10 Jul July 10, 2019 – Secrets of Venture Capital Scott Kupor and Product Innovator Tracy Hazzard
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Scott Kupor – Author of Secrets of Sand Hill Road: Venture Capital and How to Get It – Read interview highlights here
One of the best tests of your mettle as an entrepreneur is can you find a way to get someone to introduce you to various venture capitalists.
Scott Kupor is the managing partner at Andreessen Horowitz. Scott is responsible for all operational aspects of running the firm. He has been with the firm since its inception in 2009 and has overseen its rapid growth. Scott served as a Chairman of the Board of the National Venture Capital Association in year 2017 – 2018. Also, Scott worked as a Vice President and General Manager of Software-as-a-Service at Hewkett Packard. In year 2007, Scott joined HP as part of the Opsware acquisition, where he was senior Vice President of Customer Solutions.
I don’t believe in hope. Hope is not a plan and so we like to be more calculated about it. We have introduced 200 products with an 86% success rate.
Tracy Hazzard is an Inc. Innovation Columnist, Multi-awarded Designer & Product Strategist for Hazz Design. Tracy has ghost-designed, source and launched 250+ consumer products at e-commerce and mass-market retailers. She has worked with design-leading brands like Martha Stewart Living and Herman Miller to out-design, out-source and out-profit the competition for over 25 years. Tracy holds over 37 utility and design patents with an unprecedented 86% commercialization rate along with her partner, Tom Hazzard. Her rich professional experience has given her the expertise and genuine pulse to know what clients want and how brands can promote with purpose.
Highlights from Scott’s Interview
If you follow country music and you know about Nashville row or country row, this is a similar idea. But a lot of these roads are actually not that exciting. Stanford is by far the most attractive part of Sand Hill Road, but it is where all the VCs tend to congregate. As VCs, we want the same thing that you want as an entrepreneur, which is we’re trying to help facilitate the growth and development of hopefully a very big and longstanding and profitable business. So we’re actually both on the same page here.
VCs are not there to run the business. The only thing that VCs do is hopefully work with a CEO, provide guidance and expertise about how to grow the business. And then there’s VCs like ourselves, who have made a big investment in what we call the post-investment team. We’ve got more than 100 people here at the firm, who think about how we can help you in terms of sales and marketing. How can we help you identify new executives to hire, new engineers? Those are the mechanisms by which we try to help. The entrepreneur is the magic here, and the last thing you want to do is mess with that magic.
That’s exactly why we wrote the book; I think there’s a huge amount of disinformation and misinformation in this business. And what I hope people will take away from reading the book is that we all share the same goals, we all want to build companies. And again, the way that we can do that is obviously providing capital, but hopefully, in more cases, also being a useful partner, with you as the CEO and the founder of the company, and helping grow and develop the business.
We changed the way we’re registered and regulated by the SEC, which is a long story that’s not going to be interesting to your listeners, but at the end of the day, we are in the venture business, we were in the venture business, we will be in the venture business for the next 10 years. We literally changed the regulatory structure and that caused that news to seem like more than it actually was. But our job is the same as it was before, which is we look for great entrepreneurs, looking to build great companies, and hope that we have a chance to partner with them.
The word connection, that’s exactly the way to think about it. One of the best tests of your mettle as an entrepreneur is, can you find, through one or two degrees of separation, a way to get somebody to introduce you to various venture capitalists. You will find venture capitalists, of course, do their own kind of proactive deal identification, where we try to go out and find all the best entrepreneurs, but inevitably, we’re not gonna be able to do that perfectly. So one of the best things you can do, if you are particularly in a market that is not local to your venture capitalists, is usually a set of relationships. You use your network and say, “Okay, gee, do I know somebody who can at least help me get in front of the right person for a conversation?” And I think what you’ll find is the market is incredibly efficient in that respect. If you’ve got a good idea, and you have a way to find your way in the door there, the market tends to be pretty efficient through there.
If you think about what you have to do as an entrepreneur, you’ve got to be able to knock down walls, you’ve got to be able to find customer opportunities. Part of starting a company is a little bit of willful suspension of disbelief, right? And so, a great way to demonstrate your creativity is to show that you can leverage your network to find a way to get into an organization that might not have been so obvious for you.
