20VC Accel's Brian O'Malley On The Prioritisation Of Growth, The Metrics That Show True Customer Retention & Why The Most Interesting Companies Create A Market

Summary Notes


In this episode of the 20 minutes VC, host Harry Stebbings interviews Brian O'Malley, partner at Accel Partners, who shares his journey from a developer at Motorola to a venture capitalist leading investments in consumer marketplaces and companies like Dollar Shave Club and Skullcandy. O'Malley emphasizes the importance of retention as an exponential growth factor, the need for startups to focus on core value propositions, and the balance between growth and cost-efficiency. He also discusses the significance of building a strong team that can execute independently and adapt to market needs. The conversation also touches on the impact of market potential over existing market size and the role of early users in shaping a product's future. O'Malley's recent investment in Luma, a next-generation home Wi-Fi router company, exemplifies his investment philosophy focusing on strong performance, security, and team expertise.

Summary Notes

Introduction to the Episode and Guest

  • Harry Stebbings hosts the 20 minutes VC podcast, interviewing top venture capitalists.
  • Brian O'Malley from Accel Partners is introduced as a specialist in marketplaces and consumer-focused companies.
  • Brian's background includes leading investments at Accel and Battery Ventures in companies like Dollar Shave Club and Skullcandy.
  • Prior to venture capital, Brian worked in sales and technical roles, notably at Bowstreet before its acquisition by IBM.
  • The podcast episode is sponsored by Lisa mattress and Massamart, with a nod to the Mattermark daily newsletter.

"Now I always say we interview the best VCs in the world across all spectrums and spheres here at the 20 minutes VC."

This quote establishes the podcast's focus on interviewing prominent venture capitalists, positioning it as a resource for insights across the venture capital industry.

"Therefore, I'm delighted to welcome Brian O'Malley, partner at the world famous Accel Partners."

Harry Stebbings introduces Brian O'Malley, highlighting his role at Accel Partners and his focus on consumer-focused companies and marketplaces, setting the stage for the discussion on venture capital.

Brian O'Malley's Path to Venture Capital

  • Brian was drawn to venture capital during college due to its blend of company building and financial markets.
  • Despite his interest in computers and his father's career at IBM, Brian pursued an undergraduate business program.
  • He worked as a developer at Motorola and then joined startup founding teams.
  • At Bowstreet, Brian transitioned from a strategic role to technical sales amidst the dot-com bust, learning valuable lessons about enterprise applications and sales processes.

"I was maybe a little bit different. I was coming through school in the late nineties and had been fascinated by venture at the time."

Brian's early fascination with venture capital during his school years laid the groundwork for his eventual career path in the industry.

"I ended up doing a little bit of both, where I moved into more of a technical sales role, where I helped build out a lot of the integrations at the time and then helped take those into customers."

This quote explains Brian's hands-on experience in a technical sales role, where he developed integrations and engaged with customers, providing him with practical business and technical knowledge.

Learnings from Early Career to Venture Capital

  • Brian experienced rapid growth and subsequent downsizing at Bowstreet, learning to adapt to dramatic market changes.
  • He emphasizes the importance of not assuming to have all the answers and the need to ask the right questions.
  • Brian's experiences taught him that hard work alone does not guarantee success; it must be aligned with the right product strategy.
  • These lessons influence his approach to venture capital, particularly in boardroom interactions with founders and teams.

"In venture, you see a lot of people who sort of show up and assume that they have all the right answers without really understanding the context or the history."

Brian criticizes the tendency of some venture capitalists to offer solutions without fully understanding a company's unique challenges, emphasizing the need for context and historical knowledge.

"And that's been something that in the boardroom, you see a lot of venture people show up, spend a half hour looking through the materials, and assume that they have all the right answers."

Brian's quote illustrates a common issue where venture capitalists may not invest enough time to truly understand a company before making judgments or recommendations, highlighting the value of his comprehensive approach.

Market Trends: Value Compression and Fundraising Challenges

  • Two converging trends: fundraising becoming more difficult and valuations dropping.
  • Fundraising is a means to an end, and success can still be achieved despite varying degrees of founder dilution.
  • Building a lasting company often takes 8-10 years, during which fundraising environments can fluctuate.
  • Brian emphasizes the importance of building a strong company regardless of the fundraising climate.

"Yes, I think there's two separate trends that are converging at the same time, and they both have to do with fundraising getting harder and values dropping."

Brian identifies the dual challenges facing startups: the increasing difficulty of raising funds and the compression of company valuations.

"But at the end of the day, if you're successful, whether you as a founder get diluted down to 25% ownership, or whether you get diluted down to 12% ownership, if you end up selling for several hundred million dollars or more, that still is a pretty good day at the office, and that still is a very successful outcome."

