My bet on NYC

I made a personal and professional bet on NYC this year. After founding a company in CA and two in Boston, I was apprehensive about moving to a city in which I had never worked, and perceived as a finance town. As I left a tech event last week, I thought to myself, this has been the best decision of my life. The NYC tech ecosystem is a work in progress, but I’m happily here for the long haul.

NYC tech is welcoming and collaborative

There is a fair amount of clique-ness to venture capital. There are times when it reminds me of my high school. Most of the time, however, I have found the atmosphere in NYC to be collegial and collaborative. Within our portfolio, I’ve been amazed to see how many founders know each other and regularly connect. We hold a number of events for our portfolio and they ask for more, often following up with each other on various topics.

Historically, the tech ecosystem was an afterthought in the broader NYC economy. The funny thing about venture capital in NY is that most folks here lump it in with Wall St (imagine that in the Valley!). The tech community still feels like it has something to prove. My favorite example is the “Made in NY” logo co-opted from the film business now imprinted on virtually every NY company’s website.

The east coast corridor is a real strength

Much is made about Boston vs NYC.  However, the ease with which you can get between the cities has made for some pretty interesting cross-pollination. Some of the best VC firms originated in Boston and have expanded to NY.  Moreover, I’ve connected NY companies with really capable engineers from Boston who have joined those companies. Similarly, we often recommend NYC PR and design agencies to our Boston companies. There’s no doubt that NYC and Boston are amazingly complementary when it comes to company building.

NY is young but lacks a deep bench

I think I’ve seen only two blue blazers since I’ve started at Founder Collective NYC! The average age of entrepreneurs I meet in NY is late 20s. My observation is that NYC lacks a “deep bench.” There are some real standout entrepreneurs, but I’ve seen a fair share of CTOs with less than 5 years of commercial experience. My view is that the VP corps of a company are often the most impactful in a venture. These are the folks whom, after an exit, go on to start the next great cohort of companies. That hasn’t quite happened yet in NYC, but it does feel like its coming.

Entrepreneur-friendly, but expensive

I can take 7 meetings a day, grab a drink with a portfolio company and be home before my kids go to sleep. This is a real structural advantage of NYC. I bump into entrepreneurs and investors in SoHo, Flatiron and even on the Upper West Side. NY lends itself to a lot of f2f which is important for a business that, at its core, is very f2f.

Many lament the cost of living and working in NYC. There’s no question that this makes it difficult to have a family and work in a start-up. That said, I’ve been amazed at how scrappy NYC entrepreneurs can be; I’ve seen companies that have a dozen employees working out of the founder’s living room. Many of our companies leverage co-working space, offshore labor and contractors while keeping their core in the city.

The NYC tech scene is evolving at a start-up pace. Like any venture, it’s iterative. The venture world is changing in many ways and this bodes well for NY. I bet we will look back in a few years and marvel at how the NY tech scene is as much a part of the NYC economy as fashion or media today. Who knows, maybe a successful entrepreneur will become mayor someday!?

Putting the “hard” in hardware

I woke up in a cold sweat. Our camera supplier filed for bankruptcy – we were single sourced and GA was only a few months away. Our Director of Hardware calmly shrugged, “hardware has the word ‘hard’ in it for a reason.” Thoughts of managing supply chains, quality issues and CoGS models still give me the chills from my experience at Brontes and Sample6. At Brontes, we built a custom 3D scanner out of 27 custom lenses,  300 LEDs, and it took 18 months.

“Guts” of a Brontes scanner

Having seen a dramatic increase in the number of new hardware start-ups, I’ve been thinking about whether its easier today to do hardware?

Here’s why it’s gotten easier …

Today’s hardware companies focus less on the hardware itself and more on wrapping a software layer on top of often off-the-shelf hardware. Arduino (open source hardware prototyping) and things like Atom’s Express (a portfolio co) allow for rapid hardware experimentation.

