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Weary of ‘Fruit Fly’ Consumer Startups, Andreessen Horowitz Raises Series A Bar (wsj.com)
116 points by _pius on Oct 10, 2013 | hide | past | web | favorite | 95 comments

I know it's been true for a while, but "pivot" is really gone from "alter part of the business while retaining certain aspects of it and the company's core strengths" to "pitch an idea in the trash and start over."

Properly pivoting an idea probably should not be too disruptive to investors' investment thesis, since the pivot is happening because a new, clearly better route has been uncovered in the process of the first idea that the team can leverage their past efforts in executing on some tangible way. If you're really going to just try a completely new idea from scratch, it would make sense to refinance the business and give investors a chance to take their money out, but that's hard to legally structure obviously and would take too much time.

So I get the sense that AZ is saying a lot of startups aren't pivoting really but just pitching and starting over too often if they fail to get initial traction quickly enough. This combined with the illiquid nature of startup investments forces them to not really know what they are investing in and be stuck with it once it materializes.

People have started to forget that startups generally take a long time and a lot of work to build momentum. It's easier to just pitch what you have and jump into the next shiny thing. Particularly when you have ridiculously long runways due to low costs and absurd valuations. I blame the ridiculous liquidity in deals right now combined with the "fail fast" culture.

Pivots can land a VC with a conflict of interest, where two non-competitors suddenly pivot into each other's space.

The classic example was PicPlz and Burbn (renamed Instagram after the pivot), the VC in question was a16z


If the value in most startups -- as evidenced by the practice of acquihiring -- is really just the team, then a pivot would be anything which changes the business while keeping said team.

The value of most FAILED startup can be salvaged from the team, you will never see a startup with a valuable/popular product gets acquit-hired. Sure, the team has value as engineers, but a company that keeps failing with their products and keeps "pivoting" puts doubt on the value of their founders as entrepreneurs (they may still be brilliant engineers). VCs like to invest in entrepreneurs (especially entrepreneurs who are also engineers). So the quality a VC looks for from a team is drastically different than the quality a bigger company looks for when they acquihire a team.

Since most startups fail wouldn't this make the parent's comment true?

Not if you go by investment returns...

This is obviously not the case, otherwise VC's would not analyze the business model or product at all when making investments. On the contrary, the particular idea and plan take on a large part of the investment thesis. In fact, the pairing of the team and the idea (can this idea be executed on by this team? do they have some unfair advantage in this area?) is an important factor as well.

In other words, what you're doing here is basically redefining pivot so as to be meaningless.

It is interesting that a16z is making a public announcement following the angelist syndicates announcement a few days back. The initial sentiment with the angellist event was that it will drive down VC fees, angels and founders will be king and take more control etc. However, a16z and by proxy (I suppose) silicon valley VC community is making a public announcement that they will not be funding series A anymore. It could be lead to some interesting outcomes.

1. Via Angellist syndicates it will be easier to raise up to $1 Million (maybe half). So you will have a bunch of companies that get funded via this super series/seed/angel model.

2. Then they will hit a roadblock, they will not get any $10-$20 Million to fund growth or get a true product/market fit.

3. The vast majority of the companies from step 1. will be wiped out because even if they have a hint of product/market fit, they will not get funding.

4. The tiny minority from step 1. that can get funding for Series B. in the range of $50Million or more will wipe out all other startup in the category and capture all the gains. This in turn means a16z and the likes will be able to extract a lot more stake out of the angels and the founders.

Net net, won’t be surprising if angellist and other crowd funders end up losers in the process and returns go to a16z and their compatriot VC’s.

Love VC double speak in the article. You know how politicians talk, when they have to pass some unpopular law they invoke the common man and the small business owner. Scott Weiss from a16z is a standup guy. Always fighting for the engineer founder. Fucking those MBA types since the beginning. Please elect him to be your VC. If AirBnB showed up at a16z do you think he would turn them down (non-engineering, MBA type company). Yeah, didn’t think so :-)

Just to be clear we didn't publicly announce that we are not doing Series A investments anymore. They remain the bread and butter of what we do. Scott was making a more nuanced point about a difference between how we look at consumer vs enterprise companies right now, and our relative preference for enterprise A's and consumer B's.

