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Demystifying the conversations we're already here at RRE and with our portfolio companies. In each episode, your hosts, Will Porteous, Raju Rishi, and Jason Black will dive deeply into topics that are shaping the future, from satellite technology to digital health, to venture investing, and much more.
Jason: I don’t recommend crossing a stream on skis.
Raju: [laugh].
Jason: You got to be really—you got to hit it as fast as you possibly can to get to the other side.
Will: We don’t [pack 00:00:09] those guys who go into the river with skis on.
Jason: Right. Yeah, exactly.
Raju: Yeah. A little known fact, by the way, for our listeners is, Jason was a world-class Junior Olympic skier in his day—
Jason: Indeed I was.
Raju: And any lesson that he gives you from a skiing standpoint is worth listening to.
Jason: Yeah, I don’t recommend the river crossing.
Raju: [laugh].
Will: Welcome to RRE POV—
Raju: —a show in which we record the conversations we’re already having amongst ourselves—
Jason: —our entrepreneurs, and industry leaders for you to listen in on.
Will: Welcome back to RRE POV. Our topic this afternoon is an oft-heard phrase around the RRE offices: “More startups die from indigestion than starvation.” Now, what does that mean? We all know that the journey of building a company is hard, and that many companies are starved for capital for a long period of time, so to get deeper into that topic, we’re going to be exploring it with Raju who coined the phrase some years ago. Raju, what does it mean to say that more startups die from indigestion than starvation?
Raju: It’s too funny, I say this to every entrepreneur, basically, first board meeting [laugh] and sometimes even before the first board meeting, and it’s really two expressions that I use concurrently, Will and Jason. You know, more startups will die from ingestion than starvation, and great startups are created through great sequencing. And what I mean by indigestion is really biting off too much and trying to do too many things concurrently without, kind of, figuring out what your core is, what’s working, what is your ICP—your Ideal Customer Profile—and then kind of expanding from there. Indigestion is really trying to create multiple products or go after multiple markets concurrently, and you know, kind of doing all of them at a mediocre level, or really kind of stressing the organization by trying to do too many things concurrently. Especially young companies really need to focus at first.
And then the corollary, which is, you know, great companies are created through great sequencing is, much like when you’re skiing, and you’re going down a hill, you’re doing moguls, you kind of have to see your path. And you know, if you hit the mogul incorrectly, you’re probably going to wipe out, or if you’re trying to cross a stream, and you see a bunch of rocks, you know, kind of seeing the pathway from rock to rock to rock, and not going down the wrong pathway, and getting stranded on a rock and having to backtrack.
Jason: I don’t recommend crossing a stream on skis.
Raju: [laugh].
Jason: You got to be really—you got to hit it as fast as you possibly can to get to the other side.
Will: We don’t [pack 00:03:11] those guys who go into the river with skis on.
Jason: Right. Yeah, exactly.
Raju: Yeah. A little known fact, by the way, for our listeners is, Jason was a world-class Junior Olympic skier in his day—
Jason: Indeed I was.
Raju: And any lesson that he gives you from a skiing standpoint is worth listening to.
Jason: Yeah, I don’t recommend the river crossing.
Raju: [laugh]. So anyway, that’s kind of what I’m talking about. And I can jump into a few things in terms of signs of indigestion if you want, or we can take this any way you guys want.
Jason: Yeah, let’s do that. Signs of indigestion. I think, like… the way that I kind of see it is this incredible amount of ambition that’s coming from an excitement around a space, a deep understanding of that space, and then looking to the existing solutions that are already in the market, and saying, “I need each one of those things,” or, “I’m going to do each one of those things better.” Or, you know, maybe that’s instantiation number one. Instantiation number two, is, “Oh, we haven’t gotten the [poll 00:04:11] we’re looking for, and it’s going to be this next feature that’s going to be the thing that brings us—that really gets us over the line.”
And there’s probably a few of these, like, motions that are—they have good intentions, but they kind of lead you down this false promise or false dawn, kind of, path, and create all of this, like, cost structure and support, particularly when you’ve already made promises to customers for what you’re going to do that can be really damaging to the company. So yeah, I would love to hear, like, you know, the different types of profiles and symptoms that you typically see, Raju, as these companies are building, particularly at the early stage because we’re an early stage venture firm.
