be like you’re a SaaS business serving small businesses. Well, okay, small businesses, a lot of them are going to be intensely impacted. And so you might go, “Look, I have to do a RIF, because the recovery pattern here for me is at least a year out.” Right? It isn’t like in three months we’re going to get to a place where it’s like, “Well, okay. It’ll be like a recession. We’re 20, 30% down, growth rates slower.” It’s like, “No, no, no, no, This is slaughtered and I have to do that.”

Reid Hoffman (04:07):

But then, the next question is, is, okay, when you’re doing a RIF, are there options to do things like furloughing? Are there options to do reduce salary, reduce bonuses? You say, “Look, this is what we’re going to do”, and people can sign up for it or not. That’s the next level down on it, because then you could say, “Look, we keep more people in place.”

Reid Hoffman (04:25):

And then the next layer below that is you can go, “Well, are there ways that I can help people get their next jobs?” We’re going to do a reduction in force, but we’re going to find the resources, give them the resources, actually ask people in the company to say, “Hey, be a reference.” If there’s other things you know about, refer people to them. We’re going to do things to try to help that transition.

Reid Hoffman (04:49):

So I think it goes the whole stack down on RIFs. Now at the end of the day, you’re doing no one any favors if you say, “We don’t do a RIF”, and then the thing just goes out of business in two or three months. That doesn’t help anybody. So actually in fact, a couple of my startups have done RIFs. It’s working through it. It’s applying all these principles in terms of how you’re doing it.

Reid Hoffman (05:08):

Then the last point, which was the point I was making. The first thing is sometimes people go, “Oh my God, uncertainty. We just got to go. We’ve got a plan on no revenue for six months.” And for the majority of our tech businesses, if you’re really planning on no revenue for the next six months, that’s a different universe. So I tend to say, “Don’t plan on that. Plan on really challenged and recession, but don’t plan on no revenue.” Like if we’re in a place where a B2B business and enterprise has no revenue for six months, then you’re in a different place altogether as an industry, as a society, everything else. And we’ll be sorting things through there.

Reid Hoffman (05:43):

So with that plan you also monitor, because maybe I’m wrong. So you go, “Okay fine, we won’t plan on no revenue for six months. We’ll plan on no revenue for a couple months, or it takes two X as long and it is only 60 or 70% as much revenue as we’re getting.” And that’s what we’ll plan, but we’ll be monitoring to see if it’s right, or not in order to recorrect.

James Currier (06:04):

Got it. And so what are some of the things that people you think need to be unlearning right now? If you’re an early-stage founder, you said, “Look, normally you’re operating in one mode, which is just the go go mode.” Now you need to be a little bit more human and realize that they need your support as much as you needed their support before when you were out slaying the dragon, what are some of the other things that we need to unlearn? The mental patterns that we need to throw out the window?

Reid Hoffman (06:28):

Typically, what you try to do as an entrepreneur is you try to simplify the problem that you’re doing. You try to have a specific set of hypotheses that you’re testing, usually around product market fit, or scale product market fit. Sometimes micro ones on, “Oh, I’m going to hire this person who I think has the talent, although not the experience. They’re going to learn.” There’s a set of things that you’re testing. The problem is that you have to kind of now do is you have to realize that there’s a set of things that you think you’ll be learning now, that you won’t actually really learn. They’re unique versus repeatable things. Although you have to learn and adjust and adapt to the new circumstances. And you have to be thinking about like, “Okay, so what are the things that we’re going to do that are now that are just getting through the worst of this crisis? What are the things that we can now learn that we wouldn’t have prioritized learning, but we’re good to learn now?”

Reid Hoffman (07:19):

Like so for example, a really classic one across the whole startup universe is, “Well we should really learn remote interviewing. We should learn to say, “Okay.”” Separate from the circumstance, we wouldn’t have bothered learning remote interviewing. It just not a skill that’s on the short list of priority, but we’ll do it now. And that could be helpful to us as we’re recruiting talent from across the country, around the world, opening up new areas like learning distributed work. Some places really should learn distributed work very early. Some places shouldn’t bother learning distributed work until much later. Well, we’re going to learn that now and then that could help us with talent and being in Boulder, in Austin, or somewhere else, at the start up.

Reid Hoffman (07:56):

So it’s a shift of mindset about which things you’re going to learn now. Why are you going to learn them? Learning them for just the crisis, learning them for repeatable work. And those are the kinds of things to trade mindset. Now the other thing of course is the generalization of the point that I just made is to say like for example, in typical world, your startups making progress, you’re going to get financing. There’s enough focus on entrepreneurship, new products. We’ve shopped, product market fit. We’re going to scale. It may not be the pricing you like, may not be from who you like, but you’ll get financing.

Reid Hoffman (08:27):

Now, one of the things is external financing’s are going to be very difficult through probably at least August. Maybe if you’re really lucky, it’s July. September, October, I think pricing may get reset, but it’s there. I think it will be back there. But in that interim period, new financing from a new player is super difficult, and so I’ve seen a couple of them happen and there are two categories of which I’ve seen happen. One good for NFX and the other is scale companies where investors have been pursuing them for over a year. And said, “Well, we’re going to do a round of financing anyway.”

Reid Hoffman (09:03):

And they go, ” We’ve been wanting to be in this company for a year anyway. We’re going to go in no matter the fact.”

James Currier (09:06):

So where the VCs know the founders already and having established rapport and knowledge exist.

Reid Hoffman (09:12):

And have been pursuing.

James Currier (09:14):

Yeah.

Reid Hoffman (09:14):

And then the other one is Series A. And the reason why smart folks are still doing Series A’s is because they go, look, as long as we make sure that we’re doing a Series A with 18 months plus of capitalization so that we’re on the other side of this, then you got a pricing mismatch. Maybe the pricing is going to get hit a whole lot more than we think now. And what the pricing is, we may make an error in pricing investing now, but the things we invest in now will get money later. So those are the only two. Other than that, no external financing’s that I’ve seen.

James Currier (09:42):

Yeah, right. And the companies with the Series A’s, the money becomes a competitive weapon.

Reid Hoffman (09:47):

Yes.

James Currier (09:48):

Right?

Reid Hoffman (09:48):

Yeah.

James Currier (09:49):

As others are skimping or laying off or pulling back, if you’ve just raised a Series A in this time then you’re going to have a little bit of an edge in moving forward in the markets that are moving.

Reid Hoffman (09:58):

Yep. And the one thing I would add to the companies that did raise a Series A, get that money to last you minimum 12 months, preferably 18 plus months from now.

James Currier (10:08):

We’re saying 24, but yeah I think that’s right. I think 18 to 24 is probably right. Now one of the things that people have been telling us they’re learning right now that they hope to keep after the crisis is the DNA of frugality. Learning how to keep costs down, reviewing just software subscriptions that everybody’s signing up for. Real estate cost containment, not over- hiring, that sort of thing. Number one, do you think that, that’s a good thing to learn? Number two, how does that play into the blitzscaling concept because I know that would be in a way, an opposite. I think probably Jeff Bezos has done both, but very few do both. How would you see frugality as being a new learned behavior? In the depression my grandparents learned to be very frugal and they stayed that way their whole lives.

Reid Hoffman (10:54):

Learning frugality is a good and smart thing to do. This is actually one of the things that we in Silicon Valley get a little too lazy at is because there’s so much capital, and the capital is there because it knows it generates a bunch of results that relative you and I have known each other 20 years. Back when we started this, oh my God capital was extremely important.

James Currier (11:12):

Yeah, there were about 120 venture firms.

Reid Hoffman (11:14):

Yes, exactly. And you were watching every dollar because it really made a difference.

James Currier (11:19):

Yeah.

Reid Hoffman (11:19):

And now you’re like, wow, hey, rents are expensive. We’ll still get the nicer place and it’ll be more expensive. And there tends to be more of that. And it’s good to really be strategic about capital’s expensive, sometimes impossible to get. Like kind of a pandemic adjustment period. And we should spend it as carefully as possible. And that’s always a good thing to learn. Now, that being said, within blitz scaling, there’s kind of two things. One is, blitz scaling is relative speed. It’s a, am I moving faster than my competition at being the first to scale? Either my real competition or the potential emergent competition, or that kind of thing. And that really matters in a bunch of markets, especially those with network effects, right?

Reid Hoffman (12:00):

A la NFX. And so the first, we call these Glengarry Glen Ross markets. First prize Cadillac, second prize steak knives, third prize you’re fired. The difference when one, two and three really matters. And so relative speed does really matter. Now that being said, it’s relative speed. So if all of a sudden capital’s drying up and actually in fact everyone’s being, okay, we got to make sure we get to the right milestones. Then what you’re doing is not saying speed doesn’t matter anymore. What you’re saying is actually in fact, I can now be more efficient in my capital spend and still be moving faster than my competitors.

Reid Hoffman (12:33):

And that’s the mindset that you need to essentially shift to with this. It isn’t that the rule of, first to scale really matters. Now sometimes in your industry it might be … You might say, look actually in fact the one who’s going to be the first to scale is the one who gets across the pandemic desert, the pandemic crisis. And the one who gets across it actually in fact it’s the survival of going across that matters. And that’s going to be the speed because it’s speed that compounds over time to scale, not speed today, speed this week. It’s speed that is relative to when you’ve really established your scale product-market fit and have gotten the flywheel and the engine going.

James Currier (13:09):

Right. Relative to the market that you’re in.

Reid Hoffman (13:11):

And competitors.

James Currier (13:13):

And your competitors. Yeah. Got it. Yeah. Yeah. Just being the last one standing is often the path forward.

Reid Hoffman (13:21):

Exactly.

James Currier (13:22):

A lot of this is going to come and go, and I’m just wondering if you’ve got any ideas already about what’s going to change around human behavior? Work or maybe social that you think you’re already starting to see this adjustment being made to how we work or how we’re going to be socially. Some things will drop away. People say, Oh, we’re going to get back to normal. Everyone’s going to be at the bars, at the restaurants. We’ll all be at the Golden State Warriors games within a year. It’ll all be back to the same. Are there things that you think that you can anticipate changing?

Reid Hoffman (13:50):

Well, I tend to think the changes. We all see the changes that have happened, like shelter in place, a bunch of other stuff. The changes that persist tend to be the ones where there is either a negative force to keep that in place. Or an absent of a positive where people kind of go, well we were doing a bunch of that, but maybe we didn’t need to do as much of it. So I tend to think that some of the changes will stay is I think there’ll be a slower return in the events business because I think a lot of people, and especially travel as well, because the people think well, in fact, I can get a bunch of this done now that I’ve actually really had to dig into it. See how video conferencing works. Now I can get a bunch of that done this way, and that’s actually much more time efficient for me.

Reid Hoffman (14:33):

That still allows me things. And I think you’ll see more virtual events still. Before when people said, “Hey, we’re going to do a virtual.” It’s like, I’m just going to wait to do the in-person one. The in-person one’s better. It’s like, well actually in fact, maybe some of these events or some of these things I will do as virtual events. But I think that pattern. I think similarly distributed work, I think people will learn things like, well actually in fact getting a day a week working at home or a day a week working with no meetings or a day a week or two half days doing no meetings and so forth. That’s actually going to be much more productive. We’re going to do that. And I think those kinds of things and the set of tools that go with it I think will play it out.

James Currier (15:07):

It does feel like the days of the five day work week in the office are over for at least information workers.

Reid Hoffman (15:13):

Yeah. Or at least a version of it that says, hey, we’re going to focus on these kind of new pieces of productivity we found. And so even if we’re all going to go to the office, we’re going to actually do like it’s like no meetings Wednesday. So nothing scheduled so we can kind of work through, are those things happening? I also think by the way, unfortunately, it’s one of the things we need to put the most attention to is I think the restaurant business will come back more slowly in part because I think people will have the residual worry about, well what happens if the disease kicks off again? And this is compact space. It isn’t so much they didn’t like the restaurants, didn’t enjoy going and seeing people. It just I think it will be a slower return, in which case that will be a, it’s an industry that employs a lot of people, provides a bunch of service and glue within the culture of the community. And I think that will be one that will be in terms of life will be slower as well.

James Currier (16:06):

Yeah. And given that some of these things are going to change and persist, are there things, are there opportunities you see for the startup founders? A lot of people talking about, oh, I got to do a RIF or I can’t get capital. Or, it’s hard for me. Well, yeah it’s hard, but where’s the opportunity within that changing landscape? Are there some things you see people doing?