Re AirBNB, (a) we are an investor in AirBNB, and (b) the founders are extremely sharp product people and technically very deep. The CEO is a designer by background, like Ben Silbermann at Pinterest, another investment of ours. Both are hypercompetent product people with deep technical chops.

If you haven't found market fit on $5M, which you can raise on AL, you need to fold, not try to raise $10-$20M. No one will give you that kind of money without mega traction.

I don't think your numbers will work out. It is going to be very difficult to raise $5M on AL. Here is an example of someone who raised $250K. He needed 35 backers[1]. This is during the heady starting days. At an average investment of $10K to $20K you will need 500 investors to get to $5M. How will this work with so many investors? My guess is you will get to $1Million, tops and stop. I doubt you can show market fit with $1Million.


The numbers are already working.

Crave just raised $2.5M on AL - see http://blogs.wsj.com/venturecapital/2013/09/19/50-shades-of-...

Crave is showing lots of fit - market or otherwise.

With AL syndicates, getting to $5M for a hot startup on AL will be a cake walk. All you need is for a few of the top syndicators to get excited about you and you're at serious money. In fact, some of them are actively contemplating that possibility: see http://www.linkedin.com/today/post/article/20130928204536-24...

Heck it's barely worth getting out of bed for only a million dollars.

> and by proxy (I suppose) silicon valley VC community

I don't think it proxies that well. As the article points out, a16z raised a $1.5 billion fund, some top-tier firms might come close, but most of the mid- and bottom-tier VCs operate with the fund sizes in double-digit millions.

Also, for a highly contested B round, A round participants or brand-name VCs will get preference over a generic nondescript firm with a Sand Hill Road address.

Somebody from YC might correct me on this, but I think a16z's participation in automatic round upon admittance to YC comes with drag-along rights, which they can choose to exercise at either A or B rounds. So they don't have as much of a problem of missing on quality dealflow that others will miss on if they choose to skip A rounds.

I'm actually not even sure (without checking) if we have any drag-along rights from the YC Start Fund investments. If so, I don't think we have ever claimed them. We would never force a company to take our money if they didn't want to even if we had the legal right.

This shift is yesterday's news. Given their size, brand and PR, however, when Andreesen Horowitz does it, they get an article in the WSJ.

The reality is that tons of VCs have already migrated away from consumer startups.[1][2]

Data to support above

[1] 84% of 2013's largest exits in tech have been to enterprise companies - http://www.cbinsights.com/blog/trends/enterprise-tech-consum...

[2] 70% of 2013's largest tech financings have been to enterprise - http://www.cbinsights.com/blog/trends/venture-capital-enterp...

Disclaimer: I'm a co-founder of CB Insights - the firm that put out this research.

It is also worth noting that this follows a major drought in enterprise startups. I don't have the numbers (you might know) but enterprise startup activity took a gigantic dip after the 2000 crash when large enterprises en masse all but stopped buying new enterprise technology from new companies.

Looking at 2013 exits (or financings) is missing the mark. VC is a game of 1000x returns. And those returns have come from companies like FB, Google, etc. Most of the value of YC's portfolio come from Dropbox and Airbnb. All of these companies are decidedly consumer companies.

Recent enterprise home runs -- VMWare, Salesforce.com, Workday, SuccessFactors, 3Par, Data Domain, ... there have been a bunch. Just recently Palo Alto Networks, Fireeye, a bunch of others.

Sorry if my point was not clear. The article suggests a new insight into the venture landscape by A16Z given their shift away from consumer startups. Just trying to point out that the shift has already happened among VCs towards enterprise so this is not new.

Whether enterprise is a better area for VCs or not is a separate argument.

It's likely that Dropbox probably makes way, way more money from enterprise than from it's consumer business.

Google and FB, too, make most of their money from enterprise customers.

This is only true if you blindly ignore the fact that enterprise customers are willing to give them money because of their consumer backing. If consumers backed away from FB and Google, their enterprise customers would be following them out the door. Clearly this makes them consumer oriented businesses.