Raju: You kind of nailed the theme. You know, I see five signs, and you know, they’re kind of different, but the same in many ways. But one sign is, you know, companies raise too much capital; they wind up hiring too fast. And so, what you have is, like, you got the most ambitious startups that have a huge target market, which in reality is a combination of smaller target markets or ICPs, or ideal customer profiles for those who don’t know what that means. So, rather than aligning the entire company around a single ICP initially, and then expanding from there, you wind up raising a lot of capital, you hire a bunch of people, and you go after multiple ICPs concurrently.
And the impact is typically disastrous, you know, sales is moving in different directions at the same time, marketing is moving in different directions at the same time, and most importantly, product is moving in different directions at the same time. And so, what you wind up doing is having a collection of three different ICPs that are trying to push the company concurrently. And it’s wacky. It winds up—well, you got a thought about that, Jason?
Jason: Yeah, I just hope we can jump in on each one. I know, you got the five—
Raju: A hundred percent.
Jason: —set up. I think, like, just from my experience, just jumping on this kind of specific one, the pushback you hear from the entrepreneur is that, “Well, we’re a platform. We’re a platform. We don’t have to change the technology at all. We just need—it’s, here’s the ICP over here in this industry, and this completely other industry, completely other person, but we can sell to both of them.” Like, what’s the response? Like, [laugh] how do you react to that? Because I think that’s a natural push back that I continuously hear.
Raju: It’s a really, really powerful point that you’re making. And the way to tell if you’ve got the platform versus a different ICP is how much product change are you making? How much do your sales collateral need to be entirely different? Do you need to hire different salespeople that have industry expertise? Do you need to, you know, have three different—five different landing pages, and marketing to different constituents? Are you affecting—is there, like, five or ten features for each ICP that you’re trying to change? And I don’t disagree that you should get all of them because you know, maybe 80% of the tech stack is the same, but if you try to do it right off the bat, you’re going to drive the organization nuts, and everybody’s going to be competing for resources of which you’ll be limited. And what winds up happening is, you build a feature for this ICP and a different feature, but it’s generally not enough, you know? You probably need three or four features. So, rather than going that route, it might be more worthwhile to say, “Hey, let us, kind of, tackle a big enough one, a core one, create repeatability, and then just do concentric circles around that.” Raising too much money too fast can be a [laugh] problem because you feel like you need to spend it and justify why you raised it.
Jason: Exactly. And I think the key part in there, certainly if you’re building product, but I think the underappreciated aspect of the thing that you just said is the sales and marketing, all that extra collateral. They think it’s the same motion; it’s rarely the same motion, selling to Keurig versus MGM Casinos, versus you know, Tableau, right? And it’s like, well, our product is the same: it’s a data platform. But all the sales collateral, you have to hire different salespeople, they need to know all the industry lingo, and all that industry knowledge, and it isn’t actually one repeatable sales [motion 00:08:37].
In the early days, you’re just trying to get, I call it a pocket of yeses. And you want to find a pocket of yeses that are really close to each other, so that you can go out and, as you said, expand that concentric circle. Because you can go after the thing, but just do it later, right? You really want to get good at one just to prove it out. So, I think you made a fantastic point, I just wanted to emphasize that particular part because the people who don’t have to change their product, there’s still a cost to it, supporting multiple industries.
Raju: The third expression I always use with startups is, “There’s an opportunity cost for everything.” [laugh].
Jason: Absolutely.
Raju: Everything has an opportunity cost. You feel like it’s free. It’s not free. No free lunches.
Jason: No. So, that’s a great number one. Number two?
Raju: The second one I have is, like, not giving enough soak time.
Jason: I definitely need enough soak time.
Raju: You know, abandoning a sector too quickly because of a few poor sales meetings, or you had one good sales meeting in a different sector. You’re better off finding the right design partners who have a varied perspective on the market, and kind of really putting that one to bed because I’ve seen these companies, they go from one vertical to another, back to the first vertical, and generally speaking, it’s they’re just not getting enough soak time, and kind of, they haven’t talked the right types of customers before they’ve, kind of, moved on to the next sector.
Jason: So, you’re saying that, like, they’re not patient enough.
Raju: Right.
