The false sense of security from product/market fit

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CC image courtesy of gerry

If you are in the startup ecosystem, you undoubtedly hear frequent talk about product/market fit. Investors and founders speak of it as a magical milestone. The milestone proving you have built something that people want. The moment at which investors line up and fight to give founders money. The time at which founders race to expand their teams and ramp their marketing and sales spend.

You can get lots of advice from accelerators, advisors, and investors on how to work towards this goal, but that advice often falls short. Product/market fit is not permanent. It is not the end of the journey. Instead, it is one of many steps along a never-ending path.

This obsession gives entrepreneurs and investors a false sense of security. For founders, it can lead to doing more of the same and relying on past successes. It can lead to spending too much money, too fast. But doing more of the same rarely works in the technology world. If you are doing something important, there will always be others looking to deliver a 10x better experience. They will be leveraging newer and more powerful technologies to render you irrelevant. Achieving product/market fit is not a reason to sit back and celebrate. Instead, it is an opportunity to keep innovating.

For investors, the false sense of security leads to large investments at rich valuations. It leads to getting caught up in the moment of a “hot” deal. It leads to overlooking legitimate questions about the team and the market. A select few of those investments may work out spectacularly. But there is a long list of $20M+ investment rounds leading to shutdowns, fire-sales, and layoffs. Beepi may be the latest example, but it just one of many.

In today’s early-stage venture ecosystem, many investors focus their energy and dollars on companies with momentum. But I’m focused on a different approach. This means:

  • welcoming product/market fit risk
  • focusing more on the team than on traction
  • focusing more on how a company achieved success than on fact they did
  • seeing what companies can become vs. what they are

When we invested in Dollar Shave Club’s seed round, they didn’t have product/market fit. They hadn’t yet released their launch video. They had flatlined at less than 2K subscribers. When I first discovered Nirav Tolia, then CEO and founder of the fledgling user-generated sports almanac, Fanbase, Nextdoor didn’t even exist yet. But these companies had Michael Dubin and Nirav. They had unique insights into their markets. They possessed a relentless drive and a healthy chip on their shoulder. And their vision and charisma would later give them unfair access to talent and capital.

A few years later Dollar Shave Club had millions of customers and a rapidly growing business. Nextdoor had deep engagement across more than 100K US neighborhoods. Both had achieved product/market fit, but they refused to slow down. They never stopped innovating.

At Shasta Ventures, we are looking for founders that refuse to be satisfied. We are looking for founders that see product/market fit not as the end, but as just one step along that never-ending road.

The false sense of security from product/market fit

How Mobile is like the Star Wars trilogy

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The original Star Wars trilogy followed a typical story arc. Triumph, followed by disappointment, and then a return to greatness. Studying innovation in mobile over the last decade reveals a similar story.

A New Hope: mobile computing explodes

In A New Hope — the first installment in the trilogy — young Luke Skywalker discovers he possesses special Jedi powers. He joins the forces of good, and together they do the impossible in destroying the indestructible Death Star.

In 2008, Apple opened up the iOS app store to third-party developers and unleashed a torrent of innovation. Like Skywalker, these developers discovered special powers for the first time — location awareness, touch interfaces, always-on connectivity, social graph integration, and a powerful camera. These “why-now” enablers provided a fertile environment to developers. An environment for creating magical user experiences. WhatsApp, Uber, Instagram, Uber, Snapchat, Lyft. All never-before-possible experiences. All magical. They grew on the back of an exploding distribution platform, but distribution alone was not enough. The underlying technology enablers made these businesses possible.

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Empire Strikes Back: the dark age of mobile

In Empire Strikes Back, Luke and his friends get knocked down. Luke fails to grow as a Jedi and suffers the consequences. Darth Vader overpowers him in a lightsaber fight, and he loses his hand. Meanwhile, he is unable to save his friend Han who remains frozen in carbonite at the mercy of the bounty hunter Boba Fett. At the end of the movie, there is nothing to celebrate.

