Frameworks for Using Diversity to Win

Cofounders - Iman Abuzeid Rome Portlock

by Iman Abuzeid MD, CEO & Cofounder, Incredible Health

Cofounders - Iman Abuzeid Rome Portlock

Incredible Health cofounders: Iman Abuzeid and Rome Portlock.

If you ask any VC or executive the attributes they look for in great founders, the phrase “data-driven” will be one of the first things you hear. As a CEO, we also expect our executives and team members to make data-informed decisions when possible. One of the superpowers of Silicon Valley is its penchant for data – it is one of the strongest prerequisites for action here. And although I’ve experienced first-hand some investors and operators in the tech industry who want a more diverse workforce because “it’s the right thing to do”, what we really should be saying is “it’s the data-driven thing to do”.

Because the data is crystal clear: diversity leads to stronger performance.

I learned these diversity concepts before founding Incredible Health, and applied them while building products that make Incredible Health not only the place where nurses find jobs, but also where they advance their careers. It is also one of our secrets to successfully hiring excellent tech talent for our team from other top companies.

As a tech community, to really change the extremely slow diversity trajectory we are currently on, we need to first understand what the data is telling us. And then, we need frameworks to take action.

This essay aims to provide both operators and investors with both.

Let’s start with the data:

Companies with more diverse management teams have 19% higher revenues due to innovation, and 9% higher EBIT margins, detailed in this BCG study.

McKinsey reports detail that companies in the top-quartile for gender diversity on executive teams were 21% more likely to outperform on profitability. Companies in the top-quartile for ethnic / cultural diversity on executive teams were 33% more likely to have industry-leading profitability. There’s also a huge penalty for opting out of diversity: companies in the bottom quartile for both gender and ethnic / cultural diversity were 29% less likely to achieve above-average profitability.

Harvard Business Review highlights that diverse teams make decisions 2X faster, with half the number of meetings, primarily because they are more prone to re-examine facts and keep discussions objective. Their decisions deliver 60% better results because they focus more on facts.

This study by the Kauffman Fellows dismantles the “pipeline” excuse: while diverse STEM graduate numbers continue to rise, that’s not translating to more employment in tech. In addition, using Crunchbase data the report describes white founding teams and white executive teams raising venture capital more often. However, when diverse founding teams do successfully raise, they tend to raise 60% more than white founding teams, particularly in late-stage rounds.

Diverse founding teams have higher returns when cash is returned to investors, detailed by this Kauffman Fellows report. Historically, diverse founding teams earned a 3.26X median realized multiple on IPOs and acquisitions, compared to a 2.50X realized multiple for white founding teams: a 30% increase. Ethnically diverse startup founding teams provide higher returns to investors.

There’s countless more academic papers and research on this topic; the items above are just a small sample.

How do diverse teams deliver better results (higher revenue, higher profitability, and higher returns to shareholders)? Short answer: Better and faster problem-solving.

Individuals with different backgrounds and experience see the same problem in different ways, and come up with different solutions — cognitive diversity. That increases the odds that one of those solutions will be a hit. In a fast-changing environment like the technology industry, with high stakes and intense competition to innovate, the responsiveness that diverse teams enable ensures the company is better positioned to adapt. Enriching your team with individuals of different genders, races, ages, and more is key to boosting your company’s intellectual potential and likelihood of achieving your mission. Biases can be kept in check because there’s a higher chance of questioning assumptions that hinder innovation and growth.

I experienced this first hand in product development and marketing at Incredible Health. Our team is highly diverse in age, gender, race, political views, and experience. Consider that we built our product for US-based nurses, 20% of which identify as minorities. Nurses in turn care for a diverse patient population. Therefore, when we built our first-of-its-kind Continuing Education (CE) product into Incredible Health’s apps, where nurses across the country can complete fully accredited online CE courses for free (instead of paying $240M out of pocket every year) to maintain their licenses, our team knew we’d have to provide a wide range of courses. It wasn’t enough to only provide general courses like Heart Failure for example, but also led to us including courses for specific populations like Nurse’s Role in the Opioid Epidemic, Caring for HIV/AIDS, and Delivering LGBTQ Culturally Competent Care.

At this point in the history of technology, where smartphone penetration in the US and other countries is over 80%, and businesses are adopting technology more rapidly than ever before, nearly every team is building and marketing technology products for a highly diverse population. It’s a competitive advantage to have a diverse team that reflects your user base. They can recognize user problems and needs earlier and avoid blindspots. For example, they can address the trust and safety of specific user cohorts that feel unfairly targeted, or use more culturally sensitive marketing language that is suitable for a wider range of communities. They can more easily empathize with a diverse user base and question assumptions more thoroughly, as we build and grow the next generation of products from social networks to business workflow software.

Ask yourself this memorable question the NFX partners explain to their portfolio on why diverse teams have stronger performance: “Imagine you need to lecture on a topic to a group you don’t know. In which scenario would you prepare more and deliver a better lecture – when you know the group is all of the same opinion as you and will gladly accept your view, or when you know that they have different opinions? In a company, it’s exactly the same. More diverse teams lead to more thinking, more preparation, and more points of view, which creates far better companies.”

Most importantly, 2020 has accelerated and made it crystal clear that customers expect more, and this is now table stakes. There is zero tolerance for culturally insensitive Juneteenth app filters, housing marketplaces that discriminate, community networks that enable racism, or unfettered violent rhetoric aimed at specific groups. Your customers, especially those under age 40, expect more and are saying it with their dollars. In a recent Deloitte survey of Gen Z and Millennial respondents, both groups reported that “they won’t hesitate to penalize companies whose stated and practiced values conflict with their own.”

Another competitive advantage of diverse teams: Winning the war for talent and avoiding “diversity debt”.

Investors asked me how we’ve hired a team at Incredible Health of engineers and sales reps with strong track records of accomplishment and 10+ years experience each. They also ask how we managed to successfully poach talent from Facebook and other top tech companies even before our Series A. Your company’s success is driven by the speed and quality of your talent, and the competition for tech talent in the Bay Area, and the US in general, is intense. Our huge mission, the founders’ network, rapid growth, top tier clients, and top tier investors certainly helped attract top executives and team members.

However, when beating competing job offers, and attracting a wider range of applicants, the makeup of our diverse team has been a critical competitive advantage. It’s easy to poach from Facebook when they, like much of the tech industry, consistently have terrible diversity metrics year over year. It’s easy to beat the competing offer from another top startup because their team is homogeneous whereas ours is diverse. The team they meet through our interview process signals and definitively proves that everyone is welcome at Incredible Health.

The data on the preferences of talent under age 40 is clear too. The same Deloitte survey referenced above found that the majority of millennials give a “great deal” or “fair amount” of importance to gender and ethnicity diversity when considering what companies to work for.

Teams that are slow to diversify accumulate “diversity debt”, a concept similar to “technical debt”. By choosing the quick and easy approach of building a homogenous team at first, it is increasingly more difficult to fix later because most talent prefers not to join homogenous teams.

So if you’re a team leader, how do you hire and retain a diverse team?

I’m a big fan of frameworks that can be implemented fast, in order to make rapid progress to building a heterogeneous team. Building an inclusive, diverse, and high functioning team is a long-term commitment, but here is a 4-part framework to get started:

Part 1: Make diversity and inclusion an objective / goal

Startups are chaos, particularly those that are rapidly growing. It’s the CEO and leadership team’s responsibility to drive focus, and a key tactic to do so is through a narrow set of OKRs or goals. For example, an objective is “build a team that reflects our customer base.” If it’s not an OKR, then it’s not a priority. By including diversity as an objective, that drives accountability and focus, and encourages teams to come up with creative solutions and resources to achieve the goal. This objective can also be part of the performance evaluation of hiring managers. For early-stage CEOs, you are the Chief People Officer, and the buck stops with you.

Part 2: Diversify your HR / Recruiting team ASAP

It dramatically helps to ensure those that are doing the hiring – whether it’s the founders in the early days, the hiring managers, and eventually the HR and Recruiting teams – are diverse. They have access to a more diverse network, have the knowledge of different sources of talent and can have more nuanced perspectives when evaluating talent. For example, they’re connected to Black software engineers with computer science degrees from Georgia Tech, have access to Black engineer meetups and communities in the Bay Area, or have an established track record of hiring diverse talent.

However, even if the makeup of your HR team is not diverse, then at a minimum grill them on their diverse network and diverse sourcing during the interview process. This team controls who gets through the front door, and carefully designs the interview process to reduce bias and increase hiring on merit – so don’t underestimate their critical role in hiring a diverse team. Even beyond hiring, a diverse HR team can be more empathetic or understanding of diverse employee issues that arise even after team members are hired.

Part 3: Start hiring for diversity as early as possible, and avoid diversity debt.

Diversity debt, like technical debt, occurs when you build a homogenous team first because that’s easier and faster, and then it becomes increasingly more challenging to diversify later. Studies show that diverse candidates, and talent of all backgrounds who are Gen Z and Millenials, are less likely to join or consider your company because the existing team is homogenous. Therefore, the best time to build a diverse team is from the very beginning, because it becomes increasingly more challenging as you grow. As described earlier, it’s a competitive advantage to have a diverse team, especially a diverse executive team, because it begets a consistently heterogeneous team and wider applicant pool for the rest of your company’s history. So start as soon as possible.

Part 4: Make sure your entire team believes they belong.

Creating a work environment where diverse teams can thrive is critical to attracting and retaining a diverse workforce. For example, construct and run meetings in a way where everyone is heard. Set clear agendas. Circulate written documentation and ideas beforehand. Reward individuals’ “obligation to dissent” so teams arrive at the best ideas for customers and company goals, instead of the best ideas for egos or seniority.

Generous family leave for parents with newborns, legal support for immigrant work visas, and flexible work schedules, enables a wider range of team members to excel at work too. Some of these policies and norms are not financially feasible when it’s just 2 or 3 founders working away in an apartment in the earliest days. However, once there’s revenue or funding, these norms should be re-examined, implemented, or modified to enable a diverse team to succeed.

The elephant in the room: Fundraising and Diversity

At this point in history, the abysmal statistics for funding women and people of color are well known. For example, less than 1% of venture capital goes to black founders, despite the ample evidence that diverse teams drive business results. So if you’re an investor or operator of any background navigating this structural bias in the technology industry, how do you think about this topic and make a positive impact to reduce bias?

I’m not a professional investor, I’ve only done a few angel investments personally and as a Sequoia Scout. However, I’ve raised over $17 million in capital from top tier investors in Silicon Valley for Incredible Health, across our seed and Series A rounds in the last couple years, so I’ll offer some nuanced perspectives:

If you are a female or PoC founder, then start with my detailed guide for how founders can successfully raise from top tier investors. The one additional tip I would add for any founder in these specific cohorts is psychological: You know the statistics show structural bias exists. Take a moment to acknowledge it, accept it, and then rapidly move on because dwelling on it will only cost you time and energy that’s already in short supply. Assertiveness, confidence and ambition are critical to a successful fundraising process. Your counterparts (and competition!) in other cohorts are not wasting a single ounce of mindshare on bias, and neither should you.

Also, your target investor list should have clear criteria to help you succeed in the long term. One additional criterion can be focusing on investors that have already funded diverse teams, highlighted in NFX’s Signal product.

For the tech investing community at large, it’s helpful to highlight some specific examples of investors who have made rapid progress in diversity, as evidenced by the companies in their portfolios, and their track records of returns. Seeing real-world examples and KPIs is a key way I’ve understood what’s possible and what the bar is as an operator, so a similar technique can be used to see what’s possible in investing in diverse teams.

Please note this is a non-exhaustive list, and stems from my experience getting to know these investors, some of whom are Incredible Health investors, or investors I got to know well while building our company:

Jeff Jordan (Andreessen Horowitz)

Let’s start with a titan of the venture capital industry: Since taking OpenTable public as CEO, Jeff is frequently on the Forbes Midas List, and has driven massive returns for a16z. Jeff is a board member at Accolade, Airbnb, Incredible Health, Instacart, Lime, Lookout, OfferUp, Pinterest and Wonderschool. Notably, he led a16z’s investment in our company Incredible Health, Wonderschool (Chris Bennett), and Cadre (Ryan Williams) – all of which have black CEOs, and has historically invested in black founders, LGBT, women, and more. Jeff met me through NFX in 2017, and led our Series A in 2019.

I asked him recently what’s his secret to investing without bias, and what enables him to successfully do it whereas his industry peers lag behind. His answer: “When I’m making a new investment, I’m looking for the elusive founder/product fit – the idea that this founder is the only one on earth that can solve this specific problem. Problems are as diverse as people – so it would be a pretty limited viewpoint to think that only one type of person or background can solve all the world’s problems. I have learned that I never know anything about a person until I spend enough time to really know them. Once I invest the time, skin color, preference and all the rest become invisible. In investing, I think this is my key competitive advantage — true knowledge of people. I’m also looking for entrepreneurs who can overcome obstacles to will their idea into existence. Many diverse founders have already (at least partially) proved their ability to do this by getting all the way into the VC pitch room.”

Bill Gurley (Benchmark)

Bill is another titan veteran of venture capital, consistently on the Forbes Midas List, and drives huge returns for his LPs. Zillow, Uber, Stitch Fix, Nextdoor, Solv, Marco Polo, Instawork, and Good Eggs are some of the companies he’s led investments in. Notably, Stitch Fix (Katrina Lake), Nextdoor (Sarah Friar), Solv (Heather Fernandez), Marco Polo (Vlada Bortnik), and a company in stealth (Meredith Harris) have female CEOs.

I asked Bill how he’s been able to invest in female or a diverse set of founders, whereas his industry peers have lagged behind. His answer: “While I am thrilled to have the opportunity to work with such a diverse set of founders and CEOs, I didn’t arrive at this outcome as a result of a direct objective. So in retrospect, I would suggest that ‘absence of bias’ is the likely key. Gender and race are not part of how I find or evaluate founders or companies, so I end up with diversity in my portfolio.”

James Currier (NFX)

James has built 4 companies, had multiple exits, and he’s one of Silicon Valley’s leading experts in growth, network effects, and marketplaces. NFX also has a diverse portfolio that includes Incredible Health. The role of a seed investor like James in breaking the bias that pervades this industry cannot be underestimated. The NFX partners were our earliest investors. James mentored and coached me in skills like fundraising and network effects, and most importantly shared his extensive network of trust that he built over 20 years. His role in my professional development was critical to our success to date. Experienced seed investors and former CEOs like the NFX partners who take the time to mentor and teach diverse founders are crucial, not only to impart knowledge and skills, but also because they are important and trusted feeders to larger funds in the venture ecosystem.

