Nir Eyal’s book Hooked has become the go-to manual for anyone wanting to build a habit forming business, and who wouldn’t want to build one of those? Businesses that are part of our regular routines profit hugely from regular custom without marketing spend, and many of today’s biggest businesses have habits at their core. Want to know something? You probably reach for Google. Have some time to kill? There’s a good chance you go to Facebook (unless you’re a millennial…).
But not all businesses can be based on habits.
Habits are, by definition, part of our routines, and most of our routines are daily. When you think about it, it is only a small fraction of businesses that we use daily. The others we find each time afresh each time we need them, or maybe remember them if they have a powerful brand. On the desktop we find things via Google and we also use Google to help us remember the brands we only half recall, and that has worked fine. Booking holidays, buying clothes, fixing up our houses – these are all examples of things we spend big money on but don’t interact with regularly enough to build a habit.
Apps are changing the game for these non-habit forming businesses on mobile.
Habit forming businesses are able to get an icon on our home screens and maybe lure us back via notifications. Non-habit forming businesses, which you could define as those which we don’t want to download an app for, are challenged by the fact that traffic is now predominantly on mobile and skews more that way each month (Baby2body, one of our partner companies, gets 91% of it’s traffic from mobile), and that within mobile an increasing share of time is spent in apps.
The solution to this problem is not yet clear, although there are some hints. What we need is a mobile equivalent to Google search, including paid marketing (these things exist on mobile, but the user experience isn’t equivalent). I suspect the answer will lie in a combination of services being surfaced through contextual app platforms, of which maps, messaging and maybe calendars are the most obvious, and a much smarter notification stream.
Facebook’s new Messenger Platform
is a sign they are thinking this way about the future and in China Baidu maps already acts as such an app platform for millions of users.
How this plays out, and how quickly, is critical for the mobile strategies of most ecommerce companies, including many of our partner companies.
This tweet from YC’s Sam Altman was in my feed this morning:
You can see why he’s pleased. Lots of his companies have got a $1mm revenue run rate which is a sign they are valuable.
It takes a while to get to a $1m run-rate and I’m wondering if YC is trending towards backing more mature companies and fewer true startups.
Here in the UK it seems to me that Seedcamp and Techstars have made a similar shift in strategy. It makes sense, they get similar equity positions in businesses with more proof points that are therefore more likely to be successful. On top of that the introductions these programmes can make to potential investors, customers and advisors are more valuable to companies that have product and revenues.
That leaves a gap for true startups. Which is where we play
Everyone loves a high valuation and it’s natural for founders to want to minimise dilution. They will most probably go on to raise multiple rounds of venture capital after all. And look at what Zuck achieved…
But companies that spend too much time optimising terms end up as net losers. YC’s Sam Altman explained why in a post last year:
Startups are usually a pass-fail course — either you succeed or you don’t. If you fail, maybe you get acqui-hired, but that’s happening less frequently and is usually little better than just getting a job at the acquiring company instead.
The important thing is to get good investors, clean terms, and not spend too much time fundraising. The biggest problem comes from chasing high valuations. Contrary to what many people think, at YC we encourage companies to seek out reasonable valuations. Valuations are something quantitative for founders to measure themselves on, and there are lots of investors willing to pay high prices, so they don’t always listen. But I’ll say it again: trying to get really high valuations is a mistake.
If you’re clearly in a position of leverage, it’s fine to push for a high valuation, but don’t jerk investors around. Just say what you want and don’t get into a lot of back and forth or term complexity. Also remember that very high valuations often push out good investors.
And don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round. The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one. If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.
We think about valuation the same way. Much better to have a smaller piece of a bigger pie and the best way to get a big pie is to get good investors and minimise time spent fundraising.
I was talking with another investor last week about what it takes to be successful in this industry and made the point that it takes a certain type of person to be able to remain human whilst repeatedly saying ‘no’ to entrepreneurs who are asking you to join them in pursuing their dream, and, even more difficult, occasionally saying no to the follow-on funding that would allow existing investments to keep going. This investor is a successful investment banker turned VC and he replied that all the most successful bankers he has known have an ‘emotional off-switch’. Most of the time they are great people fully engaged across a range of emotions, but when the occasion demands it they say ‘this is business’ and proceed with what they think has to be done without emotion. We agreed that without an ‘emotional off-switch’ it’s hard for people in senior roles to make consistently good decisions.
I’ve been dwelling on this since and have had three further thoughts:
- Whilst it’s important to assess the pros and cons of big decisions without emotion it is important to understand the impact the decision will have on the emotions of others (and yourself). If a course of action will cause emotional damage that should be on the list of cons.
- Flicking the ‘emotional off-switch’ can’t be an excuse for bad behaviour. The responsibility to behave well remains unchanged.
- It isn’t just bankers and investors that need an ‘emotional off-switch’. Entrepreneurs (and possibly everyone who takes big decisions) needs one too. Times when entrepreneurs need their ‘emotional off-switch’ include when team members aren’t working out, when folks need to be hired in over the heads of the founding team, when customers are difficult and when new initiatives aren’t working out. It’s interesting to note that all of these examples are when things aren’t going well. That’s because letting go is emotionally challenging. Correspondingly, one of the most common laments I hear from successful founders is that they wish they had moved more quickly on difficult decisions instead of holding off in the hope that things would get better.
I suspect that many people wouldn’t like to have an emotional off-switch, but then leading companies and investing isn’t for everyone. For those of us who choose these vocations finding that switch and knowing when to use it are pre-conditions for success. Following this post I will be more mindful about how and when I use mine.