The Download Why e-commerce fads competing with Amazon eventually fade

Posted Feb 3, 2016 by Erin Griffith (@eringriffith) via the LA Times

  ClassPass, a well-funded start-up, sells unlimited fitness classes at participating studios for about $100 a month, depending on the market. Above, a class in Denver.

ClassPass, a well-funded start-up, sells unlimited fitness classes at participating studios for about $100 a month, depending on the market. Above, a class in Denver.

It's hard to name a category of start-ups that has struggled to produce big, billion-dollar exits more than e-commerce.

Competing with Amazon isn't easy, it turns out, and aspiring Davids have turned to ever more novel strategies to differentiate themselves from Goliath. The problem? Like anything trendy, each new twist on the e-commerce model eventually goes out of style.

Perhaps you remember the great subscription commerce wave of 2012 — as I called it, stuff-in-a-box. It was a clever way to score recurring revenue by sending subscribers a container of curated stuff they didn't even know they wanted.

But it didn't take long for each new stuff-in-a-box start-up to feel increasingly ridiculous: subscription perfumes, dog toys, cured meats, even stilettos hawked by Kim Kardashian. Customers were often frustrated by the relentless barrage of products, with some not realizing they were being automatically charged each month for the goods.

Investors quickly realized the model was little more than a 21st century twist on the Jam of the Month club, and the subsequent shakeout, marked by mergers, shutdowns and pivots, happened quietly.

After subscription commerce came "content and commerce," a trend that peaked so fast it's more of a blip than a full-fledged fad.

The idea — tacking an editorial operation onto a store — failed to increase profits for most start-ups, and last year the leader of the pack, Thrillist, split its e-commerce and media businesses. Founder Ben Lerer conceded to technology website Re/code that it was "not the most productive" for the two to share resources.

Lately the hottest thing in e-commerce is "ClassPass for X," a trend that combines monthly subscription fees with experiences. (Millennials love experiences, I'm told.)

It follows the success of ClassPass, a well-funded start-up that sells unlimited fitness classes at participating studios for about $100 a month, depending on the market. (In the Los Angeles/Orange County market, the price of ClassPass was recently increased to $119 a month from $99).

There is already a ClassPass for hair blowouts (Vive; $65 per month), massages (Zeel's Zeelot program; cost varies) and live music (Jukely; $25 per month). It's too soon to call this new model a fad, but if past e-commerce innovations are any indication, it may not be long for this world.

All of these recent e-commerce models are descendants of the mother of all retail fads: flash sales. With the January acquisition of Gilt Groupe at a painfully low price — it raised $280 million but sold for just $250 million — the model has finally croaked.

Flash sales (and its cousin, daily deals) suffered from over-saturation. Copycats drove up the price of acquiring customers, which accelerated start-ups' burn rates and prompted shopper "deal fatigue."

When it became clear in 2012 that Groupon and Gilt would not live up to soaring expectations, copycats pivoted away from the model. But instead of focusing on the fundamentals (supply-chain management, say, or customer service), many of them simply latched onto the next hot strategy.

With such carnage, it's puzzling that so many e-commerce entrepreneurs continue to chase buzzy new business models.

But the explanation is simple: As long as there's an Amazon, there will be e-commerce fads. The Jeff Bezos-led behemoth has already won on price, selection and service. All that leaves is novelty.

Erin Griffith is a writer at Fortune.

 

A Case Study Of Startup Failure

A founder that loses credibility with investors will face the toughest "no" in their career at some point.  Sharing bad information is good...

Posted Sept 19, 2015 by Bo Yaghmaie via TechCrunch

Startups fail. In fact, startups often fail. Anyone who has spent any time in the startup and venture capital ecosystem will tell you that failure is the most pervasive characteristic of the ecosystem. There is no shame in that. If building a great business from a startup was easy, everyone would be an entrepreneur. If identifying a startup that would return 10x on capital was easy, everyone would be a VC.

I know a prominent VC, with multiple big hits as a founder, who had chosen the vanity plate for his first Ferrari to bear the name of his first failed startup. He told me that he learned more in that failure than he could have in any big outcome. That was an “aha” moment.

More recently, one of my startups hit the wall and shut down. In the weeks leading up to closing its doors, I experienced many other “aha” moments. I thought it might be helpful for me to share three of the biggest ones.

But first, let me put some very basic facts before you. The startup was the founders’ first. What the founders’ lacked in experience, they made up for in passion and enthusiasm. They had raised a few million dollars from a novice fund in the form of a relatively standard preferred stock financing. The investors did not have a board seat and, therefore, the founders unilaterally controlled the board without investor input.

The investors, however, did have a block on a sale of the business, unless the sale exceeded an agreed upon price. In the months preceding the company’s ultimate demise, the company had raised a bridge round in the form of a convertible note. Management sought to raise additional capital, to no avail, and ultimately reached out to a handful of competitors to explore a potential sale. Ultimately, one potential acquirer emerged that had an interest in the company’s core IP and the continuing services of the company’s founders.

Unfortunately, the price they were willing to pay for the company was less than the principal amount of the convertible notes that the company raised in its bridge financings — and far less than the thresholds that would trigger an automatic conversion of the preferred stock that would avoid the requirement that the preferred stockholders consent to the transaction.

And therein lay the quandary. To do the deal, the company needed the approval of its preferred stockholders. But the preferred stockholders had no reason to approve a deal in which all of the proceeds would go to the holders of the debt in the bridge financing, despite the fact that they had invested significantly more capital into the company, and were insistent on a pro rata distribution of the proceeds as a condition to allowing the deal to proceed.

Obstinate, unyielding and irrational: These are all very bad traits in an investor.

The note holders were willing to accommodate the preferred stockholders with a small piece of the proceeds, but would not share the proceeds on a pro rata basis. As a result, a sale of the business required three disparate constituencies — the founders, the preferred stockholders and the convertible debt holders — to come together and agree to a path forward. But that never happened, and the company hit the wall. Looking back, here are some of my “aha” moments as to why.

The Rose Colored Glasses

Unbridled passion and unbounded enthusiasm are the hallmarks of any great founder. Unfortunately, however, it is all too easy for a founder to confuse his or her desire to will a good outcome with the reality that will inevitably out-will any founder.

In this particular instance, the founders simply did not want to believe that despite some successes, the business simply may not have been on a trajectory to attract additional capital. Moreover, they were reluctant to scale back their expenditures to create a longer pathway to the milestones that may have attracted additional capital.

Similarly, by focusing all their attention on emphasizing to their investors the successes they were achieving, and ignoring many of the other shortcomings of the business, they created an impression with the investors that did not jibe with the reality they faced. As a result, when reality took over events, the founders lost their credibility with their investors. And, unfortunately, there is nothing more important in difficult times than having earned credibility with your cap table.

Of course, I am not suggesting for any founder or entrepreneur to forego enthusiasm or passion in what he or she does day-to-day, or the way in which he or she presents the potential for the business. But I am suggesting that, especially in troubled waters, there is nothing more important than trying to present your investors with an objective view of the business and to balance your successes with your failures and the challenges that you face.

In this case, I tend to believe that had the founders presented a more realistic picture for their investors in the lead-up to the end, the investors may have been less surprised by the stark choices they faced and, therefore, been more willing to be accommodating.

Share, Share, Share

Again, there is a natural tendency by many founders to only share good news, to only share wins and to only highlight accomplishments. But it can be as important to share bad news, shortcomings and failings. The inclination to go into a shell in the face of problems or challenges creates an information vacuum that will be extremely difficult to bridge when you inevitably have to turn to your investors for help.

First of all, you never want to surprise your investors with bad news. Surprising them with good news is a different matter, but not bad news. Secondly, if you are not engaging with your investors about the problems that you are seeing in your business, then you are not only isolating yourself in not seeing the ideas and suggestions of others, but also are taking away the investors’ “shared ownership” of the problem. If your investors feel like they share ownership in your problem, they are going to be a lot more accommodating in helping you find a path forward than if you have not been forthcoming with them, and they view the problem as your creation.

Unfortunately, the founders in the example I shared with you had stopped sharing information with their investors because they were at odds on how to execute against the plan, and had, over time, come to the conclusion that there was no real value in sharing information and plans because it typically yielded acrimony.

That was a mistake. Acrimony may be unpleasant, but it may be necessary if you want to maintain an honest dialogue with your investors. The alternative to acrimony should never be a failure to communicate. Once the channels of communications are not functioning properly, it is really hard to ask your investors to take a leap of faith with you.

Know Your Investors

I am always surprised by how little time founders and entrepreneurs spend in really getting to know their investors. There are two really important elements to really knowing your investors. First and foremost, do your diligence before taking money from an investor. Remember that not all investors are good investors. Make sure to ask your investors about their bad outcomes. Do what you can to learn about deals that they had to write off, and try to connect with the management team at those companies to get a measure of their experience under those circumstances.

If building a great business from a startup was easy, everyone would be an entrepreneur.

It’s easy to be a good investor when your investment is working out. But it’s really, really hard to be a good investor when your investment is not. Try to get a sense of how the investor behaved under the stress of a bad outcome. Was he or she supportive? Was he or she able to contribute in a meaningful way to trying to devise better outcomes? Was he or she rational and fair in the final analysis? Those are important questions to ask. But it is just as important to get to know your investor in your working relationship.

And that only happens if you are “working” with your investor, sharing ideas and maintaining a constant dialogue. In so doing, you can get to know your investor and you can manage your relationship in a way that will enable you to get the most out of your investor. Hindsight is always 20/20, but in the example I shared with you, the investors proved themselves to be obstinate, unyielding and irrational. These are all very bad traits in an investor, which may have been gleaned earlier with a greater degree of diligence and caution at the outset of the relationship.

But the founders also failed to do more during the course of their relationship to come to terms with their investors’ idiosyncrasies. The founders also failed to build a strong enough bridge that could offer the possibility of a path across the troubled waters that they ultimately faced.

16 Startup Metrics

When Reverb Partners works on a business plan for a client we always include the following key performance indicators in our report (conveniently detailed in this excellent blog post by Andreessen Horowitz):

Posted by Andreessen Horowitz with Jeff Jordan, Anu Hariharan, Frank Chen and Preethi Kasireddy  

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 ones. 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 founders know how and why certain things are working (or not) … and can address or adjust accordingly.

Business and Financial Metrics

#1 Bookings vs. Revenue

A common mistake is to use bookings and revenue interchangeably, but they aren’t the same thing.

Bookings is the value of a contract between the company and the customer. It reflects a contractual obligation on the part of the customer to pay the company.

Revenue is recognized when the service is actually provided or ratably over the life of the subscription agreement. How and when revenue is recognized is governed by GAAP.

Letters of intent and verbal agreements are neither revenue nor bookings.

#2 Recurring Revenue vs. Total Revenue

Investors more highly value companies where the majority of total revenue comes from product revenue (vs. from services). Why? Services revenue is non-recurring, has much lower margins, and is less scalable. Product revenue is the what you generate from the sale of the software or product itself.

ARR (annual recurring revenue) is a measure of revenue components that are recurring in nature. It should exclude one-time (non-recurring) fees and professional service fees.

ARR per customer: Is this flat or growing? If you are upselling or cross-selling your customers, then it should be growing, which is a positive indicator for a healthy business.

MRR (monthly recurring revenue): Often, people will multiply one month’s all-in bookings by 12 to get to ARR. Common mistakes with this method include: (1) counting non-recurring fees such as hardware, setup, installation, professional services/ consulting agreements; (2) counting bookings (see #1).

#3 Gross Profit

While top-line bookings growth is super important, investors want to understand how profitable that revenue stream is. Gross profit provides that measure.

What’s included in gross profit may vary by company, but in general all costs associated with the manufacturing, delivery, and support of a product/service should be included.

So be prepared to break down what’s included in — and excluded — from that gross profit figure.

#4 Total Contract Value (TCV) vs. Annual Contract Value (ACV)

TCV (total contract value) is the total value of the contract, and can be shorter or longer in duration. Make sure TCV also includes the value from one-time charges, professional service fees, and recurring charges.   

ACV (annual contract value), on the other hand, measures the value of the contract over a 12-month period. Questions to ask about ACV:  

What is the size? Are you getting a few hundred dollars per month from your customers, or are you able to close large deals? Of course, this depends on the market you are targeting (SMB vs. mid-market vs. enterprise).

Is it growing (and especially not shrinking)? If it’s growing, it means customers are paying you more on average for your product over time. That implies either your product is fundamentally doing more (adding features and capabilities) to warrant that increase, or is delivering so much value customers (improved functionality over alternatives) that they are willing to pay more for it.

See also this post on ACV.

#5 LTV (Life Time Value)

Lifetime value is the present value of the future net profit from the customer over the duration of the relationship. It helps determine the long-term value of the customer and how much net value you generate per customer after accounting for customer acquisition costs (CAC).

A common mistake is to estimate the LTV as a present value of revenue or even gross margin of the customer instead of calculating it as net profit of the customer over the life of the relationship.

Reminder, here’s a way to calculate LTV:

Revenue per customer (per month) = average order value multiplied by the number of orders.

Contribution margin per customer (per month) = revenue from customer minus variable costs associated with a customer. Variable costs include selling, administrative and any operational costs associated with serving the customer.

Avg. life span of customer (in months) = 1 / by your monthly churn.

LTV = Contribution margin from customer multiplied by the average lifespan of customer.

Note, if you have only few months of data, the conservative way to measure LTV is to look at historical value to date. Rather than predicting average life span and estimating how the retention curves might look, we prefer to measure 12 month and 24 month LTV.

Another important calculation here is LTV as it contributes to margin. This is important because a revenue or gross margin LTV suggests a higher upper limit on what you can spend on customer acquisition. Contribution Margin LTV to CAC ratio is also a good measure to determine CAC payback and manage your advertising and marketing spend accordingly.

See also Bill Gurley on the “dangerous seductions” of the lifetime value formula.

#6 Gross Merchandise Value (GMV) vs. Revenue

In marketplace businesses, these are frequently used interchangeably. But GMV does not equal revenue!

GMV (gross merchandise volume) is the total sales dollar volume of merchandise transacting through the marketplace in a specific period. It’s the real top line, what the consumer side of the marketplace is spending. It is a useful measure of the size of the marketplace and can be useful as a “current run rate” measure based on annualizing the most recent month or quarter.

Revenue is the portion of GMV that the marketplace “takes”. Revenue consists of the various fees that the marketplace gets for providing its services; most typically these are transaction fees based on GMV successfully transacted on the marketplace, but can also include ad revenue, sponsorships, etc. These fees are usually a fraction of GMV.

#7 Unearned or Deferred Revenue … and Billings

In a SaaS business, this is the cash you collect at the time of the booking in advance of when the revenues will actually be realized.

As we’ve shared previously, SaaS companies only get to recognize revenue over the term of the deal as the service is delivered — even if a customer signs a huge up-front deal. So in most cases, that “booking” goes onto the balance sheet in a liability line item called deferred revenue. (Because the balance sheet has to “balance,” the corresponding entry on the assets side of the balance sheet is “cash” if the customer pre-paid for the service or “accounts receivable” if the company expects to bill for and receive it in the future). As the company starts to recognize revenue from the software as service, it reduces its deferred revenue balance and increases revenue: for a 24-month deal, as each month goes by deferred revenue drops by 1/24th and revenue increases by 1/24th.

