Crash Dev

Welcoming HasOffers to the Founders' Co-op Family

2013-05-21T09:55:00.000-07:00

One of Seattle's quiet startup success stories just got a little louder: as TechCrunch and GeekWire reported last night, we joined Accel's Rich Wong and Real Networks founder/CEO Rob Glaser in a $9.4MM Series A for HasOffers.

Founders' Co-op is a seed-stage fund so this is an unusual deal for us -- but then HasOffers is an unusual company. Founded by twin brothers Lee and Lucas Brown in 2009, the company won Bootstrapper of the Year at last year's GeekWire Awards for building a profitable, 79-person business with no outside financing.

I'm a huge believer in the enterprise mobile marketing opportunity -- with existing investments in companies like Urban Airship, Apptentive and MobileDevHQ -- so when HasOffers rolled out its Mobile App Tracking business last year I immediately reached out to CEO Peter Hamilton to learn more about the business. It didn't take long for me to figure out how excellent the team behind the business really was, and how big their ambitions were to play a central role in the huge and growing business of mobile customer acquisition.

Because the company was already well past the point at which we usually invest, my first impulse was to help connect them with the best Series A investors I knew who really understood mobile marketing. #1 on that list was Rich Wong of Accel, an early investor in both AdMob (acquired by Google for $750M) and leading mobile ad server MoPub (not to mention Rovio, creators of the Angry Birds franchise).

Peter, Lee and Lucas ran a very disciplined fundraising process which attracted participation from many strong firms and partners. But in the end, Rich and Accel emerged as the clear leader and best fit for the company. When Rich and Peter offered to include Founders' Co-op in the round we jumped at the chance to work with such an incredible team of founders + investors.

I'm incredibly excited to have the opportunity to play a small supporting role in what I expect to be one of the Pacific Northwest's next big success stories. I'm also delighted to see renowned Bay Area investors like Rich seeing the quality of our ecosystem and making significant new bets in the region.

Thanks to Peter, Lee, Lucas and the entire HasOffers team for welcoming Founders' Co-op into your amazing startup family -- I'm equally excited to welcome you to ours.

How to win by adding labor back in to your business

2013-05-19T15:11:00.000-07:00

Regular readers know that I'm obsessed with the Future of Work -- a catch-all phrase for the many ways in which the global labor markets are being reshaped by technology.

One visible element of this trend is the acute scarcity of digital creative talent, creating what I call "The Maker Moment"-- the current golden opportunity for people who possess those skills to both create and capture a disproportionate share of value in the global economy. (I've also invested directly in this theme by backing GroupTalent, a "CAA for digital creatives").

The darker side of this trend is the ongoing structural displacement of workers who lack skills relevant to the digital economy.

After several friends recommended it to me, I finally sat down yesterday to read Race Against the Machine by Erik Brynjolfsson and Andrew McAfee.

The book is a short, lucid read that perfectly captures the disconnect between traditional labor market analysis -- which assumes that we're in a cyclical labor downturn stemming from the 2008 crash -- and what's actually happening: a permanent reshaping of the labor markets by technology, in which an increasing number of job roles are simply being replaced by technological substitutes, never to return.

At a macro level, this trend has serious and scary implications for the future of the global economy and civil society: a world in which population grows and job opportunities shrink is one likely to experience significant hardship and social unrest.

While I don't see any obvious macro solutions to this trend, I do think there are some near-term opportunities to create job roles that -- while far from replacing previous full-time / high-wage employment -- do create the potential for meaningful work and earnings for participants in the digital economy who lack hardcore technical skills.

Lately I've found myself recommending to my portfolio companies that they add labor back in to their service offering.

I know this advice may seem odd to many of my peers in the startup community, but it's not -- or at least not primarily -- motivated by my concern for the health of the labor markets. Rather, it's based on repeated observations of scale constraints in traditional Software-as-a-Service (SaaS) business models, combined with steady innovation in, and acceptance of, Talent-as-a-Service labor platforms.

As an early-stage investor I work with dozens of developer-led organizations that begin their entrepreneurial journey with an almost pathological fear of human inputs to their business models; the tacit product vision for most of these companies, at least at inception, is the "AdWords dream" of customer self-service with no human-to-human interaction required.

This approach can carry a company a surprisingly long way, especially if they primarily sell to other developers. Atlassian -- a provider of cloud-based process management tools for software engineers -- is constantly promoting the fact that they've grown their business to over $100MM in revenues without hiring human salespeople.

But for most SaaS businesses -- and any that cater to the needs of non-technical customers -- Google's success with self-service at scale is a dangerous illusion.

The economic magic of the software industry -- which is what attracts capitalists like me to the business in the first place -- is its unique ability to support massively accelerating margins at scale by replacing labor inputs with machine intelligence. Each incremental customer for a SaaS business should -- at least theoretically -- only add pennies to your monthlyAWS bill but be worth tens, or hundreds, or even thousands of dollars of incremental revenue a month.

The problem with this theory is that most customers actually prefer to interact with humans to solve business problems, at least some of the time. A business that requires all customer interactions to be handled by machines can defend its margins, but only with an attendant loss in customer intimacy. This can work fine for routine / low risk interactions like online shopping (think Amazon.com)...

But when the service provided is new, complex, and/or strategically important to the customer, insisting that all interactions be handled through the browser virtually guarantees that the business won't scale.

Ten years ago this problem was most often solved by hiring full-time sales and support people to handle complex customer interactions. And this is still a valid approach for business models with long sales cycles and very high customer lifetime values.

But this approach doesn't really work for for the new generation of highly capital-efficient tech startups. Venture investors are quick to dismiss business models that rely too heavily on labor inputs as "services, not products", and lean / agile approaches to company development demand small teams that can adjust quickly to changes in market dynamics.

So how can an ambitious, fast-growing SaaS business hope to win by adding labor back in to their business model?

There's no single right answer to this question, but many encouraging alternative models are currently being explored by companies in sectors as diverse as online advertising (e.g, Trada), local services (e.g, TaskRabbit), and lifestyle retail (e.g, Stella + Dot).

To me, Trada is the most interesting of these because it attaches a labor-based service offering to the most self-service of all digital offerings: keyword advertising.

Trada's insight is that running an effective keyword advertising campaign requires significant human expertise. These skills are relatively new and most companies don't have in-house experts on staff. But rather than create a traditional consulting services business, Trada created a specialty labor market for keyword advertising entrepreneurs. Customers specify a target cost-per acquisition and set a budget, and entrepreneurs working on the Trada platform use their skill to acquire customers for less than the target cost, keeping the difference as compensation for their expertise (after Trada takes a cut for being the platform provider, of course).

The key insight -- which can be applied by almost any SaaS business targeting high-value work processes -- is to attach a contingent labor marketplace to your software platform that turns a DIY (do-it-yourself) offering into a DIFM (do-it-for-me) one.

This approach is made possible by the accelerating, technology-powered disaggregation of the labor market -- there are fewer full-time jobs available in enterprise, and more smart people willing to work in non-traditional ways that allow them to apply and/or develop marketable skills.

If you squint a little, it's actually not hard to envision a future in which most professional work takes place in these kinds of technology-assisted labor markets -- with tasks put out to bid and compensation based, at least in part, on quantifiable job performance.

A quote from Race Against the Machine sums this future state up perfectly:

"The key to winning the race is not to compete against the machines but to compete with the machines."

This isn't just good labor policy, it's good business.

Geekwire Awards Keynote: Turtles + Flywheels

2013-05-10T11:45:00.001-07:00

The crew at GeekWire -- Seattle's leading tech media + events platform -- invited me to keynote this year's Seattle Startup Awards. My notes for the speech are reproduced below (the picture is by Adam Loving) -- the same content, plus a video of the speech, can be found on GeekWire:

I want to talk to you tonight about two things:

Turtles
And flywheels

Some of you may have heard the story about the Hindu wise man who explained to a child that the earth rested on the back of an elephant.

"But," the child asked him, "what does the elephant stand on?“

“A tortoise” replied the wise man.

“And what does the tortoise stand on?” the child asked again

“Another tortoise” replied the wise man

This went on for some time until finally the wise man finally got frustrated and said: “Stop asking child, it’s turtles all the way down!”

To me, this is the perfect metaphor for a startup ecosystem.

When I was right out of college and trying to figure out what to do with my life, I thought I was supposed to get a job at some big company. And somehow I found myself living in Florida and working for AT&T, which had something like 350,000 employees at the time. And my part of the company was basically a credit card business, which is really a pretty sleazy business.

And I hated everything about it.

And I thought to myself, I’m clearly doing this wrong.

So I quit.

And I moved back to Seattle to work on a startup of Craig McCaw’s and it was like Alice in Wonderland when she goes down the rabbit hole. There were all these young guys running around just making it up as they went along, raising all kinds of money from the junk debt market and trying all kinds of crazy ideas.

And this was also about the time that the time the Mosaic browser came out -- and I remember subscribing to Wired magazine right when it first started and my brain was just exploding.

Because what I had discovered was that a company wasn’t some static, permanent thing that you had to fit yourself into, but a thing that anyone could make, and could change -- even I could change it.

And I spent the next 15 years of my life learning how to start businesses.

Sometimes I did it inside existing companies, and sometimes from scratch. Sometimes my partners and I financed them with credit cards and sometimes with venture money. And sometimes they worked and sometimes they didn’t.

But no matter how they turned out, I loved the work. I loved the people and the culture. And I knew I was wrecked forever as an employee and I’d never be able to do anything else but be an entrepreneur.

Then, about five years ago my business partner Andy Sack and I figured out that instead of doing one startup at a time we could actually build a startup that built startups, and we created Founders Co-op do do exactly that.

In the last five years we’ve invested in over 40 companies in the region. Those companies have gone on to raise more than $140 million in additional VC money.

But as I’ve learned what it means to be a startup investor, I’ve also realized that a startup to build startups can’t really be successful if the broader community it operates in isn’t also growing and developing.

So -- in addition to my day job at Founders Co-op -- I’ve tried to figure out how to help make that happen, and it’s led me to all kinds of places I never expected to go. The announcement today about the City of Seattle’s “Startup Seattle” initiative is just one example of what that looks like, and I’m proud to have played a small part in that story.

You see where this is going, right?

The startup community is just like that story about the elephant -- it’s turtles all the way down.

Whether you’re making your first leap from a corporate job to a startup job; or starting your first company as a founder; or you’re a serial entrepreneur who’s mentoring and investing in other people; or you’re Jeff Bezos, who’s in the process of reshaping huge chunks of the global economy; or you’re Bill Gates, who did the same thing and then took everything he learned as an entrepreneur -- and most of the money he made -- and is now trying to make the whole world a better place.

If you’re here tonight, you’re part of an extended community of people who weren’t content to take the world as they found it, but stepped outside the system to try their hand at making it better, or different -- more interesting, or more fun.

The startup community is the most welcoming and positive community I’ve ever been a part of. And once you’re in it, even as your role changes over time you just keep finding new ways to do work that matters to you, and to make the change you want to see in the world.

