galapicon valley

7/31/2019 Galapicon Valley

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Weird, Wacky and Fun Stuff is Being Tried

PART 1: Rise of Black Frankenstein! copyright 2011 all rights reserved

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BlogNewcombbn

copyright 2011 all rights reserved

Black Frankenswangalapicon valley and The RISE of


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WHOI am Steve Newcomb. I am most

commonly known as the founder of

Powerset, which is now the Microsoft

Bing search engine. I have been part of

building 12 other startups and none of my

startups have ever failed. Many things

define me, but above all else is my

endless appetite to learn and to discover

new things.

HOWGet notified each time a new essay is

released:

phone: (415) 290-0787email: [email protected]

web: www.blognewcomb.com

twitter: @stevenewcomb

facebook: stevenewcomb

linkedIn: stevenewcomb

WHAT

I am a man, 40 years oldwith brown hair that

seems to have its own

agenda. I stand 6 foot

1.5 inches, but I'm

convinced I have

shrunk at least 1/4

inch.

Sometimes I have

facial hair,sometimes I don't, it

seems to depend on

how close or how far

I am away from

being in the

Caribbean.

WHEREI live in South Berkeley in a normal

house. I'll work anywhere I can get to the

Inter-tubes or any place where I can meet

someone interesting. I particularly like

coffee shops, but I usually dont order

coffee. I love iced tea, it is my elixir of

choice (only with Splenda of course).

WHYThere are far too few entrepreneurs that

stop long enough to share their stories

and knowledge. If just a few of us stop to

take the time to write down what we have

learned so that we could pass it on, we

would make the paths for future

entrepreneurs just a little bit easier to

blaze.

The essays that I write are for the benefit

of founders of startups. My intent is to

offer a no bullshit approach to advising

people. I try to always include lessons

learned from my experiences in

creating my companies. If youare a first time founder, or

considering becoming one, I

hope that my essays can

give you raw insight into

what it was like for me.

And while I dont think

that my experiences

could ever represent all

of the knowledge

necessary to become a

great founder, I do think

that I have a few

nuggets of uncommon

and perhaps unique

insights.

BlogNewcomb
http://linkd.in/cekQQWhttp://bit.ly/c4qrlPhttp://bit.ly/bFuc7lhttp://linkd.in/cekQQWhttp://linkd.in/cekQQWhttp://on.fb.me/bsDRJ7http://on.fb.me/bsDRJ7http://bit.ly/c4qrlPhttp://bit.ly/c4qrlPhttp://bit.ly/bFuc7lhttp://bit.ly/bFuc7lmailto:[email protected]:[email protected]


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One of my favorite movie quotes comes from Men in Black, when agentKay says to the newly minted Agent Jay: There's always an Arquillian BattleCruiser, or a Corillian Death Ray, or an intergalactic plague that is about to

wipe out all life on this miserable little planet.

In some weird, and sometimes inverted way, thats how I feel about theSilicon Valley. Whether its the blog-o-sphere, the quora-sphere or thehackernews-o-sphere, the cognoscenti seem to constantly offer proof thattheres always some new incubation model, some AngelGate dinner meeting,or some evil venture partner that is about to change life as we know it on ourangsty little startup planet. Here are questions that I have:

Why has YC become so hot? Why has their been an explosion of YCBrethren? and is any of this permanent or is it a sort of combinator bubble?

Why is Yuri Milner and SV Angels offering $150K with no cap and no

discount to all YC Startups? that seems crazy and unsustainable; but is it?

Why did AngelGate happen? Why does it feel like there is some weird

battle going on between YC, TechStars, Angels and VCs?

What is really behind all of these things? Has something fundamental

changed or is this some kind of blip in our path?

What does all of this mean to us? founders... What should we do about it?

But try as I might to name the one thing that is driving all of these changes, Icouldnt - until now.


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BLACK FRANKENSwangalapicon Valley and The RISE of


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A Darwinian Realization

A Darwinian Realization: In the past decade we have seen the rise, and nowdomination, of a new species of startups - what I call the FrankenBoomer

Generation (which I define in detail later). And the impact of this dramaticevolutionary shift is now radiating out to the rest of the species in ourecosystem - incubators, angels and venture capitalists.

