Flight to Quality

For technology companies, the market has drastically shifted from prioritizing growth above all else to the quality of the underlying business and its growth. This is healthy and grounded relative to the irrational exuberance over the better part of the past decade.

One of the things I have been thinking about recently are the parallels between this market correction and the way we think about the broader economy. So much of our capitalistic orientation over the past century has been focused around growth: “Growth in GDP equals good.” It’s a simplistic point of view that doesn’t account for underlying flaws, medium and long-term instability, and negative externalities associated with that growth. It was significantly more good than bad by any measure of progress, but we are beginning to see the objective measures of its limitations.

As more of the global population comes around to the consequences of the perils of the climate crisis, economic inequality, and the rapid attack against democracy, it is incumbent upon us to reevaluate our growth at all costs mindset and begin to value the quality of growth above arbitrary measures of it. We (i.e. Western Civilization) have operated like a company that spends money to grow top line without accounting for the health of the underlying business and its constituents. And that is now completely unsustainable.

While I am no fan of presenting problems without solutions, I do believe this is a critical concept to collectively wrap our heads around in the decades to come. We have an entrenched set of behaviors and way of life that is comfortable, but not healthy. We produce significantly more foods than we need, and as a result there is an obesity epidemic. To our hearts’ content, we manufacture and buy an unfathomable amount of shit we do not need and let much of it go to waste. We partake in activities daily that are enjoyable, but detrimental to long term health and sustainability of virtually every natural and human made system.

When I first dug into the upcoming energy transition, it became obvious just how much and how quickly we need to improve the way we produce energy in order to continue to flourish as a civilization. There is a profound difference in scaling energy and scaling quality energy. We are entering an era where the quality of growth matters exponentially more than growth in and of itself. While this is admittedly a rather highfalutin and subjective musing, I do think there is merit to it and I am particularly energized by the concept and think that not only is it a good thing in the long run, but it is absolutely necessary. More than anything, I am committed and excited to support entrepreneurs and causes that share this sentiment to make it a reality.

Performance Reviews that Don’t Suck

Most managers hate giving performance reviews. They require tons of effort to do well, and people are usually terrible at giving feedback frequently so they end up surprising their direct reports with things that are delivered for the first time in a formal review. Even worse, some managers will try to avoid tough and awkward conversations by any means, so they just provide a dull and useless review. I’ve been guilty of this myself, and it took me a long time to get my act together and find a way to deliver performance reviews that are helpful for everyone.

In my experience, good performance reviews start before someone accepts a job or new role. It begins with a document that clearly articulates the mission of the role and the outcomes you expect the person to deliver in that role. I stole this from Who: The A Method for Hiring by Geoff Smart. It’s a good book I recommend to most Founders and People Leaders. (Here’s a synopsis with an example of the MOC form I referenced.) In the book, the document serves as a mechanism to better recruit and screen candidates, but I actually think it’s even more useful as a tool for ongoing management and aligning expectations for what success looks like. It also solves for the problem of someone accepting a job thinking it’s one thing, but it’s really something entirely different (mismatched expectations are frequently a reason why employees do not make it). Here’s an example of a scrubbed version of a Head of Business Development expectations document:

Now you and your direct report have a source of truth you can continually reference to understand how they’re performing. The cadence that I think works best for performance reviews is two formal ones per year, and informal ones every other month in between (ie four informal reviews throughout the year and two formal reviews). Monthly is too frequent and doesn’t allow enough breathing room to get things done. During the informal check-ins the manager and direct report should take this document and mark every outcome as either Green (on track or exceeding), Yellow (behind plan), or Red (Code Red!). The informal check-ins are also an important time to recalibrate the document. Company priorities shift and the outcomes should change over time, and sometimes the mission of the role evolves as well.

If this process is happening at least two times before a formal performance review, nothing should be a surprise. As a manager you are clearly articulating how you think someone is performing in the role relative to your mutually agreed upon expectations, and as a direct report you know where you stand and what you need to improve upon to flourish.