James’ take on investing in diverse founders: “First, I have a clear focus and checklist for what I look for in founders that can be found across all demographics and are important in early-stage entrepreneurs. They include things like character, speed, thinking in a data-driven way, and having something to prove. Second, I acknowledge that I do have biases, so I’ve built counter biases in favor of diverse founders into my thinking, our processes and our software. For example, if it’s a Black founder, that triggers our counter bias methodology to make sure we haven’t missed something. My Partners – and everyone at NFX – participates in this way of thinking.”

Jess Lee (Sequoia Capital)

Jess Lee has been a partner at Sequoia for the last 3 years, and has been a tech operator for over a decade. She’s also backed female founders at Sequoia, such as Katherine Ryder at Maven and Amira Yahyaoui at Mos. Jess found me through Female Founder Office Hours, organized by a non-profit she co-founded: All Raise. All Raise has a huge mission, but what many miss is that it has done wonders for diversifying the deal flow of the investors involved, and helped them find phenomenal companies.

Jess’ secret to consistently investing in female or diverse founders is that she was a female founder herself and experienced investor bias firsthand. She built a startup targeted at women (fashion app Polyvore), pitched to many rooms of all-male VCs, and had to resort to theatrics to convince people that women’s fashion was a worthy category. That gave her a positive bias for underdogs and fighters. In her own words, “Startups are an irrational endeavor because the odds are so against you. The kind of person who keeps fighting, despite the system being somewhat rigged, is exactly who I want to back.”

James Joaquin (Obvious Ventures)

James has been a CEO/founder of 7 companies, helping lead them to IPO (Xoom) or successful acquisitions by Apple, Kodak and AOL. As a co-founder of Obvious, he invested in Miyoko’s Creamery (Miyoko Schinner) and in Beyond Meat, one of the most successful IPOs in 2019. James met me through NFX in 2017 and led Incredible Health’s seed round and joined our board. His team has explicitly called out their continued desire to hire diverse investors, and fund diverse founders: “World positive, leading companies are diverse companies.” James pioneered the World Positive term sheet, and required we send him our mission and values before wiring our seed capital.

I asked what’s his secret to investing in diverse founders. His response: “Investing without bias is a human impossibility since we all carry unconscious biases around with us, so that’s even more reason to build a methodology to counter it. First, remember the data – diverse teams deliver better business outcomes. Second, celebrate the founders’ distance traveled. A founder who has faced more adversity in life is better prepared to tackle the myriad challenges of a startup versus a founder of privilege. Third, founder-market fit matters; have they ‘worn the shoes’ of their customers. Leadership teams should match the diverse set of consumers they serve.”

Charles Hudson (Precursor Ventures)

Charles is one of the OG diverse investors, investing in diverse founders long before it was required. His portfolio closely resembles the ratio of diversity in the US population. His notable early-stage companies with female or diverse founders include Finix (Richie Serna), Carrot Fertility (Tammy Sun), Noyo (Shannon Gogin), Runa (Courtney McColgan), Fuzzy (Zubin Bhettay), Squad (Isa Watson), and Incredible Health (Iman Abuzeid). “The fact that my investing team is black, and we have an established track record of funding female, black, white, and/or latinx founders, attracts even more diverse founders to us every week.”

How do you make rapid diversity progress when investing?

If you’re an investor reading about the investors above, and you have a largely homogenous portfolio, or struggling with low returns, what are you waiting for? If you have a couple wins under your belt, and are looking for the next set, what are you waiting for? The prominent examples above show the mindset and execution to fund diverse founders is not only doable, but it’s part of the data-driven approach to higher returns. Here’s a 3-part framework to put the data into action:

Part 1: Make diversity a priority, an OKR, and measure it.

The next 20 years in tech are unlikely to look like the last 20 years – your returns depend on finding diverse founders, founders with highly unique perspectives and insights. In the same way you rapidly ramped up your understanding and network in cryptocurrencies, fintech, SaaS and other “hot” opportunity areas, you can rapidly ramp on diversity too. For example, track and modify the diversity of the founders in your deal flow, your team, and your referral sources to result in a growing number of female, black or latinx CEOs in your portfolio.

Part 2: Build a bigger tent to fix your sourcing, and help your CEOs.

One tactic that every investor cited above has is an expansive national network that is diverse – specifically scouts and “referrers”, executives, and subject matter experts – a huge tent. This helps CEOs in their portfolio hire diverse team members, but also heavily expands and diversifies their deal flow. For example, I met Mike Smith, President and COO of Stitch Fix through Jeff Jordan, and Mike subsequently referred excellent talent to me.

Expand your network so at a minimum, you’re connected to the major hubs and connectors who already have an established network of diverse founders. BLCKVC is one place to start, another is investors that have already funded diverse teams, highlighted in NFX’s Signal product.

From 2020 onwards, you’re expected to support your portfolio companies with diversity, so it’s best to rapidly make progress inside your VC firm too. Hiring diverse investors is a key shortcut to building a bigger tent too.

Part 3: Remove or counter the bias in your diligence process.

I’ve gone through the full diligence process of the best of the best Series A funds in Silicon Valley. It felt unbiased, highly process-oriented, and rigorous. It included evaluating our vision, market, product, team, founder-market fit, speaking to customers, understanding the founder’s story and traits that enabled success in the past and will propel the future, business metrics, backdoor references and more. Heuristics like “two white guys from Stanford” are sloppy and haphazard, and have the potential to continue hindering future returns if companies are evaluated in this unsystematic way.

We are coming to terms with what we have or have not done right in tech in relation to diversity. Regardless of how we all got here, today is our new starting line. We all want to win. Data is one way Silicon Valley has won this far, and it’s the way we can keep winning. The data is clear – diverse teams win.

Let’s lead into the future with data, and make diversity more than just a statement we proclaim.

Let’s make it an action we take.

Thank you to Jason Brown, Chirag Chotalia, Mark Munro, Rome Portlock and Christen O’Brien for reviewing this essay.

For more information about Incredible Health, visit https://www.incrediblehealth.com/. Follow Iman on Twitter @ImanAbuzeid and Incredible Health at @JoinIncredible.

34 Questions to Recruit World-Class Talent in the Remote Era

34 Interview Questions - OG

by James Currier (@JamesCurrier). James is a Managing Partner at NFX, a seed-stage venture firm headquartered in San Francisco.

34 Interview Questions - Header

For the last century, we’ve been learning about the best ways to hire and work in an office setting. Now the clock has reset and we’re racing to find the new best practices for the remote era. This sudden cultural shift to remote work presents an opportunity for startups. Startups that adapt will have the advantage and they will become magnets for the best talent.

Like with technology shifts such as web-to-mobile, rapid cultural shifts can also provide a ledge on which to build iconic companies.

Remote Working - Google Trends

Long-term increase in search interest for “remote jobs”. Source: Google Trends

Adapting to remote work requires relearning how to recruit the best talent. There are two sides to this. Half the equation is about learning to discern talent within the structures of a remote hiring process: figuring out which qualities to look for and what questions to ask. The other half is relearning how to attract the right people.

Today we’ll walk you through what we’ve learned so far about attracting and discerning remote talent, including a list of remote interview questions that we’ve collected through surveying top Founders. Some of it is common sense, and some of it is counterintuitive.

 

Top Interview Questions To Discern Remote Talent

We surveyed 100s of top Founders to get their #1 favorite interview question based on the qualities we’ve identified as most important for a remote hire. Below are the 34 best to help you build your remote interview process.

A short list of qualities and characteristics to particularly look for in a remote job candidate would include speed, initiative, adaptability, and intrinsic motivation. And of course, you should be asking questions to figure out if they can help you attract more remote talent.

Remote Interview Questions - Faded List

 

Speed:

1. Is it more important to move fast and get it done, or to take your time and do it right?
2. Can you describe an example of when you helped your team move faster?
3. Describe a time when the organization you were working for went too fast and it was a problem. How did you feel about this? (They should say they loved going fast even when things went wrong.)
4. How do you prioritize building processes and systems versus shipping against your goals and deadlines?

Initiative:

5. Describe a time when you over-delivered against what was expected of you. Why did you want it so badly?
6. What are some projects you’ve done in the past that you came up with yourself? If it didn’t get implemented, why could you not convince your boss at the time?
7. What do you consider to be your best idea at work, and what obstacles did you overcome to make it happen?
8. Three years from now, what new things will you have learned, who do you want to have added to your network? How will this job help you achieve this?
9. If you were to get this role, what would be your biggest challenge and how would you approach it?

Adaptability:

10. We are resource-constrained and things are really ambiguous here, is that what you want for yourself?
11. Describe a time when your boss changed plans really quickly. How did that make you feel?
12. Describe a time when things were changing really quickly. What was the environment like for you? (Notice if they use negative words or positive words.)
13. Describe a time when you had to change your plans suddenly. How did you communicate this with other people?
14. Who’s the most difficult person you’ve worked with?

Intrinsic Motivation:

15. Tell me about a time when you loved your work. What did you enjoy about it?
16. Describe a time when you became consumed with what you were working on. How did you deal with it?
17. Describe something you created, either in work or outside of work, that you are proud of.
18. When was the last time you were working on something and looked up at the clock only to be shocked at how much time had passed? What were you working on, and why were you so absorbed by it?
19. Tell me about a niche product or something for your hobbies or passions that you’re extremely opinionated about and why.
20. What’s the most recent thing you learned about yourself at work? How did you learn it? Why?

Job Longevity:

21. Walk me through your last few jobs. What did you learn and why did you leave each?
22. What do you want out of your next job that you aren’t getting now?
23. How long can you see yourself being here? What’s next for you?

Past Performance:

24. What was the highest performing team you’ve ever worked on? Why was it so high performing? What was your role?
25. What is your superpower? What is the one thing you do better than most others in your profession?
26. What do your coworkers tend to respect and admire most about your work?
27. What do you consider your natural gifts, and what are the things you’ve worked hardest to get good at?
28. Who have you learned the most from in your career? What did you learn?
29. How do you push the boundaries and limits of what you do?
30. What advice would you give to someone starting new in your profession? What are the best things to spend time learning and doing, and what’s a waste of time?
31. What are you most proud of in your career so far?

Talent Magnetism:

32. If we hired you today, who would immediately want to join us?
33. Can you name a time when you recruited someone to a company you were working on?
34. Who are the three most exceptional people you’ve ever worked with and what made them so exceptional? Do you think you could convince them to join you here if we hired you?

 

Adjust Your Hiring Process

Beyond the interview questions, more of your hiring process needs to adjust for a world of more remote.

There’s an opportunity there. The current systems for hiring aren’t that great, so now is a chance for us to improve how we hire overall.

One advantage of remote hiring is access to volume. The number of people you can interview remotely is more than what you could do in person. In theory, this means you’ll have a greater chance to meet the perfect candidate.

Secondly, doing interviews remotely is also going to allow us to digitize and coordinate questions between interviews more easily. It’s a good opportunity to overhaul old analog hiring processes. Redundancies between interviews can be lessened and wait times eliminated. Inconsistencies between different interviewers can be removed. Remote gives us the opportunity to be more systematic and coordinated.

Third, there are biases that may not come into place remotely, which may help us to make better decisions in who we hire.

Fourth, some people who would be poor office mates may be great remote workers and vice versa. Remote work will change who we consider the top performers.

Fifth, vetting becomes more important. References are even more critical if you’re never going to meet the people you hire in person.

Remote candidates should also expect the vetting process to be longer and more rigorous and should be willing to put in more work during the interview process — even potentially working with your company in a “try before you buy” scenario.

 

How To Attract The Top Remote Talent

Adjusting your hiring process for remote includes changing how you make your company an attractive destination for the best talent. Showing people that you have the best place to work is no longer about having a fancy office like the Googleplex with 3-star chefs and nap pods. Now you have to compete by offering people:

  1. The chance to do great work.
  2. Great compensation for that work.
  3. Access to a strong culture and community of coworkers that includes remote.

Having a sense of community and belonging is a big and underrated reason why people work where they do. “Belonging” is not as tangible and obvious as compensation, so belonging is often overlooked. But the unseen hand of network force is just as powerful in our work lives as it is anywhere else. The people you work with are a big part of your life.

Step 1. Know Thyself and Really Build Culture

Building a strong remote culture doesn’t happen organically as it might in an office with daily, unplanned interactions. Remote work means you have to put more effort into fostering a culture.

The NFX Culture Scorecard

 

What stage is your startup, and how do you expect it to evolve over time?

Remote Startup - Chart

Self-knowledge here is important. Be really clear where you land on this grid, both now and in the future. Are you building a remote culture and community from scratch, or are you transferring a culture you built in an office online? Will you become more or less remote as your company grows? Having a clear answer now will allow you to build for the future.

Some Founders are adamant about being fully remote. Some want to be fully in-office. It’s safe to say we are going to see more fully and partially remote companies than we did before, and there are going to be successful companies in every box on the grid above. Success will depend on implementing the right culture and processes for the box you’re in.

One thing to consider is, how iterative and creative does your product need to be? Highly creative products have typically been done better in person. If you’re changing significant business and product attributes more than once or twice a day — language, onboarding flows, your go-to-market, channels, product features, etc. — it’s possible that being in the same room still produces the most iteration speed and the least friction.

For instance, can you build a consumer-facing social product with a fully remote team? Yes, of course. Can it be done as quickly or as well as your competitors if they are in person? The jury’s out.

What type of company you are or what stage you’re at should come first in deciding your long-term mixture of remote work.

Step 2. Build A Performance Culture For Remote

We wrote the Company Culture Manual as a guide to building culture in person. While many of the same principles apply in a remote context, there are adjustments that need to be made.

Download the Culture Manual

Remote work is a skill in itself. People who make good office workers may not necessarily be the best remote workers. Some of us need to be in an office to perform at our best. We perform better with an audience. We need to know that others are right there watching what we do. We like periodic eye contact and coaching.

Some other personalities do better when remote. More independent work, fewer interruptions, not as much social time.

Thus, a big part of building a strong remote culture is therefore to discern the right talent for remote vs in office. Hiring people with the right qualities and motivations to succeed remotely will seed the culture.

The other part of creating a good remote culture is to iterate through elements to see what sticks. We’ve seen some positive results simply by taking synchronous experiences from office environments and moving them to remote — experiences like birthday celebrations, happy hours, yoga, meditations, stand-ups, all hands, etc. They have been adapted for remote and they work to some extent.

Asynchronous experiences take it to the next level, with nicknames, employee awards, competitions, trivia games, meme sharing, volunteer work on shared values, donation programs, structured mentoring, etc. As time goes on, we expect new types of remote-only rituals and activities to develop and stick. Create them, test them. They are important. [You can download our comprehensive list of company rituals here.]