We’re all so busy that don’t often take time to think about how our work relates to the work of others in the community. Which brings me to my second topic... Flywheels

A flywheel is a store of energy -- the more energy you put into it, the more power it has. And the more massive it is, the more energy it can store, and the harder it is to stop.

For any one of us, on any given day, it can sometimes be hard to see how our individual effort amounts to anything. But when you start to string days together into years, and you look back, you can see how far you’ve come, and how much you’ve accomplished.

The truth is, it takes time to build anything of lasting value:

Our identities as people
Our role in the world
Our companies
The communities we live in and contribute to

The better something is -- the more powerful and lasting -- the longer it takes to build.

I grew up in Seattle in the ‘70s and ‘80s, and I remember what it was like before Microsoft, before Amazon. I graduated from high school in 1986 -- the year Microsoft went public -- and I left for the East Coast, and then the Bay Area, and then Florida.

I came back in the early ‘90s to work at McCaw until AT&T bought us, and then went back to California. And then I finally came back for good about a dozen years ago, and have been hammering away at my little corner of the local startup ecosystem ever since.

We often wring our hands about all the ways in which our community is less than other places -- fewer startups, less money, fewer big wins to our credit. I do this too.

But when I zoom out -- with the perspective of those 25 years, and having lived and worked in some of those other cities we compare ourselves to -- I can tell you with absolute certainty that we have built a flywheel of incredible mass, and that flywheel is spinning faster and faster.

Every single one of you in this room makes up some portion of that mass. And the energy that you expend each day -- on your own growth, on the work of your companies, and as a participant in our broader community -- makes that wheel spin just a little bit faster.

We are all of us, together, the co-founders of the Pacific Northwest’s startup community -- from Portland down south, right through up to Vancouver. And the thing we’re building together is already one of the massive flywheels of the global economy. And we’re just getting started

I want to thank Geekwire for being the convener + storyteller of our community and bringing us all together tonight to celebrate that work.

And I want to thank each of you for the work you do -- every day -- to build + spin that wheel

Thank you, and on with the show!

Software eats the organization

2013-04-18T17:00:00.000-07:00

Marc Andreesen's battle cry -- software is eating the world -- is true at both the macro and the micro level. As organizations become increasingly software- and data-powered, software development practices have escaped from IT to become organization- and process-design principles for the entire enterprise.

This point was driven home for me this week by Steve Blank's funny and self-deprecating post. "When Hell Froze Over - in the Harvard Business Review". In his (understated) words:

"The techniques invented in what has become the Lean Startup movement are now more than ever applicable to reinventing the modern corporation."

This shift from top-down / waterfall business and product planning to the iterative, customer-centric lean / agile approach has unfolded at blistering speed -- much faster than most large organizations have been able to cope with.

While thought leaders like Blank (and now HBR) have slowly won converts at the top of the organizational pyramid, line workers have led the first wave of culture change from below -- aided by SaaS vendors who have made it easy (and cheap) to adopt lean practices at the departmental level.

When an individual contributor in a big company can improve his or her odds of success by adopting a lightweight SaaS product -- whether in CRM, bug tracking, digital marketing or cross-team collaboration -- the first cracks appear in the dam.

And when entire departments -- and then cross-departmental teams -- shift big chunks of organizational workflow to these tools -- the dam is fully breached and organizational change must follow.

If it doesn't -- either because management doesn't get it or IT won't allow it (two symptoms of the same disease) -- these intrapreneurs will start looking for roles in more forward-looking organizations where their efforts are more likely to be rewarded.

This shift from waterfall to lean organization design is most visible at technology-driven companies like Amazon.com. Steve Yegge's controversial (and now redacted) blog post about the company's then-radical move to a Service Oriented Architecture (SOA) made a much larger point about the cultural change that followed:

Amazon's org design mirrors its engineering design; it is cellular, autonomous, measurement-driven and accountable down to the team and project level.

This kind of change comes less naturally to organizations where IT is viewed as a necessary evil, a collection of nerds tucked away under the CFO organization and kept out of sight while the real heroes of the business go about their important work. And unfortunately for those organizations, the dawning realization that software is actually the heart of the business will probably come too late.

But for the great mass of organizations -- big or small, for-profit or non-profit -- which are neither technology-adept nor technology-averse, the moment to embrace "software" practices like Lean and Agile as core organizational principles is right now. The ideas are free and the tools are cheap, but the ability to build an organization that survives and thrives in a software-powered future is priceless.

"Exercise Your Options in Washington"

2013-04-15T21:05:00.000-07:00

I was chatting with a startup lawyer here in Seattle the other day about California's recent income tax changes and their potential impact -- both real and psychological -- on how high-performing startup founders think about where to build their next company.

I'm mostly a tax policy skeptic when it comes to entrepreneurial decision-making; in my experience, success-oriented founders build their companies wherever they think they'll be most likely to win, and the local tax burden is considered not at all in their decision-making process.

But the recent level of angst among California entrepreneurs -- and the growing trickle of income tax refugees I've met who have relocated their families to Seattle in the past year -- has me questioning my assumptions this time.

I don't think Seattle needs to get all Texas about it, but we should be proud of how founder-friendly our local culture and policy environment really is -- and we shouldn't be shy about sharing the facts with our entrepreneurial friends down south.

My lawyer friend suggested a tagline for this non-existent founder recruiting campaign: "Exercise your options in Washington"

OK, so it may not be pure marketing genius, but it gets the point across.

If you hate the tagline but like the idea, feel free to weigh in below -- or shoot me an email -- with your suggestions. I'm at least half-serious about this, and if the broader community gets behind it I can think of a half-a-dozen ways to turn up the volume.

Creative commons image at top by: manleyaudio

Embrace the mess

2013-04-13T20:38:00.000-07:00

This post first appeared on Medium.com

Startup culture fetishizes simplicity.

In products, business models and founder narratives, points are given for clean lines and beveled edges, and deducted for rough spots, long explanations and run-on sentences.

Blame Steve Jobs, or @ev, for that matter — for creating this beautiful lie. Just don’t let their considerable magicians’ gifts keep you from spotting the machinery underneath.

I get sucked in myself. I’m an early-stage investor in part because I love the purity of a clean slate: just a couple of brilliant founders with a huge idea and no messy baggage to drag along.

But the older I get, the more I’ve come to appreciate a good mess.

Take Mark Suster’s recent (and excellent) series on the critical role of professional services in enterprise software. How many great young companies have failed to achieve meaningful scale because they drank too deeply from the 37signals Kool-Aid jug? How did the fallacy of “self-service” enterprise software become accepted as gospel by so many talented young entrepreneurs?

Managing people is messy. Humans don’t scale.

And yet the Goliaths of enterprise software all achieved dominance via small armies of consultants and “customer success teams”, who made sure that initial decision to buy metastasized into an ever-deeper commitment to the platform.

No, it’s not always pretty. Incentives get misaligned. Bad behavior sometimes follows. But taking humans out of the equation isn’t a solution, it’s a dodge.

Leadership is a solution. Values are a solution. Embrace the mess.

Here’s another example, a little closer to home (for me, at least): running a seed fund. I’ve spent the past five years learning the basics of early-stage investing. Find great founders, write them checks, how hard is that, right?

But every day I peel the onion a little more.

To run money you have to raise money. How do you do that? To find great teams you have to see hundreds — make that thousands — of not-so-great ones. How do you do that? You see more and better deals if you have a stronger local ecosystem. How do you build one of those?

What began as a simple life of founder meetings and startup hustle is now a tangle of tasks and commitments I couldn’t have imagined when I set out. Not just the obvious-in-restrospect stuff like fundraising and LP communications, but many, many more loosely-coupled activities: supporting accelerator programs, speaking and writing, volunteering on industry trade groups and government commissions, mentoring new investors and seeking advice from veterans so I don’t have to make every mistake from scratch.

It’s a mess. I love every minute of it. And — slowly, very slowly — it is making me more effective at the simple task that sits at the center: finding amazing people and helping them win.

Simple isn’t the opposite of complex, it’s just an elegant (and wrenchingly difficult-to-achieve) misdirection that tucks complexity out of sight.

Messy is interesting. Messy is valuable. Embrace the mess.

Microsoft, Amazon and the "Resource Curse"

2013-04-03T22:29:00.000-07:00

For the past week or so I've been devouring -- and hugely enjoying -- Daniel Yergin's comprehensive survey of the energy business, from the first oil strike in Pennsylvania, through the energy crises of the '70's and '90's up to the present era of fracking and (once again) abundant fossil fuels (natural gas this time around).

There's much to learn about the complex relationships among technology, capitalism, state governments and consumer demand in the book, but one parallel to the tech industry jumped out at me immediately: the paradox of "Dutch Disease" (also known as the "resource curse"); here's Wikipedia's definition of the latter:

"[T]he paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like mineral and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources."

I can't read that sentence without thinking about the sharply divergent cultures and strategic arcs of two remarkable companies: Microsoft and Amazon.

Microsoft could be the tech industry poster child for the resource curse -- a company seemingly blessed with a massively profitable and "sticky" core franchise (Windows + Office), but that has failed for over a decade to deploy that wealth productively in support of new initiatives.

Even the way the company prosecutes innovation -- dumping billions into late-mover attempts to imitate industry leaders (Apple and Google most notably), or grossly overpaying for "strategic" acquisitions that somehow fail to thrive post-deal (e.g., Avenue A / Aquantive, Skype, Yammer) -- seems to reflect a misplaced faith in overwhelming force over persistent excellence as the decisive factor in any given strategic battle.

Amazon, by contrast, is the company Wall Street analysts love to hate, because it keeps eroding its own operating margins with price cuts and reinvesting every spare nickel of free cash flow in new ideas instead of sensibly parking profits in offshore tax havens. A casual observer might accuse Jeff Bezos of deliberately starving the organization of resources, paying his people too little and working them too hard to attract and retain great talent.

And yet... seen through the lens of the resource curse, Amazon's thin margins and culture of permanent scarcity look like pure management genius.

How do you run a $60 Billion business where every employee still treats company money like it was their own, works like a dog and holds themselves and their peers to insanely high standards of excellence and output? Apparently, you never rest on your laurels, constantly harvest profitable lines of business to feed ever-faster cycles of innovation in new ones, and keep placing bets on the future without regard to competitors, Wall Street or anyone else.

This is -- of course -- a grossly unfair and ill-informed oversimplification of a much more complex and dynamic strategic situation facing two very different companies which grew up in two very different eras in tech. And there's nothing I'd rather see -- for the good of Seattle's ecosystem as much as for the company and its people -- than for Microsoft to re-emerge as a leader and innovator. But it may require a sharp and scary erosion of Microsoft's core revenue franchises -- triggering a real fight for survival -- for the company to shake off the torpor of abundance and regain its fighting form.

P.S. -- Google is the next in line to suffer from the resource curse -- their core search advertising franchise is the magic cash machine that feeds their culture of abundance -- but so far they've done a better job of deploying that cash against genuine innovation that matters (Gmail, Google Maps, Android, Google Docs) than Microsoft. Only time will tell, but the realist in me thinks that the resource curse will eventually erode that culture's competence from the inside out no matter how well the leaders play their cards.

Steve Jobs was right when he said "stay hungry, stay foolish" -- too much of a good thing never turns out well.

