Value vs arbitrage entrepreneurs

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All businesses at their core, and their entrepreneurs can be categorized in two styles: value or arbitrage. A value business is one that creates something out of ubiquoutus components and sells that to people. The arbitrage business is when the entrepreneur acquires something, usually a commodity, then sells that or a derivative of that to people at a higher price. When you talk about a business, if you thin along these terms, you will be able to determine which one it is. For example, Google is an arbitrage business. It acquires data on the cheap, actually for free by scraping websites around the world, then sells that data, or advertising built on that data. Nobody charges Google for when their bots visit their sites, but that’s another story. Once you have a good arbitrage business then the goal would be to maximize your earnings out of that business. That is what Eric Schmidt had done for Google. He optimized the business and built mechanisms to maximize its earnings. He in my opinion is the best arbitrage engineer in the world. Now, the founders of Google don’t like being in the arbitrage business. They want to be in the value business. That is why they try to build products like Gmail, Google places, the android, etc, etc. But the reality is that 99.99% of Google’s revenues come from its ad business. The problem with the arbitrage businesses is that once you’re in, it is very hard to get out.

Now think about Apple, Facebook or Instagram. They are all in the value business. Their founders are value entrepreneurs. They don’t buy and sell data, although Facebook comes close at times, which clearly Mark Zuckerberg does not like, and clearly some people in Facebook do like. Wall street likes arbitrage businesses better because it’s easier to calculate and make estimates about its earnings. This is where Facebook and Wall Street will run into disagreements because Facebook still has not figured out how to extract the value out of what it has. Yes it sells ads, but that’s just basic stuff.

Apple worked extremely hard to continue being a value business and it succeeded, at the end becoming the most valuable company in the world. Steve Jobs spent his life making sure they provided value not arbitrage. Dell is in the arbitrage business, it doesn’t make and sell anything novel, it resells stuff. How about HP, Oracle, eBay, or your next startup? So ask yourself what kind of business do you want to start? When you think about any business try to understand whether they are value or arbitrage businesses. Arbitrage businesses do not last very long and either get dissolved on their own or by the forceful hand of governments. Value businesses are harder to start because it requires amazing knowledge base and imagination. It requires a lot of thinking. And as humans, we don’t like to think very hard by nature. Instinctively, we are drawn to arbitrage.

I’m not saying there’s anything wrong with either. I’m just making a distinction. Either type of business could make you very wealthy just look at the founders of Google. But it is only with the value business you will feel that you contributed something to the world and made people’s lives better, and with an arbitrage business you will always question whether or not this is a real business. The decision is yours and it will determine the rest of your career as an entrepreneur.

Student entrepreneurs

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Earlier this week I announced via Twitter that we reserved 50k to fund promising startups that come out of Stanford’s EBootcamp 2012. Per the request of the event organizers, I’d like to make a clarification here. We’re not sponsoring the event itself. If you’re a student entrepreneur attending this event, we may not be able to consider your startup for funding while you’re still a student.

That said, there’s nothing stopping you from committing yourself to your startup just like Bill Gates or Mark Zuckerberg and looking for funding. If that’s the path you choose, definitely give it all you got, and then contact me.

On a side note, for those of you student entrepreneurs, you need to decide whether what you’re working on is just another project or something that you really want to do. Events like eBootcamp are great venues to broaden your horizons and make contacts. But no matter what event you attend, put your startup first. And listen to everyone with your startup in the forefront of your mind. Don’t let corporate campuses mesmerize you. Instead, look for things that inspire you, and if you notice things you don’t like, just don’t do those in your own startup. Make the best of your participation in the event and have fun!

Don’t get stuck (in a bubble)

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The worst feeling for anyone is the feeling of being stuck. When you feel stuck, you feel like you can’t move, you have no options, and that you’re in despair. You may feel this way in a relationship, in your job, or in your startup. This feeling intensifies when the people around you feel the same way or complain about the same things. In reality, you are never stuck. This is an illusion. The only exception is in very serious circumstances such as in health or in war, and very smart people are trying to fix both problems, so I’m not going to write about that. I will tell you what you can do if you ever feel stuck.

First, avoid getting stuck. Don’t take actions that will limit your options. In basketball, actually in all sports, the most advantageous place to be is in the middle of the court. There, you can go to the right or to the left. You can pass anywhere, shoot a jump shot, or drive. These are all options available to you. You decide what you want to do. The job of the defender is to limit those options. They will try to guide you to one side, taking away the option to go to the other side. They will force you to the boundaries of the court where you will be limited even more. Once you’re there, they will double team you. All they are doing is taking your options away from you. Watch March madness, and the best teams execute defense this way. Whatever you do, try to keep as many options open as possible. With people, don’t burn bridges. In your job, make as many friends as possible across other departments. That way when you hate your boss, and you will, you can try to switch to another department where you will have more time to hate your next boss. In a startup and in your own business, the BIGGEST value is that you will always have options to solve problems. People who realize this, start companies. The goal is to not get stuck. You get stuck when you get lazy.