In 2013 following the first wave of mobile, newer enabling technologies were slow to emerge. Just as Skywalker stubbornly abandoned his training with Yoda, developers stubbornly and repeatedly imitated previous successes. On-demand “Uber for x” companies popped up in almost every category you could imagine. They leveraged technologies like location awareness but ignored business fundamentals like positive unit economics. Not surprisingly, many of those companies have shut down and disappeared. Many feel that this is the end of the story. Today, many feel that mobile is dead.

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Return of the Jedi: return of hard-core CS unleashes new wave of innovation

In Return of the Jedi, there is a return to greatness. Wiser after returning to complete his training with Yoda, Luke harnesses his full Jedi powers. He destroys the evil Emperor, and he enables his friends to do the impossible again when they destroy a second and more powerful Death Star.

While on-demand companies were operating with upside-down economics, researchers and PhDs were experimenting with machine learning techniques. Concepts like neural networks and deep learning, while not new, had several advances make their use more effective. First, massive data sets (e.g., images, text, audio, video) became more available. Secondly, storage of these large data sets was no longer cost prohibitive. Finally, GPUs became widely available providing the processing power required to power deep learning. The combination of these trends enabled machines to learn on their own and apply that intelligence to virtually any problem.

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In the last four years, we have seen massive strides forward in the effectiveness and accuracy of these technologies. Machines have developed senses that until now were only reserved for humans. They can see, hear, talk, and understand. They can recognize images and speech with greater accuracy than humans. As these techniques migrate from the research world to the commercial setting, they will power another generation of transformative companies. It is early days, but in the next ten years, unimaginable leaps forward are coming.

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We are already starting to see deep learning power magical end-user experiences. In the social media space, PicsArt and Prisma leverage machine learning to transform photos into the style of famous artists. Google Photos makes your entire photo library searchable without requiring manual tags. In health care, Face2Gene uses image recognition to help diagnose dysmorphic features from photos. In the education vertical, Shasta’s portfolio company—Socraticleverages machine learning to help students when stuck on homework.

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These examples only scratch the surface of what is now possible. We will see magical experiences across every vertical. Just as Luke Skywalker emerged from his setbacks more powerful than ever, so too will the wave of mobile innovation return in the years to come.

If you are a founder that shares this vision, we want to meet you and learn about what you’e building.

Available @: twitter / linkedin

How Mobile is like the Star Wars trilogy

Unbundling the $700Bn Credit Card Market

I carry two primary credit cards in my wallet. If I don’t pay off my monthly balance I incur interest rates of 13.5% and 16.2%. But I also have an unsecured credit line from Wells Fargo that is only 9.25% APR. The underlying credit risk of all three credit products is exactly the same, and yet there is a massive gap in APRs. Sadly, this phenomenon is not unique to me. Data from the Consumer Finance Protection Bureau indicates that credit card banks typically overcharge consumers by 10-50% relative to their true credit risk.

One year ago Jason Brown and Jasper Platz identified this market inefficiency and set out to solve the problem. What they came to realize is that banks do this out of necessity. Many credit card customers use their credit card purely as a means of payment, not as a credit line. Since banks don’t generate interest revenue from these customers, banks must subsidize the cost of acquiring and servicing those customers through artificially high interest rates applied to customers carrying balances. Ultimately, the banks get away with it because they can. They bury high APRs in the fine print and lure in consumers with promises of rewards and cash back.

Today we are announcing Shasta’s most recent investment, leading the $15M series A financing for Tally, a financial technology company solving this problem.

Equipped with their unique and fundamental insight about the tallyt-redcredit card industry, Jason and Jasper set out to unbundle the credit card. The result is Tally. Pay and earn rewards with your existing credit cards. But use Tally to get the lower APR that you deserve. Use Tally to automatically manage multiple monthly bills and never again incur a late payment fee. Use Tally to maximize savings by intelligently optimizing grace periods and introductory rates. Set it, forget it, and save money.

The stakes are huge. Every year consumers lose billions to credit card companies through artificially high interest rates and late fees. More than $250 billion of the $700 billion credit card market is held by prime borrowers who carry balances, precisely the target customer that Tally can help most. Even a small dent will enable Tally to become a very large company.