There are companies that have been 100% remote for many years. Some of the most discussed ones are Automattic, GitHub, 37Signals, InVision, Zapier, and TopTal. Automattic, for instance, started as an open-source project, with people remote all over the world contributing to the code base. They slowly picked up their best contributors as full-time employees. These were folks who were attracted to remote work from the beginning and it created a unique company DNA.

If you can show prospective employees that you’re building a strong remote culture, it will be a magnet for top talent who are looking for companies that have adapted for the future.

 

Staying World Class In The Remote Era

Founders should take care that they don’t lose the energy and camaraderie that in-person work creates in the transition to remote. Remote work may be lifestyle-friendly, but in the startup world competition is fierce. You have to take care to retain a competitive level of energy and camaraderie to operate, whether remote or not.

In the end, winning startups are made of people who are 100% switched on 100% of the time and operating at a world-class level.

If remote work is part of the playbook for operating at that level, then it makes sense. But if it’s implemented for some other reason, then it may make it harder for you to compete. Choose carefully in deciding what makes sense for your company. If you do embrace remote for the long term, put your full effort into adapting your hiring practices and culture building to succeed as a remote or partially remote organization.

The percentage of work that is done remotely will certainly increase. Companies that thrive in the new era will learn to turn the challenges of remote work and remote hiring into an advantage.

Thank you to the fantastic group of Founders who participated in the creation of this essay.

Connect with James Currier

How Contrarians Think: The Early Days of Square, Yelp & PayPal with Keith Rabois

How Contrarians Think - 1%

by James Currier (@JamesCurrier). James is a Managing Partner at NFX, a seed-stage venture firm headquartered in San Francisco.

How Contrarians Think - 1%

Silicon Valley loves patterns and playbooks for executing on market disruptions. Take a great startup, break down its wins into a series of actions and reactions, and then follow that blueprint. Simple, right?

What rarely comes to light is that the great Founders do not study rules so they can follow them. They master the rules so they can break them. Underlying their vision are mental models that get at the key question: Which patterns do you violate, and why?

As a Founder, the clarity of your thinking behind that question is defining because, as my friend Keith Rabois puts it, “If you’re trying to reinvent everything, that probably means you’re not really successfully reimagining anything.”

Your highest leverage is studying the rules as a starting point, but spending much more time on the mental models — the psychology — behind rule deviation.

This essay and podcast is an examination of the rule deviation behind some of technology’s greatest startup feats — PayPal, Square, Yelp, and even touching on Apple, Tesla and SpaceX. Keith has been instrumental as an early team member in many of these companies. He’s had a storied career in Silicon Valley, and he now is a partner at Founders Fund.

Whether you agree or disagree with Keith’s conclusions is not the point. The point is — as always — creating something of true significance starts with seeing what others do not.

Let’s jump in.

 

1 ) Being a contrarian is easy. The challenge is being a contrarian and being right.

  • The basic principle of a contrarian is the ability to think for yourself, on any topic, and being able to derive a set of views independent of what other people around you think.
  • That’s very difficult to do because everybody is mainly influenced by the 5 people you spend the most time with.
  • For Founders, it’s a whole lot easier to build a business when you see the world differently at first. That gives you time to develop it, build traction and momentum, and accumulate advantage… before the rest of the world realizes that you’re on the right track.
  • Peter Thiel wrote about this in Zero to One, where he talks about secrets. What secrets does the Founder have or team have, that are insights about the world that everybody else thinks are wrong, but prove to be accurate?
  • The challenge of being a contrarian is not in being contrarian. The real challenge is the Venn diagram overlap of being right and different.
  • Reid Hoffman has a great quote about this: ”It’s actually pretty easy to be a contrarian. It’s hard to be contrarian and right.” Jeff Bezos has said the same thing.
  • Personally speaking, I am an anti-FOMO person. I prefer JOMO — I run my life around the joy of missing out. The more things I’ve missed, the happier I am.
  • I grew up in an anti-war household that loved George McGovern. Then I went to Stanford, which was incredibly leftist when I was there — borderline Socialist or Communist — and I survived that. Then I went to law school, which is full of left-wing professors. Now I am a conversative in Silicon Valley. So maybe to some extent, I might go crazy if I was sitting around with fellow conservatives all day!

 

NFX Frameworks for Startup Ideas

 

2. Only after you’ve mastered the rules do you get to violate them.

  • The art in most fields is understanding the rule precisely, and then knowing when to deviate. There’s truth to that in Silicon Valley too, that deviating from rules doesn’t make much sense, per se. It’s knowing why you’re deviating from the rule.
  • I remember the first time I learned this. I was a kind of annoying high school kid, and I remember sitting in English class and reading some of these great works of literature and noticing that some of the best authors of all time would occasionally violate grammar rules. And I’d ask my teacher: “Why does my paper get marked up when I do this, but so-and-so famous author gets away with it?” And the correct response by my English teacher was: “Well, when you master all the rules you get to violate them.”
  • If you follow the rule book, you’re not going to create an iconic company from scratch. There is no rule book that tells you how to build the next SpaceX or Tesla by definition. And so you need to know what rules you’re going to change.
  • That’s why I don’t like the phrase “best practices.” Best practices just lead you to the replication of something else. You can borrow best practices, but you need to know where you’re intentionally not following “best practices” or you’ll just be in the middle of the Bell Curve, which is not the goal. You need to be at the extreme one percent. So you want to consciously violate some of the rules, but have a very intentional strategy for doing it.

 

3. Case Study: How Apple breaks the rules

  1. It’s a closed platform. For 20 years, most people have argued you don’t build a closed platform.
  2. It’s a secretive company; they don’t let their different teams talk to each other inside the company.
  3. They don’t actually use metrics for the most part to measure themselves.That’s all very unconventional. All three of those things would violate most Silicon Valley norms, but they’re indispensable to Apple’s success. There’s a reason why they are the most valuable technology company today.

 

4. At PayPal, we didn’t think we were misfits. We just knew something the world didn’t appreciate yet.

  • There have definitely been times at many companies I’ve been involved in when the world thought we were crazy.
  • For example, Red Herring magazine, which at the time was the centerpiece of Silicon Valley technology consensus opinion, ran this cover story on PayPal called “Earth to PayPal.” Peter (Thiel) never forgot this. When we celebrated our IPO, he held up the cover. When we celebrated our acquisition by eBay, he gave another speech holding up the cover. So, we definitely were considered to be weird, odd misfits at the time.
  • I don’t think on the inside we thought we were misfits. Our companies were making, for the most part, quite wise decisions. Whether the world appreciated it or not… that wasn’t the key criteria for us.

 

The Hidden Patterns of Great Startup Ideas

 

5. How “The PayPal Mafia” broke the rules — and won.

  1. The number one thing is to really credit Peter and Max for their recruiting. They had a philosophy of finding the right people and ultimately sourced a huge fraction of the PayPal network through their personal networks. Peter, through his connections at Stanford, and Max mostly hired engineers out of his high school experience in Chicago or from the University of Illinois. They identified people with high potential at scale and mixed everybody together.
  2. Once we were in the building, there was a set of management philosophies that were very different at the time, which may have enabled us to be successful with this company and then also subsequently. For example, we didn’t really believe in general managers. Peter was adamant that we were not going to hire people whose skill in life was managing. We were going to promote the best person in each discipline to lead that discipline. So for example, the best engineer would become VP of Engineering, the best designer would head the Design team, the best product person would lead the Product team, the best finance person would be CFO, and that led to a building of craft and gave a meritocratic feel. Everybody knew that their boss was actually pretty damn good at what he or she did. So I think that was pretty fundamental.
  3. PayPal was a hard business. It was very challenging. There were a lot of obstacles, a lot of people and enemies that didn’t really like us, ranging from Visa, MasterCard, to federal and state governments at different times, eBay, et cetera. So it was sort of a trial by fire situation. You definitely bond with people in that kind of environment, and you get to see who’s really good under pressure and stress and who actually doesn’t thrive under those circumstances. So, after PayPal, when people subsequently went to start their own companies, I think a lot of us already knew how each person would do as a Founder. Peter and I talk about it all the time… being a Founder is like chewing glass. It’s not particularly fun, it’s very painful, it requires a lot of self-actualization and initiative. And I think our time at PayPal gave us pretty good insight into who was likely to thrive in that environment. And that’s why I think some of my colleagues’ companies did really well.
  4. When we all exited PayPal and were investing in or starting new things in 2003, 2004, 2005, most people didn’t think that there was another wave of consumer innovation that was likely to be successful. We happened to believe there would be, which is why we started all these companies, funded each other’s companies, etc. History will record that as being right, but it wasn’t obvious at the time.

 

6. Counterintuitive KPIs in the early days of Yelp, PayPal, and Square.

  • It was probably the second board meeting we had since I joined the board of Yelp. I remember Jeremy Stoppelman was finishing his presentation and he basically gave us this vision that Yelp was really building this viral social product, which not everybody appreciated at the time. I looked across the table and said, “Okay, well, if you’re building a social product, what’s the key metric that’ll tell you whether you’re right or wrong?” And he looked up and down the table and said, “It’s the number of unique, one-on-one personal messages from one member to another.” And personally, at the time, I thought the answer was ridiculous. But very quickly thereafter, certainly within three to six months, I realized he was actually right that that was the key predictor for whether we were building a true community. It was extremely counterintuitive at the time.
  • I’ve given you the PayPal example too. Nobody really believed that eBay was a target market for PayPal. But then David Sacks noticed that there were 54 sellers on eBay who had hand-typed into their listings: “Please pay me through PayPal.” It was a very small number obviously, and the first reaction of the PayPal executive team was, “Oh my God. Why are these people using PayPal? We should get rid of it because that’s not what we’re supposed to be doing.” But then David came into the office the next day and said the opposite: “A-ha! I think I found our market.” So we created a PayPal logo that they could insert, as opposed to type, and then we created an automated way to insert the logo because these sellers had lots of listings. It basically became both the market for the company to focus on, as well as the guiding light for the product strategy for two years.
  • Back when I joined Square, we were just launching and we’d shipped about 10,000 or 20,000 Squares into the world, and we started to grow. Here’s what happened:
    • We weren’t doing any marketing; we didn’t have money to do marketing. But I remember Jack pointing to his computer the second week after we shipped the Squares, and noticing that day by day, we were adding more users per day, growing a little bit each day. And he asked me, “Why is this happening?” And I paused because under the standard set of rules it really shouldn’t have been happening. We weren’t doing anything to create this growth.
    • So I thought about it for a few minutes and I formulated a hypothesis. And it was really only a hypothesis given the constraints. I thought, “A-ha! Maybe this is a function of people seeing Squares in the real world, seeing the actual device, and some fraction of them that see it, sign up.”
    • So once you have a hypothesis, then the next question is, “Well, how do you validate that? How do you test it?” If true, there should be a ratio for every new Square we shipped, and every new customer, and every transaction in the rate of growth. Turns out there was a perfect relationship, it’s exactly 1%. So for 1% of all transactions on let’s say day zero, we have 1% of signups the next day, new signups, and they just were perfectly consistent. This is amazing. We now have an actual viral loop in the real world. We had this observability. We’ve been in the real world that’s causing growth, but it was not at all obvious.
    • We decided this word of mouth was partly from the aesthetic appeal of the device, the consistency of the design of the device, with the name of the device, so people can remember. You see the square, it’s called Square, and that’s easy to remember when you want to go sign up. It worked for the early days.

 

7. The team you build is the company you build (especially remotely).

  • I learned this from Vinod Khosla when he was on the board at Square. He said, “The team you build is the company you build.” At first, honestly, I found it a little surprising, because typically people in Silicon Valley think about technology and technical advantage and IP, and then they think about distribution advantages, and distribution strategies and network effects. They often forget the people and the way he expressed it, it was just so simple. It was one of those things that every minute you think about, it gets more and more powerful and insightful. He mentioned this to me maybe 8 or 9 years ago, but I still think about it every day. The team you build really is the company and with the right people you might have a phenomenal company, but a lot of people have an unmitigated disaster and most companies are somewhere in between.
  • Regarding teams doing remote working accelerated by COVID019: The benefit of being co-located is mostly extemporaneous conversations; dialogues that wouldn’t have happened by scheduled meeting, by fiat, by calendar or by remote. It’s the step-function of innovation that I do worry about remotely. I think about how many really good ideas at PayPal came from spontaneous meals together or spontaneous late nights, like over a drink or pizza. Some of those ideas are really 10X ideas. But ideas happen in random time intervals.
  • A lot of people are trying remote for the first time right now. The good thing is their existing relationships at all these companies that are suddenly switched to remote because of COVID. I do wonder about how high fidelity the debates and dialogues would be if there were no preexisting relationships from the real world before these companies had to go remote.
  • It goes back to knowing the rules. I think there are some advantages to remote working if you know which rules you actually can’t break.

 

8. Ridiculous ambition + knowing which rules to violate = exceptional Founders

  • Founders need to think about what they are doing differently and why? What are their secrets? Why are they likely to have unreasonable success?
  • I mean, if you think about it, it’s heroic, almost ridiculously so, to have someone raise their hand and say “I’m going to change the world.” “I’m going to change the entire financial services world.” “I’m going to change the entire real estate world.” “I’m going to change this entire whatever.” That’s kind of ridiculous. But you need people who can take on ridiculous ambition.
  • That’s when you can have a dialogue about, “Well, what rule do you violate? Why?” And that allows you to understand how the person’s brain works and the calculations they’re making.
  • The bad version of that conversation is when they don’t even realize they’re violating the rules, or they don’t understand the reasons why they’re deviating. That’s usually a disastrous recipe for a mess because you don’t want to violate all the rules. You want to select the least. If you’re trying to reinvent everything, that probably means you’re not really successfully reimagining anything.
  • Look for people who are ambitious, definitely. There’s ambition and then there’s ambition. I like to find the outrageously ambitious people. Borderline a little crazy. I’ve certainly worked with and worked for a lot of people that fit that DNA, so it doesn’t bother me. I expect that it’s part of what makes the person super impressive. When they see the world differently, I expect they will occasionally have very strange reactions to the world.
  • The people who really want to walk through walls, who you know will walk through that wall one way or the other — that’s basically the most important thing in a Founder.
  • Then they need the IQ and horsepower to understand why and how to walk through that wall.
  • When you meet a Founder, it’s very hard to project beyond what this person is capable of today — instead you want to project what is this person going to be like in 10 years? And that’s really a growth question, so you’re looking for a sustained rate of growth.
  • What makes the exceptional Founder, the real outlier, can be one of two things. They are either outrageously good at one dimension — extremely world-class. Like, “I have never seen someone like this in X-dimension.” Or they have a compounding rate of learning that’s absurd. And you get to go along for the ride and for five or ten years and just watch them grow.

