Stealing Signs - Issue 19
Judging VC Skill, Investing in a Pandemic World, Vertical Neobanks, VC x Music Lyrics, and Behavioral Rigidity
Worth Reading
Investment Decisions In A Pandemic World
Semil Shah, Haystack VC
Most of the large VC firms raise money from large pools of institutional capital — pensions, nonprofits, universities, and endowments. The stock market just cut off 30% of value in less than 10 days. For most of these places, VC is a small percentage of where they invest, and they will continue to invest. But, consider for a moment nonprofits, many who rely on donations and fundraisers to keep operations going — the demand shock and travel restrictions will hurt these places in the near-term. Or, consider large universities which have sent students home and/or have medical/science or hospital systems which are on the front-line now to help their local areas combat the pandemic”
Semil’s perspective on how COVID-19 has likely changed VC behavior is spot on. This post is, in my experience, a highly-accurate peek behind the curtain of current-state VC operations. A great read for founders. The section which resonates most with me is the now non-existent hallway chats related to deals and partner meetings. First, I miss them, ha. Second, these chats and tangent threads are often an important part of the decision-making process. Slack threads and Zoom meetings means much, much more asynchronous communication than we’re used to, which likely impacts decision making for many funds.
However! At Founder Equity, we’re as committed as ever to investing and supporting entrepreneurs. While it certainly isn’t business as usual, we’re actively meeting with founders and prepared to make investments over the next couple of weeks. Please reach out if you’re building something! jackson dot bubala at founderequity dot fund.
Vertical Neobanks
Ayo Omojola, Carbon Health
“You can think of a vertical neobank as a checking account + debit card product, focused on a specific customer segment (rather than focused on a broad swath of “consumers”) that solves a money movement problem for that customer segment segment, and monetizes by capturing the balance available to that customer segment at the end of the money-movement.”
Ayo defines and identifies “vertical neobanks,” and explores why they're attractive to 1. companies with large customer segments, and 2. the customers. Really enjoyed this post — the examples help make this concept crystal clear: Mercury, Square Card, and Uber. One key insight about why companies like the “vertical neobank” concept is that their customers already trust the business with their money and financial data. This is likely why we saw “everyone become a bank” in the last half of 2019, as many software companies began to offer financial products and services to customers.
The Difficulties of Judging VC Skill
Byrne Hobart, The Diff
“Having an abundant supply of loose ties in a tech-adjacent space is a source of persistent VC alpha — but this, too, is hard to quantify in advance. The best investing strategy is to know everyone in a space before it appears investable, so you get lots of rock-bottom seed and Series A valuations. But that looks suspiciously like a big waste of time. In 2011, Bitcoin was only well-known to crypto nerds, anarchists, and drug users. Not exactly the network that will impress the typical LP.”
Byrne explores the difficulties of evaluating a VC fund manager, which are rooted in the difficulty of measuring the two main sources of VC “alpha”: deal flow and judgement. He suggests both sources are very difficult to measure, both before they produce returns and after they’ve paid off.
His analysis of “deal flow” as source of VC alpha is interesting — it’s extremely difficult to measure before it produces returns, but is easier to measure when it’s paying off, unlike “judgement,” which is equally difficult to measure in advance as it is during its payoff.
As Byrne suggests, the best investing strategy is to know everyone in a space before it appears investable. I’m still working on the right approach for this and which spaces I want to focus on, but in the meantime, I’ve taken a three-pronged approach to building a strong network: 1. Meet with as many people as possible to build my network as quickly as possible, 2. cultivate existing networks to strengthen ties and extend connections, and 3. identify and build relationships with people before “they become investable.” The first two are straightforward and common, but the third prong is interesting and probably most familiar to entrepreneurs and investors — it essentially boils down to, as Keith Rabois would say, identifying undervalued people. I’m not sure I've figured out how to identify undervalued people — I’m not even sure I could properly value myself — but I do have the benefit of being a young person in a network-driven industry, so I likely meet with undervalued people by default since many are new to professional life, thus have yet to be assigned a proper value. It’s a skill I hope to develop and refine over time, and for now it’s more a goal than a part of my strategy.