Reid Hoffman (16:26):

There are. That’s a little bit of the reason I was mentioning remote hiring and interviewing, kind of patterns for asynchronous or distributed work, the tools and improving the tool set. Kind of getting the, how do we make the two to three hours of work without interruption efficient, right? As part of productivity. All those things will persist. A lot of people tend to say, oh, we’re going to do stuff because it’ll be the market driven by the pandemic. And obviously there’s some areas where that’s super important. Testing equipment or kind of measurement diagnostics that may persist for a while. There’s a bunch of stuff that’s like, no, no, you got to think about the real product-market fit that you’re always working towards is two to three years out. And as part of that kind of two to three years out, you got to think, all right, I know things are going to be weird this year, but what are they likely to be like next year?

Reid Hoffman (17:15):

And in which case, target that. And that’s a little bit like the earlier lesson I was mentioning is, there are some things that will look like lessons this year that are actually only lessons for this year. Not lessons for 2021. And you won’t fully know. You have to make an informed, intelligent risk bet on it. But that’s the kind of thing to do. And so I think patterns of work, patterns of company operations I think will be persistent. I think some parts of product market fit will be persistent, but some will also just be highly volatile.

James Currier (17:44):

Yeah, yeah. We’ve seen a lot of companies renegotiating all their contracts down to lower their total cost basis. We’ve seen them resetting all the salaries, including the founders down.

Reid Hoffman (17:55):

Yeah.

James Currier (17:55):

We’ve seen some of the companies go after competitors. Just directly go after their competitors saying, okay, we’re going to take market share.

Reid Hoffman (18:02):

Yes, exactly.

James Currier (18:03):

Because they’re on their …

James Currier (18:03):

… because they’re on their heels, and we can choose to be on our heels or we can choose to be more aggressive.” Some of these companies are moving to virtual products. So these events planning company, they’re moving toward how can we turn this, using WebRTC, how can we now create a product that does something digitally that we used to do physically. Some of these major pivots, I think, are giving opportunities in the desert at this point.

Reid Hoffman (18:30):

Yeah, I think that’s totally smart to do. It’s good to recognize this is a wildly different time. The only super crazy people think that two months from now, it’ll be just back to where it was in January. That’s the insane point of view. Now, some things are more opportunities. Some things are, because like the example of your competitors might be really slowing down, et cetera. You’ve raised the Series A, your competitor hasn’t. You have an ability to grab customers, do things. You have ability to figure out a go-to-market motion that may actually, in fact, be lighter weight and more globally distributable like these kinds of things. Those are good opportunities to grab. Then sometimes you also have to say, “Well, but actually, in fact, we also have to focus on cost and longevity.”

James Currier (19:13):

Yeah, totally. Are there some areas, Reid, where you think that founders should be focused on in terms of making an impact over the next few years as we come out of this next year or the year after, where there are startups that are needed to put people back to work or there are startups of need that might not exist? We’ve seen a torrent of remote working applications in the last few years already. Always hard to know which ones of those will catch on and be big, but beyond that, are there areas that you think founders will start to see a greater return to speed that could really make an impact?

Reid Hoffman (19:47):

The natural impulse for most people is how do I get medical tests to the hospital, equipment to the hospitals, which was a very good thing to be doing a month ago. How do I finance science, and vaccinations, and inoculations? How do I support my local restaurants and so forth? I tend to think that the top focus, obviously, for most startups should be is like, look, if I can get a really good business going, I’ll be creating jobs. That’ll be a back to work kind of thing for people. That is actually a super important thing for me to do, and I shouldn’t get too distracted. Now, that being said on a secondary order, it’s kind of the we’re going to make our products free for hospitals and first responders. When we’re going to be catering at our startup as we’re going back to work, we’re going to make sure that we’re going to be ordering food from restaurants around, like choose some restaurants to help get back on their feet. We’re going to be a persistent orderer from them, right? As a way of doing.

Reid Hoffman (20:49):

I think those things are also very good to do, but things that kind of say, “I’m focused on my startup and my business first because that’s creation of jobs and industry.” I mean we’re going to be in X quarters recession. And the question is is it a small number X or a large number X? Is the only real question with that.

James Currier (21:10):

Yeah. That’s right. I think it’s an instinct to try to take care of everyone around you in the micro. I think this idea that just by creating a scalable enterprise and creating a foundation that could produce hundreds, thousands of jobs in the future is actually quite an ethical thing to do.

Reid Hoffman (21:31):

Yeah, exactly. It’s important. It doesn’t mean that you don’t care, right? You care deeply, and you could do things that you can to help, but the only way that this recession really gets back and the SMB jobs get recreated and everything else is that we move out of recession back into the normal growth of an economy. And that sometimes you have to have a longterm focus for that.

James Currier (21:53):

Agreed, agreed. It does feel as if what you’re saying is that the changes that we’re going to have here for the next one need to be around the shelter-in-place because the economic impact of this, the economic virus that this is may prove over the next two or three years to be more impactful than the virus itself. We have no idea, but it could very well be. The response of shelter-in-place is probably not the optimal response we can have. And so it’s almost as if we need some cultural entrepreneurship, not just entrepreneurship, entrepreneurship, but cultural entrepreneurship to shift what our playbooks are as a community and a society.

Reid Hoffman (22:30):

Yeah. We’re in the emergency playbook, which is the we fumbled. We’re going setback. I mean like the kinds of things would be some to say, “Well, look, the moment that we see a pandemic start to happen, you say, ‘Look, we’re going to shut borders for the moment, and we’re going to ramp up testing intensely.'” We go, “For that, we need to make sure that we have high testing capability.” By the way, if we’d done that here, we might have been able to shut the borders, just shut the borders of the US for a week, ramp up testing, be capable on healthcare stuff, and it would have been an entirely different curve that we were in.

James Currier (23:04):

Yeah. The network here is interesting also though because this virus connects all the countries. If one country tries to do herd immunity, and the others don’t do that, it creates a lot of suffering for the ones that try to do shelter-in-place while someone else is just out frolicking, and then their people are spreading the virus around. So it’s interesting, the sort of network effects, if you will, the different cluster implications of how everyone’s policy rolls out because we’re all interrelated now.

Reid Hoffman (23:32):

100%. It basically says doing shelter-in-place doesn’t really help you very much unless you also close the borders for that relevant time. One of the weirdnesses in the US is you got some states, you have California, Washington, now New York going, “Okay, we’re going to do the shelter-in-place.” Then, okay, well, what should we do? Should we then say, “Okay, no one from any of the other states is allowed to come? Unless you’ve gone through your own quarantine process, we’re not going to allow it.” Baseline intelligence to say a quick, brief shelter-in-place coordinated, then actually has the least economic impact and the highest impact on the RO of the spread of the virus.

James Currier (24:11):

We need to at least understand the math behind that, and then educate the decision-makers about that at every stage so when the next one comes, they’re ready for it.

Reid Hoffman (24:18):

Yes, exactly.

James Currier (24:19):

Do you think there’s any role that Silicon Valley has in what happens next or is everyone just mad enough at Silicon Valley at this point about our social media and all the chaos that that causes that our voices just aren’t really welcomed anymore?

Reid Hoffman (24:34):

Crises come with opportunities, and, obviously, people were pretty, decades of the young, swashbuckling technology entrepreneur being the hero, Dread Pirate Roberts or the Johnny Depp character where it’s actually heroic. Then the last five-plus years has been the Techlash, and people pretty angry across a number of things like did social media break democracy and truth-telling. Is the disbalance of wealth causing extra suffering, and we’re not taking responsibilities for the things we should be doing? Some of that Techlash, I disagree with. I think some of it’s the media being extra unhappy because people aren’t paying enough attention to the media as they’d like, but the business models are being challenged and those kinds of issues. So they amplify that without taking honest responsibility for that being part of the perspective and motive there.

Reid Hoffman (25:27):

I think that the opportunity for Silicon Valley is to say, “Look, step up and help people in this crisis.” We, as a valley, what are the things we can do in terms of helping people get back to work, helping with jobs, helping with vaccines, and inoculation, and pandemic, helping with information? You see some defensive game going on right now, which is like, well, let’s stop the spread of bad pandemic information, right? Which is the kind of thing that social networks need to be doing more of, which is stop the flow of what is just very clearly bad information anyway. But let’s also now figure out how to help. How do we get good information? How do we build those trust things? So what are the things we can do where people said, “Okay, you stepped up, and you did a lot more than you had to do than the minimum to help the rest of us navigate this pandemic?” I think there’s an opportunity there, and I think people should be doing it.

James Currier (26:21):

Yeah. Is there something that’s going on that’s really unnerving to you right now? What’s the thing that sort of stands out as, “Wow, that’s something we need to stop right away or that’s a mindset or an attitude or a set of language that’s..”

Reid Hoffman (26:34):

You mean within Silicon Valley?

James Currier (26:35):

Within Silicon Valley in particular, but staying focused on the environment that these early-stage founders are in that are listening to this.

Reid Hoffman (26:42):

Well, this may be less the early-stage founders, but the one that I’ve been particularly irked is about is that Silicon Valley, because of its focus on the future, has been beating the drum on UBI, universal basic income. The way that they’ve been beating the drum is this kind of really terrible marketing. It’s misleading and terrible marketing. It’s like, “Hey, we’re creating all these technologies. It’s going to take all these jobs away from you…

Reid Hoffman (27:03):

It’s like, “Hey, we’re creating all these technologies it’s going to take all these jobs away from you, but don’t worry, we’re going to put you on welfare.” And it’s just like, “Oh my God, you’re wrong.” The speed at which the jobs are going to be taken away and change is not the speed at which you’re envisioning. I understand you understand the speed because of the speed at which the technology industry moves.

Reid Hoffman (27:20):

Take one of the favorites which is truck drivers. Right now there’s a massive shortage of truck drivers and you say, “Well but AV is going to take that away.” It’s like, “Well, yeah, okay, when the autonomous vehicle trucks start getting manufactured, 10 years from then, is when they’re going to be at rough scale that actually in fact the truck driver industry will be hit.”

Reid Hoffman (27:40):

Okay, so when’s one of those trucks going to be manufactured? I don’t see it in the next couple of years. Maybe it’ll be manufactured in the next couple of years. And that will be the first one, not the scale manufacturing. Stop with this, like say, “Hey guys, don’t worry about the tech industry cause we’re all going to put you on welfare.” Stop with that discussion.

Reid Hoffman (28:01):

Say, look, there’s a lot that we’re doing with technology. It’s going to be creating new jobs. Now, there’s going to be adaptability, there’s going to be transition. It’s like the same transition from agriculture to industry. There’s going to be pain. And we’re going to need to help with that. And we’re going to need to participate. Because yes, it’s not to say there’s your pain, but that the UBI thing is a ways out.

Reid Hoffman (28:18):

And by the way, the precise limitations of the pandemic response of writing minimum wage checks will show the exact current gap between now and a star track future of UBI. Because if you go to most people and say, “Would you like six weeks of minimum wage check?” The answer is, “Absolutely, yes, of course I’d like that.” Would you like that or would you like your job back? They’re like, “I’ll work out what the six weeks looks like, give me my job back. I really need the job.” That’s what we’re going to see.

Reid Hoffman (28:45):

And so that’s what I would say. Now that’s not a Silicon Valley activity thing as much as a way that we talk to the rest of the world.

James Currier (28:51):

Yeah, it does feel tone deaf to suggest that people don’t get meaning out of their work. And that they’re going to be happy on welfare.

Reid Hoffman (28:59):

Yes. And actually in fact the truth of matter is there’s going to be a lot of work for at least the next 20 years. And probably longer than that, until the next 20 years. Well, 20 years is half a career of someone who’s graduating this year.

James Currier (29:15):

So, instead of having no jobs, it’s just a matter of having to adapt to new types of jobs every 10 or 12 or 15 or 20 years?

Reid Hoffman (29:21):

And how to help with that, is the actual focus.

James Currier (29:25):

Anything else that’s going on that’s unnerving you, is there anything that the VCs are doing that’s bugging you?

Reid Hoffman (29:30):

Well, not particularly. I mean, I do think that, I’m less of a fan of what some VCs do, which is go back and try to renegotiate drastically term sheets or other kinds of things. I get it, responsibilities to LPs and so forth. But it’s kind of a shared thing. And so I tend to think the right approach is how do we share the pain.

