• Strava’s CEO on Community, Competition, and Love-Hate Industry Relationships

    gallery-mark-gainey (1)People love Strava, the 95-person, San Francisco-based company whose training app for cyclists and runners has garnered an almost fanatical following. The company keeps its number of “members” close to the vest, but among the passionate acts of its users was one recent job hopeful who employed the company’s mobile app to spell out “Hire Me” over the course of an 8.1-mile run that ended at Strava’s offices. Another user plotted out a bike ride in the shape of a turkey. In the U.K., where the company’s app has taken off (70 percent of Strava users are outside the U.S.), the press has even asked of its obsessed users: “Is Strava Destroying Your Marriage?”

    Last week, at a StrictlyVC event in San Francisco, Strava’s charismatic cofounder, Mark Gainey, talked at length about his business with Sigma West managing director Greg Gretsch, who wrote Strava one of its first checks. During the conversation, Gainey opened up about what he views as the biggest weak spot of the sporting goods goliath Under Armour, his “love-hate” relationship with the navigation equipment company Garmin, and the one thing that keeps him up at night. Some of that chat follows here, edited for length.

    When Strava started [in 2009], it had 5,000 users. How has it evolved into a global brand?

    It’s been a fascinating ride. [Cofounder] Michael Horvath and I . . .wanted to motivate and entertain the world’s athletes. At first, we were a web company that supported Garmin devices for cyclists. We basically tried to surprise and delight cyclists using the data they’d just uploaded. [Editor’s note: users had access to all of Strava up to five rides; afterward, they were asked to pay $6 a month, or $60 per year for the use of all of its features.]

    In 2011, in trying to figure out a cheaper way for people to participate in Strava, we launched a mobile app that put us on a completely different path. The good news was that wow did that create growth, domestically, internationally – everywhere. The bad news was that we had to completely reconstruct our team and rethink the way we were building ourselves out.

    What types of athletes are using Strava?

    We started with cycling and really focused on them; cyclists are data geeks who are used to [logging their data]. But now, almost half the activity coming in is from the running community, You can upload up to 28 different activities into Strava, though. We see everything from yoga to skiing to kite surfing. We want people to capture their athletic life on Strava.

    What’s the business model and how has it evolved?

    You can use Strava for free as long as you like, or you can upgrade to $6 a month or $60 a year. It’s a very straightforward model that has worked very well for us over the past five years. By going direct to athlete, we’ve been able to maintain that one-to-one relationship and really create long-term customer value.

    A year-and-a-half ago, we also began developing a second direct-to-athlete revenue model, with integrated commerce. We’re not trying to be the Amazon for athletes or create a shop where you can buy stuff but [rather] integrating opportunities into the Strava experience. You can sign up for a monthly “Gran Fondo” — we basically challenge for you to ride roughly 100 miles on a given Saturday — and if you finish, you get an email from us and you “unlock” the ability to buy a limited-edition jersey. We routinely get more than 100,000 people who sign up for these challenges, and it turns out that rewards for athletes is really powerful. We’re simply trying to keep them motivated.

    We also launched something six months ago called Strava Metro, which is an opportunity for us to begin working with urban planners and local governments, taking ride and run data in any given population and giving them an anonymized version of it so they can plan bike paths and pedestrian walkways. That’s something we’ve begun to license out and we think it’s another interesting part of our business going forward.

    What are the metrics that matter most for Strava?

    A long time ago, we placed a bet not to worry so much about the top of the funnel and user acquisition but [focus instead] on engagement. We were sort of fortunate in that athletes tend to network with each other anyway, so we let that kind of be the organic growth, and we focused attention on keeping people engaged.

    Where things have shifted over the last one-and-a-half years is that engagement [now means] something very specific; we call them SUMs, Strava uploading members who [port] their activity into Strava. It’s a powerful metric. We know that once we get them uploading a few times, they’re lifers. If you saw our cohorts, our members, our athletes –they don’t go away. They hibernate when it’s a polar vortex outside, but they’ll come right back.

    Under Amour has been busily acquiring companies. It bought MyFitnessPal and Endomondo last week for $475 million and $85 million, respectively. Over a year ago, it acquired MapMyFitness [for $150 million]. Can you comment on what’s going on, and how you see the market evolving?

    We’re pretty excited about our future. We did a Series D [last fall] led by Sequoia. We didn’t need the capital; we’ve been pretty efficient with our capital. But we were sending a clear signal to the market that we intend to go and grow a global brand. We think there’s a great opportunity to build a sports brand using digital as the platform, so we’ve watched with interest as there has been some consolidation. Under Armour has been especially aggressive over the last year and a half. What we’re finding is that they’re just very different businesses.

