Extraordinary people do extraordinary things

How do you evaluate founders and founding teams? It’s hard to have to assess the “fitness” of an entrepreneur if your overarching sentiment is one of respect for the courage of the journey.  

Over time we have developed language around this question, things like personality traits (openness, agreeableness, conscientiousness, extroversion, neuroticism), functional skills (domain expertise, commercial insight, ...), and EQ (charisma, coachability, etc.). 

I find myself repeating a phrase that I heard (I think) early on my venture career: extraordinary people do extraordinary things

I like that lens on a founder's background. It's unlikely in my view that we are going to meet a world-changing team that hasn't done extraordinary things previously. It's a hard truth, but relying on your company to be your first extraordinary thing is not a great idea.

This is true both as guidance for raising venture capital, but also as life advice. Why wait to lead an extraordinary life until you have identified a commercial opportunity to pursue?

Now what that extraordinary thing is varies very widely: by no means do I mean that you need to have a CV stuffed with extracurricular BS that seems to be the required condition for Ivy League schools or Goldman Sachs. No, I'd much rather you had set up a charity in Tanzania, rowed around the world, participated in the Math (or Sports) Olympiad for your country, written a few terrible (or amazing) screenplays, invented the hashtag, or run a kick-ass subreddit. I like curious founders whose ambitions go beyond the commercial.

Of course I subscribe to the notion that great ideas, and teams, and companies can come from anywhere. And so I will often meet with companies that look very interesting but come from "unlikely" teams. Perhaps more so than other folks in our market, I will take these meetings because I believe openness and whatever the inverse of cynicism is is key to being a good VC. And many folks don't talk about the fact that they've done awesome things in the past - they feel it's not appropriate in a "business" setting, especially if they held conformist jobs like consulting, banking, or corporate.

I do believe in the notion of extraordinary people and, perhaps even more so, teams. And hence our current tagline: early-stage venture capital for exceptional European entrepreneurs. We hope to meet more of them. 

Introducing other investors

I am often asked to make introductions to other investors. Once we are committed to leading or joining a round, I love making these introductions. I like the company and the founders and I know showing them to other investors as a "pre-qualified" opportunity makes their job and the job of the founders easier. It builds our reputation with other investors for being a collaborative firm that finds good investments. And it helps the founders raise a larger round for our future portfolio company.

However, many founders ask for introductions to "other investors" once I've passed. This happens most frequently when I haven't even met the team. And sadly it's mostly first-time founders that then seem quite put out when I don't comply with their wishes.

There are a few reasons I decline making these introductions. First of all, I haven't evaluated the company beyond a short look. I probably passed on it because it is outside of my investment scope (e.g. enterprise software, late stage, low growth, no defensibility, weird ownership structure, small market, etc.) or because the team looked like an "unlikely" fit.* In most cases I haven't even met the team. 

That doesn't mean it can't be a good investment for other funds. They may have very different criteria from me. But I have my focus because that's where my expertise lies. And if I started qualifying deals for other investors that do very different things from me, I probably wouldn't be doing much else with my time. What's worse, I probably wouldn't be doing it very well.

Secondly, if the company is in my remit but I pass, what message does introducing the company send to other investors? It's a terrible signal - hey, here's a company I didn't think was good enough for us to invest in. Take a meeting because I value your judgement and time less than my own. You can see the problem. This is terrible for founders and so I end up saying "I'm sorry I don't do that." 

Next time this happens, I'll send the founder this blog post. So they know it's with their interest at heart that I'm not introducing them.

How I learned to stop worrying and love random inbound email

I've been in venture for about a decade now - three years as analyst-associate-principal at Atlas Venture (now Accomplice), a year as a VP at Accel, and over five years as a general partner at Sunstone. Over that time I've received tens of thousands of unsolicited inbound emails. And for a very, very long time, I prided myself on the fact that I'd respond to all of them.

But a few things have changed over the last years. Most obviously, the volume in our market has gone up significantly. Everyone wants to be in tech. Then, there are many different inboxes now - from email to LinkedIn, Twitter, Instagram, Facebook. It's hard to keep up. And a few years ago, founders figured out how to mass-customize personalized emails. Some of them are very sophisticated and so not all the "personal" email I get is really all that personal.

At the same time, I've built a sizable portfolio (ten companies), with a number of high-involvement board seats, got married, had two beautiful kids. And so time is in shorter supply than it used to be.

All that means that I will start using a different process for unsolicited email from people that I do not know. I will still try and reply to a few a day. I like the serendipity of it and some areas and people intrigue me. I did the very first investment based on a cold inbound email earlier this year - which was in response to a DTC blog post. I loved that.

But for the large majority of emails, if I haven't gotten to them after a week I will move on and they will never get a reply. 

As you know we have a team of associates, Deepka Rana in Berlin/London and Philippe Collet in Copenhagen/Stockholm. You might have better luck reaching them. Or there's always the possibility of talking to someone I know and trust to be a good filter for me. That will always remain the best way to get in touch.

