back to basics: product market fit

Copyright Bill Watterson (used under fair use)

a lot of people smarter than me have written a lot of intelligent things about product market fit. i still get asked the question by entrepreneurs of how i would define it so i thought i'd lay down a summary of my thoughts here.

creative, but largely unhelpful definition:
where the rubber meets the road

or, as Andy Rachleff would say:
when the dogs start eating the dog food

this is the most simple definition. the market is ingesting what you're serving.

external (the investors) definition:

a non-trivial group of customers or users are engaging with your product and service, and have proven that they are willing to trade something valuable for it, usually time or money (or both)

internal (the founders) definition:

early observations of your original value hypothesis being proven correct. a value hypothesis articulates what exactly your product or service is, who will use it, and most importantly why they will value it.

when you have early signs that your product or service is being used by people who truly value it, you've achieved product market fit.

this framework may seem a bit at odds with lean startup methodology.

  1. what if the product or service that customers are valuing is not core to our business?
  2. what if my core product or service is being valued by customers we didn't built it for?

shouldn't these be celebrated? shouldn't that count as product market fit? yes, eventually. but in the first instance you need to rally the company around the product or service that is taking off, and potentially rethink your long-term mission, your medium term strategy and your short-term tactics. in the second instance you should run with it, but also ask yourself why your targeted audience isn't ingesting the product or service and another one is, and potentially rejig the customer facing aspects of your business accordingly.

the above definitions may seem vague and imprecise. the truth is, it's hard to find a universal definition of product market fit that applies to every company. it might mean 4 enterprise customers signing sizeable contracts, it might mean $80k MRR, it might mean participants in a network starting the share meaningful content with one another, it might mean one developer deploying your framework for the first time in production...

perhaps it's clear, but of the above, i think the internal definition is most vital. if you're confident you've achieved product market fit but an investor or external party doesn't agree, go find one that does.

finoa

One of our hypotheses at Balderton is that there is inherent value in building bridges that allow people and firms to venture beyond their comfort zone towards transformational new technologies.

While many consumers in emerging markets were still struggling to understand how cryptocurrencies worked and how to access them, Luno built a simple, powerful mobile application that allowed people across a disparate range of markets to buy, store and learn about cryptocurrencies. Today, Luno has reached more than 7M customers.

Now, several years later, many institutions in Europe and beyond are struggling to understand not only cryptocurrencies, but an entire new ecosystem of decentralized finance and the building blocks that power it. Once they have made the decision to enter this new ecosystem, they often struggle to find partners that can provide them with professional, powerful and reliable services that serve their core needs on the frontiers of money and banking.

Chris, Henrik and the entire team at Finoa are focused on being that partner. Even as they collaborate with many of the most promising protocols to come to market, they are establishing partnerships with and providing white glove custodial services to traditional champions like Deutsche Telekom.

While experiencing phenomenal growth, the Finoa team have kept their feet firmly rooted to the ground and have their eyes set clearly on becoming the de facto standard for institutional custody of digital assets in Europe and beyond.

At Balderton, we’ve seen how rapidly financial technology businesses can reshape traditional markets. From Revolut to GoCardless, Zego to Luno, we have been lucky to partner with exceptional companies and now look forward to the journey ahead with Finoa.

coinbase s1 teardown

Coinbase published their S1 last week ahead of a Direct Listing that may value the company as highly as $100B. In an ecosystem where everyone extols the benefits of decentralization, this is a business that on Dec 31, 2020 had 11.1% of total cryptocurrency market capitalization ($90B of $782B) live on its platform. Imagine if Citibank had never stopped growing...

Financials

2019 rev: $534M
2019 OP: ($46M)
2019 adj EBITDA: $24M
2019 NI: ($30M)

2020 rev: $1.3B (2.4x yoy)
2020 OP: $409M (31% OP margin)
2020 adj EBITDA: $527M (40% EBITDA margin)
2020 NI: $322M (25% NI margin)

Given where Bitcoin and the cryptocurrency market is currently trading, I would expect 2021 revenue growth to accelerate. Not sure what guidance has been given but it would not be surprising to see revenue clear $5B in 2021. The business has tremendous operating leverage (transaction expenses are ~10% of revenue) so would be highly cash generative in that scenario.