Before the formal performance review, I take this document and go to town. I’ll start with a 1-2 paragraph high-level assessment of the person’s performance. This is the synopsis of key takeaways from the previous two quarters. Then I will go through the Outcomes and highlight each bullet as green, yellow, or red, and provide commentary (usually 1-3 sentences) with my reasoning. Sometimes an outcome may be Red but it’s not the person’s fault (eg a pandemic eviscerated your market). Sometimes it may be green but it’s because something happened in the market and can’t be attributed to the work that was done (eg a pandemic created unforeseen tailwinds). It’s important to call these out in the commentary.

After this I will highlight several things that the person did well since the last performance review in a What else did Person do well? section. These might be tactical wins that are worth calling out, or specific things the person has been working to level up for some time. It’s an opportunity to articulate the things that stand out that are special about the performance and person. After this section comes the What can Person improve? Here’s an opportunity to dive into 2-4 elements of the job that are not listed in the Outcomes section. It can range from “being cognizant of burnout” to “being more succinct while speaking in public” and “getting in the weeds to build better knowledge of the function.”

Then I will link to a document containing the person’s 360 Feedback from their peers and direct reports. Their direct reports feedback will be anonymized and organized thematically, but feedback from their peers should not be anonymous if the person is an executive (this is one of the hallmarks of a high-functioning leadership team). Under the link I will write a paragraph of my takeaways from the 360 feedback. Does it align with my assessment? Where is it different? What is surprising? Do not read the 360 feedback before writing your review otherwise it will bias you and you will cheat by using other people’s feedback to inform your own! And lastly, I create a Next Steps section that has a list of questions for the person to reflect on that serves as the agenda for conversation during the review. To better visualize this, here’s what a document would look like for someone who has been with the company for at least one performance review cycle:

This entire document is delivered to the direct report before the scheduled performance review, ideally 2-3 days. If you’ve done your job right, there really should not be any surprises outside of what they may read in the 360 feedback. Now when you meet for the formal performance review you aren’t reading through a document or notes on feedback, you are having a conversation about your report’s reaction to the feedback you so thoughtfully and thoroughly crafted. Almost every time I’ve done this, the conversations have been short and sweet. No surprises makes for easy, constructive, and delightful performance reviews. That’s right, delightful. This strengthens your relationship with your direct reports. Most managers they’ve worked with over the course of their career haven’t put in half the effort or thought to develop real professional relationships that you just delivered in a single performance review cycle.

Sometimes, there are surprises. Sometimes there’s just a total disconnect between you and your report. You may have poorly articulated feedback in an informal review beforehand. They may strongly disagree with your assessment, especially subjective ones (this happens, and it’s part of the conversation and this can be very healthy). Agreement on the objective outcomes should be clear unless something is very off between you and your report, in which case someone will likely head towards the exit soon. 

When the meeting is over, ask your report to come to your next 1-1 with a draft of updated expectations and their own version of their Areas of Improvement. This is a critical point: for senior people, expectations are driven by you at the point of hire, but thereafter it is most useful for the employee to take the lead on this themselves. Over the next week work with them to mutually agree on the updated expectations and the areas of improvement that are most important between that day and the next formal performance review. Then in your next informal and formal performance reviews you should revisit the Areas of Improvement with your commentary on their progress. 

Voila! The amount of effort that is required to do this reasonably well may seem daunting, but it’s worth it. Good management is hard work, and the price of failing here means you won’t be able to assemble and retain the high-performing team you need to succeed. In my experience, it makes life an order of magnitude easier and more enjoyable.

It took me years to get to this process which is by far the best one I’ve used in my career. It is largely geared towards working with executive and leadership teams (ie people that should be further along in their career and have real professional maturity). Many mentors helped me get there, and I owe a lot to my executive coach Jason Gore in helping me to flesh this out (especially the green, yellow, red assessment cadence and the Next Steps section) and Cody Forrester who would continuously give me feedback on how to improve my performance reviews over many years. It’s an always-evolving process, but I do hope you find this as helpful as I have.