Jason: They’re not patient enough, and so there’s this, like, idea that, “Okay, we’re on the treadmill. We got to keep going. We got to be landing every week, every month, every quarter, et cetera.” But sometimes things just take a little bit to get over the goal line.
Raju: Yes, but there’s a little bit of different nuances to it, what winds up—you know [sigh], inevitably a startup is kind of like trying to figure it out, and so they’ll have this thought, you know, where they come from an industry, and they’re like, you know, this industry will work, and then they are getting close, but not really getting contracts. And then they—an investor, or somebody they know introduces them to a different class of customers, and they have a great first meeting. And all of a sudden, that becomes the real point of, like, opportunity, they kind of have happy [ears 00:10:52], and they just jump onto another vertical very quickly, only to find that one also has its own nuances, and what they probably should have done is, kind of, soaked some time into the first vertical, or the first ICP, found design partners—not even paid—and learn enough. And obviously, you got to move with velocity as a startup, but at the same time, you just don’t want to, like, hop around and have a Brownian motion effect in how you build a business.
Jason: Yeah, that makes sense. Number three, let’s hit it.
Raju: Number three, chasing the competition. Can’t lose the feature battle, right [laugh]? And so, what you wind up doing is saying, “Hey, we got a competitor over here. This is a giant market, we don’t want to lose. We need every single feature.” Typically, what that means is you don’t have the right design partners. Because you need a roadmap, you need to create a sequence for your business. Just because the competition is building feature x doesn’t mean it’s actually the feature that moves the needle, nor is it the feature that the early customers are going to want, or is it the feature that your narrower ICP needs. You really got to figure out, like, roadmaps, roadmaps, roadmaps, push back, create, give yourself some leverage by, you know, saying I don’t need all these features right away. What are the core features that I do need that I need to do really well?
Will: So Raju, that sounds good, but in a rising market where you’re seeing competitors raise big rounds or announce big deals, like, how do you see great entrepreneurs keep their focus, keep their—almost keep their blinders on, so to speak, to just focus narrowly on that side of things?
Raju: You know, it really comes back to the first point, which is, what is your narrow ICP? I believe big markets are made up of small markets, and if you kind of focus on your initial customer profile, and then kind of say, “What is my second one that’s very adjacent to it, or the third one that’s very adjacent to it,” the feature set that’s required really comes out of that. You want to service your customers, you don’t want to get into a feature war with your competitors. And if you focus on serving the needs of your key customers, the feature set will fall out from that rather than, you know, “Hey, my competitor, just built this API or integrated with this company.” People think it’s like this—you know, like, the war is going to be won in a year. It never is won in a year. It’s won in ten.
Jason: Yeah. I also think, like, every company, is its own thesis about the future. Like, here’s what I believe about the future, and this is the company that fits well into it. And it’s fine if another company has a different thesis. Like, don’t go chase their thesis. It’s your the—what do you believe, right?
And I think also, you know, you don’t know whether they’re also just chasing the ball. Like, back to the prior point about soak time, it’s like, maybe they’re just running around with their head cut off and trying to, like, just gather up all of the features. And that’s going to be a tough journey for them to be on. Like, I guess the flip side is that they might have put the soak time in—like, I think the fear is that they put the soak time in, they built the feature based on, like, an amazing pocket of yeses, and you want to go get those pocket of yeses, but you’re just, like, behind… you’re, you know, behind the eight-ball, you’re a little bit late to the party. And there is a bit of FOMO there, but, like, sticking to your own guns and your own thesis will serve you well.
I think kind of implicit in some of this is that you have to make trade-offs, and you still have to make bets. Like, you’re making a bet. You can’t make every bet all at once. You need to, like, pick a direction and risk a bit going in that direction. And it will either pay off or it won’t, but you certainly need to listen to the market and spend a lot of time thinking through where you’re going strategically, but rarely do you find, like, the best place to go by looking left and right to the people who are fundraising. It’s mostly a distraction.
Also, how much they raised, also. It’s like, that’s good for them. Great. That’s not our company, we don’t have access to that. Like, we need to continue down our path. We’re not going to raise a ton of money by being the slow follower of another startup. So anyways, I think it’s a great point.
