A short critique of the state of startups.


Crowdsourced employment offers huge disruptive opportunities due to the inefficiencies of traditional labor market, but we’re not too sure this company is on the right track. Due to relatively low margins in this space, we see three primary growth opportunities: scale, scope and skill. Growth can primarily be attained through larger scale (more revenue), more activities that are efficiently crowdsourced, and higher skilled activities (since these have higher margins). But this company is going down the “quality” path. A lack of quality can obviously hurt growth, but we don’t see quality as a significant driver of growth for crowdsourcing of mundane or rote tasks. In fact, too much attention on quality will invariably increase costs, which is most likely the most influential competitive factor.

Instead, we think this startup should focus on higher growth opportunities. Preferrtably, we would see this startup slowly moving up the margin ladder by tackling high value activities that can effectively outsourced. Otherwise we just don’t see too many opportunities with this business model (which is probably the same conclusion that amazon came to in deciding not to allocate more resources to its Mechanical Turk).

Startup product analysis: network effects vs innovation quotient

There are many ways to analyze startups, each bringing it’s own insight and relevance. With the current trends in startups, we like to think of categorizing startups along the lines of quadrants with varying degrees network effects (think social) and technological innovation. Each quadrant tells us different things about the possible gating items for a successful startup. Moreover, it tells us which startups to avoid from a product perspective. But more importantly, it helps up pick winners and losers because we of the relative position of each startup. Ideally, startups that have both a high innovation quotient and network effect are better products compared to ones lacking in either of these areas.

Why did we choose network effects and innovation quotient? We view these two attributes as drivers for relative strength, since they are the thesis of the current tech wave. Look at the most successful tech products; each had an high innovation quotient and network effect. We see this as no coincidence. The widespread adoption of ecommerce and mobile maximizes and therefore demands that these two features exist in all successful tech consumer products. In our view, the innovation quotient is required to capture attention and margins. Without it, the product is a commodity. The network effect is required to capture free users. Without it, marketing and acquisition costs are prohibitive.

What does this mean for startups. Constantly innovate. If your innovation quotient declines, you will become a commodity. Also, create a product with high network effects. You want the value of your product to become more valuable as you acquire more users (and not just economies of scale).

The case for innovation in tech IPOs.

IPO exits have proven hugely unprofitable for public investors, particular in tech. Facebook, Zynga and Groupon are all marking post-IPO lows. Stock sold on unproven business models and overhyped user growth are primarily to blame, but in the current IPO market, few tools exist to provide public investors with tools to mitigate risks of buying during an IPO. In fact, other than the technological advances in trading, little has changed in IPOs in the last 20 years, which leaves investors with few options in structuring an IPO: investors can demand that fewer shares be sold or that the shares be sold at a lower price.

Why are investors at such a disadvantage? IPOs are captive to entrenched interests. Investment bankers want the status quo because their fees are relatively high. Institutional investors, who are the primary buyers in stock in an IPO, don’t really care because they can flip the stock shortly after the IPO. Both of these entrenched players want IPOs to be hot so they can maximize their profit.

Without tools to mitigate the overvaluation of companies, the market for IPOs cools, perhaps secularly. Even worthy companies have a harder time accessing the market or are subject to more stringent regulations.

We see opportunities for major innovation in IPOs. In the M&A market, buyers mitigate risks through various rights, including claw backs, earn outs, and other post transaction adjustments. Why can’t these same tools be also used in IPOs? Sophisticated purchasers would be in a great position to negoitate the terms of an IPO with the company and the investment banks. Empowered with the ability to claw back some of the initial offering price, public investors would be more willing to commit capital in speculative IPOs, thereby opening up the public market to more companies. We hope that the enactment of the JOBS Act will foster innovation in the IPO market that enhances value for companies and public investors.

Instacart (@Instacart) will fail

TechCrunch’s article on the endeavors of Instacart’s founder is an impressive display of tenacity and verve. But we’re not buying the 1-hour grocery delivery business model. Instacart proposes to create the delivery infrastructure to provide on demand delivery (e.g., drivers paid by the hour, etc.), which must be significant to meet fluctuating demand for groceries, no matter if 100 or 100,000 people are ordering. This is a fixed cost, and unless the company figures out how to convert it to variable cost, the company will bleed cash. While the company appears to be minimizing these fixed costs by narrowing the items available for delivery, we don’t think they are tailoring their product enough to create a profitable business model. We would prefer if Instacart avoided the creating delivery infrastructure, instead focusing on ways to exploit existing delivery infrastructure.

