Investors tend to value growth over everything else because a business can’t get big enough to break out if it isn’t growing. Of course, there are a number of key performance indicators for managing a business well and toward profitability — which we’ve written about here — but there are still stomach-churning moments where growth trajectory was interrupted.

Sometimes it happens gradually, but in a surprising number of cases it happens suddenly: The business is growing one day, then it’s not growing the next. I’ve taken to calling these growth hiccups “Oh, shit!” moments for CEOs. So what do you do when the growth rocket judders? MORE


A few weeks ago, we shared some key startup metrics (16 of them, to be exact) that help investors gauge the health of a business when investing in it. As one reader shared: “Drive with them, don’t just ‘report’ them”. So here are 16 more metrics — from TAM, ARPU, and sell-through rates to network effects, scale, NPS, cohort analysis, and more — that we think are important to add to the list. MORE


We have the privilege of meeting with thousands of entrepreneurs every year, and in the course of those discussions are presented with all kinds of numbers, measures, and metrics that illustrate the promise and health of a particular company. Sometimes, however, the metrics may not be the best gauge of what’s actually happening in the business, or people may use different definitions of the same metric in a way that makes it hard to understand the health of the business.

So, while some of this may be obvious to many of you who live and breathe these metrics all day long, we compiled a list of the most common or confusing metrics. Where appropriate, we tried to add some notes on why investors focus on those metrics. Ultimately, though, good metrics aren’t about raising money from VCs — they’re about running the business in a way where you know how and why certain things are working (or not), and can address or adjust accordingly. MORE

A big part of managing two-sided marketplaces involves managing tensions between the two, often opposing “sides”. Typically these are consumers on one side and micro-entrepreneurs or small businesses on the other. Depending on the type of marketplace it is, this tension could be between buyers and sellers (Amazon, eBay, etc.); diners and reviewers and restaurants and establishments (OpenTable, Yelp); guests and hosts (Airbnb); riders & drivers (Lyft, Uber); and so on.

So what should you do when you believe introducing a new product or feature will benefit the marketplace as a whole — but one or both of the sides have trouble seeing that big picture? Here are some tactics that I have deployed while managing different marketplaces… MORE

YouTube does a fantastic job of generating zillions of video views for its community. Yet it does a relatively poor job of helping their users earn money. There hasn’t been any serious competition that can deliver viewers at such scale… Until now. MORE

Until now, crowdfunding has mostly been an occasional, desktop sort of experience. We might back a new gadget launch or a charity a few times a year, but it’s not an everyday thing. With a smartphone in our pocket, however, we not only have access to crowdfunding platforms whenever we want, but to the crowd that comprises the various social circles of our lives. MORE

A big investor mantra over the past few of years has been “SoMoLo”, an acronym for the mega-trends “Social, Mobile, and Local”.  How have these trends been performing for investors?  Social clearly has been delivering huge, as evidenced by the very strong performance of the Facebook, LinkedIn, and Twitter IPOs.  Mobile has arrived with a vengeance, with smartphones and tablets already generating more traffic for many consumer online businesses than PCs.  But at this time last year the bloom looked to be off of the “local” rose, due at least in part to the very poor performance of Groupon as a public stock.  It got so bad that a company that I know in the local space who was looking to raise a round was told by multiple venture firms to look elsewhere for capital as they “don’t do local”.

But I’d argue that local in the past year has flourished as an investment category.  A good chunk of the consumer Internet businesses that have gone public of late focus on local, and these businesses have traded strongly as public companies.  OpenTable probably opened the door here in 2009, but other high quality local companies quickly followed suit including Yelp, Zillow, Trulia, and Angie’s List.  Even Groupon, just last year the poster child of the demise of Local, has enjoyed a resurgence and now sports a market capitalization of $6 billion—a valuation that rivals the price of their oft-ridiculed non-sale to Google a few years back.


