July 18, 2015
By Joe Lonsdale
One of the fun things about venture capital is you are constantly learning new ideas and strategies from one business and then applying them to others. Inasmuch as there is a useful purpose to what we do as VCs, I tend to think it’s our duty not only to mentor entrepreneurs and executive teams, but also to learn from them and the others involved. We can then pass on lessons to aid the startup ecosystem and help businesses succeed and grow their impact.*
In this spirit, there were a handful of clever ideas I either learned or applied this week—
USING THE 1% TO HELP THE MASSES: LUXURY ADOPTION FIRST IS SOMETIMES NECESSARY
I remember being intrigued by this idea as a middle class schoolchild, and I think people under-rate its importance. Economists have long understood that some sort of inequality has always been necessary to drive progress – capital accumulation is required to create investment ecosystems. Moreover, there are a lot of new great ideas that are only available to the very wealthy at first, but as they become more accessible to the regularly wealthy, and then the middle class, and eventually the poor, we consider them basic necessities. Refrigerators, TVs, and mobile phones all followed this pattern.
Despite this track record, some people still get really offended when you come up with an idea that only the wealthy can currently afford. Maybe it’s because they are angry about all the inequality in the world, and I cannot argue with them that some of what causes the inequality makes me angry too. But it is okay to sell stuff to rich people, and it often leads to good things.
One of my favorite examples of this is Tesla. I don’t know if it’s apocryphal, but I’ve heard that Elon Musk said that he is using the 1% to fund his R&D so that he can create awesome electric cars at prices for the masses.
This subject came up this week as I was explaining a couple of companies to investors. One of the companies that is particularly interesting to me is a liquid biopsy company that we invested in that can detect stage 2, 3, and 4 cancer better and more cheaply than any other solution. Even though it is a new test, over 10% of U.S. oncologists ordered it and use it to quickly and efficiently understand what cancer you have and how it might have mutated. This technology could also be integrated into another business model targeted at high net-worth individuals, who could give a little blood and get screened every few months to find out, with high probability, whether they have mid-stage or later cancer. This could save a lot of lives and is possible today. The idea of excluding a majority of the population from an effective diagnostic tool that could save their life might seem repulsive to some, but within a decade, as the price is driven down, it seems likely that this will become a normal best practice. And, frankly, if you’re part of an HNW family and you are over 40, I think you should be doing this every couple months and if you’re not you should ask your doctor why not [caveat: I am not a doctor and am totally unqualified to give anything resembling medical advice].
Selling to the wealthy is not always the best business model, but—especially with discontinuous innovations that have the potential to change the way we live—it can be an effective way to make revenue while continuing to develop the product. On a personal note, this could have saved my mother’s life, since we unfortunately found her cancer at stage 4 shortly before she passed several years ago. So I think it’s not only a smart business model—it’s an important idea to get moving on.
PRICE ELASTICITY MEANS MARKETS MIGHT BE A LOT BIGGER THAN YOU THINK
The liquid biopsy example demonstrates that businesses are sometimes a lot bigger than you think when prices change dramatically. The liquid biopsy described above might have a certain TAM (total available market) if it’s just oncologists ordering it, but their lower costs actually mean it’s something that a lot more people might order all the time in the future. That means the market is maybe 10000X bigger than a model would tell you today. The same is true for Color Genomics, which does genomic screening for women’s health. Leading scientists now agree that the product is inexpensive enough at ~ $300 that every woman in her late twenties or early thirties should find out what actionable information there might be in her genes—not just women who think they are at risk from known family issues.
Not to bring him up too often, but this idea also relates back to Elon. Thanks to Founders Fund, I am a small investor in Space X from before our fund, and was asking my friend Brian at FF why he thought Space X could be worth more than 20 – 30 billion, as I’d added up the numbers in that market and it didn’t make sense to me. Of course, I hadn’t considered that if you drive down the prices so dramatically, the market is probably somewhat elastic and a lot more people end up wanting to send things to space. It’s hard to model these things, but the intuition that the company might be a lot bigger might be right.
There are tons of examples of this sort of thing, including what happened when semiconductor chips and Internet bandwidth became really cheap. I remember arguing with my teacher in high school, who thought that Internet speed on a 56K modem was fast enough. What he didn’t understand was that raising the speed by an order of magnitude opens up whole new possibilities of what you can accomplish over the web. Demand for bandwidth went up exponentially in response to it being cheaper and available. In retrospect, this was pretty obvious, but as shown by my naiveté around SpaceX, it’s important to remember to apply the idea more broadly. There are a lot more companies in our portfolio where this is relevant.