Raju: It’s really good. I’ll move on to point four, which is, chasing revenue. This a definitely an indigestion issue. You promised features, services, to get revenue in the door. Typically, happens right prior to the next fundraise [laugh], you’re trying to hit an inflection point, you know, like, I got to get this revenue in the door, and so you basically just tell people this is—you know, you’ll do anything for a dollar, and you’re kind of stuck with the consequences, right?
There’s an opportunity cost for everything. Now, you have a bunch of features that you have to build, there’s a lot of functionality you have to build. This one is the trickiest one of them all because, you know, look, you got to create a revenue ramp before you fundraise your next round. I think this is just managing expectations around the customers that you have. The ideal revenue-chasing models are the customers that are willing to accept what you have on the shelf today, but they’re willing to wait for the features that are going to come down the road, not ones that are saying, “I’ll buy, but you got to build these three things.” Then those are the customers that churn [laugh] you know? You never quite build the features.
Jason: Build those three things that aren’t on your roadmap, crucially.
Raju: Yeah, custom stuff.
Jason: Yeah.
Will: So, that’s a great litmus test. Willing to buy today in advance of the things that they want that you’re going to have. They like what you have today enough. And it’s an enormous point of validation, to your earlier description, just about, if you’ve got the sequencing, right, when you have those moments with customers, you’ll know it because they’re buying what you have today, and also in anticipation of what you’re going to build tomorrow. And it’s not just for them.
Raju: Exactly. I’ll just move to the last point, which is kind of… not… as seen in the market, but that’s really, like, making acquisitions too early to expand markets or product gaps.
Jason: Oh, my gosh. Yeah.
Raju: We’ll have another podcast on sequencing of startups, like, the four or five stages of startups, which I know all of us—all three of us—have very good experience with, like, super early to, like, Series A, B, C—and you know, forget the series, but like, where they are. It’s okay to make acquisitions down the road. That’s kind of an orthogonal growth pathway. But some companies, they’re like, “We’re going to make this acquisition because it’s going to get me into this market, or it’s going to get any global, or it’s going to fill this product gap.” And man, is it hard to assimilate a company, and really, really hard to take somebody else’s product and fit it into your architecture. And all of us have experience on this. I want you guys to chime in.
Jason: Just look at the number of Fortune 500 failed acquisitions. I mean, like [laugh], even people with, you know, the entire J.P. Morgan team running all the numbers and doing all—and then being acquired into a Fortune 500 company that has, you know, HR, and they have a whole team dedicated to assimilating this new technology, and all this stuff, half of those even fail. And so, I think it’s, it makes sense, but your business has to be suuuuper stable. Like, super stable. Like, you need to know—you need to be, you know, in that stage four—you know, in terms of, like, startup stage—where your core business is humming. Like, you just need to, like, feed, like, fuel into that fire, and that’s, like, all you need to do. It’s a coin operation for you to be able to even start thinking about acquiring.
And I, when I’m talking through with my portfolio companies, it’s like, “Okay, great. So, you like the CEO and you guys get along. Do you—like, have you met everybody in that company?” Because they have a different culture. That’s a different team. Those are different people, like, they might not be that happy in [laugh] under your culture, and your team, and all this type of stuff.
I mean, it gets down to the individual people, and also down to the individual customers. Like, they bought from somebody else, and now you’ve got to take on all of their contracts and obligations. Are you ready to support that? And frequently, it’s so tempting, right? It’s so tempting. We’re just going to combine these two things; we’re going to be even better on paper at work, like, makes total sense, but boy, is it challenging. So yeah, not—for early stage, it’s tough.
Will: Well, I think even for more mature stages. I mean, once you get past the financials, I think M&A is basically products, people, and customers. And in technology markets, you know, there’s always going to be product platform consolidation. So, you’re either taking some of what you bought, and merging it with what you have, combining two codebases, or you’re just moving the customers over onto your platform. And then there’s the people question, you know, I think in most cases, you strip away the executive leadership, maybe there’s some talent there, maybe there’s some talent on the sales leadership side, but really you’re focused on is this development organization additive to where I’m trying to go and help my emerging company grow even faster? So, I think it’s part of the reason M&A is so challenging, even when you’re talking about fully working businesses where there is profit, and cash flow, and already significant market position.