Expect VC funding to get harder after the economy improves.

VC funding has been relatively in recent quarters. On first blush, entrepreneurs may see this as smart money funding great opportunities, especially with so many disruptive opportunities in the tech, clean tech and healthcare spaces. But we view this as overly simplistic. VC commitments come from institutional investors, such as pension funds and insurance companies. But institutional investors have other places to put their money, such as equities, bonds, private equity and real estate. With interests rates low, institutional investors have been starved for yield, and remain over-allocated in venture capital and other alternative assets from 2008. Once interest rates do increase as they will when the economy rebounds, though, our view is that institutional investors will become even more particular in the funds in which they invest, resulting in the further concentration of commitments in a few leading VC funds that have a history of successful exists.

Anonymous said: Hiya, I just wanted to say thanks for the mention, on behalf of couplewise-dot-com. We really appreciate it. We'll retweet it tomorrow. Also, we thought it worth mentioning the use of "minority" where we think "majority" was intended. It's very possibly our misunderstanding. Apologies for any offense. Thank you again. We wish you and your team all the best and look forward to future opportunities to cross-promote. - Jacob W., Mktg, couplewise-dot-com.

Keep up the good work and I hope your product works.


Hopper (@hoppertravel) takes travel&tech to the next level by focusing on travel planning. Apparently this company has been been in the works since 2007, collecting and analyzing data to provide travel planning recommendations. If they can deliver, which is a big if, we see this company as having huge appeal to people that like to vacation, but hate planning. Moreover, by moving up the traveling planning decision tree, we see this company as having huge revenue potential (think a travel magazine on steroids), and the opportunity to compete head on with travel deal websites. So hurry up and launch already.


We’re excited about Couplewise’s (@Couplewise) foray into the high margin area of couple’s therapy. Since the vast minority of marriages end in divorce or are otherwise dysfunctional, we think there’s huge room for growth in this area which is dominated by overpriced alternatives. With a more aggressive pricing plan, a proven and defensible product and a few referrals by celebrities, we think this company could be on a winning path.

Three reasons why @Square will go the way of Groupon

Update on @Square, reiterate bearish outlook.As an update to our previous post, we want to report that after a brief survey of small businesses we’re still unsure if they are aware that income transacted over Square’s network should be reported as taxable income to the IRS and state. This reinforces our view that small businesses continue to operate under a cash payment model, and that there will be merchant retraction once they realize this model is unworkable with Square.

1) Competition - The mobile payments space is intensely competitive, highly fragmented industry. We see entrenched players using their capital to underprice competitors, driving down margins to capture market share.

2) Not sticky - Square isn’t sticky. Merchants and consumers can easily switch to another payment system.

3) Not as big as you think, yet - Mobile payments are a huge opportunity, but until they can challenge the established players (visa, etc.), we just don’t see it being revolutionary. On the one hand, merchants with huge amounts of volume will not use Square as the primary credit card processing mechaism because they get discounts from credit card processors. On the other hand, many small businesses will be reluctant to use Square because of its fees and because they will have to declare these revenues to the IRS (which is less likely in a cash transaction).

Evolution of commerce

We really liked techcrunch’s article on tech & transportation, but we thought it was too descriptive rather than normative - it didn’t inform us of where tech is driving transportation specifically and commerce generally. We view tech as fundamentally reorganizing commerce by removing entrenched suppliers and empowering individual consumers and suppliers.

Tech does this by dramatically lowering transaction costs and removing barriers to commerce or any other activity. Without tech, renting a car would be extremely cumbersome, as suppliers and consumers would have to find each other, negotiate and coordinate. And without a huge amount of volume, a business could not make money. But with tech, the cost of finding, negotiating and coordinating is greatly reduced - ideally a person must only have to visit a website that offers a service, the rest being extremely easy. Moreover, the widespread use of the web and mobile means that businesses can achieve scale, making it profitable since the marginal income exceeds the marginal cost.

