We recently sat down with Ann Miura-Ko, General Partner at Floodgate, as she gave her views on the evolving nature of entrepreneurship within tech. Named as the most powerful women in startups by Forbes, Ann has led investments in several disruptive companies, including Lyft, TaskRabbit, and ModCloth. Ann also teaches entrepreneurship at the school of engineering at Stanford.
Can you share Floodgate’s history and investment thesis?
We emerged amidst the global financial crisis in 2008 to fill what we viewed as a gap in the financing market. This gap was triggered by the fact that traditional Venture Capital firms going up-market. And since angels were similarly facing the impact of the financial crisis, we felt we had an exciting opportunity to be disruptive within the seed market. We typically invest between $500K to $3MM in the initial round of financing as lead investors. We are looking for what we believe can become one of the top 15 companies in any given year. We feel very fortunate to have worked with some great companies and to have built a solid reputation within the entrepreneurial community.
The cost of launching a start-up is exponentially less than what it was 10-15 years ago. As such, we’ve all seen massive growth in the formation of new start-ups. What is your take on the current state of the market at a high level?
I think there is both a very positive side and a potential negative side to the exponential growth of new startups.
On the positive side, I believe that the mass democratization of entrepreneurship we have witnessed over the last 5-10 years is as significant historically and economically as the Gutenberg press or the Ford Model T. With the Gutenberg press, we had the democratization of ideas – what used to take hours or days to copy could now be copied by the hundreds and distributed to the masses. The Ford Model T made a car affordable to the middle class and literally transformed the layout of our cities and suburbs. In a similar way, the Internet (and mobile) has enabled supply virtually through anyone can find demand anywhere. This has enabled a new generation of entrepreneurs – those who are located outside the geographical reach of Silicon Valley, those without access to a mentor who could make a quick call to a top tier venture capitalist on Sand Hill Road, and even the micro-entrepreneur who can now leverage platforms like Lyft, TaskRabbit, Etsy, or Chloe and Isabel to completely redefine the notion of employment so that it is fully on their own terms. At Floodgate, we believe that these trends point to the fact that the next Mark Zuckerberg or Bill Gates will not necessarily be a young white male hacker. That is the power of democratized entrepreneurship – it is no longer in the clutches of a small group of individuals but rather truly based on the power of the idea itself and the talent of the entrepreneur. This is what makes me extraordinarily optimistic about the future of entrepreneurship.
On the other hand, the explosion of startups is not only a result of low cost of admission, but also the social phenomenon where the singular act of founding a company bestows upon that founder a hero status. What we don’t often discuss, though, is that not every startup idea is worthy of the founder. Because being an entrepreneur now is a very legitimate career path (there is now even an Entrepreneur Barbie), we are treading in dangerous waters that people will simply found a company for the sake of being a founder. Regardless of market cycles, the number of large exits (> $500M) since 2003 has consistently been between 10-20 per year. Despite what the media may portray, it is very difficult and rare to build a disruptive company. I’m not advocating against starting a company, I just counsel people to be thoughtful about doing so. Being the founder of a company going nowhere is not nearly as interesting as being employee 100 of Facebook.
That makes sense. When you look at an opportunity early on, how do you determine whether a company really has an opportunity to be disruptive?
I think first and foremost, we are looking for an insight by the entrepreneur that is non-consensus but right. If they are wrong, there is no hope. If the idea is consensus, since we are early stage investors, the idea will not be unique and the market will already be crowded.
The second is that we want the entrepreneur to be pursuing a really large market. This seems obvious but we mean something very specific here. We want the business model of the company to be such that they can capture a significant portion of that market. It’s not enough that the industry they are part of is a big one but the go to market model has to match up to why they will be able to capture a slice of that market. Generally, we say we want to be able to imagine a path to $100M in profitable revenue within 5 years.
Lastly, I would say that we like entrepreneurs to be authentic to the idea they are pursuing. The narrative of why they got started with this business idea is just as important as the idea itself.
The allure of starting a company early on in one’s career can be very seductive. Going back to your hero analogy, how do you view the trade-off between starting and leading a company that may not be of massive scale vs. being a small cog in the wheel of a disruptive company like Facebook or Apple?
Very few startups begin with the belief that they will not be a legendary business. Of course, we all know that truly legendary businesses are likes tiny needles in a large haystack; these businesses not only are of incredible scale, but also survive the test of time. Throughout history, the number of founders who were able to build these types of businesses without prior experience can be counted on two hands.
I do think that here in the valley, we tend to really discount working for a larger company. We act like it is “selling out”. Even though I work in venture capital, I don’t think this is true. I think the very act of asking whether it’s worth it to be a “small cog” belies our assumptions about what it’s like to work at a larger corporation. Particularly for recent graduates, there is tremendous opportunity to learn from experienced managers who have grown teams and cultivated talent. The opportunity to work for a disruptive and visionary company at any capacity is an invaluable experience and can prevent future entrepreneurs from making obvious and subtle mistakes. I’ve asked this of some of my students at Stanford and have asked this of some entrepreneurs – is this idea truly good enough for you? If it isn’t, find another idea or go work at a company where the idea is good enough for you.
Once a company has launched, what is the top signs early on that provide clues on a company that is “hitting” and how long before those clues really start surfacing?
Early indicators differ for types of companies. For companies that are technology driven, I’m looking for early proof points that the technology works. This can take a few years to get to revenues so I want to see technical development over that time frame whether it is interim prototypes or new use cases as we test on various verticals and customer sets.
For B2B companies, revenues tend to be the early indicator. The best companies reach $100K in revenues within 12-18 months and $1M within the next 12 months.
For B2C, we look at either revenue (similar to that in B2B companies) if that is the business model or we are looking for network effects and user growth.
Lastly, the caliber of hires is a strong sign across the board. If you’re bringing on top-tier talent, chances are that you’ve built something that has a clear value path.
What about Product-Market fit? We hear how important this is as an early milestone. What are the early signs that a company is reaching Product/Market Fit?
Product Market fit is binary – If you’re asking whether or not you have it, I can guarantee that you don’t. You will always know when Product Market fit is happening. The company won’t be able to meet demand or hire quickly enough. When Product Market fit has truly happened, product is literally being pulled from your hands; if you try to take it away, customers will scream for it back. That’s what real Product-Market fit is and everything prior to that is a company still striving for it.
Given the backdrop of your earlier comments, where is entrepreneurship headed in the future?
I’m really excited for it. In particular, I’m excited about the diversity of entrepreneurs and ideas. The odds that the next Mark Zuckerberg will be a young college drop-out who likes to wear hoodies is actually very small. I believe the next name brand founder will have a very different profile. The fact that Alibaba could potentially be one of the largest IPOs ever already shows that this is the case