Jason: Yeah. And I think, like, they’re like, “Oh, yeah, we’re going to spend x million dollars to go build this thing”—or sorry, “To go acquire this company.” And it’s like, wait, but if we just cordoned that off, hired a bunch of engineers, we’re saying we think it aligns so much of our business that, like, we need to acquire an external business. It’s like, why don’t we just build it? Like, people don’t think—it’s like ten million bucks to go acquire this thing.
It’s like ten million bucks in engineers, that goes a pretty long way, and then we own and operate it. We don’t have to do any technical re-architecting, we don’t need to re-platform, we don’t need to do all this extra lift that is underappreciated, but is a huge amount of work, and is—back to your point earlier, Raju—an opportunity cost, right? It’s like, time spent integrating to companies is time not spent building your own product, being out in the market. Like, it’s a distraction factor that I think people underappreciate.
Raju: Yeah, a hundred percent.
Will: So, I want to kind of pull the discussion back to the bigger picture topic of how you avoid indigestion [laugh], and how you, as a board member, help a company that you’re committed to make great choices on this. Because I think the theory is very clear for the first part of this conversation, but the implementation comes down to hard conversations, and frankly, being willing to put the brakes on, in the context of good company leadership. And if management’s not inclined to do that, I think the question then becomes what do we as board members have to say in these moments in pushing people on the confidence that they have in product-market fit, in the objective signs that they have that they really have got the sequencing right such that now they can start to spend a little more to lean forward a little more in terms of the pace at which they reach for revenue and those sorts of things. You guys have thoughts on that?
Raju: I think the biggest weapon that a board member has in this arena is two pieces of work: it’s a budget, and the roadmap. And one of the, I guess, goals of the board is to approve a yearly budget, and kind of figure out—and then measure the, you know, the company’s performance along that budget. And that budget involves not just spend, areas of focus, and customers, and revenue, all sorts of notions. And then there’s a roadmap, which says, you know, what are we going to do over three years and four years? And so, I think the counseling that I perform is, like, hey, we have all of these markets we want to cover and, you know, and everybody wants to go, like, nuts and kind of tackle, like, in health care, you want to do, you know, sort of healthcare providers, you want to do payers, you want to do clinicians, you wanted [laugh] do, you know, small to medium companies that are working in healthcare, and there’s all this notion of where to play.
Let’s just sequence it, right? Let’s just create a roadmap, and let’s focus on what our plan is for this year. And you can not authorize budget in certain ways, right? That is the negotiation that happens. And sometimes it happens more than once a year. In fact, in most of my companies, happens more than once a year because it’s not going exactly on plan.
So that’s, sort of, two tools. And then the third tool is, it’s okay to have a little bit of skunkworks in the company, just to explore, you know, putting one or two other founders on a particular vertical to see. The trick is, to not get distracted, and have that be the center of attention, and the core to be the center of attention. So, I’m sure you guys have other ideas as well.
Jason: Yeah. I think I would just say, you know, we just went through, like, five ways to diagnose it. I also think, like, there is another side to each one of those, and it’s not, like, super clear-cut. Like, you can’t disregard competition entirely. You can’t say we’re only going to build the features we want to build, and not our customers. You know, you can’t infinitely spend time soaking. Maybe you just got it wrong and you do need to pivot.
And so, I think that’s where the nuance kind of comes down into the discussion, like, bringing the experience that we have across all of the various board meetings in the decades we’ve spent doing this to the table so that, hey, you know, have we let it soak long enough? Like, are we missing a key feature that our competitor just built that, you know, hey, they had a great idea. We think that’s going to be table stakes in two years, and so we got to build it now.
And I think, you know, it is much more of a discussion. It’s not like a checklist of, oh, do I have these five things? I think the reason why it’s so common is because of the temptation and the nuance, the nuance where, you know, there is no hard line and each market and each company is a bit different in what you need to bite off. You might need to bite off a lot more in healthcare because they’re just higher expectations and higher requirements, versus, you know, an SMB company that just needs some, like, payroll software, and you know, they don’t even know the term API, you know? They might have lower requirements for what they need. They just need the money to get paid out. So—
Raju: I do agree with that.
Jason: Yeah.
