Part 5: Everyone is becoming a “hyphenate”

The silos between creative professionals are breaking down, just as the silos between types of media are breaking down. In established media, everyone has their own, well-defined role: Writers, editors, designers, artists, musicians, composers, singers, producers, directors, actors, etc. Each role is further defined by media, so, for example, there are writers for books, plays, movies and television. Historically, there have been “hyphenates”—people who perform multiple roles, such as the singer/songwriter or the writer/director, but they’ve been fairly rare.

Today, hyphenates are quickly becoming the rule rather than the exception, at least for Internet-based media. It’s not uncommon to find one person performing multiple roles. It saves time and money, and gives them more creative control. One person can be a composer, musician, producer and audio engineer. Another can be a screenwriter, director, producer and actor. Yet another can be an author, editor and book designer.

At the same time that creators are doing more, publishers should be doing less. The typical model for book publishers, especially those doing non-fiction, is to find writers, assign them subjects, provide editorial direction, do copy editing and fact checking, design the books' covers and layouts, do the typesetting, put together marketing plans, and sell the books to retailers and distributors. Most publishers don't start farming out work until it's time to actually print and bind books, or convert book files into retailers' eBook formats.

The job of publishers in the future is going to be facilitating, not performing, the work of creators. Publishers will become a member of the creative team instead of the driving force—part angel investor, part project manager and part marketer. The publisher’s underlying goal will continue to be to make money, because that’s how profits can be plowed back into underwriting more creation. However, they’ll do that by supporting their creators, not making creative decisions for them.

And that brings us to the end of this series. Here's a summary:

1. The role of publishers is being transformed by the Internet, mobile devices and wireless broadband.
2. Publishers are in the business of entertainment, information or education, not creating and selling print books and eBooks.
3. Being successful as a 21st Century publisher requires going “all in” on all types of media.
4. As a practical matter, there are no more financial or technical barriers to entry.
5. Everyone is performing tasks that used to be done by multiple creators, and publishers are becoming facilitators and supporters of creative teams.

Is there too much emphasis on scalable startups?

Enterpreneurs, especially technology-based ones, are encouraged to "think big" and build startups that have the potential to grow to an enormous size. Steve Blank, the father of the Customer Development process, calls these types of business "scalable startups". As he puts it, "A 'scalable startup' takes an innovative idea and searches for a scalable and repeatable business model that will turn it into a high growth, profitable company. Not just big but huge. It does that by entering a large market and taking share away from incumbents or by creating a new market and growing it rapidly."

By definition (and as Steve says in the very next paragraph), "A scalable startup typically requires external 'risk' capital to create market demand and scale." This is the very definition of the role of conventional venture capital: Invest a large amount of money in a startup, with the hope that the business will grow big enough to exit, either through an acquisition and IPO, and pay the investors a huge multiple on their original investment.

Steve calls the alternative to a scalable startup a "small business", while venture capitalists have a more derogatory name: "Lifestyle business". These businesses don't have the potential to become huge (with equally huge valuations), and are therefore bad. Or are they?

Somewhere between a "mom & pop" business like a local hardware store or restaurant and, say, Facebook, there are a lot of businesses that have the potential to grow into valuable companies that can be sold at a good multiple, but don't have the potential to be "huge". In software, there are development tools, utilities, and vertical applications that can be significant businesses. On the Internet, there are countless online services that could grow into significant businesses and be acquired by larger companies. These opportunities are right in the wheelhouse of angel investors.

Consider a startup that an angel invests $100,000 in and ends up being acquired at a 20-to-1 multiple. The angel walks away with $2 million. To a venture capital firm, that's not even worth wasting time on, but it's a good return for an angel. Compare that to a VC that puts in $1 million to get a $20 million return. The VC's financial exposure is ten times as much, and the probability of getting back $20 million is lower than that of the angel getting back $2 million.

Obviously, any angel would give their right arm to get the return that Peter Thiel got from Facebook ($500,000 invested for a $1.7 billion valuation of his share of the company as of last November, and undoubtedly, more now.) However, the odds of that kind of return are incredibly long, even for the best VCs. The new model is smaller investments in more companies at earlier stages. The larger number of investments, and their small size relative to historical VC investments, compensates for the higher risk of seed investments, as well as lower absolute rewards if and when the companies exit.

To be clear, a startup that has no hope of an exit with a 10X to 20X return to investors won't get funded by angels, let alone VCs. Those businesses have to bootstrap and/or call on "friends & family" for financing. However, there are a lot of "non-huge" startups that can still exit with a good return on investment, and dismissing them as "lifestyle businesses" means closing off a lot of good opportunities to make money.