Yes - Box showed them that :)

> VC is a game of 1000x returns.

That's not true. Today, a lot of funds, particularly larger ones, are placing bigger bets on companies in later rounds, which is arguably a smarter strategy than trying to place lots of small bets earlier in the hopes that you'll get lucky and discover the Facebook or Twitter and have put enough into it to make your big percentage return a big absolute dollar return.

Taking Twitter as an example, its last round of funding in 2011 reportedly entailed a $9.25 billion valuation according to PitchBook. If its valuation at IPO is north of $20 billion, as some expect, the investors who poured $400 million into the company in 2011 would more than double their investment. If you look at Twitter's S-1, a lot of the biggest stakeholders were investors in Series C and beyond.

"...placing bigger bets on companies in later rounds, which is arguably a smarter strategy..."

Is it necessarily a smarter strategy? To me just seems this is the latest swing of the pendulum up and down the risk/reward curve. If factors change in 5 years, their "smart strategy" could begin to include more emphasis on consumer A's.

It's a smarter strategy at times I would say. For example, when the Fed is intentionally inflating a stock market bubble ala right now. That provides an excellent window to ride the public market to massive valuations completely unsupported by fundamentals (eg LinkedIn, Tesla, Splunk, Twitter, Facebook etc).

It's all fun and games until the stock market crashes again.

Can you list which enterprise companies had these large exits?

In which an MBA dismisses MBAs. And pivots are dismissed by a fund that is pivoting.

Speaking as a practicing fruit fly geneticist, the metaphor of a "fruit fly experiment" is lost on me... anyone care to enlighten me?

Fruit flies grow very quickly and don't live very long.

The corollary is Fruit fly populations mutate at a fast rate.

And there are a lot of them.

I would think that a practicing fruit fly geneticist would get excited when fruit flies come up, not snarky :-).

I didn't read that as snarky. I also don't understand the fruit fly analogy and I can understand why a fruit fly geneticist (who knows a few orders of magnitude more than me) isn't sure which aspect of fruit flies is the relevant one.

I'll go read several textbooks on fruit fly genetics and get right back on this.

Now that's what I call a pivot :) More seriously, I was just trying to point out a source of confusion.

In any case, I'd love to hear more about the enterprise space as it's something I'm interested in but have little visibility into. Elsewhere you mention 1200 execs (annually) tell you what they think of new ideas. Can you share any of the insights or problems?

I bet there are lots of nascent startups/ideas that may not realise they have an enterprise offering because they're not fully aware of the problems companies have. I'm working on turing some systems research work into a spinout and only recently have I begun to understand how valuable it could be to the enterprise [1]. This is partly because a lot of the tech stuff I see online is around consumer companies (my fault, I know - but I'm working on it).

[1] http://nymote.org

Here are a bunch of general observations:

* Enterprises have a continuous ongoing need for new technology. Some they build in-house but like anyone else they are mostly busy running their current business and so they tend to buy important new technology from technology companies. I bring this up because it was in doubt a while ago -- and enterprises really slowed down buying new technology between ~2000 and ~2008 -- but I think it's a constant truth.

* Just like consumers, in enterprises there are early adopters, mainstream adopters, and laggards. The good news is that there are almost always early adopters for any interesting new idea -- we always tell enterprise startups to look for the first 5 customers -- if you can make them happy, then you can reference sell to the next 10, then the next 50, then the next 100, then the next 500, and then you are huge.

* Consumerization of the enterprise is real. The bar on usability and ease of adoption is being set by the consumer product industry; employees are increasingly bringing their own devices and services with them to work; there are more and more enterprise products that can be bought and adopted bottoms-up.

* However, it is hard to get a lot of MONEY from enterprises through only bottoms-up adoption. To get the money, at some point you have to strap on your big boy shoes and go in top-down and explain to senior executives why your technology is going to give them real competitive advantage or save them a lot of money. (This is the "enterprises don't have credit cards" principle -- you have to go get the money.)

* There are real constraints around what technology enterprises can adopt and how they can adopt it. A short and incomplete list: internal bureacracy, sunk costs, existing vendor relationships, regulations, data protection laws (e.g. in Europe), security requirements, need for integration with existing systems. At first these seem very frustrating to deal with. Later you realize that these can become a source of competitive advantage for you once you are in. Figuring out how to navigate that is really key and something the best enterprise entrepreneurs are very good at.