As with any selling, the higher you can get in the organization, the earlier the better, of course, but associates play a really, really important role. And I can tell you, in our firm, we don’t use that title. But there are lots of people here who are meeting entrepreneurs for the first time, and we have a very structured process for how they then sit down with the rest of the general partner group and help us get visibility into stuff. So I think there’s if there’s no harm at all in going that route, and I think you’ll find that actually, it’s quite an effective way to get to the broader general partner base.
All we need, whether it’s one page, or 10 pages of PowerPoint is we need your articulation of why this opportunity is so interesting, how this can be a very, very big company. In particular, the part that I think people forget about, is why you are the right person for us to back going after that particular opportunity versus any number of other teams we might back. So we don’t need business plans, we don’t care about what the spreadsheet says for what your year 20 revenue’s going to be. We’re more interested in your thinking around the product and the market. And in particular, as I said, the fitness of your team for this particular opportunity.
We are a multistage firm, which means we will invest at the seed stage at the earliest. And that tends to mean 1 or 2 million dollars is typically where those kinds of investment opportunities will come. And then we will invest all the way up to as much as 100 million dollars in a company. So we really think about it at an early stage where you’re trying to say, “Hey, what if this business could work?” We recognize there’s no product yet, but what could it be to later stage stuff where the business is working, albeit at probably a smaller scale? And now the question is, can our money be used to help you actually go from a 5, 10 million dollar business, hopefully to a 100 plus million dollar business?
Yeah, if you’re a seed stage, I’ll go back to an example. We invested in Instagram, when it was still that stage company, right, it was a very early company. In fact, it wasn’t even called Instagram at the time. And at the time, they were raising capital, and at that stage, typically, for a million dollars, you’re probably talking somewhere between 10% on the low end, and maybe as high as 20% on the high end, in terms of what you might sell to an investor at that point in time, that’s probably the range to think about. Particularly out here, oftentimes, when somebody does a seed, this will sound funny, but there’s something these days called a pre-seed, which means oftentimes, these companies have raised money even before they get to the seed level. They might have raised hundreds of thousands of dollars from friends and family or others. So yeah, for something to get that valuation, you’re talking about a $5-10 million valuation at the seed level. In most cases, they will raise some money before, and so the product itself may not be working, but at least there’s probably something there that we can diligence as opposed to purely just a PowerPoint deck.
Believe it or not, every now and then back of napkin deals might happen. We certainly had deals that go down over a weekend sometimes, which is not the preferred way to do it. But I think if you’re an entrepreneur, and you’re planning for this, I think you should assume… Look, it probably takes you three months from start to finish in a process, because, month one, you’re probably meeting people and getting to know them and talking to a number of firms. Month two, you’re probably deeper engaged in what we call the diligence, helping the VCs understand the business in a lot more depth. And then that kind of leaves 30 days on the end, once you have a term sheet to get all the legal documents in order, where you can actually close the deal and then fund the business. So the minimum timeframe that you should plan for as an entrepreneur, and hopefully, you know, you get one of those napkin deals that take you out of market a lot faster.
We will do anything where software is a core component of the business. So an example would be Instagram, as I mentioned, or Facebook or Twitter, or a company like Slack, which is in the enterprise application space. Anything where software is the foundation will do it. We do life sciences and software stuff. We do crypto and software stuff. So anything. And the real answer to your question is we’re basically in the outlier business. Our job is less to dogmatic about what we’ll invest in, and more to be open-minded as to what entrepreneurs are doing out there, and allow them to take us into areas that we might not have realized were really good investment opportunities.
The simple way we think about it is, probably 40% to 50% of what we do, unfortunately, are in that category of, “Hey, great idea turned out to be not a good business.” And hopefully, you get a few pennies back. And then you’ve got a couple of middle of the road outcomes. And then you have to have an Instagram or Facebook or hopefully an Airbnb or Pinterest or something like that, where you can make significant multiples of your money. That’s the way this business works. It’s very high risk, very low probability of success. But hopefully, when they succeed, they really succeed. That’s the only way to make the financials work at the end of the day.
There’s a lot of companies that we invest in that are not profitable today, and some that even when they get to be public companies are not profitable. So I think the real question in those businesses is, do you fundamentally believe at the individual unit level that those things work? Does an individual ride in a mature market actually produce a real sustainable profit? From the data we’ve seen, in those types of things, or delivery services or others, the good businesses do, in fact, make profits at the unit level. These companies tend to be investing in very significant growth, which obviously drives the overall results from the business negative. That, to me, is the fundamental question. And if you believe that, then you say, “Great, if it can make profitable profits in this market over time, I believe other markets will look like that.” And you either get comfortable with that or not in order to decide if you’re going to make the investment case.
