CS183C Session 4: Ann Miura-Ko

Our guest for today’s class was Ann-Miura Ko, who delivered a guest lecture and was interviewed by John Lilly. You can watch the recording here.

  • Palo Alto native
  • Yale EE
  • McKinsey & Co
  • Charles River Ventures (“My second day of work was 9/11, so I got to see what happens when the VC world comes to a screeching halt.”)
  • Stanford PhD
  • FLOODGATE: Started in 2008. Once a week, would look at companies with Mike Maples; around that time Mike “accidentally” raised a fund.
  • “I had a great string of beginner’s luck.”: Three investments in 2008 — TaskRabbit, ModCloth, Zimride/Lyft
  • “Each one of those founders, as much as I took a bet on them, they took a bet on me.”
  • Spring Quarter: Will be teaching MS&E 275

Hunting Thunderlizards

  • Not dinosaurs, but Godzilla
  • Born from radioactive, atomic eggs. Mutated from Day Zero.
  • Swim across the Pacific, and end up in San Francisco, emerge from the Bay with an attitude and wreak havoc.
  • 1) Converts advantages to disruptive power
  • 2) Minimizes technical and organizational debt
  • 3) Achieves product-market fit: “Uncontrolled pull from the market.”
  • 4) Avoids competition
  • Thunderlizards are exceedingly rare
  • Number of software companies 1980–2012 reaching key revenue milestones: 2,952 IPOs — > 826 $100MM rev — > 96 $1B rev — > 17 $4B rev
  • In any given year, only 25 companies exit for more than $500 million
  • FLOODGATE is the first institutional money in; $500K — $3 million checks
  • “We’re either really early, or way too early.”
  • “We try to make sure that the companies don’t accrue the kind of technical and organizational debt that will interfere with growth.”
  • The Value Stack:
  • 1) Proprietary Power: Avoids competition
  • 2) Product Power: Achieves product-market fit
  • 3) Company Power: Minimizes technical and organizational debt
  • 4) Category Power: Converts advantages to disruptive power
  • Proprietary Power (“This is the most evident at the start of a company.”)
  • 1) Proprietary IP: Ayasdi started with the Chairman of the Math Department at Stanford, and one of his graduate students. 25 years of research went into it.
  • 2) Access to scarce supply: DeBeers is the canonical example
  • 3) Creation of high switching cost: Keurig coffeemakers. “If I buy the machine, I’m probably going to keep buying the little K-cups.”
  • 4) Network effects: LinkedIn, natch.
  • 5) Authentic team: Lyft. “When Zimride first came in to pitch, they had this incredible story of how the founders met. When John talked about why he joined Zimride, he told this incredible story of how when he was at Cornell, he had this incredible professor who said, ‘Whenever there is a huge discontinuous shift in the economy, it has always been led by transportation.’ I want to be a part of that. When I invested in Zimride in 2010, it took two years to get to the product pivot that became Lyft.”
  • “Building products is easier now, but developing these insights is not. This means that there’s something that you know, that other people do not.”
  • Veeva Systems: “Every great startup has one fundamental assumption that has a less than 50% chance of being correct, but if true, will give you a 100X advantage in the market.” For Veeva, it was building their entire platform on Force.com: https://www.veeva.com/
  • “That’s what allows you to unlock the market power before anyone else does.”
  • Product Power
  • “Technology in search of a problem.” You have to convert proprietary power into product power.
  • “Product-market fit implies market power — a market that is large and growing, that often feels uncontrolled.”
  • When Instagram was launched, Mike realized that they had barely survived the weekend. They had until the weekend to move it from servers to the cloud, or it was going to go down.
  • “If you’re asking whether you have product-market fit, you don’t”
  • It is incredibly rare for a product to create the market; one example is VMware.
  • “The hardest kind of businesses to assess PMF are marketplaces. Because you have supply and demand, it can take longer to mesh.”
  • “I’ve seen entrepreneurs track all of their hypotheses in a spreadsheet. It’s as much an art as a science. You have to know when the experiment itself was flawed. You have to be honest with yourself about what went wrong in those tests.”
  • Instagram: As Burbn, it took 5 steps to post images. But people were doing that anyway. So they doubled down on it.
  • “When you do customer discovery, don’t say, “Take a look at my product and tell me what you think.” Ask them about their life, and that may reveal the product you should actually be building.
  • Company Power
  • How do you develop and reward talent? How do you foster clear communication?
  • Companies that have done this really well: Facebook, Netflix
  • Goes far beyond HR
  • “There are lots of unicorns today that are still searching for that scalable business model.”
  • “Without processes in place, you will incur both technical debt and organizational debt. You’ll see a company with 8 C-level executives. That’s organizational debt. People don’t think they have a career path. That’s organizational debt.”
  • “Are the founders open to thinking about these things, and are they open to suggestions? If the founder is going to be a CEO in the long term, these are the things they have to be open to.”
  • “How good are the founders at early hiring? What are they willing to give up to get the best people? We have one company that has been able to attract amazing talent from big companies. The CEO spends a lot of time thinking about how they do interviewing, what they put together as a compensation plan. They think about it just as much as they think about the product. When I invested in Ayasdi, one of the things that convinced me was that Gurjeet brought on this amazing product person. He knew what he didn’t know, and he wanted to surround himself with people who could help.”
  • “The founders who are successful are fairly generous with equity. They want people to feel like owners, not employees.”
  • Category Power
  • “When Netflix came in, they didn’t think that they were competing with Blockbuster. They destroyed the category, and built a new one.” Also: Starbucks, Amazon
  • “How does the founder think about the language that they use to describe their market? If they aren’t in control of the market, but are allowing the market to define what they are, that’s something that worries us.”
  • Can the Category Power ever come before the Company Power? “Category Power is external, while Company Power is internal. Some people will try to get Category Power by buying their way in. But in reality, it makes no sense from a unit economic standpoint. They are both important; you need a sustainable business model, and you need to find another way to get to Category Power.”