This doesn't get into specific insights/problems that they have at any given moment but this is a good general framework to begin an enterprise discussion.

Having worked in enterprise field for quite some time, I feel that all consumer-startup driven innovation in terms of ease of use, UX, drastic decrease in cost, etc. only recently has been trickling down to enterprise, which has a much higher inertia and barriers to entry.

The CIOs are now much more open to new products than before even in very traditional and conservative industries, while the leading existing technology providers are not in a much better position to offer a new product, as they would be starting from scratch because of huge technological advances and a shift in development practices, all thanks to consumer startups.

Given a backing from an A-list player provides the needed boost in initial traction for enterprise startups, basically a "rolodex" of previous acquisitions and a network of CIOs, if an idea has a market, the failure rate can be kept at a minimum.

The only thing I don't understand is how an exit strategy looks like, as it seems only logical that there should be a monster or two on the enterprise market (Microsoft and Oracle of the 21 century), who should either acquire those products that succeeded or develop their own alternatives. So I'm pretty sure that in 5 years time the great consolidation is coming and it will become more difficult to develop a business out of a product idea.

I agree with your first three paragraphs.

On your final point, I think that's certainly possible. At least that's the historical cycle. There are actually a bunch of plausible acquirers at scale -- of the new companies Salesforce and Workday are certainly candidates, and a bunch of the older companies as well -- it will be interesting to see if a new CEO of Microsoft embarks on a major acquisition binge of enterprise cloud companies (perhaps in conjunction with spinning off or killing some of their less-successful consumer efforts).

However, it's also possible this cycle plays out differently, or at least at much larger scale and over much longer. The three big arguments in favor of this are:

* New enterprise cloud/SAAS vendors may be able to sell into much bigger markets than traditional enterprise software -- since there are many more companies that can use online services than could ever install and use enterprise software on premise. In particular, going downmarket is far easier with the new model. Plus, globalization and the developing world could dramatically increase market size. So new entrants may be able to get much larger as independent companies than the last generation.

* New enterprise/SAAS vendors may exist in many more categories than traditional enterprise software. New development/adoption/business models make it reasonable to think about a lot more horizontal and vertical applications and services than old enterprise software was capable of addressing. So maybe new vendors get much larger than anticipated since they can cover a lot more functions and verticals, or alternately maybe there are many more new vendors than we can conceive of now. We are already seeing a trend towards enterprise use of a lot more cloud apps per customer at this point in the cycle than a lot of people expected.

* As a consequence of the prior two, the independent market caps of the new cloud/SAAS vendors may end up being a lot higher than you might anticipate from history. This could really remove the incentive to sell hot new cloud/SAAS vendors as quickly.

I think these are live topics right now, and the answers will determine a lot of what happens in the enterprise startup ecosystem for years to come.

Basically, they can't compete at the A level now against Angelist. If you're a fundable startup, would you take $5M from any VC (even someone as stand-up as AH) with control strings attached or would you rather raise on Angelist and stay in control?

So the real funding opportunity for AH is at the B round, where as Scott says, they will go in hard.

Makes total sense.

That's not why :-).

This is not something they are choosing - it is a market reality. Its now possible to start a company and essentially get to a B round without taking investment because cloud services make it so inexpensive that founders really don't need VCs any longer.

Cloud services have gotten cheaper but talented hires have gotten more expensive, and the latter is always the largest expense in scaling. And no, you can't scale a company and keep head count ultra tiny, there's just too much to do.

Also not why :-).

To me this is essentially admitting that Andreesen Horowitz is loosing the ability to identify impactful startups. That is fine, its harder to do at scale, but nothing is different now than 5 years ago. We have lots of people doing experiments, some hit early success, some pivot. Once you get product market fit, you raise that B/C/IPO on the back of the growth you've been able to afford thanks to your raises and revenue.

Just as Berkshire Hathaway had to change their investment strategy when they grew very large, it is fine for AH to do the same, but I don't believe for a second that things are hugely different in 2013.