Btw, this post was inspired by a 2013 AVC blog post. Thanks Fred for leading the way on trying to stay sane using our new superpowers of communications.

DTC advertising: moving from social to television

A few days ago I wrote about "revisiting DNVB terminology" because we were seeing Facebook emerge as the new middleman (aka "CACs are the new rent") with acquisition costs having risen dramatically in the last 18 months. Cue LeanLuxe's newsletter highlighting a Digiday article about direct-to-consumer brands switching to television advertising.

Interestingly the story begins with HelloFresh, a Rocket-originated company from Berlin, Germany, that alongside Blue Apron introduced meal kits in the US (and Europe). Rocket Internet properties have historically introduced television spending quite early. This was a response to the European online audience only scaling to a certain point, but also because performance marketing experts at Rocket (and now Project A) are world-class multi-attribution specialists and were able to e.g. time online ads with television commercials, making use of second screen advertising to lower the media break issue (i.e. how do you get people to go to your site when they've seen the TV ad? A: on the device they're holding in their hand). 

Overall we're seeing much more interesting tactics in traditional media. Television is certainly performing, but so are podcasts (how many mattresses can a person buy?) and outdoor (metro, billboards, buses). Up to this point I've very rarely seen radio or print work, but that's not to say that they can't. If you can do organic - word-of-mouth, community, guerilla - that's obviously preferable to all paid tactics.

Facebook's response to DTC brands deemphasizing them due to cost has been to push "conversion" audiences versus optimizing for clicks, as well as Instagram video (stories, but also its new longform content). It will be interesting to see how this plays out.

My favorite DTC brand build on television remains MyPillow, which reportedly makes 25,000 pillows a day in its own factory. The Mike Lindell founder story is as American dreamy as it's possible to be. Tragic and wonderful. 

The DTC rollup opportunity

News emerged yesterday that Martin Sorrell's S4 Capital, which doesn't even have a website yet and apparently is spelled "S4", has bought Dutch agency MediaMonks in a $300 million deal, beating out his former company WPP. Notwithstanding whatever happened at WPP, which Sorrell left after 33 years amazingly successful years, props to a 73 year-old for getting back to market within 2 months of leaving the $20 billion revenue company he has built over decades. 

I also recently read about the amazing rise of Vista Equity Partners (WSJ paywall), the private equity firm that hypothesized that SaaS buy-outs could be leveraged well given the predictable revenue stream from software subscriptions.  

For followers of this blog, you know that I am fascinated with and actively investing the Cambrian explosion in DTC/DNVB. On the back of the news above, it struck me that this segment could support a rollup/buy-out strategy similar to the ones employed at WPP from 1983 onwards and at Vista Equity in the last decade.

Like in software, DTC ecommerce relies on many similar tactics and requires the same infrastructure: whether it is in marketing or distribution. While almost all new brands outsource much of this to e.g. branding agencies or 3PL logistics service providers, economies of scale would confer significant advantages in many of these functions. 

DNVB/DTC companies are almost all global by nature. The internet ignores most borders and the attractiveness of brands scales beyond their home markets - see e.g. Away or Glossier who are practically being pulled into Europe by consumer demand.

Further, scale and the ability to expand brands and businesses beyond verticals would increase the valuation multiples used to price these companies, which would lower capital costs. Scale also provides easier access to capital markets, which in turn would make it easier to finance the massive infrastructure investments necessary to compete with Amazon. 

Finally, building these businesses on the core of a subscription offering for consumable basics (think Dollar Shave Club, Lillydoo, others) would bring the cash flows necessary to introduce leverage - further reducing capital intensity for early-stage investors. 

Building such a "digital consumer brand" PE vehicle would not require massive investment - perhaps $250-500 million to build a $5-10B+ company - though it would still take "early-stage" guts, not unlike the first deals that WPP did. I wouldn't be surprised if someone tried it soon. The fragmented DTC market looks ripe for the picking. 



US Store Closures and Openings 2018 To Date

As you know, we're big fans of the rapidly reorganizing consumer economy here at Sunstone Capital. Though admittedly some of it makes us very nostalgic (I loooved Toys "R" Us *sniff*). 

What's interesting to see is the very clear shift in the offline retail word towards discount/utilitarian. See the expansion of Dollar General below. Quoting from our DTC thesis:

...consumer preferences seem to be fragmenting. The large, homogeneous Western middle class which was the mainstay of consumer packaged goods (CPG) brands has split in two. At the bottom end, private labels are booming, with consumers increasingly utilitarian and looking for value. At the top, the preference is for quality, authenticity, and meaning - with tastes skewing small and independent. Large CPG brands are being squeezed in the middle.  

