Hyperlocal is a scale game
Interview with Hunter Walk
The things seem to have taken a U-turn for startups. Not long ago everyone was raving about unicorns, sky-high valuations, and new takes on the Uber for X idea. Now founders, with their rockstar status under fire, are wondering whether they’ll be able to raise another round of funding.
We wanted to learn more about what happened. We’re also curious about how technology trends and the changing landscape affect small and medium businesses, category especially important for us at Estimote. So we reached out to Hunter Walk, a partner in Homebrew seed fund that has invested in, among others, Shyp, Managed by Q, and Estimote. Hunter is one of the most prominent early-stage investors and has previously worked as a Director of Product Management in Google and has been on the founding team of Linden Lab, the company behind Second Life. He also has keen interest in how SMBs can leverage technology. Enjoy!
Not long ago everyone was talking about startups joining the unicorn club day by day. Fast-forward a few months and there’s a whole new narrative. People are now more concerned about not becoming a ‘unicorpse’. What’s changed?
The refocusing on fundamentals is healthy after a period where entrepreneurs, investors, and press were all complicit in crowing about midstage valuations rather than exits. No one ever won a marathon at mile 8. Fortunately at the day to day level, there’s less noise. Founders and their teams can focus on building an amazing company with less pressure to use fundraising as a weapon. There’s still plenty of venture capital available to entrepreneurs at all stages.
An intriguing side effect of this shift is the public image of VCs. Silicon Valley’s thought leaders used to be demigods in tech circles. These days Paul Graham is publicly challenged because of his views on income inequality, Peter Thiel’s involvement in Gawker lawsuits is a major controversy, people who put their money behind Theranos are getting lambasted. Is this scrutiny good or bad for VC community?
We’ve left behind industrial capitalism and are firmly in technology capitalism. To me that means businesses are increasingly powered by software and with that opportunity comes a spotlight. As a community we’re still somewhat young and occasionally tone deaf in terms of understanding how to communicate with different segments outside of our world.
That said, for me, the past 12–24 months have seen an acceleration of understanding and outreach. We’re talking more about diversity and holding our companies accountable. We’re stepping up on the political front as a group that has a voice. We’re celebrating the philanthropy of people like Mark Zuckerberg and creating new types of role models. There’s still a tremendous amount of work to do. My standard line is, I’ll know we’ve come a long way when I go to a party in San Francisco and hear someone brag about having gotten into the “seed round” of solving homelessness versus just bragging they were in the seed round of Uber.
Press has a lot to say about how fundraising is getting harder for startups. But what about raising as a VC? How are LPs reacting to what’s happening in the market?
LPs — the investors in venture funds — generally take a long term approach. They have fund managers with a lot of paper writeups from the last few years and are interested in seeing those managers get to cash returns. What’s comforting is that there aren’t any vanity metrics in venture. The LPs will support those funds which perform with excellence and shed those which underperform. The challenge for them of course is that cycle times are very long — the average fund takes 10 years to start showing meaningful returns — so you are slow to commit, slow to exit. We’re still early in our second fund and don’t anticipate raising a third fund until 2018.
I promise I will only ask about politics this one time. You’ve wrote that Donald Trump is American phenomenon, driven largely by lower income white males, and largely built on myth and hoax. If Trump wins the presidential race, what are going to be the consequences for Silicon Valley?
Ah, my comparison of Trump and the Bigfoot myth. I did get some interesting tweet replies on that one. I despise what Donald Trump stands for but have empathy for the percentage of his followers who feel ignored or trampled upon by the structural economics changes in the American economy. When Hillary wins in November — it’s going to take a lot of work but she’s going to win — that’s just going to be the start of figuring out how to bring Americans back together. From a Silicon Valley standpoint, Trump would be horrible for innovation.
Is there any category or market that’s still great for fundraising? AI and all-things-bots seem to be doing fine and generate a ton of buzz, same goes for VR. But are there solid business models behind these?
At any given time there are markets that appear to be hot in terms of fundraising. It usually has to do with opportunity created by a new platform shift, emergence of a compelling technology, change in behavior by consumers or enterprise customers, etc. Yeah, right now AR/VR, bots, and AI are three areas where investors and founders are dreaming about the future. The reality? All three of these segments will create great value and also see a large number of failures. That’s just a truth about every new market. The challenge for founders and investors I believe is having a true POV. Founders and investors who are thin thinkers — accepting just the standard line about a market without depth beyond that — don’t interest me. At Homebrew we need to be early or contrarian to succeed.
You seem particularly interested in SMBs. Recently on your blog you’ve been interviewing SMB founders about tools they use. What’s the typical tech stack behind a small, local company? Do they rely on SaaS startups day to day?
SMBs have a large TAM (total addressable market) but the “A” — addressability — is the toughest. It’s a difficult segment because you typically see low value per customer (relative to a Fortune 500 company), a very distributed base and a buyer who is busy running their business, not necessarily interested in being the first adopter of your app. That said, talk to any SMB and they all cite new tools which have allowed them to scale. We tell every SMB entrepreneur to make sure they are solving a problem which is (a) large, (b) urgent, and (c) valuable. If you don’t have all three, it’s a nice to have, not a must have.
How about IoT? Do you see SMBs tapping into physical world data and connected objects?
Absolutely but at a pace slower than SaaS and mobile. From an enterprise IoT perspective we tend to look at larger buyers than SMBs.
Speaking of physical world, Facebook has recently opened up their Offline Conversion API. It integrates beacons, GPS, Wi-Fi, and more to close the loop between ad impressions and location visits. Google is launching Nearby Notifications to let you know about apps and websites relevant to your location. Who’s going to win the battle over hyperlocal ads?
Hyperlocal is a scale game so you need huge amount of information on consumers AND the ad network. Facebook and Google are certainly amazing here. People keep waiting to see what Apple can do. Who knows, maybe Pokemon GO will win the market.
Do you expect other tech giants to have a strong foothold in this area, too? Apple and Amazon earn their money in completely different ways than Facebook and Google, how (if at all) will they approach microlocation?
It’s very difficult for a company to shift its DNA. The biggest argument against Apple in the hyperlocal space is that they aren’t built on ads or consumer targeting models. They can probably be a spoiler — what happens as they support different types of ad blocking or make it difficult to share data with third party providers?
Final question is to you not as a VC or a product person, but as a consumer. With contextual computing on the rise thanks to location tech, IoT, and data mining, are you more excited about the possibilities it opens for frictionless experiences, or concerned about privacy?
I’m 100% more excited about frictionless experience and willing to take the privacy tradeoffs which may come from enabling those interactions. It’ll take a while to get some of the interaction models correct and figure out how to help consumers make the trade-off decisions around privacy that they’re comfortable with, but overall it’s upside.