How to Size a Market in 5 Minutes or Less

My basic approach to market sizing is this:

# of potential customers x average selling price = Total Addressable Market

Don’t know average selling price (aka ASP)? No problem. Then use economic value creation instead as an upper threshold for price.

Economic value creation is what it sounds like: amount of economic value that product crates for the customer vis-à-vis time savings, cost savings, new sales, productivity increases or whatever.

For example: Assuming the product actually works, Widget X should save the average customer $1,000/year due to feature A and boost revenue by $500/year through feature B. Ergot, the economic value of Widget X to a customer is $1,500/year.*

How much value you capture––ie the market value––of the value you create will depend on the business, but especially in the early days of fleshing out a startup idea, I find this to be a very useful proxy and upper threshold.

For back of the envelope calculations, I typically assume that I’ll be able to capture 1/2 of the value I create at the absolute maximum.

In my experience, customers are more willing to let you capture a higher proportion of new revenue (especially high margin revenue!) as opposed to cost savings. New revenue “feels” free whereas cost savings does not.


*If you’re really sophisticated, you might argue that value creation = incremental profit, but I find that most customers & business have a really hard time actually calculating incremental profit.

Poor. Hungry. Driven.

In hiring and investing, we are all biased. My bias? I bias toward and pattern match on PHDs:

Poor. Hungry. Driven. 

I look for people who’ve taken it on the chin in life and come back determined to win.

I look for hustlers who’ve risen beyond their station in life. 

I look for champions. 

These are my people. We all have biases in this life, and this is who I am biased towards hiring and funding. 

If that’s you, say hello. We should know each other. 

Why Generic Outsourced Assistant Services like Exec, Operator, Etc. Failed

High-frequency tasks: Better to hire an expert
High-value tasks: Better to hire an expert
What’s left: low-frequency, low-value tasks

That and anyone good churns out of the system, gets a real job.

It’s that simple. 

(Because Sam Gerstenzang asked…)

Context: In 2011, I launched Humanoid, a crowdsourced virtual assistant service. And yeah, it had all these problems. 

For more context, check out Panos Ipeirotis’ writings on The Market for Lemons.

14 Lessons Learned from Year #1 as a Startup Investor

Lessons I’ve learned investing so far:

1) FOMO is real. You have to make a conscious effort to not let it affect your thinking and maintain your own intellectual independence.

2) Investing downstream of YC at Demo day is both awesome and terrible. Awesome because the companies are amazing. Terrible because you have no time to decide and the entire dynamic encourages you to be viewed basically as a commodity.

3) If it doesn’t feel right, don’t do it. For me personally, I often have accurate gut feelings that I am not able to articulate until later. I am getting better at articulating the source of my feelings faster, but not in real time.

4) Be decisive. If I’m on the fence, just pass. Don’t string yourself or the entrepreneur along.

5) The best entrepreneurs learn really effing fast and will get better before your eyes. If something doesn’t feel right, ask yourself “is this founder learning fast?” If the answer is no, pass.

6) Have a clear investment thesis and criteria. This makes life soooo much easier for you and the entrepreneurs. It took me a while to get here, but now I have a simple pitch: I invest in outsiders doing crazy shit that, if it works, will solve an important social problem. Awesome people is #1. World changing is #2. Crazy is #3 and something I’m willing to flex on, whereas #1 and #2 are “must haves.”

7) Life is easier when you commit to saying what you actually believe, even if the message hurts. I still always try to be kind, but now that I’ve committed to being truly honest, I feel better and freer. It’s great!

8) Slow down. Have a process. This helps build deep rather than shallow conviction.

9) Investing is about feelings. How does the company make you feel in your gut? Listen to that feeling. Numbers matter, but it’s all fucking guesswork and no one really know. While there is value in fundamental analysis, there’s no value in false precision.

10) Truth > fact. Facts you can prove. But there’s a lot that is true that is not provable.

11) My best decisions come from when I listen to my gut.

12) Leave everything on the field. Act with decisiveness, passion and conviction. Hold nothing back. Regret nothing.

14) Don’t doubt yourself. Fight for what you believe, even when other people think you’re wrong or stupid. Just because you might sound stupid doesn’t mean you’re wrong.