What is a non-Valley seed fund good for?

2013-03-29T09:07:00.000-07:00

We all want to believe that our work matters -- that the 50 or 60 or 100 hours a week we spend away from our families actually makes a difference in our professional community and, if we're lucky, in the wider world.

As a self-taught venture investor -- Andy and I started Founders' Co-op five years ago, after nearly 20 years as entrepreneur/operators -- I'm always testing my assumptions about the role I believe I can play in the innovation community, and the meaning I want that work to make in my own life and the lives of others.

This post is a public unpacking of those assumptions, and an invitation for anyone who cares about these topics to challenge my thinking and make it stronger.

Like many entrepreneurs, we started Founders' Co-op on a hunch -- really a pooled set of observations from our experience as founders in two more-established startup markets (Boston for Andy, SF/Bay Area for me) who had moved to Seattle and together started a venture-backed company here.

Our original thesis was very simple and went something like this:

Seattle's a great city with a ton of software engineering talent -- mainly because of the massive entrepreneurial successes of Microsoft and Amazon.
For some reason all that success, money and talent hasn't translated into a very active or high-performing startup scene.
It's kind of a bummer to be an entrepreneur in a city that doesn't have a strong culture of entrepreneurship.
We're here, we like working together and we want to build something cool -- maybe we could do some good, *and* make some money -- by trying to change that.

Today -- five years in -- that simple set of ideas is still the animating spirit behind what we do.

But along the way we've learned a ton about what it really means to run a seed-stage fund -- from raising capital and sourcing deals to managing a growing portfolio of companies through both success and failure. (Taking on TechStars Seattle in 2010 accelerated our learning about fund management at least as much it has helped the participating teams).

In the same half-decade, the entire venture capital industry has been buffeted by a series of changes, some cyclical and some more fundamental: poor aggregate financial performance, collapsing startup costs and the resulting emergence of a new, pre-venture tier of company formation and financing. The current "Series A crunch" is just the latest symptom of these changes, and the anticipated Federal approval of startup crowdfunding will be yet another disruptor of the established patterns for innovation finance.**

Our ongoing journey as professional investors -- cross-threaded with the accelerating changes in our operating environment -- has led us to a much deeper understanding of the opportunity we intuited five years ago:

We now think we know what a non-Valley seed fund is good for, and we're hell-bent on filling that role in a way that makes us uniquely relevant to the entrepreneurs and investors we work with.

This post is already deep into tl;dr-land so I won't attempt to itemize the entire catalog of observations, personal mistakes, wise counsel from others and accidental insights that produced this view (though I'm happy to get into all of that 1:1 if you're interested). Instead, I'm just going to make a series of assertions about our evolutionary niche in the current landscape of software innovation:

As a non-Valley seed fund, our mission is to scout extraordinary founding teams currently operating outside the Bay Area and help them build businesses that the best venture capital investors in the world want to back.

This mission is informed by the following beliefs about high-performing (i.e., "venture-grade") software innovation:

Innovation finance is -- and will remain -- geographically concentrated.
Sand Hill Road is the Wall Street of Venture Capital, and the leading Series A+ venture firms will continue to produce the best economic outcomes for both founders and early investors.

But innovation activity is increasingly diffuse.
The collapsing cost of software innovation and globalization of entrepreneurial culture means that elite founding teams will be increasingly be distributed among a growing number of global innovation hubs (e.g, those identified in the Startup Genome ecosystem report).

Early-stage innovation finance is highly contested within innovation financial hubs...
Incumbent (VC) and insurgent (super-angel / Micro VC) finance players compete aggressively for access to elite founding teams located within the top innovation finance markets: SF/Bay Area and (more recently) New York.

...but few money-center investors are effective at systematically sourcing quality early-stage deals in secondary innovation markets.
Most traditional money-center firms still expect founders to relocate; those willing to invest outside money-center hubs still struggle with weak sourcing and diligence networks pre-deal, and weak oversight and support systems post-deal.

In the context of these assumptions, the role of a seed fund in a secondary (non-money-center) market is crystal clear:

Secondary market seed funds are market specialists, building a fabric of relationships and on-the-ground founder support that connects the growing pool of high-performing global innovation markets with the few global hubs for innovation finance

Does this mean you can't build a Tier 1 Series A+ VC firm outside the Bay Area or New York? Brad Feld's success at Foundry Group (located in Boulder, CO) suggests otherwise.

Does it mean that every early-stage investor outside the money-center markets has to build deep ties to the Valley? Obviously not: a tiny percentage of startups in any market are really a fit for VC; many will go on to build terrific businesses with the help of local angel investors.

But for me and my work at Founders' Co-op these assumptions create an operating framework that's both simple and clear

I am a market-maker, matching world-class founders in secondary markets with the "best" (most effective / most ethical / deepest market understanding) money-center venture investors for their stage and focus.
My #1 job is to find amazing entrepreneurial talent in markets that are overlooked or under-penetrated by money-center venture investors.
When I find them, I must do everything in my power -- from money and relationship access to hands-on hustle -- to prepare them and their companies for success in the next tier of the capital markets.
To maximize their odds of capital markets success I must also develop trusted "buy side" relationships with as diverse a cross-section of Tier 1 venture investors as possible, so I'm able to make relevant founder/investor matches with speed and accuracy.

If I do these things well, repeatedly, for years and years:

I will help amazing founders achieve their dreams and make a difference in the world
I will make money for my investors
I will make money for myself, my business partner and my family
I will be able to raise a new -- small -- fund every few years so I can keep on doing it.

I'm aware that the world is full of urgent needs and I'm not sure my work will do much to meet them, but helping gifted makers make is what I love to do. I'm grateful to have found this work while I still have time and energy to learn a new craft, and I honestly can't think of anything else I'd rather do.

The world is changing fast and I'm sure I'll have to revise my plans accordingly, but for the time being you know where to find me -- hammering away at creating the best damn secondary market seed fund I can build.

=====================================================

**NOTE -- if you want to dig deeper into the accelerating structural changes among tech/innovation funders, investors and entrepreneurs, a few research papers worth reading include:

"Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion" - Harvard Business School
"We have met the enemy and he is us: Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds and The Triumph of Hope over Experience" - Marion Ewing Kauffman Foundation; and
"Seed Investing Report: Startup Orphans and the Series A Crunch" - CB Insights
"Startup Ecosystem Report 2012" - Startup Genome

Apply now for TechStars Seattle 2013

2013-03-18T16:14:00.000-07:00

We just opened the application floodgates for our next TechStars Seattle class and I wanted to be sure that anyone who reads this blog got the word.

For those who aren't familiar with TechStars, here's the Cliff's Notes version (if you already know the deal, apply now!):

What:
TechStars is a three-month founder boot camp. Selected teams move to the host city for the duration of the program and receive intensive hands-on coaching from a kick-ass group of mentors. Selected companies also receive up to $118,000 in seed funding -- $18K plus an optional $100K in convertible debt. The program ends with a Demo Day where each company has a chance to pitch in front of hundreds of angel investors and VCs.

When:
The Seattle program runs from early August to early November, but applications are due by May 31 and early applications (which improve your odds of acceptance) are due by May 3.

Where:
All companies work together in the Founders Co-op offices in South Lake Union for the duration of the program. Our office is surrounded by Amazon.com's global headquarters, and is also home to The Microsoft Accelerator (powered by TechStars) and CodeFellows programs, so there's a constant flow of startup talent, venture investors, tech execs and media through the building.

Why:
TechStars is the #1 accelerator in the world for teams located outside Silicon Valley (with full props to Paul Graham and Y Combinator for pioneering the model and dominating the Bay Area ecosystem). TechStars has graduated nearly 200 companies which have collectively raised nearly $300 million of venture capital after graduating.

Who:
TechStars looks for exceptional founding teams who are objectively, mind-blowingly awesome on at least two vectors:

Making -- relentlessly efficient and effective creators of beautiful, functional software (and sometimes hardware), who have a track record of making stuff that works -- whether in school, at work or on their own time -- because it's their primary mode of self-expression.
Learning -- insatiably curious information omnivores with strongly-held fact-based convictions that are constantly subject to critical analysis and revision based on new data, who actively seek new and faster ways -- including interacting with other human beings -- to learn and adapt in order to improve.

Just like last year, I will personally be reviewing every application so it's a great way to get me up to speed on you, your team and your ideas.

Ya'll come!

What are your dreams for Seattle's innovation economy?

2013-03-11T14:00:00.000-07:00

I'm still not quite sure how this all came to pass, but I just trooped down to City Hall to be confirmed by the Seattle City Council as one of 15 members of a new City of Seattle Economic Development Commission.

It's an amazing group of people, including UW President Michael Young; Port of Seattle CEO Tay Yoshitani; Washington Biotechnology and Biomedical Association President Chris Rivera; and... me.

If I had to guess, it's probably because I've been making an increasingly noisy nuisance of myself on the topic of innovation ecosystems + and Seattle's global competitiveness for the past few years.

I started out just doing it in private conversations. Then I joined the board of the Washington Technology Industry Association and realized it was something the whole industry cared about. And then I started writing about it*

*Just a sampling of my rants on the subject include the following tl;dr inventory:

And my personal favorite...

I have a dream: making Seattle a global magnet for software entrepreneurs

The way I figure it, someone at the City got wind of this guy who kept running his mouth about Pacific Northwest innovation and decided they were better of having the lunatic inside the tent than out there running loose.

First they invited me to a few public hearings about Seattle's startup community. Then I was asked to join an advisory group for a City of Seattle Startup Initiative. And the next thing I knew I was sitting in the Council chamber waiting for President Sally Clark to call my name for confirmation.

The Commission is a year-long appointment, which means I have about 12 months before the City realizes they've made a terrible mistake and throws me off the bus.

In the meantime, here's what I need from you: if you live in the Northwest and read this blog you care at least a little bit about the future health of our innovation economy.

If you have *any* ideas or suggestions for what the City of Seattle could be doing to make life better for entrepreneurs, I need to hear them.

And if you're skeptical about what role city government could possibly play in innovation, just remember that the City of Seattle is a $3.9 billion dollar enterprise with significant powers over local tax, transportation, zoning and land use, education, telecommunications, arts and public safety matters. The city is also an active partner with other regional influencers like the University of Washington and the Port of Seattle, not to mention State and Federal programs that directly (and indirectly) support city residents.

So *please* give me a shout and help me represent the hopes and dreams of our community on this Commission. I promise I won't make you sit in any meetings, and I'll do my best to make the case on all of our behalf...

Seattle City Hall photo at top by OZinOH

How Amazon achieves excellence at scale

2013-03-04T17:41:00.000-08:00

Everybody knows that Amazon.com is an amazing business (or collection of businesses): the global leader in online retail; innovator and front-runner in cloud infrastructure; emerging digital advertising juggernaut; and much more besides.

But seen up close -- my office is located in the middle of the company's South Lake Union campus and I interact with current and former Amazon employees every day -- Amazon is even more impressive for something its customers rarely see: its professional culture.

I have never encountered an organization that both expects and receives the level of sustained excellence from its people that Jeff Bezos gets from his.