Remains of the Day - Behavioral Rigidity and TAM
Eugene Wei, Media & Technology Entrepreneur, Executive, and Investor
“In theory, we’ve created a surplus of consumer attention which you might hypothesize to be a rising tide for all media boats. You might say that since Spotify can stream over your phone, it’s TAM is almost all your waking hours. In actuality, it’s not, and understanding the behavioral overlay of TAM on one’s daily routine matters as a product manager.”
Eugene’s Substack is a top 5 newsletter for me. He’s one of the most interesting people in the world (early at Amazon —> film school —> Hulu —> founded Erly —> Flipboard —> Oculous —> investing & advising startups) and I actually went with the “Issue 01, 02…” format for Stealing Signs as a nod to his newsletter. He covers a few very interesting topics in this issue, including his chat with Ben Thompson about the half life of information, the TV “bottle episode,” and the movie Contagion.
My favorite section, though, is “Behavioral Rigidity and TAM,” where he explores the recent decline in Spotify streaming due to COVID-19. The key insight is that, in order to get a complete picture of a product’s market, one must understand where the product fit into users’ routines and in which contexts their customers use the product — the behavioral TAM (total addressable market).
For example, Eugene suggests one may argue that Spotify’s TAM is all of one’s walking hours. However, when you factor in a behavioral layer, their TAM looks much different — key listening moments like the gym and commutes have been eliminated due to COVID-19, and the time users previously allocated to Spotify is now filled by other, non-Spotify actions. Even though Spotify is always accessible on one’s phone, their TAM is not all of one’s walking hours. Instead, it’s tied much more closely to users’ routines and specific behavioral contexts.
So, a behavioral overlay can significantly impact TAM. For Spotify, it seems to have decreased it. TikTok, on the other hand, is a great example of an increase in TAM:
“When you analyze the rise of YouTube vloggers and TikToks shot in the bedrooms of teens across the U.S., you won’t have a complete picture of the TAM without understanding just how much discretionary time teens have each night in their bedrooms.”
A Day in the Life
Stewart Butterfield, CEO of Slack
Stewart chronicles his last few weeks as the CEO of a company reporting earnings in the heart of a global pandemic. This thread is brilliant. It’s long, but worth every tweet. Slack has expertly managed unprecedented growth in a time of enormous uncertainty — from March 16th - 25th:
Slack: 2.1M new users, growing from 10.4M to 12.5M users
COVID-19: ~289k new cases, growing from 182k to 471k cases
<stuff> Weekly!
LOL Weekly: Learning About VC from Music Lyrics
Andy Weissman, USV
lollll this is so good haha. He even made a deck! My favorite lyric, from Kanye’s Touch The Sky:
Lyric: I'm tryin' to right my wrongs, but it's funny them same wrongs helped me write this song
Learning: Venture is a Power Law business
Funding Weekly: UNL - Internet of Places
“UNL is a universal addressing and naming platform that gives anyone and anywhere a unique, universal address. Made to connect the unconnected and unlock the economic potential of locations.
We make locations smart and transactional. We convert any location a point-of-sale, a point-of-delivery, a point-of-payment and a point-of-experience.”
UNL raised a $2M seed round from Here Technologies, Elev8.vc, Venturerock, and SOSV. This is the first time I’ve heard the term “Internet of Places,” and it seems they’re doing some pretty cool things: creating a 3D grid on top of the Earth’s surface and gave every cell a unique location ID. Sounds like this could have significant implications for global last mile delivery efficiency.
Baseball Weekly: Finding a Team to Watch Without Baseball
Sean Roberts, The Hardball Times
MLB.TV recently announced they are making the full 2018 and 2019 seasons available to stream for free! This article is a thorough analysis of the best teams to watch. It’s very odd and pretty funny to see such a detailed and thoughtful analysis of this topic, but it’s much appreciated. There is only one answer to the “which team should I watch?” question… the 2016 World Series Champion Chicago Cubs. While not available on MLB.TV, Marquee Sports Network is replaying all of the 2016 Cubs playoff games, and here’s the full NLCS Game 6 — arguably the best game in the 2016 playoffs and second only to 2016 WS Game 7 for best game in Chicago Cubs history. Hendricks v. Kershaw to go to the World Series. Hendricks turns in one of the best pitching performances in Cubs history. Incredible game. 2 hours and 29 minutes of chills.
Art Weekly: Untitled (1974)
Imi Knoebel
From virtual Art Basel Hong Kong 2020:
