I started at Lehman Brothers on June 1st, 2007 as a first year analyst. It was my first job out of college. Dick Fuld, the CEO at the time, publicly discussed “the road to two-hundred,” in which he would not retire until the stock reached $200 per share, almost three times the price when I arrived. Everyone at the firm believed this as though it were a fact – that there was something special about Lehman Brothers stock – it always went up.
I joined Lehman for a few reasons. The first was personal. My mother worked on Wall Street and passed away when I was a teenager. I felt, somewhat misguidedly, as though following in her footsteps would bring me closer to her. The other reasons were simpler. I had been interested in the stock market as a kid (though I went to work trading bonds and credit derivatives), I wanted to make good money, and I thought maybe, just maybe, it would be a bit of fun.
Investment banking was a default career of sorts in 2007, something for the kids who didn’t quite know what they hell they wanted to do, and there were plenty of jobs being given out back then. The startup community in NYC was nascent, and entrepreneurship as a career (which I still don’t quite understand) was not something I had ever been exposed to. I vividly remember walking into the career services office my junior year in college and being prompted with, “Well, which bank would you like to work for?” I was later told that of my class of 1400 graduates from Yale, forty percent took jobs in finance. No joke. I remember thinking even then (as many probably were), that while rising global powers such as China were positioning themselves to be the largest coal and energy producers in the world, the United States was seemingly intent on producing the largest number of hedge fund managers. Fortunately, from my viewpoint at betaworks today, and after living in China for a year, I believe that innovation is alive and well in the United States of America, although much still has to be done to ensure that we're competitive in the decades to come.
To make a long story much shorter, and I’ll probably write additional blog posts about some incredible things I witnessed at Lehman during my time there, my experience was not what I had hoped it would be.
Once I had started, It took me several months to figure out what the traders around me were actually doing, or even simpler, what I was supposed to be doing. We were tasked with both providing liquidity for our clients and trading the firm’s own book (money) in the corporate bond (and structured derivatives) markets. I worked alongside a number of PhD’s and rocket scientists. These were highly intelligent people moving around unthinkable sums of money and financial products, and making huge gambles to boot.
In the early days, I learned important lessons on markets, liquidity, and how to value impossibly complex financial products. I would spend days attempting to understand the intrinsic value on structured bonds collateralized with physical jet engines or commercial real-estate scattered across various regions of the country. The reach of these products was real and the analysis could mean millions won or lost for the firm. The purely cerebral slice of the industry, and I’ll stand by this today, was fascinating (to me).
Unfortunately, what I eventually came to learn, and this took time, was that what was really happening was a simple transfer of wealth, more often than not from the less intelligent and informed to the more so. I worked in a highly opaque market. There was no price ticker scrolling across our screens telling us what these bonds and derivatives we traded were worth. In fact, no one really knew what any of this stuff was worth. Which, it turns out, is a trader’s field day. What this meant, in its simplest form, is that these traders (or salespeople) could buy bonds at the “market” price from intelligent hedge fund managers in NYC and sell this same crap at much higher levels to unsophisticated (but legally considered “sophisticated”) pension funds and insurance companies in middle America. What I discovered, quite starkly, is that the part of Wall Street that I worked in was simply transferring wealth from the less sophisticated investors, often teachers’ pension funds and factory workers’ retirement accounts, to the more sophisticated investors that call themselves proprietary trading desks and hedge funds. Of course, the traders had all sorts of excuses and jargon to deal with this truth. “Oh no,” they would say, “We are important providers of liquidity that create stable financial markets. We’re a crucial part of a system. And besides, if we don’t do it, someone else will.” These are the lies that people tell themselves so that they can buy larger homes.