A good proxy to measure the growth — and ultimately the health — of a SaaS company is to look at billings, which is calculated by taking the revenue in one quarter and adding the change in deferred revenue from the prior quarter to the current quarter. If a SaaS company is growing its bookings (whether through new business or upsells/renewals to existing customers), billings will increase.

Billings is a much better forward-looking indicator of the health of a SaaS company than simply looking at revenue because revenue understates the true value of the customer, which gets recognized ratably. But it’s also tricky because of the very nature of recurring revenue itself: A SaaS company could show stable revenue for a long time — just by working off its billings backlog — which would make the business seem healthier than it truly is. This is something we therefore watch out for when evaluating the unit economics of such businesses.

#8 CAC (Customer Acquisition Cost) … Blended vs. Paid, Organic vs. Inorganic

Customer acquisition cost or CAC should be the full cost of acquiring users, stated on a per user basis. Unfortunately, CAC metrics come in all shapes and sizes.

One common problem with CAC metrics is failing to include all the costs incurred in user acquisition such as referral fees, credits, or discounts. Another common problem is to calculate CAC as a “blended” cost (including users acquired organically) rather than isolating users acquired through “paid” marketing. While blended CAC [total acquisition cost / total new customers acquired across all channels] isn’t wrong, it doesn’t inform how well your paid campaigns are working and whether they’re profitable.

This is why investors consider paid CAC [total acquisition cost/ new customers acquired through paid marketing] to be more important than blended CAC in evaluating the viability of a business — it informs whether a company can scale up its user acquisition budget profitably. While an argument can be made in some cases that paid acquisition contributes to organic acquisition, one would need to demonstrate proof of that effect to put weight on blended CAC.

Many investors do like seeing both, however: the blended number as well as the CAC, broken out by paid/unpaid. We also like seeing the breakdown by dollars of paid customer acquisition channels: for example, how much does a paying customer cost if they were acquired via Facebook?

Counterintuitively, it turns out that costs typically go up as you try and reach a larger audience. So it might cost you $1 to acquire your first 1,000 users, $2 to acquire your next 10,000, and $5 to $10 to acquire your next 100,000. That’s why you can’t afford to ignore the metrics about volume of users acquired via each channel.

Product and Engagement Metrics

#9 Active Users

Different companies have almost unlimited definitions for what “active” means. Some charts don’t even define what that activity is, while others include inadvertent activity — such as having a high proportion of first-time users or accidental one-time users.

Be clear on how you define “active.”

#10 Month-on-month (MoM) growth

Often this measured as the simple average of monthly growth rates. But investors often prefer to measure it as CMGR (Compounded Monthly Growth Rate) since CMGR measures the periodic growth, especially for a marketplace.

Using CMGR [CMGR = (Latest Month/ First Month)^(1/# of Months) -1] also helps you benchmark growth rates with other companies. This would otherwise be difficult to compare due to volatility and other factors. The CMGR will be smaller than the simple average in a growing business.

#11 Churn

There’s all kinds of churn — dollar churn, customer churn, net dollar churn — and there are varying definitions for how churn is measured. For example, some companies measure it on a revenue basis annually, which blends upsells with churn.

Investors look at it the following way:

Monthly unit churn = lost customers/prior month total

Retention by cohort

Month 1 = 100% of installed base

Latest Month = % of original installed base that are still transacting

It is also important to differentiate between gross churn and net revenue churn —

Gross churn: MRR lost in a given month/MRR at the beginning of the month.

Net churn: (MRR lost minus MRR from upsells) in a given month/MRR at the beginning of the month.

The difference between the two is significant. Gross churn estimates the actual loss to the business, while net revenue churn understates the losses (as it blends upsells with absolute churn).

#12 Burn Rate

Burn rate is the rate at which cash is decreasing. Especially in early stage startups, it’s important to know and monitor burn rate as companies fail when they are running out of cash and don’t have enough time left to raise funds or reduce expenses. As a reminder, here’s a simple calculation:

Monthly cash burn = cash balance at the beginning of the year minus cash balance end of the year / 12

It’s also important to measure net burn vs. gross burn:

Net burn [revenues (including all incoming cash you have a high probability of receiving) – gross burn] is the true measure of amount of cash your company is burning every month.

Gross burn on the other hand only looks at your monthly expenses + any other cash outlays.

Investors tend to focus on net burn to understand how long the money you have left in the bank will last for you to run the company. They will also take into account the rate at which your revenues and expenses grow as monthly burn may not be a constant number.

See also Fred Wilson on burn rate.

#13 Downloads

Downloads (or number of apps delivered by distribution deals) are really just a vanity metric.

Investors want to see engagement, ideally expressed as cohort retention on metrics that matter for that business — for example, DAU (daily active users), MAU (monthly active users), photos shared, photos viewed, and so on.

Presenting Metrics Generally

#14 Cumulative Charts (vs. Growth Metrics)

Cumulative charts by definition always go up and to the right for any business that is showing any kind of activity. But they are not a valid measure of growth — they can go up-and-to-the-right even when a business is shrinking. Thus, the metric is not a useful indicator of a company’s health.

Investors like to look at monthly GMV, monthly revenue, or new users/customers per month to assess the growth in early stage businesses. Quarterly charts can be used for later-stage businesses or businesses with a lot of month-to-month volatility in metrics.

#15 Chart Tricks

There a number of such tricks, but a few common ones include not labeling the Y-axis; shrinking scale to exaggerate growth; and only presenting percentage gains without presenting the absolute numbers. (This last one is misleading since percentages can sound impressive off a small base, but are not an indicator of the future trajectory.)

#16 Order of Operations

It’s fine to present metrics in any order as you tell your story.

When initially evaluating businesses, investors often look at GMV, revenue, and bookings first because they’re an indicator of the size of the business. Once investors have a sense of the the size of the business, they’ll want to understand growth to see how well the company is performing. These basic metrics, if interesting, then compel us to look even further.

As one of our partners who recently had a baby observes here: It’s almost like doing a health check for your baby at the pediatrician’s office. Check weight and height, and then compare to previous estimates to make sure things look healthy before you go any deeper!

 

From Social Networks To Market Networks

Posted Jun 27, 2015 by James Currier (@JamesCurrier) via TechCrunch
James Currier is a cofounder and partner of NFX Guild, an early-stage fund with a three-month program for marketplace and network businesses.


Most people didn’t notice last month when a 35-person company in San Francisco called HoneyBook announced a $22 million Series B*.

What was unusual about the deal is that nearly all the best-known Silicon Valley VCs competed for it. That’s because HoneyBook is a prime example of an important new category of digital company that combines the best elements of networks like Facebook with marketplaces like Airbnb — what we call a market network.

Market networks will produce a new class of unicorn companies and impact how millions of service professionals will work and earn their living.

What Is A Market Network?

“Marketplaces” provide transactions among multiple buyers and multiple sellers — like eBay, Etsy, Uber and LendingClub.

“Networks” provide profiles that project a person’s identity, then lets them communicate in a 360-degree pattern with other people in the network. Think Facebook, Twitter and LinkedIn.

What’s unique about market networks is that they:

  • Combine the main elements of both networks and marketplaces
  • Use SaaS workflow software to focus action around longer-term projects, not just a quick transaction
  • Promote the service provider as a differentiated individual, helping to build long-term relationships

An example will help: Let’s go back to HoneyBook, a market network for the events industry.

An event planner builds a profile on HoneyBook.com. That profile serves as her professional home on the web. She uses the HoneyBook SaaS workflow to send self-branded proposals to clients and sign contracts digitally.

She then connects to that project the other professionals she works with, like florists and photographers. They also get profiles on HoneyBook, and everyone can team up to service a client, send each other proposals, sign contracts and get paid by everyone else.

This many-to-many transaction pattern is key. HoneyBook is an N-sided marketplace — transactions happen in a 360-degree pattern like a network. That makes HoneyBook both a marketplace and network.

A market network often starts by enhancing a network of professionals that exists offline. Many of them have been transacting with each other for years using fax, checks, overnight packages and phone calls.

By moving these connections and transactions into software, a market network makes it significantly easier for professionals to operate their businesses and clients to get better service.

We’ve Seen This Before

AngelList is also a market network*. I don’t know if it was the first, but Naval Ravikant and Babak Nivi deserve a lot of credit for pioneering the model in 2010.

On AngelList, the pattern is similar. The startup CEO can complete her fundraising paperwork through the AngelList SaaS workflow, and everyone in the network can share deals, hire employees and find customers in a 360-degree pattern.

Joist is another good example. Based in Toronto, it provides a market network for the home remodel and construction industry. Houzz is also in that space, with broader reach and a different approach*. DotLoop in Cincinnati shows the same pattern for the residential real estate brokerage industry.

Looking at AngelList, Joist, Houzz, DotLoop and HoneyBook, the market network pattern is visible.

Six Attributes Of A Successful Market Network

Market networks target more complex services. In the last six years, the tech industry has obsessed over on-demand labor marketplaces for quick transactions of simple services. Companies like Uber, Mechanical Turk, Thumbtack, Luxe and many others make it efficient to buy simple services whose quality is judged objectively. Their success is based on commodifying the people on both sides of the marketplace.

However, the highest value services — like event planning and home remodeling — are neither simple nor objectively judged. They are more involved and longer term. Market networks are designed for these types of services.

People matter. With complex services, each client is unique, and the professional they get matters. Would you hand over your wedding to just anyone? Or your home remodel? The people on both sides of those equations are not interchangeable like they are with Lyft or Uber. Each person brings unique opinions, expertise and relationships to the transaction. A market network is designed to acknowledge that as a core tenet — and provide a solution.

Collaboration happens around a project. For most complex services, multiple professionals collaborate among themselves — and with a client — over a period of time. The SaaS at the center of market networks focuses the action on a project that can take days or years to complete.

Market networks help build long-term relationships. Market networks bring a career’s worth of professional connections online and make them more useful. For years, social networks like LinkedIn and Facebook have helped build long-term relationships. However, until market networks, they hadn’t been used for commerce and transactions.

Referrals flow freely. In these industries, referrals are gold, for both the client and the service professional. The market network software is designed to make referrals simple and more frequent.

Market networks increase transaction velocity and satisfaction. By putting the network of professionals and clients into software, the market network increases transaction velocity for everyone. It increases the close rate on proposals and expedites payment. The software also increases customer satisfaction scores, reduces miscommunication and makes the work pleasing and beautiful. Never underestimate pleasing and beautiful.

Social Networks Were The Last 10 Years. Market Networks Will Be The Next 10.

First we had communication networks, like telephones and email. Then we had social networks, like Facebook and LinkedIn. Now we have market networks, like HoneyBook, AngelList, Houzz, DotLoop and Joist.

You can imagine a market network for every industry where professionals are not interchangeable: law, travel, real estate, media production, architecture, investment banking, personal finance, construction, management consulting and more. Each market network will have different attributes that make it work in each vertical, but the principles will remain the same.

Over time, nearly all independent professionals and their clients will conduct business through the market network of their industry. We’re just seeing the beginning of it now.

Market networks will have a massive positive impact on how millions of people work and live, and how hundreds of millions of people buy better services.

I hope more entrepreneurs will set their sights on building these businesses. It’s time. They are hard products to get right, but the payoff is potentially massive.

* Disclosure: I am an adviser and/or investor in HoneyBook, Houzz and AngelList.

FEATURED IMAGE: SHUTTERSTOCK

The Millennial Delusion

Posted Jun 27, 2015 by Danny Crichton (@DannyCrichton) courtesy of TechCrunch

The obsession with “millennials” continues to fascinate me. Despite being the most outspoken generation in history, people – very important and powerful people – claim they don’t understand us. We make no sense apparently, as if the actions and career paths of our parents make total and complete sense.

There are even consulting firms that specialize in teaching businesses how to interact with us (I refuse to link to them, Google if you dare). I wish I could start one of these and just talk about myself all day as a passion job, in the process becoming the very essence of a millennial.

A meta-millennial, perhaps.

More words have been spilled in the business press about this arbitrary agglomeration of people than any other, yet debates seem to go on endlessly.

That’s because there really is no debate, and there really is no such concept as “millennial.” If it wasn’t clear already, millennial values are American values, which is perhaps more obvious this week with the Supreme Court’s decisions around same-sex marriage, health care, and housing discrimination, which were significantly more in line with millennial thinking than with the baby boom generation.

Millennials are a figment of our imagination, a delusion of marketers and others who believe that the changes in our society are only applicable to a narrow group of people rather than our whole population.

They’re completely wrong.

What’s happening is that people are finally taking advantage of all the technological progress we have made over the past few decades, finding empowerment in the world that was lacking before. We all now have the ability to choose our own paths – our own “passion careers” – and use technology to foster a better future, not just an elite sliver of the population with enough resources.

Unsurprisingly, everyone seems to be doing just that.

We can see technology’s influence on society everywhere. Millennials are described as more “socially conscious” than any other generation, but this is a function of our heavy use of technology, particularly social networks. People today have more access to news and opinion from the United States and around the world than ever before, and it shouldn’t be surprising that conflicts or diseases in other places have an emotional resonance with us that didn’t exist before.

Take, for example, brands like Nike and Apple, which have had to deal with the harsh conditions of their factories overseas. They were forced to make changes and improve those conditions not because of changes to laws or advocacy by a government, but simply because their customers started to have the means to pay attention to their actions.

As a tool of social progress, the camera in our smartphones is probably more impactful than any other currently out there. With live video streaming apps like Periscope and Meerkat, we don’t just view these images later, but feel the very essence of a situation in real-time. How can you watch harm happening and not feel some desire to ameliorate it? This is not a millennial thing, but rather a human impulse.

Technology brings to us a deep awareness of what is going on around the world. It’s one of the reasons why so many of my generation refuse to take part in the traditional labor market and instead pave their own paths. We have been exposed to so many wrongs in the world, that maybe it is time that each of us attempts to do something to make it just a little bit better. If ignorance is bliss, then technology has made us permanently anxious to fix every problem.

When we combine that sentiment with the constant push in America for entrepreneurship, it shouldn’t surprise anyone that millennials are more free-thinking and independent than previous generations. The idea of climbing up a corporate ladder seems so alien since so many storied companies have ceased to exist in our lifetimes and the process seems so divergent from actually improving humanity.

It also helps that technology has brought down the costs of building our own companies and service organizations. Today, anyone – not just millennials – has this alternative option of simply ignoring everyone and going their own way. The stasis of the world has been replaced with technology-based flexibility powered by the cloud and mobile devices.

Empowerment has a price though. If ever there was a debate to be had in this country, it is that the great projects of our time still do take significant teams to build. Everyone can’t be a founder. While we have a cooperative and community-oriented spirit, that doesn’t necessarily translate into wanting to join someone else’s startup or nonprofit. Indeed, we probably want to start our own.

Nonetheless, we have to accept that the world won’t revolve around a few hundred massive companies, but rather millions of small ones. The biggest challenge that comes from “millennials” is simply that we think in a decentralized way about the world, while businesses still focus on centralization. There is supposed to be one brand, not millions of them adapted to every consumer.

Thankfully, we have seen a sea change in marketing over the past decade in order to facilitate consumer engagement with brands, but we still need more at the product and services level.