I don't just mean that Amazon employees work long hours -- they all do, from entry-level roles all they way up to the top -- but rather that the company has built the most effective and scalable system for recruiting, managing and developing high-performing talent that I've ever come across in my 20 years in corporate America.

I was so impressed by this that I started asking Amazon people about exactly how the company has pulled this off, and their answers are surprisingly consistent: everyone -- from new hires to long-time employees, as well as folks who have joined through acquisition -- cites the seriousness and consistency with which the company applies its stated values (the Amazon Leadership Principles) across hiring, performance reviews and even in everyday decision-making conversations.

As a former AT&T employee I was deeply skeptical when I first heard this -- my experience of bigco corporate "values" has always been one of Orwellian absurdity.

But when I actually took the time to read Amazon's values, and to reflect on what I know about the company and its people, I had to reconsider: these are the most specific, concrete, actionable and authentic set of written values I've ever seen. They immediately feel true to the company and its brand. They are challenging -- even inspiring -- but also exacting in their demands.

I've reproduced the list of values below -- when you read them, note that most of them refer to the expectation of "Leaders" -- and by implication, that every Amazon employee is expected to act and think like a leader.

If you're building a company of your own -- especially if you're just getting started -- it's worth thinking about what a similar list would look like for your organization.

AMAZON LEADERSHIP PRINCIPLES:

Customer Obsession
Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.

Ownership
Leaders are owners. They think long term and don’t sacrifice long-term value for short-term results. They act on behalf of the entire company, beyond just their own team. They never say “that’s not my job”.

Invent and Simplify
Leaders expect and require innovation and invention from their teams and always find ways to simplify. They are externally aware, look for new ideas from everywhere, and are not limited by “not invented here”. As we do new things, we accept that we may be misunderstood for long periods of time.

Are Right, A Lot
Leaders are right a lot. They have strong business judgment and good instincts.

Hire and Develop the Best
Leaders raise the performance bar with every hire and promotion. They recognize exceptional talent, and willingly move them throughout the organization. Leaders develop leaders and take seriously their role in coaching others.

Insist on the Highest Standards
Leaders have relentlessly high standards - many people may think these standards are unreasonably high. Leaders are continually raising the bar and drive their teams to deliver high quality products, services and processes. Leaders ensure that defects do not get sent down the line and that problems are fixed so they stay fixed.

Think Big
Thinking small is a self-fulfilling prophecy. Leaders create and communicate a bold direction that inspires results. They think differently and look around corners for ways to serve customers.

Bias for Action
Speed matters in business. Many decisions and actions are reversible and do not need extensive study. We value calculated risk taking.

Frugality
We try not to spend money on things that don’t matter to customers. Frugality breeds resourcefulness, self-sufficiency and invention. There are no extra points for headcount, budget size or fixed expense.

Vocally Self Critical
Leaders do not believe their or their team’s body odor smells of perfume. Leaders come forward with problems or information, even when doing so is awkward or embarrassing. Leaders benchmark themselves and their teams against the best.

Earn Trust of Others
Leaders are sincerely open-minded, genuinely listen, and are willing to examine their strongest convictions with humility.

Dive Deep
Leaders operate at all levels, stay connected to the details and audit frequently. No task is beneath them.

Have Backbone; Disagree and Commit
Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly.

Deliver Results
Leaders focus on the key inputs for their business and deliver them with the right quality and in a timely fashion. Despite setbacks, they rise to the occasion and never settle.

IP vs. IT: Innovation in the Entrepreneurial Age

2013-02-28T16:50:00.000-08:00

AngelList'sBabak Nivi published a great post earlier today titled "The Entrepreneurial Age"; his thesis statement is as follows:

In the entrepreneurial age, physics and information will be replaced by entrepreneurship: the ability to serve a customer at the highest level of quality and scale, simultaneously. We will learn to put entrepreneurship to great use and it will be the basis for an organization’s differentiation and victory.

His words are different than mine, but Nivi's argument immediately struck a chord with me as a manifesto-grade statement about the culture gap between "old" and "new" modes of innovation that I've been seeing in my work at Founders Co-op and TechStars.

To back up a little, I've been in the software business for over 20 years (my first PM role was at AT&T, building an "audiotext" information service, just a year before the Mosaic browser changed everything).

In those 20 years, I've witnessed what I believe is a fundamental, permanent shift in the way that business value is created through technology.

The "old" mode -- the one I began with 20 years ago -- viewed hard assets as the foundation of value creation: established brands, protected intellectual property (IP), massive amounts of capital, lobbying and regulatory capture.

Human capital -- meaning anyone outside the executive suite or boardroom -- was a commodity input that had to be managed, but not a fundamental constraint.

The "new" mode was shocked into existence after the Internet bust of 2001 -- when the both cultural and capital support for software innovation effectively dried up -- and has been steadily gathering speed ever since.

The enablers of the "new" mode should be familiar to anyone reading this blog:

The collapse in the cost of software innovation (powered by open source tools and cloud infrastructure)
The explosion of global internet connectivity, linking nearly every human and business to every other in close to real time.
The smartphone (and tablet) revolution -- making digital (as opposed to voice, paper or f2f) the primary mode of service access for both consumers and professionals, for an ever-growing share of economic activity.

The current generation of technology entrepreneurs take all these things for granted. They've never known a world in which capital and patents were the foundation of business success. For them, smart software is a lever that can be applied to almost any human problem, the tools of production and distribution are freely accessible to all, and new customer insights can be turned into product improvements as fast as they can write and ship code.

The only real constraints on technology innovation today are human capital and speed -- the most technically skilled AND customer-agile teams are the ones that win.

Many people who have been in the innovation business for a long time -- old-school VCs, university commercialization offices, business-school academics -- have had a hard time shaking loose from the "old" model -- the most common tell is an obsession with "defensible IP", especially patents, as the core of enterprise value creation.

For better or worse, there is nothing stable or defensible about business success in an Entrepreneurial Age. the new model of success is "permanently emergent" -- the only way a company can win is to listen better and adapt faster to its customers' changing needs than anyone else in the race. And to keep doing that, day in and day out.

"Venture Capital Efficiency" and fundraising success

2013-02-06T16:57:00.001-08:00

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I had a great conversation with one of our Founders Co-op LPs today and thought the core points were worth sharing.

(This post gets pretty far into the weeds of venture finance, so if that's not your bag please skip this one and come back around for the next one).

The heart of our exchange was how ironic it is that the entrepreneur community -- including both startup founders and the bloggers and media pundits that write about them -- loves to celebrate big fundraising events. Most of the time these big raise announcements don't include information about the pre- or post-money valuations at which the deals were done.

And that means the "successes" that get celebrated the most are often not the ones that create the most wealth for founders and investors.

Now for a quick side trip into the basic mechanics of venture finance (if you already know this stuff just skip ahead).

When a startup raises equity capital, there are three key numbers that determine how much of the company is sold by the founders and purchased by the new investors (yes, I'm ignoring the option pool for simplicity's sake):

The "Pre-Money Valuation" is the notional value of the company before the investment is made.
The "Investment Amount" is the actual amount of new cash that comes into the company in the raise.
The "Post-Money Valuation" is just the sum of the first two numbers, reflecting the increase in enterprise value produced by adding the Investment Amount to the company's balance sheet.

The least intuitive part about this math is that the ownership stake purchased by the investors in any given financing round is calculated based on the Post Money Valuation, NOT the Pre-Money Valuation. So a $1 million Investment Amount applied to a $4 million Pre-Money Valuation purchases a 20% ownership stake (1:5), not a 25% stake (1:4).

This means that a startup's enterprise value is actually the accumulated sums of two very different inputs -- the total capital raised over the life of the company, plus the total enterprise value created over the life of the company.

The first is a relatively weak signal for the firm's capacity to create wealth, the second a very strong signal. But because the second value is usually kept secret by the firm and its investors, the broader community tends to place a disproportionate weight on the first value -- capital raised -- when handicapping a startup's "success".

In my experience these two values tend to change at radically different rates in different companies -- with massive impacts on the economic outcome for founders and early investors.

When it comes to creating startup wealth, founders and early investors care much more about "Venture Capital Efficiency" than they do about total capital raised.

The Venture Capital Efficiency of a startup -- the rate at which investor capital is turned into shareholder value -- can be expressed as the ratio between total capital raised and total enterprise value (which for privately held companies is typically equivalent to the most recent Post-Money Valuation).

As a general rule, the less capital a startup raises, and the bigger the delta between the Post-Money Valuation of the prior raise and the Pre-Money Valuation of the next raise, the more effective that startup can be said to be at turning investor capital into "real" equity value.

Instagram was the VC deal of the decade NOT because it sold for $1 billion (actually more like $750 million after the post-IPO decline in Facebook's share price is taken into account), but because the company only required $57 million in venture capital to produce that billion-dollar outcome ($50MM of which came in at a huge valuation just before the deal closed).

Without even discounting for that late and expensive $50MM raise, the raw Venture Capital Efficiency (VCE) of the Instagram deal was 17.5 -- 1 billion divided by 57 million.

And if that late money came in at a "fair" price (i.e, in the context of heavy M&A interest from both Twitter and Facebook) -- say $500MM -- the VCE of that final raise for the founders and early investors was more like 67 ($500MM divided by the $7.5MM that had come in previously). THAT'S the kind of return that investors get out of bed for.

For startup founders and early investors, "winning" isn't measured in terms of capital raised but in Venture Capital Efficiency. The real value creation occurs between fundraising events, and the measure of success isn't how much you raise, but how much daylight you can put between the Post-Money Valuation of the last raise and the Pre-Money Valuation of the next one.

Hacking the market for engineering talent

2013-02-04T21:51:00.000-08:00

Time : Quality : Cost -- It's the optimization problem at the heart of every software development project.

Under normal market conditions an effective manager can achieve two out of three, but pushing too hard on any one vector -- lowering cost, making the product more awesome, shipping it sooner -- inevitably leads to compromise on the others.

At the moment, the market for software developers is anything but normal.

Software products used to be built by technology companies for use by every other kind of company. Today every business -- in every sector of the global economy -- needs access to software engineering talent. Turns out the "tech sector" is now the whole fucking economy.

That screaming sound you hear is project managers, recruiters and HR leaders around the world with thousands of open engineering positions they can't fill.

Every unfilled position translates into products that don't ship, revenues that aren't earned and competitive opportunities missed -- because the rest of the economy isn't holding back to give tech laggards a chance to catch up.

This collision between urgency (on the part of industry) and scarcity (among skilled makers) is one of my favorite themes as an investor. We're living in the "Maker Moment" -- a unique window in time when super-empowered makers have a chance to both create and capture huge value as actors in the global economy.

The labor markets have been slow to adapt to this new reality.

Big companies have traditionally held the upper hand when it comes to hiring -- most good jobs once existed as full-time salaried positions on the payroll of major corporations so talent had to come to them. Recruiters were used to fill high-level executive positions but most rank-and-file jobs enjoyed an applicant surplus that made hiring an inbound proposition.

But as open technical positions have multiplied, and average time-to-fill stretched out from weeks to months, alarm bells started going off among professional staffing managers -- new solutions were needed to fill their increasingly strategic software design and development roles.