Q&A

  • What can you ignore at the startup stage? “What is the unique advantage you’re building today? What is that proprietary power? The second piece you can’t ignore is the product-market fit. I focus on those two, and developing the team. You don’t need to think about titles or career path at that point. The organizational debt starts to occur a little bit later. You need to be aware of the technical debt you’re incurring, but you don’t need to fix it. The most important thing is the speed with which you’re making decisions.”
  • “When a founder is frozen or needs more data, that’s the sign of distress.”
  • Does every founding team need an origin story? How can you tell if they’re authentic? “I like to see a tie between the idea and the team. Why you? Why do you have this unique insight that no one else has? For every single investment, that tie is there. But authenticity can come in many forms. Perhaps you’re the customer. Perhaps you’ve worked in the industry for some time and really understand the market. I ask, “Why you” in every single pitch.”
  • “There’s a moment in time in every single startup, where you march through the Valley of Death. In that moment, if this is one of 10 ideas you whiteboarded in your office, you’re more likely to flee the scene. We like it when the idea is the only one that they wanted to do.”
  • A lot of people are skipping the technology step, and starting with product instead. How do you think about technology-led versus startup-led. “We like to see some kind of proprietary insight, even if it isn’t technology. It could be supply chain or network effects. There are a lot of ways to lock a customer in in a proprietary way. Some people just come in at the product level, and most of the accelerator companies are coming in at that product level, and all you’re focused on is achieving product-market fit.”
  • How do you get comfort that this amazing technology will bridge to something that will become valuable in the world. “One part of my investing is what we call ‘radical science.’ The risk is that it is technology in search of a problem. The reason Ayasdi resonated with me was that in my PhD, I was dealing with complex data sets, so I had some empathy for why being able to take complex data sets and figure out what was inside them, was important. At that same time, we were creating a thesis for big data, and I had decided that when data became that big and complex, the big problem wasn’t how to store it or access it, but rather what you were going to do with it. I had spoken to banks and pharma companies, so I had some intuition that what Ayasdi was doing would be useful. We have another company called Enscopix that lets you see the mouse brain at work. The guy was really capital efficient. He took $1.5 million from me, and never touched it. Meanwhile, he sold $18 million of his devices. Now, he’s come back with what he thinks is the billion-dollar idea — Illumina for bioscience. It’s a big idea, and he had the time to come up with it because he was so capital efficient.” http://www.inscopix.com/
  • JL: The lesson is, you have to find the right investor. 99% of the investors Gurjeet pitched probably had no idea how to think about the company. You just learned something about Anne’s patience around science. “I’m interested in security, which is what my research focused on, but I’m scared of investing in it because I know all the problems.”
  • Marketplaces: TaskRabbit, Lyft. JL: We talk a lot about liquidity. Are the transactions clearing? We look a lot for inflections in liquidity. “One of the most important pieces of a marketplace is not demand, it’s supply. At the earliest stages, how effective are you at getting suppliers on board, and how loyal are they to your service? A lot of times, that actually leads to demand. If your supply is loyal, the demand will come. If you turn on Lyft and there are no cars, you’re probably not going to try it again. In TaskRabbit, if you have a lot of people bidding on a job, to the demand side, it looks like a thriving marketplace. Balancing supply and demand is easier when you have a lot of suppliers who are committed to the marketplace.”
  • What do you like to see in founding teams? “We’ve invested in solo founders, but the healthier dynamic is to have at least two. Five is too many. It’s very lonely to be a solo founder; you feel like you can’t ever escape and you’re a prisoner of the startup. With a dual team, you feel a social pressure to stay in the game; there is a teamwork element that can be very helpful. Also, every person has a weakness. To the extent that you can round out one another’s edges, we like to see that kind of yin and yang. In our own firm, me and Mike, you just look at us, and we’re clearly very different. He’s a lover, not a fighter…I’m more of a fighter. I’ll get mad about something, and he’ll say, “That’s not a big deal.” But when we were negotiating our lease, I got sent in as the pit bull, and he came in to make nice afterward. We do like to see someone fairly technical on the team. If you completely outsource your development to Costa Rica, we’re unlikely to invest.”