 

You can listen to the podcast conversation here.

Connect with James Currier

24 Ways B2B Marketplaces Win

24 Ways B2B Marketplaces Win

by James Currier (@James Currier). James is a Managing Partner at NFX, a seed-stage venture firm headquartered in San Francisco.

24 Ways B2B Marketplaces Win

The internet is 30 years old, but business to business commerce and services remain stuck in the past. Most companies still don’t use modern software.

20 years ago, with much fanfare, Founders and VCs made an attempt to bring many B2B marketplaces online. It failed spectacularly (see the final section of this essay for more discussion of this).

Finally, 20 years later, a lot has changed, and B2B marketplaces are starting to work.

I see 6 general reasons why:

  1. Online purchasing became normalized for consumers. People expect the same interface when buying at work for B2B.
  2. Financial infrastructure that didn’t exist before is now available.
  3. The scale of the internet is far bigger, meaning more opportunity for liquidity. There were only about 300 million people on the internet during the first wave of B2B marketplaces.
  4. Prevalence of mobile and IoT devices. It’s now easier to get the supply and data into the system, allowing for automated inventory/reselling/tracking, etc.
  5. There’s more willingness by Founders to operate managed marketplaces — taking on logistics and fulfillment, transactions, QA services, and building trust online.
  6. The ownership of many businesses has been passed onto a more digitally literate generation.

Just as the last 15 years have seen tremendous consumer marketplace success stories, we expect to see the same level of success for B2B marketplaces over the next 10 years.

Today, we’re sharing 24 ways to make B2B marketplaces work. Founders who can execute using these lessons will be in a position to revolutionize B2B markets.

 

The NFX Marketplace Glossary -- Founder Resource

 

1. Create a new set of transactions

Find transactions that are not happening today, and enable them to happen. Most Founders see a market and say “How can I digitize that transaction and capture a percentage of it?” That’s fine. But sometimes it’s better to say “Who isn’t making any money in this market at all? Who can I help launch into business in this market?”

If you can take “non-participants” from $0 revenue to $X revenue, and if they can build their business around your marketplace, they will become loyal nodes in your marketplace, helping you grow with less resistance.

This is important because other companies that have revenue under the status quo will resist your growth. They will worry that as your marketplace changes their market, they could lose revenue, lose margin, or lose an advantage they think they have today. This risk aversion is simple human nature.

2. Understand B2B buyer psychology

In B2B, buyers’ minds are focused on their margins. That’s the core of their business. And they’re highly aware that your rake could cut into their margins.

They also care about quality, certainty, and the hope that the purchase will give them an advantage against their competition now and in the future. A B2B buyer brings a rational, multi-level consideration set to transacting on your marketplace.

Further, a company buying from you could become dependent on you for their margins, and thus their livelihood. You could make or break them, which is a lot of risk for them. So you can see why so many established businesses are wary of B2B marketplaces.

Contrast this to buyers on B2C marketplaces who typically use a marketplace for convenience, speed, and availability. They are much less sensitive to your rake, and they’re more interested in finding what they’re looking for and getting it quickly. And since a B2C marketplace only controls a fraction of their lives, they don’t worry about whether they buy it from your B2C marketplace or some other source.

3. Become a student of clever pricing strategies

Because B2B buyers and sellers are much more sensitive to margins, pricing — and how it’s communicated — is key to making a B2B marketplace work. You must become a student of clever pricing strategies. Do you put the rake on the buyer, the seller, or both? Do you build your rake into the named price? Do you show pricing? A traditional rake might not be the best way to monetize. So be sure to experiment and iterate on it with knowledge of what has been tried before.

4. Look for the “network interrupt”

In B2B, you are often going up against an “if it’s not broken, don’t fix it” mentality. People have grooved into their current workflow/decision-making and prefer to stick with what they know. This compounds across an industry. Think of a market like a network of people. If everyone in the industry is doing things a similar way, it will feel like more of a risk to try something new, even for the sake of greater efficiency.

B2B marketplaces should look to create a “network interrupt” that forces people out of their patterns. A network interrupt can come in the form of a new economic reality or emerging technology that changes the experience dramatically. Or it can arise from a competitive situation — for example, if your marketplace empowers one visible node in a new way that causes the other nodes to react out of perceived competitive pressure.

5. Start on the outskirts

Don’t immediately try to attack the center stronghold controlled by winners and market incumbents. They have a vested interest in preserving the status quo because they often have more to lose than to gain if the market is made more efficient.

Instead, it might be a better strategy to start on the outskirts of the market and work your way in. Focus on the marginal nodes with the most to gain from a new way of doing things. This can be the best strategy until you hit a critical mass in your marketplace and get your 2-Sided Marketplace nfx going.

6. Talk to customers, build friendships

For B2B marketplaces, ongoing customer insight is critical. Talk to your customers. Don’t just watch the data coming out of your software. Get to be friends with people. Reach out to them directly, on video calls, phone calls, emails, texts, and meet up with them for breakfasts, lunches, dinners, conferences, weddings, etc.

During several periods in the evolution of your B2B marketplace, you should expect to spend 50% of your time talking to your users directly, asking them questions, and getting feedback.

7. Avoid markets that are too consolidated

We wrote in the NFX Marketplace Scorecard that online marketplaces typically do best when there is a high degree of fragmentation on both sides of the market. If there are only a few sources of supply or demand in a B2B market category, online marketplaces will not see much success.

Fragmentation is Good B2B Markteplaces NFX

This is because fragmentation is an indicator of lots of competition, so 2-Sided Marketplace nfx will be quite powerful when fragmentation is high — once a critical mass on one side of the market joins a marketplace, their competitors will have no choice but to follow.

Consolidation is bad B2B Markteplaces NFX

Consolidation in the market, however, means that the powerful players on either side will be able to leverage their market share to prevent the successes of new marketplace entrants. Either that or the marketplace will be overly reliant on big players and will be crippled if any one customer defects. Either way, it’s not ideal for building a marketplace.

 

NFX Marketplace Scorecard

 

8. Have patience, and be relentless through seasons

Remember that B2B marketplaces are “hard planes to fly” and they take 5-8 years to get going. So the pilots — the founding team — need to be data-driven, humble, and tireless to keep flying that plane properly.

Your B2B marketplace will go through many seasons, and the product needs to do different things in each of the different seasons. Be prepared to adapt with pricing, guarantees, supply-side concentration, geographic restrictions, press announcements or stealth, special incentives to certain nodes to get their commitment, SaaS tools to lock in one side or the other, allowing disintermediation and then stopping it, fintech augmentation, etc.

9. Become a broker yourself

In many B2B markets, brokers serve as intermediaries between buyers and sellers. They provide trust and consultation services for both sides in a situation where the transactions are large and buyers often need help selecting the right supply for their needs.

Simply matching supply and demand is often not enough. Discovery was the primary function of the first generation of “listings” marketplaces, but this model is not as useful for B2B. One strategy is to become a tech-enabled brokerage yourself, then move to automating on one or both sides of the marketplace later.

10. Build software for brokers

A second strategy to deal with B2B markets where brokers are prevalent is to give them the software, data, and access to supply or demand to enable them to do their jobs better. This converts brokers from obstacles of your marketplace into advocates.

My partner Pete Flint, for example, did this when building Trulia by creating an XML feed standard allowing real estate brokers to syndicate their listings to Trulia from their own websites, saving them time and effort while expanding their exposure.

11. Offer a free/subsidized trial

Keeping a business from having to go through the internal politics of having to decide to spend money — or give up a percentage rake — can speed up your sales cycle.

Of course, offering a free trial can be dangerous. You have to do it in the right way. A few ideas we’ve seen work:

First, be clear about what the real cost will be in the future once the trial expires — not just with your point of contact at the company, but everyone else behind them who will be displeased if they aren’t aware of what happens when the trial expires.

Second, create a “Pioneers Club”: a limited-access group of early customers. This makes it known that there are only a limited number of trials being offered so that people feel they have to hurry before someone claims their spot. Further, limited access also lets you explain to later users why they aren’t getting the same deal since the Pioneers Club is closed. You’ll be able to explain that it was a limited trial period.

Offering a free/subsidized trial can also help you deal with the chicken-or-egg problem, a problem we’ve previously written about when we first revealed the 19 tactics for solving this classic marketplace problem.

19 Chicken-or-Egg Tactics

 

12. Communicate your growth path with attention to the details

Remember, B2B market nodes tend to be tight-knit. Everyone talks. The network density is very high. They all know each other from the trade conferences, the councils, and the industry dinners. You have to assume that everything you tell one person in the market will be known by everyone else. How you build your marketplace will become known, so how you start and grow needs to be carefully scripted and communicated.

13. Establish trust with KYC services

B2B marketplaces should consider doing background checks on nodes on both sides of the marketplace so that you can establish trust in your brand. Trust is key. In the last 6 years, KYC (know your customer) companies have become more available and make it easier to do this.

14. Add consultation services

A big part of the way offline B2B markets work today is to include nuanced and personalized information with transactions.

For example, when I buy water pipes from a broker, they give me advice on the different product options, regulations that might apply, and tips on how to use them best — information that would be hard to find in a different way, and is tailored to my unique situation.

As a marketplace, in order to compete with the brokers entrenched in a vertical, you might have to offer similar value. Inventory is often only part of the equation.

15. Add coordinators

To create liquidity in your marketplace, you might need to become a managed marketplace where you add a product manager or coordinator to manage different pieces of the supply side to create an adequate (liquidity-creating) product for the demand side. This can appear to be “free” work that the marketplace does. In reality, this is an extra cost to you, and you need to be sure to get adequate rake in the marketplace to cover these additional costs.

16. Create SaaS workflow tools

Create workflow tools for embedding for one or both sides of the marketplaces to incentivize repeat usage on both sides without multi-tenanting.

This can’t be emphasized enough.

We’ve written about the 4 types of defensibility here. The network effect defensibility you’re trying to achieve with your marketplace is the big prize, but the “embedding” defensibility is the intermediate prize where you embed your SaaS tool into the workflow of your demand-side or supply-side nodes. So yes, this requires you to become a SaaS company. But this doesn’t mean you have to charge them a subscription fee like a SaaS company would because your revenue model can be around marketplace transactions.

Another way to think about it is that you’re building a free or nearly-free SaaS tool company that monetizes on the transactions.

17. Find the “white-hot center”

Instead of trying to capture an entire market category all at once, it’s smarter to appeal to a focused niche. Target the right segment of buyers or sellers to start with. Find the people in your market category who are most in need of the supply or demand you can unlock for them. Capture 85%+ of these best nodes’ volume and expand from there.

18. Focus on the harder side of the marketplace

Early on in building a marketplace, you have to figure out whether supply or demand is more difficult to attract and focus your whole company on that. In some B2B marketplaces, if you get supply, the demand will show up. In others, if you find demand, the supply will show up.

One of the big mistakes a Founder can make is to prematurely split the company into two teams, one in charge of growing the supply side and one on the demand, when growing only one side really matters. For human reasons, the rest of the people in your company will naturally try to support both people. Both sides will want to take up air time at company meetings and be acknowledged for their work. And it’s a distraction.

What you really want is to determine which side is harder and then put the whole company on that one side. At the early stages, the other side really doesn’t matter.

19. Become a Fintech-Enabled Marketplace

As online marketplaces have evolved over the last 10 years, there has been a consistent progression towards capturing more and more of the transaction online.

Adding fintech support for marketplace participants including insurance, financing, etc. will help guard against disintermediation and multi-tenanting. B2B transactions enabled by financial services will create higher retention and a more seamless experience.

20. Go mobile

A B2B company can still get a big advantage doing something excellent on mobile. 100% of the employees of a business are on mobile because of their personal smartphones — but most B2B marketplaces have done little with mobile.

There are many opportunities, but you can imagine that maps, real-time tracking, mobile price bidding, availability alerts, quickpay, messaging, video voicemails, and other mobile-first features would be valuable for B2B.

Ask yourself: what would make a standout or can’t-live-without feature for the supply or demand side that would be enabled by mobile?

21. Use notifications to maximize transparency

Delivery tracking and notifications are already prevalent in food delivery and ecommerce. Uber Eats and Amazon send you notifications when you can expect your order to arrive, and this consumer expectation will cross over into B2B.

People will want to know the status of their transaction. Delivery notifications at every step of the way, using maps of the location of the order, or at least a map of where in the process a transaction is, makes the timing of the transaction transparent to both sides. This will give them the feeling of having more control and visibility into when and where they are getting the thing they are buying.

22. Provide an intermediate warehousing step

It’s expensive and a pain, but full service via providing warehousing yourself might be what you need to grow the network and add enough value not to be disintermediated.

This is an offline way to own more of the transaction. Some would call this a “managed marketplace,” where you’re guaranteeing a certain service level. You take on more revenue but also more cost and risk.

23. Hire the best salespeople in your market

In building a marketplace, getting to liquidity is everything. By bringing top-performing salespeople and former brokers from your market onto your team with the promise of working with a modern, faster competitor, you can bootstrap your distribution. Have them bring their book of business and expertise with them.

24. Target new products and new services

New products or services that didn’t exist before are often a good way to break into a market because the margins are higher and the market is not yet efficient. New enabling technologies open up new greenfield opportunities that incumbents overlook because they’re busy focusing on their core business. By creating new supply or demand you can create blue ocean opportunities.

 

Why Now Is The Time To Build B2B Marketplaces

20 years ago, optimism for B2B marketplaces was high, and there was a large influx of capital to startups. They failed, creating a cloud of disappointment and skepticism that has haunted B2B marketplaces ever since.

They included procurement marketplaces like FreeMarkets and Vertical Net, Chemdex and Chemconnect in chemicals, E-steel and Quadrem in metals. The list goes on. Hardly any of them are still around.

As we listed above, there were a few reasons why the first wave failed. We believe these reasons no longer apply, and that B2B marketplaces built in the 2020s will fare far better.

We’ve written before that startup timing is about three critical factors: economic impetus, user behavior, and enabling technologies. All three are much more favorable for online B2B marketplaces after 20 years.

Founders have to overcome serious obstacles to successfully build B2B marketplaces.

For Founders who can successfully navigate, the opportunity is there to build transformative and iconic companies in this space over the next ten years, bringing the biggest markets in the world — B2B markets — online and into a new era.

Content Upgrade Marketplace Scorecard

Connect with James Currier

How Second Time Founders Can Win and Avoid Common Mistakes

The Second Time Founders Manual

by James Currier (@JamesCurrier). James is a Managing Partner at NFX, a seed and series A venture firm based in San Francisco.

Second Time Founders Manual - Knowns and Unknowns

This is the first essay in the NFX Second Time Founders Manual, a collection of essays and resources for Founders starting their second, third, or subsequent company.