YC, TechStars, AngelGate, Yuri and the rest are not actually the change

agents, but rather indicators of the ripples of this larger and more primal

change agent radiating out into our ecosystem; they are the reactions to a

larger reality; In effect, we are witnessing the startup equivalent of the dawn of a new

epoch - the fall of the dinosaurs and the rise of the mammals and the

radiating impacts of that shift;

the really exciting thing is that we arent done yet - were right in the

middle of it, and to me, thats really exciting, scary and thought-provoking.

Principles Behind the TheoryMy theory: In Darwin speak, a period of rapid innovation, or wetter weather,gave rise to a rapid increase in the available technology, or vegetation, and inreaction, a new species rose that was more optimized to the new conditions.

Darwins finches were a really good microcosmic example of the principle offast-pacedadaptive evolutionary radiation. What Darwin discovered was

the radiating effects of weather conditions to vegetation, vegetation to speciesof finches and finch species variation to life forms dependent upon thefinches via, amongst other things, finch poop.


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If you follow the analogy through it means that venture capitalists,

angels and lawyers are the ones who eat founder poop... and in some

weird way that made me feel like I was on the right track;

One possible conclusion of Darwins key findings is that when there isa dramatic shift from dry to wet weather patterns, a correlated dramatic

shift in the species of finches occurs. Since the advent of the Internet,

we have seen a similar dramatic shift in our weather - an exponential

growth in innovation. So if the analogy holds, we should see a

corresponding shift in the amount of vegetation, or technology, and

ultimately in the species of startups found in the Valley;

And if that has happened...has this evolutionary change yet radiated out

to the rest of the ecosystem? What will happen to the founder poopeaters... chrrhmmm, I mean incubators, angels and venture capitalists

who have become highly adapted to a different startup species than the

one that dominates today? In Darwins world, evolution radiates out to

all elements of the chain. So where are we in that radiation?

But first, I think its valuable to dig into my thinking behind exactly what I

mean by a new species of startups.

Species Identification

There are Four Species of Startups - The following is a simple twodimensional characteristic set model where theoretically every startup fallsinto a unique combination of two characteristic sets for a total of fourcombinatorial species variations. As described below, startups arecharacterized by either being Black Swans (going after an unforeseen market),or Innovators Dilemmas (innovating in an existing market), and are also

either Noveltechs (building new technology) or Frankensteins (mashing upexisting technology) creating the following species:


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Each of these four traits focus on different elements of a startup. Black Swan

versus ID is about market focus, where Noveltechs versus Frankensteins are

about the use of technology. Consider the following:

Black Swan (Black....Swan) - a startup going after a new, undefined market;

as described in The Black Swan by Nassim Nicholas Taleb.

A very simple and famous example of a technical Black Swan is Google, whosaw Search as an industry when the existing companies that dominated the

Internet market saw Search as search - a feature. However, Black Swans do

not have to rely on novel technology to be a Black Swan. An example of a

non-technical Black Swan is Glee, the TV Show. They have created a winner


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ID Noveltechsexisting markets

& novel technology

ID Frankentechsexisting markets

& existing technology

Black Frankenswansnew markets


Black Novelswansnew markets

& novel technology


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that I would have never called (and frankly will never understand).

Population Size - The number of Black Swans is a function of the

number of available people who are innovative enough to recognizeBlack Swan opportunities, the readiness of innovative ideas for market

and the availability of engineers to build the technology.

Killer Exit - The Black Swan is often hailed as the best example of the

type of companies Valley VCs are looking for - one that goes public,

creates a new market, is worth billions and returns a 100x to investors.

Lesser Exit - Lesser exits for Black Swans however are also possible, but

are often bound by the number of existing big companies that may

value the product as a strategic feature.

Strategies - In terms of go to market strategies, first to market often

dominates, and close follower strategies are less common.

Risks - Historically, Black Swans shared both market risk, for obvious

reasons, and technology risk, because the new markets were created as

a result of employing innovative and new technologies (i.e. they were

often Noveltechs, see below).