Maybe you're right, but that's not what Scott was saying and that's not what I think.

In my own words: consumer startups more and more have this very interesting "lightning in a bottle" effect where sometimes they take off like crazy and sometimes they just don't. I give full credit to the teams that figure out how to get the flywheel spun up, but it is also important to realize just how many highly capable founders are hard at work trying to get traction who don't. There are a lot of really excellent founders pursuing consumer ideas that just never work -- that's why companies like Yahoo and Google and others can do so many acquihires. So, if we have the theoretical ability to invest in a given category -- remembering that we can only make one primary venture investment per category -- in either the A or B round, we find it often makes sense to let other firms fund the A rounds before anything is proven and wait to see the early signs of lightning and then step in hard at the B. The end markets are so large for the winners that the investment returns in the B can still be outstanding, and we can still offer a lot of useful help to the companies at the B stage such as talent sourcing.

In contrast, enterprise startups are much more (take your pick) tractable, execution centric, brute force, predictable (as startups go). If you back a killer founder with a great engineering team, with a great idea, into a big market, the odds are high that magic will happen -- a very interesting product will get built, early customers will adopt, and value will be created. In other words, the link between founder/team competence and success is more direct. One thing that helps a lot is that whether the product will be adopted by customers or not is far less of a mystery -- you can simply go talk to the likely customers ahead of time and they will give you a very good indication. That plays well to our market development program where 1,200 big company management teams are coming through our office every year -- we ask them what they think about new ideas and they tell us. So here, backing the A round when possible makes more sense.

None of this is religion -- we still do plenty of consumer A's and enterprise B's. We just think it's useful to talk about these things in public so that entrepreneurs know before they come see us how we are thinking about things -- it optimizes their chances of getting to the right outcome with us (whatever that is).

>"That plays well to our market development program where 1,200 big company management teams are coming through our office every year -- we ask them what they think about new ideas and they tell us."

How about asking BigCos their top pain points once in a while? That would be a 1200x treasure for current/future entrepreneurs.

Yep, we do, and we set up many opportunities for our entrepreneurs to do that themselves. (I just got back from our annual CIO/CMO conference where there was a lot of exactly that.)

The comparison of enterprise vs consumer is a very interesting topic. Why the consumer traction is so much more unpredictable?

My working theory is that consumer ideas are both art and engineering. The art component either takes in the mind of the consumer or it doesn't. Like movies or music, sort of. Lots of great engineering teams can't get the art to work with high probability, and even the great consumer internet artists swing and miss as often as they hit (eg odeo vs twitter). And if the art doesn't take, the engineering won't save you.

Whereas the enterprise ideas are mostly engineering - or rather the art lies in really understanding the customer and the domain, which is relatively straightforward for the great enterprise entrepreneurs, because they are already so deep in it and you can easily go talk to the customers one at a time and learn what you need to know to predict success or failure with pretty high confidence. Not easier but different.

These are all gross over generalizations of course. I think of this as a framework for thinking - one of many - not a literal description of the truth in all cases. One lens.

I love this quote about art and engineering, music and film. Spot on. So as a startup founder, filmmaker, musician - here's my question: how are you ever gonna get these blockbusters/chart toppers without taking a chance. The biggest film in the U.S. right now (Gravity) is by a Mexican filmmaker who made arty films like Y Tu Mama Tambien and Children of Men - not hollywood stuff. Really breakout, worldchanging, consumer, Apple-style stuff is made by weirdos, punks, poets and freaks. With all the capital A16 has to deploy - why not create a fund for some of the crazy ones?

    Andreesen Horowitz is loosing the
    ability to identify impactful startups
Pet peeve: it's losing, not "loosing".

I don't know if anyone can properly guess if a consumer startup is going to get traction until it does, especially in the mobile space. That said, they did manage to get a 312x return on their seed investment in Instagram (which they declined to invest in a second time as explained here: http://bhorowitz.com/2012/04/22/instagram/)

A-H offers seed investments to YC companies in order to get a foot in the door with the small fraction who will succeed. Offering blanket seed investments confirms that they really don't have any idea at first either. There's nothing wrong with that, it's just the nature of the beast. (http://venturebeat.com/2011/10/14/andreessen-horowitz-to-giv...)