Looking Back: Startup Investing Year #1

I wrote my first check to a startup on April 11, 2017. Since then, I’ve invested in 16 startups via my personal money and a small fund I manage backed by Social Capital. I’m having blast!

TLDR: I bet on outsiders using capitalism to solve society’s most important problems. 

Here’s what the last year & change has looked like…

Investment Pace

  • 16 investments total
  • 11 personal investments
  • 6 fund investments
  • 7 advisor positions

Thoughts: In the future, I want to increase my investment pace to ~20 per year.

Founder Diversity

  • 7 immigrant CEOs
  • 5 female CEOs, including 2 all-female founding teams
  • 3 Hispanic CEOs
  • 2 South Asian CEOs (does this count as diversity? I’m not sure.)
  • 1 African-American CEO

Thoughts: I think there’s a lot of money to be made by investing in people overlooked by the typical old rich white guy VCs, especially when I can mentor & develop the founders to the point where they can pitch & raise from anyone. While I am doing much better than the typical startup investor on the diversity front, a lot of this has been luck and personal relationships. I don’t have a repeatable process for sourcing diverse talent just yet. More work to be done here.

Investment Ideas that Excite Me

Frontier Technologies with Obvious Applications

  • Artificial Intelligence
  • Industrial robotics
  • Energy storage
  • Brain-Computer Interface

Structurally Underserved Markets

  • Women
  • Ethnic Minorities
  • Unsexy non-tech industries

Consumer Products with a Cult-Like Following

  • Direct-to-Consumer brands
  • Emerging social networks
  • Vertical marketplaces

Highly-Regulated Industries 

  • Healthcare
  • Financial Services

Thoughts: This is a work-in-progress. I didn’t start off as a thesis-driven investor, but I’ve quickly become one. I’ve steadily sharpened my focus to the companies doing things that that matter to the future of humanity AND have the potential to make craploads of money. I expect this focus to continue into the future.

Investment Stages

  • Seed: 75%
  • Pre-Seed: 25%

Thoughts: I want to flip this ratio. Ideally, I’d be investing in roughly 60% pre-seed and 40% seed stage companies. Not only is the potential for return greater when you’re investing insanely early, but it’s also more fun and less competitive. There are a ton of seed funds out there, yet raising <$500k is still pretty hard! Besides, being the first check into a company is way more meaningful and personally gratifying to me than being the 20th. I can help more, which gives me a ton of personal satisfaction.

Investment Sectors

Consumer: 40%

  • Social App: 2
  • Healthcare & biotech: 2
  • Direct-to-Consumer CPG Brand: 1
  • Marketplaces: 1
  • Financial Services: 1

Business-to-Business: 60%

  • Hardware: 5
    • Commodity Sensor + Deep Learning applied to Medicine: 2
    • Industrial Robotics: 1
    • Brain-Computer Interface: 1
    • Energy Storage: 1
  • Marketplaces: 4

Thoughts: I like this mix. If anything, I’d like to invest in more consumer products. But overall, I’m pretty happy with how this has played out.

Investment Geography

  • San Francisco Bay Area: 6
  • New York: 4
  • London: 3
  • Canada: 1
  • Atlanta: 1
  • San Diego: 1

Thoughts: Wow, I didn’t realize that so many of my investments are outside of the Bay Area! In truth, the majority of these companies were in the Bay Area when I met them, then later moved somewhere else (often back to wherever they were from). My model is to build high-touch, high-trust relationships with founders, and it’s really hard to do this without spending time together in person. Skype is decent for traditional pitch meetings, but I don’t do traditional pitch meetings, so that’s an issue. I’m sure there’s lots of great companies not near me that I’m missing, but I’m not sure how I could invest successfully in such companies, especially as I move more of my focus into the earliest, riskiest, most people-dependent stage of company. If anyone has ideas on how to build high trust relationships with people remotely, I’d love to hear from you!

Next: Lessons learned.

Matt Mireles
Are you an outsider building a company that’s solving an important social problem and/or creating a better future for humanity? Pls email me. I know what it’s like to not have a network––I was driving an ambulance for a living when I started my first company––and I’m happy to receive your pitch cold & take you seriously. 