This centralizing impulse is felt even more heavily in the non-profit and government sectors. The crisis over the waste at the Red Cross is a perfect example of all the problems today with scale. How could the organization have thought bottom-up rather than top-down and possibly saved hundreds of millions of dollars while actually doing something with its donations?

Of course, the story of the Red Cross’ waste is simply another retelling of this whole millennial narrative. A team of journalists can now investigate locally and cull documents online to prove things that would have been difficult if not impossible before. Technology has empowered the donor.

Technology has given us more awareness and choice than ever before. How we navigate abundant choice is most connected with millennials since we understand this natively, but everyone else is quickly coming on board. This new world may be different, but it is also better, with more equality and security. If this is what technology can do, it’s time we all become millennials.

FEATURED IMAGE: DAVID GOEHRING/FLICKR UNDER A CC BY 2.0 LICENSE

Reverb Client Aver Informatics Raises $8.5 Million

Aver Informatics Raises $8.5 Million To Tackle Healthcare Payments

From TechCrunch by Jonathan Shieber ( @jshieber )

If you’ve ever been to a doctor in the U.S., you know the befuddling bundle of bills that awaits at the end of the road for your treatment.

The ugly truth is that those bills aren’t just confusing to you. Even most hospitals don’t know how much a given procedure is supposed to cost, according to a 2013 study from the Journal of the American Medical Association.

It’s gotten so bad that even health insurance executives are writing opinion pieces about ways to reduce waste on healthcare payments, which totaled $765 billion in 2009 alone.

Investors in the new $8.5 million round for Aver Informatics thinks that the company’s new billing management software can provide some semblance of a solution.

The Green Bay, Wis.-based company sells software that groups treatments into what it calls “episodes of care”, and then generates a bill for the entire process of treating a health condition, rather than generating a separate charge for each discrete step in the process.

Kurt

Launched by Kurt Brenkus, a former auditor with a boutique claims audit firm who also worked at United Healthcare, in June 2010, Aver Informatics’ approach stems from Brenkus’ own knowledge of the healthcare system.

“The way that the healthcare system works today is a volume-based system,” says Brenkus. “And there’s a perverse incentive in a volume-based system to do more services to make more money.”

Despite the government’s steps to curtail healthcare spending through the Affordable Care Act, healthcare spending in the U.S. is still projected to amount to one-quarter of the economy by 2022.

Brenkus says that this is one instance where big data analytics can make a difference, saving millions of dollars for health insurers and patients.

The savings were apparent to Aver’s customers from the very beginning. “The first client was a small insurance firm out of Madison, Wis. Within the first three months of working with them we saved them a half a million bucks,” says Brenkus.

Aver was able to parlay its first successes into a stint with the healthcare accelerator and advisor Startup Health through its joint venture with GE Ventures — the investment arm of General Electric, one of the biggest healthcare technology companies in the world and a huge employer in the U.S.

It was GE Ventures and Drive Capital that led the Series A investment for Aver Informatics. “Healthcare payment reform is one of our top themes,” says Ned Schwartz, a partner with Drive Capital, who previously worked for General Atlantic and Norwest Venture Partners.

Here’s what’s drawing investors and companies to the Aver service. “Our analytics go over this fee-for-service data and we recreate the way that data works as events-based data. What we do is we add this element of time and we can find information that looks at the type of treatment to determine that treatments are related to either a knee replacement, or a pregnancy, or a heart attack.”

By determining what are standard progressions of care with positive outcomes, Aver Informatics can create defined processes for the ideal course of treatment at the lowest cost, Schwartz says.

In some cases, it’s not that the healthcare system is willfully opaque or obfuscating the cost of procedures, it’s that hospitals really don’t know, or are confused themselves about treatment options. “They have made the equivalent of a Rube Goldberg machine for healthcare payments,” says Berkus. Reimbursement from insurers depends on a series of codes that healthcare providers have to enter and there’s an almost unlimited combination of codes possible for a single treatment.

“There are so many codes that happen — for a particular kind of knee surgery there’s probably roughly 100 different codes that you could use depending on the type of knee surgery that you’re doing. We’ve made it so completely complicated,” says Berkus.

In the current system, health insurers can only determine whether claims were paid in a timely fashion or not, they have no idea how many heart attack treatments they paid for, according to Berkus.

There are already 15 customers using Aver Informatics’ software, according to Berkus, and they’re saving 10% to 50% on payments for treatments across their entire patient populations. In fact, in addition to the new financing, Aver has also added two new customers — the University of Pittsburgh Medical Center and Molina Healthcare.

“What it comes down to is that there are these billing systems running on these green-screen systems from the 1990s [and updating them] is like trying to change a jet engine in mid-flight,” says Berkus. “You’ve got all of this legacy architecture and we’re literally reconfiguring this information on the fly.”

In many ways, the adoption of technologies like Aver is a direct result of federal and state initiatives, according to a Molina Healthcare executive.

“By leveraging technology we can align best with federal and state initiatives toward value-based payments. In Ohio, we are working in collaboration with the Ohio Department of Medicaid and the Ohio Office of Health Transformation to further the state’s objective of providing value based health care by implementing a new episode-based payment model,” said Martin Portillo, MD, Chief Medical Officer for Molina Healthcare of Ohio. “The goal is to develop a program that would incentivize and pay our providers while improving quality and managing costs.”

Photo via Flickr user TaxRebate.org.uk 

THE UNEXPECTED LINK BETWEEN INVESTMENT BANKERS AND ARTISTS

The right and left brained minds of artists and bankers have a few things in common for being understood and reaching their potential. BY JANE PORTER from FAST COMPANY

 

Lots of artists will admit they're not so great with numbers. Math was never their strongest subject. But when it comes to creative work, artists and investment bankers aren't all that different as far as taking risks is concerned.

"Creative people practice in the realm of ideas what financial investors do in the stock market. They defy the crowd to 'buy low and sell high,'" writes Robert Sternberg, in the paper "Creativity as Investment." "Not every stock with low price-earnings ratio is a good financial investment … neither is every new idea a good creativity investment."

Here's how thinking more like an investment banker can help your creative pursuits.

KNOW YOUR NICHE.

Sternberg takes a stock tip from investor Peter Lynch when it comes to creative work: "Invest in things you understand." That means focusing your efforts on what matters most to you, rather than spreading yourself too thin.

It takes at least 10 years in a creative field before you to see serious creative achievement, according to psychologist Dean Simonton. Translation: Patience is of the essence.

That said, knowing too much can also be restricting. The ones who are best at developing new ideas don't let all they know hinder them. "Creative people and companies don't get locked in by what they know; they are able to move on to the next idea."

BE A PROBLEM SOLVER.

There's no foolproof way to tell the difference between stocks that are undervalued and those that are selling low because they're not worth much. The same goes for testing creative ideas. Often, especially in the early stages, it's hard to tell if your idea is worth going after or not.

But Sternberg sites two basic kinds of problem solving approaches that can be effective for both investing and creating. The first "fundamental analysis," essentially means taking a forward-looking approach at what attributes of a company could help you predict a rise or fall in its stock or what elements of a creative idea could be of interest or useful to the outside world.

The second, a "technical analysis," essentially means looking at past trends or ideas to get a sense of what did well and what didn't in the past.

DON’T PUT IT OUT THERE TOO SOON.

Of course there are no hard and fast rules. Put an idea out in the world too soon and you might sabotage it from developing. Sometimes you're not ready for feedback or rejection yet. Don't rush.

"Analogous to stock market investment success, sometimes creativity fails to occur because a person puts forth ('sells') an idea prematurely or holds an idea so long that it becomes common or obsolete," writes Sternberg.

DON'T RUN FROM RISK.

Most investors know they should buy low and sell high, but very few do. People aren't all that different when it comes to creative work, says Sternberg. Creativity requires a risk-taking personality, someone who can take a stand and be a contrarian," he writes. "Someone easily dismayed by criticism will have a tough time being creative. Buying low is not easy to do. Standing on one's own is obviously risky."

BE PREPARED NOT TO BE POPULAR.

When you're "buying low" you're going after ideas most people aren't into. That means you'll likely encounter some pushback from others. "The creative individual persists in the face of this resistance, and eventually sells high, moving on to the next new, or unpopular, idea," says Sternberg.

EMBRACE THE DEAD ENDS ALONG THE WAY.

But in order to make it in the creative world, you need a healthy dose of motivation. "The amount of motivation needed to buy low can be miniscule compared with the motivation and persistence needed to get to the point where one can sell high," according to Sternberg. "Edison learned 1,800 ways not to build a light bulb before he got it right."

 

A Multi-Factor Analysis Of Startups

Via TechCrunch by Matt Oguz (@MattOguz)

Editor’s note: Matt Oguz is managing director of Palo Alto Venture Science.

Every decision we make from what to wear to whom to hire requires a balance of multiple factors. Sometimes we decide quickly and other times with deliberate consideration. Either way, we do this every day. Picking what to wear, for instance, depends on a number of variables: what we have in the closet, what we’ll be doing that day, what the weather’s like, etc. Often we pick something to wear but later question our judgment. This happens for a number of reasons:

  • We haven’t reviewed all of our clothes.
  • We haven’t reviewed all aspects of what we’ll be doing.
  • When we start that activity we realize there was more to it than what we assumed, such as attending a party where everyone is in a cocktail dress except you because you didn’t know the context of the party.

Selecting a startup to invest in isn’t much different. First, we have a number of alternatives, i.e. our deal flow. We don’t have access to all available deals. Second, we have a limited amount of time to decide and we have other constraints, such as how much cash we have, contingencies, terms, existing portfolio and so forth.

Multi-factor decision analysis, or multi-criteria decision analysis as it’s more commonly known in academia, is an approach that is intended to force hard thinking about the alternatives, contingencies, constraints, etc., to promote good decision-making. It won’t give you the “right” answer, but it will challenge intuition, help structure the problem, provide a sounding board for testing, and combine different perspectives.

People love taking shortcuts when making decisions — smart people more so than others because they believe they are better than others based on their prior accomplishments. This is error No. 1. People also place more emphasis on recent events than the event warrants, such as pouring money into messaging apps after the WhatsApp acquisition. This is error No. 2.

We also anchor our valuations to recent events. Error No. 3: If an IPO is successful, funding to startups goes up. Error No. 4: We value the popular view especially shared among more successful people. Case in point is YC demo days. Error No. 5: We think that what we have available is all that’s available. And finally, when we succeed we take a lot more credit for it than the responsibility we take when we fail. This is error No. 6.

I’m not pointing out these errors to dismiss the intellect of successful people. These errors are like a hammer chipping away from a beautiful chunk of granite leaving you with a small stone. And these errors, aka cognitive biases, are there because of where we are in our evolution. A million years from now we’ll probably decide better. We all suffer from “bounded rationality.”

So let’s dig deeper now. Consider a time when you’re an investor evaluating Facebook. Here’s the scenario:

  1. Lots of competition. Myspace was already there and big.
  2. Young and inexperienced team
  3. Litigation risk
  4. Questionable monetization

It doesn’t look that compelling, does it? But look at the pros:

  1. Great product that’s fully built
  2. Viral growth
  3. Gargantuan market

You may say this is hindsight but bear with me. If you decided not to invest in Facebook, the error you’ve made is simply assuming that the four negative parameters carry the same weight as the three positive parameters. You wrote pros and cons and crossed them out; whichever side had more won. This is when multi-factor analysis comes into play and shows its magic. All you had to do was decide which parameter was more important and by how much. One may decide it looks like this:

Oguz1

Consider RingCentral. It’s similar. VoIP is not new. Competition is huge. But it’s got a great team, a good (not yet great) product, great monetization, a big and underserved market segment, etc.

Here’s how you build your multi-factor matrix:

  1. Identify attributes that are important to you. Do this with your team.
  2. Take two attributes at a time and determine which one is more important and by how much. Do this for all the attributes and sub-attributes.
  3. Identify deal-killer (binary) attributes.

Oguz2

The attributes we selected here come from Bell-Mason diagnostics. MCDA takes this a step further and forces the decision-makers to identify how important each attribute is. Naturally, not all attributes have the same level of importance.

To take this a step further, one may decide to run more statistical analysis on attributes and how they impacted startups in the past. The results will help the team understand the importance of each attribute better.

Once you identify the factors and their levels of importance, run each startup in your deal flow through this matrix. Each one will give you a different score. From there, you can calculate your bang for the buck on each alternative. It forces you to avoid biases and look at the problem as a whole, and it builds a framework that takes you from complexity to simplicity.

Multi-factor models have been criticized in the past because they often appear “simplistic.” The simple model does not deny the complexity of the problem. It forces you to distill the key factors in a transparent, easy-to-work-with manner, and this can generate further insights and understanding.

Simon French is a renowned professor of Information and Decision Sciences at the University of Warwick. In his book named “Decision Theory: An Introduction to the Mathematics of Rationality” he states the following:

Decision analysis has been berated because it supposedly applies simplistic ideas to complex problems, usurping decision makers and prescribing choice. Yet I believe it does nothing of this sort. I believe that decision analysis is a very delicate, subtle tool that helps decision makers explore and come to understand their beliefs and preferences in the context of a particular problem. …There is no prescription, only the provision of a framework in which to think and communicate.

We agree with Professor French. The biases described above are quite apparent in the way investors make decisions. We need a disciplined approach to VC investing just like in any other asset class.

Today, we have a lot more data on startups than ever before. We know the cash influx into startups and exits. We know stage-by-stage changes in valuations. It’s worthwhile to study what attributes make or break the startup instead of making blanket heuristic statements such as “most of your investments will fail” or forming valuation correlations such as “x accelerator graduates commend higher valuation.”

Our job as investors is to avoid biases and have a structured approach to how we select startups that creates consistency and translates to newer-generation VCs unlike the models of traditional VCs, which, in our opinion, does not.

IMAGE BY GWOEII/SHUTTERSTOCK

Shake your business model if you've got brains and balls

Via TechCrunch by  (@ryanlawler)

Now more than ever, both big brands and independent merchants are looking for flexibility in the way that they reach consumers. With Storefront, they’re able to find space to set up popup shops or sell items in boutiques without all the hassle that comes with leasing space and building out their own stores.

After raising $1.6 million in seed funding last summer, the AngelPad-backed startup is announcing today that it has brought on an addition $7.3 million in funding led by Spark Capital. Along with the funding, Spark general partner Mo Koyfman will be joining the company’s board of directors.

Previous investors include Mohr Davidow Ventures, Great Oaks Venture Capital, 500 Startups, David Tisch’s BoxGroup, and Sand Hill Angels, among others.

Storefront launched as a platform to connect those who have shops or empty real estate in highly trafficked areas with merchants who wish to make their goods available without making major investments in opening up a store right away.

Just as Airbnb offers a marketplace for people to make their homes available for others to stay in, Storefront allows those who have retail space to rent it out to merchants on a temporary basis.

The platform offers everything from full retail stores that can be used as pop-up shops to shelf space in boutiques available on a temporary basis. Merchants can rent space on a daily, weekly, or monthly basis, based on how much time or space they want.

That flexibility enables major brands to create temporary shops to pitch new products, while also allowing some independent and regional merchants to test out products in new areas without committing to an entire store launch.

Since launching about a year ago, Storefront has signed up a few thousand spaces on the platform. According to co-Founder and CEO Erik Eliason, those locations range from neighborhood shops to MTA subway stops in New York to W hotels and other unique spaces.