Opprtunities for angel investors and VCs in "Flyover Country"

Earlier this week, Technori published a two-part article that I wrote for it on "Angels in Chicago". The first part explained the concept of angel investing and introduced readers to four active angel investors in Chicago, and the second part discussed the problems that angels see in funding proposals, compared angel investing to incubators, and offered some suggestions for entrepreneurs.

There's a surprising number of angel investors in Chicago. AngelList only names 16 Chicago angels, but Hyde Park Angels, the biggest angel investing group in the city, has 76 members, only a handful of which are on AngelList. There are other angel groups just getting started, like Wildcat Angels. And Groupon notwithstanding, the angels I interviewed said that the valuation inflation and competition for deals that investors are seeing in Silicon Valley and New York isn't happening in Chicago.

Terry Howerton, the head of the Illinois Technology Association, believes that the lack of VCs in Chicago is a bigger problem for startups than the number of angel investors. He said that there's only three or four VCs in the city doing Series A or later rounds, so VCs from other cities in the Midwest come to Chicago to look for deals. There's an enormous opportunity for angels and VCs outside Chicago to do deals here.

According to Bankrate.com, the cost of living in Silicon Valley is more than 30% higher than Chicago, while New York/Brooklyn is more than 50% higher, and New York/Manhattan is almost 80% higher. That means that a startup's labor costs (as well as taxes and some other operating costs) are going to be dramatically less in Chicago and other Midwestern locations. In addition, there isn't the competition for deals and valuation inflation that's occurring in Silicon Valley or New York.

Chicago has become a center of startup activity, especially for online services, as well as vertical B-to-B applications (financial, real estate, travel, etc.). There's a real opportunity here for investors, especially if you keep the companies in Chicago (rather than moving them to Silicon Valley or New York) and take advantage of the area's lower costs.

Consider the source when you ask for advice

Y Combinator held its Startup School yesterday on the campus of Stanford University, and the entire event was streamed live on Justin.tv. (The sessions have been archived for viewing here.) Some of the most interesting information came in the question and answer sessions, where many of the speakers were asked variations on two questions:

• Are you funding the type of products/services that I'm working on?
• What do I have to do in order to get funding from you?

It's natural to ask "people with money" about your ideas to see if they might be interested in investing, but it's also very easy to draw the wrong conclusions about their answers. For example, if they say that they're not funding projects in the area that you're working on, but they're very excited about another market or technology, it's natural to consider dropping your idea or modifying it to match the investor's interests. Before you do that, however, consider whether or not the investor is really in a position to judge your idea.

Most angel investors and at least some VCs started as entrepreneurs themselves; most of the angels got their initial bankroll for making investments from their startups. Many of them don't have a lot of experience beyond their own businesses and the few investments that they've made. If you ask them about a business idea that's outside their "comfort zone", they'll often give you their opinion, even if it's nothing more than a semi-educated guess.

Investors usually specialize in particular markets or technologies. It's always a good idea to know what an investor specializes in before you ask them to evaluate your business. You'll get better feedback, and you'll be better equipped to evaluate their answer.

Some investors will dismiss an idea, not because it's bad, but because they already have some investments in that area and are uninterested in making more. If they reject you, it doesn't mean that there's anything wrong with your idea, team or business plan--in fact, you might actually be potentially stronger than an investment that they've already made. (The risk in this case is that they'll tell their existing investment what you're doing.)

Finally, some investors will engage in "counterintelligence", and will deliberately mislead you because they already have a stealth investment in the area that you're working on. They may dismiss your idea or business, only to announce a few months later that they've funded a startup working on the same thing that you're doing, or something very similar.

For all these reasons, it's important to consider the source when you ask for advice, request funding or get feedback. Dig a little more deeply to understand the basis for what you've been told before you act on it.

Related articles

• Lessons from Startup School from the Founders of Facebook, Groupon, GitHub and More (readwriteweb.com)
• My 9 Favorite Startup Lessons From Startup School (gigaom.com)

AngelGate: Send in the clowns

If you haven't been following the increasingly comical affair being called AngelGate, I'll run it down for you. First, a few definitions:

• A venture capitalist (VC) is an individual or firm who invests in start-ups and small private companies with the hope of selling their stock for a large profit, either on the public market or to a larger company that acquires a company that they've invested in.
• Angel investors are individual venture capitalists who invest their own money in start-ups, usually very early in the companies' lives (typically seed or first rounds).
• Superangels are individuals or small groups of investors that invest in a larger number of start-ups than an individual angel would normally invest in, but still focus on very early rounds.
• Conventional Venture Capital firms invest in a lot of different companies at many stages of development. They have a lot more money to invest than the angels or superangels, and usually invest in later rounds.