Reid Hoffman (29:50):

And creating, one of the things that is awesome about the industries we build and thing we do as investors and things that we do as entrepreneurs is we play these non zero sum games. And we go and build something that’s new and much bigger and additive. One plus one is 10 not two.

Reid Hoffman (30:06):

So, that tends to be the share of the pain. Don’t say, “Well, okay, it’s a zero sum game.” You’re in a position where you’re in dire need. I’m going to try to get every last penny out of it. It’s like, look, let’s share the pain through this. And some VCs are going and being a little bit more rapacious than they should be. It’s more individuals than firms and so forth. But I don’t think it’s the industry.

James Currier (30:29):

It is interesting how people snap back into a zero sum thinking sometimes in times of crisis. It’s so hard to train people out of it to begin with. And then they snap back into it.

Reid Hoffman (30:39):

Exactly.

James Currier (30:40):

Yeah. I remember that moving out of Europe and the East Coast and finding how much non zero sum thinking that is out here. And how different that is, how fundamentally different that changes the human relationships between people. And maintaining that through ups and downs is pretty critical. And it’s a cultural thing. It’s a learned thing. It’s a network thing, where because you feel that way, I feel that way, because the two of us feel that way, other people are forced to feel that way. But it starts to break down and it can get bad quickly.

Reid Hoffman (31:08):

Yeah. And there’s a direct tie obviously, they’re siblings, between non zero sum thinking and growth psychology. Because if you think that actually in fact the pie is growing, yes, you want to make sure that you get a good portion of the pie and everything else. But if the pie is growing then it isn’t a, well for me to win you have to lose. And that growth psychology, that non zero sum thinking is part of how we make progress in the world. And so holding onto that and making that the way the world works is super important.

James Currier (31:39):

All right. How much of your time are you spending investing these days and what sorts of stages are you investing in?

Reid Hoffman (31:46):

There’s a “these days,” pandemic days; and there’s a “these days,” outside of pandemic days. So these days, pandemic days, it’s mostly working with the existing portfolio, my own, across Greylock and so forth. A bunch of my partners are still out there really looking at new businesses and so forth. But I’m probably playing more of a, when an entrepreneur gets introduced to me right now, I’m like, “Hey, meet Sarah Guo, meet Josh McFarland meet, you know.” And I’ll help them and work with them on it. Just for the near pandemic days.

Reid Hoffman (32:15):

Generally speaking, I’m part of how I describe a venture investor to people who don’t understand the business, that you look at 600-800 deals a year and you do zero to two of them. The benefit of my network is that I don’t have to look at 600 to 800, I can look at a smaller number, but I’m still doing zero to two deals a year. Just like every GP.

James Currier (32:31):

Got it. Good for you. Well, it’s been great to see you today, man. I really appreciate you taking the time out.

Reid Hoffman (32:36):

Yeah, likewise. Look, the entrepreneurship stuff is really important. What you guys are doing it NFX is great and really shining a spotlight on the things that matter. Building the new global world, these businesses with network effects really matters, so it’s awesome.

James Currier (32:50):

Yeah. Well, it’s great to see you, my friend. Thanks for the time and we’ll see you soon. Be well, be safe.

Reid Hoffman (32:55):

You too.

Connect with James Currier

How PayPal & Trulia Navigated Downturns: David Sacks, Craft Ventures + Co-Founder of PayPal

How PayPal & Trulia Navigated Downturns: David Sacks, Craft Ventures + Co-Founder of PayPal
David Sacks NFX

Guest Bio:

Today we’re talking with David Sacks about how to lead a company through an unforeseen downturn, and what it takes to adapt and survive in an unpredictable economy. David is a general partner at Craft Ventures and previously a Co-Founder of PayPal & Yammer. Both David and Pete founded iconic companies and led them through unstable markets to emerge with high growth and success.

In this episode, we discuss:

  • The Founder mindset during a downturn
  • The Investor mindset during a downturn
  • Tactics/frameworks for founders
  • Happy Talk vs Hard Talk
  • Silicon Valley during COVID-19

 

Transcript:

Christen O’Brien (00:04):

This is Christen O’Brien, and you’re listening to the NFX podcast. Today, we’re talking with David Sacks and Pete Flint, founders who have each navigated two companies through two downturns and emerged stronger. David with PayPal and Yammer and Pete with LastMinute and Trulia. Each of these companies went on to become market leaders, but not without hard-fought lessons. In this remote podcast, David and Pete share the specific tactics they learned about leading through hard times, the mindset founders need to adopt in order to survive, and what as VCs, they’re advising their portfolio companies to prepare for. David is now a co-founder and general partner at Craft Ventures, which like NFX, invests in early-stage entrepreneurs. Let’s jump in.

Pete Flint (00:51):

David, thanks so much for joining us today. I’m really excited to connect. We’ve both been in somewhat similar kind of fortunate or unfortunate positions, building companies through recessions and ultimately the companies became more successful for it. So you founded Yammer in 2008, just in the kind of heat of the global financial crisis and before that PayPal, during the dot-com crash, so kind of a wealth of experience there. And then my background in online travel in 2001 in Europe and then running Trulia in 2008, so there’s a wealth of experience. So hopefully in this podcast we’ll have a chance to really pull out some insights and give founders some thoughts about how to navigate the really changing situation. Maybe just from your own perspective during your experiences in leading companies through a downturn, what are some of the things that you felt you did right and perhaps some of the things that you felt you’d do differently during that time?

David Sacks (01:43):

Good to be with you, Pete. I think these types of downturns can be great times to build companies. Like you said, PayPal was mainly built right after the dot-com crash. The product launched at the end of ’99 and three or four months later we had the whole dot-com crash and the company was mostly built in 2000, 2001. And then was the first company to IPO in 2002 and kind of ended the dot-com bust. And then like you mentioned, Yammer began in 2008, 2009 and we are in the midst of the great recession then. So I think these can be obviously difficult and trying times, but also very good times to build a company. Innovation doesn’t stop just because there’s an economic downturn, there’s always need for innovation. And assuming you can get funding, which is the one thing that gets much harder during a downturn. Everything else gets easier, there’s fewer copycats, fewer competitors, the war for talent and recruiting gets an easier. So most things get easier. It’s just fundraising gets harder.

Pete Flint (02:48):

Talking about cash position and I shared a post, 28 steps, just from my experience and that’s certainly kind of a dose of realism, plus understanding your cash position is paramount. I’m hearing I think every day, the amount of cash companies need on the runway seems to be extending not shortening. I guess, what are you thinking about and what are you advising your companies and what did you do when you were in this position?

David Sacks (03:12):

We’re recommending to our portfolio companies to have two years of runway. I mean, at least eight quarters and really 10 quarters would be better because when you think about it, what’s happening right now is everyone’s businesses is getting disrupted. Well, I’d say 80% of startups are getting disrupted. There’s 10 or 20% that actually are seeing an increase in demand because we’ve got one startup that’s doing e-commerce and another one that is a nursing marketplace and both those companies have seen a huge spike in demand post COVID.

David Sacks (03:44):

But I would say that the other 80% of companies are going to be disrupted to some degree. A good number, anything touching for example, the restaurant industry or travel or anything like that, the disruption is 80, 90, 100%. I mean revenues has just gone to zero. Then there’s sort of the ones that are disrupted, not because they’re in an industry that’s kind of gone to zero, but because deal cycles are taking longer, there’s less business confidence, everyone’s kind of cutting costs and taking a wait and see.

David Sacks (04:18):

And so we’ve kind of color-coded our companies based on COVID impact. There’s kind of red, yellow or green. And red are the ones which have kind of revenue’s gone to zero. Green are the ones that have actually been accelerated, but I think most companies are probably yellow, which is to say that their pipelines have been disrupted, but they don’t even know by how much yet. And so because of that you’re going to need probably two or three quarters just to adapt and make the changes you need.

David Sacks (04:45):

If you’re kind of in the red, you’re going to need maybe a year to pivot and move to a lower burn model and then you’re going to want to have another year after that to show that the new model is working. And then you need time to go run a fundraising process, so you really want to have two, two and a half years if you’re a business that needs to retool or pivot or make major changes because of what’s happened.

Pete Flint (05:11):

We’ve done exactly the same process and similar recommendation. I think reflecting on my own experience at Trulia, we raised in Q2 of 2008 $15 million in today’s language, a Series B, and we didn’t get an upround for more than three years. We essentially had to go public to get an upround. Yet we were growing, at least doubling year over year during that period if not more. So I think not only is there kind of the fundraising window to open up, but also evaluations coming down. So I think it’s certainly going to be a really challenging time. And for all the same reasons I think particularly for network effects businesses, if you could use this as a time to build market share, then you are really sometimes the last man standing. Many of these marketplaces that came out of 2001 or 2009 really were the last man standing and they’d just build a network against a relatively uncompetitive environment and come out extremely strong. Is there anything, just as you think about what are the hardest things, the real challenges, and is there anything that comes to mind, what is super hard for founders to execute on that you feel is paramount for them to do at this time?

David Sacks (06:26):

The hardest thing is always layoffs. Everybody hates doing it, they don’t want to do it. And so they tend to wait or if they do it, they don’t cut deep enough and then they have to go back and do it again. And so that’s the one. Burn reduction is the hardest thing and then specifically the layoffs that are the biggest part of that typically.

Pete Flint (06:47):

I would agree and then the other component I think is communication. I think in this environment your team is scared, you’re worried and we’ll talk about your “hard talk” post in a moment, but just the level of communication needs to be significantly increased. If you’re doing weekly all-hands, maybe do them twice a week. If you’re doing daily stand-ups, maybe twice a day, particularly in this remote setting and that all, I think that will really separate a number of leaders, not just companies from others.

David Sacks (07:19):

I agree with that. One of the points I make in the “hard talk “post is that when you have to do the tough things, it has to be accompanied with a plan, otherwise you’ll just freak your team out. If you make layoffs but then don’t communicate and keep communicating what the plan is moving forward to be successful, then people will just be deeply anxious. And so, yeah, I think the communication’s a huge part of it.

David Sacks (07:45):

Maybe a third thing that’s hard for founders to do, but it’s really important at a time like this is, is to get all the legacy thinking out of their heads. I think that there’s so much that changes in a time like this and one of the biggest mistakes is to just be too anchored on the past and what the old plan was, and what the old organization looked like, and the old burn rate, and the old roadmap, and all that kind of stuff. And the big advantage a startup has is that it can adapt, it can pivot, it can change, it can throw away all those plans. But if founders don’t kind of let go of that legacy thinking, then they won’t be able to take advantage of that.

Pete Flint (08:28):

We obviously talk a lot about product market fit as investors and founders need to realize the market is fundamentally shifted for 80% of the companies. And that kind of means that your priority in your company may have to fundamentally shift. It’s case by case but this is where kind of stubbornness, while it is an asset for founders, adaptability is more important in helping companies get through this.

David Sacks (08:55):

I just had a conversation with a couple of founders the other day and I mean their original plans have been completely disrupted by COVID because they’re basically selling to college students and all the college students are home right now. So there’s just no distribution and they were outlining a plan for the business that involved a pivot. And the point I made to them is, “Look, you’ve still got $5 million in the bank. If you were a company that graduated from YC, you would love to be in that position. You’ve got a great team of engineers, you’ve got $5 million in the bank, your original plan now has been totally disrupted but you can do anything you want.” The new plan shouldn’t just be a rationalization of the old plan. It should actually be the absolute best plan, the thing that you would be most excited about going all in on.

David Sacks (09:43):

I think at a time like this, founders should always be all in on their best idea and you just can’t afford to be kind of hedged or pursuing a bunch of different things. You really need to figure out what is our best idea? And just how do we focus on that. If you don’t have product market fit either because you never had it or because of the disruption that’s happening now, don’t be afraid to take your startup down to the studs effectively, because it’s a lot easier to manage and adapt and find product market fit as a seed stage company. And that’s one of the big mistakes that Series A, Series B companies make is they keep operating with all of this Series B type headcount and burn even though they don’t have Series B product market fit anymore. And in a lot of cases it’d be better off going back to it being a seed stage company.