Let me give you a couple secrets that I alluded to earlier. I would say the biggest secret and misunderstanding a lot of people have is the way VCs evaluate deals. As I mentioned, so much of the evaluation is about the team. So when you’ve got somebody like Brian Chesky, who’s starting Airbnb, the real question is not, do you think Airbnb can be a big market? The question is, why Brian versus any other folks who you might see. A lot of what we’re trying to do, and I’m working, a lot of where entrepreneurs don’t spend enough time in their pitches is go to that point, tell us about how are you going to brutally take on this business? How are you going to recruit people when you need to convince them to quit their jobs and come work for you before you have anything to do? How are you going to help customers understand how to get there? All of those things that people tend to underestimate, and tend to gloss over, which tends to be the biggest piece of evaluation for the early stage for venture capitalists.
The question is, what is it that makes this particular founder or founding team uniquely suited to go after this market opportunity? In other words, if we’re starting a chicken gizzard company, maybe the answer is somebody who comes from that industry might be the least obvious person to start a new company, because quite frankly, they’re too wedded to the ways of how the business works, and they can’t think creatively. There’s a great example, and I use this in the book, of Herb Kelleher, who’s the founder of Southwest Airlines. His biggest reason why he said he was the right person to start Southwest Airlines, is because he had never been in the airplane business before. And so therefore, he had no preconceived notions, nothing to hold back the creativity of his thinking. And so, in some ways, depth of expertise in a market might actually be the exact wrong thing for somebody who’s trying to take on the market in a different way.
The other secret, it’s a mistake that we see a lot, is people tend to not think critically about how much money they want to raise and why. And so a lot of times people come in here and they say, Hey, I’m going to raise $8 million. And when you ask them why they don’t really have a good answer. It’s probably because the last three guys they ran into, before they came into the meeting, also told them they were raising eight million dollars. The thing that is so important in this business is when you’re raising for the current round of funding, think about what the story is, and what the milestones are that you’re going to want to tell at your next round of funding, and then back into the amount of money you need to raise in order to direct that opportunity. The biggest mistake in this business as an entrepreneur is to get ahead of yourself and either raise too much money, and therefore not be able to clear that hurdle for the next round of financing, or to raise too little money where you basically then find yourself stranded in between financing rounds. So I think this is a big area where people give a fairly short shrift to thinking critically about that number. And it’s got massive impact on the success of the business.
I think the market is pretty reasonable right now. There is definitely some stuff that always gets traded at a premium valuation, but the number of those companies is relatively small. And the markets pretty rational. I think you see this in some of the IPOs we’ve had, which is companies that are profitable, or that are near profitability, are getting traded at a premium relative to companies who are still consuming a lot of cash. And I think that’s a reasonably healthy place for the market to be quite frankly.
You can follow me on Twitter at NVCA or you can also go to SecretsofSandHillRoad.com to find the book. And you can also go to our corporate site, a16z.com/book and find it there as well.
Highlights from Tracy’s Interview
There’s no reason for us to believe that podcast listeners don’t want to consume more content. They’re eager to have more shows more information and learn more, so why not? Everyone absolutely should exchange podcast guest spots with each other. It’s a quick and easy way to market. And it’s very thorough. You can do your networking and relationship building and get your content out there. I love it. But from a podcast. I mean, I’ve never been turned down. When I’ve invited guests, they always say yes, it’s free publicity. Why not? It always works. We go one step further, we do a lot of video to start. So we go from video to podcast, the blog, and book. Usually, we parlay that into speaking engagements. So we’re kind of covering everything we need to do all in one task.
I don’t believe in hope; I think hope is not a plan. We like to be more calculated about it. We’ve done 250 products, not just on Amazon, in mass market as well, over the last decade, and we have an 86% success rate, commercialization rate. That’s almost nine out of 10 product successes instead of seven out of 10 product failures, which is very common. The reason, the way you flip that, is that you do a lot of market testing, market proof that people will buy what you have to sell. I do like the Amazon model because it is actually a pretty inexpensive and easy access test run. But I don’t like to dive deep into inventory or do or make anything innovative, inventive, creative, requiring tooling, until I’m absolutely, positively sure the market wants it.