But none of this matters without a phenomenal team making it happen. Jason and Jasper are entrepreneurial magnets. Their clear vision and charisma gives them unfair access to talent, press, partnerships and capital. They’ve built a world-class team of people like Jason Huynh, a seven-year veteran of Capital One now leading Tally’s credit underwriting. They’ve brought on best-in-class developers and designers that have built Tally’s simple, yet elegant product. And throughout their careers they have demonstrated the unwavering persistence and commitment common among the world’s best entrepreneurs.

Powerful vision for saving consumers billions of dollars. Intuitive and beautiful product experience. Massive market. Remarkable team. We couldn’t be more excited about investing and joining the team on their mission.

Unbundling the $700Bn Credit Card Market

Reinventing decision making for modern retailers

Long before Michael Lewis popularized sabermetrics with Moneyball, I’ve been fascinated by the idea of using data and math to get an unfair edge on the competition. The world’s best poker and blackjack players count cards and compute probabilities in real-time to beat the odds over time. High frequency traders use data science to find and exploit even the most miniscule of arbitrage opportunities to lock-in profits. And as described by Lewis, innovative professional sports teams evaluate athletes using non-traditional statistics to more accurately assess the players’ true worth. Quite simply, smart data analysis leads to actionable insights which leads to better decision-making and ultimately better performance.

Not surprisingly, this idea has large commercial applicability across a number of categories. At Shasta we’ve already made multiple investments leveraging the trend. For example, Apptio leverages data science to enable better decision making among Fortune 500 CIOs, and Anaplan is in hyper-growth mode providing a data modeling platform for enterprises to improve decision making across functional areas such as finance, sales, and marketing. We remain very bullish about this trend, and it is at the heart of our most boomerang_logorecent investment, the $12 million series B financing for Boomerang Commerce, the first guided analytics suite for modern retailers.

In the retail sector, Amazon has leveraged data analysis to grow from nothing to the top retailer in the planet. Unlike traditional retailers, Amazon makes product and pricing decisions based on numbers, not a category manager’s subjective experience and gut-feel. They continually adjust pricing in real-time to optimize for their core objective for any product, be it top-line revenue, gross margin contribution, or market share. In Moneyball, Lewis described how the subjective approach to player evaluation by traditional baseball scouts was inherently flawed. Likewise, the gut-based approach long employed by traditional retail insiders is overly subjective and flawed for the modern retail world.

To the benefit of consumers, this trend is thankfully changing rapidly. Retailers, falling further and further behind Amazon, have woken up to the power of this new way of thinking. Many have hired former Amazon executives to infuse the more modern data-driven decision making philosophy into their companies. However, changing the thinking is not enough. These retailers are not equipped to build the technology themselves. Going it alone would take years to catch up, and even then the results would be uncertain.

In 2012, Guru Hariharan left behind a career in online retail with Amazon and eBay to tackle this big idea. He clearly understood the power of Amazon’s approach from his own experience with the company, but was frustrated to observe traditional retailers losing ground and market share due to their outdated thinking. Fast forward three short years and he’s assembled a world-class team of technologists and data scientists, many coming from tech leaders like Google, Facebook and Saleforce. They have built a technology that provides retailers with real-time pricing recommendations for pricing competitively, yet profitably. It provides powerful insights about which products to stock or discontinue based on the impact to the bottom line. Ultimately, It provides customers an ability to effectively compete in the market in a manner that has been helplessly out of reach.

Most importantly for their customers, it is working. Their customers are not easy to please. They unapologetically demand a significant ROI. Thankfully, customer after customer that we spoke to witnessed a revenue and margin lift from Boomerang’s technology in weeks, not years. Typically that lift translates into a 10x ROI to their bottom line. This consistent and reliable performance has enabled the company to already win deals with nearly 20% of the top 50 internet retailers, including retailer heavyweights like Staples and Office Depot. In turn, Boomerang has grown its business 4x in just the last 12 months.

Yet for all of their early success, Guru and team have just scratched the surface. The foundation is set to rapidly grow their business and further enhance their product suite, and we could not be more excited about joining them on their mission to reinvent decision making for modern retailers.

Reinventing decision making for modern retailers

Socratic

Screen Shot 2015-03-25 at 8.12.20 AMToday we are announcing our most recent Shasta Ventures investment, leading a $6M series A round for Socratic, a question and answer community focused on high school and foundational college academics.