As a result, more than 1,000 merchants have used the platform to open up shop in New York and San Francisco, and have generated $40 million in sales through those locations, according to Storefront. For every dollar spent on rent, it says merchants are making $7 in retail sales.

For Koyfman, who is joining the board, Storefront is on the forefront of a new trend emerging in retail where spaces are available in a more flexible way. And it’s providing a new way to connect digital brands with consumers in the offline world — something that could be interesting for brands like Warby Parker, which is also a Spark Capital investment.

But really, the opportunities are endless. Storefront might provide a company like Warby to increase brand awareness in a city where it doesn’t have a retail presence, and it can also be a way for independent merchants to offer up their goods in new retail locations without having to worry about selling their products to a buyer.

Koyfman pointed out that Storefront could also be used to enable artists to launch their own show without booking space in a gallery, or for an online or mobile company to launch new products and showcase them to consumers by finding spaces with lots of guaranteed foot traffic.

With early traction in New York and San Francisco, the company is looking to expand. It’s announcing that the marketplace will now also serve Los Angeles, in addition to its first two cities.

And, to do that, it’s also hiring. Eliason says the company, which has nine employees today, is looking to grow to 25 by the end of the year. With new funding from Spark Capital in the bank, it should be ready to do just that.

PHOTO CREDIT: CHARLESTON’S THEDIGITEL VIA COMPFIGHT CC

Why Stock Prices Are So Important For Startups

Posted Apr 11, 2014 by Danny Crichton (@DannyCrichton) via TechCrunch April 10, 2014 was a bit of a bloodbath for shares of internet stocks. The NASDAQ composite index declined by almost 130 points, its worst drop in two years, and Splunk and FireEye, two of last year’s most popular technology IPOs, each declined by more than 10%. The one-day tumble doesn’t undo the gains made by the markets over the past 24 months, during which both the NASDAQ and S&P 500 indices increased by historically strong returns of 34%. But there are increasing rumbles from financial analysts that a market correction may be in order, and that does not bode well for anyone in the startup industry.

For startup founders, the day-to-day investment alchemy on Wall Street can seem pretty distant from the routine of running a venture business. But the truth is that these market dynamics play the central role in determining the success of the entire venture ecosystem. At the end of the day, startup valuations are based on the final value of their exits through mergers and acquisitions or IPOs, and changes in these exit prices have an immediate ripple effect across every decision made in the industry. While signs are pretty good that we are not in a bubble, the rapidly increasing valuations of the last year can create serious hazards for startup founders and venture capitalists if they let their exuberance run unchecked.

One example of this increased excitement can be seen in the market for IPOs. Jay Ritter, a professor at the University of Florida, tracks technology IPO data, and his data show that the number of unprofitable companies coming to the public markets has increased tremendously over the past four years. In 2009, 68% of technology companies were profitable at IPO, but that percentage has shrunk every year since, reaching 28% in 2013 and continuing to fall this year. Investors are clearly showing their desire to buy into these new stock issues, with stocks like Castlight Health doubling on their first day of trading despite a yawning gap between revenues and expenses.

To be fair, there is nothing intrinsically wrong with an unprofitable company going public. Ultimately, the market should sort through these companies, and we have certainly seen offerings launch flat when investors were worried about growth. King Digital Entertainment, the maker of Candy Crush Saga, significantly declined on its first day of trading. The reason why analysts are paying increased attention to this market trend is because there is incredible risk for companies to go public, since the process involves revealing a full set of accounting metrics, handling complex regulations, and managing expectations of very demanding investors. Without profits, the risk only becomes greater.

nasdaq2

In investment climates like the one we are experiencing, initial offerings can happen much more smoothly, and at higher valuations to boot. But it isn’t just IPOs that are becoming heated – mergers and acquisitions activity is also rapidly increasing. Thomson Reuters has reported that overall M&A increased by 54% in the first quarter of 2014 compared to last year, which was pointedly obvious in mega-deals like Facebook’s purchase of WhatsApp for $19 billion. With sky-high valuations for public equities, large companies like Facebook and Google have an easier time purchasing companies because they simply have resources at their disposal to acquire the assets they want.

All this means that final exit valuations for startups are not only increasing in value, but perhaps even more importantly, they are becoming less risky. Venture capital – like any investment asset class – is all about risk-adjusted returns. This manifests itself in the bias that VC firms have for software startups over hardware ones, and for social apps over deep-tech startups. But in our current heated investment climate, finding an exit is easier than it has been in the past, lowering risk and increasing returns for investors.

What do you do when exit valuations are increasing and the risks of exiting decrease? Well, you raise more venture capital. In the last quarter, VC firms raised more than 50% more dollars than last year according to Pitchbook. And those VCs deployed the most amount of capital ever in a single quarter. Part of this fuel is coming from money managers who performed exceptionally well last year in some of their asset classes like public equities, and now need to rebalance their portfolios, increasing the dollars flowing into alternative assets like private equity and venture capital.

There is just one key bottleneck, and it isn’t the Series A crunch. It is the fact that the number of truly exceptional businesses hasn’t really changed over the past few years in order to absorb all of that new capital. As venture data has repeatedly shows, the returns in the industry come from just a handful of major exits, and thus, venture capitalists are mostly uninterested in the rest of the universe of startups. As capital increases, so does demand for equity in these unicorn startups, and this pushes valuations for the lucky few very high.

nasdaq3

Everything works fine so long as the market increases, but what happens if a market correction is starting to take place? The first effect, by definition, would be declining valuations for public technology companies, immediately crimping M&A plans and delaying some purchases until later. For companies looking to go public, they may choose to delay or even cancel their initial offerings if the markets are too turbulent.

The real risk, though, is that venture capitalists get spooked, and start to conserve their capital to protect their current portfolio from a barren fundraising market. If that happens, any market correction could accelerate quite rapidly. Startups will have to aggressively cut back costs to stretch out their runways, which means that engineers will be fired and technology purchases will be reduced.

Even though founders have little power to change the outcome of stock prices, it is vital to stay cognizant of the public markets. Market cycles are a guarantee, but founders can still focus on the basics to give themselves the best chance for success. Assume that any capital raised has to be the last capital that enters your business, acquire revenues early and often to give yourself more control over your destiny (or even consider bootstrapping), and ensure that fundraising valuations don’t get out of control. If you time the market well, you can be the eye of the hurricane – and weather the downturn like Google after the dot com bubble.

ILLUSTRATIONS: BRYCE DURBIN

Money can't buy you love

A broken place: The spectacular failure of the startup that was going to change the world.

With almost $1 billion in funding and ambitions to replace petroleum-based cards with a network of cheap electric cars, Shai Agassi's better place was remarkable even by the standards of world-changing startups.  So was its epic failure a 21st century cautionary tale?

BY 

MAX CHAFKIN

 and 

Fast Company

.

"So this is the car." I'm standing outside a shopping mall somewhere in Tel Aviv, Israel, as Guy Pross shows me his ride.

THE CAR: The Renault Fluence Z.E. was the only vehicle to work with Better Place’s electric car infrastructure.Getty Images

The silver Renault sedan has four doors, five seats, and a body design that makes it look a bit like a fat Honda Civic. Under the hood, though, the normal 1.6-liter internal-­combustion engine has been replaced with a compact 70-kilowatt electric motor, a conversion overseen by Renault and a ­local company named Better Place. Instead of a gas tank, an enormous lithium-ion battery pack lives between the trunk and the back seat. Inside the vehicle, Pross directs my attention to the coup de grace: the center console, where, in addition to all the familiar interior features of a mid-range car--the ugly radio, the climate-control dials--there's a little joystick with some strange-­looking buttons. "This is where the cup holder used to be," he says, referring to the standard version of the Renault. In its place, Pross twirls a dial that Better Place installed to control a futuristic navigation system ­called Oscar (OS plus car--get it?), which was designed to help drivers find charge spots and predict whether or not they had enough energy to complete their journey. "It's really slick," he says.

He hands me the keys, I stick them in the ignition, and twist. There's a beep, the air-conditioning fans start to hum, and then... nothing.

"Is it on?" I ask.

Pross nods, grinning. I hit the pedal and the car jumps forward, emitting a high-pitched whir. We scoot out of the parking lot and I begin weaving, only slightly recklessly, through Tel Aviv's notorious traffic. I'm filled with that sense of energy and possibility that one sometimes feels when driving a fast car. "It's not a Tesla," says Pross, referring to Elon Musk's company. "But it's close. And it costs a lot less."

The range on the Better Place car's battery is only 80 miles or so, but the company created a charging infrastructure here in Israel that included hundreds of public electrical outlets. In addition, robots were installed at dozens of service stations that could extract the used battery from underneath the car and replace it with a fresh one in about five minutes. The idea was to put an end to so-called range anxiety, which has long been offered as an explanation for why electric cars have failed to catch on with consumers. With the Better Place network, a driver could easily navigate from, say, Tel Aviv to the resort town of Eilat, a little over 200 miles away, with only 15 minutes or so in stops.

"The technology worked, customers were satisfied," says Pross, who in addition to being this particular car's owner was a Better Place employee from 2008 until the bitter end, the company's bankruptcy declaration in May 2013. He sounds heartbroken. "It would have been a revolution."

Better Place was born to be revolutionary, the epitome of the kind of world-changing ambition that routinely gets celebrated. Founder Shai Agassi, a serial entrepreneur turned rising star at German software giant SAP, conceived Better Place "on a Davos afternoon" in 2005 when he asked himself, "How would you run a whole country without oil?" Four years later, onstage at the TED conference, Agassi, a proud Israeli with a bit of a Steve Jobs complex, wore a black turtleneck and promised, with the confidence of a man who has known the future for some time but has only recently decided to share his findings, that he would sell millions of electric vehicles in his home country and around the world. He implied that converting to electric cars was the moral equivalent of the abolition of human slavery and that it would usher in a new Industrial Revolution.

THE SALESMAN:

 Better Place founder and CEO Shai Agassi in 2009, when his startup was the toast of the worldPhoto by Dai Sugano, San Jose Mercury News, Mct, Newscom

This was science fiction, but Agassi presented it as fact, as if just by announcing his company he had already built it. It was "Shai math," as his employees would come to call it. And it was intoxicating. The TED crowd gave Agassi a long standing ovation.

Agassi got virtually every meeting he ever asked for--with world leaders, celebrities, and CEOs of some of the world's largest companies. The press anointed him the creator of a Next Big Thing. (Fast Company included Agassi on its 2009 Most Creative People in Business list.) Money from investors came fast and in big waves, roughly $900 million, and it seemed like it would never stop flowing. Until, suddenly, it did.

How did a company with so much going for it stumble so badly? ­Agassi's grand vision gave Better Place life, but according to former employees, investors, and board members, that same grand vision also ultimately destroyed it. Entrepreneurs are frequently told not to drink their own Kool-Aid--which is to say, to remember that the stories they tell about how their products will save humanity are just that.

Privately, they are cautioned to focus on the small things; to make more money than they lose; to cut costs when needed; and, when necessary, to pivot to a more promising business. The caution seems especially important in a culture that increasingly celebrates startups, threatening to confuse their mythmaking with reality. Agassi made great Kool-Aid and then drank it all himself.

"Everything we needed to go right went wrong," says one former employee. "Every cost on our spreadsheet wound up being double, every time factor took twice as long." There was profligacy, marketing problems, hiring problems, problems with every conceivable part of the business. There was questionable oversight by the company's board of directors. There was bad luck. And there was hubris. "There was nothing normal about Better Place," says Pross. "It was spectacular. Shai always said, 'If we go down, we'll make a lot of noise.'"

Agassi's startup lived fast and died young, and left almost nothing behind beyond the car that Pross and I are sitting in. Better Place sold fewer than 1,500 vehicles. Its swap stations, located next to gas stations and near highway on-ramps, closed last year. Their once-gleaming white walls, inspired by Apple's design, are increasingly caked in dirt.

Better Place is a tragicomic case study of the limits of innovation, the difficulties of getting consumers to embrace new technology, and the perils of believing your own bullshit. What follows is the story of how that happened: a step-by-step guide to the most spectacularly failed technology startup of the 21st century.

Better Place's battery-swapping stations were projected to cost no more than $500,000 each; they cost $2 million. They're now shut down.

STEP 1: DECLARE VICTORY

Shai Agassi was born in 1968, the year after his native Israel's Six-Day War, and grew up in suburban Tel Aviv in relative privilege. His father, Reuven, an Iraqi-Israeli engineer, was a distinguished military officer--rising to the rank of colonel in the Israel Defense Forces--and later a telecom executive. Shai was at least as ambitious as his dad, learning how to program with punch cards as a 7-year-old in the mid-1970s, and then enrolling in Israel's prestigious Technion university at age 15. After serving his mandatory military service, he launched a series of small-enterprise software companies with his dad. In 1995, Agassi moved to the Bay Area as part of a consulting assignment with Apple. The Apple manager killed his project, though Agassi would come to see this as the first of many signs of his own technical acumen. "You may have heard of the technology my team recommended," Agassi wrote on LinkedIn last year. "It was called the Internet."

Agassi's particular genius was in selling new products. "The confidence he has in what he's telling you is incredible," says Joe Paluska, who served as Better Place's chief marketing officer and is now the global chair of technology at the PR giant Edelman. Agassi stayed in Silicon Valley, ­developing a product that allowed large companies to create internal web portals. HP, Universal Studios, and Wells Fargo would become clients, and in 2001, SAP acquired the startup, called TopTier, for $400 million in cash.

Agassi, then 32, quickly became one of SAP's young guns. He assumed the role of head of global product development from the company's cofounder Hasso Plattner, overseeing a team of 10,000 engineers and settling easily into the role of jet-setting corporate executive. "He was this young hotshot," says a former confidant. "He was going around telling everyone he was going to be CEO."

In 2005, Agassi's hotshot status got a boost thanks to an invite to join the World Economic Forum's under-40 group, Young Global Leaders. This is where he first got interested in alternative energy, and he plunged into researching new forms of transportation with Andrey Zarur, a fellow young-man-of-Davos who was at the time CEO of BioProcessors, a venture-backed biotech company. The men worked nights, weekends, and on transcontinental flights, casting a very wide net. "Shai said, 'Let's focus on cars, and let's focus on Israel,'" Zarur recalls. "We looked at things that would make you laugh. Air cars, slot cars on electric rails, everything."

After 18 months of work, Agassi and Zarur had a draft of a white paper, titled "Transforming Global Transportation," that would quickly become famous, at least on the conference circuit. The paper is both detailed and, like much of Agassi's career before and since, ridiculously over-the-top. It compares the duo's vision, to, among other things, Thomas Edison's lightbulb, James Watt's steam engine, Henry Ford's Model T, John F. Kennedy's Apollo program, and the Internet. "Every social transformation requires ... the bravery of Churchill, the vision of JFK, the determination of Reagan, the rare ability to galvanize a country or the world to take the right step for a greater cause," Agassi and Zarur wrote. "We are standing on the verge of such an event."