Pete Flint (10:35):

Yeah and a bunch of companies have made this pivot successfully, but the majority of them don’t. This sort of persistence and adaptability, companies that get through this period almost have a…It’s really about a narrative almost about persistence. Kind of never giving up in the face of adversity. There are founders that they may just throw in the towel if they come to realize they’ve lost product market fit. In your experience coming across hundreds of thousands of founders over your career, where do you think the psychology of that persistence is and what’s the sort of kernel at that persistence that separates founders that get through this and the founders that don’t?

David Sacks (11:15):

I think there’s a greater sense of urgency on the part of the founders who make it for some reason they’re just more finely calibrated, almost sort of more high-strung in a way. They’re able to react much quicker to the changing circumstances and sort of throw away the old plan and figure out a new plan. And the ones who don’t make it, there’s just this lack of urgency. There’s always kind of like a wait and see. Give me an example, I’ve got a company that we invested in the Series A, the founder had three years of runway. He’s been running it very frugally and he asked me, “Well, is three years runway enough?” I said, “Yeah, you’re actually in pretty good shape compared to a whole lot of other people.” And he still went back and got his team to all, including himself, take a 20%

David Sacks (12:03):

pay cut, and he figured out how to cut some costs. Now he’s got four years of runway. I mean, that’s just like a tremendous sense of urgency and sort of finally calibrated in reacting to the changing circumstances.

David Sacks (12:15):

Then I’ve got a lot of other founders who their reaction is, “Well, we’re going to wait and see how things shake out over the next three months, and then if things look bad, we’ll make cuts then.” I guess that can work, too, but it’s just much less urgent somehow. There’s always a reason to postpone the tough things that need to be done.

Pete Flint (12:36):

Right. I see the same thing. Of course, the founders that delay are basically burning cash during this time, with very low revenues, and that shortens their runway.

David Sacks (12:47):

Right.

Pete Flint (12:48):

It also essentially makes it much harder for them to motivate the team. If they’ve tried something and tried something and tried something, then I think it’s just sort of a slow death, as opposed to being responsive and being fast.

David Sacks (13:02):

At a certain point, when all the companies around you are cutting costs, your employees will actually have some sense of what’s happening, and they know if the burden is too high. At a certain point, if you could just keep procrastinating it, they’re all just kind of looking around at each other, saying, “When is the axe going to fall?”

David Sacks (13:22):

So, in a weird way, you don’t get rid of the anxiety by procrastinating. You’re better off figuring out what the plan is going to be. I mean, you don’t want to just cut willy-nilly. You do want to figure out what the sort of go forward plan is, but you then make those changes as quickly as you can so that the people who are remaining with the company feel safe and comfortable, and they understand that we only needed to do this once. To your point about communication, they buy into the new plan. The longer you procrastinate doing all those things, the more anxious people actually become.

Pete Flint (13:59):

When I was running Trulia, you probably remember that time the Dow dropped a thousand points. Sequoia sent out the memo that was widely distributed. I was in that meeting at their offices, and ended up calling a management team meeting on the Sunday afternoon. We basically came in on Monday morning and presented the plan: Talk about the market, talk about what’s happening to the economy, talk about what’s happening to the industry, and then talking about our specific plan and what were some of the changes, in terms of people, that we had to make. Then also, just almost person by person, how they fitted into our business model, in the sense that this is explaining the financial details, saying, “Team by team, if you could move this metric from here to here, then the compounding impact of these changes from everybody will lead the company to profitability.”

Pete Flint (14:58):

Being very explicit, almost overly explicit, at this time is necessary to give people the transparency and kind of comfort that there’s a very explicit plan, and then they can see their role in achieving that success. “How do I contribute to this company’s success?” and knowing what everyone else is doing I think is a very clear way to do that.

Pete Flint (15:20):

I’m curious. From your experience in Yammer and PayPal, any experiences or specific tactics that you did or you had to navigate that might be helpful for the audience?

David Sacks (15:31):

Yeah. I mean, so as I think back on PayPal, it sounds a lot like what you went through at Trulia, in the sense that the PayPal business model could be expressed as a formula very easily. I mean, it was very, very straightforward. It was basically transaction volume times the price, the transaction fees, minus fraud, minus funding costs, minus customer support. So everything could be traced back to that. So we showed everybody how they fit into that and where we needed to move the numbers to.

David Sacks (16:03):

The PayPal story really was a story of a series of life and death struggles. Everyone in the PayPal Mafia now has gone on to so many other things, and PayPal’s $100 billion-plus company, but people don’t realize how close it came to dying multiple times. At one point in, I think, mid-2000 or mid- to late 2000, the company had about $40 million left in the bank, and we were burning $10 million a month. So it doesn’t take a genius to figure out that you’ve only got about four months of runway, and the company is about to run out of cash and die.

David Sacks (16:39):

The big lever that we pulled at that time was PayPal was basically free, and we had promised the customer base that payments would be free. The thinking was that payments would be a loss leader to get people into these financial accounts, basically bank accounts, and we would ultimately make money by upselling various kinds of financial products. There was some amount of skepticism or disbelief that people would ever just pay for the basic payments product. But we ran out of time, and we realized that there is no Plan B here. We just need to go with the product we have and charge for what we’re already putting out into the market. We don’t have time to do some sort of upsell

David Sacks (17:19):

So, over a few week period, we basically forced all the users to pay transaction fees. We were very worried that this could lead to enormous churn. We could lose to competitors. But, as it turns out, people were willing to pay for the service, and, virtually overnight, we were able to slash the burn by turning on revenue. Things got a little more comfortable after that. It was still pretty tough.

David Sacks (17:43):

So I think this idea that raised prices can be a major lever, but this idea of there is no Plan B, there is no time for kind of elaborate multi-step plans. You’ve just got to be all in on whatever best idea, your best product is right now.

Pete Flint (18:00):

Necessity is the mother of invention. I’ve been speaking to founders that think, “Oh, okay, we’ll raise money next year or in sort of four months.” I think there’s that mentorship to say, “There is no money.”

David Sacks (18:12):

Yes.

Pete Flint (18:12):

For some kind of more mature company, there is no kind of backstop. There is no alternative, almost like that movie, The Martian, where he’s got to figure it out.

David Sacks (18:22):

Right.

Pete Flint (18:23):

There is nothing like that to focus the mind …

David Sacks (18:26):

Yes.

Pete Flint (18:26):

… and figure out how you navigate this path and figure out, “How do we get profitable?” Of course, that might not even be possible from kind of the earlier stage companies, but the thought process is often illuminating, and then you really drill in on, “Do I truly have a 10X product? Do I truly have product-market fit? Is this something that people will buy this when they’re feeling poor and almost unemployed?” Then it’s a pretty interesting product.

David Sacks (18:51):

Yes. So I think we’re about to find out how many products are actually mission critical, because everyone’s slashing their budgets, and any product that’s kind of optional, people just aren’t going to pay for. So, over the next few months, I think a lot of companies are going to find out that they will have more churn, or their deals will take longer to close. We’ll find out they just aren’t that mission critical.

David Sacks (19:15):

VCs, I think, are waiting for that data. So it makes it kind of a really bad time to be going out and raising. I think VCs want to know which businesses have been disrupted and which ones haven’t, and it’s going to take a couple more months for us to see that in the numbers.

David Sacks (19:31):

But I agree with what you said about that the money that you have in the bank. For 80% of startups, that is it. I mean, you have to assume that that is all the money you’re ever going to have. I think when times were frothy, there’s this assumption that every 12 to 18 months, you’ll just be able to raise an upround. There’s always a bigger, better deal a year or 18 months in the future.

David Sacks (19:52):

I think now, the situation we’re in, there’s about 10 or 20% of companies that have been accelerated by this, but the other 80%, just the money you’ve got in the bank is all you’re ever going to have. So how do you make that last, to give yourself enough time to find product-market fit and to have enough time to have enough game tape after you find product market fit for the number to reflect that? Because it’s not like you can just go out and raise a month after you supposedly find product market fit, you need to have three or four quarters of rapid growth after that moment to prove that you have it.

David Sacks (20:25):

So startups really need to make sure they have the time to be able to do that. I remember back in 2000, 2001, during the dot-com crash, it went on for two years. The stock market crashed, but then the stock market just kept going down gradually after that. I think the initial crash was about a 50% down in the dot-com stocks, but then they went down another 90% over the next two years. It was like this gradual erosion, and the startups just kind of, one by one, fell. Most of them did, just fell by the wayside and died.

David Sacks (20:59):

You have to ask, “Well, why didn’t they just make the cuts upfront? They could’ve given themselves years of runway,” and they were all just kind of constantly holding out hope that things would just get better. They weren’t making serious enough cuts to give themselves the runway they needed to essentially reinvent themselves.

Pete Flint (21:16):

Yes. Just to build on that, you recently published an article about happy talk versus hard talk, the willingness to ask tough questions. We talked earlier about kind of confronting this reality, really sort of digesting the gravitas of what’s going on. Can you just share a little bit about kind of the thesis and kind of what was the trigger point for that article and why, perhaps, many founders avoid hard talk? What are the intrinsic reasons they’re perhaps wired for happy talk?

David Sacks (21:46):

I guess the trigger is so happy talk is probably the number one killer of startups. I guess the trigger for that blog post was I have these meetings with founders all the time, where the meeting starts off, and everything is wonderful. They tell you how great they’re doing. By the end of the meeting, you realize that, actually, there’s only three months of runway left and they’re about to run out of money. I’ve just had so many of those meetings, where I’m just like, “There must be something here. There’s a deeper psychology to this.”

David Sacks (22:18):

I think it’s because founders have to be optimistic. The odds are so stacked against you as a founder that you have to be optimistic to create a startup. You encounter so much rejection in the early days of a startup, whether it’s prospects telling you no or would-be employees who don’t want to come work for you or investors who say no. There’s just so much rejection that an entrepreneur, I think, does have to be fundamentally wired for optimism.

David Sacks (22:48):

But if that wiring kind of locks them into this happy talk mode and they lose the ability to see ground truth, the reality of their situation, that’s where it becomes a huge problem. So I think the best entrepreneurs are able to maintain this dual state, where they’re very optimistic about the vision of the company and where it’s going and that it will ultimately prevail, but they have tremendous clarity about the day-to-day challenges and what they need to do right now and the existential risks. They work to systematically knock off those risks.

Pete Flint (23:23):

It’s the Andy Grove paranoia. So optimism is great, but paranoia is just necessary during this time. Sure, things might bounce back in six months’ time, but what if they don’t? Because the unemployment rate is through the roof, and we may be not social distancing, but the sort of downstream societal impacts are going to be way bigger. I think that this sort of paranoia is absolutely a key asset in good times and bad times.

David Sacks (23:52):

I think the whole “Only the paranoid survive” philosophy very much dovetails with this. What does it mean to be paranoid?

David Sacks (24:03):

I think what it means is that you are constantly seeking disconfirming evidence. So you’ve got a thesis that you’re optimistic about, but it doesn’t cause you to have kind of confirmation bias. You go looking for the reasons why it might not work. You go looking for the big existential risk factors, so that you can systematically eliminate them, so you that you can work the problem. And if you’re just not sort of intellectually honest about the ways in which the startup isn’t working, then you won’t be able to solve those problems. I mean the key is you have to, I guess you have to be paranoid in order to find the problems and you have to admit the problems or you won’t be able to fix them. And the reason why happy talk is so pernicious is that if you can’t even admit to yourself or your board or whoever, or your team, what the problems are, you’re definitely not going able to solve them.

Pete Flint (24:52):

I think from a paranoia perspective, I mean there’s also just automatic risk. I think you’ve seen how other conversations with founders who are saying, I think we’ll delay these cuts or these changes, because they think they’ll be in a position to raise money in the future. And I think this is not just the outcome of a failure of mistake here, it’s your company will go bankrupt.

David Sacks (25:17):

That’s right.

Pete Flint (25:18):

And I think there were very few examples of bankrupt companies in kind of in recent history. It’s just because we’ve been on this 11 year boom. But the bankruptcies are like you remember the kind of blocks, I mean the ticker of bankruptcies that went through in 2001 and in 2009 was just a daily occurrence of companies. And layoffs is one thing, but bankruptcies were a daily occurrence.

Pete Flint (25:43):

I think that seems so far from the truth. And so just managing risk of shore, of course you can sort of make some changes today. And if you don’t have precision on those, then the downside of the situation is not necessarily a down round, it is bankruptcy, which, it’s going to be a real viral situation.