Moving on into a few other good meetings this week…
DO YOU KNOW WHAT I MEAN BY “MARKETING”? BECAUSE I DIDN’T AT YOUR AGE
Marketing in the context of our businesses doesn’t just mean branding, talking to people, spreading the word, crafting language, and all that great stuff. Sorry, English majors.
Marketing is your battle plan for the sales team—it’s about defining the landscape. Marketing is doing cohort analysis and understanding exactly what possible customers are out there. It’s understanding not only which customers will respond to what messages, but also how customers will become clients if you include certain product features. It is also really important to consider which customers will adopt today and which customers will follow which others.
This is a longer essay, but the way I see it, there is Product and there is Marketing, and a great CEO better be great at both. Engineering will take their cue from Product but should be intimately involved rather than having a command and control structure. Sales will take their cue from Marketing, but the two organizations should also coordinate closely, and they should learn from each other. Product and Marketing have to be in close touch as well.
Enterprise marketing is completely changing, and a lot of what we are doing with the product is tied to marketing. Marketing ends up having to work closely with product, customer success, and frankly, pretty much everyone. And it requires a ton of strategic thinking. I am not sure anybody at the top up-and-coming enterprise startups should be running marketing who doesn’t have something at least close to a technical background. But this is also a really hard seat to fill, and the CEO usually has to do a lot of it.
One of my favorite new Series A companies that I won’t name has a top engineering team and very bright young CEO, and I realized he had never conceptualized marketing as anything like this, but it was good to get him thinking along those lines. Now he’s fired up to go over the battle plans with one of his lieutenants and me at our next meeting.
MOST ENTERPRISE BUSINESSES AREN’T CHARGING ENOUGH, AND YOU NEED TO CHARGE MORE TO FUND FASTER GROWTH
This one was from Marc Andreessen at a board meeting this week. Peter Thiel always said that we want to signal that we are the quality option by setting our price point high. So I’ve had that beat into me, but I don’t always apply it. With regards to Marc’s note—I don’t know if he’s written about it, and I’m still wrapping my head around it—but in some cases it feels like higher prices could slow you down, especially when you are trying to get breadth and build a community on top of your product. So this is a hard one to figure out. Still, I like his counter-intuitive thinking, and it does make sense from a few things I’ve seen. If you are going to use a sales model, you want to pay people more for sales and provide incentives that make them hungrier. Being able to afford to fund the sales organization and any marketing expenses along with it for each sale means you will expand faster.
There were several more but for the sake of time, this last one is also one of my favorites.
TRIANGULATION AS PRACTICED IN BD (BUSINESS DEVELOPMENT) AND RECRUITING
This is a great concept that is important to build into a process for engineer-executives who are suddenly forced to care about convincing people of something for the first time in their lives.
Basically, when you sell into a large organization, you don’t just walk up to them. You make sure they hear about you from a couple other respected and credible sources, first. Ideally they think these sources are unrelated. It turns out when people hear something about your company from a couple sources they are much more likely to believe it, and their brain may even convince them that something is common knowledge. All great BD rainmakers understand this and leverage their networks as such.
I tend to think it also matters for recruiting top talent, an area we spend a lot of time on now. I think it’s pretty hard to use this as a simple hack, and it feels a little sketchy so I wouldn’t do that (unless I was really desperate, maybe). There aren’t shortcuts for recruiting. That said, if you spend a lot of time getting to know respected members of the community, getting their advice, and getting them excited about what you’re creating, this can happen naturally. It’s important to get out there and talk to people and to focus on meta-recruiting; not just talking directly to engineers, but inspiring others who are likely to discuss what you are doing with potential talent targets. When you look at it this way, it isn’t really a hack—you’re just sharing the truth and spreading excitement with great people about the wonderful company you are building. And then if top talent ends up hearing about you from a couple of these sources, they are much more likely to be excited to join. I think this dynamic was important at Palantir; maybe this sort of thing also works for a fund.
[As a side note, if you’re an LP, I apologize if this happened to you, but thank you for your support.]
If you enjoyed the blog, let me know. I am happy to put out more. And please feel free to send questions or suggest topics you’d like to hear about. I might try to write a bit more.
* As a side note, this is one of the reasons we like to invest in businesses with an inspiring mission – not only is it a good sign that it will attract other great people, but as we spend so much of our time trying to help these businesses grow into more successful global enterprises, it would be pretty depressing if we weren’t happy with their impact on the world. There is still a lot to improve, but I tend to think this is one of the reasons that companies that come out of our Silicon Valley ecosystem are more likely to have a positive impact.