Unfortunately, the "innovations" produced for this market have so far focused on doing the same old things with better tools: retaining specialist recruiting firms that claim to be good at filling technical roles; or arming traditional recruiters with more "advanced" prospecting tools (i.e., so they can spam developers more efficiently than ever before).

The most promising employment innovation of the past decade is the talent marketplace -- allowing buyers and sellers of work to match themselves online.

The recent explosion in vertical labor marketplaces -- companies like TaskRabbit, Zaarly, and Contently -- is the most exciting development in labor market efficiency of the past 10 years, allowing small firms and independent workers to benefit from the frictionless demand aggregation, discovery and transaction handling power of the Web.

Unfortunately for companies in need of software engineering talent, the labor marketplace idea has so far failed to address their needs.

The leading entrants in this market -- firms like eLance, Rentacoder and oDesk -- have optimized their platforms for the wrong variables in the time-cost-quality equation: they're excellent at delivering narrowly-defined software projects at low cost and within reasonable timeframes, but fail at delivering the kind of enterprise-grade software execution that modern companies so desperately need.

To date, labor markets for software development have been designed to facilitate cross-border arbitrage -- hiring moderately skilled developers from third-world countries who are willing to work for cheap.

This works fine for dentists who need a static brochureware website and don't want to pay top dollar. But for operating companies who need functional software for core business functions -- software that requires creative business problem-solving, not just building to spec -- labor cost arbitrage platforms are the wrong tool for the job.

Every modern company needs on-demand access to skilled developers with current-generation technical skills. Speed to quality is the focus, not cost.

For the past year I've been working with a gifted team of makers who come from the "sell side" of this marketplace. They know what it's like to receive hundreds of spam emails a week from technical recruiters desperate to get their attention. They love to build functional software for companies with the brands and market power to make a dent in the universe, but they prefer to do it on their own terms, at market rates, with peers they know and trust.

This team has spent the past year proving the model for a technical labor marketplace that treats buyers and sellers as equal partners -- a "talent agency" that matches skilled makers of software with high-impact creative work.

The company is called GroupTalent, and it's the first labor marketplace that matches buyers and sellers based on quality and fit first, not just cost.

Here's how they make that happen:

Businesses with unfilled technical roles submit their requirements and are presented with prospective matches within 48 hours.
The designers and developers who participate as sellers are based here in the U.S., often in the same city or region as the buyer.
Developer skills are calibrated based on actual GitHub check-ins and shipped code, not checkboxes on a form.
They're available for everything from short-term contract work up to full-time employment offers -- based on their personal needs and goals.

GroupTalent makes it effortless for growing companies to staff up and down across roles and technical skillsets, allowing managers to step off the technical recruiting treadmill and focus on solving the business problem at hand.

The GroupTalent team has been quietly testing and scaling their platform for the past year, proving to employers that they can deliver skilled on-shore talent on demand, and proving to makers that they can hook them up with great-paying gigs with smart clients whenever they want them.

Today, GroupTalent announced a fresh $1MM seed round -- adding Boris Wertz of Version One Ventures (a proven expert in online marketplaces) and Menlo Ventures' seed fund, along with additional support from Founders Co-op -- to go and rip the cover off this opportunity.

I believe that matching gifted makers with high-impact business problems is now the single most leveraged way to unlock potential and create value in the global economy. GroupTalent is creating a massive productivity multiplier for enterprise buyers and digital creatives alike, and I can't wait to see just how big a dent they can make.

Why "boring" Middle Market companies are critical to your startup ecosystem

2013-01-23T12:15:00.001-08:00

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tl;dr -- Talent is the raw material of any successful startup ecosystem. "Middle market" tech companies are a critical -- but easily overlooked -- component of a high-performance talent market.

Every major global tech hub is locked in a fierce global competition for the best brains on the planet. The ones that win that battle -- attracting and retaining an unfair share of the world's most gifted founders and digital creatives -- are ultimately the ones that will win the war for leadership in the global economy.

Tech bloggers and journalists spend most of their time on the extreme ends of this barbell: established captains of industry (like today's excellent PandoDaily piece on the limitless ambition of Amazon's Jeff Bezos); and -- since every Goliath needs its David -- the scrappy startup founders whose slingshots may someday fell the giants (Jack Dorsey of Twitter + Square fame is the ideal poster child here).

But "Middle Market" tech companies are the unsung heroes of leading innovation ecosystems -- the critical glue that allows agile startups to grow into globe-straddling bigcos.

Bigcos and research universities are the diesel locomotives of talent ecosystems -- their big brands, huge recruiting budgets and insatiable appetite for fresh brains constantly pull in high performers from around the world + offer them their first look at the opportunities and lifestyle available in their local markets.

Startups are like bike messengers, threading fearlessly through traffic to shake loose the adventure-seeking free radicals who realize -- sooner or later -- that big company life just isn't for them. They race around town and make a crowd-pleasing spectacle of themselves but usually don't offer much in the way of steady employment, and have a nasty habit of crashing into things.

"Middle market" companies are like minivans -- the unsexy mass of once-upon-a-time startups who survived their rebellious teenage phase, raised B and C rounds and broke through to the boring respectability of revenues and profits. They don't yet have the heft and brand recognition of the bigcos, but they also can't offer the freewheeling spirit and stock-option dreams of the startups.

Without a rich and diverse middle market, budding innovation ecosystems will struggle to cross over to sustainability and growth.

The majority of the talent market isn't hungry for the risk and uncertainty of startup life, but also doesn't like getting stuck in a company town with few options for career advancement. Eventually, the most talented and ambitious workers who move to a city for school or a bigco job will get out of Dodge if their local market doesn't offer enough good options -- at comparable payscales and among equally talented peers. Startups just aren't a viable option for most of these folks.

In Seattle, while I'm grateful for the legacy of Microsoft's glory years -- and ecstatic about Amazon's current awe-inspiring growth (smack in the heart of the city!) -- I'm even more excited to see a big and diverse cohort of emerging leaders finding their stride.

My mental shortlist includes several local companies that are poised to go public, plus a long list of more recent-vintage startups who have been quietly building real businesses (in classic Northwest fashion) and are only now being recognized by Sand Hill Road and landing big growth raises at great valuations.

Just a few of the middle market leaders who form the core of Seattle's future tech leadership include (in alphabetical order): Apptio, Avalara, Big Fish Games, Extrahop, Inrix, Redfin, Simply Measured, Smartsheet, Tableau, and Zulily.

There are many more I've missed -- please share their stories with me so I can help shine a light on them -- but even this short list includes enough ambition, growth and diversity of opportunity to keep many amazing people busy for a long time to come.

So thank you to Seattle's middle market companies for being the unsung heroes of our future success. You're all amazing, and we should all do more to recognize your contributions to our future leadership as a global innovation hub.

DIY vs. DIFM

2013-01-17T15:08:00.001-08:00

"Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime." - Anonymous

"Human empowerment" is a through-line in my life and work -- I love projects that help passionate creative people achieve their full potential.

And "digital creatives", makers and artists who express themselves through software (and, increasingly, hardware) are the population I'm most fired up to empower; their potential for positive impact is so powerfully amplified by the reach of networked technology.

But lately I've found myself encouraging several different startup founders to "climb up the stack" -- to think beyond offering pure tools for makers to more fully-realized (and more accessible) "solutions" for their customers.

Part of this is simple math -- there are many fewer potential customers for products that require advanced technical skills to use -- but I've also come to realize that this same thinking can also unlock huge value even among highly technical audiences.

I've worked with several portfolio companies now who resisted adding "dumbed-down" features for their technical users -- setup wizards, pretty charts and visualizations, even send-to-PDF print support -- only to see usage and customer satisfaction explode when they finally shipped them. Rather than feeling insulted (as the founders had feared), technical customers were as grateful as non-tech users at not having to always "roll their own" -- and even more grateful for how much easier it made it to share their work with non-technical audiences.

As it turns out, even the most skilled digital creatives -- people who could rebuild your entire product themselves if they had the time and inclination -- like to have things done for them.

Almost any customer base can be segmented across a distribution of skill levels and preferences that includes both hardcore "roll your own" users and less-savvy (or more time-pressed) customers willing to trade infinite choice for speed and simplicity. Product teams that lock themselves into one or the other of these mindsets -- serving only the DIY (do it yourself) or DIFM (do it for me) segments -- are likely to miss the opportunity to truly dominate the market they serve.

There is a limit to how far a product and brand can be stretched across the DIY-DIFM spectrum -- I've written before about how important it is to choose between being a product and a platform -- but the overlap between these two extremes is much larger and more elastic than many (especially deeply technical) teams realize.

Some people love to fish and do it for fun. But lots of people -- even those who know how to fish -- are happy to pay a premium to have their fish caught, cleaned and cooked for them so they can focus on other things. If your market contains both kinds of customers, don't let yourself get stuck on one or the other end of this spectrum. Pick a spot you like and see how far up or down the curve you can walk without alienating your base. I think you'll be surprised at how far you can go, and how fast you can grow.

Entropy

2013-01-14T21:59:00.000-08:00

I had a great conversation with a venture capitalist friend today about whether there's a theme to my seed-stage investing.

At first I resisted the idea -- I think if myself as a founder-centric investor who's willing to follow the lead of talented teams with much deeper insights into the business problems they want to solve than I'll ever have.

But as we talked about it, I realized that there is a theme -- of sorts -- that ties together much of what I've done as investor over the past few years.

As I've written many times before, I believe that technology is fundamentally changing the nature of work, both within and beyond the enterprise.

The net effect of that change -- and the theme that reappears again and again in our portfolio -- is Disaggregation (or Entropy, if you want to get fancy about it).

Within the enterprise, this manifests as the decentralization of technology choices: for business functions, the shift from from monolithic ERP + CRM systems to best-of-breed departmental SaaS; and in technical functions, from standardized tech stacks and on-prem datacenters to polyglot platforms, development environments and hybrid cloud infrastructures.

But the same forces of deconstruction are at work on the enterprise itself: less and less of the human work of the corporation is done by full-time employees; more and more is performed by dynamically assembled teams of employees, vendors and contractors who work virtually across geographies, disciplines and organizational boundaries.

As an investor, I like ideas that tap into the disruptions and cultural changes that this tendency toward disaggregation causes. Sometimes it's helping enterprise managers deal with the new complexities caused by their increasingly distributed work and systems. Sometimes it's helping the workers themselves as they navigate the shifting nature of employment and career as independent economic agents. (And sometimes -- but not as often as I'd like to think -- I'll still follow the instincts of gifted makers in directions that have nothing to do with either of these).

Ironically, while the economy at large is trending toward disaggregation, the technology business itself is increasingly concentrated, with a small handful of global giants (Apple, Amazon, Google, etc.) calling the tune for many of the most significant vectors of tech-driven innovation and monetization. These firms are at the root of the deconstructive forces at play in the traditional economy, but are themselves highly centralized command-and-control organizations.

I'm still processing this dichotomy between technology-driven disaggregation in the global economy and increasing aggregation of economic power within global tech leaders, but I'm grateful for the opportunity to surf on the gap between them, and to do so in the company of people much smarter than I am -- like the friend who kicked off this whole line of thinking in a casual conversation this morning.