Pete Flint (26:04):

And just from a communication perspective, we talked earlier how transparency with the team to get them to kind of have confidence in the plan, confidence of the team, is critical. That said, transparency can be a double edged sword. And what my sense is today, is that teams are looking for almost true transparency in what’s going on into an organization. And I’m curious to get your take in terms of the degree of transparency within the organization, how necessary is that from the average employee, not just to the board?

David Sacks (26:42):

I mean I think it’s very important. We dealt with this, I mean it’s a very different type of issue, but we dealt with it to some extent at Zenefits, when we actually had to do a turnaround there. To some degree, the employees already know that there’s a huge problem. If you don’t acknowledge it or admit it, speak to it, then it just again, makes everyone feel more anxious, because they feel like it’s not being addressed or it’s being covered up rather than cleaned up. So I think that the transparency is very important.

David Sacks (27:12):

And the only thing I would just add to it is that, you do have to kind of give people, I’ve called the hard talk, kind of the opposite of happy talk. It’s the, I’d say, harsh assessment of where things currently stand. I think it’s important to combine that with a plan moving forward that gives people some hope. I don’t think you just want to lay all the negatives on people without also giving them a highly actionable plan to let them know that if they do those things, there is a path to success.

Pete Flint (27:41):

Yeah, there’s a lot of talk about wartime CEO’s and we referenced Churchill in it, and it’s sort of giving almost every team a mission and an objective. And this is their mission to achieve. And if they succeed in that mission, then ultimately other people see it in their mission, then the company be successful. And like any mission, you’re going to have these unexpected surprises and unexpected changes along the way. And you don’t know necessarily, you don’t have all the direction of what to do. But it’s imperative that the teams go out and execute on those individual missions and innovate along the way. But that sort of clarity about what’s asked of people.

Pete Flint (28:22):

And I’ve seen 98% of the time that people rise to the challenge, they kind of get excited by this. They can see the path if it’s a realistic path. And then the sort of energy and ferocity and innovation comes out, and it can be inspiring for many teams. They go from deer in headlights, through to commandos, and really figure out that this is the part to success.

David Sacks (28:49):

I agree. That’s a very well said. I think you can focus people’s energy on missions on a concrete plan. They’re going to wallow in the negatives and the anxieties if they don’t have that. But if they have a tangible plan to execute on, I think they will enjoy that; they prefer that. And if you’re on the other side of whatever hard cut you’d make, then I think that it’s doubly true. Because this is the team that you’ve decided to stick with, and it’s very important to convey that obviously with any cuts that you have to make are very unfortunate, but the people who are remaining are the people who are the most important moving forward to accomplish the mission.

Pete Flint (29:32):

So to extend the Wartime CEO, you referenced Churchill, I’m a big Churchill fan as well. And he’s obviously a great kind of leader and an orator as well. So a lot of his quotes and stories kind of resonate. There’s many kinds of quotes from Churchill at this time from, “If you’re going through hell, keep going.” This is one of my favorites. Or , “Never let a good crisis go to waste.” Or “The empires of the future are the empires of the mind.” You referenced Churchill in your article, what was the reference there?

David Sacks (30:04):

Well, to me, he’s an exemplar of hard talk, which is the opposite of happy talk. And when you read his speeches, there’s a type of bracing clarity to them where he acknowledges what a dire situation they were in. There’s no shirking away from that. And he talks about how the British way of life is at stake. Not just that, but all of Western civilization. He talks about how if the Nazis win, it would take civilization back to some Dark Age. What did he say? Dark by the lights of a perverted science, or something like that.

David Sacks (30:45):

Anyway, there’s a lot of bracing language about the dire situation they’re in. But at the same time, there’s also a lot of inspiring language in there as well. That if they do face this menace, people will look back for a thousand years and say this was their finest hour. So he manages to find, I think, a really great combination of giving people the ground truth but also inspiring them.

Pete Flint (31:13):

Yeah, it’s remarkable. There’s a lot and some great movies as well. Given this kind of very strange set up where we’re remote working, we’re collaborating over Zoom and kind of online, I’m curious from your perspective, either sort of tips or tactics that you’re seeing from founders or teams? Or also, just how to manage tough conversations over this environment. It sort of feels that in some ways, the stress of this situation plus they’re sort of, frankly, they’re connecting personal nature of these platforms, almost makes it easier to have hard conversations, that you sort of forget with perhaps the niceties and the kind of chit chat, and you get down to the kind of the really hard issues.

Pete Flint (31:57):

What’s your perspective, given this strange working environment, you can’t look someone physically in the eye and kind of have these straight conversations. How are you seeing founders navigating it, either in the board conversations or in the team conversations?

David Sacks (32:12):

Yeah, I mean the idea of doing layoffs via Zoom, or I’d say even the post layoff conversations with the rest of the team gets so much harder because you can’t do it in person. That’s definitely true. I think that if you are going to do layoffs, I think there needs to be a communication plan that’s really well thought through, not just for the people who are being laid off but also for everybody else afterwards.

David Sacks (32:38):

And like you talked about, the reasons for why this is happening and what it means and what the path is moving forward have to be over communicated to everybody. Whereas some of these things might have happened in an all hands meeting before to some degree, now you may need to do an all hands via Zoom, but before that, you might want to just do more one-on-ones. Or if the CEO can’t do them all, then the exec team needs to run down a list and maybe every member of the exec team, every employee is talked to by somebody for 15 minutes, half an hour or whatever it is. So yeah, you really have to think through that.

Pete Flint (33:12):

I think that the human element of what’s going on, I think with the sort of stress and panic that’s company is seeing, if they forget the human element, then it’s very hard to recover from that. Just because so much of the success of helping a company rise from a challenging period is the culture. And it’s particularly hard to manage and curate cultures right now, but if you were able to figure it out or if you have a strong culture to begin with, then you’re going to be in a much better situation.

David Sacks (33:40):

I was going to say, we have a couple of startups that were fully remote. And I’ve always been a little bit skeptical of that, because the companies I’ve been involved in had a strong central headquarters. But they’re managing quite well with this, because they already had all the processes in place to kind of hold their teams together. So for them it’s been easy, it’s been no change. And then everybody else, they’ve had to figure out how to do it.

Pete Flint (34:05):

So maybe, let’s switch to COVID-19. So I guess in Silicon Valley, in the technology ecosystem broadly, where do you think we’re doing right and perhaps where do you think we’re not doing enough right?

David Sacks (34:17):

Well there’s been a weird dynamic over the past month, where I feel like tech Twitter has advocated for things and the so called experts have been against them. And then a week or two goes by, and then all of a sudden, the experts get on board with it.

Pete Flint (34:34):

Yep.

David Sacks (34:34):

And so like mass is the latest example where, I mean I don’t feel like I’m an expert on anything, but I’ve been tweeting about the need for mass for over a week. And it was just crazy to me that that wasn’t part of the standard kit of things that we are doing. And, and then finally, the experts just got on board with that. There are other things, the use of blood serology tests as a way of doing at home finger prick testing. We were tweeting about that weeks ago, and now the FDA is finally gotten on board with approving it. The expansion of the right to try and use things like hydroxychloroquine. Don’t know if it’s going to work, but certainly makes sense to be trying these things. And all of these things have ultimately happened. It’s just, it seems like the experts have always been a couple weeks behind.

David Sacks (35:21):

I’m not sure exactly why that is, but I mean, I do feel like for us at Craft, I feel fortunate that I know a bunch of the people on Twitter who have been very early on this, and because I know them, I sort of trust them. And when I saw them tweeting about what was coming, we took it more seriously I think. And so at Craft, we started doing work from home on March 1st, it was about two weeks before the shelter in place. And that turned out to be a very important time for people to get ready and get whatever supplies they needed. And that happened because I was listening to Balaji and other folks who I know on Twitter.

 

David Sacks (35:56):

And so, it feels to me like tech Twitter’s done a decent job of being ahead of the curve on this thing,

David Sacks (36:03):

and I’m certainly grateful to all those people who were the early warning system for this.

Pete Flint (36:07):

Ror sure. I mean, when you’re in Silicon Valley, it can often describe it a bubble. And in this context, the echo chamber, it was very noisy weeks ago and I think in the good and the bad of Twitter. It sort of amplifies perspectives and it’s very true. I think that San Francisco and Mayor London Breed were ahead of the curve in many things. I’m not sure how much of that was influenced by the tech sector, but I’m feeling today, San Francisco is in a fortunate position. Silicon Valley is in a fortunate position relative to a number of other U.S. and international cities for sure.

David Sacks (36:42):

It seems like the one place that took it seriously before it was directly hit hard. It seems like the pattern, just about everywhere else in the U.S. and I’d say probably Western Europe as well, is that people haven’t really taken it seriously until their own social networks are impacted. When it was in Wuhan mostly we were seeing these videos of people in hazmat suits, the streets being empty and being disinfected by these white plumes of smoke. There was very little coverage of it in the U.S. It felt like something was just happening somewhere else in the world. And then it happened in Iran, and then it happened in Italy, and there was still this sense will that’s not going to happen here. And then it started happening in Washington state and even New York, they were very, very late to, to react.

David Sacks (37:34):

I was getting text messages from friends in New York and there was just no awareness of it happening there. And they were kind of dismissive of the crazy tech people on the West Coast who are paranoid about this. So it does feel like San Francisco was slightly ahead of the curve and again, we had these folks who were a little bit of an early warning system on Twitter. It’s been a great resource. The strength of Twitter is the ability to get de-centralized information routing around these experts who don’t seem to know what the hell they’re talking about. I mean, if you go to the WHO website and the things they’re saying on their website are just manifestly not true, that you don’t need a mask unless you’re taking care of someone who’s infected with COVID-19. That maintaining a three foot distance for someone who’s coughing and sneezing is sufficient. I mean, things like that it’s just crazy. The best part of Twitter is being able to get access to this decentralized information. I mean the worst part is the tweet mobs that you also get, but there is something very positive about it right now.

Pete Flint (38:33):

From your perspective, what do you see is some of the longer term impacts on society and Silicon Valley? With an investor hat on, what do you see as some of the opportunities?

David Sacks (38:42):

Well, it’s very hard to know the future. I sort of see it as scenarios and then you kind of assign a probability to the scenarios and I think right now there’s kind of three scenarios. There’s the V the U and the L, which kind of generally apply.

Pete Flint (38:59):

In terms of recovery?

David Sacks (39:01):

Yes, in terms of recovery. But I think you can also use that as a proxy for vital impact and geopolitics or a bunch of other things. I mean if the U.S. Doesn’t have a V or U shaped recovery and it gets into an L, then their applications are going to be huge. And we don’t even fully know all of them are going to be. So, I tend to think those are the scenarios.

David Sacks (39:21):

And then I’ve got friends all across the spectrum. I’ve got some who are very optimistic and think it’s going to be like a V and that in April it’s going to be tough because of the lockdown, but that will arrest the exponentiality of the virus. And then starting in this summer, maybe June or May, we can start getting much more fine tuned in our policy and we can let people out of lockdown based on risk factors. And we have gloves and masks and ways of managing that aren’t as bad as locked down. And that by the summer you’ll have treatments and towards the end of the year you’ll have a vaccine. So they’re kind of on the optimistic side of this. And that would be kind of the V. And then there’s the U, which would say that basically the V story is largely correct, but the wound in the sense that we’ll get treatments this summer and we’re going to figure out an alternative to full lockdown and eventually we’ll get a vaccine in a ye,ar.

David Sacks (40:16):

But they would say that that narrative is largely right, but the wound we’ve suffered is more grievous than that. It’s going to take longer. It’s not going to be perfect. It’s going to take a few more months. And we’re probably likely to have 18 months, two year something recession. And then you’ve kind of got the case that’s worse than that, which is that actually we’ve never had a running stop of an economy like this. I was watching an interview with Kevin Warsh, former Fed Governor the other day and the way he put it was, “It may be possible to bring the economy to a sudden stop, but it’s unclear that we’re going to be able to do a restart of it.” And right now it does feel like the economy is sort of unraveling and the government is trying very hard with these massive bailouts, multi-trillion dollar bailouts to hold everything in place, hold it all together.