As a Second Time Founder, you have lessons and networks from your first experience that set you up for success.

For instance, in my second company, I knew who to bring onto my team. I could easily raise capital. I could make decisions twice as fast.

But with these advantages came disadvantages. I didn’t seek out as much advice as I still needed. I spent my own money for 2 years but didn’t operate with the same precision as when I was spending other people’s money. I was more hesitant to launch.

It turns out these are all common Second Time Founder behaviors. I wish I had known about them beforehand. So here are our compiled lists.

Potential Advantages of Second Time Founders

The 5 main advantages you have —that you need to leverage or you’re lost— are the following:

    1. Your network. As we’ve written about, the value of your network compounds over time. Having built that network running the last company, you get to benefit from it.
    2. You can raise capital more easily. Investors believe you will make fewer mistakes because you’ve already made many on someone else’s dime. Investors believe you will move faster, hire better, and shoot higher because you’re a veteran and have a network.
    3. You can hire a better team. You know more people, and you know who the top 5% of them are. Again, your network. They trust you to lead them for the same reasons the VCs trust you. It may make no sense, but it’s an advantage, so take it.
    4. You can make better decisions. Because you have more experience, and because you know more smart experienced people and can call them to ask for advice, you should be able to make better decisions. Again, your network.
    5. You can make faster decisions. You have less confusion because you’ve got a better sense of what excellence looks like. You have a sense of what the high benchmarks are.

 

Common Disadvantages

At the same time, there are mistakes that Second Time Founders tend to make.

1. Overconfidence

Second Time Founders tend to be overconfident. You might expect things to happen for you. You might not be willing to dig as deep as you did as a first time Founder. There’s a risk of feeling entitled and becoming superficial.

2. Not Asking “Stupid” Questions

VCs and employees will trust you more as a Second Time Founder, and the problem is you might believe it too much. It can become a trap for your ego. It can become a block to your pursuit of beginner’s mind and your own learning. As a Second Time Founder, the reason you want to go through a second time is to keep learning. It’s a vehicle for you to become the best person you can be. Keep asking questions and keep learning fast.

3. Surrounding Yourself with Sycophants

Another trap is to surround yourself with sycophants and “yes people” who are hoping you know all the answers. This is where it really gets ugly. When you believe too much in your own stuff, you spend too much money, and your board is pushing you to grow and go big before any of the fundamentals are in and before you have founder-market fit and product-market fit. This keeps you from being humble and from looking at the fundamentals. You must surround yourself with people who are going to tell you the truth. Don’t see challenges to your thinking as friction. See it as keeping you grounded and improving your chances of success.

4. Too Much Money, Too Soon

The first time you raised, you maybe raised a little from investors, and after some work, a little more. At each stage, you were capital constrained, and that helped you focus and make hard decisions. On your second time, if you come out the gate and raise $6 million, you might think that you’re already in year two. But you’re not. You don’t have the culture, the team, the cadence, or the processes in place. You skip to the end without building the proper foundations. The cliche to describe this is “Don’t get ahead of your skis.” It’s very common for Founders who raise too much money to have a brain shift that ruins their leadership and eventually their company. Don’t be that Founder.

 

The NFX Fundraising Checklist

 

5. Underestimating the Role of Luck

My bet is that luck was a larger percentage of your success last time than you want to admit. Because you think you were “right last time,” you might fail to pivot or iterate fast enough during the early stages of your startup. Admit how much luck was involved to bring you to this moment in your career. If you take a moment to look, you will likely notice it was a “cascade of miracles” to get you to this lucky place.

6. Getting Impatient

You pick up an idea that is mediocre because you are desperate to get back out there. You could only take so many jogs in Golden Gate Park or whatever you were doing, so you grab an idea that seems pretty good. Then you blow through half of your money on that idea simply because you were feeling itchy at home.

7. Misunderstanding “Impact”

With more confidence as a Second Time Founder, you might be willing to start a business only if you can see a straight line to demonstrating positive social impact and meaning, like global warming or recycling or education. The impact becomes the driving force rather than the product or the customer. Unfortunately, now you have two ways to fail — the business fails or you fail to make the impact. As a result, counterintuitively, the probability of making an impact decreases. Most great businesses come from focus on the product and customer. Stay focused primarily there. Build a great business to increase your impact.

8. Taking an Idea Without Founder-Market Fit

These are three common traps here. One is when you see a business opportunity that doesn’t really fit, but you go after it because it seems like a good idea and you could make a lot of money. Another is when someone else gives you the idea, and you do it because you’d like to work with that person. The third is that maybe you were superficially interested in the idea and a VC said they would fund you if you do it. In any of these three cases, the trap is a lack of authenticity. A year in you realize you’re not actually that interested in the idea because you just pursued it for the business opportunity or the relationship opportunity, or because the VC said they would fund you. In all these cases, you skipped the founder-market fit. It’s unlikely to work.

 

Founder-Market Fit

 

9. Status Anxiety

Many Second Time Founders get drawn into a business to gain respect from the people they respect. Essentially you jump back too soon or in the wrong place out of anxiety to get appreciation or kudos. Ben Casnocha has a great blog post about this condition. There are at least two main behaviors with this mental state: first, you won’t launch your product before it’s perfect because you don’t want to look like a fool. Second, you jump back in to please status players. For instance, if a VC comes to you and says, “If you do this business we’ll back you,” and you really respect that VC, you might do it. Then suddenly you’re trapped. You’ve raised $4 million, you’ve got a team of 12, you’re pursuing something you’re not really that interested in and you’re doing it for status reasons. That’s bad for everyone, particularly you.

10. Overspending

As Second Time Founders, your brains can be stuck where you were at the end of your last experience, when you had a lot of revenue. You were used to big budgets and spending a lot. It can be hard to reset and go back to spending $40,000 a month instead of spending millions per month. This can lead you to overspend and burn through your capital quickly, which puts pressure on your fundraising and on your cap table.

11. Building a Team Purely Out of Loyalty

Your VP of Marketing or VP Engineering might join your new startup to work with you. But they need to also have founder-market fit themselves. We see a lot of Second Time Founder teams dissolving and churning within a year due to not building with an eye toward sequential, organic additions with the right fit.

12. Over Indexing on Previous Pain

A lot of Second Time Founders over-index on their pains from the last company way before they know if they have product-market fit. For example, if you had a problem last time with the technology and you couldn’t raise money and almost went out of business, you might have PTSD and refuse to go through that again. So you might overbuild a product before you know if you have product-market fit. Be clear about your PTSD from the last time and stay rational about what you’re solving for now. Don’t fight the old ghosts.

13. Not Seeing Your Operational Blindspots

Don’t let your past successes become blinders. Each time you start a company it’s different. You’re starting down a different path, at a different time, in a different market, with different people. You’re going to learn new things and it’s going to require new skills. We don’t want to pick on Googlers, but we’ll use them as an example. Google culture rewards iterating slowly and overbuilding technology for massive scale. So you might imagine recent Google alums iterate too slowly and overbuild technology in their startups. Ex-Googlers might also not understand how to get traffic because for years at Google they could just put a little link somewhere and have 10 million people using it the next week. We all have operational blind spots and misaligned mental models created by wherever we were before.

14. Partnerships

Another mistake Second Timers make is doing a lot of biz dev deals because they can. You’re older and you know more people in higher places. Maybe you’re at dinner with someone or you’re up in Tahoe together, and someone says “Hey, wouldn’t it be cool if we partnered up on this together?” You can’t biz dev your way to success. Stay focused on product and customers.

Your previous experience will guide you on your journey as a Second Time Founder, but it can also lead you astray. You have superpowers, but you have to keep them in check by being patient and deliberate, by making decisions for the right reasons, surrounding yourself with the right people, and by continuing to ask questions and to grow.

 

Wisdom from Second Time Founders

Ideas are solutions to problems. An idea is the start of a deep exploration of the problems people have. This mindset is how you discover great ideas worth pursuing. The problem should be a top priority for your target audience. Choose a problem that enough people need solved so you can ensure that your business actually gets users/customers. I like to assess the frequency, urgency and pain of a problem. How often do people have to solve it? How urgently do they need to solve it when it comes up? And how painful is their current experience? The key to finding a good idea is to get excited about the problem. Love the problem(s) you are solving, not your initial idea or current solution in have in mind.

I learned that working with the wrong people will absolutely destroy a startup. This second time around, I used a series of many co-working weekends over the course of a year to work on common problems to judge (1) product-founder fit, (2) commitment, (3) strength fit between myself and the people that showed up consistently, (4) character.  Ultimately, you need your values, work-ethic and priorities to align , as well as a balance of skills that compliment each other.

Finding a co-Founder is one area I paid extra attention to this time around – to understand what are the expectations on both sides both from responsibilities and desired outcome (i.e. what do you want to get out of this?). We did an exercise where each of us wrote a one-pager with their job description and also their best/worst case outcomes. The one rule was, you can’t see the other’s page before you share yours.

So many founders don’t realize what was lucky about their first time and they’ll be able to just do it again. Also, we tend to learn the wrong lessons from success or failure. My second startup is radically different from my first one, and I think it’s an advantage because there’s a tendency to over-extrapolate from what you did before, and industries change.

As a first-time founder, you’re constantly doubted and fielding rejection. Yet, as a second-time founder, people start to believe in you more and challenge you less, making it even more important to surround yourself with strong partners and advisors who bring diverse experiences and perspectives that push and challenge you, and your business, in new ways.

In one of my companies I raised an initial round of $8m which led to the notion that we could follow a multi-strategy approach and have a better chance of succeeding. In reality, instead of hedging our main strategy we ended up not executing any of the directions fast and focused enough. Having raised too much money got us to lose our focus – which took precious time to fix.

When starting Trulia, after the initial idea, the plan was based around how I could utilize some of the unique capabilities I had developed at my previous startup and at the same time try to eliminate the structural inhibitors to growth. Specifically, I had confidence as the growth person at lastminute.com, to scale the consumer audience and also navigate on how to partner with the industry to bring their inventory online. On the other hand, I was focused on building a business that was easier to scale (US vs Europe), higher margin (media gross margins vs travel commissions) and much more focused on a single vertical (residential real estate vs all things last minute). The combination of extending capabilities while eliminating barriers to growth from my previous work was hugely influential in formulating the plan.

 

If you would like to be considered for our invite-only group of Second Time Founders, where we plan to hold private forums and small-group discussions, complete this form.

 

Connect with James Currier

The Second Time Founders Manual

The Second Time Founders Manual

by James Currier (@JamesCurrier). James is a Managing Partner at NFX, a seed and series A venture firm based in San Francisco.

The Second Time Founders Manual

We have been Second Time Founders many times ourselves. We’ve also invested in tens of Second Time Founders.

Do you have an advantage as a Second Time Founder? Yes, you do.

As a Second Time Founder, you have a set of experiences and a deeper network that give you advantages. The research numbers prove this out. An HBS study found that while first time founders have a 21% chance of succeeding with their company, Second Time Founders who succeeded with their first company have a 30% chance of succeeding in their next company, and Second Time Founders who failed in their first company have a 22% chance of succeeding with their second.

Your experience gives advantages, but it also gives you disadvantages. So we put together this manual to share what we wish we’d known earlier.

We use the term “Second Time Founder” broadly. Our use of the term includes someone who was a Founder before and is now founding their second, third, fourth, or fifth company. But it also includes someone who played a critical role in a hypergrowth company. In short, our definition encompasses anyone who has already learned what it’s really like to run a startup. It’s not your first rodeo.

The first essay in this manual is How Second Time Founders Can Win and Avoid Common Mistakes.

We will continuously add new essays and resources to the Manual – the hard-won lessons from the 10 companies we founded ourselves, as well as lessons from the community of Second Time Founders.

If you would like to be considered for our invite-only group of Second Time Founders, where we plan to hold private forums and small-group discussions, complete this form.

Connect with James Currier

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

What are remote-work plans for startups after Shelter-in-Place is lifted - NFX VC/Founder Survey #2

What are remote-work plans for startups after Shelter-in-Place is lifted - NFX VC/Founder Survey #2

The VC & Founder COVID-19 Sentiment Survey is an ongoing initiative to track how early-stage VCs and Founders are reacting to the COVID-19 crisis and economic downturn. The goal is to provide a series of reference points over time to the community, in the midst of one of the most unpredictable climates we will ever face.

Part I of The COVID-19 Sentiment Survey was published on April 3rd, 2020.

Part II is our June 2020 check-in to see how VCs & Founders are feeling and responding to the downturn nearly three months later.

In Part II, 451 Seed-stage and Series A Founders & 141 VCs reported their candid feedback on questions including:

  • Valuations – What are actual tech startup valuations looking like now, several months into the pandemic?
  • Zoom Investing – Will VCs make investments over Zoom, without meeting Founders face to face?
  • Remote Plans – How do VCs and Founders really feel about funding or operating companies that are fully remote, going forward?
  • Hiring & Compensation Shifts – To what extent has hiring compensation changed, if at all?
  • Grading the Government – How would VCs and Founders grade the Federal Government’s handling of the pandemic?
  • Pace of New Investments – At what rate are VCs investing today, compared to pre-COVID-19?
  • Revenue Breakdown – Which tech markets are seeing significant revenue gains vs. revenue losses?

Below we provide the full deck, followed by a breakdown of the results. 

Full Deck

 

Breakdown: VC & Founder Survey Data

1 – VC and Founder predictions for U.S. economic recovery are getting worse, not better.

Founders remain more optimistic than VCs about how long it will take for the U.S. economy to recover. Still, Founders and VCs alike have revised their predictions for the worse, with the majority now predicting that an economic recovery is 1-2 years away.

Founders/VCs - Economy Recovery

 

Founders - Economy Recovery

 

VCs - Economy Recovery

 

This latest survey reveals the evolving sentiment of the startup community, highlighting recent trends and comparing them to reactions from nearly three months ago when 286 Seed-stage & Series A Founders & 114 VCs were first surveyed.

VC/Founder Survey #1 Content Upgrade

 

2 – Founders are less worried about what COVID-19 means for their specific startups than they were two months ago — while 49.6% of VCs today are “Extremely Worried”.

  • VCs believe that startups need more runway right now than Founders do.
  • VCs estimate that 39.2% of their portfolio companies do NOT have enough capital to weather this downturn without raising more money.

 

Founders - Worry

 

Founders/VCs - Worry

 

Founders/VCs - Runway Needed

 

VC - Runway

3 – 60% of VCs give the Federal Government a failing Grade of D or F on its handling of the COVID-19 pandemic.

A majority of these VCs give the Federal Government an F.

 

Founders/VCs - Grade

4 – Tech startups may have a competitive advantage in their speed to adapt to changing market conditions.