To the Dreamers: a Thank You

Excellent Sheep

The only people for me are the mad ones, the ones who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time, the ones who never yawn or say a commonplace thing, but burn, burn, burn like fabulous yellow roman candles exploding like spiders across the stars and in the middle you see the blue centerlight pop and everybody goes “Awww!” ― Jack Kerouac, On the Road

One of my favorite things about being and working with entrepreneurs all day is how empowered, how self-directed they are. Entrepreneurs, the good ones at least, pursue their dreams and no one else’s. They are leaders.

The energy, the passion rubs off on you. I love it.

I recently befriended a senior executive at large, elite tech company. She was brilliant and talented, could jump through any hoop you threw at her, had a sterling resume. Her purpose, her goal in life? To win… and then retire.

To win… at what, I asked? At the game, she said. At the competition. Whatever it was.

She had such a big brain, but such a poorly developed internal guidance system.

She had no why.

I’m so spoiled from hanging out with all these entrepreneurs that I was shocked. I know people like this exist, but rarely do I include them in my life.

Yes, I live in a bubble. It’s a luxury I afford myself. A true luxury.

But man, what a waste! To be so talented, so prepared, so wealthy and strong and still… to have no fundamental system of values, no goal, no agenda for life other than to win a competition as defined by others.

It’s good to be reminded of this from time to time. It makes me look at my life––I have the freedom to hand-pick my peers!––and be grateful. Very, very grateful.

To all who strive, who struggle, who hurt and cry for their dreams: thank you. Thank you for inspiring me, for reminding me how to live. I appreciate you always, but especially today, especially right now.

Betting Against the American Dream (in San Francisco)

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My friend Matt Pasienski, a Physics PhD, just announced he’s moving to Mexico and leaving San Francisco behind. Here’s what he wrote:

The American Dream has moved to Mexico. If you work hard in Mexico you can buy a house, have a family, and live a good life. That’s not something I can see happening in San Francisco right now.

Guadalajara is going to be a major world-wide hub for technology within the next 5 years.

As an American, these words break my heart. My father, born in 1929 to a single mom living in a one-room adobe hut in the Southwest, lived the American dream and clawed his way out of poverty into a PhD and professorship at a community college in Los Angeles. This is not supposed to be the story of the United States.

As a Bay Area resident, these words ring true. In any other place, our household income would earn us a place in the upper middle class, but here in the epicenter of the technology revolution, we instead live month-to-month, renting a musty, unadorned house for $3,700/month (a steal in these parts!). Daycare for our son, provided by a local church, costs $1,600/month and only lasts until 3pm, which means if we’re both going to work, we have to hire a nanny for $20-25/hour to fill in for the missing hours (you think a nanny could live on $12/hour in these parts? haha). Total cost of childcare: ~$2,500/month.

For our small family, that’s $6,200/month (i.e. $74,400/year) of post-tax income dedicated to just housing and childcare––before food, before gas, before clothes or toys or coffee.

64% of Americans don’t even earn that much money on a pre-tax basis.

Yet this is where the jobs are. For now.

Then there was this interview with the Mayor of Palo Alto:

We have to do away with this notion that Silicon Valley must capture every job available to it… We’re looking to increase the rate of housing growth, but decrease the rate of job growth.

Yep, the official stance from the Mayor of Palo Alto is that his city wants less jobs.

Ergot, he wants these jobs to go elsewhere. Like Guadalajara.

Or perhaps Seattle.

Austin?

Los Angeles?

Boulder?

As a Bay Area resident, these words make me feel hopeless and powerless. How will we ever afford a home here? It feels so out of reach.

As an entrepreneur however, these words make me think there’s an opportunity to bet against the Bay Area, to profit from the NIMBY catastrophe that is Bay Area housing policy.

Here’s my idea. Let’s call it IMBY Corp:

1) Raise a $50M investment fund from SF techies who are frustrated by Bay Area housing policy.
Pitch it as a derivative of the broader tech economy, but with a lower risk profile than traditional venture capital or angel investing. After all, the strategy might not work, but unlike startup investing the result is unlikely to be a complete loss of capital.

2) Buy residential real restate in emerging tech hubs like Seattle, Austin, Guadalajara, etc.
Target purchase price: $600k per property. Focus on the hip, gentrifying neighborhoods that are already attracting tech talent. Think: San Francisco’s Mission district back in 2010.