The real issue with that is a price play. When you’re talking about food products, or some kind of product that has taste or style, like color choices, when you’re talking about something like that, you absolutely have to test it at parity. In other words, you need to test it at exactly the same price as the closest equivalent product on the marketplace. Because if you test it for cheaper, the assumption is that it tastes bad, or its quality is not good. So at minimum, you have to test them side by side. So what I usually recommend is sell both. Sell the current product, sell your new one, sell them side by side, and see what’s going on.
Initially the current product will outsell the new one, but as you start to get people who buy that current product, you can start to serve them up suggestions for the new, like, “Why didn’t you choose this one? Did you know it? You know, it tastes better? Did you know it functions better? Did you know it does this and so you can serve that up?” And now that you have them in your database of clients, you have an ability to have a conversation with them about what would make your new product, your better product, sell? And what would compete more heavily against that entrenched product? We like to have both going at the same time, because then it captures the people who didn’t choose us. And we can learn more about how to make them choose us next time.
Most of it is positioning. How you market it, how you talk about it, how you’re presenting it to the market, most of it is that. And so, what you may find out is that you actually do need to raise the price. That is a strategy and the initial days of a product launching is to raise the price and make it a premium. Because then they want to know what they’re missing out on.
In our industry, and I’ve done a lot of retail, I’ve done products in Walmart and Target and Costco. Love Costco better, because you can do a premium play much easier than you can anywhere else. But it is the case where the bigger brands play heavier, and it is harder to compete there. So you have to prove yourself before you ever get on the shelf. And that’s where Amazon has come in, and made this an opportunity for small brands to make that play to prove themselves, and to really show up on the shelf later and in relatively quick order. So we’ve had a lot of success going from Amazon success into store success or .com success into store success.
We don’t really handle the marketing side of the advertisements, we support it. But we don’t handle that ourselves. Our job is solely in the product design and development side. We get involved really early on. So when you were talking about your chicken desserts and stuff like that, well, this is an example of what we would do. Someone comes in, they want to make an amazing portable juicer blender, because they’re in the juicing industry, and they’re healthy eaters, and that’s what their brand is all about. They probably have a podcast, they’ve got recipes. But now they want to have their own branded juicer blender, and it doesn’t exist on the market. So we would have to come in and design it. And we would have to come in and create a whole new mechanism housing, and it’s an expensive undertaking, easily $100,000 in inventory and tooling. And so we look at that. And we say, “Well, that doesn’t make a lot of sense early on. Why don’t we make sure that we’ve got exactly the right product before you dump $100,000 into it? Let’s go buy an existing juicer and an existing blender, let’s get you started with our partners to get an Amazon listing going on those two items. You’re going to get customers, and then as we develop it, we’re going to send it out to them, and we’re going to have discussions with them, we’re going to give them marketing information.”
And we keep going back and forth. We even choose colors this way. And when we dial down into the juicer blender, where we already have fans ready for it, ready to buy it, presales ready to go. And we’re absolutely sure that when we spend that hundred thousand, and maybe we’ve already earned half of it back in the profit from the sales of the current juicer blender, we’re already absolutely sure you’ve got a market for it. And that’s how we shift and move people into it. And from that point, you’re sure you can sell, you know how you’re marketing, you’ve got those ads dialed in, you’ve got them optimized, and you’re ready to go and hit the ground running with a brand new product that’s innovative and yours.
No, you’re technically not allowed to contact Amazon customers, except to send them a thank you note and ask them to leave a review through the Amazon system. You don’t have their email. You technically have access to it, but you are not allowed to email them directly. So what we typically do is put pamphlets, postcards, things like that in the box of the item we’re selling. So it’s just a blender, and we invite them to get free recipes, get something free off of our website, invite them to come back in and join a community. And so typically, the active people in the lifestyle, they do that. So now you’ve got your early adopter fans, the ones who are active and are always looking for something new. So you’ve got the right audience to start having that conversation with.
We’re the ghost designer, we’re going to be their designer, we’re going to be their developer, we’re going to help them figure out what to make, how to make it, what it should look like. We’re going to handle getting customer feedback through client groups. That’s what they’ve got to make sure that it’s the right thing. We’re going to go and source it for them and help them make sure that it goes all the way through the first run of manufacturing. We start at ideation, so coming up with ideas if they don’t have one, all the way through to that first run, getting out there and the production run of the items. So we handle that stage of it. And then marketers and other people, we work in concert with them to make sure that it gets out. We work in concert with the facilitation of distribution, warehousing, freight, forwarding, whatever you need. On that side, we have partners that we always work with, to make that happen. So we handle everything all the way through that first run. And we find that critically important because if something goes wrong in the very early run of a manufacturer, that’s where it will go wrong or quality problems will show.