  • 40% of tech Founders have reported no change to revenues since COVID-19.
  • 20% have reported an increase in revenues.

 

Founders - Revenue Effects

 

Founders - Markets

 

5 – Startup Founders are quickly looking to fundraise, at the same time that VCs are decreasing their rate of capital deployment into new investments.

 

Fundraising Changes

 

VCs - Rate of Capital Deployment

 

VC/Founder Survey #2 Content Upgrade

 

6 – Startup Valuations Continue Dropping

60% of VCs have seen valuations drop by 20-30% so far as a result of COVID-19. They predict additional decline in valuations over the next 12 months, adding up to an average predicted decrease of 40.1% in valuations.

 

VCs - Valuation Drops

 

VCs - Valuations Predictions

 

VCs - Overall Valuations Decrease

 

7 – As more Founders move their teams to be more remote, VCs remain skeptical of the long-term viability.

  • Founders report they are planning to take their companies more remote for the long term than they were two months ago.
  • Nearly half of VC respondents said they have already invested in a startup without meeting the Founders face-to-face. 60% of them say they would invest without meeting Founders in person going forward, even after a lockdown is over.
  • But VCs report that they view remote companies less attractive as investments. Though 74% of Founders plan to move to majority or fully remote work, nearly 60% of VCs report that remote teams are less attractive as investments.

     

Founders - Remote Work Plans

 

Founders of Small-Sized Remote Teams

 

Founders of Medium-Sized Remote Teams

 

Founders of Large-Sized Remote Teams

 

VCs - Investing Virtually

 

Remote Work NFX

8 – Startups are still hiring (and getting talent for less $$)

  • 60% of Founders are still hiring (some slower than usual; some playing offense and hiring more aggressively).
  • Of those companies hiring, nearly 50% report lower salary requirements for new hires than before the pandemic.

 

Founders - Hiring NFX

Founders - Compensation

 

In partnership with Crunchbase: Early-stage fundings reported so far in 2020 are still strong.

We partnered with Crunchbase to review U.S. venture funding patterns from the last 5 years.

Crunchbase data shows that early and late-stage fundings are still strong today — down from 2019, but up overall from 2018.

Simultaneously, NFX Survey II data shows that 53.9% of early-stage VCs are reducing their rate of investments by 20-40% from normal pre-COVID-19 times, and that VCs believe the U.S. economy will heal even more slowly than Founders do. This may impact future data of successful early-stage fundings.

Crunchbase Powered NFX

Crunchbase - US Venture Funding May 2020 NFX

 

Crunchbase 1 - US Venture Funding Stage NFX

 

NFX will continue to conduct the VC & Founder Sentiment Survey, an ongoing initiative to track how early-stage Investors and Founders are reacting to the COVID-19 crisis. To stay updated on the results of future surveys, you can enter your email below:

The New Generation of Labor Marketplaces and the Future of Work

Waves of Labor Marketplaces

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

Waves of Labor Marketplaces

With unemployment expected to reach 20-30%, on par with the Great Depression, the COVID-19 crisis heralds a once-in-a-century moment in the job market.

The shelter-in-place orders from the pandemic have created a massive, but temporary, demand shock to the labor market. They have also accelerated many long term trends that will create permanent changes in the work that we do and how we do it. When the economy eventually normalizes, demand for labor will recover, and work will recover, but the shifts in supply and demand will result in a new and sizable set of unmet market needs for job placement.

When this happens, online marketplaces will be a critical tool in getting people back to work quickly, efficiently, and at scale. They will also enable new ways for people to build the skills they need to succeed, and for them to work in an increasingly remote and distributed fashion.

As I’ve written before, in a crisis Founders should be looking for ways to play to win, not just survive. There has rarely been a more opportune time to build solutions for the changing labor market. The next revolution in labor will be much bigger than the one we saw with the rise of the gig economy that came out of the global financial crisis.

At NFX, we see 4 trends in the next generation of online labor marketplaces.

  1. Greater complexity: Marketplaces are moving to onboard standardized and attributed human capital with a greater complexity of service.
  2. Improved experience: Marketplaces are evolving toward increased verticalization and taking over more of the value chain.
  3. Tech-enabled labor: Startups able to use their tech to add value to their labor will be able to unlock latent supply and offer a better experience to both sides of the market.
  4. Re-skilling and upskilling: Education and labor have always been closely associated but they will increasingly start to happen on the same platform.

We believe there’s an enormous opportunity here, not just for Founders, but for our society and economy at large. At NFX, we have been long time investors in goods, services, and information marketplaces with operational experience in marketplace creation and network effects. We’ve also been increasingly active in investing in labor marketplaces, from our Pre-Seed investment in healthcare marketplace Incredible Health, to work-from-home AI and call-answering service Smith.ai and a number of other stealth investments.

Founders that can understand and capitalize on the trends we’ll outline below will be well-positioned to build the next generation of iconic labor marketplace companies and help redefine the future of work.

 

Glossary

 

Finding the Sweet Spot: The Labor Complexity Spectrum
Labor Graph

The first and most important trend we see in labor marketplaces is towards onboarding increasingly skilled workers and offering greater complexity of service.

The first generation of labor marketplaces to hit scale — now mature companies like Lyft, TaskRabbit, and DoorDash — allowed demand-side users to quickly and easily match to a delivery person or driver or furniture-builder. These jobs are relatively simple: short in tenure, well-defined, and requiring a low threshold of skill to perform: the so-called “gig economy”.

This meant that the supply side was relatively commoditized with little differentiation between different workers beyond a simple ratings and reviews system, and the demand side was constantly seeking new types of work. The first generation of labor marketplaces was therefore able to easily or even automatically match a commoditized supply base to carry out defined, specific tasks without much threat of disintermediation. The constant changes in demand-side needs drive high engagement and frequency which builds a sustainable business.

With incumbents having taken the low-hanging fruit and consumers and businesses feeling more comfortable with online labor selection, the next generation of labor marketplaces are tackling a greater complexity of service offering.

But there’s a current sweet spot for new labor marketplaces between the well-trodden ground of the gig economy with temporary, discrete jobs and a high frequency of usage and the creative professional, skilled worker or information worker labor market which deals with complex jobs and a high degree of difficult-to-categorize differentiation between professionals. We call this the talent economy, where the internet enables talent with defined and understood skills to be connected to employers potentially in an instant.

The former area is already dominated by verticalized gig economy incumbents like Uber, DoorDash, and TaskRabbit, while the latter is served well by horizontal incumbents like LinkedIn, going after the knowledge economy.

While LinkedIn is almost two decades old, we believe LinkedIn or Indeed will not be superseded by new vertical marketplaces, but rather will be complemented by them. The network effects from its core information workers are just too strong.

It’s also worth noting that a large portion of the labor pool doesn’t have LinkedIn profiles because it’s largely irrelevant to the type of work they do. This suggests that new leading vertical job marketplaces will develop their own profiles highlighting skills and experience related to the particular industry.

The talent economy is about identifying labor pools that are standardized and attributed enough that demand-side users can quickly find what they’re looking for with an attributed search enabled by internet marketplaces. RigUp is one company to emulate in this space. RigUp matches oil & gas workers to temporary jobs at oil rigs. The labor supply has explicit skilling — definable skills that are easy to assess and label. Also, the nature of the work requires a constant hiring effort.

There are plenty of other labor categories that also fall into this category. For example, if you’re looking to hire a nurse or a construction worker, you may be looking for certain skills, certifications, and other standardized attributes that will make a hiring decision much quicker and easier than manually sifting through resumes (or LinkedIn profiles).

While more vetting is necessary to qualify candidates in this category of jobs than would be for hiring someone to mount a TV or pick up your dinner, standardization of hard attributes like degrees and certifications makes it easier to filter candidates. With stronger filtering, the demand side can focus their time on the less easily definable “soft attributes” like culture fit.

It cannot be underemphasized how much demand-side value can be accrued by improving the efficiency of search.

 

Improved Experience via Verticalization and Owning the Transaction

Capture Experience

In our essay on fintech-enabled marketplaces, we observed that the laws of physics in marketplaces push them to relentlessly focus on increasing user experience and increasing a percentage capture of revenue flowing through the marketplace.

That in turn leads to greater verticalization to improve the user experience, and also providing more services to the participants — in particular deepening integration into the enterprise via SaaS tools.

Labor marketplaces are no exception. New marketplaces are wise to adopt a vertical focus, enabling greater participation in the transaction. There is a relentless drive towards offering better experiences for both workers and employers, and in most cases this necessitates building around a specific vertical to address the needs of both workers and employers in that market sector. With increased matching and efficiency through specialization and automation, marketplaces are able to command higher transaction fees.

Vertical focus is key. Skills, attributes, qualifications, and certifications vary greatly by industry, so lack of focus reduces the user experience by adding bloat and inefficiency into the matching and discovery process. It’s much harder to quickly and efficiently find a relevant employment opportunity or job candidate on a horizontal platform than a marketplace purpose-built for your vertical.

Vertical focus also allows marketplaces to expand their offering beyond sourcing and potentially deeply embed into the HR systems of companies or the career paths of workers. For example, RigUp provides a mixture of sourcing workers with a rarefied skill set, while also offering compliance and security.

A step beyond is monetization and supply-side embedding. Marketplaces have a clear incentive and opportunity to improve the experience by adding payroll, financing, and insurance directly to the platform. As long as the demand side has sufficient liquidity, which is easier with more commoditized labor, this decreases multi-tenanting and increases efficiency.

 

The monetization model itself must vary by industry. There are two basic models: the “staffing agency” model of charging an ongoing percentage of salary, or the “recruiting agency” model of charging an upfront fee. The higher the turnover and the lower the salary, the more the staffing model is appropriate.

Finally, as a labor marketplace, it’s important to note that job tenure and role scarcity is a big variable in deciding which side of the marketplace to focus your efforts. If, for example, workers are hired to semi-permanent or permanent jobs, then it makes more sense to focus on the demand side. That’s where the constraint in the marketplace typically is. Employers will be the high-frequency users, so if you own the demand side, the supply side will come to you when they are in a period of job transition or looking for work.

On the other hand, with short job tenures, focusing more on the supply side first makes more sense because workers will have a higher frequency of usage.

 

Tech-Enabled Labor Unlocks Greater Supply

Another concept I had written about in my essay on fintech-enabled marketplaces was that unlocking latent supply is key to marketplace success.

One interesting way to do that in labor is via technology and automation. The most interesting labor marketplaces tend to be where you can use technology to increase the value that labor provides. With increased specialization of labor comes the increased relevance of automation.

Any kind of work where tech or automation can be used to incorporate specific guidance on how to do that job through the app at the point of service will create enormous value by unlocking latent supply — making it easier and lowering the threshold of training, skill or experience necessary for workers to be able to perform a job with excellence. This can happen via the worker-side experience or the employer-side.

As discussed earlier, SaaS tools are also a good way to power a marketplace. If you’re able to provide a SaaS tool to a business, you can embed yourself into the HR systems running payroll and applicant tracking, for instance by automating compliance or licensing with a SaaS workflow that plugs into HR. This can help to build up the demand side while you’re dealing with the chicken-or-egg problem, a problem we’ve previously written about when we first revealed the 19 tactics for solving this classic marketplace problem.

19 Chicken-or-Egg Tactics

 

This is also an industry that is highly fragmented. There were over 20,000 staffing and recruiting companies in the US in 2018, most with very limited technology. This fragmentation is orders of magnitude greater when considering the number of employers.

 

Reskilling and Upskilling: Labor Marketplaces & The Future of Work

Tech-enabled guidance and training will have the benefit of unlocking a greater pool of supply, which is now more relevant than ever. With the pace of change of the economy only increasing, reskilling and upskilling labor is of pressing importance.

On-the-job training and guidance via technology is now much more viable with large-scale mobile adoption. We’ve already seen how the application of mobile technology has greatly increased the efficiency and performance of labor in everything from food delivery to dog walking, and mobile instruction at the point of service has also unlocked novel labor types that didn’t exist before like Instacart’s shopper network.

This same principle can be applied to more complex and skilled work. For example, NFX portfolio company Smith.AI uses automation to augment their virtual receptionist services, an example of a human-in-the-loop AI application that could be applied to other categories.

Past labor marketplaces have gotten a bad rap for providing a mediocre quality of service or a low standard of labor. Offering tech-enabled training, reskilling, and upskilling is one way for the next wave of labor marketplaces to anticipate this problem while also providing a greater diversity of options for workers.

This benefits the marketplace as well by reducing supply-side churn, as workers stuck doing the same thing with no opportunity for advancement or progress are unlikely to stay put very long. As automation and tech get better, marketplaces may even find themselves in the position of displacing their own workers, as Uber would do if and when they built a fleet of autonomous vehicles as they intend.

It’s therefore a responsibility as well as a good strategy for labor marketplaces to anticipate supply-side disruptions and retool their users for the changing demands in the labor market. Otherwise, all the defensibility you build by aggregating a pool of labor will evaporate with the inexorable forward march of automation.

 

A Labor of Love: Building a Scalable Marketplace

There have been thousands of attempts at building labor marketplaces in dozens of verticals. What divides the successes from the failures fundamentally comes down to two things:

  1. Driving liquidity in the marketplace.
  2. Reducing disintermediation.

Liquidity most easily occurs when you are able to capture the attention of the participants when they are searching for a solution. The higher the frequency of the need, either from the supply or the demand side, the easier it is to retain their attention.

In addition, the more mobile the labor pool or the nature of the work, the easier it is to get to liquidity and hence to successful matching. The early success of Upwork, which relies entirely on remote work, contrasts with the many failures to build hyper-local service marketplaces. In many ways, the acceleration of remote work trends in labor due to COVID-19 will facilitate new marketplaces from forming. Employers are adjusting to working with distributed teams and seeing the value in it and that in itself will open up new marketplace opportunities.

Disintermediation, on the other hand, is the bane of marketplaces. This is where the supply or demand side circumvents the marketplace, typically as a result of failure to provide sufficient value for fees, or because there is greater convenience and confidence for participants to interact directly. Again, verticalization and using technology to build in capabilities where users on both sides derive value from maintaining participation on the platform is critical to addressing the problem.

Some use cases or verticals are just more likely to suffer acute disintermediation than others. In particular, marketplaces where participants demand high levels of consistency and trust are prone to disintermediation. This is especially true when it is easy to set up substitute arrangements without the aid of the marketplace after the initial match between buyer and seller. Babysitting services and home-improvement labor are key examples.

Furthermore, the higher the hourly wage and frequency of hire, typically the greater the revenue flowing through the platform to enable a sustainable standalone marketplace to thrive.

 

The Transformative Potential of Labor Marketplaces

Building for the future of work in a time of crisis won’t be easy. Founders need to navigate the challenges of building in a crisis — the uncertainty of when the labor market will return to normal — even as they seize the opportunity provided by millions of workers having lost their jobs and looking for work.

But this sudden influx of workers looking for hire is a rare opportunity to overcome the chicken-or-egg problem that makes building marketplaces so difficult under normal circumstances. Furthermore, we are seeing a “re-platforming” of how work is being done across most sectors as employers embrace remote work and distributed teams. Labor marketplaces in every vertical will have a unique chance to gain traction and supercharge their network effects.

If you are thinking of building a labor marketplace, there has never been a better time. There’s a once-in-a-century economic impetus and the enabling technologies are all there. We encourage you to start building — and to come talk to us to help get you started.

Connect with Pete Flint

The Insider Story of Houseparty

The Insider Story of Houseparty

by James Currier (@JamesCurrier), NFX Partner, with Houseparty Founder, Ben Rubin (@benrbn).

The Insider Story of Houseparty

In the last two months, the video app Houseparty has grown 1600% to become the #1 social app in 82 countries, including the U.S., with hundreds of millions of users. Its success, however, has been many years in the making.

Ben Rubin, the Houseparty Founder and former CEO, and I have known each other since 2013. I was an early seed investor in Ben’s company and went on much of the journey with him. In fact, Gigi Levy-Weiss, my Partner at NFX, was already an investor and advisor to Ben before I showed up.

Ben and I sat down together for this NFX podcast. It’s the real story that most Founders never get to hear. We’ve organized some of his key insights below, but the podcast conversation itself is worth listening to in its entirety. Ben’s candor and depth of thinking is rare, and provides a masterclass in product, pivots, and perseverance. Every Founder will benefit from hearing about the ups and downs of building Meerkat-Houseparty, and about his new work communications network, /Talk.


The Founder Journey of Houseparty

  • Life on Air was originally founded in Israel in 2012 by Ben Rubin & Itai Danino.
  • Their organizing principle was “Bringing people together — in the most human way possible — when they are physically apart.”
  • Initially built two livestream apps: AIR and Yevvo. Built an audience of hundreds of thousands of students, but it stopped growing.
  • Brainstormed new use cases with James Currier (NFX) and noticed users live streaming concerts on Twitter with the app.
  • Pivoted to Meerkat, a mobile broadcast service that made live streaming one-click simple.
  • Built the product in 60 days. Launched on Product Hunt in February 2015.
  • Meerkat was the darling of SXSW in March 2015 and hit 2 million users.
  • Subject of an intense VC bidding war leading to a $12M raise with Greylock and Josh Elman (NFX participated).
  • At SXSW, Twitter shuts Meerkat out of the API because it competes with Periscope (Twitter had purchased Periscope two months prior).
  • Ben does a usage analysis and realizes that he needs to pivot Meerkat because very few users are also persistent broadcasters and the majority of frequent broadcasters are influencers, media, or celebrities. Twitter and Facebook will dominate those groups, leaving Meerkat limited room to grow. Ben also realized that users could not easily engage and connect with each other inside the app. So not clear it was fulfilling the goal of the company — to connect people when they cannot be physically together.
  • In early 2015, Ben told investors that Meerkat was not going to work.
  • Pivot to Houseparty. Ben and team came up with the product concept around the idea of a houseparty — a social network built around live streaming that allows groups to quickly jump online with friends and also makes it easy to discover and join ongoing house parties.
  • Houseparty takes off, grows to 1 million DAU within a year. The company raises a $50 million round seven days after launch and plans to go huge.
  • Then growth slows. Houseparty is growing, but not enough to monetize or raise more.
  • 8 years and $70M later, the company now faces the choice of another pivot or a sale. They end up selling to Epic Games in June 2019.
  • In 2020, Houseparty’s growth skyrockets as a result of COVID-19 and global shelter-in-place orders. Houseparty becomes the No. 1 Social app in 82 countries, including the U.S. App Store. It was also the No. 3 Social app on the U.S. Google Play store. It draws 50 million new users in one month alone and quickly reaches hundreds of millions of users total. The team has added a bunch of games and features for key users that end up driving significant growth and stickiness during shelter-in-place.
  • Ben’s original mission to “bring people together when they are physically apart” seems more prescient than ever, and he is proud of what Houseparty became.
  • Today, Ben is running a new startup called /Talk.

 

How to build products in this next frontier that can “bring people together, in the most human way possible, when they are physically apart.”

  •  The next frontier of place and space is digital. I started thinking about spaces when I was studying architecture. I like how space can create new opportunities for people to interact in ways that create a meaningful experience. In my third year studying, a light bulb went on for me, and I realized the next frontier for designing space and interactions was digital. Creating presence and shared intimacy is a huge passion. I am still an architect, just in a new dimension.
  • Create open space in order to see. How do you create a shared language within a product team that allows for an open space to see beyond what’s there — to be okay with answers that are not there? What if there’s a process where answers present themselves as if we’re playing music, and feeling what’s wrong and what’s right?
  • Define the questions, not the answers. My product specs are one page. It talks about rhythm, attitude, and a bit about melody. I find ways, through explaining the high-level goal and problem — and through examples — to leave open space for the discussion among the team. They need a space to jam in order to reach the answer. With this approach, I’m trying to move away from defining the answers, to defining the questions. This is a bit of a cliche, but it’s what I want to be asking, and it’s the right way to help teams build great products.
  • Great product development is actually a sensory exercise. Metaphors like music and food are tools I use daily to explain to my team what is the attitude and approach I want them to take. Things that are sensory can communicate a feeling, which is what we want in a great product. When you think about a product as a song or a dinner, when I think about consumer products, there are inspiring atomic units of consumer products that you can learn from everywhere — from a favorite bodega you go to, from a restaurant menu, from a song. All of these are things that can create emotional attachment. There is something about their location, their timing, the narrative they are telling, that makes them successful.
  • Adding more dishes to the menu will not make a restaurant successful. Making a song longer will not make it a hit. You can learn a lot from the cool, fast-casual restaurant that is only 500 square feet but is killing it. There is something about it that works. You can deduce the atomic elements from it and apply it to your own product.
  • Zero-to-one product development is like jazz. For example, Miles Davis said that in jazz, when you think you play the wrong note, it’s the next note that dictates if the previous one was actually wrong. Product development, especially in the zero to one stage, is jazz. Nobody can sit behind a computer, write all the notes down, add the drum tracks, the bass, and say “I’m going to have a hit”. That’s not how it goes.
  • If you are not growing, then don’t add features. It’s not going to work. If you are not growing, then adding new features is not going to help. The only time you need to add features is if you’re growing like crazy and you have more and more users starting to use your product and the new users are different from the earlier users. So you add features for them to match their new needs, but it has to be organically generated. If you are not growing, you should ask deeper questions.
  • Find hidden growth opportunities. Hidden growth opportunities are powerful and often magical. Look for them before others find them. We found it in the Twitter API for Meerkat. The API was open and there were so many cool things to do with it for Meerkat.
  • At the same time, not controlling your main growth channel is bad. We learned that the hard way when Twitter shut off the API as Meerkat was taking off. We were competing with Twitter’s acquisition of Periscope and they were open in stating that competing products could not use the API. That forced us to pivot.

 

18 Key Observations for the Next Social Era

 

A Sneak Peek Inside Ben’s Mind

  • Focus on the origin, not the aim. People too often focus on the aim and not the origin. This is something that my wife says, and I 100% believe it. Founders too often focus on “I am going to do one, two, and three and that will get me to four.” That’s the aim. Yes, I’m very much attached to the idea of a good business that is able to sustain itself and continue the message that you want to carry into the world. But it has to come from inside me. That’s the origin. Who am I? What am I standing for? What do I love about myself? What are the things that I actually enjoy doing, being present, doing. You can be so focused on an image in the distance of what you hope to do, that you do not ask yourself what do you love about yourself and what do you want to do.
  • Unpolished is okay! How quickly you release an app is actually tied to the founder’s level of security and confidence. For our first app, we took 12 months and polished and trimmed everything so it was perfect. Our second app took 4 months. Our third took 60 days and our next POC took 30 days. You figure out there are ways to get them out there faster. That’s OK because you are still giving people the authenticity of your idea and it wins them over. This is a key part of a founder’s journey and it brings out the good side of you.
  • If your melody is catchy, people will dance. You get to a place where you don’t really care about what people think about you or say. We wanted to do something cool and put it out there — something that captured and reflected our personality. If your melody is catchy, then it will get people to dance. Consumer products are the same. People are okay with unpolished products that do really cool, new things.
  • Back to Back: Ben’s highest high during the Houseparty journey. My highest high was the end of 2015. I got a push notification from our POC version of Houseparty. I was baking bread. I was listening to the Drake song “Back to Back” and kneading my dough. I get notifications from Ryan Cooley and Will Dennis. I swipe in. Ryan is doing his thing. Will is doing his thing. One of them is shirtless. It was a real genuine moment. And it dawned on me that we were going to have a back-to-back hit. It was like, “Oh my God. This is going to work.” It was knowing you are building something true and unique and special and it has its own life. And you are like, wow, with Houseparty we are going to have back-to-back hits, this is going to take off just like Meerkat did.
  • And the lowest low. The lowest low, yeah, was definitely the understanding that I would have to sell and making peace with it and understanding that this was the right course of action. But then I did get excited for what it meant for people, and I started to see it as a win win win.
  • Startups are self-development machines on steroids. Because you are experiencing so many things so rapidly, so intensely that it gives you so many opportunities to examine yourself and understand what makes you tick. And then to try to understand your team and to understand the people you are co-creating with and that learning about yourself and about them is ultimately the reward for your own transformation. And, yes, that transformation well done could lead to a lot of money. It could lead to a beautiful product that touches hundreds of millions of people like Houseparty does today.

 

How to Recalibrate When Things Get Hard

  • That Friday night 7PM phone call. I remember one night, we were at SXSW, the Twitter team calls us to tell us they are going to close the API. The guidelines of the API were that you couldn’t use it for something that was competitive with Twitter. This cut off the biggest source of our growth. The guys from Twitter were very cool about it and I understood their POV. They needed to protect their investment. Instead of getting angry or complaining, I started to analyze what we had and what we didn’t have to work with from there.
  • If you cannot get the average person to use your product on a daily basis, it’s not going to work. With Meerkat, the app was still growing. But we took a step back and looked at the situation and saw a liability. Twitter was launching their own live video product. Facebook was about to launch Facebook Live. We looked at the use cases our competitors would go into. We mapped our two million users and separated between influencers, media, and news. We saw there was no retention of broadcasters for the 99% of people that are not media, celebs, and news. The only daily use case would be celebs, media, and news. If both Twitter and Facebook were going to fight for that, then we didn’t have a business. If you cannot get the average person to use your product on a daily basis, it’s not going to work.
  • Have the hard conversation. We told the board about the problem. We had raised $14 million a few months before. We were still growing 20 to 30% a month so we probably could have raised more. There was a thesis that Facebook might want to acquire us. But we knew we needed to pivot. It was a hard conversation. But I give the board credit for understanding and being supportive.
  • Just deal with the reality as it presents itself. I said to the board, “Guys, I’m not gonna run from the numbers. I’m looking for the problems, I’m looking for the weaknesses and I have found a serious weakness.” Yeah. And you could have gone for another four or five or six months before anybody would have known. You’re not scared of it, and you’re not pretending. You’re not pretending so that you can go raise another bunch of money — you’re honest all the way through. You tell people this is not working. “We’ve got to pivot.”

 

Learnings From Evolving Meerkat into Houseparty

  • Metaphors can create product vision. We came up with a metaphor of a Houseparty to describe the product we wanted to create. It was a wonderful metaphor. The statement and manifesto of the product is a house party. So you can imagine the team asking, right on the heels of Meerkat, “Why can’t we broadcast the conversations?” That’s where we started having a clear vision of what makes a great house party. Within a year of that board meeting where I said we have to pivot, we had 1 million daily active users (DAU) on Houseparty.
  • At 1 million DAU, Sequoia comes in and leads a $50 million round with Greylock and Aleph. After that round, we saw the product growing with great engagement and incredible community but 18 months later, with all of that good stuff, the growth was just not enough. We needed to sell or pivot.
  • Have the hard conversation — again. At that point, we had $70 million in the bank. Houseparty was the third pivot. We were eight years in. And it becomes a really hard conversation between you and your investors, and also your team, about whether you should do another pivot. We agreed that we needed to sell. The team had been troopers. The company had so many different cultures. You just need to say okay, this is where the journey ends. We had a great team and a terrific product and we knew we could provide fantastic value to someone.
  • No regrets over a great fit. Sima Sitani drove an incredible M&A process and thanks to her we ended up selling Houseparty to Epic Games, which was a perfect fit because a lot of people were using Houseparty while playing Fortnite and other games and we share some key demographics. I feel super proud now. How many people get to say they built a product that has hundreds of millions of people using it. And I have no regrets today.

 

Back at it with Ben’s new company, /Talk

  • /Talk (Slashtalk.com) is a product for fast, decentralized conversations. We are an anti-meeting tool. We believe most meetings can be eliminated if the right people are connected at the right time to discuss the right topics, for just as long as necessary.
  • There’s this new emerging use case of quick, unscheduled calls. But there’s no organizing principle for it. This is actually where work is getting done. This is where people get together to review code, where an engineer and a designer sees where a spec is missing something, this is where two people review why they’re getting errors in the compilers. And if we believe that organizations and work are going to continue to decentralize, these use cases are going to grow more and more. But there’s no inbox for any of it.
  • Meetings in most cases suppress the part of us that builds and gives room to the part of us that talks. With /talk, we break down the meeting into the building blocks of the topics, the people, and the time. We are trying to reorganize conversations to be topic-driven and fast. It totally deconstructs how conversations work. It’s really cool.

Connect with James

The Next Social Era is Here: Why Now Is the Time for Social Products Again

The Next Social Era is Here

by James Currier (@JamesCurrier). James is a Managing Partner at NFX, a seed and series A venture firm based in San Francisco.

The Next Social Era is Here

Now is the best time in eight years to be a Founder of social/communications products, and we believe it will kick off a second wave of product-first Founders who are true artists of their craft.

The Social Media Golden Age of 2002- 2012 was mostly consumer-focused. The Golden Age gave us companies like LinkedIn, Facebook, Twitter, Snap, Instagram, Whatsapp, Hangouts, Poshmark, Slack, Zoom, Gmail, and Dropbox.

In the subsequent 8 years, outside of Asia, few companies emerged on the consumer side other than Discord and Musical.ly/TikTok. The most useful way we have of explaining why is that the psychological and emotional needs of people were largely met. Those Golden Age companies covered the ground. There were no more reservoirs of need that were big enough to power the formation of another network.