Other key metrics
$1.1B in cash Dec 2020
$3.8B in 'customer custodial funds' and 'custodial funds due to customers'
$5.9B in Assets
43M verified users, +34% yoy
2.8 monthly transacting users, +180% yoy$90B "assets on platform", +430% yoy
$193B trading vol, +140% yoy

+34% yoy growth in verified users is surprisingly low. Gives credence to the narrative that the 2020 Bitcoin bull run was driven by institutional adoption rather than retail inflows.

>5% fund owners
- a16z
- Paradigm
- Ribbit
- Tiger Global
- USV

Looks like a16z and Paradigm were aggressively buying secondaries from insiders in 2019 and 2020 at share prices between $20-30. Strong conviction investments that will seemingly be rewarded. Recent NASDAQ secondaries have been between $2-300.

Statement on correlation:
"In the past, crypto markets have not appeared correlated with the broader U.S. equity markets. This trend held true until February 2020, when the U.S. stock market and crypto markets experienced a significant downturn due to the COVID-19 pandemic. Through December 31, 2020, these markets subsequently appeared more correlated as each market recovered."

mda2b1.jpg


Evolution of revenue streams. While Coinbase is aiming to move to subscription rather than transaction-based revenue, this sounds more like a shareholder story than a reality.

mda3b1.jpg



>10% of all Crypto assets live on Coinbase (this is worth stepping back and reflecting on):

Share of Crypto Market Capitalization:

mda0000101a.jpg


Share of BTC steady at ~70%, Bitcoin and Ethereum are 83%

image5.jpg

Income Statement

Other Key Metrics

the open source requirement

Engineers have been writing software for IT infrastructure a lot longer than I have been alive, and at Balderton we led the Series A in MySQL when the sounds of dial-up modems were still pervasive. There is nothing new about load balancers, relational databases, or search algorithms.

What is new is how these fundamental components of infrastructure are now being built and bought. Not long ago, an open source approach to building infrastructure software was a philosophical choice. For the generation of infrastructure software builders starting out today, being open source has become a requirement.

It has become a requirement because open source projects have distinct advantages in infrastructure software versus their closed source counterparts, namely:

i. Greater implicit trust in the quality of the work
ii. Larger scope for collaboration across a worldwide developer community
iii. Development and iteration speed that isn't gated by hiring and onboarding
iv. Scale and adoption benefits due to wider distribution and awareness
v. Revenue benefits as software buyers from developers to CTOs begin to view open source as a hygiene factor on the label

How did we get here? In the days of MySQL, open source was often still considered a fringe, radical ideology that pitted greedy businessmen against idealistic creators. Today, venture capitalists are pouring money into open source at unprecedented rates, and founders with quickly accelerating Github star counts are just as likely to attract capital as those with rapid revenue growth.

This is partially due to a signalling effect. The successes of MySQL, Redhat, MongoDB, Elastic, Confluent, HashiCorp and Databricks, among many others, have shown that the interests of the businessmen and the dreamers are perhaps not irreconcilable.

We've been excited to be part of open source journeys from MySQL to Talend, and more recently backing the company behind Traefik, one of the strongest open source communities to ever emerge out of Europe.

There is a generational shift afoot. Gen Z and those that come after them will have been networked to one another their entire lives. They share media, play games, write words and cultivate friendships with contacts next door and around the world. They have grown up with a set of tools available to them that allows for proximity, convenience, and efficiency when it comes to collaboration and communication. When they build software that is globally relevant they will harness the power of those tools to build them with global approaches.

It is interesting that even as we shift towards wider and more diverse collaboration among builders, the platforms they are ultimately building on are collapsing into fewer and fewer ecosystems. Whether it's the paucity of options in cloud hosting providers, the emergence of a single dominant standard in container orchestration, or a handful of forward-thinking social media companies that dominate the development of open source frameworks, there is a degree of concentration that is troublesome, as is often the case in software these days.

Moreover, there are some fundamental issues of fairness around value capture and maintainer compensation that are as yet unsolved. The open source requirement will only harden as the benefits of trust, collaboration, speed, scale and revenue accelerate over time, and as open source becomes increasingly commercialized it will be important that commercial entities created by and using open source contributions think about how to do so fairly.

That said, the undeniable shift towards open source is inspiring. It enables and celebrates humans from one end of the world to the other who work together on designing, creating, and debugging the most complex machines of our time.

(If you're interested in discussing the future of open source in Europe and want to continue the conversation, come join us at O4B: The Open Source Business Forum @ o4b.org!)

this moment is a portal and a hole

These words were written by White Eagle from the Hopi on March 16, 2020. While the words were specifically written in response to the novel coronavirus, his message on how to stay hopeful and resist through joy and care is even more vital today:

This moment humanity is going through can now be seen as a portal and as a hole. The decision to fall into the hole or go through the portal is up to you. If they repent of the problem and consume the news 24 hours a day, with little energy, nervous all the time, with pessimism, they will fall into the hole. But if you take this opportunity to look at yourself, rethink life and death, take care of yourself and others, you will cross the portal. Take care of your home, take care of your body. Connect with the middle body of your spiritual House. Connect to the egregor of your spiritual home. Body, house, medium body, spiritual house, all this is synonymous, that is to say the same. When you are taking care of one, you are taking care of everything else. Do not lose the spiritual dimension of this crisis, have the aspect of the eagle, which from above, sees the whole, sees more widely. There is a social demand in this crisis, but there is also a spiritual demand. The two go hand in hand. Without the social dimension, we fall into fanaticism. But without the spiritual dimension, we fall into pessimism and lack of meaning. You were prepared to go through this crisis. Take your toolbox and use all the tools at your disposal. Learn about resistance with indigenous and African peoples: we have always been and continue to be exterminated. But we still haven't stopped singing, dancing, lighting a fire and having fun. Don't feel guilty about being happy during this difficult time. You don't help at all by being sad and without energy. It helps if good things emanate from the Universe now. It is through joy that one resists. Also, when the storm passes, you will be very important in the reconstruction of this new world. You need to be well and strong. And, for that, there is no other way than to maintain a beautiful, happy and bright vibration. This has nothing to do with alienation. This is a resistance strategy. In shamanism, there is a rite of passage called the quest for vision. You spend a few days alone in the forest, without water, without food, without protection. When you go through this portal, you get a new vision of the world, because you have faced your fears, your difficulties ... This is what is asked of you. Let them take advantage of this time to perform their vision seeking rituals. What world do you want to build for yourself? For now, this is what you can do: serenity in the storm. Calm down and pray. Everyday. Establish a routine to meet the sacred every day. Good things emanate, what you emanate now is the most important thing. And sing, dance, resist through art, joy, faith and love.

VanMoof

We at Balderton are excited to be backing VanMoof on their mission towards getting the next billion on bikes. Even before these challenging times, electric bikes were on a rapid growth trajectory. As people and companies around the world begin to think about safe commuting options going forward, we believe that the quality and experience of riding VanMoof's bikes, their strong community-driven brand and their innovative go to market will help VanMoof become a household name from Tokyo to Berlin.

Taco and Ties, the Founders of VanMoof, have a higher calling: to build the world’s best commuting vehicle, on two wheels or four. With their newest electric bikes the S3 and X3, they are pretty close. To get here they have reinvented an entire industry. Most bike manufacturers rely on commoditized parts, component assembly, distributors and retailers. A VanMoof rides differently because it was built as one integrated product with complete control over their supply chain. This allows them to consistently infuse their bikes with industry first technology that creates a joyful riding experience. Their control over their customer facing front end also allows them to help tackle barriers to everyday riding, with unique services like Peace of Mind that keep your VanMoof in great shape and out of the hands of bike thieves.

Our journey with VanMoof began more than a year ago when we met Taco at the company’s Amsterdam HQ. Over lunch we fell in love with the passion, focus and ambition of the team. We stayed in close contact in the intervening months and in the past few weeks, that focus and ambition crystallised into a successful launch of their newest model. When he let us know that they wanted to accelerate their growth this year, we jumped at the opportunity to work together.