Summertime Clothes

Today we drove back from Maine concluding a family trip and an 11 year anniversary to cap off the summer. On the ride home we put on Animal Collective’s Merriweather Post Pavilion. It’s a perfect album, and it did the thing to me that only music can do. It transported me back to 2009 in the East Village. I love how a song or album can do that. Whenever I hear The Eagles’ Hell Freezes Over, A Day in the Life, or Your So Vain I find myself driving in a car with my dad on a ski trip in Arizona at some point in the mid ‘90s. Unlike anything else, music conjures memories in the most beautiful way.

Listening to MPP I looked back on that time in my life fondly. I remember our 6 story walk up at 418.5 East 9th Street. Lugging bags of laundry and luggage up the flights of stairs. I remember walking a lot around the East Village. The Mud truck I’d grab morning coffee at while grabbing the 6 train at Astor Place on the way to work at tumblr. Brunches at the Mud restaurant and the egg and avocado dish I used to order. Buying groceries at Commodities Natural Market on 1st Ave. Walking the Tompkins Square Farmers Market on the weekends with Carrie and buying flounder from the fish monger who would advise, “butter, parsley and a pinch of salt.” Whitman’s hamburger that was filled with a molten ball of cheese on the inside. Passing momofuku and always telling myself I should eat there more. Slowly but surely becoming an adult with the person I’d get married to shortly thereafter, and with whom I’d have two beautiful children.

Music can do wonderful things. Happy anniversary, Carrie.

The Silver Bullet

I oftentimes hear tropes like these from early-stage startup founders:

Customer acquisition is slow right now, but we just hired an amazing head of marketing who is going to fix it for us.

Our upcoming release has the right feature set that will improve virality and kickstart growth.

We will start scaling and hit our targets when we hire our new VP Sales.

The rebrand work we are doing is going to change the game for us.

When we launch this BD partnership things are going to skyrocket.

There are endless permutations of these. Entrepreneurs gravitate towards the optimistic outlook that a new hire, feature launch, redesign, etc., will miraculously solve the most pressing problems, course correct the startup, and catapult it into the stratosphere. I have been guilty of this myself many times over.

This wishful thinking is dangerous. Most senior hires do not work out, especially at the early-stage. An overwhelming majority of launches (90%+), whether it’s a new feature, product, distribution partnership, or rebrand, do not have the desired or intended impact. Things go wrong way more often than they go right.

On the quest to achieving product-market fit, which I think of as having a product that 1) solves a real problem for customers with a 2) clear path and trajectory towards reaching the upward bound of the first S-curve, entrepreneurs delude themselves into thinking there are silver bullets. The fact of the matter is the only silver bullet that exists in these early stages is raw grit and ingenuity. This means all hands on deck, trudging through the weeds, wringing out every drop of trial-and-error progress you can to optimize for the lucky but well deserved breakthrough that gives you line of sight to a bigger and brighter future. Grit and ingenuity. That’s it.

Marketplaces, Lead Generation, and Brokerages

When we first started Fundera we described it as a “marketplace for small business loans.” It took me several years to understand that what we were building was not a marketplace per se, but really a brokerage. Over time I developed an appreciation for the nuances of what makes an internet marketplace a marketplace. Frequently, we confuse business models that are really online brokerages or lead generation sites with the term marketplace. While the distinction is somewhat subjective, I believe there are several defining characteristics of each, and the type of business model one has matters because there is a hierarchy of inherent value.