As a Founder and investor, these eight years of drought have been disappointing because that Golden Age was vibrant. Those social media products were fun to build, fast to grow, colorful, visible, impactful. They also produce the strongest, most durable direct network effects and thus high potential companies.

These types of software products are the most artistic corner of the tech world. Like movies and music, the subtle details matter. Facebook, for instance, was perhaps the 40th social network built with essentially the same 5 features but emerged as the titan through a series of subtle differences, some lucky, but most due to talent.

Fortunately, there are two things happening now that could crack the ice and make this a great time to get back to social product artistry.

First, the pandemic is creating a new topology of psychological and emotional needs. Digital media and social products are no longer distractions, they are central to the functioning of society. “Social” and “network” is at the core of how we function, and increasingly at the core of how we relate to ourselves and project our identities. Technologies that help us work and live digitally are finally achieving real liftoff. Zoom just jumped from 10 million to 200 million+ daily active users. Houseparty skyrocketed to become #1 on the App Store, adding 50 million new signups in one month (disclosure: we invested early-on). The pandemic is not only speeding up technology adoption, it’s rewiring our relationship to it.

It could be a big enough shift so that the new psychological and emotional needs will not be served only by the incumbents, but by new companies starting now.

Second, the work environment is now open game for new social products. Two reasons for this. First, we see how good communication can be with consumer products and demand the same excellence in our work lives. But second, and newer, is that in the last few months, the distance between our work identities and our home identities have blurred. There’s a fundamental shift. We are becoming more exposed, authentic, and integrated, as we see our business counterparts in their homes with their cats, their kids, their spouses, un-showered. Starting perhaps with this video from the BBC in March 2017.

So for the first time in decades, our emotional and psychological needs are changing, both in our consumer lives and our work lives, which means now is the first time in 8 years that it could be a good idea to found a social media app or communications tool.

A warning, however. Because these social communication tools are delicate to design and as artistic as we get in the tech world, there aren’t many Founders who can pull it off. Among many other qualities, the Founders who build and evolve these products must have great design skills, be masters of A/B testing, and must have an intuitive sense of language, feel, and psychology. It’s not for everyone.

We will be publishing a series of essays and podcasts discussing the nuances of building such products. We already published one with Manish Chandra, Founder and CEO of the social shopping app Poshmark.

Today is the next installment. Below we include key excerpts from an NFX podcast with my long-time friend Josh Elman. Josh has been one of Silicon Valley’s top social media people for 20 years. As a product manager, Josh had a hand in Real Networks, LinkedIn, Facebook, Twitter and Robinhood. As an investor with Greylock for 8 years, he navigated the social media Ice Age nearly perfectly, investing in two of the three biggest hits TikTok (musical.ly) and Discord.

Three Rules for Creating a Great Social Product

The best product builders understand that great “social” means creating something that compels our humanity and our psyche. It’s the secret of every iconic social company that’s ever been built. In studying and investing in these companies, we’ve learned that there are three things a social startup must have if it is going to be successful:

1. Own a new habit

  • You need to create a new habit and then own it by building the social center of that habit. Habit formation starts small but can snowball quickly to have extraordinary gravitational pull for you and others. But, importantly, the habit really does need to be something new. It’s much harder to break old habits and dislodge incumbents.
  • Josh says: As investors, we thought people were going to start recording a lot more videos. So we looked for places that could become a hub of short-form videos, and that was Musical.ly.
  • Josh says: As investors, we thought people would want better tools for social interactions while gaming together — a relatively new habit. This led us to Discord.

2. Be super sticky

  • The habit you build should become a central part of each user’s life. Users should tell you, “If I’m bored, I will go and use the app.” This is stickiness. This is staying power. This is an emotional need.
  • More important than huge numbers or growth is demonstrating strong traction with a small group of users. You are completely solving a need for them and they swear by your product. This means you have a chance to build a deep, meaningful connection for people. This is more important than ever.
  • This is how Facebook grew, by the way; Mark Zuckerberg focused on growing in universities where he knew his product-market fit was incredibly strong. It was a smart strategy to build a sticky initial user base.
  • Social Founders must be users of their own product, and not just because they are doing QA. If they are not using the products themselves, and do not have a habit of using the product, that’s a red flag.

3. Find a Strong and Obvious Growth Hook

  • There should be a very obvious path to relatively low-friction, low-cost growth. “Hey, if this small group of people is using it, here’s why they want more people to join them, and here’s how this will expand and this will grow and this will rise above the noise.” Actually role-play that conversation before you build anything.
  • The growth hook should be owned by the startup. You cannot be dependent on something controlled by someone else to power your growth. Meerkat got crushed because its growth hook — the Twitter API — got shut off.
  • People should want to share the social product because it will make their own experience directly better, and not in an abstract way. With Discord or Houseparty, you want your friends to be with you in the product. So you share it with them. Instant gratification, instant connection. No one cares about your network effects. They care about having a better time because more people are around.

 

The Last 6 Years Have Been an Ice Age for Social Tools

In the U.S., Facebook, Snapchat, Twitter, LinkedIn, and Instagram have fulfilled our emotional online needs for the last 5-6 years. Most of us use some or all of these applications frequently, if not daily. But our social experiences have been focused on consumption more than creation; on quick emoji reactions more than deep feedback; on building ‘promotional’ channels more than personal connections.

As a result, we have been in a social media ice age for the last few years, with only a small handful of new social companies (notably Discord and Musical.ly) creating online experiences with network effects.

How we got to this point:

Social Media Timeline NFX

  • The social web started with personal homepages and mini-websites, and evolved to communities of bloggers and instant messaging and chat rooms (AOL). Social then progressed to early versions of social networks, where you could create a dynamic online “real” representation of yourself for work (LinkedIn) or real-life (Facebook) with status updates and news feed and all the bells and whistles we’ve come to know and accept.
  • These networks also exposed us all to the power of the extended network — being able to see who your friends know — codifying the concept of a “social graph,” the aggregate network of someone’s connections across various social networks.
  • Then, of course, social made the seismic shift to mobile. With that jump, we moved toward more real-time, in-the-moment updates and visual experiences… photos and videos galore. People used social media to broadcast to the world a personalized reality show, but the outcome was, ironically, sharing a less authentic personality and more curated “media.”

What made early social media so wonderful — the shared, intimate connections, and time spent together with loved ones and friends — had receded.

Key Observations:

1. For the last 6 years, social platforms have done a pretty good job of sticking around. People use more than one of them to fill different needs or to communicate with different groups. This is where we have been for the last decade of social media. For example, one person might use Facebook for communicating with family, Twitter for communicating in the startup community, LinkedIn for communicating with prospects, Instagram for sharing pictures with friends, or Snapchat for goofing around with friends.

2. Social graph network effects are exceptionally sticky, which makes it painful for a user to move from one network to another. This creates tremendous inertia. When you post a video on Facebook and everyone in your family says how much they like it, why would you move to a new social network where none of your family is?

3. Our networks, habits, audiences, and feedback expectations grew so big and so dense, that it became hard for most of us to imagine something new that could possibly address some unfulfilled need.

4. Social media became more media and less social.

5. During this static period, we did get hints at what might come next with TikTok (Musical.ly) and Discord. TikTok changed the game by making short-form video easy to make, fun, and viral in ways that Vine and Meerkat took a swing at but never accomplished. Discord brought all of online gaming onto the same voice and text chat platform, creating a “Ready, Player One” experience machine. This made online gaming much richer and more of an intimate shared experience.

6. Bright spots in social media appear when we see a better balance of creation with consumption. Exciting to see TikTok focus on creation over the passive consumption of Instagram.

7. There is a growing demand for intimate shared online experiences around doing things we love.

8. Connection is becoming less about asynchronous consumption and more about real-time togetherness.

The Next Era of Social Applications is Emerging

Sudden shelter-in-place on a mass scale has created new emotional and social needs, which are rapidly thawing the inertia of our social media ice age. What we are finding — and what the next wave of social is already demonstrating — is that it is possible to create shared, intimate moments and experiences online that are no longer dismissed as “less real” than physical, in real-life experiences.

At the same time, the demand for new online interactions has never been greater. This is exposing massive and exciting white spaces that are now emerging at a blazingly fast pace, even week-by-week, as we try mightily to find new joy in connection.

COVID-19 won’t last forever, but it has triggered a seismic shift in social thinking across many facets of life that will not disappear.

Key Observations

1. What’s really special about what’s happening right now is that we’re normalizing and improving on a lot of behaviors and platforms that have been out there for a while.

2. Take the example of Zoom — it’s been around for a while and has been an exceptional workplace video conferencing product. But it always felt second-rate to get on a Zoom vs. trying to have a meeting in person. The luxury of choice made us deprioritize Zoom. No more.

3. What shelter-in-place is doing is making us all pause and say, “What if this is the default? How do we then learn new norms and operate and make sure that this is as effective as possible?”

4. We will need to have far better tools to connect, share content, and share information. We will learn to replicate the important parts of in-person experiences and bring them to our digital tools.

5. Now consider the combinations. Take Zoom and combine it with online poker. People have been playing online poker for years. But add Zoom, and you are much closer to playing poker with your friends — talking and laughing and staying up until 1 am together. Zoom becomes the Discord for the rest of society.

6. There’s an opportunity to make this experience of playing games together online even better, and to realize it’s not about ‘entertainment’ but about core human connection, social validation and friendship.

7. A lot of interesting things are happening online around music right now, that probably will only accelerate. Previously we live-streamed concerts but it was always perceived as much lamer than being there in person. Now we are seeing performances streamed online that are of exceptional quality and have a sense of intimacy and connection that we might not even feel at a concert. John Legend is sitting there at home singing to you!

8. Check out the performance by the cast of “Hamilton.” They sang the opening number from the show from their apartments over Zoom, for a little girl named Aubrey who had missed her chance to see Hamilton “live” due to the COVID lockdowns. The definition of a live music experience shifts from “in person” to “happening right now.”

9. What if we invent even better tools to make music an intimate and shared experience? Spotify already gave us streaming and curation, but the opportunity now is to build great products that give us more “live” experiences.

10. We are moving away from treating social media as another promotional channel, and being conditioned toward lightweight (more pejoratively: shallow) interactions. Perhaps our move toward more meaningful connection is a silver lining of the shelter-in-place orders and an opportunity for the future.

11. What was being shared, pre-COVID, was less and less reflective of the actual people we love interacting with.

12. Being social is really the art of being together — conversing, engaging, sharing experiences, sharing moments, telling a joke, and hearing a friend’s laughter instantly (not just in a laugh emoji).

13. COVID underscores for us — as society, as Founders, as investors — the lack of these emotional connections on most existing social media platforms. Right now, Instagram is pretty boring. People aren’t going out and doing all these cool things that they’re showing off in photos. We are seeing energies and preferences shift towards more meaningful forms of sharing and social communication — towards Instagram Live, Houseparty, Discord, phone calls, Zoom poker nights. Those experiences are less about broadcasting over social media than they are about building and enjoying a social connection.

14. It’s science! When you’re talking to somebody, you have so much more adrenaline and endorphins and connections between you two. Even if it’s just a phone call, it’s better if it’s a video call and you’re making eye contact. This shouldn’t go away.

15. Very important shift toward creation, not just consumption. On Snapchat or Instagram, it often takes longer to consume social content than to create it. It’s the opposite for TikTok. Someone might spend hours working on a funny dance routine. Spending time practicing dance moves with your friends is a really amazing and intimate social activity. TikTok is reverting us back to a world of creators.

16. Importantly, TikTok makes it relatively easy to look good. It democratizes the skill of short-form video creation.

17. To their credit, as well, TikTok has purposefully prevented a small handful of talented “influencers” from dominating the scene — a flaw that discouraged more people from making Vines. TikTok tunes the feed so users are always seeing something new.

18. TikTok is the beginning of what will become a much bigger and broader trend towards creating experiences for friends and family online.

What if…

  • Josh’s dream social network would show how long a creator spent making a post. Say you go on a trip and make a collage, and it says, “Hey, James just spent three days curating these pictures from this amazing trip he did. Would you like to look at it?” Yes, people definitely would be more likely to look at it if they knew James had put a lot of time and care into creating it.
  • What if we could give all amazing musicians a tool where they can set up a private jam session and charge $50 or $100 per person to join for an hour or two and have a very intimate live video chat experience where you can have one on one conversation. You can know everyone else sitting there in the virtual space with you. We’ve seen artists do many online jam sessions. There’s a great space for someone to build products that can actually allow artists to run these things.
  • What if we could all cook lunch together remotely? We called the idea Lunch Buddies. Everyone would gather their ingredients and start cooking at the same time. If your eggs were sticking to a pan, you could ask someone for help. You could even hire a professional chef to teach you and some friends how to make a souffle or a perfect Sicilian pizza. What’s a better way to build fellowship and share humanity than to eat together?
  • What if social media can be used to make online work environments better? For example, email threads and meetings online tend to get hijacked by the lowest common denominator. Someone says “Terrible idea!” and the rest of the thread in a meeting or a Slack is responding to that response. So the loudest voices dominate conversations and set the tone even more strongly in remote work settings.
  • What if you could timeshift feedback and have everyone enter their thoughts or ideas or feedback in advance, and then they are all shared simultaneously? This would potentially reduce the prominence of the loudest voices and allow conversations and discussions to take more organic directions. Would it make work more fulfilling and allow more voices to be heard?
  • There is a staggering amount of potential, right now, for figuring out new tools and ways to make remote and distributed work better. To bring humans together, better, and sharing new experiences.

 

Unprecedented Opportunity for Social Experiences

Never before in the Internet Age have we had such a drastic and rapid shift of behavior by the entire global population. We are in uncharted territory. Yet, our human needs are the same as ever. We need companionship, friendship, and connection.

At work, we need a sense of togetherness and team. We need communication and feedback and respect and learning. In our social media, we need, well, love. We’re already moving away from broadcast mode and towards a mode of more intimacy and sharing.

Shelter-in-place has accelerated the pace of ongoing changes in how we work and live and spend time. This kind of dire disruption means we are all more willing to try new things and construct new modes of experiences.

The social internet was frozen in place only a few months ago — ruled by incumbents, governed by existing behaviors, feeling overly promotional, and slowed by lack of appetite or need for something new. Now the ice has broken and new social experiences are being invented daily, at work, in virtual classrooms, and in our personal lives. Driven by the need for human connection, these new social experiences are rapidly becoming routines and habits we won’t soon abandon. The most insightful Founders around us are seeing which of these habits are going to become a new normal. Which are the seeds of inspiration for creating new human experiences online?

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