Raju: It is nuanced, and you know what, there’s no black and white here, right, and it’s not a trivial process. Which is why it’s super important to have good board members that are willing to work with you, as opposed to just checking in on a quarterly basis and seeing how the plan is working, right? Sometimes you do hit a mining—you’re mining a vein, and you’re like, “Man, this vein is really big, and we need to double down on it,” or, “This vein is running dry, and so we shouldn’t mine it at all.” And so, that is sort of just being a diligent board member and working with your companies, you know?
Jason: Yeah. Do you have some examples, Raju—
Raju: I do.
Jason: —of companies that—[laugh]
Raju: I do.
Jason: —we can kind of walk through?
Raju: I have four or five examples. I’ll be quick about it—
Jason: Okay, great.
Raju: Because one of them, I think we all disagree about [laugh], so I won’t mention it. But there was a company in our portfolio, which was Airware. We put a tiny amount of money in it, and it was actually before my time. We raised 118 million bucks, right? Started as an autopilot for drones, then as a way to collect data for construction, mining, and insurance companies, then built its own commercial drone with bespoke hardware, and then it purchased a drone analytics startup, and then it started a drone fund [laugh], which was, you know, investing in other startups. I mean, if that’s not indigestion, I don’t know what it is.
And, you know, it turned out, it was tough. And, you know, maybe if they had spent less money, kind of been more focused, kind of elongated—because you know, the problem with it is that the drone market just took longer to develop, and so a lot of this was just kind of pushing in multiple directions. But you can see how you can burn 118 million bucks and not have a lot of progress in this case. So, you got to figure out, like, maybe the right strategy was to hunker down a bit and wait for the market to, you know, kind of recover.
Will: Well, I think too, Raju, you’re making a good implicit point there, which is, as you think about sequencing, you’ve got to be clear eyed about dependencies and ecosystem dependencies. And Airware was trying to build a drone operating system at a time when the drone market was, frankly, still really in its infancy. An Airware today focused on the same problems, actually would maybe—maybe—have more applicability. But the principle remains the same for this conversation of, they still wouldn’t [laugh] have done well if they’d ended up forming a venture fund, and done so many other things. So, the focus point carries on, I think, no matter what.
But it’s that failure to see ecosystem dependencies, and to be realistic about the timing and the pace at which a market is going to absorb innovation, that I think also often leads people to overinvest in trying to make the market happen in a way that ends up being a use of capital that looks like indigestion.
Raju: I have another one I’ll throw out there which, you know, everyone knows: WeWork. 22 billion, they created a lot of units, a lot of different cities, some of which weren’t really even startup-friendly, you know, expanded into China and into India—I think it was called WeWork Galaxy in India—and then had a bunch of product extensions, which was WeLive, a co-livings [laugh] pod, a luxury health club, WeGrow, which was a kindergarten program. And you can say, “Look, you got $22 billion. Like, you can do all this stuff.” But the reality is, you know, when you have the founding team and the core founder, kind of, looking to expand into orthogonal directions, and to get into the consumer marketplace and create—it was super ambitious, I’m not even discounting that—sometimes you have to just sit there and say, like, “Yeah, we’re just too wide. We got too many thi—we’re eating from too many different plates, and we got to go back to our core plate because there’s a problem there.” And try to keep all those plates spinning? You’re going to burn through a lot of cash. So anyway, what are your guys’ thoughts on that one?
Jason: I mean, I think it was just kind of an expansion into areas before the core was in a solid spot, right? And areas—both physically and in terms of services—you could have probably scaled that company much slower and built a dramatically better business out of it. Obviously, there are commercial real estate businesses, and they make money. It’s tough market right now, but it is a huge space, and that’s why they were able to raise so much cash. But they were trying to, like—I almost think it’s more of a sequencing thing than maybe an [indigestion 00:31:07] thing.
I know, those are kind of like they are the, you know, different sides of the same coin. But yeah, they obviously, like, you know, had their hands in so many different pies. And that must have been a tremendously difficult business to even get on top of. We have to remember the early Uber days. Like, this is kind of like the two of the, you know, premiere companies, and watching kind of a similar thing, and just kind of forgetting what lane you’re in, you know, where Uber, you know, raised a ton of money and—have they turned a profit, yet?