Brian provides perspective on the fundraising process, suggesting that while dilution varies, a successful exit can still yield significant rewards for founders, regardless of their final equity stake.

Venture Capital and Startup Funding Challenges

  • Venture capitalists prioritize backing potential winners at higher valuations over investing in mediocre companies at lower valuations.
  • The primary concern for startups is not the prospect of a flat or down round, but the possibility of receiving no investment at all.
  • Down rounds can be significantly lower than expected, not just by 20% but potentially 90%.
  • Ensuring startups have sufficient capital to determine if they can build sustainable businesses is crucial.
  • Many companies have shifted their focus from aggressive growth to extreme cost-saving measures, which can be detrimental.

"And what I mean by that is, as long as you're dealing with venture capitalists, they're going to be solving for trying to back the winner, and they would rather back the winner at a much higher price than put something into a company that's maybe doing okay, but not great at a much lower price."

This quote highlights the venture capitalist mindset of preferring to invest in companies with the highest potential for success, even if it means a higher entry cost.

"The real issue is just that no money shows up at all. Or if there is a down round, it's a little bit of catching a falling knife where it's not 20% lower, it's 90% lower, because people don't show up and it ends up being more punitive to other folks."

Brian O'Malley emphasizes the critical issue for startups is the complete absence of funding, or a down round that is far worse than anticipated, which can have severe consequences for the company.

Balancing Growth and Cost Management

  • Startups must find a balance between growth and cost management to meet investor expectations and reduce burn rates.
  • It's essential to identify and cut unnecessary spending while investing in areas that drive growth, like sales over marketing in some cases.
  • The example of Koopa demonstrates the importance of reallocating resources from less critical areas to sales to achieve growth targets.
  • Success and growth can motivate the entire organization, regardless of their role.

"I think that people have gone from one extreme where there was a lot of spend on things that were not driving the business forward, to the other extreme where you're taking good companies and you're cutting into the muscle a little bit."

Brian O'Malley discusses the need for startups to avoid extremes in spending and to carefully consider which expenses genuinely contribute to growth.

"What's been surprising to me is how many companies where they've handled these conversations the right way and really align people around. Look, these are the metrics we need to hit to show whether it's profitability or whether it's sustainable growth."

This quote highlights the importance of clear communication within companies about financial strategies and growth metrics, which can align team members and support sustainable growth.

Growth vs. Retention

  • Retention is considered an exponential variable, with small differences in churn rates having significant long-term impacts.
  • The focus on retention metrics varies by business type; social apps might look at day 7 and day 14 retention, while subscription services examine longer-term cohort behavior.
  • Retention is the most crucial metric for sustainable growth, as high churn rates can undermine customer acquisition efforts.

"Retention is really the only variable that is exponential, right? So if you think about your retention numbers compound every month, right? So the difference between a churn rate of 1% per month, 2% per month, or 3% per month, if you compound that out over time, it makes a dramatic difference..."

Brian O'Malley explains the exponential nature of retention and its compounding effect over time, making it a critical focus for sustainable business growth.

Creating Customer Stickiness

  • Despite the variety of products and business models in software, consumer marketplaces, and social apps, they share commonalities in creating customer stickiness.
  • The goal is to identify those characteristics that consistently result in high retention across different sectors.

"Yeah, it's interesting because I invest in software companies, I invest in consumer marketplaces, I invest in social apps. And so I invest in businesses that ultimately have very different products and different business models. But at the end of the day, there's a commonality across all of them..."

This quote indicates that while Brian O'Malley invests in a diverse range of companies, he recognizes a universal element that contributes to customer retention and business success.

Fundamental Change in User Behavior

  • Importance of high usage and stickiness in apps, across business, commerce, and social platforms.
  • A successful app must fundamentally change daily routines or purchasing behaviors.
  • Retention is critical; without it, apps risk being forgotten and fading away.
  • Retention should not be artificially inflated through difficult cancellation processes, as this is unsustainable.

"You're looking for something that's going to drive a fundamental change in behavior. Because at the end of the day, if you don't rise to that level, people are just going to forget about you and you're going to fade into the background."

This quote emphasizes the necessity for an app to significantly alter user behavior to ensure retention and prevent the app from becoming irrelevant.

Retention vs. Business Model

  • Retention and business model are often linked, but retention should not be forced by the business model.
  • Subscription models work well for consumables but may not be suitable for all products.
  • Products should inherently draw users back without relying on a subscription model.

"Subscription actually provide the value to the end consumer to not have to think about it, but other products, subscription is really serving the business more than it's serving the consumer."

Brian O'Malley explains that while subscriptions can offer convenience for consumable goods, in other cases, they may benefit the business at the expense of the consumer, potentially leading to issues with retention.