Funding - The funding strategy of a typical Black Swan varies, but

generally investors look for new markets to target before they exist.

Well known Black Swan VCs include Kleiner and Sequoia.

Founders - Founders of Black Swans are often some form of outsiders -

people who left college early, or who have bucked the system. People

who march to the beat of their own drum.

Hiring - Employees, or at least early employees of Black Swans, are

different in every company depending on what is being developed.

Innovators Dilemma (ID) - a startup going after an existing market as

described in The Innovators Dilemma by Clayton Christiansen; a company


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that is going after an existing known market with a new, innovative approach

which may or may not be associated with new, novel technology.

A famous example of a technology-based ID is Amazon.com who reinventedselling books using novel online technology. We rarely notice non-

technology-based IDs, but they are everywhere around us. To give you an

example, 18 Rabbits, a snack bar company, is currently capturing market

share from incumbent snack bar company Clif Bar, not through any

technology, but by offering an innovative way to mix new ingredients that is

difficult for Clif Bar to copy for brand reasons.

Population Size - The number of IDs are a function of the maturationcycles of products within existing industries, the level of innovative

technology being developed and the number of employees at

incumbents who realize the opportunity, have the founder instinct and

whose significant others are willing to let them take the risk. If one

could map the sine curves of these movements it would be theoretically

possible to predict the cycles of IDs coming into the market.

Killer Exit -The best case scenario exit is to go public, displace an

existing incumbent (and then purchase Clayton Christiansens second

book The Innovators Solution).

Lesser Exit - A middle case successful exit is to sell the company to one

of the existing incumbents.

Strategies - The go to market strategy for these companies are mixed

between first to market and close follower, but by definition are

followers.

Risks - The risk of failure is almost always encapsulated in the question

well, what if so and so decides to do what youre doing... wont they

just crush you? (BTW I hate that question - the answer is always

Innovators Dilemma). Historically, Innovators Dilemmas had low

market risk, but high technology risk, because by definition, the


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opportunity for the companies was created by the existence of

breakthrough technology.

Funding - The funding strategy of many Innovators Dilemma

companies includes a purposeful selection of VCs that already sit onthe boards of their potential acquirers or were the original backers of

those companies.

Founders - Founders of these types of companies often come from the

incumbents who see the innovation coming as a result of working in

the industry, recognize the dilemma in their own company and go off

on their own to capitalize on their realization.

Hiring - In terms of hiring, Innovators Dilemma companies often have

a dual strategy of stealing the strongest people from the weakest of the

incumbents and hiring fresh people almost right out of college.

Noveltech - a startup that builds novel technologies to create a product. A

great example of a Noveltech is Nuance, which basically invented speech

recognition as we know it.

Education - In many cases, Noveltech CEOs have higher degrees,

particularly in engineering or in whatever field that is specific to the

startup that is being built.

Team - The team that is hired in a Noveltech usually includes at least

one group of engineers highly specialized with advanced degrees.

Age - Noveltech CEOs and team members tend to have a higher

average age than Frankensteins.

Attitude - I dont know why, but for some reason founders of

Noveltechs seem to be the most curmudgeonly of all founders.

Funding - at least ~$500K+ for alpha, ~$4 million++ for Beta and

Market testing, then either raise Series B or sell.


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Beta - Noveltechs can take many months to years to get to the first beta

or even alpha of their product.

Patents - Often Noveltechs have a war chest of patents or at least deep

corporate secrets.

Frankensteins - a startup that combines existing technologies to create a

novel product.

Education - In many cases, Founders/CEOs of Frankensteins dont even

graduate college.

Team - Team members are dominated by all-around-athlete engineersrather than having a majority of highly-specialized engineers.

Age - Most are under 30.

Attitude - I dont know why, but for some reason founders of

Frankensteins are happier, but seem to think the world owes them

something.

Funding - as low as~$20K to beta, ~$400K to get to market, then either

raise Series A or sell.

Beta - A few months down to a few hours.

Patents - Unlikely to be a major strategy.


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How The Singularity Gave Birth to Black Frankenswan

An Arid Landscape in the 1990s supported Noveltechs not Frankensteins -The Chart below depicts the different market segments for startups where the

area of green represents the percentage species mixture and number of allstartups.