Source: CapitalIQ

When I talk about local here, I’m focusing primarily on technology businesses that power online to offline commerce.  They typically are two-sided marketplaces, with offline local businesses on one side and consumers on the other.  They typically roll out on a city-by-city basis, and require a sales effort to sign up small businesses to populate and/or monetize the marketplace.

It’s clear that mobile is helping these local businesses dramatically.  The geo-location capability of the smartphone means the computers that all of us are carrying around in our pockets are location-aware.  The resulting killer application is “show me information on businesses that are close by to where I am now”.  Using OpenTable as an example, “show me which restaurants around me have open tables that I can reserve right now”.

Building a local technology business is not all easy, due to three related features:

  • The need to expand by executing a city-by-city rollout.  It can be hard enough to make a business work in one market.  But once a local tech company has proven out its concept in one market, it then needs to roll it out to multiple cities very rapidly or risk losing them to competitors or clones.  And as the world has gotten flatter, this has become even more challenging as fledging startups in many international markets scan the globe for businesses to clone in their home region.  The local food delivery space is an example where no one company has taken their market, at least initially.  Multiple businesses have been competing in the U.S., with different companies winning different markets.  GrubHub is in the process of rolling up their U.S. competition, having acquired CampusFood and SeamlessWeb.  And there is an entirely different competitive set of companies in Europe battling it out among each other for market supremacy.
  •  The need to build up both sides of the two-sided marketplace in each market, aggregating local offline businesses on one side and consumers on the other.  And the skills required to build the two sides of the market are typically different, one with a sales motion and the other with a consumer marketing motion.
  •  A high level of operational complexity that requires armies of people, largely due to the need to sell and service tens or hundreds of thousands of local businesses.  For example, Groupon has over 11,000 employees and Yelp has almost 2,000, resulting in annual revenue per employee of just over $0.2 million and $0.1 million, respectively.

As a result of these challenges, building out a national or even a global footprint tends to take a long time and require a lot of capital:

But while building local-focused tech companies can be very challenging, it can also be highly rewarding.  Successful businesses in this space tend to have strong “winner-take-all” characteristics that can lead to very strong market positions that tend to endure:

  • Winning companies often sport strong (and largely local) network effects.  I’ve had the privilege of being involved in a number of network effects businesses, and none had a stronger network than OpenTable.  The more restaurants OpenTable has in a city, the more useful it is to diners.  And the more diners in that city use it to make reservations, the more valuable it is to restaurants.  In our IPO roadshow, we made the statement that we believed it was financially irrational for a restaurant to use a different reservation service, even if it was free, as they’d lose access to incremental diners and thus dollars from the OpenTable dining community.  This has subsequently been born out as a number of aspiring competitors, many giving their service away for free, have come and quickly gone.
  • Winning companies also typically achieve scale advantages that are very difficult for aspirants to match.  Critical to every two-sided network is signing up local businesses to use your service.  The market leader quickly has the largest team recruiting these businesses.  Their team is typically the most productive, both because of accrued learning as well as the fact that it’s easier to sell the service that boasts the most consumers in its network.  New entrants typically suffer both scale and productivity disadvantages, which in turn often results in investor skepticism that creates capital disadvantages.

The chart below, generated by my colleague Sebastian Cua, shows the strong premiums that fast-growing local companies are commanding in the market:


Source: CapitalIQ, Wall Street Research Estimates

There is a growing pipeline of late-stage private companies that will become the public companies of tomorrow, including Uber, GrubHub Seamless, MindBody and ZocDoc.  And a newer generation of local-focused companies is showing rapid growth including HomeJoy, DogVacay, Lyft, and Belly (the latter two are a16z venture investments).  We strongly believe that opportunities in local will continue to spawn great technology companies.

I would argue that the winner-take-all characteristics of local businesses create what investors crave in companies: strong “competitive moats”.  Public market investors clearly have developed an appreciation for the moats that surround the public, local-focused tech companies above given their recent stock market performance.  And it’s interesting to see exactly what these public market investors are valuing above all—GROWTH!