At that moment, the electric-car industry consisted almost solely of Elon Musk's Tesla Roadster--a two-seater sports car that started at $100,000, making it a novelty product for the likes of the Google cofounders Larry Page and Sergey Brin. Agassi wanted to sell modest family cars that would be inexpensive for the average commuter. At minimum, these cars would be able to handle at least 30 miles of commuting per day, with the option to quickly refuel for longer trips rather than having to wait overnight for a charge. The plan was to persuade world leaders in a handful of countries to create tax incentives and generous subsidies for electric cars. Because of Israel's tense relationship with its oil-producing neighbors and Agassi's ties to his home country, the land of milk and honey held special appeal as a starting place.

THE WHITE PAPER THAT BIRTHED BETTER PLACE COMPARES ITS IDEA TO THE INVENTION OF THE LIGHTBULB, THE STEAM ENGINE, THE MODEL T, AND THE INTERNET.

Before leaving SAP, hiring any employees, or apparently taking a single meeting with a potential partner, Agassi went public with his idea. In December 2006, he gave a presentation in Washington, D.C., at the Brookings Institution's annual Saban Forum to an audience that included, among others, former President Bill Clinton and former Israeli Prime Minister Shimon Peres. The heavyweights loved Agassi's idea. In a series of conversations that Agassi would later recount, Clinton suggested he consider giving the car away for free; Peres urged him to start a company. "A few days later," Agassi would tell Fortune, "I quit my job at SAP." This may have been an early instance of Shai math; Agassi actually resigned on March 28, 2007, his departure coinciding with Hasso Plattner's decision to name one of Agassi's reported rivals deputy CEO.

The Saban Forum ignited people's imaginations. Agassi conducted dozens of meetings in Israel with government officials over the following months. Then in early 2007, at the World Economic Forum in Davos, Switzerland, Peres brokered a meeting for Agassi with Carlos Ghosn, CEO of Nissan and Renault. At the time, Ghosn wanted to leapfrog ­Toyota's dominance in hybrid vehicles by going electric. The two hit it off, ­according to an account of the meeting in the 2009 book Start-up Nation, and a tentative partnership was struck. Ghosn suggested that they might build 50,000 cars a year; Peres suggested twice that.

It seems likely that Ghosn and Peres were simply spitballing. After all, 100,000 cars in Israel would be half of the new-car market, in a country where the top car brand, Hyundai, has only 15% market share. Tesla Motors, at the time the only significant electric-car manufacturer, had taken reservations for only a few hundred Roadsters. But Agassi seemed to take it seriously, telling Time the following year that Israel would eliminate new sales of gasoline cars by 2015. At TED in February 2009, he suggested that the Renault cars would enter the market in 2011, "in mass volume--mass volume being 100,000 cars."

Agassi never actually said Better Place would be selling 100,000 cars at launch, but he left observers with that impression. In September 2009, when Agassi finalized his deal with Ghosn­--who declined to comment for this story--Better Place formally committed to order 100,000 Renault cars between 2011 and 2016 for sale in Israel and Denmark. That's wildly aggressive but not wholly delusional, and it let Agassi keep his magic number of 100,000 as a talking point. He would often tell the story of an encounter he had at the Frankfurt Motor Show after the announcement. "Wait, did you say you'd sell 100 cars or 1,000?" an attendee asked. Agassi smiled and said, "No, it's 100,000."

The number let Agassi reinforce Better Place's wide-eyed optimism as a crucial selling point: He dreamed big while others sold toys. "That was the difference between us and the rest," says Ziva Patir, an early employee. "They created city cars"--tiny subcompacts like Daimler's Smart electric vehicle. "We wanted to get rid of oil."

STEP 2: LAUNCH EARLY, LAUNCH OFTEN

One of Agassi's first investors was Michael Granoff, a politically minded venture capitalist who'd come to see electric cars as a solution to ­Israel's continuing struggles with terrorism. Granoff, who would later join Better Place full time, handling investor relations and policy advocacy, introduced Agassi to Idan Ofer, then chairman of Israel Corp., a formerly state-owned holding company controlled by his family since 1999. The Ofers are controversial in Israel--a clan of pseudo-oligarchs who in the wake of the country's liberalization of its once socialist economy, bought a stake in a government-owned shipping company for what some considered a low price. (Spokesmen for Ofer and Israel Corp. declined to comment for this story.)

Agassi and Granoff met Ofer in his office in the spring of 2007. The pitch lasted an hour or so. Agassi hunched over Ofer's desk as he spoke, staring intently. He explained that Better Place would follow the model of the cell-phone industry--giving the hardware (in this case, a car) to consumers at a subsidized price and making money by selling subscriptions to a network of charging spots. He suggested that Better Place could be the world's first trillion-dollar company. Ofer was polite, but he didn't seem particularly interested. "I remember ­being certain that nothing would come of it," Granoff recalls.

Stephen Colbert, 

right

, to Agassi: "Let's cut to the chase here: Will this car get me laid?" Nope.

AGASSI'S CENTRAL THESIS--THAT PEOPLE WANTED TO BUY CAR SERVICE THE WAY THEY BUY PHONE SERVICE--WAS FLAWED. "NOBODY LOVES THEIR WIRELESS CARRIER," SAYS A BETTER PLACE DESIGNER. "THEY LOVE THEIR IPHONE."

At the end of the meeting, Ofer asked if he could have a copy of Agassi's white paper and then walked the two men to the elevators. As Agassi and Ofer shook hands to say goodbye, Ofer leaned in and said in a low voice that Israel Corp. was in. "Put me down for a hundred," he said. As in, $100 million. Agassi's charisma had carried the day.

The deal would get even bigger in the coming months. Ofer added $30 million from his personal fortune. Granoff's fund, Maniv Energy Capital, joined the venture firm ­VantagePoint and Morgan Stanley in a $200 million financing round. It was, as Agassi would often brag, one of the largest seed rounds in history.

Agassi celebrated the investment with a press conference that ­October. A team of publicists from Hill+Knowlton, the A-list PR firm, organized a lavish event at New York's Essex House on Central Park South. Publicists were brought in from Israel to manage the Hebrew-speaking reporters, and a branding consultancy created a 3-D animation that showed cars pulling into a swap station and being charged in parking spots. "I didn't know why we were launching so early," says an investor who attended the event. At the time, the company had just a handful of employees. "The whole thing was weird."

Three months later, Agassi did it again, hosting a second launch event in Israel, during which he told reporters that Better Place's cars would be priced "roughly half that of the gasoline model today," despite the fact that Better Place and Renault had yet to agree on pricing.

Agassi had effectively committed to a business model before he had even settled on a name. (At the time, the startup was called Project ­Better Place; Agassi would formally shorten it in 2008.) "Shai is a friend and an amazing guy," says Gadi Amit, founder of ­NewDealDesign, whose firm designed Better Place's charge spots. "One of his flaws is that he tends to overrationalize things and he misses cultural and human connections." Amit points out that Agassi's central thesis--that people wanted to buy car service the way they buy phone service--was flawed. "Nobody loves their wireless carrier," Amit says. "They love their iPhone."

STEP 3: THINK LOCALLY AND GLOBALLY--ALL AT ONCE

A reasonable argument can be made that the enormous investment round led by Ofer was actually the seed of many of Better Place's problems. "If Shai had raised $50 million instead of $200 million, it would have forced us to focus," says Patir, who joined Better Place in early 2008 and served as VP of policy. Instead, Agassi had the money to think about anything, and anywhere, he wanted.

EMPLOYEES CALLED BETTER PLACE THE HIGHLIGHT OF THEIR CAREERS. "IT WAS A BEAUTIFUL DREAM TO DREAM; PEOPLE GOT HOOKED," SAYS ONE. "IT WAS ONLY LATER THAT YOU'D SEE THE REDUNDANCY, THE ARROGANCE."

Though Better Place at the time was only set up in Israel, Agassi ­already had global plans. "If the government of Poland created a new policy for electric vehicles, I had to make sure they created a policy for battery exchange," says Patir, who managed a 10-person team.

That a senior executive was required to lobby Polish lawmakers on behalf of a revenue-free startup that didn't yet do business in Poland might sound ridiculous. It was just the beginning. Agassi hired separate groups of managers in Israel and the United States--as well as in Denmark and Australia, where the company was planning to expand. The Danish and Australian enterprises were nominally independent from Better Place's global organization, partially raising their own funding from such local partners as DONG ­Energy, Denmark's giant utility.

Demonstration projects were planned in China, Japan, and Hawaii. This convoluted structure was reflected in the R&D organization led by a former SAP colleague, Barak Hershkovitz, who created the Oscar navigation system. The R&D team was based in Israel, but reported to Agassi in Palo Alto. The corporate structure proved so complex that Agassi hired a team of management experts in Palo Alto, led by a former Boston Consulting Group veteran, to keep the whole thing straight. "Better Place was never a startup," says Shelly Silverstein, an early human-­resources employee. "It was built from the ­beginning as a conglomerate."

Better Place also paid above market. "Everyone wanted to work for us," says one Israel-based executive. "Normally when you have this kind of company"--meaning a ­mission-based startup--"you don't have to pay the highest wages. But we did."

"You don't see the wasted money when you're in the middle of it," Silverstein says. She, along with nearly everyone I met who once worked at Better Place, told me that her time there was the highlight of her career. "People were motivated by the vision: It was green, it was sustainable, and it was a little bit Zionist. It was a ­beautiful dream to dream; people got hooked. It was only later that you'd see the redundancy, the arrogance," she says.

The one group of people Agassi seemed in no hurry to hire were actual managers with car-industry or infrastructure-building expertise. "We had no automotive experts," explains one person familiar with the inner workings of the company. "Nobody who'd done a car in their life."

Agassi's head of automobile partnerships, Sidney Goodman--the man in charge of making sure that Renault built cars with batteries that could be easily swapped--was a former SAP business-development executive who'd served in the army with Agassi. (Goodman declined to comment for this article.) The guy in charge of building the battery-switching stations was a relatively green SAP account man, who by all accounts had no experience working on an energy project or a real-world construction project. But he had one credential no one else could boast: He was ­Agassi's baby brother, Tal.

"There were two objectives in the white paper: to eliminate range anxiety and to deliver cars cheaply," says Zarur, Agassi's coauthor on "Transforming Global Transportation," and, eventually, a Better Place board member. "In hindsight, we deviated from that mission. And all the bad blood and the backstabbing and whatever else was the result of that."

STEP 4: PROMISES, PROMISES

In August 2008, Agassi appeared on the cover of the September issue of Wired magazine. Inside, the writer Daniel Roth described a meeting in which Agassi and his senior team--which included his brother, sister, and father--batted around ideas about how the company's charge spots would work. They landed on the notion of using a robotic arm to plug in the car. "This is 'think different,'" Agassi said, quoting the Apple slogan. "In 2008, we put the cable in the unit, in 2010 we use an arm, in 2012, there's a smart arm that connects automatically. For the home unit, the users get a pull cable for free, or they pay $500 and they get autoconnect. It'll cost $250 to build, and we'll sell it for $500."

This little scene, presented as evidence of Agassi's quirky brand of genius, was, in fact, pretty much totally insane. Even today, a basic wall-mounted charger with a cable sells for $700; the kind of robotic arm Agassi proposed, if it could have even been built, would probably have added thousands of dollars to the cost. (The idea of a robotic arm was, not surprisingly, quickly abandoned.)

Agassi indulged similar flights of fancy for Wired's benefit. He shared with Roth a text message he sent to a carmaker about his plans to sell cars in Denmark: "I'll be offering $20,000 cars in a market where you're selling $60,000 cars. How many have you planned to sell in 2011 in Denmark? Because I recommend you take them off your plan."

Leave aside for a minute that Agassi was publicly insulting a company with which he might one day need to partner. Look instead at the numbers: Electric cars were nowhere near as cheap as Agassi was claiming. His deal with Renault would require Better Place to pay close to $32,000 for every car and battery that was delivered. Even if Renault had offered its car at a substantial discount, it's hard to discern how Agassi arrived at that $20,000 figure--and even harder to understand why it was taken seriously. The car would ultimately retail for $37,000 in Denmark, not including the cost of the battery; in Israel the after-tax price would be roughly $35,000, plus $12,000 for the first four years of access to Better Place's charging and swap-station infrastructure.

I asked former executives and employees whether this discrepancy was a result of Agassi being out of touch with reality. The answer, in this case, was no. Agassi privately conceded to Better Place executives that the Renault deal was a bad one, but he was attempting to play a game of poker with the entire auto industry. "What Shai had in mind was that once we get a second car company, we could renegotiate with Renault," says someone who was privy to pricing discussions. Better Place's second car deal, the thinking went, would force Ghosn to come back to the table begging for new terms. "Because Shai's an optimist, he was willing to sign anything Renault put in front of him. He didn't think the price was an issue; it was an interim number."

Unfortunately, many of the traits that made Agassi a great futurist made him a terrible ­negotiator. Carmakers, especially German ones like Daimler and BMW, tend to be conservative, and Agassi's attempts to force them to adopt Better Place's model caused them to recoil. "Shai correctly wanted to create a situation where the automakers would move quickly to electric," says Amit Yudan, Better Place's Austria-based business development manager. "The carmakers are used to a totally different ecosystem. Somebody from another industry trying to treat them as an equal partner is not in their DNA." Another insider puts it more bluntly: "If we hadn't been such assholes, BMW would have agreed to do a swappable-battery car," he says. "Instead, they gave us the finger. [Agassi] pulled the same shit with ­Mercedes."

Perhaps Agassi's most promising lead was with General Motors, which had recently ­em­braced the idea of electric vehicles. Michael Granoff, the investor who had introduced Agassi to Idan Ofer, managed to score a meeting at the Renaissance Center in Detroit in 2008 for Agassi and his top car executive, Sidney Goodman, with a group of GM executives. The GM employees were skeptical, especially of Agassi's projections for the uptake of electric vehicles. "It took the Toyota Prius 15 years to get to 1.5% market share in the U.S., and the Prius is a hit," says someone who represented GM in the meeting. "You have to have a very compelling value proposition to get people to sign up. They'd started with ideology."

A more immediate problem was the fact that the Chevy Volt, which was nearing its production date, would not be compatible with Better Place's battery-switching infrastructure. The Volt featured a T-shaped battery, meaning that it couldn't easily be swapped out by Better Place's planned service stations.

But GM had a counterproposal. Would Better Place consider managing a network of charge spots for the Volt? It likely wouldn't be a profitable business­--Volt was designed to have a backup gasoline engine, after all--but it might kindle a relationship. "I thought: Let's just do it," Granoff recalls. "It'll be fantastic, and we'll move them toward our model." Agassi dismissed the idea out of hand. "You'll never build this," he said of the Volt. "It's a stupid car. How are you going to sell your $40,000 car against my free car?"

A free car? Granoff panicked. This was not part of the plan. The idea of a free car had been one that Agassi and other Better Place executives had toyed with as a thought experiment. If battery prices continued to fall ... if electric car production ramped up ... eventually ... perhaps ... maybe ... possibly ... a company could give consumers a free electric car, charging $500 a month for ­access to the battery and charging network in the same way that wireless carriers gave away phones and made up the cost by charging for usage.

A free car was a notion you take for a spin on a Davos afternoon. It wasn't an idea that was ready for the Renaissance Center. Agassi's decision to float it during the meeting, says Granoff, was "a complete absurdity."

The GM executives were nonplussed. "If it's free, why don't you just swap the car instead of the battery?" one asked.

"That's a stupid question," Agassi said, infuriated.