David Sacks (41:07):

But somehow if it just slips out of their fingers and you start to see ripple effects of distress, of people becoming insolvent, credit worthiness just sort of sequential ripples, you could really see a great unraveling. And so that would be kind of on the extreme end. And if that happens, we’d be looking at a whole new world order in which I think the U.S. would probably be compelled to pull back from many, if not just about all, of its overseas commitments. You could really see a change in the world order where China becomes the world’s biggest economy. It already is sort of at parity with the U.S., but in a world in which we were wounded or were crippled and they were still humming along that would be a huge geopolitical shift and there can be very big implications from that.

David Sacks (41:54):

I kind of call that the “Fall of Rome” scenario which might be out to edge of the L. And I’m not saying any of these things are going to happen, but I think they’re just scenarios. And the reason why the markets are so volatile right now is because these are the scenarios. I mean, you’ve got everything, a V shaped recession to a deeper recession, to a depression, to a new reshaping of world order. All these things are on the table. And when the scenarios are that extreme, every data point can swing the market wildly as people try to assess which of these scenarios they support.

Pete Flint (42:30):

Yeah. And it’s very unclear which of these three scenarios is right now, because there’s really no precedent for this. There’s no playbook. This is not an asset bubble driven recession and the intertwined global economy, it is very unclear which of these scenarios is going to happen. Obviously from our investing and technology perspective it seems, it’s almost very surprising that I think there are many sectors sort of principally education and healthcare, which have been almost like a VC shortcut is sort of avoiding education, avoiding healthcare because there’s really a lack of large number of successful startups in those areas. It does feel that maybe now is the time for education and healthcare companies that perhaps can get over the friction of regulation and kind of societal inertia that there now is a time for building quite interesting healthcare and education companies. Curious as you’ve clearly were a bit early on to be sort of enthusiastic about how this changes and how we used it in order to change society. But is there anything that you are seeing or obviously remote work is just an emerging trend that will be accelerated.

David Sacks (43:45):

Yeah, there’s a whole bunch of trends that were already underway that are just going to be turbocharged by this. Obviously the shift to remote work, e-commerce, death of retail and this shift to e-commerce, I mean that’s going to happen 10 years faster now. I mean it was already happening, but it seems like 80% of retailers are going to go out of business now. Everything that can be delivered will be delivered basically. I mean that was already happening. The shift from restaurants to delivery as well. We were a Series A investor in CloudKitchens. The whole idea of ghost kitchens, once the main consumption of restaurant food is delivery, then it changes your whole equipment that a restaurant needs. So that’s happening.

David Sacks (44:27):

You have the shift from movie theaters to streaming. I saw that Netflix and Disney now have roughly the same market cap which is just unbelievable. It’s extraordinary. So there’s a lot of these trends that are already happening, and I think now they’re just going to be accelerated. And then there’ll be hopefully, like you’re saying in the areas of health and education, we get a slacking of red tape. I mean, this is where I think the wartime mentality is very helpful, is that we can finally cut through a lot of those red tape. Telemedicine, letting doctors practice across state lines would help telemedicine.

David Sacks (44:58):

So there’s a lot of things like this that we still need the government to react in the right way, but I think there could be an opening up of these markets based on wartime realities.

Pete Flint (45:09):

Yeah. It’s so true. It’s the new reality that we’re in. Well David it was terrific to have you on today. Thank you so much for your time. Stay healthy, stay safe in this kind of crazy world we’re in. So thanks again for joining me today.

Connect with Pete Flint

Results from the VC & Founder COVID-19 Sentiment Survey, Part I

VC and Founder Sentiment Survey

The VC and Founder Sentiment Survey

The VC & Founder Sentiment Survey is an ongoing initiative to track how early-stage Investors and Founders are reacting to the COVID-19 crisis.

The goal is to provide a reference point to the community in the midst of one of the most unpredictable climates we’ve seen.

286 Seed & Series A Founders & 114 VCs provided their thoughts on important questions such as:

  • Are VCs really investing at the same pace?
  • How long do Founders think it will be before the economy recovers? What about VCs?
  • Are Founders changing their fundraising plans?
  • What percentage of Founders have made layoffs?
  • What is the impact on hiring?
  • What are other Founders doing to cut expenses?
    …and more

We plan to run this survey every 5-8 weeks to see how sentiment is changing. As Founders ourselves who have been through several downturns, we understand the challenges our community is facing. We hope this information helps everyone navigate more confidently.

 

Part I – Founder Survey Data
a. Founder Sentiment

 

 

On scale 0-10, what are founders' biggest concerns during COVID-19?

 

On scale 0-10, what are founders' biggest concerns during COVID-19?

 

What are founders doing for self-care during COVID-19?

b. Company Changes

What changes are founders making with their companies during COVID-19?

 

How are founders' changing their hiring plans during COVID-19?

 

Are founders making layoffs during COVID-19?

 

How much are founders changing their products during COVID-19?

 

How are founders feeling about remote work during COVID-19?

 

What tools have been critical for company remote work during COVID-19?

c. Fundraising

How are founders feeling about fundraising during COVID-19?

 

How have founders changed their fundraising during COVID-19?

 

Part II – VC Survey Data
a. VC Sentiment

What is the VC sense of the impact this crisis will have on the economy?

 

When do VCs think the US will be back to normal?

 

b. Strategic Changes

How VCs are shifting their investment strategies during COVID-19?

 

Capital deployment into new investments

 

VC time expenditure during COVID-19

 

What percent of VC companies had to layoff employees during COVID-19?

 

What geographies are VCs focused on?

 

c. Startup Valuations

Changes in valuation of companies during COVID-19

 

Lower % change in valuations of companies during COVID-19

 

How much will early stage valuations decrease during COVID-19?

 

Founder recommendations from VCs about fundraising during COVID-19

 

Part III – Historic Data on ’08 Downturn Recovery Time, in partnership with Crunchbase

We partnered with Crunchbase to review funding patterns from seed to Series C through the last downturn to understand the impact of the 2008 financial crisis, and what we can learn for today. Startups are being guided by investors to plan for a two-year runway to be able to survive this downturn.

From Crunchbase data we observe a funding reset that started in the fourth quarter of 2008. 2009 was the low point down by 36 percent year over year for seed through Series C funding amounts. 2010 grew year over year by 45 percent. It took two years for funding amounts to exceed 2007 and 2008 invested amounts.

a. Seed to Series C, by Dollar Volume 

b. Series A to C, by Deal Volume

Funding counts for Series A through C cut back by 27 percent in 2009. Counts grew in 2010 and recovered in 2011 above 2008 funding counts. (It is interesting to note that seed counts–not shown below–grew through this timeframe, as a newer institutional funding stage.)

 

Leading Startups Through Uncertainty: Stacy Brown-Philpot, CEO of TaskRabbit

Leading Startups Through Uncertainty with Stacy Brown-Philpot, CEO of TaskRabbit
TaskRabbit CEO NFX

Guest Bio:

TaskRabbit invented the gig-economy in 2008 with a marketplace that matches freelance labor with local demand for everyday tasks. Stacy Brown-Philpot became CEO of TaskRabbit In 2016 and led the successful acquisition of TaskRabbit by the IKEA Group. During her tenure, TaskRabbit has expanded its presence into 45 markets across the United States, the United Kingdom and Canada with a plan to expand globally. In addition to shaping the future of work, TaskRabbit is now a core driver of the e-commerce and services strategy for the world’s largest furniture retailer with the mission of making everyday life easier for everyone.

In this episode, we discuss:

  • Leadership changes
  • Growth vs. profitability
  • Competition
  • Exits
  • Expanding
  • Regulation

 

Transcript:

Pete Flint (00:32): So it’s a real pleasure today to have Stacy Brown-Philpot, the CEO of TaskRabbit who is also a dear old friend. So thank you for joining us today on the NFX Podcast.

Stacy Brown-Philpot (00:46): Thank you for having me, Pete. Nice to see you.

Pete Flint (00:48): I’d love to just kick off and if you think about in 2020, the technologies in the startup ecosystem, since this day it has exploded. I mean startups and seed funds, it’s like exploding, so it’s almost, on the one hand, is easier than ever to be a founder and start a company and the CEO, but at the same time, perhaps it’s harder than ever to be a great leader. Can you share a little bit about how you think about leadership and is there a crisis today in technology leadership and what can we do about it.

Stacy Brown-Philpot (01:20): What does it mean to be a leader in today’s times is a really hard question to answer because it’s evolving. I would say in the past, people would say if you become a CEO of a publicly traded company, then your number one priority is your shareholders. If you become a founder of a company and you get investors, then your priority is to deliver the value that you said the investors want. And if you create a business and people buy it, you get a return and that’s no longer the case anymore. The expectations, I wake up and I think about not just how much value we’re creating in terms of revenue and profitability, but also the team that we’re building. We have to not just have a mission, but live that mission every day. We have to focus on the culture, we have to talk about the culture, and then we have to look at the external environment and be able to respond to the culture.

Stacy Brown-Philpot (02:08): Outside of TaskRabbit, there’s a lot happening, a lot in terms of the treatment of women. As a woman who’s a founder, I have to come in and have a point of view and maybe not always have the right answer, but create an environment that’s inclusive and people can hear it. As the political environment changes, people are asking me, what should TaskRabbit respond to in these situations? And that never used to be part of the dialogue anymore. It was always very separate. And so I wouldn’t call it a crisis of leadership, I would just say that what’s expected of a leader today goes way beyond just profits and profitability and it extends into how you treat people, what kind of person you are and how you lead and not just what you do.

Pete Flint (02:54): For you as a leader, perhaps I’m curious, you’ve done a whole bunch of different things throughout your career. Was there a particular leadership challenge that was incredibly challenging and perhaps share what was that challenge and how did you get through that?

Stacy Brown-Philpot (03:11): We had a data breach two years ago and … it was almost two years ago at this point, and our site went down and we had to come together as a team to really figure out what we were going to do. And obviously a lot of the work was going into getting the site back up, figuring out what data, if any, was compromised. Making sure that the people who worked at the company employees were taken care of. And of course we were thinking about our Taskers, tasks had to be done. Clients were depending on TaskRabbit for somebody to show up and the app wasn’t up and it wasn’t running. And so we scrambled as an operations team to pull all these things together. We got the crisis response team to manage through it. And one of the things that we were debating was how do we handle it if a Tasker can’t show up for their job because they can’t find out where the client is that day? Do we compensate them for that day or do we not?

Stacy Brown-Philpot (04:17): And there was this moment where we were trying to do the analysis, but we couldn’t do the analysis in enough time that we had to do the press release. And I said, “Forget about the analysis. Let’s just pay everybody for the next two days.” Like if you were going to do a task, we’re going to figure out what you probably would have earned on that task and we’re just going to pay the Taskers because it’s the right thing to do. And so sometimes you just don’t have … you’re in a crisis and you just don’t know what the right thing to do is.

Stacy Brown-Philpot (04:45): And in this case, that was the right thing to do because then we told all our Taskers that was going to happen. You know what they started doing? They started going on Facebook to find their client. They started figuring out, well, did I have this person’s phone number, can I text them and see if I can still show up? And many of them went out of their way to get the tests done even though the site was down and we didn’t even see a dip at all in the growth of our revenues because of that outage.

Pete Flint (05:09): Can you walk us through the, how you figured out what the right thing to do is. Who do you rely on in times of crisis to help you navigate?

Stacy Brown-Philpot (05:16): We are a very tight team and so it was my core leadership team that came together and there was some decisions our general counsel could just make by herself. And there was some decisions that we all had to make as a team and this was one of them. So we had my VP of ops, we have my general counsel and we had the team there.

Stacy Brown-Philpot (05:34): The other thing that I did is we had advisors, we had some great advisors who do crisis management and then I contacted a couple of people who’d gone through this before. And so I have great people in my life who’ve seen many things that I have yet to see and I’m excited to learn what those things are. This is not one that I planned for, but when it happened, I had a couple of people who’d gone through it beforereach out to me, said, “Hey, if you ever need help around this, let me know.” And I remember texting one person and said, “Hey, we’re trying to decide where we’re going to do here.” He said, “Here’s how I would think about it.”

Stacy Brown-Philpot (06:08): And ultimately it came down to our values. Our number one value is caring deeply and that value was more important than anything else that we were dealing with at the moment and we cared deeply about our Taskers. So you said if that’s the value, fine, we just pay everybody.

Pete Flint (06:24): Out of that experience, was there anything that you changed fundamentally from the company or yourself or the things that you learned just going through that?