The venture industry is awash with talk of the “Series A Crunch”, where it’s getting progressively more challenging for seed companies to land follow-on financing.  In my short two-year tenure as a full-time investor, I’ve seen this crunch hit very hard at a number of quality early-stage consumer companies.

Why is this happening?  A number of factors are coming together to create this crunch:

A significant supply/demand imbalance has emerged between seed and Series A financings coming out of the economic near-meltdown of 2008-2009.  In 2009, there were about the same number of seed and Series A financings, but the number of seed deals have exploded since then while the number of A-rounds grew only modestly.  In 2012, there were 2.5x as many seed financings as A-round financings, whereas historically these were more in balance.  This suggests something like 60% of seeds could be stranded.

Investor expectations have expanded substantially.  It’s become steadily less expensive to launch many consumer-oriented Net businesses over the years due to things like Moore’s law, improving programming tools, the cloud and the ability to access users from multiple large platforms.  Now we often see the kind of traction that we used to expect from Series B companies in Series A companies, and from Series A companies in seed companies.  For example, a number of our recent Series A investments built multi-million dollar revenue run rates on their seed round.  We’re getting spoiled.  Combine this with the above supply/demand imbalance and you’ve got a situation where the bar is being raised exactly when the competition for the A-round is becoming particularly fierce.

The source of seed capital has been changing.  In recent years, the amount of seed investment from non-traditional institutional sources has increased dramatically.  More and more seed capital is coming from sources like angels, “super angels”, micro-VCs and incubators.  To under-score this point, we have close to a thousand separate angels as co-investors in the consumer companies in our less-than-four-year old portfolio.  This influx of new capital has arguably had an inflationary impact on seed valuations, which obviously has an initial attraction to many entrepreneurs but can create challenges in a “crunch” scenario.  These non-institutional sources of capital are not inclined or structured to potentially help a company secure additional capital in a crunch.  And the higher valuations provide a higher hurdle that must be overcome by potential new investors in a crunched company.

The number of potential Series A investors appears to be contracting.  The venture business is showing early signs of a significant consolidation.  The amount of capital invested has trailed the amount raised for a number of years, and the capital that is being raised is increasingly consolidating among fewer, larger firms.  The number of investors who can write that Series A check is starting to fall.

The impact of these factors is playing out before our eyes.  We’re seeing more and more potentially promising companies who have spent much of their seed round to generate solid early traction, but not the kind of traction that sets them up well for a Series A financing these days given the higher bar.  These companies face a brutal situation.  They are running low on money.  Prospective new investors want more proof, particularly given the higher seed valuations.  And many of the existing investors, particularly on the angel side, become “tapped out” or “want to stay diversified” when approached for bridge financing.  These companies’ futures are rapidly called into question.  It’s been very painful to watch.

So here are a few suggestions for entrepreneurs who are trying to start consumer-oriented Internet businesses:

Raise more money in the seed round to give yourself runway to make the progress you’ll need for a Series A, along with some contingency if things don’t go perfectly along the way.  The size of seed rounds has increased substantially in our firm’s short history, from under $1 million a few years back to almost $2 million this year.  But I’d argue that even these larger new rounds are often too small given the rising Series A bar.  Increasingly, a $1 million to $2 million raise requires absolute perfection on the part of the entrepreneur.  You should consider suffering a bit more dilution early on to secure the resources to deliver the metrics that will attract the more demanding Series A investors.  Things like up-and-to-the-right user and revenue results, deep engagement, compelling cohort economics, and a proven ability to acquire users with a positive ROI on their marketing spend.