Happy 2013 to all of you out there -- it's still day one in the technology business and I couldn't be more excited to see what this year will bring.

PDX, Tindie + The Maker Movement

2012-12-17T10:13:00.000-08:00

Craft beer. Artisan coffee. Chunky knit sweaters. Indie rock.

The Pacific Northwest has always over-indexed for offbeat dreamers and hobbyists -- some of whose quirky passions "accidentally" turned into global businesses (think Microsoft in personal computing, Starbucks in coffee, or Amazon in online bookselling) and even cultural movements (Nirvana, SubPop Records + grunge music).

Today's "Maker Movement" reflects the mainstreaming of 60s-era countercultural traditions that persisted in the Northwest long after the rest of the country had moved on.

Take the Oregon Country Fair, a huge annual gathering of crafters that has been held continuously since 1969 -- carrying the DIY flame over 40+ years and ultimately kindling the fire of more "modern" interpretations like Maker Faire and Burning Man.

And while Seattle's corporate successes -- and resulting growth -- have steadily chipped away at the indie vibe that prevailed here in the '70's, the dream is alive just a few miles down the road in Portland, OR.

The Maker Movement celebrates the power of the individual to make meaning through craft. Not coincidentally, "Human Empowerment" is a core investment theme for us at Founders Co-op -- we believe digital creatives have incredible power to create positive change through technology, and we get excited whenever we find big opportunities to unlock and amplify that creative power.

I'm proud to announce that we've just combined our passion for empowerment and our deep Northwest roots by backing Portland-based Tindie -- the "Etsy for Digital Creatives"

Tindie founder Emile Petrone is a Bay Area veteran who made his way to the Northwest thanks to another Founders Co-op portfolio company; Urban Airship acquired SimpleGeo back in 2011 and Emile moved up along with others from his team. Emile fell in love with Portland, but he had also fallen in love with hardware hacking and couldn't let go of an idea...

Here's the story in Emile's own words:

On April 7, 2012, I left a post on reddit.com/r/Arduino, "Would you support an Arduino marketplace or am I totally off base?" With the support and feedback I received, I started on the site, opening it up in different phases.

Emile opened his store on June 26, 2012 and received 11,000 visitors on his first day. By September he had quit Urban Airship to work on Tindie full-time.

I sat down with him a month later to hear his story, and by mid-October had agreed -- along with my friend Boris Wertz of Version One Ventures -- to dive in and help Emile build Tindie as an investor.

Open source software and cloud infrastructure have already unleashed the collective power of hundreds of thousands of software creatives around the world -- making it possible for small, lean teams of empowered humans to touch the lives of billions.

Those same forces are now at work in the hardware community -- with collapsing hardware costs, open source platforms like Arduino and Raspberry Pi and affordable 3D printing pointing the way toward another, even more significant wave of digital innovation.

As Chris Anderson so forcefully described it in his recent book, "Makers: The New Industrial Revolution", the disruptions wrought over the last 20 years in the world of Bits are coming next to the world of Atoms, and we've only begun to realize how massively this will impact both our culture and our economy.

It's an amazing time in history to be a digital creative, and the Pacific Northwest is an amazing -- and unique -- place for Makers to make a difference. Founders Co-op is proud to play a small supporting role in this extraordinary community of creators, and to welcome Tindie to our own community of portfolio companies.

What is Seattle good at?

2012-12-14T22:36:00.000-08:00

The Startup Genome report that came out a few weeks ago -- ranking Seattle #4 among global innovation hubs -- was both a good thing and a bad thing for the Pacific Northwest innovation ecosystem.

Good, because it shined a light on some of the core strengths in our regional innovation market.

Bad, because it artificially "flattened" what's still a huge gap between the world's leading innovation market -- Silicon Valley -- and everywhere else.

The hard truth is that the Pacific Northwest is still 20-30 years away from having the kind of down-to-the-roots innovation culture that the Bay Area enjoys today. We have a huge lead over most other global innovation centers, and our community is rallying around innovation with more commitment and focus than I've ever seen here before, but we have decades of work ahead of us.

How can we get to the future faster? By playing to our strengths.

Every innovation market competes globally with every other for access to the fundamental building blocks of innovation: talent, capital and attention. The leading innovation hubs around the world -- those 20 markets ranked by the Startup Genome report -- have each found unique ways to attract and retain an "unfair" share of the world's innovation resources.

But if anyone in the other 19 ranked cities (Seattle included) thinks their goal is to "beat" Silicon Valley, they've already lost.

The Bay Area is the "reference design" for an innovation hub -- an aspirational vision of what a fully integrated ecosystem looks like at maturity.

The challenge for every secondary market is to understand on what specific vectors of innovation it can play for keeps. In macroeconomic terms, we each need to define what comparative advantage we intend to use our basis for differentiation and "trade" in the global innovation economy.

Where to begin?

Fundamental innovation capacity in any discipline only emerges over time. It takes multiple generations of startups in that discipline, with at least a few scaling to success, to create the human capital and financial wealth that can then be recycled by the next generation of startups. Each new layer in an ecosystem is built upon the innovations, talent and entrepreneurial wealth of the prior generation.

To know what Seattle is good at today you have to look backward and understand how + where breakout success was created in the past.

Seattle matters today as an innovation hub because individual entrepreneurs chose to build their companies here decades ago. Those few companies formed the bedrock of five major vectors of excellence in our local technology ecosystem:

Aerospace / Defense

It's easy to overlook Boeing's foundational role in Seattle's current software-centric innovation culture, but the roots of our tech community were laid down by a great wave of mechanical, structural and electrical engineers who moved to Seattle during the World War II defense buildup and stayed on to help Boeing build its commercial aviation and defense aerospace businesses.

"The Lazy B" hasn't played a leadership role in the entrepreneurial ecosystem for many years, but don't be surprised if the Maker Movement and its growing passion for physical manufacturing opens the door to renewed engagement with Boeing's deep and highly skilled pool of engineering talent.
Enterprise / Productivity

In 1975, two Seattle geeks and high school buddies -- Bill Gates and Paul Allen -- dropped out of college to hack up an operating system for the Altair 8800. Microsoft, the company they founded to commercialize their work, went on to become the most profitable software company ever, using its PC operating system monopoly as a lever to spawn a massive global ecosystem of enterprise IT and office productivity applications and vendors.

The rise of the Web and open source software brought an end to Microsoft's technology leadership, but the company's global installed base of enterprise customers and vendors continues to spew cash, funding a huge array of unprofitable lines of business that collectively draw thousands of gifted scientists and developers from around the world to the Pacific Northwest each year.

For good and for bad, Microsoft's enterprise / platform DNA and massive wealth creation form the core of Seattle's entrepreneurial ecosystem, giving the region a natural edge as a place to found a build an enterprise software startup.
eCommerce

In 1994, just as looming antitrust litigation and competing innovations were chipping away at Microsoft's dominance, Seattle was incredibly lucky to be chosen by Jeff Bezos as the home for his new online bookstore, Amazon.com.

Thanks to Bezos' vision and leadership, 18 years later Amazon.com not only dominates online retail but also powers a huge chunk of the broader internet economy via its Amazon Web Services platform. Like Microsoft before it, Amazon is also leveraging its financial and market power to pursue hugely ambitious new efforts in consumer electronics, media and publishing, online advertising, and more.

In aggregate, Amazon's ambitions are now drawing thousands of talented technologists to Seattle across an astoundingly broad range of technical and innovation disciplines. This recruiting wave is the talent pool from which our next generation of founder/entrepreneurs will spring.

Best of all from the perspective of the broader Seattle ecosystem, Amazon has made a huge commitment to building its business in the heart of the city. The company just completed a billion-dollar real estate deal to acquire its South Lake Union campus from Paul Allen's Vulcan Capital, and is planning to add three 37-story office towers on adjacent blocks just north of downtown. By locating thousands of skilled tech workers in the city instead of the outer ring suburbs (as Microsoft did), Amazon is single-handedly creating the kind of urban density that spawns accelerated rates of innovation and new venture formation.
Mobile

Since 2007, Apple's iOS ecosystem and Google's competing Android effort have put the Bay Area at the center of the smartphone revolution. But North America's mobile communications business was largely created in the Pacific Northwest, and the DNA of those mobile pioneers is deeply baked in to the regional culture.

Craig McCaw was the first to spot the incredible lifetime value economics of the cellular phone business and tapped Mike Milken's junk bond expertise to quickly amass mobile licenses for most of the top US MSAs. His McCaw Cellular became the largest mobile operator in the US and was acquired by AT&T in 1994 to form the kernel of what is now AT&T Wireless.

Around the same time that Craig and his brothers were snapping up licenses under the McCaw banner, another Northwest wireless entrepreneur -- John Stanton -- was assembling a similar portfolio under his Western Wireless brand. In 1999, Stanton spun off his urban MSAs into a new company called Voicestream, which was acquired in 2001 by Deutsche Telekom and rebranded as T-Mobile, now the 4th-largest US mobile operator.

Thousands of talented people moved to the Seattle area to help build these companies, and stayed on to create their own startups around the mobile ecosystem. In 2004 Taiwanese handset giant HTC set up its Americas headquarters office across the freeway from T-Mobile's HQ campus, adding smartphone device skills to to the mix. And despite long odds, Microsoft continues to dump billions into its struggling Windows Phone division in an effort to avoid disruption in their core enterprise business by the smartphone + tablet juggernauts.

Collectively, these efforts have seeded the Pacific Northwest with a deep and multi-generational talent pool of mobile expertise, plus a rich vein of angel investors whose wealth was produced by bold moves that helped create the modern mobile era.
Gaming

Last but not least, the Pacific Northwest has maintained a persistent leadership role in the casual gaming industry through several technology generations.

Japanese casual games pioneer Nintendo first established American operations in New York in 1980, but two years later moved their US headquarters to Redmond (the same Seattle suburb where Microsoft is located), bringing the first wave of digital gaming talent to the region.

In 1996, as arcade gaming gave way to in-home console and PC games, Microsoft veterans Gabe Newell and Mike Harrington created Valve, publishers of the hugely popular Half-Life series and operators of Steam, a social distribution network. Together, these businesses generate hundreds of millions of dollars in annual revenue for this still-private company.

In 2000, three partners founded PopCap Games in Seattle, growing their casual gaming business over the next decade to $100M+ in annual revenues before selling to publishing giant Electronic Arts in 2011 for $1.3 billion.

Also in 2000, Microsoft unveiled the first version of its hugely successful XBox gaming console -- wich has become the company's most successful product line outside the core enterprise productivity business, selling tens of millions of units worldwide and supporting a huge ecosystem of entertainment titles.

And in 2002, Paul Thelen -- formerly manager of the casual games business within Seattle's Real Networks -- founded BigFish Games, a privately-held casual game studio and publisher that now employs over 600 people at its office on the Seattle waterfront.

There are dozens more small but fast-growing game companies in Seattle that -- in ways lage and small -- spring from the same deep well of gaming talent, knowhow and capital built up here over the past 30 years.