Although it took some time, many months, the moment I realized this truth, I was done. To do that sort of work, you have to either really love it or convince yourself that it somehow has worth. Otherwise the hours, stress, and bullying will eat you alive. I remember taking the subway home each night asking myself “What have I done today? What have I created?” And it meant that I couldn’t sleep well, I was embarrassed to tell people what I did, and I felt as though I personally owed every single person that I mucked over in the markets each day. The experience reminded me of one as a child when I unfairly sold some worthless items to neighbors at a stoop sale in front of our house in Brooklyn. When my parents found out that night, they made me go from home to home on our block returning the money.
Apart from the actual work, I also came to realize over the course of the year that I was at Lehman (and Barclays), that a perverse and at times terrifying culture existed at the firm (and from conversations with friends most likely throughout Wall Street). The people around me measured themselves by one metric: The amount of money he or she made for the firm. Their bonus determined the respect they received. And yet, every last person felt poor. I remember during the first bonus season hearing that one reasonably successful trader was thinking about leaving the firm. I asked one of my colleagues why that was and he responded, “He made just under a million. They fucked him.” I was astonished. I had the incredibly good fortune to live a comfortable childhood. I received a wonderful education at a top public high-school in NYC and never really needed anything. But the lens through which the people around me at Lehman looked at the world was so distorted that I couldn’t figure out where they came from. In what possible reality can someone receive a million dollars and feel as though they got fucked?
What this bizarre reality really meant is that I couldn’t be myself. In Chris Sacca’s widely viewed commencement speech, he encourages graduates to go on and be their weird selves. When I heard this for the first time, it resonated deeply with me, as I know well a time in my life when I couldn’t do it. I’m a mess in a million different ways, and I’ll be the first to point it out. But I also know that I am kind, that I am intellectually curious, and that in my heart I’ve always been a builder. In the latter months of my time at Lehman, a dark time for me, I found much solace in reading literature and novels that had nothing to do with my job. I read on the morning subway before sunrise and it calmed me. One day when I got to work, I left my book on my desk, The Corrections by Jonathan Franzen. My boss saw it and asked “What the fuck is this?” I told him that it was a book I was reading. He replied, “Well get it the fuck out of here. We’re here to make markets and money. And nothing else.” And he was right. There was no place for that book there. There was no place for my weird self.
Around this same time in late 2008, I was living with five other guys from college, four of whom were in similar roles as myself. We created a running joke: “Would you rather have someone shit on your face, but then be able to spend the day however you please, or would you rather go to work today?” Eventually the answer for all of us was unequivocally, “Shit on the face.” So something I know now: When you’d rather have someone shit on your face than go to work, it’s probably time to leave.
And so a year after I started, after the largest bankruptcy in American history, after surviving six rounds of layoffs, I left Lehman (at that time Barcap) during the worst recession our nation had seen in decades. I had little idea of what I might do, of how I might earn the next paycheck, or of how I might eventually find a place to create real value in the world. And it turned out to be one of the happiest and most creative times of my life.
If you’re reading this, you probably work for a tech startup. Your incentives are aligned with a theory that software will eat the world. Mine certainly are. We’re inclined to believe that machines will replace many of the common tasks performed by humans today (but not us), and that sophisticated algorithms will make the data around us more useful. I believe that over time these trends will play out with dramatic force. But not yet.
In fact, over the past year, I’ve come to believe that humans are more important for product development than ever before. This may seem glaringly obvious and of course The Times is On it. But I’m talking about humans as part of the product and community building process itself, something that goes way beyond enhancing algorithms. What I’m positing is that the most successful consumer Internet companies have to themselves be human, they have to have a soul, a core. The soul of the company must be reflected everywhere, in the product design, UX, copy, editorial, customer service, all the elements that an end user might interact with. My simple point for founders is not to forget that.
Let me give you a few examples I’ve seen recently:
How do you know that Rushmore was built by people who really love music? Go read their /purpose page. Does that look like it was written by a human? It sure as hell does, because Cameron, Tyler, and team don’t take boilerplate copy, they put their fucking soul into it.
Which articles do you read most often on Longform? Yes, you read the top picks in the main feed. And who chooses those articles? Why are those few better than all the other longform pieces over the course of the week? It’s because Aaron and Max have damn good taste, and they’re humans.