It was an arid technical landscape - The Internet as both a technology

and a marketplace was in its infancy and therefore the total amount of

usable and available technologies was very small.

It was an arid business landscape - The business models associated

with the Internet were unknown, unproven and did not have wide

support amongst entrenched incumbents.


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ID Noveltechsexisting markets

& novel technology

ID Frankentechsexisting markets


Black Frankenswans

new markets


Black Novelswans

new markets

& novel technology

In the 1990s


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It was an arid talent landscape - The total number of engineers that

understood Internet technologies were small.

Noveltechs dominated - Because of arid technical, business and talent

conditions, Frankensteins simply couldnt survive in such conditions. Both Black Swans and IDs existed - But IDs probably outnumbered

Black Swans, simply by the nature of Black Swans being things nobody

thought of before and IDs being things lots of people already knew, but

few did anything about.

Founder Poop Eaters Specialized for Noveltechs - The species of

founder poop eaters such as lawyers, venture capitalists and angels

created themselves in such a way to optimize a relationship with

Noveltechs.

Checksum - Go on Crunchbase and do a search of companies prior to

1997 and youll see what I mean. I couldnt find a single Frankenstein

on the list. They were all either ID Noveltechs or Black Novelswans.

Netscape (Black Novelswans)

Yahoo.com (Black Novelswans)

Amazon.com (ID Noveltech); or

Google.com (Black Novelswans) or eBay (ID Noveltech)

Then the weather, or rather innovation, changed - Throughout the remainder

of the 1990s and continuing today, we see a rapid, exponential growth in

innovation. As the Internet matured, the total number of innovations began

to grow. This rapid period of innovation, or wet weather, has given rise to a

rapid increase in the available technology, or the vegetation.

In other words, the bellwethers of a Darwinian evolution, specifically ofadaptive radiating evolution, have taken shape:


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Business Models - the proliferation, maturation and simplification of a

large number of Internet business models which became easily

understood, shared and accepted amongst all species of the Valley

ecosystem;

Technology - the advent of super fast, super scaleable, super elegant,

super easy to learn and use coding languages, common code libraries,

widgets, and apis;

Sharing - the advent of open source business models that made all of

the code libraries above available to all;

Coding - the advent of better programing languages that made it easier

and easier to become an engineer;

Productive Population - the massive shift in the total population of

productive workforce created as a result of technical libraries that made

junior engineers, or even non-engineers, as productive, and in some

cases more productive than senior engineers were 10-15 years ago;

Cloud Computing - the advent of cloud computing, security and other

centralized technologies that changed the time to set up a scalable

production website from months to minutes, and from large capital

expenditures to pay as you go usage rentals;

Founders - the scale of founders who understand Internet business

models and coding and cloud computing.

Today, if you go into Crunchbase, or just think about it for a moment, youllsee the shift for yourself. Unlike other market segments (like green-tech,hardware, semiconductor) which have stayed much the same (depicted in

green) Consumer Internet companies, depicted in blue, have shifted.


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TheFrankenBoomer GenerationExplodes - As indicated by the blue

area, there has been a ginormous population explosion in the total

amount of startups at the seed and angel stage dominated by

Frankenstein companies, creating a wave of a new species of founders:

FrankenBoomers.

Unique to Consumer Internet - This species change only happened in

the Consumer Internet space; other market segments like

semiconductor, biotech, materials, food and greentech did notexperience the same changes.

Internet Noveltechs Lost in the Noise - While the explosion of

Frankensteins has inverted the species mixture in the Valley, what

happened to the actual population of Noveltechs? One theory


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ID Noveltechs

existing markets

& novel technology

ID Frankentechs

existing markets


Black Frankenswans

new markets


Black Novelswans

new markets

& novel technology

Today


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postulates that it has remained almost constant - they are just hidden in

the noise. Another says that those founders who would have created

Noveltechs simply didnt; they created Frankensteins because they were

cheaper, less risky and faster to fail or succeed.