...Big is less and less better. Previously, brand scale conferred huge advantages in pricing power, margins, access to supply chain, and retail ubiquity. No longer. An economically, commercially, and environmentally more literate and conscious consumer increasingly distrusts big brands. Emerging affluent tastes are natural and organic, while the poor or disillusioned prefer the honesty of unbranded commodity.

We think this is only the beginning - retail is poised to keep changing over the next decade. 

Revisiting the DNVB terminology

Richie Siegel of Loose Threads has an interesting post as part of his (paid for) Loose Threads Espresso newsletter: Do DNVBs exist anymore? Revisiting the buzzword.

The main thrust of the argument is that with rising acquisition costs Facebook has become the ultimate "middleman": by some report, Facebook CACs have risen as much as 17x between 2011 and Q1 2018. The response of many "online first" or "born digital" brands has been to move to omnichannel more quickly, reflecting the better economics of the retail channel (no online acquisition, no logistics cost). 

The core challenge is thus that the better contribution margins attributable to the "vertically integrated" (relative to retail ecommerce) brands are eroded significantly. The "variabilization" thesis, in which all parts of building an online brand are essentially variable cost, does not hold true because scaling on Facebook itself has become cost prohibitive.

I think this is largely true, but with one major caveat. Online or "digitally native" is still both the best and most cost-effective way to experiment with building a brand before scaling it. Especially brands built using an existing community, a Kickstarter project, or organic tactics like PR, are able to validate their product-market fit before raising significant capital.

Further, while most online channels are indeed becoming unprofitable, the three significant changes we still believe to be true are: 

1. the variabilization of the supply chain (making e.g. manufacturing and logistics easier to access as a small player) 

2.  the propensity of customers to let digital touchpoints be the deciding factor on the consumer journey - even if that journey terminates offline, and

3. capital abundance, providing higher willingness to spend a dollar per revenue generated (and thus, perhaps, enterprise value) than in previous years.

Of course the latter will depress returns (hopefully just for investors rather than founders), but it still means it's possible today to build rather large businesses in verticals that have previously been ignored as too capital intense. When that music stops is anyone's guess. 

Many of our portfolio companies take a blended view of acquisition costs. While Facebook by itself is prohibitive, we see that it can be a cost-effective touchpoint along a purchase journey that frequently can't or shouldn't be attributed to the last click.

I love Loose Threads which, along with 2PML and Lean Luxe, is a required read these days.

Much love,
Max

Consciousness and creativity

The pioneer is always in a minority of one. I don't know whether that's a quote I should be attributing to someone. But to me it is the essence of the visionary founder story. Even after you have followers, investors, employees... to pioneer can be a very lonely business, indeed. 

Creative individuals are frequently branded by the collective as asocial. This is particularly true in European countries, some of which are oppressively collectivist. From Janteloven to the pervasive envy of German society to state-sponsored innovation in France, Europe suppresses the strong individualist consciousness in a range of pernicious little ways. I can't fault the European founders who John Galt it out of here (frequently to YC). 

The creativity of human consciousness is threatened by few things, but religious or ideological or political totalitarianism is one. And so I find what is happening throughout the Western world disheartening. Because it isn't just crazy Republicans, and Trump, and ethno-nationalism. It's also gender theory gone wild, radical sentimentalism, and social media lynch mobs. Both sides seem to be self-radicalizing. And no, this isn't false equivalency and I'm not siding with "the Nazis." Grow up. 

Such fixations lead to a sterility in human consciousness and a lack of creative progress. So far as humanity as a whole is concerned, I am not worried because these things tend to be provisional. At times, perhaps, necessary to integrate and transcend. The human project as a whole has an assimilative vitality that tends to win out. 

But as someone who is primarily backing "heroes", i.e. individualists on their startup journeys, I can see how the ideas are getting more incremental, more fearful, more tactical. And I attribute that in large part to the cultural moment we are living through. 

I am very happy when I see stories about the burning man generation, because it is just this sort of free-thinking that is needed for ideas to stay big. 

Happy 4th of July, Americans. 

H1 Blogging Retrospective

Half a year has gone by and I've made 117 posts on this site, which is 10% below my target of 70% of days (personal OKR). 

June especially has been shameful with four posts. I just felt like some of my last posts were trite. Perhaps it would be better to do twice a week and aim for quality instead? 

Exculpatorily (this is not a word), it feels like we're doing a DTC deal a month at the moment. We recently invested in the $850K seed round of a company in New York and are in contract drafts with a vertical commerce company in the UK ($3 million seed round). We're moving into some verticals we're less familiar with (beverages? sexual wellness?) but we think being contrarian holds the key to acceptable valuations and potentially very fast growth. As long as we can get them the follow-on capital...

I'm delighted that for the first time ever I backed a cold inbound company. That was on the back of the switch in focus to DTC/DNVB. Who says blogging doesn't work?

So here's to a better blogging H2. I'll block time in the calendar every day this month and let's see how that goes.

Tips and tricks and suggestions, just comment below. 

Much love.