The company boldly launched the S3 and X3 at a time when around the world supply chains are falling apart and people are uncertain about their futures. Despite this uncertainty, the company has seen unprecedented demand. Bicycles are dependable and are becoming an ever more important part of our commutes. Cities like New York, London, Milan and Berlin are building better bicycling infrastructure at unprecedented rates in order to become safer, greener, and cleaner.

Our conviction was deepened by tremendous market growth in electric bicycles, particularly in Europe and the United States. For example in Germany, an important market for VanMoof, the overall electric bike market grew 39% yoy in terms of units in 2019, from 1M to 1.4M, outpacing analyst estimates. While VanMoof market share in Germany is growing quickly, it still represents only low single digits. There’s no ceiling in sight.

VanMoof is much more than a company. It has created a diverse tribe around its brand filled with a world of people who ride bikes but resist the “cyclist” stereotype. There are models who name drop the brand in Vogue articles even while its subreddit boasts more than one thousand members.

Customers love VanMoof because Taco, Ties, and the entire team’s commitment to quality produces a category-leading product that is changing the world for the better. Tim Bunting, myself and the entire team at Balderton are thankful to be on the ride.

zurück in berlin

back in berlin

In 2014 I left a rewarding but comfortable job in New York City to work for a start up in Berlin. Six months later the company folded. I was charged with selling the furniture.

Luckily I stuck around. The folks at SoundCloud took a chance on me and I was able to find personally fulfilling work that taught me a tremendous amount, understanding how SoundCloud was transforming musical careers, providing a platform to access unique content, and understanding the source of the product's tremendous popularity in cities like Cairo and Jakarta. (In Cairo I got hugs walking around the city with my SoundCloud t shirt on).

After some turbulence within the company, I left Berlin in 2016 to join the team at Balderton in London. And now, almost six years and several lifetimes later after I first arrived in Berlin, I’m moving back to the Hauptstadt. I’ll be continuing to invest for Balderton from Berlin, finding ways to do what we’ve already done well even better in Berlin and across DACH.

I’m reminding myself not to have expectations that it will be similar to my last chapter here. I’m in a different phase of my life. My partner and I are expecting to expand our family soon, and inevitably this next chapter will be slightly less rambunctious and experimental (outside our home at least).

It’s the first time in my life that I’ve moved back somewhere, and it’s no coincidence that Berlin is the place that pulled this constant wanderer back. The city and the shape one’s life takes here is at once both exotic and calm. It’s the capital of one of the industrial engines of the world, but you’re more likely to befriend a wandering artist than a titan of industry. The city was a battleground for all the great ideologies of the 20th century, and only recently has had time to come up for air.

Today, Berlin is an incredibly high velocity city that is attracting high powered talent from across the globe. I don’t know another city that 22 year olds from San Francisco, Hong Kong, London or New Delhi would be as excited to move to, or another city that would be as open to welcoming them.

The same is true of venture capital, which has formed an extraordinarily different relationship to Berlin in the past decade. In 2009 Berlin-headquartered companies attracted $26M in total funding across 50 rounds into 48 companies. In 2019 Berlin attracted $4.7B in funding across 316 rounds into 272 companies. Sure, in 2009 the global economy was in recession, but in 2007 capital raised was still only $50M.

In a very short span of time Berlin has proven it can create world-class companies. From public companies like Zalando, Rocket, HelloFresh and Delivery Hero, to private juggernauts like N26, GetYourGuide, AUTO1, Frontier Car Group, Contentful and SoundCloud.

At Balderton we believed in Berlin early. We were early backers of Wooga back in 2009, and led the seed round of Contentful in 2012. We have a small, high quality and growing portfolio in Berlin and around DACH, including category leaders like Contentful and Sophia Genetics, emerging companies like Dalia Research and Kaia Health, and our most recent investments McMakler and Infarm.

We’ve also been fortunate to serve on the board of two Berlin-headquartered companies, Wooga and Frontier Car Group, where we’re no longer shareholders. The two companies quietly sold for a combined amount of roughly $900M. We were a part of both companies from a very early stage, and have seen the unique challenges and opportunities that scaling a company from Berlin presents.