Structure your round differently.  I’d suggest getting more institutional participation in your seed round, as institutions are more likely to support a high potential but not-yet-ready-for-Series-A company in the event it encounters the crunch.  That in no way suggests that follow-on financing from institutions is a certainty or even more likely than not, but my observations suggest the odds are higher.  Similarly, consider structuring your seed deal in a way that doesn’t scare off potential new investors in the event that you’re facing a potential crunch.  Obviously these recommendations can be interpreted as self-serving given my role as an institutional investor, but my motivation for writing this is in the hopes of helping even one entrepreneur avoid the pain and suffering I’ve been witnessing by those who have been caught in the crunch.

Raise from multiple institutional investors.  This can help accomplish a few things.  First, it brings more deep pockets to the table that can fund a Series A or a bridge if needed.  Second, it can fire up the competitive juices of the participating VCs, who don’t want to risk losing out to a rival on the A round at a hot seed company in which they’re both invested.  Lastly, having multiple VCs can diminish any potential negative signaling issues down the road if an institutional investor in your seed round does not do the A.

Cultivate these institutional investors as you launch the company, updating them periodically on your progress and learning.  Some entrepreneurs do this extremely well, managing to stay top-of-mind with investors and building a relationship, a track record and credibility.  These can come in very handy with investors if you find yourself potentially entering crunch territory.

Resist the temptation to raise too early.  We often encounter companies who come to us saying that they had inbound interest from another/other firm(s) and elected to use this as a signal to start broader fundraising conversations.  But there’s interest and then there’s interest.  One of the jobs of a VC is to network broadly with potentially interesting companies, and their “interest” more often than not does not result in funding.  And if you swing and miss at an early round, it can be much harder to create positive momentum behind an A round once you go out again.  You need to be disciplined.  Wait until you have multiple months of metrics moving in the right direction before you start fundraising.  Resist the temptation to talk to every prospective investor who calls when you’re not fundraising.  Ironically, nothing piques the interest of an investor more than an entrepreneur who remains relatively inaccessible.

There are signs that the startup ecosystem is already correcting to mitigate the crunch going forward.  The number of new seed financings is down meaningfully so far in 2013, which would help to correct the supply-demand imbalance.  And capital is starting to be attracted to the gap between seed and traditional A rounds, which some term “mango seeds”.  But higher investor expectations earlier in a startup’s life are here to stay, and the smart entrepreneur will take steps to mitigate follow-on financing risk.  On each and every financing, they should ask themselves one key question: What do I need to prove in this round to get the next round?

Note: I’d like to thank my partner Chaz Flexman for his many insights on this post!

Now it seems strange
How we used to wait for letters to arrive
But what’s stranger still
Is how something so small can keep you alive
Arcade Fire, We Used to Wait

It’s election season.  And since Candy didn’t use my question in the second debate, I thought I’d ask it here: “President Obama and Governor Romney, the United States Parcel Service is forecasted to lose $5.5 billion in 2012, and also has defaulted on scheduled payments of $11 billion.  What would you do to fix it?”

Since the debates are now over, let me take a shot at answering it.

We have a thesis at Andreessen Horowitz that “software is eating the world”, such that analog businesses in a wide variety of sectors are being crushed by rapid digitization.  In my last blog post, I discussed how this was playing out in retail, where market share gains by online retailers at the expense of offline retailers are threatening the long-term viability of many offline merchants due to their high operating leverage.  This same dynamic is playing out in communications.  The USPS is an analog business being rapidly consumed by digitization.

According to the Postmaster General, “The core function of the Postal Service is the physical delivery of mail and packages…to every address in America.”  Physical = analog.  Here is the USPS product mix in 2008, just four years ago:

It was an analog cornucopia.  Half of their revenue (and even more of their profits) came from first class mail, but this personal and business correspondence is being rapidly replaced by digital email, texts, social networks, and online statements and bill-pay.  Similarly, catalogs, magazines and newspapers are being replaced by commerce and content websites, supported by email marketing.  I had a front row seat at eBay as money orders started getting replaced by PayPal.  The only growth business that USPS has is packages due to the explosion of e-commerce.  But unfortunately, this business has been relatively small for them (representing only about 14% of 2008 revenue) and highly competitive vis-a-vis UPS and FedEx.