Stacy Brown-Philpot (06:32): I have two things. One of them is, one of my favorite quotes is by Dr. Martin Luther King, which is the ultimate measure of a man or a woman in today’s time is not how he stands in times of convenience, but how he stands in times of challenge and controversy. And we had yet to have something controversial happen, and this was it. And it really was a test of what kind of team have I built? Is this the kind of team that’s going to stand together? And we completely did. So it was a good learning about the importance of building a team of people who are going to be there with you and through that time of challenge and controversy.

Pete Flint (07:11): Yeah, that resonates with me in the time when I was running Trulia, 2008 during Lehman collapse, it was like … then you’re in the real estate, you’re in the online real estate company, that financial market collapses, real estate collapses. And we were about three years old then, but it was just a torturous time. You just, you do not know what to do. But having built a foundation of a strong culture and values, then people figure it out. Obviously they need clear leadership, but I think the culture is one of those things that certain company values are set. It’s one of those things that certain companies leave too late and they try to add it in when they need it and it’s-

Stacy Brown-Philpot (07:54):  It’s too late then.

Pete Flint (07:54): … not authentic and is far too late. But if you’re able to infuse a really strong culture from the outset, then you have no idea what crisis, but there’s going to be a crisis and you’ll be thankful that the infrastructure is there and that culture that will able you to carry through that. Were there any experiences which you had to as a company just get through a certain kind of constraint or challenge? The kind of unlock some value as you think about scaling the business off, whether, I think Ben Horowitz calls it the struggle. In that early scaling period, were there any stories about, okay there was this kind of this hack or this idea or this insight which enabled the company to perhaps go where it is today.

Stacy Brown-Philpot (08:38): When I joined TaskRabbit we were known for, oh this is going to be the next eBay for services. There’s auction model, people bid, people ask and it matches and we were in nine cities and it was going fine. The problem we had is our fulfillment rate, which if you all are running marketplaces, you know exactly what I’m talking about, was like 50%. And so any investor would look at them and say, “I’m never going to put another dollar in because that’s just awful.” We just couldn’t figure out how to move that number. And the struggle as you mentioned was like, we tried everything. We were trying to convince people to set different prices. We were trying to convince clients to pick certain categories and you just couldn’t convince people.

Stacy Brown-Philpot (09:26): Ultimately, we had to change the product and when we changed the product to a direct-hire model where we listed all the Taskers who were available with their hourly rates and what their skills are and then you just go in and hire the person, it was like, fulfillment rate went up, skyrocketed, it was successful, but we had to go through that and tweak and iterate and really try really, really hard to figure out, this thing is not going to work. We actually have to tell people who’re available to do what and how much is going to cost. Otherwise, we’re never going to get our fulfillment where it needs to.

Pete Flint (10:01): So this is a demand-side pick-

Stacy Brown-Philpot (10:03):  Correct.

Pete Flint (10:07): … just to say, and then before, what was it? It was opaque.

Stacy Brown-Philpot (10:09): It was, demand-side still picked but you just bid. I want to get my house cleaned. 25 people bid and you go back if you want to and pick, but they bid different prices. The problem with that, you pick somebody for $10 you’re unhappy. You pick somebody for $100 and they still don’t do a good job, you’re unhappy. You pick somebody for $50 you think is amazing, but then, “Oh, but you know what? I’m not available on a day that you want,” then you’re still unhappy. So you just couldn’t make people happy with an auction model.

Pete Flint (10:36): And that reduced that friction. So enabled the matching rate to go up. So it went from 50 to something-

Stacy Brown-Philpot (10:42):  Like close to 90%.

Pete Flint (10:42): Oh wow. Okay.

Stacy Brown-Philpot (10:43):  Yeah, way better.

Pete Flint (10:48): You have a business. So that was the core pricing change. And what was the reaction from the participants in the ecosystem? Obviously, on the demand side, I think they would probably be much happy, on the supply side similarly, it was like, okay, I get what the company is about. I can easily fulfill orders. That supply-side was elite as well?

Stacy Brown-Philpot (11:03): Yeah. We launched this as a test in London where no one knew anything about TaskRabbit. So when we launched it, super successful. Taskers knew how much they were going to make. People could hire, the person showed up, everybody was happy, and then we brought it back to the US and when we did that, everyone’s going to be equally as happy, right? Wrong. But what we have built was a community that had come accustomed to a certain way of working and behavior. And so our Taskers were worried that if I put myself out there and put my calendar, how do I know I’m going to get hired? I used to have so much more agency. I could bid and now I can’t bid, I’m just waiting for somebody to hire me. I don’t trust you. There was a trust issue. So they had to believe in us that the work was going to come.

Stacy Brown-Philpot (11:52): Likewise, clients like to pick from 25 people, who is TaskRabbit to decide who the best person is, how are we going to know? How do I trust you? So it really pushed us to create a higher level of trust. And initially, the trust was not there. So we had to rebuild that trust for sure.

Pete Flint (12:09): That took like three, six months to figure out that?

Stacy Brown-Philpot (12:12): Less than six months. And the reason why I said that answer so fast of how long that took is because we were watching what happened to our revenues over a six month period, and they needed to reach a certain level for us to know if that was the right decision or not. And we did.

Pete Flint (12:29): But one of the classic … I mean, if you see in the marketplace, businesses are incredibly dynamic. You’ve seen how an existing business model is incredibly hard to change. And one of the wonderful things about marketplaces, they’re incredibly sticky. But one of the challenges is the participants really hate change. So you see people like Craigslist, which just don’t change, but kind of do okay. Increasingly less okay, but they do okay, and then you see in other businesses which are constantly innovating, evolving, and Amazon has perhaps been pioneering its incremental changes over time. If you were to perhaps pioneering. It’s incremental changes over time. If you were to perhaps do that again, and change perhaps the pricing model or business model within a marketplace, what changes would you do? How would you do it differently, or alternative? What was the best thing you did with that change?

Stacy Brown-Philpot (13:17): There’s a lot that we would’ve done differently. We would have chosen that business model, but we probably would’ve done a lot more communication about what was about to happen. We thought we’d do this great press release, and tell everybody, and they were going to be happy. And the truth is, is we should have brought the community along. Because it’s such a sticky marketplace, people are so invested. We didn’t tell our taskers until the day before it was happening. We should have introduced the concept to them. We should have got them involved. We should have encouraged them to participate in the development process, and those are all things we could have done, even if we ended up with the same decision, on the same tight timeline, we would have brought people along. And that’s a unique thing about marketplaces that many other companies don’t have to worry about. But the importance of the community, and how you interact with them was a huge piece of what we would’ve done differently. For sure.

Pete Flint (14:12): As the marketplace ecosystem has evolved, there’s been this sort of tension between horizontal marketplaces, or increasingly verticalization. How do you think about this balance between horizontal versus vertical?

Stacy Brown-Philpot (14:27): That is a tough balance. When we started, we were everything. And so because we were everything, we were nothing to somebody and everything to everybody. Since then, we’ve actually focused, and become a lot more vertical, focusing specifically on home services. So a task management network that gives you trusted people to do things around your home. It’s a much easier message to communicate. And so while we haven’t specifically said only TV mounting, or only furniture assembly, even though we’re owned by IKEA, or only cleaning, we have put in some boundaries of what we will offer, and what we will do, and what we won’t. And the reason is adjacencies. I think it’s important to have some adjacencies in a marketplace, because a customer comes to you, you spend all that money, and all that time to build trust, and now, they want to come to you for something else. So you’ve got to look at what are the adjacencies. And so we built our marketplace around what adjacencies actually matter for our target customer. And it tends to be things around the home.

Pete Flint (15:33): And that adjacency is not only important, I guess to increase the revenue per customer, but also to increase the sort of repeat interactions. The more people use this as a kind of like the habit, this is my go-to, then that increases frequency, increases brand, increases retention.

Stacy Brown-Philpot (15:51): That’s right. It’s all about being this go-to team. And so you have to have enough frequency, and presence in their mind, and in their home, for that to really work.

Pete Flint (16:02): With Services Marketplace, one of the big changes have been disintermediation. How do you go kind of like off-platform with the sort of home care marketplaces, it’s been a real challenge. What do you do to overcome that challenge of transactions happening off-platform?

Stacy Brown-Philpot (16:16): Disintermediation is hard to manage. We spent a lot of time figuring out how to keep people on the platform, and sometimes to get somebody to come to you, you have to actually just let go. So if you said, “You know what we’re going to do? We’re going to build the best marketplace that we can, we’re going to attract amazing clients who have a lot of demand, and we’re going to give our taskers the best opportunities for work that they can find. They can set their own hourly rates, they can set their own schedule. And you know what? We’re going to back them up. Something goes wrong, we’re going to be there for them.” And that’s the kind of thing we want to build. And so we built that, and so we’ve been able to manage this intermediation because you now have a place that you can go where you now trust this platform to do things for you that you might not otherwise choose to do on your own, or to validate things and uncertainties that you might have about using the experience.

Stacy Brown-Philpot (17:07): And that’s how we’ve done it. I have yet to find another company that does anything that prevents anybody from just leaving the marketplace. And we do have success stories, and I like to call a lot of them success stories, where people will find a full-time job, because they went and did a task, they bartended somewhere, this startup was hiring, and they got a job. So doing engineering, or some other thing, that’s great. That’s exactly what this community is about. If we’re not growing the community that we’re a part of, we’re not doing something more than we thought we were here to do.

Pete Flint (17:41): I guess it’s also a function of the rake as well? What is the kind of pricing, if you try to sort of… if you tried to kind of charge too much, as a marketplace, and that creates problems. If you charge too little, then it’s hard to build a sustainable business, and attract supply and demand. Is that, if you think about that kind of, the evolution of that decision, has there been kind of any insights that you’ve learned over the evolution of TaskRabbit in terms of pricing? Other than just fixed price?

Stacy Brown-Philpot (18:12): Yeah, the take rate, or rake, or however you want to describe it is this weird thing, because you can do the bottoms up version, which is like, here’s our costs, here’s how much we need to cover the costs. This is what it needs to be. And then you can do the outside inversion, which is how much are people willing to pay for this service, and then how much can we make? We have really tried to focus on letting our taskers set their own hourly rates. And we don’t mess with that number at all. So if you want to charge $150 an hour, that’s your decision. And then we’ve looked at what does it take to build a great marketplace? How much do we need to charge? That prices some people out. And it does. But then we educate them on, well, if this is how much you want to make in a week, this is how many tasks you can do at a lower hourly rate, for example.

Stacy Brown-Philpot (19:03): So we try, we do a lot of education around the rate, but because we let them set their own hourly rates, that’s the best thing that we do, because we’re not taking money out of the tasker’s pocket. We may be charging more to the clients, but it equalizes to some degree, the experience on the marketplace, because the client still has a choice on who she wants to hire at a higher or a lower hourly rate.

Pete Flint (19:29): And just as you think about TaskRabbit specifically, demand versus supply constraint, how is that, and we’ll go into sort of geographic expansion, how do you think about, are you supply constrained, demand constrained, in general? And then how do you think about your geographic expansion? What are the kind of gating factors for you to go into different markets? Because it seems to me that many other competitors have just gone out of business, because they’ve either grown to fast in too many different markets, or they haven’t attracted enough demand, or the demand’s not sticky enough.

Stacy Brown-Philpot (20:05): So TaskRabbit now operating in six countries, and each country, including the US is very different. We’ve gone through the cycles of being demand constrained, and supply constrained, in almost all of them. We just launched Spain last month, so that one’s still very new. We have a lot of supply, because we always start with a lot of supply, and enough to meet what we think the demand is going to be, unless we’re way, way off. And by and large, investing in not just the quantity of supply, but the quality of supply has been the most important thing to balance the two-sided marketplace. So even when we get demand constrained, we’ve still got a great supply, and when we’re supply constrained, we can really work with that community and say, “Hey, things are happening. It’s the end of the month, it’s New York. People are moving, it’s the summer, and nobody wants to do it themselves. So, if you want to earn some extra money, this is the time to do it.” So we’ve got that relationship there to manage some of the spikes in demand while we build up the supply that we need over time.

Stacy Brown-Philpot (21:14): Every country is different. We went into Canada thinking this was going to be a slam dunk, and we turned out to be way more supply constrained than we thought. And part of that has been working with IKEA as a partner. So after the UK, we launched in Canada. That was the first country we launched with IKEA. And some of our criteria is how big is the market? What’s the potential? What does demand look like? Readiness for this kind of work, independent contractors. But it’s also where does IKEA operates? How can they really support our growth? And it turned out that the team in Canada really unlocked a lot of growth for us that we just did not anticipate. It was exciting because we can now go meet that challenge. But it created a new dynamic for us in how we scale in a new country, for sure.