Startup Leaders Today are Frankensteinian Dominated - Consider the

startups who dominate the news now. All of them are technically easy

to build, the difference is that they saw the market differently, or they

saw a different way to combine existing technology:

GroupOn (Frankenstein)

FourSquare (Frankenstein)

Quora (Frankenstein)

Greplin (Frankestein)

Interesting Exercise - go to the Crunchies nominations page http://

crunchies2010.techcrunch.com/and go down the list. Old companies

like Facebook and Twitter are on the list, but they seem to be kind of a

hybrid Noveltech and Frankenstein. But the more you trend towards

younger, newer companies, the more you trend toward Frankensteins.

Back to the Original Questions

Lets look at the questions I posed at the beginning of the essay to see howthey might now be answered?

Why has YC become so hot? Why has their been an explosion of YC

Brethren? and is any of this permanent or is it a sort of combinator bubble?

They are new species ofIncubators reacting to the evolutionary shift.Permanency is always a function of IRR in our industry.

Why is Yuri Milner and SV Angels offering $150K with no cap and no

discount to all YC Startups? that seems crazy and unsustainable; but is it?


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http://crunchies2010.techcrunch.com/http://crunchies2010.techcrunch.com/http://crunchies2010.techcrunch.com/http://crunchies2010.techcrunch.com/http://crunchies2010.techcrunch.com/


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They are new species ofAngels reacting to the evolutionary shift.

Permanency is always a function of IRR in our industry.

Why did AngelGate happen? Why does it feel like there is some weirdbattle going on between YC, TechStars, Angels and VCs?

AngelGate and the other battles between investor species are indicators

of the tempestuous rippling effect of the radiating change going out

throughout the valley.

Actionable Steps

What are the clear actionable things we can take away from this realization?How can we benefit? What dangers exist now that didnt exist before? Whatquestions should we ask?

Use knowledge to your advantage - One of the impacts of this shift is going

to be that it will upset and likely change the existing ecosystem of investing -

particularly early stage investing. The old species of investors will clash and

go into battle with the new species of investors and that will likely result in

higher valuations and seemingly irrational investing. If I were a

FrankenBoomer founder creating a new startup, I would simply take

advantage of this for my own benefit while making sure that I dont screw

myself in the process.

Control over Sale of Company: One of the areas that is most likely

to come under fire is the term in the investors rights agreements that

give investors or board members the right to stop an acquisitioneven if the investors dont have a controlling percentage ownership.

Old investor species will have difficulty letting go of this, new

investors species will likely bend on this one.

High Valuations - High valuations are almost always good for

founders, unless it limits your exit options. Look for old investor


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species to claim that you are stupid for raising at high valuations,

look for new investor species to be irrational and be valuation

insensitive. In reality, super high valuations only screw a founder if

the founder gives minority VCs the right to block a sale of a

company or if the founder is so concentrating on equity preservationthat they arent running their business properly.

Rolling Closes - Rolling closes with ratcheting up valuations and

crazy open ended, no cap, no discount bridges are likely to become

more standard amongst new species of investors and irrational old

species of investors who are fighting to maintain their relevance.

Weird Money - There are going to be some really weird players

coming into our ecosystem and offering money. Look forcompanies, investor groups and anything else that has a lot of

money and doesnt know what to do with it making an attempt at

getting into the Valley ecosystem. Specifically look for big money

from New York to make a move on the Valley, bringing with them

New York rules and players; for that matter, New York itself is likely

to become more of a competitor to the Valley, along with its cousin

Boston.

Big Money - Old style angel investors will become like local book

stores in that they will be threatened by new species of investors

who act like Walmarts.

Conclusions and Questions

We have, in fact, seen a wholesale shift in the mixture of the types of startup

species that exist. While the 1990s were dominated by Noveltechs, we nowlive in a world of the FrankenBoomer Generation where Black Frankenswansand ID Frankentechs feast on the technology vegetation created by theSingularity.


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Large Pool of Available Technology is Permanent - This wet weather

pattern and the corresponding vegetation seems to have the

hallmarks of a climactic rather than seasonal shift. The growth of

available, usable mashup-able technologies is not likely to slow

down anytime soon, so it seems likely that the trend towardsFrankensteins is not a fad, but rather a long term trend.