As they walked out, Agassi told Granoff, "The next meeting we have, it'll be at our headquarters and we'll have a bigger market cap."

STEP 5: DISRUPT THOSE CLOSEST TO YOU

Agassi's self-confidence was in some sense understandable. In 2008, clean tech was considered to be the hottest investment opportunity in the world, Better Place was one of the new ­sector's stars, and GM and the rest of the old economy seemed on the brink of collapse. That October, as the United States searched for answers amid both the financial meltdown and the presidential campaign, Agassi delivered a speech in which he offered to build the 44th president a Better Place network across the U.S. for a cool $100 billion. Two months later, while the incoming Obama administration debated how to handle a flailing auto industry, The New York Times' Thomas Friedman devoted a column to lauding Agassi, saying, "What I find exciting about Better Place is that it is building a car company off the new industrial platform of the 21st century, not the one from the 20th--the exact same way that Steve Jobs did to overturn the music business." He implied that the government would be better off giving any money earmarked for saving Detroit's auto industry to Better Place.

Agassi's 2009 TED Talk argued that the right moral decision--abandoning oil--would produce great prosperity.

"WE SPENT $60 MILLION TO BUILD SOMETHING THAT TOMTOM SELLS FOR $29.95," SAYS A FORMER BOARD MEMBER OF THE BETTER PLACE NAVIGATION SYSTEM. "WE THOUGHT WE COULD DO EVERYTHING BETTER."

Agassi had long seen himself as a Steve Jobs–like figure; now the most prominent writer at The New York Times had decreed it so. The failure of GM, and the public reaction to it, "made him think he was a prophet," says someone who was close to Agassi at the time.

The U.S. government did not take Friedman's advice. In mid-2009, GM filed for bankruptcy, selling itself to the U.S. government in a $50 billion bailout. The Department of Energy did ­offer loan guarantees to several ambitious clean-tech startups, including Tesla Motors, but it declined to give Better Place any of the funds earmarked in the economic stimulus package for electric-vehicle infrastructure. The government didn't discover flaws that other investors missed. Rather, Better Place had yet to partner with a carmaker whose vehicles were available in the United States, hurting its candidacy. (Discussions would resume with the resurrected GM, but they never led to a firm deal.)

The perceived snub from the U.S. government seemed to rattle Agassi. Although he continued to successfully woo private investors--in January 2010, he announced a second investment round of $350 million, which gave the company a $1.25 billion valuation--his behavior became erratic.

Agassi went on vacation to Israel in the summer of 2009, disappearing from the Palo Alto office for much of the rest of the year. Then, in February 2010, Agassi emailed his Palo Alto staff to inform them that he'd decided to relocate to Israel. He also began telling people that he had separated from his wife and now had a girlfriend, Tami Chotoveli, the owner of a luxury watch company who had apparently been moonlighting as his personal coach. Several former employees say that Agassi brought Chotoveli to meetings and hired some of her friends to top positions. Better Place had hardly been a meritocracy before Agassi's return to Israel, but now, says one former employee, "There was a watering down of the management team and a level of cronyism." (Chotoveli declined to comment.)

Meanwhile, Agassi had a falling out with his VP of operations Aliza Peleg, the non-family member at the company to whom he'd seemed closest. "Nobody could manage Shai, really, but Aliza had been an incredible counterpoint and a sounding board," says a senior executive. In mid-2010, Agassi forced Peleg out after accusing her of communicating behind Agassi's back with Alan Salzman, a board member from one of Better Place's investors, VantagePoint. (­Salzman declined to comment; Peleg did not respond to interview requests.)

"That was around the time he started to go nuts," says a person with knowledge of the machinations of the board. Employees left behind in Palo Alto were horrified by Agassi's behavior. Efforts to diagnose him were something of a secret parlor game among certain disgruntled workers. One told me that he later sought out excerpts from the DSM, the psychiatric manual, in an effort to categorize Agassi's state. He decided that his absentee boss suffered from a narcissistic personality disorder. "Every box was ticked," he says. The DSM's clinical definition of narcissism includes "has a grandiose sense of self-importance," "is preoccupied with fantasies of unlimited success," and "shows arrogant, haughty behaviors or attitudes."

The sudden move to Israel was in some ways logical for the business--Better Place had an annual $7 million travel budget, according to a former employee, and Israel would be its launch market--but it alienated many senior ­employees. More than half of the original Better Place leadership team--"the grown-ups," as they were known--would eventually leave in the wake of Agassi's exodus. This included CFO Charles Stonehill and the general counsel, David Kennedy, who both left in 2011. Neither man would be immediately replaced. (Stonehill and Kennedy did not return requests for comment.) It would take Better Place, a company with hundreds of millions of dollars in capital and plans to file for an IPO, nearly two years to appoint a new CFO. Peleg was never replaced.

Meanwhile, Agassi brought his own brand of divisiveness to the Tel Aviv offices. At the global headquarters, which was on a different floor than the Israeli headquarters, he built himself a glass cube of an office. "The luxury in the global office was amazing," says Shelly Silverstein, the HR exec. "It was petty, but they had stuff we didn't have. We only had cookies from Israel; they had Nature Valley granola bars and Coke Zero. It didn't feel like one company." A rumor circulated that Agassi had spent more than 5,000 Israeli ­shekels--$1,500--on a coat rack.

STEP 6: THE ANSWER TO A HIGH BURN RATE? A HIGHER BURN RATE

To the outside world, Better Place still preened in 2010. The company opened a visitor center in a Tel Aviv industrial park that February. Built inside a giant converted oil-storage tank, it was a poetic expression of Agassi's ambition to replace fossil fuels with something clean and modern. The attraction, which was being dismantled when I visited earlier this year, featured a mile-long track where customers could test-drive a prototype car and a theater with 30 vintage car seats, a giant wall-size screen, and a hologram machine that projected a life-size Shai Agassi. One last, slightly mystifying feature: a futuristic rotunda, not unlike the war room in Dr. Strangelove, in which customers stood in a circle and played with personal touch screens that showed the planned locations of Better Place's switch stations.

The launch of the Better Place car was still two years off, but the visitors' center, which cost the company at least $5 million to build, was nonetheless quite a draw. More than 100,000 people went on tours--grade-school classes, tourists, and dozens of U.S. congressmen, senators, and governors. Some 30,000 sat down with a Better Place salesperson to pick a color and fill out a form stating their intent to purchase a car whose price had not yet been announced.

Unlike Tesla, though, which had asked early customers to secure their spot with a deposit of $5,000 or more, Better Place's reservations were not binding. Except, perhaps, in Agassi's mind. In a 2011 interview with the tech news site GigaOm (whose founder, Om Malik, is now Fast Company's technology columnist), Agassi publicly claimed that inventory was sold out for nearly two years. Employees told me that Agassi made similar boasts on internal conference calls. "Shai was giving these talks with wrong numbers," says someone who worked in the company's marketing division in Israel. "We knew they were too optimistic, but it was very hard to convince him."

In reality, Agassi's projections were falling far short. Agassi had assumed that the car would cost roughly half the price of a typical gasoline car and would have a range of at least 100 miles. Instead, batteries were delivered with a range of closer to 80 miles, and the terms with ­Renault meant he was selling an unsexy family car for about the same price as a nice sedan like the Mazda3 or the Toyota Corolla. (Not to mention that customers were asked to spend an additional $3,000 or so a year to rent the battery and pay for the use of charging and swap stations.) "There was a bit of Shai math going on there," says Evan Thornley, CEO of Better Place's Australian subsidiary. "If there were 100,000 cars on the road tomorrow, his economics would have been right. But the time frames he talked about for selling cars were crackers."

Meanwhile, the cost to build out Better Place's charging network had ballooned. The original spreadsheets that Agassi and the Palo Alto founding team had assembled called for swap stations to cost approximately $500,000 each. So, building 40 stations in Israel would cost about $20 million, while 20 in Denmark could be built for about $10 million. Ultimately, however, each switch station cost at least $2 million, meaning that Better Place would have to sell many more cars and driving subscriptions to pay for its pricey infrastructure. "Because it was so expensive, we needed more customers," says Patir, the former VP of policy. Given this, Agassi's bullishness could charitably be seen as a way to stoke the company's momentum into sales.

That would be very charitable indeed. Better Place could have also drastically cut costs and conserved cash. Sales and support could have been outsourced--or, given that there was no product, simply shut down. It could have bought off-the-shelf charging stations from GE instead of designing proprietary ones. The program to develop the Oscar navigational system could have been scaled down. "We spent $60 million to build something that TomTom sells for $29.95," says a former board member. "We were building our own charge spots and call centers. We thought we could do everything better."

By the spring of 2011, just five quarters after closing $350 million in financing, Agassi had to start fundraising again. The goal had been to raise another $350 million at a $2.75 billion valuation. But all Agassi could get was $200 million at a $2.25 billion valuation. The November 2011 press release cited GE and UBS as investors, but people involved with the round say their contributions were minimal. Almost all of the money came from existing shareholders. "The general public was like, 'Wow, this is a rocket ship,'" says one. "But the bloom was off the rose, and the financial community knew it."

By the time Better Place would finally have a car for sale, in January 2012, the company's daily burn rate--that is, the amount of money it was losing each day on operating expenses like sales, R&D, salaries, and payments to ­suppliers--exceeded $500,000.

STEP 7: WHEN ALL ELSE FAILS, GO SCORCHED EARTH

Better Place sold just 100 cars in its first two months, mostly to employees. "The press and the public were expecting a low-priced car," says a marketing executive. Agassi promised to ramp up sales once the cars' technical kinks had been worked out. But the reality was a PR disaster.

In June, with sales still slow and cash running out, the board of directors convened for its regular meeting. At one point, Agassi was asked to leave the room and Zarur, Agassi's original collaborator, proposed that the board assume ­responsibility for hiring an operations chief and a CFO. According to people who were present, the board agreed, and Ofer, the largest individual shareholder and the company's chairman, promised to inform Agassi. "By that point it was clear in our minds that this was not sustainable," says an insider. "The only way we could keep Shai in the company was if he became a figurehead. They were taking the company away from him."

Shortly thereafter, Agassi spent the day at Ofer's house and managed to talk him out of it. "Idan went wobbly," says a senior executive. "Shai said, 'Over my dead body,'" says a board member. "Ultimately it was over the dead body of the company." When Alan Salzman, who had been Agassi's loudest critic on the board, learned what had happened, he resigned in disgust.

Ofer went on ­vacation following his visit with Agassi, sailing the Mediterranean on his new yacht, Better Place, reportedly a $10 million, 165-foot sloop. Agassi, meanwhile, ­accused Zarur of betraying him. Sometime later, Zarur's biography on the Better Place website was rewritten to downgrade his contributions to the company.

On September 28, 2012, Agassi emailed the board, asking for a "safety net," a bridge loan that would allow the company to make payroll and pay suppliers. For months, he'd been negotiating to raise even more money. There was a deal for about $56 million in debt from the ­European Union's investment bank, most of which was earmarked for Denmark, and there was talk of a possible $50 million project in California and a $100 million deal to build a network in the Netherlands. But the money hadn't come through, and without additional funding from current investors, the company would be insolvent in a matter of weeks.

Agassi had finally overplayed his hand. ­Israel Corp., though controlled by Ofer, had been a public company since 1982, meaning that Better Place's books were audited as part of Israel Corp.'s regular fiscal reporting. So Better Place's dismal sales and massive losses were now a matter of public record. Insiders say that Ofer, who had been the company's most passionate defender--often to the point of willful ­blindness--became angry. "Idan realized he was being manipulated, he realized he'd been made a fool of for five years," one says. "Shai went from being the person he loved most to the guy he hated most."

Days later, Ofer proposed that Agassi step down as CEO and become chairman. Agassi said no; Ofer would have to fire him outright. So Ofer did. "An electric car with a switchable battery is the future," Agassi wrote in an email to the company on October 2, 2012, announcing his departure. "I will think of you every morning, as I enter my electric car, start it, and smile as I see Oscar come up to greet me." Agassi continued to drive his Better Place car but never returned to the offices.

In what was perceived as either an act of blind faith or perhaps a face-saving move, Ofer led one final $100 million financing round and turned over the tiller of this sinking ship to Thornley, the Australian CEO. "The financial management was in such a mess," Thornley says. "We had suffered from a lack of management discipline. There'd been a lack of accountability."

As the new CEO, Thornley saw the full effect of that lack of accountability. Agassi, with the board's consent, had allowed many of the company's suppliers to insert high minimum orders and cancellation penalties into its contracts. This created more than $100 million of off-book liabilities. Canceling the billing-system contract alone--Agassi had purchased the software from Amdocs, which primarily serves large telcos with millions of customers--would cost the company $80 million.

These runaway expenses meant that Better Place would have to quickly sell as many as 30,000 cars in Israel just to break even. But by November 2012, the company had sold just 500 cars there. "There wasn't a snowball's chance in hell we could have gotten to positive cash flow in Israel," Thornley says. "The only path that existed would have been to raise more capital and expand to other countries." By the time the books closed on 2012, Better Place would record an operating loss of $386 million. The board fired Thornley in January 2013.

Dan Cohen, a close associate of Ofer's, took over. He shut down operations in Australia and announced that the company would only focus on Israel and Denmark. (Upon hearing this news, Daniel Roth, now a LinkedIn executive, sardonically acknowledged on Twitter that his Wired story, "The Future of the Electric Car," should be amended to add, "But Probably Not.") A few hundred more cars were sold--mostly on corporate leases, and mostly because Better Place guaranteed to buy back the cars after the leases were over.

Those guarantees would be worthless by May, when Better Place declared bankruptcy. The company and its affiliates in Australia and Denmark had raised almost $1 billion. They had only put around 1,400 or so electric cars on the road by the time the court-ordered liquidation started that spring.

Some former employees and customers blame Better Place's failure on the board of directors, and especially Idan Ofer. According to that argument, the board could have allowed the car more time on the market, could have made more of an effort to enforce sensible financial controls, and could have fired Agassi at least a year earlier.

It seems likely that after the bankruptcy is settled, investors, including Ofer, will have lost every penny they put in. Agassi's 12% stake in the company is now worthless; his patent for a battery-exchange station will wind up being owned by someone else; and the company he poured so much of his life into is dead. Meanwhile, those customers who purchased cars are left with a hard lesson in what it means to be an early adopter. "We didn't know how bad the state of the company was when we bought the car--we just really believed in the vision," says Brian Blum, a Jerusalem-based freelance writer and father of three who bought a Better Place car in August 2012. "It's a real shame, because the car drives so well. I try to be positive."

STEP 8: SHOW NO REMORSE

I first contacted Agassi about this story nearly a year ago, in June of 2013. We corresponded many times in the months that followed, as I tried to convince him to go on the record--via Facebook, email, phone calls, and eventually during an in-person meeting at a seaside café outside Tel Aviv. The answer was always the same. Agassi steadfastly refused to explain his tenure at Better Place or to confirm or deny ­allegations of erratic behavior and poor management. "It's a great story," he wrote in his first Facebook message to me in June. "But I'm in no position to interview right now, for obvious reasons." Shortly before press time, he agreed to respond to my reporting, but only in writing. In the end, he simply replied that "Shai Agassi declined to comment for this story."