They’re like close to profitability, but it’s like 15 years in or something like that. And they were, like, public about the fact that they were going to be unprofitable for a very, very, very long time, and that their profitability might actually be entirely reliant on Level 5 autonomy. That’s why they had that autonomous vehicle system. And I think there was a certain amount of, like, looking at Uber and saying, oh, this group was able to do it; it’s all about scaling as fast as possible into greenfield, and it doesn’t matter what my unit economics are now. I’ll figure it out, I just need to spread this as far and wide as possible, with as many services as possible, and at scale, I’m going to fix all these problems.
And the problem is—and Raju, you’ve said [this 00:32:26] before—like, scaling Band-Aids is so tough. Like, never scale a Band-Aid because before you know it, there’s a thousand Band-Aids, and they all need your time and attention. And, you know, if I look at WeWork, that’s kind of the way I would articulate the temptation that they had, and the businesses they built, and particularly, you know, have to remember the time in which they built it, and who their peers were.
Will: You know, Jason, I think there’s a really crucial idea in what you were just describing of a failure to appreciate standalone unit economics. And I see that happen in every cycle when the cost of capital goes down. That abundance of capital flowing in almost kind of tends to obscure the ability to have a conversation about unit-level profitability. And now that we’re in an environment where capital is really scarce, the proverbial tide has gone out, so to speak. People are confronted with the absolute unit economics, and whether they can acquire customers profitably with the capital that they have or that which their business generates.
And I think as we look across the portfolio, and we see a lot of companies that are growing profitably and generating cash, you see that focus and discipline and just how lean the actual sequencing can be to make the unit economics work on very narrow—but successful—product lines. So, to me, it feels like there’s that moment in a lot of these stories where the companies sort of expand out into other adjacent markets, or different divisions, or what seemed to be complementary line of businesses that is always a telltale warning sign.
Raju: Yeah. Interestingly enough, I just read, like, insiders say—I don’t think this is just true for startups—insiders say that Apple killed the Apple car because instead of just planting a flag in the ground with a good enough car, kind of with an Apple user interface, a slick Johnny Ive-designed interior and exterior, and an iPhone-like UI, the company bet everything on autonomy and a complete Apple experience. And, you know, if you think about their history, you know, the iPhone wasn’t built, like, in day one. You know, you started—where we are with the iPhone, what 14 or 15, you know, we got through a lot of iterations to get to there. And so, they were trying to build that car with just too many, you know, bells and whistles right out of the gate. So—
Jason: Yeah. I think, good for them for cutting it though.
Raju: Exactly. Exactly. That’s a smart business.
Jason: That’s smart. Jeff Bezos, Amazon had a smartphone—
Raju: Yeah.
Jason: Was in the market for I think maybe less than a year.
Raju: The Fire Phone.
Jason: Just cut it. [I mean 00:35:08] lost $200 million or somewhere around there. The Fire Phone. It was—you know, I think great executives know one to launch new product and when to cut bait.
Raju: Should we move to Gatling gun? I have questions for you guys.
Jason: Let’s do it.
Raju: Yeah. All right, so I’m going to lay it out there. And these Gatling gun questions are always going to be pertinent to the podcast that we’re doing, so this one’s focused on indigestion and starvation.
Jason: Oh, jeez.
Raju: So, I’m going to be, like, food…
Jason: Oh boy.
Raju: Food, there’s a food theme here. And/or a startup sequencing theme there. So—
Jason: Those ones I’m probably going to be more comfortable with.
Raju: So, I’ll ask you guys—throw it out there—what is the best sequenced product that you guys know of?
Jason: Ohhh. Will, you got one?
Will: [laugh]. The first thing that comes to mind is actually a blender because you start on mix, and it’s kind of slow, and you know, they just got faster and faster over time as they realized that people wanted it to be faster. You go all the way up to liquefy. I mean, Liquify was a real breakthrough innovation, when companies like Oster came out with it.
Raju: All right.
Will: So, you know, the blender.
Jason: Damn, that’s good.
Raju: You got one, Jason?
Jason: Oh—
Raju: I’ll give you mine in a second.
Jason: I feel like if I had more time, I could come up with a really good one.
Raju: Okay.
Jason: Go ahead.