3) Invest $30k per property in renovations & furniture.
Make the house nice enough and furnish the properties in order to…

4) Rent the properties out on AirBnB to generate cash flow.
Back of the envelope: Average rental price of $60/night. Revenue potential per property: $21,900 (reality will be less, see next point…)

5) Use a third-party service provider to handle guest checkins, cleaning etc. for the first two years.
Assume third-party service delivers 60% property utilization and takes 30% cut of gross revenues, leaving IMBY Corp. with $9,198 per year in net income before taxes. Assume that once the fund switches to first-party service in year 3, property utilization jumps to 70% and overhead drops by to 20% of gross revenues, leaving IMBY Corp with $10,512 per year in net income per property before taxes.

5) Sell the properties for a profit after 5 years at a 50% premium on the purchase price.
Starting with $50M, you’d be able to buy 76 houses (assuming ~$500k in initial overhead). If each house sells for an average of $900k after 5 years (entry price: $600k), adding in all the associated setup costs ($50k) and AirBnB profit (($9,198 x 2) + ($10,500 x 3)  = ~$50k) makes it a wash, the result is a net profit of $300,00 per house with a final total portfolio value of $68,400,000 for an Internal Rate of Return of 7.65% per year over five years, which is better than buying US Treasury bills, but nowhere close to being an LP in a Sequioa fund much less angel investing in the next Uber.

Am I missing something? Would you take this bet? This is an idea I’ve been toying around with over the last few weeks. Perhaps someone else wants to run with this and make it a business?

I’d love to hear from any real estate or finance folks with actual experience investing these types of assets. Are my ballpark assumptions in the ballpark? Please share your thoughts in the comments on tweet me @mattmireles.

You’re always gaining credibility… or losing credibility.

The Rakish Brigantine

“Should we fire the CEO?” That’s the question at the heart of every board meeting. It’s the only thing I can really do as a board member, really. Even if I never say those words, the question is always in the back of my mind.

-Anonymous Board Member & Entrepreneur

A founder called me today. His lead investor was in the news in a bad way:

Rothenberg Ventures, the four-year-old, San Francisco-based seed-stage venture firm, may be on the brink of implosion, say several sources close to the firm.

 

At Rothenberg, the Rise and Fall of a Virtual Gatsby  -Techcrunch

“I thought startups were the ones that failed,” he said. Through the phone, I could hear him shaking his head in disbelief.  “It never occurred to me that my VC would implode.”

[Disclosure: The founder in question gave me permission to write about this. ] 

The founder was young. No professional experience outside of a couple menial summer jobs. But the business was surprisingly solid and well thought out. The boy could sell and he had the numbers to prove it.

But he’d just started raising money again. And here was his lead investor, the only brand name on a cap table littered with unsophisticated friends, family and randoms, going through a very public meltdown at the worst possible time. The other investors had looked to Rothenberg for guidance on how to respond to the many unpleasant gyrations that come with being a minority investor in a fledgling technology startup helmed by an inexperienced CEO.

“Dude, this is not good.”

The founder had called me, laughing nervously as he joked about having shat his pants “multiple times” throughout the course of the day.

We talked it over.

Did Rothenberg have a board seat? No.

Was he relying on Rothenberg as an ongoing source of capital? No.

Could Rothenberg call the note? When did the note mature? He didn’t think so, but he was looking into it.

Could Rothenberg sell their stake to someone else? Looking into it.

Was anything about his operating plan going to change as a result of Rothenberg melting down? Not a thing.

“Honestly,” he explained, “it just looks bad. I’m not sure how to address it when we talk to investors.”

Address it head on, I advised. You can’t hide it or run from it, so just directly acknowledge the problem, explain how it affects you and what you’re going to do about it.

This is what leadership is all about.

As an entrepreneur, you’re always being judged––by investors, by your team, by your board. It sucks, but it’s what you signed up for, so embrace it.

You’re always either gaining credibility or losing credibility. Remember that.

The surest way to lose credibility is to go silent.

Silence is like darkness. People are afraid of the dark, the unknown. It invites their fears to run wild. It feeds the monsters in their head. And those monsters, that fear is not your friend.

Good CEOs control the narrative. Good CEOs fill the silence.

Bad shit happens. This is true in startups, business and life. You can’t control for it.