Agassi may see this dark time as a kind of wilderness period before he emerges again with another world-changing idea--like the one Steve Jobs went through after being fired by Apple in 1985. "I wouldn't count Shai out," says Saul Singer, coauthor of Start-Up Nation and a friend of ­Agassi's. "I'm sure he'll find a way to reinvent ­himself--to try to find the next big thing. What's funny is, he'll be forced to do it lean--and that's okay."

Indeed, Agassi has not completely left the public stage: Last August he wrote a four-part, 8,000-word series on the future of cars for ­LinkedIn. In the posts, he argued, still dwelling perhaps in the realm of Shai math, that Detroit should offer a mass-market electric car for less than $10,000 and make up the money by creating a charging network. Much of the piece seems straight out of his original white paper, but Agassi didn't mention his old company. It was as if the past seven years hadn't happened.

Agassi isn't the only person who feels that his idea will outlive the infamy of his startup folly. Many of his former employees, even those who have clearly come to despise their old boss, still treat that white paper by Agassi and Zarur as a near-sacred document. They believe that ­Agassi's fundamental insight was world-­changing and will eventually come to pass. "In 10 years we probably could've gotten there," says Thornley. "The tragedy of the company is that we were trying to accelerate the trend toward electrification and we may have retarded it."

Maybe not. While Better Place was being sold for scraps, Tesla Motors, which pursued a strategy that Agassi had long derided as overly cautious and small-minded, delivered its 25,000th car. Perhaps more significantly, the company has added nearly 100 so-called supercharger stations in the U.S. and Europe since late 2012. The stations can deliver 170 miles' worth of battery capacity in a half-hour charge. The networks look a bit like what Agassi long imagined.

Tesla's Model S car, it turns out, has a swappable battery. Musk never seemed to put much stock in that technology, but he had the intellectual flexibility to allow that Agassi might have been right about a few things. In June 2013, just three weeks after Better Place's bankruptcy filing, Musk hosted an event in which someone drove a Tesla onstage and a contraption below the stage swapped its battery in 90 seconds. The plan is to roll out a handful of battery-switch stations this year between Los Angeles and San Francisco. Customers will be able to choose between a free charge or a paid swap.

Tesla's next task will be to build a gasoline-free mass-market car. The Model E, as it's being called, will be a $35,000 family sedan. It is slated for a 2017 ­release, 10 years after Agassi's launch. Tesla's success--and that of any other electric-car company--will likely depend on how well they absorb the lessons of Better Place's failure.

[Photo by Loulou d’Aki]

J.Crew And Kate Spade To Foster The Next Big Fashion Tech Startups

Fusing brands, technologies and trends is an important agenda at Reverb Partners. Fast Company highlights a great partnership between two of our favorite brands.

“Fashion is not something that exists in dresses only,” Coco Chanel once said. “Fashion has to do with ideas, the way we live, what is happening.” Today, the truth of Chanel’s statement is particularly evident in the burgeoning intersection of fashion and technology. What with bras that tweetWarby Parker-designed Google Glass, and an app that hunts down that cool bag you saw on the subway, the way we shop and dress ourselves increasingly relies on the digital.

The New York Tech Fashion Lab is a new accelerator program founded byLisa Morales-Hellebo that hopes to support young and growing companies innovating in fashion, retail, and technology. Morales-Hellebo knows first-hand how challenging it can be to launch a new company in this arena. She was the founder and former CEO of the now-defunct fashion tech startup Shopsy. “Fashion tech is such a diverse space,” Morales-Hellebo tells Co.Design. “People don’t really get how broad it is and how nascent it is.”

The lab, a collaboration between the Partnership Fund for New York City, Springboard Enterprises, and major fashion retailers, is accepting applications through tomorrow from fashion tech startups. Six to eight startups will then win the opportunity to be mentored by retailers--including Ralph Lauren, J.Crew, Kate Spade, Macy’s, and the Estee Lauder Company--over the course of a 12-week program, which will culminate in a demo day.

“New York City is the epicenter of all things fashion tech," Morales-Hellebo says, "but currently, there’s a lack of real collaboration between retailers and the startups trying to serve them. This fills that hole.”

The fashion and technology market has been growing exponentially according to Morales-Hellebo. “In the past few years, we went from Makerbot being an odd concept to people having 3-D printers in their home," she says.

One day, who know? We might be downloading access codes to print a new pair of Gucci shoes on a 3-D printer. Learn more about New York Fashion Tech Lab's program by clicking here. Applications close tomorrow, April 4.

What Eating A Burger A Week Reveals About Good Design

IN A CREATIVE RUT? YOUR NEW MUSE AWAITS AT THE NEAREST IN-N-OUT.  From Fast Company.

Hamburgers often seem anti-design. There are no clean lines or carefully chosen pantone colors in greasy patties of ground beef. Even the most meticulous arrangement of lettuce, tomato, and ketchup gets pretty gnarly-looking after a few bites. But make no mistake: the hamburger is a design teacher as wise as any color theorist or expert typographer.

At least, that’s what San Francisco design firm MINE wants to prove with its latest project, “The Message is Medium Rare: Creative Insights, One Burger at a Time.” To investigate the idea that an inquiring mind can find inspiration and insight literally anywhere, MINE designers Christopher Simmons andNathan Sharp are eating a burger a week for the next 52 weeks and sharing the creative lessons they learn.

"The Message is Medium Rare is a reflection of how we think about creativity," Simmons tells Co.Design. "My hope is that the project will inspire others to make their own oblique observations and apply them in their work."

The designers visit bars, fast food joints, food trucks, and fancy restaurants, and order the establishment’s “signature” burger. They photograph it, eat it, then analyze the experience through the lens of design. While these designers, passionate carnivores, happen to have chosen burgers as their new teachers, "A different person might glean insight from infomercials orJane Austen novels," Simmons says. "The world is overflowing with meaning. This is just our way of slowing down and taking the time to notice it."

The lessons they’ve gleaned thus far are as meaty as their muses. Here, five of their burger-induced creative insights:

1. DESIGN IS A BALANCING ACT.

The signature feature of the Classic Burger at Roam in SF was “broad, wavy leaves of lettuce that burst forward in a radiant greenbelt of freshness,” Simmons writes. “Each chlorophyll-filled bite offers a distinctive lettuce flavor that is refreshing yet undeniably lettucey. Other flavors are present--lettuce, lettuce, and lettuce--but it is the lettuce that steals the show.”

The takeaway: "Well-crafted design is well-balanced design," he writes. "Well-balanced design requires judicious editing and thoughtful attention to both proportion and scale. If we allow ourselves to fall in love with one aspect of a design--a great image, bold typeface or satisfying technique, for example--we can lose sight of the smaller role it's meant to play in a larger scene. Unrestrained, a minor element can become a major distraction, overstepping its supporting role and upstaging the central player."

2. THINGS HAPPEN.

After Simmons ate this beauty at Pig & Pie, a harried waitress confessed she had forgotten to place Simmons’s order for an additional burger to take back to his studio for a glamour shot. “She apologized and hurried off to the kitchen to place it,” Simmons writes. “Moments later she was back with a couple of slices of lemon shaker pie, on the house.”

The takeaway: "Never miss an opportunity to turn a negative experience into a positive one, just follow this simple rule: When you screw up, own up, then make it up."

3. YOU MUST BE PRESENT TO WIN.

After the waitress at It's Tops Coffee Shop mysteriously disappeared for 15 minutes, leaving the designers to ponder their bleu cheese-heavy burger unattended, they wrote this important lesson.

The takeaway: "Ninety percent of life might just be showing up, but it’s the other 10% that makes the difference. You can’t check out of a project--not mentally, not physically, not even temporarily--and expect it to succeed on its own."

4. MANAGE FIRST IMPRESSIONS.

At Super Duper, homemade pickles are stocked in big jars by the entrance--and they're free. That jar is where Simmons saw an important design lesson.

The takeaway: "Super Duper’s pickles are an inexpensive and powerful brand message. Believe it or not, they're a sophisticated expression of a thoughtful brand strategy. By stocking them front of house (the way Five Guys stocks its peanuts on the dining area floor) one has the sensation of stepping into a working kitchen rather than some antiseptic fast food cafeteria. By giving their handmade pickles away for free they establish a rapport of pride and generosity with their customers. And by keeping the quality high and consistent they demonstrate these values rather than stating them with empty tag lines or insistent signs declaring 'hand-crafted' and 'artisan.'"

5. NAME THE FRAME.

“Does this taste…musty to you?” Sharp asked Simmons after a few bites of this mushroom-filled beefsteak at the Doc's of the Bay food truck. Once he'd heard that particular label--musty--applied to a pungent flavor he hadn't yet defined, Simmons found his experience of the burger had been ruined: "I may have been convinced that it was a flavor too subtle or refined or new for my palate to identify," he writes. "I could have been told (and I may have believed) that it was an acquired taste that I would come to appreciate. Once labeled “musty” however, those options were closed to me. The label--not I--was in control of the experience."

The takeaway: "When presenting creative options give each a name--this one is contemporary, this one is traditional, etc. If you don’t someone else will and you’ll be at the mercy of their label, not yours. Once, when presenting logo directions to Stanford University, I showed three options which, in the interest of neutrality, I labelled A, B and C. Someone in the meeting made a remark about direction C looking like a butt, from which point on it was referred to as the “butt logo” (and from which point on I knew it had no chance of being picked). Ever after I've given my own nicknames to every idea we present."

So if you've been creatively blocked and are looking for a new muse, don't expect one to show up all toga-clad and playing a flute. Look in unlikely places: she might be sitting on a plate at Shake Shack, wearing a nice potato bun, waiting for you to decode the message in her wilting lettuce leaves.

For more of Simmons's rare ideas and very well done project, go here.

A Young Inventor, Finding the Crunch Factor

By JACK HITT on Feb

The way Mark King tells the story, the idea came to him in an instant just three years ago, when he was a 21-year-old community-college dropout. Like the proverbial Edisonian light bulb, there it was: an organoleptic analyzer.

Mark King of Bellingham, Wash., says General Mills’ decision to have him develop a texture analyzer was life-changing. “I was going from making things out of Super Glue and bubble gum,” he says, “to making an analytical device for a multibillion-dollar company.”Credit Stuart Isett for The New York Times

That’s its technical name. To you, it’s a device that measures the texture of granola bars. Mr. King had seen a call for ideas on a website sponsored by General Mills, where the company invites amateur inventors to come up with fresh concepts. Mr. King typed out his organoleptic musings in an email and hit send. Soon, General Mills had him on a plane to Minneapolis, its corporate home.

Mr. King was a 17-year-old high school student when he developed a deep desire to be an inventor. His method was to “go to my coffee shop for hours” — specifically, Woods Coffee in Bellingham, Wash., where he still lives. He’d order a latte and type “inventor-friendly company” into Google. “I would make up an invention on the spot regarding their product line,” he said. “Then I would send it off to the company and pitch it.”

For instance, he came up with a new way to put fruit and yogurt into a cup. No luck. He came up with a way to make packaging biodegrade more quickly. Radio silence.

His innovative teenage peers were horsing around in the digital playground, looking to create the next social medium or crowdsourcing technique. But Mr. King, with his thick blond hair and a wholesome 4-H grin set off by some Ryan Gosling stubble, seems happily old school. For inspiration, he stared into the family larder.

Despite years of no, Mr. King persevered — a textbook case of what innovation lecturers like to call stick-to-it-tive-ness. This trait is now analyzed and dissected in business schools, and, if the empiricism is to be trusted, what appears to undergird this necessary characteristic is an uncanny inability to become frustrated.

So Mr. King was thrilled when he found G-WIN, or the General Mills Worldwide Innovation Network page, in 2011. The site has received thousands of ideas from inventors since it went up in 2009, but considers somewhere “less than 10 percent” for use at the company. It was on that website that he read of a need for “a quantitative method of analyzing the texture of a chewy granola bar to assess differences in bar texture.”

In the science of food, texture is big doings. Already on the market are devices, resembling drill presses, that carefully push a metal plate onto a sampling of food, yielding a texture measurement that in some cases is broken down into subtextures: “chewiness, gumminess, cohesiveness and firmness,” according to one description. Even tofu, which might seem like the null set, texture-wise, can be gauged this way.

The precise design of Mr. King’s breakthrough is now a trade secret. General Mills is pursuing a patent, and Mr. King was cautious about discussing the mechanical specifics. “I signed an agreement,” he said nervously, “that was as thick as my thumb.”

But he described his thinking process — one that caused him nothing but trouble in school but also partly explained how a vision of a granola-texture testing machine might spring forth spontaneously in his brain. “I never really got good grades in school because I have always been a daydreamer and I can’t read all that well,” he confessed. Instead, he built things — like anelectric car to drive himself to high school so he could get one of the prime parking spaces for green vehicles.

He dropped out of Whatcom Community College and Western Washington University — two local colleges — disappointing his family. “My father is a retired submarine captain, and so he kind of had expectations that I would go to college,” he said. “And ‘inventor’ is kind of a weird” thing to claim.

Then he enrolled in a local machining school that offered a degree in C.N.C., or computer numerical control technology. Essentially, that’s precision metal-cutting. He built a one-cup, polished-metal French press; it was cool-looking and provided a valuable lesson in thermodynamics. Pour coffee in a sleek, handle-less metal cylinder, he said, and “the whole thing turned as hot as the coffee itself, so I couldn’t even pick the thing up.”

In creating and observing these three-dimensional objects, Mr. King said he realized that he had a different kind of memory. “Any mechanical thing that I have ever seen, I remember,” he said. “And I can take an idea and add something that I had seen before, like five years ago. I can add something to it, subtract something, flatten it out, expand a part and then add something else on, and I can do it in a second.”

He began compiling this internal library of mechanical operations at an early age, when he smashed open his Sonic the Hedgehog remote-controlled car. He later developed a compression sack for camping gear — an accordionlike bag with a small negative pressure pump that compressed the bag into a dense brick. At age 17, he applied for a patent on the sack but, after entering college, did not complete the patent process.

When he saw what General Mills was looking for in a granola-bar texture machine, “I took a ton of different ideas and ran them through my mind, and then I just came onto this one that I saw was kind of interesting,” he said. He wrote down a description and sent it in.

“Then I got an email, and they said the idea was awesome,” he recalled. “They said, ‘O.K., call this number at this time, and use this code, and then you’ll be calling into a teleconference.’ ” Imagine. “It was like a James Bond scenario.”

After sending a more elaborate computer design to the company, he heard back at once: He would get $250 an hour to build a prototype. “I was outside myself,” he said. “I was going from making things out of Super Glue and bubble gum to making an analytical device for a multibillion-dollar company.”

Mr. King spent the next six months cutting the metal parts. He made about $18,500 in consulting fees. Mr. King and his prototype were flown to Minneapolis, where they went to a big General Mills plant. “I swear I could see the curvature in the Earth — this was a huge building,” he said.

Inside, he said, he was shown “Nature Valley granola bars, granola bars that had not been released yet, granola bars that they only sell in Mexico, and all of the granola bars that they sell in every corner of the world.” He was invited to select any test bar he wanted.

“We went out into this texture analysis lab and saw the machine and it worked,” he said. “We all just were high-fiving.”

General Mills continues to use the prototype he built, according to Mike Helser, who leads G-WIN. With his General Mills earnings, Mr. King has built a small manufacturing studio of his own and moved on.