Pete Flint (22:02): And is there any frameworks or as you think about geographic expansions, is there any both sequencing different regions as well as timing? Are we ready to expand into another market? As you speak to other marketplace founders and CEOs, are there any rules of thumb that you develop to help to understand this geographic expansion?

Stacy Brown-Philpot (22:20): So one rule of thumb is not to even think about it in regions. You’ve got to think about it not even at the country level, at the city level, make the city. Meaning people say make the market, make the market the city. Have enough demand in that city, where geographically speaking, the people who are doing the work for us are willing to drive as far as that city is big, to go and do the work. And so really focus on making the market, and making the city. We launched in London in one store for IKEA, in the Wembley store. And we didn’t go to the next store until we figured out that that store was a good store.

Pete Flint (23:04): So neighborhood, not even cities, just a neighborhood.

Stacy Brown-Philpot (23:04): Neighborhoods. It’s neighborhoods. And then we didn’t launch in more cities across the UK for a long time after we did London, because we were looking at the numbers, and the potential. We weren’t yet big enough to do enough brand marketing to cover the country. It was not going to pay off. And some of these smaller cities are so small, that you’re just not going to generate enough demand from those. And so the big cities really make the neighborhood, but for the smaller cities, make sure you have enough coverage to afford the marketing around them.

Pete Flint (23:38): So TaskRabbit is a division of IKEA now?

Stacy Brown-Philpot (23:41):  Yes.

Pete Flint (23:44): How’d you get to know the IKEA folks? It’s an amazing kind of partnership. How did you get to know them?

Stacy Brown-Philpot (23:51): This is going to sound like one of those Silicon Valley stories, and maybe it is, but in December of 2015, the IKEA team came to visit Silicon Valley and met a bunch of companies, including TaskRabbit. There were like 10 people in the room, around a table, that was not an IKEA table, which they commented on the minute they walked in at our office. We now have IKEA tables, by the way. And we thought it was a great meeting, but one of the most important things we shared with them in that meeting was how many people pay somebody else to get their furniture assembled. And on average, how much they pay, which is often as much, or a little bit less than the cost of the item. And so with that information, and we didn’t even have a relationship with them, we were just like, “Just so you know, lots of people go to Emeryville store, and they then log into TaskRabbit and they hire somebody to come put it together.” So that became the conversation around the partnership.

Pete Flint (24:53):  I’ve done that.

Stacy Brown-Philpot (24:53):  You’ve done that?

Pete Flint (24:54): I’ve done that. Exactly. That was the first use case.

Stacy Brown-Philpot (24:56): Of course. Lots of people have. And that started the partnership. And from there, we really focused a lot on what value are we going to create? We obviously were creating value for customers who wouldn’t otherwise shop at IKEA. The only reason why they went is because they know somebody from TaskRabbit is going to put that thing together for them. But the company is very values-driven. And so to go from a partnership, to an acquisition was not just about how much money we were making for them, or for ourselves. It was also about what kind of value we were creating, and our own values as a company, and the alignment of those values. So a lot of the diligence was ours on values, and what matters, and what kind of company are we building, and why. And how can we really do that together.

Pete Flint (25:43): And just, how do you manage the culture? You’ve shared with me privately just the values, and it’s really impressive, and the organization, and it’s a remarkable company. How do you effectively navigate this sort of fast-moving, fast-charging, we’re a tech-driven company in Silicon Valley, we move a hundred miles an hour because that’s what’s required and that’s in our DNA, versus a European furniture maker. It’s like night and day.

Stacy Brown-Philpot (26:12): You make it seem so different, Pete. It is very different, but the missions are very similar. So our mission at TaskRabbit is to make everyday life easier for everyday people. Ikea is to create a better everyday life for the many people. Ours was written 11 years ago, theirs 76. So because that mission alignment was there, we could then there’s some forgiveness that happens on both side, which is like there’s this greater mission that we all sort of care about how we get there. We really have been left independent to do that. We’re technically a separate legal entity. We have a board that governs the company and they really didn’t want to, what they say, squash the butterfly and like, let’s just let this company run independently.

Stacy Brown-Philpot (26:54): So part of it is that decision as part of doing the deal. The second thing that we did was right after we announced the deal, we announced in October of 2017 and in January of 2018 we redid our values, and not that we didn’t have great values before but it was a moment and an opportunity for us to create new values if we wanted to, or reinforce the same values, but to establish that this is still going to be a separate entity. We’re still going to have our values, and these are the values are going to carry us through this next phase for this organization that’ll also be around in 75 years.

Pete Flint (27:32): And just can you, through that period, what’s been some of the growth in geographies or any metrics? Just like from the acquisition to where you are today.

Stacy Brown-Philpot (27:42): Yeah, we have seen so much growth. We went from two countries to six countries. Let’s see. When we first met with Ikea and started this partnership, our business was about 2% furniture assembly and now it’s 20% furniture assembly, so it’s grown.

Pete Flint (28:00): It’s still the vast minority.

Stacy Brown-Philpot (28:02): It’s a vast minority but and so it’s fueled a lot of our growth. The business is still growing, and at the same time the customer acquisition from Ikea is also growing and many of these customers are getting something assembled and then coming back and getting something mounted or some other service done, so that’s been impressive. Ikea is the world’s largest furniture retailer, and so imagine having that customer base to tap into. It’s the one thing we were hoping for and it’s really paid off.

Pete Flint (28:32): And if there was, you know, because it’s really unusual that this sort of big traditional company and this fast-moving tech company, it’s hard for them sometimes to work together in this environment. What would perhaps have been some of the biggest surprises of the experience, and then what advice would you give founders that are building high tech companies who are kind of building either partnerships or M and A with other perhaps more traditional companies?

Stacy Brown-Philpot (28:57): One of the biggest surprises is to be the world’s largest furniture retailer, you have to be a good business. The business has to be good and has to be well-run. Otherwise you’re out of business. But the process by which companies make decisions is often very different, and so we’ve got the DNA here of this is the pace. It’s really fast. Let’s just go, let’s go, let’s go. Let’s raise the next round of funding, and now we’re going to be successful. And they’re just very patient. They have like, 40 billion euros on the balance sheet. They can just wait, and they can test and they can iterate, and so their process of innovation, maybe it doesn’t happen as fast, but they have the capital to invest and they have the time to invest and so we had to both get comfortable with how the pace of decision making for sure.

Stacy Brown-Philpot (29:42): So if you’re at all considering a partnership or potential M and A with a more traditional company, number one, the pace is probably not going to be as fast as you want it to be. Number two, often those things align with the strategy of which you have very little influence over, meaning if that company has a strategy that fits with what you’re doing, then it’s going to be very easy for you to get that deal done. If you’re trying to sell in your strategy into a company that’s 20,000 people, that’s exhausting. And so think about where else you should be spending your time. If this is your number one bet, and for us Ikea was the company. You’re like, “If we could partner with anybody, we’d love to,” make sure you set aside some resources but not all the company resources to do it and to focus on it.

Pete Flint (30:33): So trying to create this sort of nimble team of Navy SEALs, kind of running a million miles an hour, but kind of working with the mothership but not necessarily letting them dictate the strategy. So it feels to me like TaskRabbit kind of invented this sort of word “gig economy,” and it’s remarkable. Like, it’s pioneer in the category way before Uber and Lyft I think in terms of the impact on their economy, but a huge amount has changed as that segment of the market has expanded. Tell me a little bit about what’s happening on regulation side and how TaskRabbit thinks about it. You’ve got AB 5 and various kind of measures in flux. What is the right thing for the industry to help all participants in the ecosystem as well as what do you think’s right for TaskRabbit?

Stacy Brown-Philpot (31:20): Leah deciding to start this company 11 years ago, I don’t think she went in thinking, “I’m going to create the gig economy or the sharing economy,” but she just wanted to have neighbors helping neighbors and it turned into a phenomenon that the world was actually ready for. It was 2008 and people were ready for something different. They needed a way to afford to live. Today people need a way to afford to live and more and more people need a way to afford to live, and so whatever regulation that has been passed or is currently in the process of being passed is really I believe in service of that, but the process is different than how many of the companies in our space are approaching it.

Stacy Brown-Philpot (32:04): So what matters for the industry and for the sharing economy or gig economy is that we create a way for people to afford to live. We are creating economic opportunities. We are filling the income gap. We are helping people pay major bills. We are doing a lot of the things that a lot of people say they want to do. It is actually happening because of the companies that we have and for TaskRabbit, we want nothing more than for that to continue. We want to continue to offer our taskers flexibility to set their own hourly rates. We want them to have the option to set their hours for when they want to work, but we also want them to have benefits. We are not against portable benefits. We want to create a structure where that is supported and available to them, and so those are the things that we’re advocating for as we navigate some of the regulatory environment.

Pete Flint (32:55): And is there a Holy Grail out there? What would be the, if you were writing these bills, what would you advocate for?

Stacy Brown-Philpot (33:04): I wish there were a Holy Grail. It is so complicated because when we have these conversations, everybody has something else in mind about what’s important for the group. When we talk to our taskers, they want to be able to save for retirement, like access to a 401(k). They obviously want great healthcare. Some of them want worker’s compensation, but most of them don’t because a lot of them are supplementing their income and they have a job already that provides that. So we would love to be able to offer some way to afford the things that they need when they need it. I don’t know what that looks like because we don’t have a structure today anywhere. W-2 does not allow for that structure. We don’t have a structure today anywhere that allows for that.

Pete Flint (33:48): And there’s no other international market which you’ve seen that kind of does a good job in navigating this? Some of these socialist European countries? No?

Stacy Brown-Philpot (33:57): Six countries and nothing. We found nothing. No. Every country has a point of view around independent contractors that some of them whom are different than in the US. Some of them are more accepting, some are more stringent, and so we’re having to deal with that as well.

Pete Flint (34:15): You know, here we are in the midst of the corona crisis. What do you think about that? I’m sure you’ve had conversations with your team. They’re sort of, on the one hand it’s clearly a travel industry. Is it going to be really challenged? On the other hand, there’s at least speculation that there’ll be certain industries as I saw this morning that Grubhub was upgraded as a stock because people were going to be like, you know, getting their DoorDash.

Stacy Brown-Philpot (34:38):  Using delivery services.

Pete Flint (34:38): Using their delivery services. DoorDash, and maybe it’s too early to tell, but how do you think that might impact not only just TaskRabbit, but perhaps this broader ecosystem of the gig economy or shared economy?

Stacy Brown-Philpot (34:52): I think it’s a little bit too early to call any particular company. Obviously certain industries. Where do I think TaskRabbit fits in this? The most important thing that we care about is the safety of our employees and the community, our taskers and our clients, and so we’ve focused on what communications do we need to do to make sure that they are protected at this time? Many of them have to go to work, but we want them to be safe, so we’ve said things like if you have to cancel because you’re not feeling well, then we’ll waive the cancellation fee. Something like that. Something where they feel like they might be penalized for something but they won’t be.

Stacy Brown-Philpot (35:35): I think over time the dependency that we have on services is actually going to go up because now the things that we used to do ourselves, we’re going to start looking around and figuring out, who can do them for us? And that may create some value. It may create some, or it may be scary to people, but if it becomes more of a norm then I think for anybody who’s running a marketplace for any kind of service has an opportunity to demonstrate what kind of value you can create. So we’re just trying to be as safe as possible during this time so people can see that this is a valuable service, whether you’re in a crisis or not.

Pete Flint (36:11): But it seems that there would be some sort of lasting impact from this, and what we’ve seen in so many, when you have these economic shocks or shocks of any kind, then there’s a mismatch between supply and demand. And it’s the smart, nimble marketplaces that can identify these mismatches of supply and demand that can capture market share and then use that as a wedge to expand into other markets. So while I’m just hopeful it will pass pretty soon and we can move back on with what we’re doing before.

Stacy Brown-Philpot (36:38):  Yeah, I hope so too.

Pete Flint (36:40): So, thanks again Stacy. This was amazing conversation, and such a wonderful story and such a wonderful leader, so thank you for joining us today.

Stacy Brown-Philpot (36:48):  Thank you for having me!

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