Revenue Predictability and Customer Engagement

  • Startups may need predictable revenue streams to manage cash flow and production costs.
  • Early revenue, especially when margin positive, is indicative of customer engagement.
  • Revenue is a critical metric for commerce-focused startups, while social apps may rely on audience aggregation for future monetization.

"It helps with cash burn and it helps with expenses. That's one thing. And the next thing is that it shows a deeper level of customer engagement around a product."

Brian O'Malley highlights that revenue is beneficial not only for the financial health of a startup but also as a signal of customer interest and engagement with the product.

Market Importance and Potential

  • A promising market is not necessarily large or well-defined at the outset.
  • The most interesting companies often create their own markets.
  • Investors look for products that might seem niche but have the potential to grow significantly.

"It's really more a function of market potential."

Brian O'Malley discusses the concept of market potential as opposed to existing market size, suggesting that the future growth prospects of a market are more important than its current state.

Platform vs. Problem-Solving

  • Companies should not start as platforms but as solutions to fundamental problems.
  • Initial focus and value to early users are crucial for growth and community development.
  • Over time, successful products may evolve into platforms as they scale and gain widespread adoption.

"Nothing really starts out as a platform. You need to start out solving a very fundamental problem."

Brian O'Malley stresses the importance of addressing a core problem before aspiring to become a platform, as initial focus is key to achieving the scale necessary for such an evolution.

Quick Fire Round Introduction

  • The quick fire round is a segment where short statements prompt immediate responses.

"And I want to dive into a quick fire round now. So I say a short statement and then you hit me with your immediate thoughts."

Harry Stebbings introduces the quick fire round format, which is designed for rapid and instinctive answers to brief prompts.

Personal Insights on Business Literature

  • Brian O'Malley expresses his appreciation for the book "Zero to One" by Peter Thiel.
  • He credits the book with helping him differentiate between incremental and transformative companies.
  • The book has influenced his perspective on assessing companies and their impact on their respective marketplaces.

"My favorite business book that I read is actually zero to one. It was something I read on vacation a little while ago. It really helped me crystallize my thought process as I looked at companies, which ones are more incremental and which ones were fundamentally changing a marketplace and changing the way something is done today."

This quote highlights Brian's endorsement of "Zero to One" as a book that has significantly shaped his thinking around company evaluation, particularly in distinguishing between those that are making small advances and those that are revolutionizing their fields.

Career Trajectory and Personal Success

  • Brian O'Malley feels fortunate about his current position and the team dynamics at Excel.
  • He measures success by the opportunity to continue his work and improve over time.
  • Joining Excel was a strategic move for Brian, considering it as a long-term platform for his career.

"So my career goal is to continue to have the opportunity to do what I'm doing and just get better at it over time."

Brian's definition of career success revolves around the sustained ability to do his job well and to grow in his role, suggesting a focus on continuous improvement and long-term commitment to his position.

Evolution of Company Selection Process

  • Initially, Brian focused on strong value propositions and market opportunities, somewhat neglecting the team aspect.
  • He observed that companies often plateau without the right team to scale operations.
  • Over time, Brian's approach has evolved to prioritize teams that are self-sufficient, skilled in hiring, and proactive in problem-solving.
  • He notes that having a history of success is not always indicative of future success; instead, he values teams with clarity and urgency in addressing their goals.

"And so I think over time, my thinking has evolved to really looking at the team."

This quote encapsulates Brian's shift in investment strategy, emphasizing the importance of the team's capabilities and mindset in a company's potential for growth and success.

Investment in Luma

  • Luma is a company developing a next-generation home Wi-Fi router.
  • Brian was attracted to Luma due to the significant market need and the potential to become a central platform in the connected home ecosystem.
  • He believes that the Luma team's background in enterprise networking and security gives them an edge.
  • Luma addresses performance, security, and content filtering, with a focus on family-friendly network control.
  • Brian is impressed with Luma's recruitment of a strong team with relevant experience.

"And so what excited me about that opportunity was a. I think it's a very real market problem, and I think it's an important market to a lot of players."

Brian's rationale for investing in Luma is based on his belief in the existing market problem and the significance of the market to various stakeholders, indicating a strategic approach to investment based on market demand and potential impact.

Conclusion of the Interview

  • Brian O'Malley expresses gratitude for the opportunity to share his insights.
  • Harry Stebbings provides ways for listeners to stay connected and mentions a personal endorsement of a product unrelated to the interview content.

"Yeah, always a pleasure. Thanks so much, Sherry."

Brian's closing remark shows his appreciation for the discussion and the platform provided by the interview, reflecting a positive experience sharing his professional journey and investment philosophy.

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