During the past 3.5 years in London I've worked hard to be present in the ecosystem and have returned to the city often. Balderton has been busy too. With the exception of Contentful, all of our active DACH investments have come since 2016. But it will certainly be different being on the ground here full time.

We’re always looking for the next great company to come out of Berlin. If you’re working on something transformative please don’t hesitate to reach out --- I’m at colin@balderton.com. (Egal in Deutsch oder Englisch)

Containous

At Balderton, we are very excited about the emergence of organic online communities. Some of the most productive and powerful of these communities to emerge in the last decade have been the globally decentralized teams of developers collaborating on open source infrastructure software. We believe strongly that being open source is becoming a pre-requisite for widely-adopted, high-quality infrastructure software today.

For us, the most compelling and strategic aspect of open source software is the community that drives the creation, development, and ultimately adoption of that software. Emile and his team at Containous, the company behind Traefik (pronounced “traffic”), have led the Traefik community with tremendous success over the last few years and we at Balderton are humbled to be joining it.

Traefik is a global leader in networking software that was built natively for a containerized, service-oriented architecture. Traefik is an open-source reverse proxy and load balancer written in Go. In short, it helps companies take internet traffic from outside their applications, and route it efficiently and effectively into their own architectures. Traefik provides a reload-less reconfiguration, metrics, monitoring and advanced traffic management that are essential when running microservices. It is easy to use and easy to configure, but powerful in its extensibility and horizontal scalability.

It has more than one billion docker pulls, has been starred by more than 25 thousand developers on Github, and has more than 400 individual contributors that hail from around the world. Traefik is used in production within critical infrastructure at companies like Ebay, Expedia, New Relic, Bloomberg, Cisco, Sysdig, Credit Suisse and Talend. Thanks to the strength of its community, Containous have so far been able to scale Traefik to these heights despite limited financial resources.

We look forward to playing an active role in the community as Containous continues to evolve its core product Traefik alongside it's newer products Maesh and Traefik Enterprise Edition, helping to transform networking for businesses, developers, and end users around the world.

probably quantum? NISQ and where we are today

Screenshot-2019-11-06-at-14.57.42

In October, my colleagues Lars Fjeldsoe-Nielsen, Maxime Le Dantec and I were honored to co-host an awesome crowd of thinkers and builders in Quantum Computing at Balderton HQ alongside the UK's National Physical Laboratory, just a night before Google announced their achievement of quantum supremacy.

I won't get into the fray as to whether Google's result amounts to supremacy or speedup, and I think this blog post by Leo at Rahko does a succinct job of summarizing the result and placing it in context. (For a more detailed take see Scott Aaronson's post) Needless to say, these are exciting times for the future of computing and for achieving a greater capacity to understand Nature.

Our gathering was motivated by John Preskill's paper Quantum Computing in the NISQ Era and Beyond. NISQ is an acronym that describes the current available quantum computing devices. They are Noisy Intermediate-Scale Quantum Computers that represent huge advances compared to the available technology a few years ago, but are still a far cry from a truly Universal Quantum Computer. In the paper, Preskill writes that "Now is an opportune time for a fruitful discussion among researchers, entrepreneurs, managers, and investors who share an interest in quantum computing." As capital has surged into this still-highly experimental field in ever greater quantities (from $70M in total quantum-focused VC in 2015 to $560M so far in 2019), it becomes critical to gather disparate viewpoints within four walls and try to separate signal from noise. (We were also inspired by BlueYard and Google's 2017 Munich gathering, A Quantum Leap.)

Over the course of the day we were lucky to have vigorous debate from company leaders like Christopher Savoie, CEO at Zapata, Ilyas Khan, CEO at Cambridge Quantum Computing, Leo Wossnig, CEO at Rahko and Justin Ging, CCO at Honeywell Quantum. These voices were complemented by many researchers from Oxford, Cambridge, UCL and other universities, by investors, and also by representatives of the UK government, including Roger McKinlay, the Challenge Director for Quantum Technologies at UK Research and Innovation.