Lead generation is the easiest model to distinguish. If a site relies on selling leads (i.e. CPL) or being paid for driving high-intent traffic that buys something (cost per acquisition, or CPA) to make money, then its business model is lead generation. There are many different types of lead generation sites, and they can be quite lucrative businesses, particularly in markets where paying customers (i.e. the businesses that buy leads) do not have performance marketing as one of their core competencies. Lending Tree is an example of a company that is excellent at leveraging the CPL business model. They have many different forms on their website across a variety of different financial verticals (e.g. mortgages, personal loans, insurance, etc.). These forms collect basic contact and demographic information about consumers interested in those products. That information is then sold to providers of those products through an exchange auction that matches buyers with leads based on customer profiles and willingness to bid on those respective profiles. In some CPL models a lead is sold to multiple bidders, and in others exclusively to one bidder (usually for a higher amount). This model can produce lucrative results for the lead generator, but sometimes sub par experiences for consumers if their information is sold to too many buyers.

The CPA model relies on a visitor taking an action, expressing explicit interest in a particular seller’s product, and then completing the purchase themselves. Another financial services example here is Credit Karma whose model is surfacing relevant financial products like credit cards to consumers based on their credit scores. If a consumer likes and wants the card and applies for it and is approved, Credit Karma is paid a fee for finding that customer for the credit card issuer. Usually these fees are much higher than a CPL fee because they are only paid once a transaction has been completed and the provider has found a new customer. At Fundera, we employed this model when we expanded into financial products beyond SMB loans. Customers would come to our site when they were researching small business credit cards or checking accounts, and we would recommend these products through content-first experiences via affiliate links. If a reader liked an option enough to click on it and buy it, then we were paid a CPA fee.

Most lead generation businesses rely on models where they buy low and sell high. If a business finds a vertical where consumers have difficulty identifying the right product, lead generators can aggregate supply to help consumers make easier decisions. We see this in financial services and travel a lot. The downside of lead generation businesses is that they can be a race to the bottom if they’re in a crowded and competitive market. The barriers to entry are essentially aggregating supply (i.e. buyers of leads or businesses willing to pay for new customers) so there is little in the way of defensibility. The other downside is that they are very transactional businesses, and the lead generator very infrequently has a relationship with a customer. This means that for a shopper, it’s usually a one-and-done experience. This requires the lead generator to be on a perpetual treadmill of buying and selling traffic, constantly searching for new arbitrages to scale. Another important distinction for lead generation businesses is that the final purchase and transaction takes place off-site. While there may be marketplace-like experiences where visitors can search and browse for things to buy, ultimately they are directed somewhere else to get the thing they need to purchase.

The best lead generation companies usually have some combination of a distinguished and highly trusted brand and a proprietary channel or value proposition they use to acquire customers that competitors cannot replicate. These companies typically have staying power and defensibility, are highly differentiated, and immensely more valuable than competitors.

Marketplace businesses are fundamentally different than lead generation businesses in several different ways. First, the end-to-end customer experience and transaction takes place within the marketplace. This is an important distinction because the customer associates the entirety of the purchasing experience with the marketplace, and ultimately the relationship is between the marketplace and the buyer. While similar to lead generation companies in that sellers of product will pay marketplaces fees for helping them to acquire new customers, marketplaces have other ways of monetizing by adding in additional services to enhance the customer experience for buyers and sellers (e.g. payments, insurance and guarantees on purchases, buy now pay later options, marketing tools for sellers, etc.). Layering on these services is only possible because the entire experience takes place on-platform.

Some of the most valuable and iconic businesses in the world are internet marketplaces. One of the key defining characteristics of a defensible marketplace is the uniqueness of supply. Uniqueness can mean several different things. It can mean reliability like Uber has with near consistent ubiquity across cities around the globe. It can mean vastness of options like Amazon. Or it can mean finding things that are truly distinct to that marketplace like esoteric vacation homes on Airbnb or crafty and quirky gifts on Etsy. The uniqueness and differentiation of supply is one of the things that ultimately attracts demand and creates network effects and defensibility. Over time copycats emerge that try to compete for the same supply so marketplaces are forced to innovate on creating delightful experiences for buyers and sellers, expanding product offerings and services for marketplace participants, and expanding into adjacent markets to bundle offerings for buyers in order to increase LTV (lifetime value) so it can afford to outspend competitors on CAC (customer acquisition costs). Airbnb is an excellent example of a marketplace flawlessly employing these strategies as incumbents and new startups began to copy its business model. Searching for vacation rentals on the site is a genuinely delightful experience, renters are provided with incredible insurance and cancellation policies along with trip planning tools, homeowners are given incredible levels of customer support and services to maximize bookings and revenue (e.g. professional photography for listings), and the marketplace now provides add-on experiences ranging from luxury enhancements to affordable and fun tours around your airbnb.