  • Is homogeneity important? “You need to have agreement on vision. If you’re arguing about everything, you just lose too much time. That might be on technical stack, for example. But diversity in terms of perspective is very important. I don’t think you can go from a homogenous organization to a diverse organization later on. It’s very difficult.”
  • How do you help your companies figure out how to hire? “Some of our companies come to us for help, and we’re involved in interviewing or closing candidates. If they’re asking us for candidates, that’s a problem. The best companies are using their employee base to unlock the latent talent in another organization. They’re just picking great talent from other companies one at a time. They’re snipers. ‘I worked with the smartest person two years ago. I’m going to convince them to come work with us.’ Recruiters and job boards are tactics, but the best candidates are internally found.” JL: It’s a little easier to be a sniper when you’re a deep technical company.
  • Lyft’s pivot from carpooling to drivers (which Uber copied as UberX): “Zimride was constantly experimenting. They had sold this carpooling platform to 100 universities, Facebook, Lawrence Livermore. The hypothesis was that if you got all these campuses, the networks would interlink, and you’d have something. That wasn’t going fast enough. So next they looked at bus routes from SF to Tahoe, and SF to LA. Logan rented a van and drove these routes. That didn’t work either. None of them felt like product-market fit. Lyft was just yet another experiment. ‘Mobile is big.’ The first time they pitched me, it was women drivers and women riders. By the time I got back to my office, they said, ‘We’ve already dropped that.’ They’re really nice guys, and I would tell them, ‘You need tiger’s blood.’ They showed their resolve when they proposed Lyft. They launched it. Tommy Lee, the Stanford Tree, came into my office, and told me, ‘This is going to be huge.’ There was this Zimride platform hanging over their heads. We took a long walk around the Giants ballpark. At the end of the walk, the conclusion was we need to move everyone on to Lyft. It looks obvious in retrospect, but consider how bought in they were into the vision. You’ve sacrificed weekends and birthday parties to build something, and it’s not working. And this other thing that you’ve built is. And now you have to shut down your baby. It took a lot of courage to aggressively take that step.” JL: It’s hard to even see it; you’re so committed. “You’ve sold your investors and employees on this vision; it’s hard. Pivoting is hard — you feel like you’re going to throw up.”
  • “There was this one guy who made the pink mustaches, and he must have thought he won the lottery. Eventually, I think they brought the guy in-house.” JL: Did they ask the board? “They told us, and I think the board said, ‘That’s interesting.’”
  • How do you keep the employees bought in? “They were running experiments all along, but the big shift was shutting down the sales team that was selling to universities, and shifting them to getting as many drivers as possible. When you saw it taking off, I think everyone was bought in.”
  • Lyft vs. Uber: “We never talk about Uber. Companies are different, not better. There are a lot of P2P ride companies — the reason why Lyft has maintained an advantage is that it had such a differentiated experience — the fist bumps, the pink mustaches. The irreverence of the brand has also created a differentiated appeal. That’s why Lyft Line works so well. It’s an experience that translates generationally. My dad had triple-bypass surgery, and my mom and I weren’t available to take him to a checkup. So I trained him on Lyft. When he got back, he called me and said, ‘What an incredible experience. I pressed a button, and the nicest man showed up to take me to the hospital. And he asked me about my life, and was I feeling okay.’ That’s something that’s very defensible.”
  • “It’s a marketplace model, and there’s a huge battle for supply. Do you fixate locally or internationally? Lyft has picked its battle.”
  • “Lyft has a lot of the Thunderlizard characteristics.”
  • Are you investing more in founders’ knowledge, or the fact that they’re quick learners who can adapt? “We can wait until another founder who shows up who has both. We’re fairly selective — I might make four investments in one year. I’d prefer someone who is fast, but I’d rather have both that and authentic insight into the market.”
  • JL: I’ll fall in love with my investment. Then I’ll fall in hate with it. Then I’ll love it again. After I make the final call, I feel like throwing up. It’s nerve-wracking for the investor as well as the entrepreneur.”
  • “If the idea isn’t controversial, there are so many people working on it already, it’s hard to be the winner.”
  • “Often, the best investments are the ones where Mike or I says, ‘I don’t get it, it’s stupid,’ and the other one says, ‘I don’t care, I’m doing it anyway.”
  • “We passed on Airbnb — they had made more money off selling cereal than renting rooms.”
  • How much do you worry that PMF is local/geographically based? “If it’s local, we really worry. Is this a Blue State, wine-sipper business, or will it appeal to Red State beer-slammers. We prefer Red State beer-slammer businesses, because they’re more likely to have broad appeal.”