Through the course of the afternoon we uncovered some of the challenges associated with measuring progress within quantum computing. What are the right metrics? The oft-reported total qubit number is almost certainly not a fair metric. One also has to look at measures of connectivity, fidelity, and circuit depth. Similarly to when you look at the specs for your new laptop, there is no one metric to rule them all.

We had a debate about the benefits and drawbacks of the various hardware approaches for quantum computing, including superconducting qubits, ion traps, and spin qubits. Most notably, we had agreement that superconducting qubits are easy to design with microwave electronics, but can be inherently unstable and there can be calibration issues. Ion trapped qubits have high fidelity and connectivity, but can be difficult and inaccurate to control. Spin qubits in silicon have the benefit of a pre-existing fabrication supply chain that is already manufacturing silicon chips at massive scale and low cost.

To varying degrees, all approaches are experiencing challenges scaling devices to many high quality qubits. We also lack any sort of infrastructure to allow interoperability between different QCs with different types of qubits.

A recurring theme was the necessity of teams working on hardware, software, and end-users (customers) to maintain an open dialogue. A preference one place in the stack could turn into a specification somewhere else.

On the software side, the discussion largely focused on what degree quantum algorithms would need to combine with classical and machine learning algorithms in order to be usable in the near term. Many of us were excited by the scope of using quantum computing and machine learning to augment one another, (as an example of a hybrid approach see this recent paper). All that said, we still have a ways to go in terms of demonstrating concrete value to customers.

Finally, we discussed the need for a deeper talent pool in quantum; quantum chemistry and other potential areas of near-term applications; and how quantum computing might best be regarded as a new frontier of generalized computation that is well-suited to problems requiring high dimensionality rather than high throughput.

Gathering perspectives from academia, industry, investors, and government is an important way to drive technologies further in a thoughtful fashion and we look forward to continuing the conversation with all those who joined us.

rahko

For decades theoretical physicists and computer scientists have explored what might be possible if we took a fundamentally quantum approach to computation. They’ve discovered algorithms that are theoretically able to accomplish tasks no classical algorithm has historically proven capable of. In order to execute those algorithms we require usable quantum computers that are able to perform operations on quantum bits. While a truly general purpose quantum computer is still some time in the future, the pace of advances in quantum hardware in the past few years has been astonishing.

At Balderton, we have been following the rapid emergence of quantum computing with tremendous curiosity (and a healthy dose of skepticism) for several years.

While the future scope of disruption is potentially vast, many applications of quantum computing are contingent on clearing major engineering challenges, largely around scaling the number of error-corrected qubits required to perform many quantum algorithms.

However, there are areas emerging, in particular, quantum chemistry and quantum machine learning, where quantum computing may have a disproportionate impact sooner than anticipated. Why? In chemistry, classical computers have encountered intractable problems that cannot be solved, unless we use quantum approaches to model quantum phenomena. For example, today we fix nitrogen and create ammonia using the Haber-Bosch process. The Haber-Bosch process is only 15% efficient with each pass and we use it to produce 450 million tons of nitrogen fertilizer each year. Currently a ton of fertilizer goes for around $500. Plants are able to fix nitrogen more efficiently but we don’t fully understand how because we can’t simulate nitrogenase. Using simulations to help better understand nitrogen fixation is an opportunity of tremendous scale.

Within this backdrop, we were lucky enough to come across the team at Rahko. Leo, Ed, Miriam and Ian have gathered a small but world-class team in London. They are taking unique approaches towards unlocking quantum discovery for chemical simulation, with techniques rooted in quantum machine learning that don’t require fully error-corrected quantum computers. Their goal on the product side is to build a robust quantum chemistry platform that provides best-in-class toolboxes for running quantum algorithms. Their work cuts across an entire spectrum: from deploying classical machine learning techniques and quantum-inspired methods on classical computers, to hybrid approaches using both classical and noisy intermediate-scale quantum computers (so-called “NISQ” devices), and in time techniques that will utilize quantum computers exclusively. Academically, there is a growing body of research exploring the intersection of machine learning techniques and quantum circuits. Rahko is well positioned to help companies leverage breakthroughs in this area as they unfold.

We couldn't be more proud to be working with the entire team at Rahko and are looking forward to growing and learning together in the years to come.