That’s great, so where does it take us? Our view is that the most successful businesses will minimize the transaction costs and barriers to commerce, while at the same time maximizing scale through a successful product. Through this lens, we can see that startups should question the status quo as much as possible, with the goal of finding and eliminating the costs and barriers between suppliers and consumers.


We share the vision of stamped, but we’re not happy with Stamped’s design: it is inherently unsocial. Stamped tries to deliver in an area of huge opportunity - product discovery - where others are trying and arguably failing. What we like about Stamped is the potential to go beyond merely recommendations from friends, to celebrities and others with domain expertise. Where Stamped fails though is in creating an inherently unsocial product. This app blindly tells you what people have stamped, without regard to any of your personal peculiarities or other social features (your interests, location, etc.). Moreover, we were disappointed to observe the one dimensional experience of the app, which lacks many of the social features we’ve become accustomed to. Without creating a product that is inherently social, we feel that user attrition of this app will be high, with almost nothing pulling it’s users back to the app. We hope Stamped will go back to the drawing board to rethink its product design to become more engaging and social.


We like Verbalizeit. Language barriers present huge opportunities for mobile tech in an increasingly international world. But See Verbalizeit as falling short in two areas. First, although Verbalizeit is competively priced, we don’t know if per minute billing is the right pricing model. Instead, we see more opportunity in the task-based pricing model, where customers purchase translation services rather than time (thereby communicating value and profiting from efficiency). Second, and along the same line, we feel as though more can learned by trying to address the problems of a defined customer. While this company’s product is aimed at translation for consumers and small businesses, we see a better approach as defining a narrower target customer, even narrower than a small business. So long as the target market is large enough, with this approach we could get comfortable with the viability and competitiveness of Verablizeit’s business model.


Mobile parking solutions are a great idea, but we’re not convinced of Quickpay’s product competitiveness, which seems focused on providing traditional yet tech enabled services to parking garages. The result is a low value business model dependent on delivering non-disrputive products.

Tech brings huge opportunities to parking with the possibility of new revenue sources. For example, we see opportunities in increased utilization, efficient pricing of parking spots, supply chain managment and product distribution (think hourly delivery), and advertising. But to bring these new revenue sources to market requires vision and experience that this rather stodgy management team lacks (update: except the new CEO).

Be bold is our advice. After leveraging a more innovative team, we would like this company to go back to product drawing board and determine how it can be more disruptive in the parking industry.

Omni Water Solutions

While we see huge potential in the fracking space, we’re not convinced of this company’s ability to position itself to meet future demand, estimated at $9 billion, from the treatment of fracking waste water. With the emergence of fracking, many firms including this one are rushing to become a leader in the treatment of the massive quantities of water used in the process of extracting the gas and oil. But this company’s technology is based on drinking water purification, and pivoting to waste water treatment creates a two fold problem. First, we’re not convinced that this company has the scalable, affordable and cutting edge technology required to treat the many different variants of fracking waste water. Second, we don’t believe this company’s team has the sales connections or experience to sell within the fracking space, which is dominated by big players. To become a leader in this space, this company needs to quickly prove itself with large scale demonstration projects that are partnered with established players.


While we think Stipple is a cool, defensible product, we’re suspect of this company’s ability to succeed. Foremost, we’re not confident in its distribution strategy, which frankly is a bit confusing. By developing its own browser plugin, recruiting Justin Timberlake, providing free accounts to Etsy users, and developing its own Stipple Community, we see this company incoherently struggling to create push and pull for its product. We agree with’s apposite remarks.

Stipple is an attempt to solve this, but for it to matter, users must see enough value in it to download software, a tall hurdle that has killed plenty of good ideas in the past. Mr. Rey was vague on how Stipple plans to overcome that, though he said partnerships with retailers such as Etsy would be core to the strategy.

Central to this company’s distribution strategy must be a deep focus on the needs of its chosen customer (advertisers, content providers, etc.), especially considering the fact this product is arguably trying to create a new market. But we’re just not convinced that this company has such a focus, so we expect more product iterations and loss of market share to more focused competitors.