Last Tuesday, Mike Arrington, the publisher of TechCrunch, learned about a secret meeting of superangels being held at a restaurant in San Francisco called Bin 38. He was told that he wouldn't be welcome at the meeting if he attended, but he went anyway, and in a private meeting room, he found "ten or so" of the largest superangel investors in Silicon Valley. They basically went into a silent stupor when they realized that he was in the room, and he left shortly afterward. Later, "sources", which Arrington says were three people who attended the meeting, told him that the following subjects were discussed (I'm going to quote directly from the TechCrunch article:):

• Complaints about Y Combinator’s growing power, and how to counteract competitiveness in Y Combinator deals
• Complaints about rising deal valuations and they can act as a group to reduce those valuations
• How the group can act together to keep traditional venture capitalists out of deals entirely
• How the group can act together to keep out new angel investors invading the market and driving up valuations.
• More mundane things, like agreeing as a group not to accept convertible notes in deals (an entrepreneur-friendly type of deal).
• One source has also said that there is a wiki of some sort that the group has that explicitly talks about how the group should act as one to keep deal valuations down.

Venture capitalists, whether large firms, angels or superangels, are competitors. They do work together at times on deals, but generally, they compete with each other to make investments. There are U.S. Federal laws that deal with collusion between competitors to fix prices, terms and conditions, and to keep out or limit the activities of other competitors, and they have nothing to do with monopolies or market share. The very act of competitors conspiring secretly as Arrington says they did could be interpreted as illegal.

The best thing for the participants to do would have been to say nothing and refuse to comment if asked by the press, but that's not what happened. The day after the TechCrunch article was posted, Dave McClure, a superangel, claimed that Arringon's charges were a "bullshit superangel consipracy theory", admitted that he attended the meeting, gave his take on what was discussed, and then finished his screed with this line (and this is a direct quote: "(sic)i'm here to Disrupt, motherfucker. (sic)so go right ahead & Hate On Me."

Yesterday, Ron Conway, founder of the Silicon Valley Angels and one of the earliest angel investors, wrote a long email to attendees of the Bin 38 meeting to say that:

• He didn't attend either meeting (apparently there were two meetings), although one of his partners did
• He didn't agree with the agenda or process of the meetings
• He'd really appreciate it if the other superangels not talk to him again
• His only interest is the entrepreneurs that he funds
• And by the way, Dave McClure, don't write or say anything about this email

One of the most endearing things about Dave McClure is that he's incapable of keeping his mouth shut, so almost immediately after Conway sent his email, McClure demonstrated his mastery of Twitter by sending the entire world a message that he had intended to send only to another attendee of the dinners. In it, he confirmed that there were two meetings, said that he and other attendees were being "thrown under the bus" by Conway, and confirmed the identity of another person, David Lee, Conway's partner, who attended both meetings. McClure deleted the errant tweet, but not before it had been copied and widely distributed, including to TechCrunch.

TechCrunch ran McClure's tweet, and then they received a copy of Conway's email and ran that. McClure is continuing to respond to other postings around the web that agree with his point of view, when the best thing he could do right now is visit a foreign country with no Internet connectivity.

Whose story of what happened at the meetings is right, Arrington's or McClure's? Arrington didn't name any of his sources and didn't go into any specifics about what action(s) the group agreed to undertake (if in fact it agreed to do anything.) For his part, McClure didn't mention the fact that there were two meetings, not just one, in his response to Arrington's story, which certainly detracts from the authenticity of his account. Also, his tweet in response to Conway's email didn't say that Conway's or Arrington's charges were wrong, only that he (McClure) and other attendees were being thrown under a bus by Conway.

What conclusions can we draw from this mess (so far)? In the song "If I Was a Rich Man" from "Fiddler on the Roof", Tevye sings:

The most important men in town would come to fawn on me!
They would ask me to advise them,
Like a Solomon the Wise.
"If you please, Reb Tevye..."
"Pardon me, Reb Tevye..."
Posing problems that would cross a rabbi's eyes!

And it won't make one bit of difference if I answer right or wrong.
When you're rich, they think you really know!

Now we know: Being rich doesn't make you smart or give you common sense.