Tige Savage: Founders Need to Solve for Degrees of Freedom — Not Valuation
Over the past two decades, Tige Savage has emerged as one of the most prolific backers of local technology startups. Savage, now the managing director at Revolution Ventures, backed Zipcar in the mid-2000’s, bet on LivingSocial just before the deals craze hit in the early 2010’s, and now serves on the board of Booker, the salon booking firm that raised $30 million from Revolution Ventures, FirstData and others earlier this year.
In an interview with Street Fight, Savage talks about what went wrong at LivingSocial and Groupon, why founders should solve for “degrees of freedom — not valuation,” and why the next big thing may not come out of Silicon Valley or New York.
As an early investor in LivingSocial, you saw the explosion and subsequent implosion of the first round of local commerce companies first hand. What caused these companies to struggle to evolve beyond the original daily deal model?
What happened was Groupon went public, they raised a billion dollars, and then they had an accounting issue. The journalists and analysts who had written these articles saying [daily deals] was the best thing ever, and maybe over-rotated positively on the way up, over-rotated negatively on the way down, which sparked a terrible cycle that sent the stock plummeting.
Meanwhile, LivingSocial was stuck in a tough place because the company was not public but was perceived to be valued purely as a function of the price of Groupon’s public stock. [The company] had a perfect comp in the market that was now valued a fraction of what it was a year earlier. Groupon may have hated their valuation, but at least they had a billion dollars in cash. One of the effects of this perception issue was to limit LivingSocial’s access to capital in the private markets.
Was it a lack of insight, poor prioritization or just mis-execution?
I think it was all of it. The transformation of the industry away from the novelty of daily deals to becoming a broader provider of services online combined with Groupon’s nervousness to scare the market and LivingSocial’s need to adjust to its capital constraints left us stuck in that daily deal mode for way too long.
Revolution has made its name investing in companies outside of Silicon Valley and New York. Talk a bit about why the firm makes an effort to look beyond the main technology hubs?
The fact of the matter is that the barriers to start businesses are just so much lower than it used to be. Silicon Valley, which is really the epicenter of entrepreneurship in America, simply does not have a monopoly on good ideas. The cost of building a business elsewhere has been reduced by the ability work remotely, cloud services, and the ability to have distributed workforces. It’s the way the whole web works.
Okay, I see why a company can operate distributedly in ways they could not before. But are there reasons — maybe, a market trend — why companies located in so-called secondary cities may actually outperform those in New York or San Francisco?
I totally think there is. A city such as Detroit is really good at certain things. Chicago is really good at certain things. All of these cities typically are pretty good at something and many of these industries right now are ripe for transformation. The biggest venture deals are no longer router companies acquired by Cisco. They are these “boring old businesses” that are ripe for disruption because technology allows a more convenient business model that often is tough for the incumbents to compete with because it cannibalizes its core business.
But when that happens there is often this hubris among tech people that you just have to be a smart tech person to win. The reality is that if you combine a smart technology person with a person who understands the industry, you’re much more likely to win. And the people who understand these industries are typically in the cities where those industries dominate.
Revolution recently invested in OrderUp, a food ordering service based in Baltimore. It’s been fascinating to watch this sudden reinvestment in food ordering, a category that has been around since the dotcom era. From an investor’s standpoint, what has made the food ordering businesses suddenly attractive again?
There are a few things that are happening at the macro level. People are becoming more and more acclimated to doing more things quickly and online; people are more and more time starved; and mobile devices are increasingly in everyone’s pocket. That means that companies such as Uber who leverage all three of these trends are generally successful.
But a lot of the business models that have come up require the densities of these major cities as well as the psychographic composition of the people who are in them: massively time starved, wealthy. When we were invested in Zipcar we used to say that 50% of the global market for Zipcar was in New York because the city is just so unusual.
Do you see that as a problem for a company such as OrderUp?
But food is different: everyone eats. Everyone comes home from work and doesn’t want to make dinner. And everyone would like to order from more than just Papa John’s and Domino’s. The confluence of those macro and technology trends conspire with the fact that this is a category that people use three times a day.
If you look at company like Grubhub, something like 90% of their business comes from less than 10% of their cities because they cannot invest enough in New York. While they’ve invested in these major markets, and for good reason, it has created opportunities in other cities for companies to flourish.
The macro factors that you mentioned — acclimation to ordering online, mobility etc. — are the same factors that investors use to justify the rapid investment in on-demand models. Do you believe the growth of the sector, and the models that are out there today, are sustainable?
It depends. I think there are going to be a lot of smaller companies [in the on-demand sector.] I think there’s going to be bad businesses, good businesses, a smaller number of big, good businesses, and a large number of small, good businesses.
There’s real transformation in consumer utility and how business get done, and there’s going to be some big businesses that come out of that. But there will also be some smaller businesses in industries where the status quo isn’t that bad.
What are these “big, good businesses” doing right?
The best companies are attacking massive categories that suck. That means that if the category doesn’t even grow, but you can provide a better approach and get a reasonable share of it, you can build a decent-sized business. That’s one of the reasons why we like going after these billion dollar categories.
But the best of those companies actually expand the market. Uber, for instance, has made the market bigger: more people ride black cars than they used to. It used to be that rich people or corporate accounts would get driven to the airport but most everyone else would take a cab or the subway. They actually expanded the market.
Given your experience with LivingSocial, what advice would you give founders of high-growth companies?
My advice to founders is to be pragmatic when you’re evaluating your options. When raising capital, don’t always solve for value — solve for degrees of freedom. If it’s the most capital with least diluting than great. But sometimes, that’s not true.
One of the things I say, all of the time, is that it’s hard to make money. It’s hard to take an idea, build a company and make it attractive enough that someone either wants to buy it or have it go public. When you’re making financing decisions, make sure you have as many degrees of freedom to make money as you can. Because as soon as you bring in a big new investor, their job is to make money for themselves. What might have been a perfectly fine outcome when a buyer comes knocking is no longer an option if the market turns.
It’s often a characteristic of first-time CEOs, but also in general, to think that valuation in financing is a proxy for how well you’ve done — and that’s just not true.
Steven Jacobs is Street Fight’s deputy editor.