Thanks to prior generations of innovators, the Pacific Northwest has the ability *today* to drive global innovation on any of the five vectors outlined above. We've also shown the capacity to merge these disciplines to create new kinds of innovation -- like Avalara's hugely profitable enterprise SaaS business managing sales tax complexity for thousands of online retailers.

Just because we're strong in these areas doesn't mean that we can't foster world-class innovation in other domains -- Microsoft and Amazon alone have picked so many fights on so many fronts that nearly every aspect of digital business has found its way into the local innovation gene pool.

But if I had to guess where the next billion dollar company in the Northwest was going to emerge, it would be along one of these five vectors.

And we aren't standing still as an innovation ecosystem. There are at least two emergent vectors of innovation in which the Pacific Northwest is already playing a leadership role:

Cloud

Amazon Web Services began as an outgrowth of Amazon's core retail business, but it has quickly become the gold standard for Infrastructure-as-a-Service (IaaS) and the bellwether of a massive global shift from on-premise enterprise datacenters to virtualized or "cloud" computing infrastructure.

Other huge companies -- including Google, HP, IBM, Rackspace, Microsoft and EMC -- are also targeting this opportunity, and Amazon's leadership is being challenged on many fronts. But the foundation has been laid for another massive wave of technology innovation and many of the key players are here in the Pacific Northwest.
Big Data

As software-based systems come to dominate both the consumer and enterprise economies, the next big opportunity for software value creation is in sifting through the massive data exhausts of these systems to identify patterns that indicate either risk or opportunity -- and to spot those patterns sooner than competitors.

There is no clear regional leader for this category of innovation. The Intelligence community near Washington DC has been a heavy investor in the field, and the financial services business in New York, New Jersey and Connecticut is increasingly reliant on predictive analytics to drive trading strategies and manage risk, making the Tri-State area another hotbed of big data innovation.

In Seattle, Big Data innovation has flowed primarily from our native strength in enterprise IT. Local big data visualization company Tableau Software has built a $100M business helping commercial customers spot patterns in large and complex datasets since 2003. More recent local entrants like Spacecurve and Simply Measured are scaling quickly by applying similar techniques to new high velocity / high volume datasets like those produced by mobile devices and social media.

No region of the world -- not even Silicon Valley -- can take for granted its role in the global economy. Each of us must take responsibility for our own ecosystems, spotting talent and matching it with capital and mentorship to produce the greatest odds of success for individual companies -- and by extension for the system as a whole.

I'm grateful to live in one of the leading innovation ecosystems in the world. I'm also determined to find ways to help Seattle extend its leadership in current areas of strength, and to continue to explore new vectors that will position our community for future success. I can't imagine anything more fun, or more worthwhile.

Welcoming Apptentive to the Founders Co-op Family

2012-12-10T09:05:00.000-08:00

A few weeks ago I published a long list of Enterprise SaaS opportunities being diven by the massive global shift to "Mobile First" customer communications.

Most large enterprises have been caught flat-footed by the speed of this transition, and are now scrambling to catch up to their customers' preference to access digital services via native mobile (iOS and Android) apps.

We've seen this up close at two of our existing portfolio companies -- Urban Airship (in Mobile Engagement Management) and MobileDevHQ (in Organic App Marketing, a.k.a. App Store Optimization) -- which are not only seeing extraordinary growth in customers and revenues, but also increasingly being talked about as C-suite priorities, not just tactical product marketing tools.

There are many startups chasing elements of this broad theme, and most of them tend to stumble on one (or both) of two significant choke-points in the mobile enterprise adoption curve:

SDK Integration -- Most 3rd-party enhancements to native iOS and Android apps require the app publisher to make code changes -- and often design / UX changes -- to their apps. This usually increases the size of the app (lengthening download time), requires app store approval (particularly painful on iOS), and injects new dependencies into engineering processes that are already stretched tight. With literally dozens of firms seeking SDK-level access to the best publishers and apps, the default answer from most product teams is 'NO'.
Enterprise Sales -- Even if you can get the product team to integrate your stuff, turning those installs into money (in the form of monthly recurring revenues in the hundreds or thousands of dollars per customer) requires good old-fashioned selling skills that go way beyond what most early-stage Enterprise SaaS teams are capable of. Leveling up your sales capacity before you've proven your business model is a painful chicken-egg bottleneck that stops many gifted product teams in their tracks.

I pay close attention to this sector, and whenever I come across a team that's attacking a critical piece of the Enterprise Mobile puzzle and has cracked the code of both SDK integration and enterprise sales -- particularly among mobile publishers with millions of installs -- I lean in hard.

Apptentive -- a member of the TechStars Seattle class 2012 -- is one of those companies, and today I'm thrilled to announce that they're also the newest member of the Founders Co-op family.

Enterprise traditionalists might describe Apptentive's offering as Mobile Customer Support (MCS) or even Mobile Customer Relationship Management (MCRM). But the guys at Apptentive aren't your typical bean-counting business guys -- they believe that great brands are built from customer love, not "risk management" (or worse, "damage control") -- and their mission is nothing less than bringing love back to the mobile customer experience.

Together, OS-controlled app stores and "native" apps (i.e., software that runs locally on the mobile device instead of connecting through the open web) have cut brands off from their mobile customers.

Apptentive helps brands built on customer love knock down these artificial barriers and get back to the business of "delivering happiness" through their mobile apps with the same skill and fidelity they achieve through any other channel.

Better yet, Apptentive doesn't treat mobile as a separate vector for customer happiness, but integrates effortlessly with leading enterprise platforms like Assistly (now Desk.com) and Zendesk to deliver a unified view of the customer across all digital channels.

Congratulations to the Apptentive team on their graduation from TechStars Seattle and thanks for letting Founders Co-op play a small part in a future filled with mobile customer love.

The vision thing

2012-11-28T22:26:00.000-08:00

I love working with engineering-centric founding teams -- makers who can not just envision the future but build it as well.

But I had a conversation this morning with another early-stage investor that highlighted a common skill gap in teams like this: even when they have a crisp vision of the future in their heads, they're often not that comfortable articulating it in public.

This is obviously painting with a very broad brush -- "engineers" are all kinds of people, with all kinds of individual strengths and weaknesses. But to borrow from the Meyers Briggs Personality Type Indicator framework, they more often fall on the "S" (for Sensing) end of the spectrum than "N" (Intuitive) -- meaning they feel most confident when they build arguments based on a foundation of facts rather than making (or at least going on record with) big logical leaps.

And early-stage founders have to do more than just build product and listen to customers -- they also have to sell, painting a vision of the future that can get new hires, investors and analysts excited about where they're going and why they're going to win. Almost by definition, that vision is always bigger and more audacious than the current state of the business might suggest.

Roman Stanek -- CEO of GoodData -- described this tension perfectly in a blog post I came across last night:

"...there's a clear distinction between what I would call air wars and ground wars. The air wars are talking to analysts going on speaking trips and so on. The ground wars are selling stuff to your customers and solving a real problem. Every company has to do both. The air wars help to build the brand. The ground wars help you win customers."

Technical founding teams usually start out with natural excellence in the "ground war", but have to invest time and effort in building up their "air war" capacity.

Those that recognize this early and lean into the task tend to accomplish more, faster, than those who expect to win through execution alone.

Seattle + The Startup Ecosystem Report 2012

2012-11-26T22:48:00.000-08:00

I was both pleased and surprised last week to find Seattle ranked #4 on a global survey of startup ecosystems -- below Silicon Valley, Tel Aviv and Los Angeles, but above several much more talked-about innovation centers, including both New York and Boston.

The report was a timely validation of a hypothesis I've been exploring -- with the help of many others -- about the global diffusion of innovation, and the corresponding rise of the "city-state" (as opposed to the national economy) as the locus of global competition.

The report's authors summarized this macro trend very well:

"Overall, the Startup Ecosystem Index paints a glowingly positive picture of the state of entrepreneurship around the world. While Silicon Valley is far and away the strongest ecosystem, just 5 or 10 years ago most of the other ecosystems on this list either barely existed or didn’t exist at all. The global startup revolution is going strong, indeed."

I'm already on record as believing that Seattle (and the Pacific Northwest more broadly, including #9 on the list, Vancouver BC) will be one of the global winners in the Innovation Economy, so I was both gratified to find us ranking so well, and spurred to an even greater sense of urgency by the many areas in which we remain weak.

Here's a quick rundown on my takeaways -- both positive and negative -- from the report:

The index is a composite of eight different factors, and Seattle's strong overall showing was attributable to outperformance on just one of those -- masking average performance on many others, and significant weakness on some of the most critical factors for future growth.

On the positive side, Seattle was ranked second only to Silicon Valley on the quality and depth of our talent pool.

Thanks to the extraordinary success of our "pillar" companies -- Microsoft and Amazon -- and increasingly reinforced by an excellent Computer Science and Engineering (CSE) program at the University of Washington, Seattle is rich in the scarcest and most valuable resource in the innovation economy: digital creative talent.

Unfortunately for the long-term health of our startup ecosystem, Seattle ranked 19th out of 20 for "Startup Output" -- defined in the report as "the total activity of entrepreneurship in the region, controlling for population size and the maturity of startups in the region."

In other words, the deepest talent pool outside of Silicon Valley -- Seattle's -- is also among the least productive in the world when it comes to creating new tech startups.

The report doesn't shed much light on the "why" behind this underperformance -- we under-indexed slightly for funding support (#7) and startup performance (#6), and matched our overall ranking (#4) for community support of entrepreneurship -- so while we can do better on these fronts, it's difficult to attribute the poor start rate to a lack of capital or mentorship.

Our most significant areas of underperformance as an ecosystem were on the "Trendsetter Index" (a measure of openness to new innovations, where we placed 11th) and the "Differentiation from Silicon Valley Index" (a measure of the extent to which we have nurtured unique competencies that set us apart from the dominant innovation market, and where we ranked 14th).

Both criticisms may be true, but neither are particularly actionable (we can exhort each other to "think different" all we want, but it's unlikely to make it so).

So what *can* we do to get more local talent off the bench and into the game?

For years, Microsoft was a certain path to wealth as a technical professional in the Seattle area -- not only did they pay well, but the stock gains made thousands of early hires rich beyond their wildest expectations. That baton has now been passed to Amazon where pay is poorer, but stock appreciation continues to mint millionaires at an impressive rate.

It's been a long time since a new Seattle-based company produced a huge windfall for more than the founders and investors -- where even the rank and file who committed early wound up with a nest egg and some mad money too.

If I had to put my finger on the one thing we could do to improve our weak "startup rate", it would be to produce more explosive wins in Seattle -- for the curent generation of local tech talent to witness their peers creating huge impact -- and huge wealth -- with companies of their own.

I can think of a half-a-dozen local companies that are already on a path to producing the next generation of tech wealth in Seattle, and dozens more that could get there within the next five years.

If we want to really earn our #4 ranking -- and claim our spot among the small handful of city-states that will dominate the global economy in the next 50 years, we need to dream big dreams here in Seattle and put all our weight behind making them come true.

I'm not just betting we can do it -- I'm all in.