Instead, what you can do is:

Work fast and do whatever you can to make sure they hear the bad news from you –– this sets you up as in control of the situation and in the know. Nothing makes people freak out like reading, for the first time, bad news about themselves on the wide open internet.

Acknowledge that bad shit has happened –– this demonstrates that you’re firmly attached to reality and not clueless. As my anonymous board member friend explained to me once, a clueless CEO is fired CEO.

Explain how the bad shit affects your business, specifying that which you know for sure and that of which you are still uncertain  –– this demonstrates that you understand the gravity of the situation. It’s always better for you to define that which you fear than it is to leave it to someone else’s imagination (or worse their officemates)

Lay out your plan of action ––this is the essence of leadership, this is what everyone wants to hear. People want their leader to be a man (or woman) with a plan. Now, you and I both know that your plan might not work, but that doesn’t matter. Having a plan means that you’re in control, that they don’t need to worry, that you’re on top of it.

Ask for help –– this transforms the problem that you own into a problem that the group owns, which will at least soften the blow in event that you fail, and at best lead to new ideas and more actual help. If the problem is yours alone to bear, then it’s easy for other to sit back and entertain their primal desire to blame you.

Aside: On a tactical note, I find that SMS and iMessage are a better way to communicate with stakeholders than email. Message composition is faster because it’s less formal. Response time is faster because the channel is so noise-free. How many times have you had an email sitting in your inbox forever, just waiting for your response. But you don’t respond because your thoughts are too complex, you’re too nervous, etc. The same can happen with a text message, but it does so much more rarely.

If you don’t know it, the iMessage hack is pretty useful. Oftentimes, you don’t need a phone number to send an iMessage. Just past the person’s email into iMessage. If the text turns blue, it works and you can be sure it’s tied to the person’s account. If it stays green, maybe they’re on Android or it doesn’t work. It’s an easy hack and a great way to cut through the noise. Be warned though that not everyone will appreciate your invasion into their personal space, so be prepared to cajole and apologize away your way into the recipient’s comfort zone.

/end 

People always want to be led, especially in times of uncertainty and fear.

Communication is the bedrock skill of leadership. Do it right and you’re a hero. Do it wrong and you’re in a world of hurt.

“It’s times like this when you learn to be a CEO.” I said, signing off. “Inspire confidence. They will follow.”

PS If you know of any founders that need coaching or startups that need a hustler, send them my way. I recently left Dishcraft and am figuring out what’s next. Contact me: @MattMireles  or  me@mattmireles.com

People, like businesses, want predictable revenue.

Let me set the record straight for you deluded millionaires of the world: For most people most of the time, working in the “Gig Economy” is an act of desperation that you do only because the alternative is unemployment or an even worse job.

Working a gig is exactly like being a temp. It sure as fuck beats unemployment, but unless you’re a teenager or a bored housewife, temping is not desirable.

People –like businesses– want predictable, recurring revenue. 

In business, we call this “quality of revenue.” Investors pay a premium for companies with high quality revenue. Here’s how Bill Gurley of Benchmark Capital (led Uber’s Series A) described

Investors favor pricing models that provide a high level of predictability and consistency in the future. It is easy to see why revenue visibility would have a positive impact on a Discounted Cash Flow analysis. The more certain you can be of future cash flows, the higher premium you will put on a business, and as a result, you will see a higher price/revenue multiple.

-Bill Gurley, All Revenue is Not Created Equal: The Keys to the 10X Revenue Club

Working in the Gig Economy is the worker equivalent of an transactional eCommerce company reliant on SEO. Times may be good now, but you never know what tomorrow will bring. The flick of a programmer’s switch can leave you ruined .

And while the same can & does happen to full-time employees, with employment comes a financial safety-net called unemployment compensation.

A financial safety net… yeah, who would want that?

Getting Unstuck

“The only difference between Elite Entrepreneurs and those just getting started is the amount of time we stay stuck.”
Dan Martell

Winning is all that matters. You only have to get to the top of the mountain once. How much time you spent falling down at the bottom beforehand doesn’t matter (other than the opportunity cost, I suppose.)

Q: How long did it take for Steve Jobs to get back on the horse after Apple fired him?

A: More than a few minutes. Also, who the fuck cares?!?

Being able to get yourself out of a rut is a good thing. But even the best of us end up there sometime.

Something to think about.