The Cost of Testing a Beta is Permanently Cheaper - If thats true,

then it logically follows that the pool of mashup-able technologies

will only get larger (and likely exponentially larger) and betas will

become even cheaper.

A Permanent Increase in the Demand to Want to be a Founder - If

thats true, then it only gets easier to try to do a startup, so it seemslikely that the trend towards an ever growing population of people

who want to create seed and beta stage startups is likely to be a long

term trend.

A Permanent Increase in the Demand for Early Stage Financing - If

thats true then we have a huge bubble of FrankenBoomers that will

be coming at every stage of financing including seed, angel and

venture capital financing.

But thats where it ends. There is a core misalignment in what the supply of

people who want to create startups and what drives the supply of money

from investors. For startups, its all the things I mention above, but for

investors it ultimately boils down to return on investment. No matter how

many people want to be founders of a new company, without money, its all

irrelevant. So there are a couple of possibilities:

No Ripples Beyond Series A - The evolutionary impacts of the

FrankenBoomer shift has, to date, shown no indication that changes

have radiated beyond Series A investing. Regardless of that fact that

there has been an exponential growth in founders attempting to

mash up new startups, there has been little or no growth in the


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number of companies hitting Series B, there has been little or no

impact on the total dollars of startup acquisitions and little or no

impact on the public markets.

The Bubble - So what we have is this huge bubble of early stagecompanies at seed, angel and somewhat at Series A, but no impacts

are really felt later than that from the FrankenBoomers;

Physics of Macro Market Physics - The physics of market dynamics

mean that the total wallet size and the total number of companies

going public, or getting acquired will always stay about the same;

Therefore, a filtering effect happens that makes the FrankenBoomer

Generations impacts moot when considering large scale markets.

A Very Stoppable Force Meets Immovable Logic - Either the fail rate

of the FrankenBoomers will dramatically grow in line with its own

growth in numbers, or the average size of exits will decline. Either

way there will be a balancing of the system. These physics are not

likely to change.

Expect IRR for Early Stage to Be Trending Down for Old Species of

Early Stage Investors - So if thats true then a correlated shift

downward should happen to early stage investors; Old species,relying on the 2/20 model will find it difficult to survive and raise

new funds once the current funds are put to use.

A New Early Stage Investors Species - New fund models, however,

are more likely to find a way to survive. This is in essence perhaps

one of the most important potential nuggets of this essay. The new

species of early stage investors that adapt their financial model to

the new species of founders are likely to be the ones that survive.


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The Next EssayEven though I still have much more to say and I still have many questions to

pose this essay is getting ridiculously long. So I will release my other thoughts

in short(ish) essays that will be released in sections designed to be long

enough to get make a worthy point, but short enough to minimize death

threats to me.

The next essay I plan to release is titled YC Makes Yummier Primordial Soup.

It delves into the radiating impacts of the rise of Black Frankenswans and ID

Frankentechs Startups, the impacts of the new FrankenBoomers species of

founders, and the creation of new species of FrankenBoomer poop eaters,

chrremm, investors - the most prominent examples being two new, but

separate species - YCombinator and TechStars.

Special Thanks: Although it in no way means that these people endorse,

believe in or even like me, I would like to say thank you to them for debating,

arguing, agreeing and disagreeing with me as I prepared this essay.

Lucinda Newcomb

Aaron Brodeur

Emily Melton

Donna Boyer

Andre Marquis

Jennifer Walske

Archit Bhargava

Brent Schulkin

Shawn Broderick

Reid Hoffman

Katie Rae

Franco Salvetti

Benjamin Black

Cliff Moon

Sahil Jain

Naval Ravikant

Babak Nivi

Darshan Shanker

David Cohen

Will Fitzgerald

Pejman Nozad

Kalvin Wang

Natasha Mooney

Dan Birken

Ryan Mickle

Aditya Mahesh

Tibet Sprague

Thomas Korte

Yin Yin Wu

Alex Le

Siqi Chen

Justin Joshimura

Brent Locks

Marcus Ogawa

Phillip Mobin

Chris McCann


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