Additionally, incubators aren’t just for web-heads anymore. Lemnos Labs in the Bay Area, New Lab in Brooklyn and Bolt in Boston, serve as great resources. In the past, I spent months searching for lab space and buying used equipment on Overstock.com. Today’s hardware start-ups begin product development on day one. Couple this with the rise of 3D printers like MakerBot and services like Shapeways, and it has become easier than ever to create prototypes and bring them to prospective customers, partners and investors. Crowdfunding sites like Indiegogo and Kickstarter provide a forum to take pre-orders and gauge demand, while generating cash flow even before the first article is made.

But it’s still hard …

You can’t start a hardware business in a Starbucks! Hardware requires more capital and takes longer to get to market. Hardware is often evaluated as much on look and feel as functionality or value. Thus, costly services like industrial design are  needed which  forces the trade-off between design and speed-to-market. Perhaps most importantly, many consumer hardware start-ups compete against the behemoth electronics brands and thus struggle to get distribution (or give up 30-40 points of margin for it).

Go for it …

We fund a fair number of hardware start-ups at Founder Collective. I love meeting hardware companies. My view is that hardware is a field where experience matters, so I encourage hardware entrepreneurs to get someone on board in some capactity with experience sourcing and managing vendors. Also, business model creativity is really important given the risk of commoditization. Consider models like renting or pay-per-use to create recurring revenue. Finally, bake as much functionality as possible in the software and enable over-the-air updates. Tesla is a great example of this (for ex. they’re changing the software to increase the height of the car to reduce the risk of the battery catching fire on highways).

Hardware start-ups are hard. But when you get it right, there’s nothing quite like bringing a new physical product to the world.

Yes, the goal posts keep moving

 

Goal post

It was one of my least favorite aspects of raising money. Time and time again I would ask VCs to articulate what metrics would be required to close funding. Inevitably I’d be left unsatisfied and wonder, “why does it feel like the goal posts keep moving?”

The answer has come into focus now that I’m on the venture side and it’s unsatisfying and simple. They are moving.

No such thing as hard metrics

Some investors might say I’d need to see “x” pre-orders for a hardware start-up, “y” downloads for a mobile app, and “z” revenue for an e-commerce company. Yet, such a formula is misleading to entrepreneurs (and bad investing). There are no precise metrics for getting funding, given how many intangibles go into building start-ups. Much like applying for college, kids with lower SAT scores get accepted to better schools and vice versa.

The venture market is more like the stock market than you think

We often think of the venture market in very different terms than the stock market. It feels like a cottage industry, more like the local real estate market than the broad securities exchange. The reality is that investor behavior is more similar than different. Macroeconomic factors impact the venture market – increasing stock values, economic data and even political conflict has an impact on capital raising for start-ups. Like the stock market, the venture market ebbs and flows.

Investors are influenced by their portfolio & deal flow

Let’s say you’re an e-commerce company doing $25K in monthly sales when you first sit down with a VC. The investor seems enthusiastic about the company. You come back a few months later doing 4x the sales looking to close the funding. Instead, the VC seems much less enthusiastic than the first meeting. What happened? It was a 4X!

Perhaps one of the e-commerce companies in the portfolio hit hard times and that colors the investor’s view. Or, maybe a new opportunity surfaced in the meantime that makes your company appear less attractive on a relative basis. None of these reasons are rational, but nonetheless impact the investment decision.

So what’s an entrepreneur to do?

One of my trusted mentors, Jeff Bussgang, said to me “VCs are in the extrapolation business.” It’s sage advice. Rather than focus on individual data points, the entrepreneur must generate data that demonstrates an upward trajectory of the business. Unfortunately, the x and y coordinates of these points are not obvious.

I discourage entrepreneurs from asking VCs to articulate metrics that will trigger funding. Instead, think about the risks of the business and identify the metrics that best address those risks. Don’t look to VCs to lay out a path for funding. Instead, knock down the risks you see and frame those metrics as the ones the prospective investor should care about.