He financed his newest idea — a digital-theft-proof wallet — with a Kickstarter campaign. He asked for $5,000 and received $44,312. He started a small business called Trayvax to make them. “I have one employee,” he said, “which is awesome.”

Still, each success seems to happen only after another season of failure. “My Kickstarter money has pretty much run out, because of how many mistakes I’ve made,” Mr. King acknowledged, “but I’ve had to kind of pick myself back up and learn from them, and keep on pushing forward.”

Not long ago, he saw the movie “Fat, Sick & Nearly Dead,” which celebrated the nutritional pleasures of vegetable juices. But many juicers can be a big mess. So he came up with the idea for a small device that blends vegetables right in the cup and is easy to clean. “I designed a portable juicer that I thought would sell well,” he said. “Now it’s just a matter of learning about injection molding.”

Correction: March 2, 2014 An article last Sunday about a young inventor’s device for testing the texture of granola bars referred incorrectly to the Patent Office status of one of his earlier creations: a compression container for camping gear. The inventor applied for a patent on the container but, after entering college, did not complete the patent process; he has not received a patent.

A version of this article appears in print on February 23, 2014, on page BU3 of the New York edition with the headline: A Young Inventor, Finding the Crunch Factor. Order Reprints|Today's Paper|Subscribe

Software Patents Are Bullshit

Via TechCrunch, by  (@rezendi), Columnist. “Patents are enshrined in the U.S. Constitution for a single purpose: to promote the progress of science and useful arts.” Alas, when it comes to software, it is difficult to imagine a system worse at this than the current one.

Everyone knows this–and most people will readily admit it–but no one, with the possible eventual exception of the SupremeCourt, is willing to do anything about it. No one is sufficiently incentivized to fix a system which hurts everyone a little while helping a handful of trolls and corporations a lot. Even people and organizations who would benefit from radical reform have been so traumatized by the status quo they now have an irrational fear of change.

And so: “Two days ago, Bank of America was granted a patent on [nmap].” Patent war goes nuclear: Microsoft, Apple-owned ‘Rockstar’ sues Google.” “Google sues to protect Android device makers from Apple-backed patent hell.”

Oh, it goes on and on and on. “Apple Wins Big Against Samsung In Court.” “Google Awarded Patent For Free Rides To Advertisers’ Locations.” “Court: Google infringed patents, must pay 1.36 percent of AdWords revenue.” “Uber-troll Intellectual Ventures faces Motorola in first patent trial.”

Etcetera, etcetera, etcetera, etcetera. And for better or worse — mostly worse — the US patent system influences and infects its counterparts around the world.

It’s true there’s been some progress of late. The US House passed the Innovation Act, which “is designed to target the patent troll problem.” Better than nothing, I suppose, if it passes the Senate; but who are we kidding here? The problems with software patents do not begin and end with patent trolls. Software patents are fundamentally harmful from the word go.

As Matthew Yglesias puts it in Slate:

The problem is that we’re granting far too many patents, tying up vast swathes of industry in litigation and negotiation rather than innovation … In the thriving digital sector, patents don’t work at all, and more patents are likely to cause more litigation rather than more innovation … In almost no sector of the economy do politicians talk about their desire to promote more monopolies and less competition, but that’s exactly what the recent round of patent reform is all about. America [...] needs more thinking about how to roll back harmful monopolization without doing too much damage to the sectors where the system works.

Does society benefit from the existence of software patents? Hell, no. In their absence, is there a risk of vitally important software secrets being kept secret for generations by insular guilds? Hint: I’m a software engineer by trade and it was hard for me to type that last sentence without laughing aloud. I suppose it’s possible that there may be some kind of darkly brilliant genius software innovation that no other team of developers in the world could ever stumble upon. But that seems pretty goddamn unlikely to me — especially when contrasted with the enormously negative costs of the software-patent status quo.

It’s sometimes argued that patents protect startups from larger companies, but in today’s software world, that protection is unnecessary. Startups can and very frequently do succeed without the benefit of patents, simply by executing better and faster than the incumbents. As Mark Zuckerberg put it on Facebook’s tenth anniversary:

When I reflect on the last 10 years, one question I ask myself is: why were we the ones to build this? We were just students. We had way fewer resources than big companies. If they had focused on this problem, they could have done it.

The only answer I can think of is: we just cared more.

Patent law is a disastrous affliction which hamstrings the entire software industry. It is essentially legal DRM, and as I once said of DRM, “it reminds me of the great Ryszard Kapuściński‘s depiction of the Soviet economy:”

One can assume that a significant portion of the Soviet metallurgical industry is devoted to producing barbed wire … For the matter does not end with the wiring of borders! How many thousands of kilometres of wire were used to fence in the gulag archipelago? … If one were to multiply all this by the number of years the Soviet government has been in existence, it would be easy to see why, in the shops of Smolensk or Omsk, one can buy neither a hoe nor a hammer, never mind a knife or spoon: such things could simply not be produced, since the necessary raw materials were used up in the manufacture of barbed wire.

How much energy is wasted, how many millions of dollars are squandered, how much innovation is stifled because of software patents? The total costs are immense. And the benefits? They honestly seem nonexistent to me.

We could mitigate this damage by giving software patents a shorter lifespan, say 5 or 7 years instead of 20. A useful way to think about this is the Tabarrok curve:

patent-napkin

It genuinely seems to me, though, that with software patents, that curve only bends downwards, and while five- or seven-year patents would certainly be much better than the status quo, zero would be better yet.

But unless the Supreme Court steps in to cut this Gordian knot with an unexpectedly enlightened sword, I can say with considerable confidence that nobody will do anything about them. The system has evolved into a status quo wherein nobody has any incentive to do the right thing. That problem, alas, is enormously larger than mere patents — and commensurately more difficult to fix.

BOOMERS TAKE MORE RISKS, START MORE BUSINESSES THAN TWENTYSOMETHINGS: STUDY

WANT A KILLER STARTUP? GET WITH A GRAY-HAIR. THAT'S WHAT A MONSTER.COM REPORT SAYS.  Via Fast Company.

A new national survey released today found that the age group most likely to consider themselves entrepreneurial is Baby Boomers. The findings, in which 45 percent of respondents from 50 to 69, compared to just 32 percent of 18- to 29-year-olds, labeled themselves as entrepreneurial, contradicted the researchers' original hypothesis.

And the research, conducted by Monster.com and Millennial Branding, surprisingly had Boomers describe themselves as having the highest risk tolerance. When it came to risk-taking, 43 percent of the older workers said they were comfortable with high risk, compared to just 28 percent of gen-Yers.

This goes against the stereotype of the tech-savvy, startup-happy young graduate. But other studies corroborate the idea that older people aren't just entrepreneurs--they're good at it. Two big studies of hundreds of successful companies found the average age of founders at the time they got going was from 39 to 41. A separate analysis of Kauffman Foundation data in 2009 found that the average age of entrepreneurs is actually rising, with the largest growth in the 55–64 age range--and the smallest growth among 20- to 34-year-olds.

How can this be? Well, from an economic perspective, older people have more wealth and less debt than younger people, which certainly makes a better foundation for risk-taking. Also, average job tenure is dropping, so people in their forties and beyond are less likely to be comfortably ensconced in a "lifetime job" and more likely to be looking around for a new opportunity.

From a cognitive perspective, older people have more education and have had more chances to try and to fail in their careers and in life--experience that is always good to draw on if you want to start a successful new venture. And as Marc Freedman of Civic Ventures argues, people in the second half of life are more likely to be looking for a way to combine "passion, purpose, and a paycheck," looking for work that marries their values and interests, and allows them to leave a legacy. That is, they may be taking more risks because they have less to lose in pursuit of work that feeds their souls.

One word that kills your credibility

Excerpted from Inc. Magazine, this article by Eric V. Holtzclaw is essential reading for anyone that stands up in front of a group and makes a presentation. I have watched more salespeople and companies pitch their ideas over the years than I care to count. And during thousands of interviews with consumers about how they use different products and services and respond to marketing messages, I have honed the craft of ferreting out telltale signs of lies and omissions.

From that experience, I am going to let you in on a little secret about a word you should stop using immediately.

It is "actually."

For the experienced listener, "actually" is a dead giveaway of an area that at the least needs to be further investigated, and may point at a deception.

Let me explain.  When you use the word "actually" properly, you are comparing two thoughts and providing clarification.

For example:

Question: "Did you go to the store for milk?"

Answer: "Actually, I stopped at a gas station."

In this example, it is easy to see why someone might use the word . The original question suggested that you went to the store, but you might not think that a gas station is really a store. In your mind, you are comparing and justifying the decision to stop at a gas station rather than a grocery store.

Back to the business setting: Extra words used in a sales presentation or investor pitch are unnecessary. They subconsciously point listeners to question if there's more unspoken information. The word "actually" serves as a spoken pause, giving the presenter's brain time to catch up and decide how to resolve the conflict in their mind between the question asked and reality.

A common example of how this plays out in a sales presentation or investor pitch:

Question: "How many customers are using the platform?"

Answer: "We actually have over 100 companies."

The word "actually" isn't important to the answer.  It's extra information that makes the listener curious as to why the word was added. An astute investor or customer will follow up with a request to see a customer list or to get a customer referral.

In a customer interview, the customer may use the word as a way to please the person asking the question:

Question: "Do you use this product?"

Answer: "Actually, I have."

To the experienced listener, this answer actually (get it?) means, "No, I have never used it" or "I used it once and it didn't do what I expected or needed."  An appropriate follow-up is to ask for a specific example or time that the function was used.

Perfecting your pitch requires attention to what you say and removing anything that distracts them from your primary message.  As a listener, keying in on the word "actually" can clue you in to the subconscious and give you a competitive edge.

 

A Content Company Weighs Becoming a Technology Company

A version of this article By BRYAN BORZYKOWSKI appears in print on February 20, 2014, on page B4 of the New York edition of the New York Times.

TPR MEDIA creates and distributes medical-related messages and information to patients. Co-founded by Betsy Weaver in 2002, the company, which is based in Boston and has 20 employees, helps hospitals reduce the number of calls doctors receive from patients and keeps people informed of what to expect on their medical journeys.

For example, the week before an operation, the patient receives a reminder of what to bring to the hospital and what medications to take before arriving. In the days after the operation, regular emails explain how the patient should feel and what drugs he or she should take.

The Challenge

In 2009, after several years of 30 percent growth, the company’s revenue leveled off. While the recession may have caused some of this, TPR Media continued to see little movement in 2010 and 2011. “It was not trending in the upward direction we expected it to be trending,” Ms. Weaver said. “Everyone knows that if your revenue line is not growing, then you’re dying slowly.” She decided she needed to find a way to get her revenue moving again.

The Background

Ms. Weaver started TPR Media to deliver patient information to pregnant women and gradually expanded into other areas, such as orthopedics and obstetrics.

Early on, the content was sent by email, a process that was outsourced. TPR Media created the messages, but another company owned the email platform.

In its first five years, the business grew to nearly $2 million in annual revenue — in part because Ms. Weaver renewed about 80 percent of the contracts that came due every year. But in 2009, signing new business started to become more difficult. “We were saying, ‘Wow, we’re not going anywhere fast here,’ ” she said. Looking back, she pointed to several reasons for the slowdown. The first was competition — other companies had started doing what she was doing, and it had become harder to sign new clients.

The second was that the recession made an already conservative medical industry even more risk-averse. Hospitals were nervous about spending money and, again, new clients were harder to find. “No segment of the marketplace is immune to nervousness in a recession,” Ms. Weaver said. “And we’re in a segment that’s traditionally preoccupied with risk.”

It also became clear that clients wanted to be able to send their messages in ways other than the email platform she was using, such as through social media, and many clients wanted her to be flexible enough to service several of their divisions. None of this was possible with the outsourced email platform. “We could only go to people and say, ‘Do you want this thing we have?’ ” Ms. Weaver said.

She realized that she had to make changes, but she wanted to make sure that she made the right changes. “You have to think about it,” she said. “You can’t change direction on a dime.”

One of the first changes she made, in 2010, was to incorporate social media into her content offerings. Patients would be able to receive messages through Facebook and Twitter instead of, or in addition to, email.

Within three months, she managed to develop 50 Facebook modules and a back-end platform that could automatically send content through the social network. Developing the content cost the company about $75,000, and developing the social media platform cost “several hundred thousand” dollars more. Still, however, clients seemed reluctant to sign on to the new health care content marketplace, which the company calls UbiCare.

Some thought that they did not need TPR Media’s services. “They ended up thinking that since Facebook and Twitter are free, they could do it themselves,” she said. “They thought, ‘Why should I pay someone when we can do this?’ ” In 2010, Ms. Weaver concluded that she would have to consider other options.

The Options

She thought about trying to raise prices for new customers. Some hospitals paid around $10,000 for specific services, while others paid double for additional services. Revenue might rise if the company offered only one rate.

Of course, in a recessionary environment, there was a risk that people would not pay the higher price, and she was having enough trouble signing up new clients already. But she said she believed her track record would persuade people to pay. “Everyone that you sell anything to starts out by saying, ‘I don’t have the money for that,’ but we had tons of testimonials that showed this works,” she said. “We were confident it wouldn’t be a problem.”

She also wanted to try looking for business outside the medical field. Any company that needed to send out timed information could be a client. Schools could help parents with a child’s development, and pharmaceutical companies could relay instructions about how and when to take medication. Of course, preparing content for and marketing to new industries would take time and money.

Ms. Weaver’s most ambitious idea was to bring all of her technological needs in-house. Using a third-party company to distribute content had become increasingly frustrating. It often took weeks to make simple changes to programs, and carrying out new ideas took even longer. “We wanted to add bells and whistles, but we weren’t in a position to change things ourselves,” she said. Maybe, her team started to think, we should build our own platform. Maybe we’re not just a content company but also a software company.

Bringing technology in-house, however, would fundamentally alter the business. She would have to hire and oversee a team of technology people, hire a chief technology officer and spend time focusing on developing software in addition to content. She knew it would be a big move, but she thought that not paying regular fees to a third-party developer would save money.

What Others Say

Steven Greenbaum, co-founder and chief executive of PostNet International Franchise Corporation, a design and printing company for business-to-business companies: “My sense is that her strength is in information and not in technological development and creation. I’d want to stick to my core strengths. I’ve had to take some of my own technology in-house, and it’s not easy.”

Robert Livingstone, founder and chief executive of RoyalText, a mobile marketing company that got its start in the health care industry: “My first recommendation would be to see what they can apply their same service to. We shifted from working with doctor’s offices, which had a sales cycle of up to three months, to working with restaurants and retail where the sales cycle can be a few days. I would also dedicate fewer resources to try and get new clients and spend more time servicing existing ones.”

Andrew Hazen, co-founder and chief executive of Allbobbleheads.com, a company that makes custom bobble heads: “It’s shrewd of her to realize that she has to keep iterating and that she’s now exploring technology and willing to hire a chief technology officer. I think it can be a good thing to try and develop a proprietary technology that can become an intellectual property asset. When it comes to pricing, I think it doesn’t have to be an issue as long as she can support it with value. It’s like any software-as-a-service model — you have a good, better and best plan and then you push people to the middle.”

The Results

Offer your thoughts on the You’re the Boss blog at nytimes.com/boss. Next week on the blog, we will provide an update on the decision Ms. Weaver made and how it is working out.