This will probably come off as dickish, but that is not my intention.

No where in your comment did you outline where my reasoning is wrong. Losing vs Loosing. Instagram doesn't address why they are dropping series A investments. 300x growth on nothing is still nothing.

As for seed investments into YC companies, who cares? If they are getting out of the seed and series A game, I assume that that extends to everything else.

The fundamental point is that the further you move down the investment line the less you are likely to be able to identify revenue before it happens.

I don't take it as being dickish. When did they ever have that golden touch you refer to?

None of the exits, except Instagram, listed on Wikipedia were invested in at a seed or A stage. http://en.m.wikipedia.org/wiki/Andreessen_Horowitz

alternative perspective VC SV startup is at a tipping point and "smart money" is being more cautious ( conservative ) as the market swings down .

Or maybe they are actually loosing the ability, like loosing the hounds of war! But I doubt it.

I don't know if anyone can properly guess if a consumer startup is going to get traction until it does

A classic example is the drug Viagra, one of the most profitable consumer technology investments in recent history. Its (most profitable) use today was originall reported as a "side-effect" in early clinical trials.

Losing the ability to identify or losing the desire?

When you get down to it, if you have a $50m fund, you might want to invest in ~10 A-rounds at ~$5m each. If you have a $1.5bn fund however, do you really want to invest in 300 A-rounds?

Nope. The best way to spend your time is looking at the bigger, later investments. You probably still only want to have roughly the same number of total investments to oversee. So if an A-round company is gonna take the same amount of attention as a B-round or later, you shouldn't waste even a second of your time considering them.

It's nothing to do with ability to identify, just correctly prioritising the time the VC's have available to them.

In our case that isn't actually how we think about any of this.

First, when we (or any venture firm) makes an A-round investment, we typically reserve another 2-3x of the A-round investment size for participation in future follow-on rounds for that company. So a $5M Series A shows up on our books more like a $20M commitment. The other $15M isn't necessarily always deployed, of course, but we also double down even more strongly in certain cases (either out of opportunity or sometimes necessity) so it balances out.

Second, it's not either/or -- we do venture rounds as small as $3-5M and we do growth rounds as high as $100M. Each fund has a blend of both.

In practice, we don't pay a lot of attention to any of this. When we get a great A round opportunity, we take it. Same with B rounds, and same with later-stage growth rounds.

Interesting to know, thanks. My example was probably a bit too hastily made-up.

So I guess in summary, it's not so much about investor time and attention but mostly about managing the risks of the different sectors.

Consumer startups are inherently less predictable and therefore you invest only when a company appears to have found its market and be at least partly on the way to success. Whether that be A round or later is irrelevant.

Whereas the enterprise startups are more predictable, in that if you find a great founding team with a good idea, they are more likely to make a success of it in that sector. Therefore you can cast a wider net, earlier in the lifetimes of the companies, than you would for consumer startups.

Or to summarise the summary: A good, predictable bet is better than an unpredictable one. Or maybe, never look a gift horse in the mouth?

Generally yes. Distilled down, quality of team seems to be a better predictor of success in enterprise than consumer, in that we see many more great consumer teams struggling to get traction than we do great enterprise teams struggling to get traction (on a proportional basis). There are many other factors for both but the "lightning in a bottle" element for consumer startups is real and very frustrating for teams that end up not being able to capture it.

I would just take out "only" from your comment -- there are exceptions everywhere. When we talk about patterns like these, they really are only patterns -- the truth is always in the specific details.

Has the number of tiny trivial startups increased lately? Judging from demo days, I would say yes. The startup is the the new garage band. If you like what you hear, we're selling CDs after the show.

Is that bad though? We've democratized starting a company. Not everyone needs to be a $1B exit or even a $10M exit.

Yes and no. The signal/noise ratio is certainly lower, but there is also more signal overall, if you can sift through the noise.