    When you listen to Under Armour CEO Kevin Plank, he’s very clear. His business is selling apparel and shoes, and he needs channels to do so. And he has figured out that he can get 100 million email addresses when he pulls together these sites.

    At Strava, though, we have a strict definition of community. Community is about getting our customers to interact with one another. That’s when community happens, [that’s] when you have network effect. I’m not judging. Under Armour has a loyal customer base, Nike has a loyal customer base, Apple has a loyal customer base. I’m not saying that community is the way to go, but in our case, we’re a community-based business. We’re akin to a LinkedIn or a Facebook, and our business is very much predicated on the way the network interacts. And when you look at things like MyFitnessPal and Endomondo, the challenge they’ve had is there’s tremendous churn with them because there isn’t network effect. So it’ll be interesting to watch how it plays out.

    Will we see Strava make any acquisitions?

    Part of the reason to do the raise [last fall] and put ourselves in a position of strength [for that possibility]. It sure feels like it’s a market that’s ripe for consolidation, and we’d rather be on the aggressor’s side.

    What would you be acquiring for?

    We’re always looking at other services that would benefit our athletic community. Areas around nutrition are interesting, around training. The event marketplace is fascinating for Strava. The challenge is the noise of opportunity. There are so many things we could do for our athletes and frankly we’re a team of about 95 people, so we’re trying to be careful about what we do and don’t do.

    Which companies are always on your radar?

    Under Armour has always been on my radar [particularly after they acquired MapMyFitness last year]. Nike is always on my radar; we talk to them all the time and think there are opportunities for interesting partnerships, but they have Nike Plus, so I monitor that one closely. Another would be Garmin, [a company] that everyone thinks that we’re in bed with and that we’ve had this close relationship with since day one because we sell all their devices and support all their users. But the truth is it has been a love-hate relationship for the better part of five years. We think there are amazing things to do together, so we’re hoping it’s more the cooperation part but . . .

    What I actually lose sleep over is the startup I haven’t seen yet. I understand those big businesses and what they’re trying to do. I worry that there’s someone else who has figured out how to something really cool with mobile and apps and that we don’t have time to do. The guys who make me nervous are the companies that [venture capitalists] are probably funding right now.

  • The “15” Meme Fallacy

    magic-numberBy Greg Gretsch

    StrictlyVC recently observed that a 10-year-old study has done much to inform how venture capitalists now behave. That data found that between the mid ‘80s and mid 2000s, about 15 tech companies are founded each year that account for 97 percent of all public returns. It was popularized around 2009, when Marc Andreessen and Ben Horowitz – who were launching their venture firm at the time — began discussing it widely with reporters.

    Yet the idea that only 15 tech companies each year go on to produce $100 million in revenue and therefore “matter,” has never sounded right to me. It doesn’t square with my own experience, having led Sigma’s investment in three companies that reached more than $100 million in revenue per year: EqualLogic, which sold to Dell for $1.4 billion; Responsys, which went public, then sold to Oracle for $1.6 billion; and oDesk, which recently merged with Elance and remains private. I’m working with several more companies now that I’m confident will reach that very important milestone.

    So what? Well, the problem isn’t the belief that a small number of companies generate the lion’s share of venture returns in any given year. That’s been the conventional wisdom for years. The problem arises when this belief is taken the next few steps. In other words: If there are only 15 companies founded each year that matter, then in order to be a good firm you have to be an investor in those 15 companies (or many of them), then therefore (and this is where many firms go off the rails), it doesn’t matter what you pay for them.

    Overlooked in this march toward the “winner’s circle” is the time required to build a company to $100 million in revenue. It took EqualLogic roughly 6 years, Responsys roughly 12 years, and oDesk a decade. The aforementioned research covered a span of time through the mid 2000s. All of my $100 million companies were founded in those cohort years but reached the magical $100 million mark in more recent years, meaning they wouldn’t have been in that 15-per-companies-per-year estimate.

    To believe that such a narrow number of companies is all that matters doesn’t make intuitive sense, either. According to Morgan Stanley, there were more than 20 venture-backed tech IPOs each year between 2001 and 2014. It’s safe to assume the vast majority of those companies mattered to their investors. The same is surely true of the countless great M&A transactions we’ve seen over the same period, like WhatsApp, Nicira, Instagram, and YouTube.

    Worth noting: None of the aforementioned M&A deals got to $100 million in revenue on their own.

    This brings me to another point. While it’s true that venture investing follows a power law — meaning that a small percentage of companies each year represent the overwhelming percentage of gains from that year — you can still generate fantastic returns without being in those monster hits.

