Butterfly Effect Business Plans


From time to time, we meet super ambitious teams with a unique insight around a big problem and a roadmap to take their solution to the market.  In these cases, teams are complete, the early product is in production and there are signals of some product-market fit, represented by a few loyal, paying customers.  They have done a remarkable job taking their idea to this stage and now need venture capital to accelerate their go-to-market.  They also rightly expect to be rewarded for the good job they’ve done with a high pre-money valuation.

The scenario I describe above is ideal for us, as an early-stage VC with a fund size of $150m.  It ticks many of the boxes we look for in our pipeline and typically we decide to extend a term sheet.  However, frequently, the valuation we attach to the business is lower than the team’s expectations.

The primary reason for this is that at the stage we focus on, the ultimate success of these companies is dependent on multiple factors, all resulting in a positive outcome.  Not only does the team have to continue to execute brilliantly, but their competition also has to execute more weakly and the regulators need to cooperate and the business cycle has to continue strongly and their market needs to grow as they predict, and so on and so on…

Their ultimate success is predicated on a long list of combined probabilities.  Facing these types of “butterfly effect” business models, one needs to take into consideration the resulting long odds of success and price investments accordingly.  Compounding probability is a notion that is not obvious to many founders.

Seeing the Invisible Market

Colourless Forest Nature Trees Fog Forest PathIt’s the last day of 2018 and it’s tempting to write a wrap-up post.  I will not, particularly because it has been an embarrassing year for this blog.  Let’s see how 2019 turns out in terms of blog productivity.

Instead, I’ll write about a sentence I saw in @fredwilson’s post this morning about their experience in trying to gauge Airbnb’s market opportunity:

We made the classic mistake that all investors make. We focused too much on what they were doing at the time and not enough on what they could do, would do, and did do.

As early-stage investors in technology companies, we find it a constant challenge to extrapolate the market power a startup will have once it achieves its goals.  Those goals are usually super ambitious, to begin with.  To evaluate the second order opportunities past the obvious goals is difficult.  However, some of the biggest historic returns in VC have been the result of new markets that opened up once a venture succeeds in its initial plans.

My tool for dealing with this challenge is evaluating the first market, but weighting the market size factor lighter than we used to.  We are probably less likely to decline an opportunity purely due to market size.

Every day is a school day.  Happy 2019!


Our First Unicorn

Today UIPath announced its new round of funding taking the company to a post-money valuation of $1.1b (The news had leaked on Friday and Techcrunch had already run the story).  I actually dislike the unicorn fetish and find the obsession with it meaningless, but I could not resist the headline of this blog post.

What is great about the story at UIPath is that it’s a validation of a key thesis of ours at the Earlybird Digital East Fund:

Innovation is not under the monopoly of Silicon Valley and bright engineers from underserved venture capital markets will continue to build great companies.  There is an attractive VC opportunity in focusing on regions with a strong tech talent base.

Congratulations to everyone involved, starting with Daniel and Marius, my partner Dan Lupu, who was the first to spot the talent in the founding team, Ondrej, Reshma, and Luciana, who have been on this fantastic journey.


I am a product of a rationalist education. After my schooling, my career progressed in a way that made me more of a disciple of the rationalist cult.  As a strategy consultant, we were brought in to be analytical, usually getting rewarded for overly complex models and frameworks that our clients used to make decisions (or, more often, validate decisions they would like to make).

My rational mind was also in the driver’s seat when I launched my first startup in 1999.  It was the first time I was facing critical decisions about the strategy and tactics around a company, and I found it easy to build analytical frameworks for those decisions.

1999 was a horrible year to start a digital business.  From the peak of the dot-com bubble, we hit the crash head-on.  The next few years were full of anxiety, tough choices and blood, sweat & tears.  It was then that I realized that in a lot of the decisions we were making as a team, my co-founders and I were also relying quite a bit on our intuitions.

Following my exit, I returned to my hometown of Istanbul and started to get to know the startup landscape there.  I found myself falling back into my analytical habits.  Perhaps, the lack of familiarity made me suspicious of my intuitions.

Now that it’s been 12 years since I have been back, I find that my intuition is playing a larger role in how I make decisions.  As a VC, we spend a lot of effort looking at data and building frameworks around sectors, markets, and companies.  However, I keep getting amazed how well my intuitions generally guide me.  A lot of my regrets were results of me ignoring my intuitions.  One of my 2018 resolutions is to focus more keenly on that inner voice.

This was inspired by a post on the great Farnam Street blog.

Digital Turkey

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Turkey is at the core of both our investment strategy and geography.  Naturally, we have quite strong opinions on the market, both positive and negative, formed by the process of investing into dozens of companies in the region, as well as having seen the vast majority of promising startups.

However, from time to time, we come across statistics that blow us away.  Here is one from a recent Visa study on digital payments:

Nine in ten (91%) Turkish respondents have used a mobile device to make payments, and nearly three quarters (74%) say they use their mobile device for payments on a regular basis compared with the European average of 54%

We know and like Turkey’s young, digitally savvy population, but this number was a surprise to even us.

Drama in VC Land

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Since the dot-com boom in the late 90s, the venture capital industry has become a popular pop culture topic.  The mythology around young executives getting to place bets on the future of technology with other people’s money has a certain appeal.  Add to that the irrational exuberance of the 90s, the stories of overnight fortunes and the drama of the crash that followed, and the public interest in the industry was firmly cemented.

Since then, the fascination has only grown.  We’ve had the Hollywood take on how tech innovation and VC works in The Social Network.  VCs such as Peter Thiel, Jim Breyer, Fred Wilson, Marc Andreessen and Bill Gurley have become household names.  Charismatic founders like Steve Jobs, Elon Musk, Mark Zuckerberg, Reed Hastings, Jeff Bezos, Travis Kalanick and Evan Spiegel are now celebrities.

The price our industry pays for this popularity is what we are now witnessing, with scandals like those at Rothenberg Ventures, Binary Capital and 500 Startups,  and the fight on the board at Uber becoming front page news.  This public drama has its toll on VC firms and startups involved.

I’ve been thinking that what we see in Trump’s White House must be making the writers’ job at House of Cards very difficult.  Now I am thinking the same about the writers at Silicon Valley.


Cities are What Counts in Emerging Markets

Germany has 4 cities with a population over 1 million.  China has 160! (Probably some metro area vs. city limits debate here, but that’s not the point.)  Look at the top 10 cities by Facebook usage.

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No London, NY or Paris. All emerging markets (despite missing China).

The amount of aggregate attention in large cities in emerging markets is an important factor in many consumer internet businesses.  If you look at internet business models that require local execution, you’ll see that the geography you have to consider is more “city-denominated” rather than “country-denominated”.  It is not a surprise that the food delivery powerhouse YemekSepeti.com (the largest component of $5bn market cap Delivery Hero) came from Istanbul.  When you evaluate local commerce businesses such as Yelp or Groupon, looking at it city by city is more meaningful than looking at it country by country.