So what has happened to the volume of USPS deliveries?  It’s been decimated:

I have to give the USPS management credit—they saw pretty early on that a freight train was coming right at them.  When I was managing eBay in the early 2000’s, the USPS management team organized a session with select Valley executives on what they could do to mitigate potential disruptions to their business due to digitization (I was likely invited because the eBay community in aggregate was one of their largest customers).

Any business that encounters disruption on this scale needs to respond decisively to remain viable.  And the Postal Service is essentially a business: They are “an independent establishment of the executive branch that does not receive tax dollars for its operations.”  But unlike privately owned businesses, “…the Postal Service is nevertheless restricted by laws that limit its ability to control costs and grow revenue in the way a business would.” (2011 Annual Report)

What are some of these restrictions?  The USPS…

  • Has a “universal service” obligation that mandates the delivery six days per week to a national footprint of 151 million homes and businesses
  • Has labor agreements that specify cost-of-living wage increases and contractual benefit plans for employees and retirees
  • Faces limits in raising prices
  • Is “restricted by law from taking certain steps, such as entering new lines of business that might generate additional revenue…”

USPS management has attempted to navigate these restrictions to mitigate the financial impacts of digitization.  They have been trying to control the costs they can, rapidly consolidating mail-processing facilities and adjusting their employee counts down in line with falling mail volumes.  And they have raised prices.  Unfortunately, the biggest price increases have been in packages and shipping, their most competitive market:

So what’s the net outcome of these actions?  Massive and growing losses.  Revenue is eroding rapidly as the price increases have only partially compensated for plummeting volume.  And they’ve made very modest progress on lowering expenses:

And unfortunately, their situation is even worse than this.  The USPS historically has not accrued for the cost of retiree health benefits; they’ve booked them on an as-spent basis (governmental entities are allowed to do this, unlike the private sector).  And the costs they were spending paled compared to the costs they should have been accruing.  Congress in 2006 mandated that USPS catch up on these obligations over a 10-year period, a process called “RHB Pre-Funding” (RHB stands for Retiree Health Benefits).  They were able to make these Pre-Funding payments between 2007 and 2010, but their economic meltdown has caused them default on their recent obligations (Josh Barro of Bloomberg provides an excellent explanation of this issue here).  The $11 billion in defaults, combined with their operating loss of $5.5 billion, is resulting in the disastrous $16.5 billion 2012 deficit.

USPS management has presented a plan for how they potentially can navigate their way out of this mess (USPS “Plan to Profitability”).  It involves significant savings from changes in benefit plans, decreased service levels (e.g., moving from six to five-day delivery), some post office closures, and continued headcount reductions.  It also involves continued price increases and identifies some revenue-boosting initiatives.  It’s an ambitious plan, but it has a few big issues:

  • About half of the financial improvements require require “significant legislative change”, and Washington hasn’t been very good lately on that front.
  • It ignores the issue of the under-funded retiree health benefit costs.
  • Most importantly, it assumes that their revenue erosion moderates significantly going forward.  This just won’t happen; that digital “genie” is out of the bottle.

On the current course, we’re destined to see ever-larger losses as revenue continues to fall and expenses are only tweaked. The Postal Service is effectively becoming a taxpayer-supported entity, with ever-growing losses subsidized to maintain the “common good” of physical mail delivery.