Raju: I’ll throw one out there, I think we had the iPod that was started, and that basically helped the digital music era move on, and layered upon that was iTunes where they kind of changed the distribution of music, which—and layered upon that was the iPhone where they coupled a bunch of things together like a music player, a watch, a phone. And then, you know, we ultimately have the Apple Store where Apple is making a ton of money. But all of this was really sequential. And I don’t think, you know, if you move to the Apple App Store, or you had the iPhone before you had the iPod and iTunes, I don’t think it would have worked. So, I think it was a very, very successful sequenced product to get to where we are now with the Apple ecosystem, especially around the phone.
Jason: Yeah. Like, I was just trying to think through, like, you could probably walk back, like, any really successful product and then just look at their sequencing. Like, very few products are—
Raju: Oh yeah.
Jason: Built from just from scratch, including blenders.
Raju: Yeah. Including blenders.
Jason: Including blenders.
Raju: All right, so I’m going to ask the next question. Best food startup in history: McDonald’s, or Starbucks?
Jason: McDonald’s. Big Mac all the way, baby.
Raju: I know you love the Big Mac. How about you, Will? What’s your—
Will: Yeah, you know, McDonald’s is actually far more of a breakthrough story for its time, right? In the whole standardization of the entire process of making your meal. I think McDonald’s gets a lot more credit.
Raju: Okay, fine. I’ll go with that as well. Okay, worst food startup in history: Webvan, or Juicero?
Jason: I mean, maybe I was technically alive for Webvan, but I never—it’s just kind of one from the history books for me, so I got to go Juicero. I was… it was kind of a fun journey to be on with the Juicero thing.
Raju: How about you, Will?
Will: I feel like Juicero is sort of an amusing one off, and Webvan is one more story on the pile of flaming disasters focused around last-mile delivery. And you know, in the 25 years, I’ve been an investor, I feel like we see last-mile delivery companies every cycle. It’s a manifestation of when the cost of capital has gotten too low that we think that we can conquer those economics. And as we know, a very small handful of companies ever have, Amazon being perhaps the greatest example. So, Webvan stands out to me for that. But Juicero was actually a lot more memorable.
Raju: All right. Next question. Best food movie: The Hundred-Foot Journey, or Bradley Cooper’s Burnt?
Jason: Ratatouille.
Raju: That’s the next question. You jumped the gun. So, just regular movie. Regular, not cartoon movie. Not cartoon movie.
Jason: [laugh].I haven’t seen either one. I haven’t seen either one.
Will: [laugh] I’d go with Ratatouille as well.
Raju: [whispers] fine. I’m going to go with The Hundred-Foot Journey. Okay, just a couple more rapid-fire questions. You already jumped a gun on the other one, which was best food cartoon movie, either Ratatouille or Sausage Party, and you guys went with Ratatouille right off the bat. Although Sausage Party is hilarious. Absolutely hilarious.
Jason: I got to check it out.
Raju: All right, Best Food Show: Beat Bobby Flay or Iron Chef?
Jason: Iron Chef.
Raju: All right, fine. I’m going to go with Beat Bobby Flay because I kind of… kind of like it because there’s, like, three parts to it, you know? Just like two people do the whole challenge and then they try to beat Bobby. But okay. And then your favorite food that you would actually be willing to get indigestion over?
Jason: It’s probably the Santa Fe BK Breakfast Burrito.
Raju: Oh, man.
Jason: Well, just breakfast burritos generally but… breakfast burrito. I love a breakfast burrito.
Raju: Fine. I’m going to go with Pepe pizza from New Haven, but—
Jason: Ohh.
Raju: —that’s—yeah.
Jason: That’s good.
Raju: All right, I think that’s a wrap. Appreciate you guys indulging me on this one. Hopefully you guys—listeners—got some value out of it. But—
Jason: No, it was great.
Raju: We’ll have more of these, more sessions, give tips and tricks to entrepreneurs in terms of how they build their businesses.
Jason: Awesome. See you guys next time.
Raju: Thanks, all. Bye.
Will: Thank you for listening to RRE POV.
Raju: You can keep up with the latest on the podcast at @RRE on Twitter—or shall I say X—
Jason: —or rre.com, and on Apple Podcasts, Spotify, Google Podcasts—
Raju: —or wherever fine podcasts are distributed. We’ll see you next time.