Online written content tends to be produced through one of two very different approaches. The first approach is professionally-driven publishing. The New York Times, ESPN, The Wall Street Journal. These companies employ professional writers to create their content. The alternative approach is community-driven publishing. Yelp, Wikipedia, TripAdvisor. Community-driven content publishers build communities anchored around a common passion, and their most active members contribute and share lots of content, not for a paycheck, but because of an authentic passion for the subject matter.

In the evolution of the Internet, professionally-driven publishing understandably emerged first since it was the most direct translation of the print publishing world. But community-driven content publishing has many inherent advantages. It costs less. Thanks to passionate experts it is as good, if not better, than professionally-created content. It improves over time and never goes stale. Finally, highly engaged communities exhibit a gravitational pull that create massive barriers to entry.

In category after category we’ve witnessed professionally-driven publishers getting surpassed by community-driven publishers. The Yellow Pages was surpassed by Yelp. Lonely Planet and Fodors were surpassed by TripAdvisor. Encyclopedia Britannica was surpassed by Wikipedia. And yet for all the advantages of the community-driven publishing model, it hasn’t overtaken every category yet. In the world of academic knowledge, the traditional textbook publishers have been very slow to move content online for fear it would diminish the value of their core print business. Therefore, when students search online for content they typically encounter a highly fragmented hodge-podge of sources like lecture handouts or websites built in 1995. Those sources are often unhelpful, unreliable or overwhelming.

In 2013 two mission-driven and product-obsessed founders, Chris Pedregal and Shreyans Bhansali, saw this gap in the market and created Socratic. It is a community where confused students can ask questions, and where passionate community members like Ernest Z., a retired Professor of Chemistry, collaboratively answer those questions. The result is the best answers that exist anywhere online. Answers that students love.

Socratic started a year ago with only Chemistry and now they have thriving communities across 12 subjects, ranging from Physics to Biology to Macroeconomics. They’ve been successful by focusing on the product experience and their community members. The product is thoughtfully designed to make it easy to write the best answer possible. Tools like their math formula writing software and in-line graphing functionality make this possible. And they focus on features that deepen engagement among their contributors. Contributors can see their impact, build their reputation and engage with like-minded community members. The result is contributors like Ernest answering 1,772 questions seen by over 1 million students across 215 countries, and an audience that has grown over 10x since the start of the most recent academic year.

At Shasta we have bet on this theme before to great success. In 2007 we invested in Spiceworks. Eight years later Spiceworks has raised $111 million and is now the definitive destination online for IT professionals. Six million IT pros turn to the Spiceworks community to ask questions and share advice. We see a similar potential in Socratic. Academic knowledge is an important category and yet there is no definitive online destination for it. With their community-driven approach and their phenomenal product intuition, we see Socratic becoming this place. Their impressive team has accomplished a lot in a short period of time on limited capital, and the company is on a rapid growth trajectory. We’re honored to join Chris, Shreyans, and their team to help make their bold vision a reality.

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Bloc

3 years ago Marc Andreessen famously declared that software is eating the world. The core idea – one that we strongly believe in at Shasta Ventures – is that over time all industries will be reinvented by advances in software. Just as software innovator Amazon overtook Borders and as Netflix surpassed Blockbuster, ultimately every industry will be reinvented through software innovations. But none of these advances are possible without the key building blocks in place. Inexpensive computing power, scale-as-you-go storage, and powerful developer tools are essential for this transformation, but on their own they are insufficient. None of this reinvention happens without talented software developers making it happen. And on this front we are woefully behind. Demand vastly outweighs supply, and our traditional liberal arts higher education system, great in many ways, is not suited to mass-producing computer science graduates with the necessary technical skills for today’s world.

In the spring of 2012, Roshan Choxi and Dave Paola (and later joined by Clint Schmidt) set out to attack this problem. From their own experience as aspiring programmers, they knew that they were more successful learning software development through the watchful mentorship of a co-worker or manager than they had ever been in university. They knew that they learned best through practical, hands-on creating, not through repetitive exercises. And they had grand ambitions to make their solution available to every person on the planet with an internet connection, not just those within close proximity to a physical-based education institution. From these insights, Bloc was born. Today, we are announcing Shasta’s investment into the company by leading its $6 million series A financing.