We come up with our ideas from needs, from resources. But I mean, the reality is, if you’re not mining bad reviews, and you’re not understanding use cases, why it’s not working, why people are choosing not to buy something, or what’s missing in the marketplace, then you’re not doing the industry of service. But we’d like to use our market to understand and verify if we’re right. And when we verify if we’re right, if there’s market proof, there’s a market product fit, then we know we’re more likely to be successful in launching this product and we can advise our clients to spend money. Because the reality is that product launching is expensive, and we don’t want to make a mistake. I mean, 14 out of 15 Home Shopping Network style products typically fail. So it has a high failure rate in many parts of the of the industry. Even if you’ve made it to a VC, the chances are you’ll still fail.
Usually it didn’t totally fail, it just didn’t move based on their metrics, or your profitability is way off, because of being on QVC or HSM. Similar to our joke about Walmart, HSM can kill a product, a new product brand, instantly. I’ve never brought a product in there first; it doesn’t happen. It’s a nail in the coffin already, and so we don’t like to do that. We’re also not fans of Kickstarter for most products.
It’s a really good example. We developed a new product that came out of a need. As you know, I’m a podcaster. I do a lot of live events, and I was doing a live event where I was backstage, in a really dark backstage, interviewing Gary Vee. And I only had three minutes to interview him. I had to drop my zoom device and I had to drop my microphone down to the floor. I hand him a microphone, we get started, we go. And when it was all over, and I picked up the zoom device, it had died, the batteries just died. And so I had gotten zero recording of this great three minute conversation I had. I was so furious. So I called up my partner, who’s my husband Tom, and said, “This is ridiculous, there’s got to be a better way.” And about 30 days later, we designed a whole new microphone. That’s what we’re about to bring out.
But I’m against Kickstarter, Indiegogo, that style of crowdfunding, not because it’s not viable–it’s viable–but it’s viable for a very select group of products. Over 85% of retail is bought or controlled by women, bought or influenced by women, so women decide what plays in retail. But Kickstarter and Indiegogo is 70% to 80% male, so it’s not an indicator of whether or not you’ll actually sell it retail later. That being said, a microphone, a tech device like that is a more male-oriented product. We’ve already done an algorithmic test to prove that that’s the case; it’s already showing high probability for success with marketing to that male audience that matched to the demographic of Kickstarter and Indiegogo. That’s the only reason we’re going to go through it. We’re really doing it for a marketing play, not because we need to, because we can pay for the launch of this product. I’m already very certain, based on presales that I’ve already conducted on my own, that it’s going to work.
I mentioned my interviews, that I lost the recording. What we designed was a self-recording microphone. It’s called the brand caster self-recording microphone, and it has a branded mic flag, so it’ll have your show name on it. And in that mic flag, we have an SD card that lasts for all day, we have a light that goes on. So if your SD card is running out of power, the light will start flashing at you. It has a battery. So it’s not run by wires or cables. There’s nothing in it, it’s just got a simple battery that you can replace when the battery runs low, within 10 minutes of running out. Another light will flash so you can end your closure conversation or pause your conversation, replace your battery, and keep going. Additionally, you can string two together, so you can capture to track recording. And then you can hook it all straight to your phone and drop it in the Dropbox for your production team to take care of. There’s a little cable that will attach it, and you can download straight from the SD card into your phone or onto your computer. It’s all self-contained. The only thing you have to carry around is the microphone and maybe an extra battery. There’s even an extra SD card in the bottom of the mic flag. We’ll probably do a $199 feature and a $249 retail. It’ll include a book on how to podcast, and a free month on our privatized platforms. So it’ll include some extras in the box.
The mic’s been getting a lot of good feedback from livestreamers, people like that, because it’s a lot to carry around. There’s a lot of equipment, and most of us are solos, right? We’re solo hosts, we don’t have a team. We don’t have a big staff following us around with boom mics and video cameras and the whole thing.
The best place to follow me on social is LinkedIn. I participate heavily there, but you can find me anywhere you can find me at hazzarddesigns. And that’s the two Z’s. You can also reach out to me, you can find my column at hazzdesign.com, you can contact me directly through that. And you can find our information on our company for podcasting at podetize.com.