The differences between lead generation businesses and marketplaces are vast, and to fill that void there is the brokerage model. The brokerage model is what we employed at Fundera. There are several distinctions between brokerages and marketplaces, but a key one is automation versus people-intensive. Marketplaces are fully automated. You can complete a purchase as a buyer without ever speaking with a person. Everything is magically taken care of for you by software. But in instances where buying something is a very intensive process, a human intermediary is usually needed to help facilitate the transaction. Getting a small business loan is a good example. Whereas I can simply find a vacation rental on airbnb or a neat piece of art on Etsy and instantly buy it with my credit card, I can’t simply buy a small business loan. I have to apply for one by providing a lot of information about myself, my business, and documentation ranging from bank statements to tax returns and more. Then I have to decide between a variety of complex products and offers with differing terms that I’m eligible for. In instances like this where there is a high amount of friction to make a purchase, people are often needed to help complete the process.

There are many other products where a brokerage model is required to facilitate a transaction such as online insurance and mortgage agencies. Usually we find these in complex financial products that have some type of regulatory or compliance component. These transactions simply do not work without a person helping a customer along, there is just too much friction. This isn’t a bad thing per se. There are actually a lot of good things about it. Brokerages are able to manage almost the entirety of the end to end customer experience, and as a result they can form a relationship with the customer. Usually, if they’re customer-friendly and mission driven, brokerages can earn the trust of a customer through this experience such that the customer continues to return to them for recurring needs like getting another loan, refinancing, or getting another adjacent product. These high-trust relationships usual mean that brokerages can achieve strong LTVs. Also, since the purchasing process is more complex the associated brokerage fees can be lucrative, and have terms where the brokerage is paid in perpetuity whenever a policy or loan is renewed. These can be phenomenal and defensible businesses, particularly when the brokerage builds a brand and a large customer base it can continuously service over time. A synonymous term to brokerage that describes these models is Customer Origination, wherein the business is effectively originating a new customer, that is completely and entirely onboarding them into a brand new product, on behalf of a seller.

The downside of a brokerage business versus a marketplace is that humans are required to facilitate transactions. Nobody has to be in the office, at their desk, or on the phone for a marketplace to hum. It does so 24/7 all on its own. But a brokerage needs people to power it, and therefore cannot scale as quickly and as much as a marketplace (of course there are other limitations to scale like TAM). Also, brokerages usually do not have unique supply like a defensible marketplace. The products brokerages sell usually feel like commodities: money, insurance policies, interest in real estate, etc. This is not necessarily a bad thing, it’s just the way it is.

Ultimately, all of these models connect buyers and sellers and are viewed as customer acquisition channels by their paying customers, but different attributes of marketplaces, lead generation businesses, and brokerages ultimately determine how good of a business they are. This is by no means an exhaustive list of attributes, it’s just my first-pass at a visualization of them:

If you had three businesses that all sold the exact same thing, did the same amount of revenue and EBITDA, but employed these three different business models, the marketplace would be most valuable, then the brokerage, then the lead generation model. That said, it is very possible to build absolutely phenomenal, large and profitable internet businesses using all of these models. Many companies have already done so and will continue to do so. But distinctions matter when evaluating opportunities and thinking about how to enter a market and what to build and invest in next. Marketplaces, brokerages, and lead generation models all have their place in the world of internet businesses, and frequently the lines blur between them. They’re constantly evolving and in many instances it can be inaccurate to pigeonhole a company into just one bracket. But being realistic and objective about what type of business you have as an entrepreneur and investor provides an excellent frame of reference for how you can think about strategically growing and evolving over time.