    Even if you take out the “15”, there will still be many 10x exits that are just making up for the companies that lost everything for that vintage year. And any venture investor would be happy to invest in a 10x company whether or not it was among those that generated the bulk of the returns in venture for its vintage.

    The biggest problem in investors’ religious adherence to the 15/$100 million meme is that it causes bad behavior. When every investor is chasing that mythical yearly batch of 15 companies, the resulting competition causes valuations for those anointed companies to skyrocket. That’s bad for investors who often end up investing at valuations greater than the public market is willing to give these companies (see Groupon, Zynga, et al.). It’s also bad for companies. Those for which capital is cheap and easily accessed are at greater risk of making non-economical business decisions that create business models that rely on increasing amounts of cheap capital (see Fab, Box.net, et al).

    Bill Gurley put it best when he told the WSJ: “Excessive amounts of capital lead to a lower average fitness because fitness, from a business standpoint, has to be cash-flow profitability or the ability to generate cash flow. That’s the essence of equity value . . . [and] we get further and further away from that in the headiest of times.”

    At some point someone will do the definitive piece of academic research on the topic. Unfortunately, given the long time required to scale most companies to $100 million in revenue, the mature cohorts will be so far out of date that they won’t be relevant to the then-current investing climate.

    Greg Gretsch is a managing director at Sigma West.  Follow him @greggretsch

  • Planning for the End of a Bubble

    Bursting-BubbleWith so much talk lately of bubbles and burn rates, venture capitalists seem to be hoping for the best but planning for the worst. None will tell you with certainty that we’re at the top of the market, but they say they’re trying to be as prudent as ever — just in case.

    Investor Stewart Alsop, for example, whose firm is in the process of raising a third, $100 million, fund, says the way his firm is planning for the end of today’s go-go cycle is by “not investing in momentum businesses right now.”

    It’s not an entirely new trend for Alsop-Louie Partners, which has always stuck to atypical and very early-stage investments, and that’s largely because Alsop remembers the last bubble so well. “I was at [New Enterprise Associates] and we’d raised a new fund in 2000 and invested in telecom companies through that fall,” he recalls. “The idea was that these were real companies, buying real stuff.”

    When it became apparent that the telecoms’ endless growth possibilities weren’t so endless (they eventually built up an oversupply of capacity), they tanked, and NEA — along with many other firms — had to write off almost all of their investments. The lesson for Alsop: “That venture capital isn’t based on what happens in the next 12 months.”

    Venky Ganesan of Menlo Ventures says his firm is also being cautious. For one thing, Menlo is taking a good long look these days at whether the unit economics of the startups it meets with make sense. The firm is also focused on business models that aren’t dependent on the availability of cheap capital, and it’s “orienting toward more seed and Series A rounds so we don’t have a timing issue,” says Ganesan.

    Ganesan says he doesn’t believe we’re in a bubble, citing some of Menlo’s portfolio companies like Uber, which are “growing revenue at a pace we haven’t seen in our history.” Even still, he says, by funding companies that will “go to market in 18 to 24 months,” Menlo is essentially buying itself time to better understand “whether this is a bubble or a long-term secular trend,” he says.

    It’s an approach to which Greg Gretsch of Sigma West can relate. Gretsch says he doesn’t know whether or not we’re “in a bubble and headed for a crash” and that “anyone who says they know is a fool.” But he sees plenty of companies whose “business model is the ever-decreasing cost of capital that’s freely available” and says Sigma has been steering far clear of them.

    Like Alsop, Gretsch suggests that his firm is mostly sticking to its knitting, meaning “focusing on companies that have a fundamental business with real customers who are buying.” He adds that while most of Sigma’s portfolio companies are spending their revenue on growth at the moment, “a large percentage [of them] could cut back to profitability if they had to. We don’t have any [portfolio companies] that will hit the wall hard” if the winds change.

    That’s not to say that Sigma West is insulated from what’s happening around it. Says Gretsch: “The challenge in this market is that everything is expensive and you have to make sure you’re not making investments to keep up with the Joneses. We hear a lot of, ‘Our competitor has this great space and employee perks and they look better to [outsiders].’ And it’s like, yeah, those things would be optimal from a cultural standpoint, but those competitors are spending a ton.”

    Gretsch says he tries to be sympathetic to his startups, but he’s not taking anything for granted right now. He points to a Chicago-based portfolio company that’s doubling its workforce every year and recently asked his opinion about whether it should move into a big new building whose landlord wanted a 10-year-lease, or into several smaller satellite offices that required shorter commitments but could come at a cultural cost.

    He nudged the company toward the satellite offices.

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