How are companies like Quibb and Bib & Tuck building small, but extremely engaged communities of early adoptors. By literally hand picking each and every person. That’s how. How does each person add value to the network? Sandi and Sari know because they do their homework and they’re humans.
One of the reasons we make seed investments at betaworks is to build an ecosystem of founders that will add value to a growing network of companies. How do we make this happen? Sure, we use simple tools like facebook groups as well as a proprietary thing or two, but we also use humans (the betaworks crew) to ensure the connections between these nodes. Want to know what one of our most successful approaches to date has been? Sit our founders down at a table every so often and buy them dinner. That’s right, humans interacting IRL. It works.
All of this is not to forget that the most important thing for a startup is to build something that really solves a problem for your customers or users. If you can’t do that, no amount of soul will save you. But in a world that’s increasingly competitive, especially for consumer applications, injecting soul (humans) into your product, whether it’s through community efforts, product, copy, or editorial, is a real competitive advantage. Anything less is an indication that the founders don’t really care about what they’re building, and the folks on the other end always see right through that.
I’m seeing a new type of startup emerge. This startup is not yet a company, but an experiment in its purest form. The founding team is very small, often one technical person. In some cases, the founding person is recently self-taught and is hacking something together because she needs this thing to exist.
I’m seeing a few of these new startups achieve early signs of traction and engagement. They are slowly and deliberately building small communities or early customers. Some are even making money. In fact, a few of these startups are profitable (in the ramen sense).
Not surprisingly, VCs, seed funds, and angel investors are circling around these companies. But here’s the reason I’m calling them the 2013 startups: the founders are saying NO to the money. This is a fundamentally different strategy than the one I witnessed with many of the most sought after 2012 startups. The 2012 startup had a good founding team, maybe a beta, and the opportunity to raise (in some cases) millions of dollars on attractive terms. So why not take the money? Hell, in some cases, these financings represented years of runway. Fuck 18 months, we have YEARS to figure this out! The reason that this was a bad strategy at such an early stage is that now many of these startups have millions of dollars in the bank, no traction, and no idea what to do with the company (or themselves). Companies that are prematurely overfunded are designed to throw money and bodies at problems that may not exist.
Danny Sullivan used a good Sim City analogy to describe 2012 seed funding in a recent episode of the Gillmore Gang. Paraphrasing, he discussed how there were ways to buy accelerated growth in the game, but every time he did it, he seemed to end up with a less sustainable city than if he’d just built it (slower) himself. Similarly, one of John Borthwick’s core mantras is that funding is all about sizing. It’s alright to raise large amounts of capital if you can understand the business you’re in and how you’ll use the money to grow. Startups in 2013 have access to the most sophisticated sets of data, tools, and analytics our world has ever seen. They should use these tools to understand and measure their business before stepping on the VC treadmill.
The 2013 startup founder is taking these lessons to heart. He’s saying no to the money not because he thinks he can bootstrap forever or because he wants better terms or because he’s playing coy, the founder is saying no to the money because until he can show some sort of sustained and organic growth, why raise years of runway? The 2013 startup is the pre-2012 startup, a throwback to a simpler time, and a sign of more mature founders.
What does this mean for investors?
The 2013 startup isn’t so bad for VCs, who should be in the business of funding growth. Almost all of the 2013 startups will need capital at some point. The 2013 startup, however, is not so good for seed investors. For it is at this very point, one or two founders, a beta with a little traction, that fits the seed fund model. The 2013 startup has the opportunity to skip this stage of financing entirely. Because if they can engineer organic growth with one or two founders (and survive this period), then they can commit to building a valuable long-term company, which likely requires more than seed capital (from the larger VCs).
So what does this mean for seed investors (and me)?