I suspect this is more of a PR move about their focus than anything else. We'll have to see how it plays out, but as a16z grows, I'm sure a ton of Series A deals are trying to get an intro, this leads to overhead and a mass of companies that a16z doesn't feel are a good fit for the exponential returns they are looking to get. Get rid of those companies by saying we don't do series A. But they'll still get deal flow through their contacts, and I'm sure if an amazing Series A opportunity comes through, they'll jump on it. Nothing here is stopping them from investing, they're just saying "if you're looking for Series A, don't come to us".

My question is how does investing in YC companies at seed stage, but then blanket refusing to invest in those companies Series A deals reflect on those companies? Or is this another reason to state loudly that they don't do Series A deals? That way it doesn't reflect badly on the early stage companies that existing investors aren't re-investing. Then, if they do decide to invest in a YC company series A, it's a positive response, rather than the expected.

I think Scott's interview is being overinterpreted. We aren't blanket refusing to do Series A investments -- in fact, we are working on multiple Series A investments right now (both consumer and enterprise). Scott was describing our framework for thinking about consumer vs enterprise in the current environment, not laying down the law on what we will and won't do.

Interesting when read right after this from another z16z partner: http://bhorowitz.com/2013/10/08/cash-flow-and-destiny/

At what level of traction would you recommend entrepreneurs start pitching for a consumer series A?

If an app has, say, one million (non-transactional) users, is that interesting? 100k?

One of the hardest things I found with fundraising was calibrating expectations for each stage. My last startup was enterprise, and there were investors who told us we needed one hundred customers to raise a series A and investors who told us two enthusiastic customers were enough. Nowadays, the expectations for enterprise have gotten clearer, but in consumer there's new ambiguity since you hear people say things like "10m users is the new 1m users."

I think it's mostly situational depending on the kind of business.

For the classic, pure, viral, social and/or user-generated content businesses -- that will probably be monetized with advertising -- the generic headline metrics like daily/weekly/monthly active users and engagement/retention rate are important. There are just so many new products that attempt to be the next Facebook/Twitter/Youtube/Pinterest that showing that you are already punching through the noise is pretty important.

For two-sided marketplaces (the next eBay/Etsy/AirBNB/Uber) it's most important to have a real theory about how you're going to get both sides of the flywheel spun up. The traction doesn't need to be gigantic but there needs to be a real plan. We still see too much handwaving in this category -- it is REALLY hard to spin these up from a standard start and most simply languish and die.

For ecommerce and ecommerce-like busineses (the next Fab/Ziluly/OneKingsLane/Zulily), the most important thing is showing a model, with initial proof, of how the cost to acquire customers is less than the lifetime value of those customers. For example, in recent years it has become harder to build these businesses based on Google keyword advertising -- search volume isn't growing very fast, and lots of people are trying to acquire customers in most categories, and so keyword ad rates often get bid up to just past the point of unprofitability (the delta is the amount of excess funding going into businesses in these categories). So creativity on customer acquisition -- and showing that in economic terms -- is key.

I think that a credible team with any of this in reasonable shape from a seed round is not going to have trouble raising an A in this environment. But for those that have already raised an A, it has become really critical to have these factors nailed (whichever are appropriate) to be able to raise a B.

Finally, probably obvious but worth saying -- investors are all over the map on all of this stuff all the time. It's very valuable to be able to prequalify investors for interest and knowledge about particular categories -- and frankly IQ and judgment -- prior to meeting with them. Good advisors and angels can be very helpful with this. This is also why we try to be transparent on these topics (such as with Scott's interview) -- better for us and for entrepreneurs to know how we think before they walk in the door.

Why do you consider Uber to have the marketplace problem? If it is as simple as hiring new drivers, isn't it more of a general business scaling problem, similar to hiring more engineer to scale up more features in purely software startup?

Uber had the marketplace problem when they started but they figured out ways to punch through it, as has Lyft (our investment). Both companies have a range of clever techniques for how they did that. Drivers are not full time employees for either company so it's not as straightforward as just hiring them but money certainly helps in both cases.

Somewhat odd because some of the most valuable enterprise ventures recently have begun as consumer plays with a path to the enterprise. Dropbox is one example. The iPhone was consumer before enterprise. Github focused on individual debs before it made its enterprise play. I'd argue that AirBnB kind shows the same because I've noticed an uptick in the number of business travelers requesting to stay with us (i.e. they expense they Airbnb stay).