But there are alternatives to mitigate the pain of this digital transformation:

Stem the Bleeding:

There are some very highly leveraged ways that you could improve USPS economics.  But all require political will, so they’re not likely to happen any time soon:

  • Re-invent the post office.  Operating and staffing 36,000 physical post offices is hugely expensive.  And these post offices are being hollowed out, as volume going through the average post office is down 19% in the past four years alone.  USPS needs to steal pages from the UPS and FedEx playbooks.  Most physical post offices should be closed and replaced with self-service kiosks, supported by proven technology tools.  These kiosks could be located in retailers, who would gladly trade a little space in exchange for foot traffic and possibly a revenue share. Closing post offices would save a fortune in operating and staffing costs, and the proceeds from selling the real estate could fund the benefits shortfall.
  • Deliver mail less often.  Your local mail person is delivering 23% less mail to an average location today than four years ago.  It doesn’t make sense to keep delivering progressively less mail with the same frequency.  Cutting delivery down to three days a week, say Mondays, Wednesdays and Fridays, would halve delivery trips, but the average time to deliver something would increase by only a half day.
  • Restructure comp and benefits.  Postal Service employees and retirees are expensive.  I calculate current USPS manpower costs at $84k per employee (excluding those RBH pre-funding costs), compared to $67k and $70k respectively for UPS and FedEx workers (who have a higher proportion of skilled jobs like airline pilots and mechanics).  It’s not intuitive to me why USPS labor deserve a 21-25% premium over their private sector counterparts.  An enormous 80% of USPS costs are labor-related.  If they paid the same labor rates as UPS (and that of course is a BIG “if”), their current $5.5 billion operating loss would swing to a multi-billion dollar profit.
  • Selectively raise prices.  The cost of mailing a first-class letter was in the U.S. was $0.44 in 2011; comparable figures in other countries include Great Britain at $0.74, Germany at $0.77, Japan at $1.06 and Norway at $1.63.  Giving the USPS more flexibility to raise selective prices could mitigate near-term financial pain.


Package delivery is the only one of USPS’s market segments that is growing.  But the packages business is very competitive, and USPS is getting its clock cleaned by UPS and FedEx.  In my experience, many businesses start out using USPS given its ubiquity and low rates, but switch to UPS and FedEx as they grow due to their volume discounts and superior service.  USPS needs to focus on packages, improving their service and having the latitude to offer volume discounts.  They actually should have a cost advantage competing for an incremental package since they already make a trip to each destination each day.


A few private sector companies have in recent years explored trying to digitize your mailbox, providing consumers with a website that serves as a secure virtual mailbox to which mailers could send digital versions of the mail. Physical mail is very expensive for businesses—in addition to billions in postage costs, there are even larger costs in paper, printing and processing.  As a business, I’d be willing to pay a fee to deliver electronic correspondence at scale if it saved me big bucks in physical production and delivery.  And as a consumer, I would dramatically prefer to check a website for my mail than make the daily trek to the mailbox.

The challenge in building this service is the classic chicken and egg problem—it’s only interesting to consumers if many businesses use it, and it’s only interesting to businesses if many consumers use it.  USPS may be uniquely positioned to solve this chicken and egg problem with their scale, universal reach, and relationships with both consumers and businesses.  They could charge much lower “postage” rates for this service, but at higher margins as they replace the costs of physical distribution.  And they could provide related services like integrated bill payment, archiving and the like.  In the process, they also save about a zillion trees!


UPS and FedEx currently deliver packages to every home and business in the U.S., just like USPS.  They don’t currently go to every one of these everyday, but they are in every neighborhood every day.  And both of these businesses are operated significantly more efficiently than the Postal Service and turn a profit.  It feels like there would be massive efficiencies from combining USPS operations into one of these companies.  Alternatively, there’s a war that’s starting to brew around delivery to your home from players including Amazon and Wal-Mart, and both are world-class at logistics.  Amazon alone spent a stunning $4 billion in 2011 on outbound shipping costs; they now spend more on shipping than marketing!  Might they be interested in owning delivery to the home?

Software is eating the world, leading to the rapid destruction of many legacy analog business models.  It’s a foregone conclusion that the post office will go the way of record and book stores, as bits don’t require physical buildings to be delivered.  The Postal Service as we know it is well along the path of being obsolete.  Acting on this reality sooner rather than later will save taxpayers very many billions of dollars.