Mainly, I think that it means an acceleration of something we’ve seen for the past few years: An ever clearer demarcation between seed investors that can add value and investors that are just writing a check. Even though the 2013 startups may not need the money right now, almost all of them need help navigating the treacherous road that is building a valuable long-term business. This post is not meant to be a flyer for betaworks, but it’s a fact that entrepreneurs approach us because they know we’re builders. First and foremost, we make things. We seed invest in companies outside of betaworks in order to build the best network of makers (inside and outside of betaworks) that can navigate this road together. In fact, we recently made a seed investment where we’re not simply providing money and network, but a couple of our internal studio companies will act as the first customers.
I know well a 2013 startup when I see one, because that’s exactly how we build new things at betaworks. Our projects don’t start as companies, they start as lean product experiments with no more than a couple people that we fund ourselves through the seed stage. If we don’t see a road to growth or data to support our project’s thesis, then we don’t go to the market to raise additional capital.
As for me personally, I’m damn excited for the 2013 startup. It’s not as showy as the 2012 startup, which is why it’s so much sexier. The 2013 startup has the opportunity to be just as big as the 2012 startup, but it will get there differently, with a little less money and a little more help. And I think that means I keep my day job :-)
I’ve been at betaworks for over a year now. With Josh and John’s guidance, I oversee our seed investing activity, where I’ve gone from complete noob to moderate noob. Since I started we’ve made 21 investments in new companies. The transition from builder to investor has been fascinating, damn fun, and at times downright bizarre. For the first six months, for all sorts of reasons and biases, I basically had to dismantle how I have traditionally viewed products and people (another post). Only recently have I begun to rebuild a more productive process through which to formulate opinions on the products, companies and entrepreneurs we meet. My goal is to share these views more often, mostly so that we may have constructive discussions, which I hope will continue to force my learning process.
As you might have guessed, this post is about what I learned from Ding Dong and other products like it. We are not (yet) investors, but in the time I’ve known the founders I’ve learned more from them than they from me, often the case in my job, which is why I love doing it.
Ciaran O’Leary, a friend and investor in Berlin, showed me the app a few months ago, the conversation went something like this:
@ciaranoleary: hey check out dingdong in the app store… real time social / sharing networking… kinda interesting… good guys from the netherlands moving to berlin
@nchirls: Just tried it, but I don’t get it?
Two months later, I get it. And the road from there to here has been a slap in the face. A few things I’ve learned along the way and have since vowed to protect … really these are lessons I constantly remind my future self:
Every time, really, every single time, look at a product with new eyes. This is harder than it sounds. It requires that you beat the shit out of past grudges, biases, and perceptions. In fact, remove any thought of what you might think about the “space.” There is time for that later, but don’t think about the market just yet (another post), it’s a boring and unjust way to look at new things.
Look at the product. Close your eyes and try to imagine the world a few years from now with this new thing in it. You won’t always see it, but look for it anyway.
Form an opinion over time, but definitely form an opinion. What the hell do you think? Look at the product, put it away for a few days, and then come back to it. Is it still exciting? Have you been thinking about it when you go to sleep at night? Are you up at 2am writing notes about it? Find a way to weave it into your life.
Show it to friends and people whose product opinion you trust. But have your own opinion going in. Don’t let them formulate your opinion for you, but allow them shape it. Argue about it. You’ll learn more this way.
Spend time (if possible) with the product before you speak with the founders, but don’t allow your opinion of it to ruin what they might be building for in the future. Yeah, it’s buggy, get over it. What does their view of the future look like? Does it fit with your vision and the vision for the product?
I’ll be the first one to say that in my first few months at this, I operated scared. What will John or Josh think about it? What do other investors think about it? What will my father think of it (sorta kidding, but not really)? This is the worst and most debilitating way to operate and invest.
Don’t get me wrong, having good partners as co-investors is crucial, we couldn’t do what we do without them. But ultimately, forming one’s own opinion is everything. Conviction is everything, and not many investors have it. I’m working on it. If in the end people think you’re crazy, you’re probably doing a bunch of things right.