The same goes to angel investing. Most angels in the valley talk about the same stuff, mostly the deal flow. Once they feel they are stuck in a place where they aren’t getting deals, they discount themselves. I find this lazy. I don’t have a list of deals, I don’t worry about deal flow. I try to meet amazing people. And here, people are amazing. There are over 1,000 meet ups around the startup theme in Palo Alto. All you have to do is go to these events. And you will meet entrepreneurs and startups that nobody has heard of before. My goal is to be involved as early as possible so that I can contribute more. I’m not interested in a startup just because “top” angels are all in. The essence of the startup is uncertainty. Just because a startup came out of y-combinator, doesn’t mean they will be the next pinterest. All it means is they carry somewhat less investment risk. So if you’re an angel, take a step back, look at the startup from a logical point of view evaluating it based on about your experiences and knowledge. If it makes sense to you, then invest. If not, don’t. If you do, you’ll get stuck and you’ll hate it. You will get stuck whenever you buy into the general consensus.

So here’s a trick if you ever feel stuck. For one day, do things you haven’t done before. Go take a piano lesson, audit a class in a field of absolutely no interest to you, talk to someone completely out of your circle, and if you can afford it, get a massage. Remember, there are so many beautiful things in life, and the essence of life is there are limitless possibilities. Explore those, and you will get to where you want to go. Don’t be lazy.

Why this is the best place to be

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If you’re young and mobile, there are three cities in the world that’ll make you successful beyond your dreams while you’re still young. New York, if you’re in finance, Los Angeles, if you’re in acting, and Silicon Valley if you’re in tech. But it is only silicon valley that will make you happier. It is true, that all three cities are highly competitive. But failure in SV, unlike the other two cities, is welcome. In fact, if you haven’t failed, you haven’t tried hard enough. And how do you define failure here anyway? Did your startup tank? Whose didn’t? Your bf/gf dumped you? Who doesn’t get dumped? You don’t think you’re attractive enough? So who is? Everyone here is SMART and tolerant.

I moved here December of 2011. It was something I wanted for a very long time. So when I finally did, I was ecstatic. I decided to leave my first startup still operating in Atlanta. I decided to move here, start evaluating other ventures to invest as an angel investor and cultivate my own ideas with others. But I was very nervous because I didn’t know that many people here. So one day at Coupa Cafe, I started writing down the names of people I did know here. It was about 5 people. I wanted to meet more. So I started searching for events and meetings in and around Palo Alto. I organized my day like this:

8 – Wake Up, make coffee
8-11:30 Work on existing businesses that need my attention
11:30 – 1:30 Basketball at YMCA Palo Alto
2-5 Hangout at coffee shops, work on new stuff
5-8 Attend meetings

About a month later, I went to the crunchies award event in SF. Wow, so many important, successful and cool people all in one place! I felt like I was Charlie at the chocolate factory. But wait, I didn’t know anyone, so I sat in the very back row, carefully watching everything that happened around me. Then I had an epiphany. Everyone seemed a little anxious about being there, and I wasn’t the only one who didn’t know anyone. That made me feel better. Once the event ended, we all walked out to the hall where they set up drinks. When I was in line to get a glass of wine, I recognized the person behind me. It was Vic Gundotra, the man behind Google Plus. But I know him from a very cool Mercedes commercial. So I said hi, and started chatting with him. I told him what I did and he gave me his email if I ever needed anything. WOW! Was that cool!

I kept the conversation short and courteous, and decided to walk around. I ran into three people I met at an event earlier that week. We all seemed happy to have run into each other. So now, I met Vic, ran into three people, that makes four people I know there. Not too bad! After a brief conversation, decided to walk around more. And see three more people I met a week ago. Then I see one of my neighbors in my building, another angel investor I met at the social event in my building. I couldn’t believe that there are about 10 people there I know and I’ve only been here for a month, and they are all successful, smart, amazing people. Turns out my neighbor Suraj needed a ride back to Palo Alto, so we rode together and talked about all sorts of ideas about tech, startups and investments. Suraj and I are now good friends and we evaluate a lot of deals together.

So, there are a few rules around meeting people, especially in the valley, if you want them to like you. First, keep the conversation brief, to the point, but not blunt or rude. Be nice. Some techies try to sound cocky, but most successful ones aren’t. Set your benchmark to the most successful people. Tell them what you think, who you are, what you do, in other words, tell them your story. Believe it or not, the best investors and venture capitalists are NOT interested in your ideas as much as they are interested in you. And when you pitch to a top investor, think about it, they are smart, went to great schools, have lots of experience, traveled the world, seen, read and done it all. There’s only one thing they have not experienced yet. And that thing is YOU. They will have heard every pitch, every story, every bs, and the only thing they have not experienced is the image of you telling your story to them. This is what resonates with people.

So this is my first blog, and it may be all over the place but I’m hoping to get better at it. But, if you’re in tech, and want to succeed, come to the silicon valley. This is an amazing place full of amazing people whom you can meet quickly, easily and form working relationships.

I only wish I was here before Steve Jobs passed because maybe I would have met him someplace. But that’s life. It feels like the time I went to the Iridium Jazz club in NYC for the first time where Les Paul used to play every night, but when I went there, he had passed away the week before. Nonetheless, his spirit was there, and so is Steve Jobs’s in the silicon valley no matter what people say.