Screen Shot 2014-11-17 at 11.32.56 PMBloc offers mentor-led online courses in software development and design. The courses leverage Bloc’s proprietary curriculum, and students are matched with regular mentorship from experienced industry professionals. The intensive courses require significant commitment, but also are flexible to match a student’s individual life circumstances. The curriculum, world-class mentorship, and intensity result in students regularly completing courses with the skills necessary to be hired into full-time software development positions. In the online education space we have had hesitation investing in companies selling into bureaucratic educational institutions, but we are compelled by direct-to-student offerings such as Bloc’s that offer students a tangible financial return from their investment.

Like other managed marketplaces, Bloc’s success creates a virtuous cycle. Attracting the best mentors leads to the best student outcomes. The best student outcomes generate additional student demand. More student demand increases the utilization of mentors which drives up mentor earnings, thereby attracting more of the best mentors and perpetuating the virtuous cycle. Businesses like these can be difficult to get going, but once the flywheel starts moving they carry significant momentum. And for a business just over three years old, Bloc has tremendous momentum. It is rapidly growing its student enrollment, its revenue, and its mentor base, all while achieving profitability. Yet for all its early success, we see a business still in its relative infancy now poised to explode. The market demand for software developers will be tremendous for years to come, and we believe that Bloc has the best approach, product, community, and team to capitalize against this significant opportunity. We are thrilled to join Roshan, Dave, Clint and team on this exciting journey.

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Timehop

Thanks to Facebook, Twitter, Instagram and many other social media networks, Internet users are sharing more and more each year (see Zuckerberg’s Law). Taken in its entirety, social media sharing creates a rich story for each of us. It comprises our most noteworthy moments in life. This history is incredibly valuable to people, but all too often it lies buried. It lies buried across multiple networks. It lies buried behind the news feed consumption mode that narrowly focuses on only the most recent 24 hours.

Three years ago Jonathan Wegener and Benny Wong set out to solve this problem. Their mission was to empower people to easily collect their digital history, and to make it accessible, useful and meaningful. newlogo-751e104342da3b2ea3db5a436007c549The manifestation of these efforts is Timehop. As is the case with many of the best mobile experiences, the product is beautiful in is simplicity. Each day you open the app and you are presented with your memories from that day in history. Today we are announcing Shasta’s most recent investment, leading the company’s $10 million Series B financing.

Timehop is one of the fast growing mobile apps in the market. More people open and read their Timehop each day than read the New York Times. Of those that have registered for the service, more than half return daily. In the iOS app store it is consistently a top 50 overall application and a top 10 app in the social networking category. In summary, it’s a rocket ship with off-the-charts repeat engagement.

But even with such phenomenal growth, it’s a company still in its relative infancy. We believe it has the potential to ultimately serve hundreds of millions of people, but they have a long way to go to get there. As such, how they got here was equally important to our investment thesis as their successes to date, since it’s these characteristics that will enable the team to achieve their lofty aspirations. Specifically, they’ve gotten here by:

  • Keeping it simple. They’ve maintained focus on doing just one thing, but doing that one thing incredibly well.
  • Continual experimentation. Less than 15% of what they have experimented with is in the product today. This approach has led to a number of counterintuitive learnings that are critical to its success.
  • Focusing on repeat usage. As previously mentioned, more than 50% of their registered users open up Timehop daily. This is not by accident.
  • Making it social. Our best memories typically include good friends and family members. Naturally there is a strong desire to relive these experiences with others. They’ve made it seamless for anyone to publicly share via social media or to privately share via text messaging.
  • Growing from organic user acquisition. It would have been easy to cut corners and rely on paid customer acquisition to grow. Instead, they incessantly hammered away on the product and sharing features until they unlocked a more sustainable organic customer acquisition engine.

At Shasta, we don’t invest in ideas. We invest in the people that can successfully execute to make those ideas a reality. In Timehop, we found a team that we believe has the right mindset, playbook and DNA to achieve its big vision. We could not be more excited about joining them for this journey.

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