The Future of Specialty eCommerce: Platforms, Marketplaces + "Native Monetization"

2012-11-14T22:27:00.001-08:00

I had a great conversation with a Vancouver, BC entrepreneur this morning that forced me to organize several half-formed thoughts about the future of online "specialty" retailing" -- this post is the result.

Specialty retailing is the opposite of the everything-under-the-sun kind practiced by supersites like Amazon + WalMart.com. "Specialty" means that the merchant focuses on a specific category of merchandise -- say Electronics (e.g., Best Buy), or Outdoor (REI), or Footwear (pre-Amazon Zappos) -- and in aggregate it makes up the lion's share of both the offline and online retail landscape.

The entrepreneur I spoke with this morning is pursuing a site analytics / conversion optimization insight that would be most valuable to an online specialty retailer. Our discussion centered around the future of online retail -- what will it look like, who will the winners be and where are new opportunities likely to emerge?

I didn't even realize I had a framework for this before we spoke, but it turns out that I do, and it goes something like this:

Online steals share from offline at an accelerating pace

I've written before about how local / store-based retail needs to re-imagine its reason for being in the Amazon + iPad age, but a16z's Jeff Jordan made the case much more forcefully -- and with prettier charts -- in this post. The net is that specialty retail merchandising as we know it will continue to exist, but dollars and attention will move online much faster than most retailers expect.
Superstores will dominate direct-nav online retail

Humans are efficient (lazy is another, less-nice word for it) and the more retail moves online, the more crap they have to wade through to find what they're looking for. Which means that the biggest online superstores (and Amazon is the dominant player here) will control an ever-larger share of online shopping discovery as well as transaction volume -- because they just make it easier than anyone else to find and buy what you're looking for.
The biggest and best-run specialty retailers will dominate their online niches

As physical location and retail storefronts fade in importance, specialty niches that once accommodated many strong regional players will experience significant concentration, with a small handful of tech-savvy incumbents seizing the same direct-nav leadership role in their niche that Amazon does in general retail (e.g., in Outdoor, REI and Backcountry.com will win at the expense of regional chains like A16 and Paragon Sports).
Branded platforms + marketplaces will pull together the long-tail of specialty retail

As direct-nav pulls away and search-based discovery gets (even) harder, small merchants (the ones that run single-location storefronts or small regional chains today) will increasingly gravitate to branded seller platforms (Storenvy, Shopify) and marketplaces (Etsy, ebay) to benefit from their umbrella brands and traffic pipelines, versus trying to go it alone.
Social curation and "native monetization" lifestyle media will replace search as the gateway to specialty retail

Where search (SEM + SEO) was the leading channel for new customer acquisition in the past, specialty retailers will have to master a whole new set of traffic skills to profitably acquire customers going forward. Social -- a catch-phrase for a huge range of platforms and tactics, but led by Pinterest, Twitter and Facebook -- will dominate the organic / unpaid side of the house. "Native" product placement in digital lifestyle media -- think architects submitting portfolio images to Houzz or designers paying for product reviews by influential lifestyle bloggers -- will replace search ads as the most effective paid strategies.
Native mobile -- and especially tablet apps -- will leave web / mobile web in the dust

Consumers' preference for native mobile shopping experiences vs. mobile-aware web ones continues to surprise old-time web-heads like me. The iPad (and competing Android tablet offerings) has quickly become shoppers' preferred way to shop online, and brands that take full advantage of its tactile UX (supporting app-like flourishes like swipe, pinch, etc.) are meeting customers where they want to be. Notice Fab's decision to go native (despite massive success with Web and email), understand that a third of their visits and sales now happen via native apps and you can see where the puck is going.

None of this will happen overnight, and the specialty retail marketplace is so huge that there are still plenty of opportunities to sell digital solutions to traditional specialty retailers of all shapes and sizes. But if you're placing a bet on the future, you should assume that this market shrinks rather than grows -- and that weaker players will begin to fail at an accelerating rate as the combined shifts to online and tablet take their toll.

Think I'm dead-wrong? Have more evidence to support the arguments above? Please let me know!

Ignite 18 + "The Maker Moment"

2012-11-13T11:17:00.002-08:00

Last Thursday I participated in my first-ever Ignite, a multi-city live event series that operates under a brilliant tagline for the ADD era: "Enlighten us, but make it quick."

UPDATE: I just added the video of my session above.

This was not only my first time as an Ignite attendee, I was also one of 15 speakers for the night, each of us charged with delivering a 5-minute talk, backed up by exactly 20 slides that auto-advance every 15 seconds (which is how Ignite keeps the "enlightenment" flowing).

And the format wasn't even the most daunting part; my fellow speakers included heavy hitters like Seattle Mayor Mike McGinn; social media marketing maven Shauna Causey, and Virgina Tech massacre survivor Kristina Anderson (among many other super-talented folks).

My topic for the night was something I say every day in private conversation but had never before delivered in public. The video is are embedded at top if you want to sit through the whole pitch but the tl;dr version is as follows:

We have arrived at a unique moment in the history of technology and human society: what I call "The Maker Moment"
The explosive growth of global connectivity, coupled with the collapse in the cost of software development, has made software the "operating system" of human progress -- the most efficient lever for positive change in the world.
The rate of positive change through software is limited by one thing -- an acute global scarcity of "digital creatives" skilled in all the disciplines needed to create effective software tools and experiences.
As explosive global demand for these skills collides with acute scarcity, makers are empowered as never before -- whether they realize it or not they are the "limiting reagent" in the global economy, and talent (for the moment) is more powerful than capital.
This condition won't last forever -- maybe five years, maybe 10 -- but makers with a passion for positive impact shouldn't wait to claim their power and seize their opportunity to create change.
There are several concrete steps that any maker can take to maximize his or her chances of making an impact -- simple things like moving to a city with lots of other makers in it; or leaving a digital crumbtrail of their skills and passions online for others to find -- all the way up to the big leap of building their own company.
No matter what they choose, the "Maker Moment" means that failure is impossible for talented digital creatives -- even if they stumble the market will reach down and pick them back up, because their skills are too valuable right now for the market to miss out on. The only failure is not to try.
Makers don't have to change the world all by themselves -- traditional economic actors like financial investors, big companies and even government and non-profit players are all eager to participate in (and profit from) digital innovation -- but makers are the drivers in a way they never have been before.

None of the above will be news to folks who are already embedded in the innovation culture -- startup founders, venture capitalists and entrepreneurship advocates.

But I'm on a mission to drive this idea as deep into mainstream culture as I possibly can -- so that nobody with the skills and passion to create positive change misses this unique moment to shine.

If my Ignite talk -- or the ideas behind it -- encourages just one more digital creative to realize their true power and become an author of the future (and not just a passive consumer) it will have been a night well-spent.

Thanks to the Ignite Seattle crew -- and especially Bryan Zug and Scott Berkun -- for the opportunity to present. And if any of you have an idea you care deeply about and want to share with the world, I strongly encourage you to submit your own Ignite talk -- it's an amazing experience.

P.S. Special thanks to Adam Tratt and the gang at Haiku Deck for making my slides beautiful.

City-states, capitalism, creatives + customers

2012-11-05T17:41:00.000-08:00

My brain is exploding.

This will be a short post that foreshadows an (as yet unwritten) longer one but I wanted to point out some great thinking + writing by others, and also offer up the beginnings of a framework that extends / integrates these ideas to (hopefully) make them more actionable.

First, the links:

Steve Denning's excellent article on the failure of "shareholder value maximization" as the animating principle for organizations, pointing to "customer capitalism" as the way forward.

Venkat Rao's equally thought-provoking three-part Forbes series, "Entrepreneurs are the New Labor" (Part I, Part II, Part III), which among many other ideas predicts the rise of a "Global City-State Economy"

And finally, the intellectual antecedent (by 20 years!) of both of these:

Robert Reich's The Work of Nations, which I have heard about for years but finally sat down to read this weekend, and which anticipated the effective secession of the global "symbolic analyst" class (i.e., the one that you belong to if you're reading this) from the rest of society.

These are by no means the only thinkers / ideas that are at work here -- Brad Feld's "Startup Communities" is a very practical riff on many of the same themes -- but they help stake out the boundaries of the idea-space I'm trying to get my head around.

The themes / assertions in these (and other writings that I'm now trying to integrate) include the following:

The "disruption" promised in the first Internet boom -- and then dismissed as so much hype by non-tech market players -- is finally here and gathering steam.

Many complementary innovations (e.g., open source / cloud / mobile / big data / global IP networks / etc.) are acting in combination to create a Sandy-sized hurricane of threat (to incumbents) and opportunity (to innovators) across nearly every sector of the global economy.

The "limiting reagent" in this transformation -- the scarce resource that controls the rate at which this chemical reaction can proceed -- is talent: those with access to "digital creatives" skilled enough to compete in the global innovation market are able to advance their agendas; those that cannot attract / retain digital creative talent fall further and further behind.

Unlike previous waves of capitalist innovation and progress, the unit of organization for this pool of digital creatives is not the firm but the individual (in the first degree) and the city (in the second): the elite pools of digital creative talent that currently control the rate of global innovation are dynamic, self-organizing and location-based.

Silicon Valley is (and will remain) a global leader in digital innovation, but its dominance will diminish somewhat as elite pools of talent agglomerate in cities around the world: there will be many global innovation hubs that compete along increasingly specialized vectors of innovation that leverage local strengths (e.g., New York in Finance, Media + AdTech; LA in Entertainment; etc.)

As software "eats the world" (to use Marc Andreesen's pointed phrasing), demand for digital creative skills across the global economy will expand much faster than the available pool of talent can grow to address it. This will be somewhat mitigated by new productivity tools and labor market innovations, but acute scarcity will prevail for the foreseeable future.

In these conditions of acute / persistent scarcity, the global competition for digital creative talent will intensify. Traditional labor market actors like corporations and universities will continue to be players, but new actors -- particularly location-based innovation communities like the kind described in Brad Feld's book (see above) -- will take a leading role in promoting their markets as destinations for the world's most capable digital creators (i.e, independent of any specific company or economic interest in that community).

The city-states with the best odds of competing successfully in this new reality will be those that can attract and retain elite talent without regard to specific companies or industries: the cities or regions that optimally serve the full range of human needs of the maker class (and not just their professional / economic aspirations) will be the ones that win the long-term battle for talent.

Because the most powerful economic actors in the global economy will be members of the digital creative class, the firms that stand the greatest odds of success in this new, talent-centered economy will be those that best address the human needs of their customers (in many cases blurring the distinction between customers and employees in terms of who has a voice in the direction of the company and the development of its products); the commercial battle will increasingly be for customers' hearts as well as their wallets.

All of the above trends will quickly and dangerously exacerbate the separation of elite players in the global economy from those who lack the skills to participate in digital creative work. The most pressing economic and policy question of the next 20 years will be how to bring the greatest possible share of the global population along with these changes, and what to do on behalf of those unable or unwilling to participate.

Lots to chew on here -- and lots of better brains and pens than mine have been pushing these ideas along for many years -- but it feels like another big inflection point in the modern narrative is unfolding right now and I'm eager to engage folks in my own little innovation community about how we can work together to play a bigger role.