The enterprise is increasingly consumerized so any play that offers that opportunity should be interesting.

Great post, but I think when they talk about consumer they are talking about totally free consumer facing time-sink eyeball-monetization companies like Facebook, Twitter and Pinterest. I don't think they consider consumerised enterprise to be in the same category. I could be wrong though.

Yes, I (roughly) agree. The consumer companies Scott was talking about are ones where they need to generate a "lightning in a bottle" effect to work as investments. There are other kinds of consumer companies that are much more straightforward to analyze -- for example, those that pay to acquire customers and have a model to make money by doing that.

Two things are worth highlighting in your comment. One is that the examples are "yesterdays" companyies that are not all that new (in dog years;). Two, is that the entry point and the profit sweet spot were not the same. The Bet now (as per the article) is that markets that before were not likely adressable directly, are now so. Ie, there is a change in the enterprise maket (ie, latent demand) that is now directly accessable as a go-to-market strategy.

Agree. However I'd say that for technology (software and maybe now hardware), consumer to enterprise is the new normal. Meteor for example is going this approach. Individual developers are not exactly consumers, but before a platform is ready for production most users are tinkerers, which in my mind is a consumer that is part of the maker movement. Eventually those maker consumers help take something to maturity where it eventually gets adopted by the enterprise. With the Arduino, Raspberry Pi and Beaglebone, I think we're going to see consumer hardware startups mature and at least one will be a huge hit because it's a consumer tech hardware company that ends up having enterprise tech hardware relevance.

I'd say that the biggest change in the enterprise space is that individuals are increasingly responsible for purchases as opposed to some centralized purchasing department. Grassroots IT is the only adoption strategy with an element of virality.

I will go on record to say that Rap Genius is the most ridiculous investment ever, and that it will tank with not a dollar in sight within ten years. If this is the type of startup Andreesen Horowitz are backing away from in B2C I would understand, but this is one of the consumer plays they did invest in. And now the message is that they want to invest in solid consumer startups only. Makes no sense to me.

Rap Genius is on fire (in the good way).

Good luck in jail!

Maybe it's a promo investment, this is something journos can get excited to write about, more so than another ERP or middleware solution.

Nope. We don't do those. It's the real deal. One of the fastest growing consumer properties of all time with huge market opportunity.

I worked for a consumer startup that fit the profile. CEO would come up with an exciting business model, raise money with the dream, staff up, fail the execution and then 6 months later lay off half the company to go lean, pivot and repeat. They've squeaked by with 4+ years in business doing this, raised tens of millions from good investors. I could definitely see why any VC firm would want to steer clear of a business like that

Why do you work there? And I don't mean that in a snarky way, I'm curious what motivates you to stay.

Not the parent, but "I worked..." -> past tense.

I don't anymore.

Whoops. That's what I get for posting at 2am.

Most successful funds place the majority of their dollars in follow-on rounds for their earlier investments.

Correct -- this is a key consideration for actually running one of these funds that is not always obvious on the outside. A $5M A round investment carries an implied commitment to invest $10-15M more in later rounds.

Always a bit depressing when you are reading an interesting article, from someone well respected, then boom sudden MBA bashing. :/

Scott is a Harvard MBA himself. Me, I'm going to let the MBAs fight it out :-).

Reading that article, I get the strong impression that A16Z really doesn't much know what the heck they are doing.

Yep, that's probably it.

Yes, it is.

Next to no one at A16Z is qualified to review new, correct, significant, powerful, valuable, useful technical material, review research papers in technical fields submitted to peer-reviewed journals of original research, be a problem sponsor at NSF, NIH, or DARPA, or be even an assistant professor at a research university in a technical field.

An entrepreneur with some new, correct, significant, powerful, valuable, useful technical material as the crucial, core technology of an information technology startup would face a serious threat with a partner at A16Z on their Board because that person would not be able to evaluate budgets and projects for new technical work for the company.

Reminds me of a joke

Time flies like an arrow. Fruit flies like a banana.

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