The Price of Anything

Michael Flaxman is the CEO & co-founder at Priceonomics, a Y Combinator alum. His goal is to find tell consumers what prices they should look for when they want to buy whatever it is they want to buy. I mean, there are hundreds of things you can research through their website. We got to talk about how it works, the YC experience, chair arbitrage, and what comes next. For more from Michael and the guys at Priceonomics, check out their blog. Their blog has some great articles; I link to two specifically below.

What’s your pitch for Priceonomics ?

We are the price guide for everything. You know how you can figure out what your car is worth on Kelley Bluebook? We can do that and we do it better than them. But it’s not just cars. We’ll also tell you what it costs for bikes, boats, sunglasses, RVs, and planes. Basically anything you sell on eBay or Craigslist or in the real world, we know what it’s worth.

So how does it work?

We price everything algorithmically. There’s no human interaction involved in any specific price guide. The site works by crawling the web. We index all the transactions we see online. We’ve done it for hundreds of millions of them. We’ll take unstructured text from them and determine what it means. A transaction we might find would be an iPhone 4S for $400. From that, we’ll figure out it’s the iPhone made by Apple and it’s the 4S model. We know the price, location, and date. We aggregate that with all our other information, and then we can see a nice bell curve of all Apple iPhone 4S’s. We’ll see what the average price is and how that’s trending over time. That’s always been the core of what we do. What we’re starting to do more of is showing people “Oh hey, would you like to see the iPhone 4S coming up for sale in your area?” Maybe it’s something you want to buy. We can do that for any other product too.

As mentioned, you’re a Y Combinator graduate (YC W12). Their application process is famous. How was your experience getting in?

It’s exactly as advertised. There aren’t any special secrets or advice you’ll hear from me that you can’t find anywhere else. First, there’s the application that you just find online. It’s really long, but it’s quite helpful. It forces you to think through your business. The closest thing we have to a business plan is our YC app. We never made a PowerPoint or wrote a full plan, did market sizing, or anything like that. That app asks you really hard questions. I recommend that people go through it whether or not they’re applying. They’ll be better off for the experience. Anyway, we got past that and we were super excited. We got down to Mountain View for our interview. It was only ten minutes long, so that’s stressful. And, there are now so many people interviewing that you don’t interview with all the partners anymore. We were the first batch that met with a subset. We just interviewed with three partners that I think were randomly assigned.  That was it. We got in and we met the rest of the partners on day one.

On your blog, you put together an awesome post talking about your fund raising experience and I urge readers to visit it. In it, you were labeled “The Closer,” so first off, congrats on that. You closed the post by thanking YC for everything they did. What was your time there like?

Something that’s not totally clear on the outside is how hard those guys work. There are a lot of partners at YC and they all work really hard. They’d literally watch our presentation, film it, and send it back with comments saying you did this right, don’t do this, and change that. One of the things that surprised me most, even though it’s not directly related to funding, was about a new blog post we put out. We didn’t publicize it or anything yet. Ten minutes after it was live, Paul Graham sent out an email pointing out some typo six paragraphs in that was really minor. He’s just really on it. They all are. That just shows how hard they work all the time, for all the companies. At the end, they’re introducing you to investors, helping you on the pitch, but during YC is where the real value is. You say to them “I got this idea, I want to build this.” They’ll say “Show it to me,” then say “That’s the coolest thing ever!” or “That’s not such a good idea, don’t waste your time on it.” They’re really honest but in a helpful way. The direction of where to take the product, what to do about fundraising, I mean, that can take forever and we took almost no time. They did all the legal stuff too.

We mostly got to focus on building a product, and didn’t have to think fundraising until the very end. We also got this just instant credibility. For most companies, from day one, it’s all about money. You’re just an idea and in a super scary place. In YC, you have a little money from them, and you’re not immediately concerned about having to pay the server bills with your credit card. And I can’t stress enough this credibility. You go to talk to an investor at Demo Day, and you’re all of a sudden this legitimate thing. That means we get to spend all of YC building something cool.

On your About.Me page, you’re a self proclaimed “Econ Dork turned Silicon Valley Entrepreneur.” How did you get into startups and entrepreneurship?

I’ve always had a passing interest in entrepreneurship. I took a bunch of courses during college and it was my first job when I was twelve. I always had that interest, but got a management consulting gig out of college. It was very corporate and wasn’t exactly exciting. I didn’t love my job and just came out to California to build a startup. I was the first employee at Thumbtack.com, the marketplace for local services. I wasn’t really making rational decisions at the time. I didn’t want a corporate job and I was really excited about this company. I took this completely blind leap of faith and had no idea what I’d get into. I totally loved it. I found myself working all the time and not because I was forced. I loved this uncertainty and risk. It was great to just try something out. If it didn’t work, it didn’t matter. You just tried something else out. About three years after that, my co-founder Rohin and I came up with Priceonomics and thought “Let’s go for it.” At the very beginning, we approached Omar and he was into it too, so we launched.

In one post, Rohin talks about arbitraging the price of chairs and turning a small profit on it. While you’ve said that’s not a business model you want to pursue, what is the long term goal?

We found out the chairs were heavy and bulky, and people were flaky. There was a lot of nitty gritty work involved. We made a decent amount of money in a short period of time, so I don’t want to turn my nose up at that. But it wasn’t for us. We’re still figuring out what’s best.

People come to us usually when they want to buy, and sometimes to sell. When they’re looking up prices, it’s usually because they’re about to purchase something. That’s the best user to have, someone with the intent who’s ready to go. In terms of what model’s best for that, we’re not sure yet. We could show users all the products at the underlying sites, like at Craigslist, help them buy it, and collect some affiliate fee. We could offer to connect them with each other. If someone wants to buy and someone else wants to sell, we can connect them, like eBay does. It could be a lead generation thing. If someone wants to buy a car, we can go to a dealership in the area and say “Here’s an active customer.” We could do a data thing. We have really, really great data. We actually just released a Priceonomics API and we’re excited to see what people do with it. It’s early for us though, that’s what the next year for us is about.

Right now you’re hiring some developers and engineers. Hiring is a crucial task for startups, to the point that Fred Wilson is doing a series for MBA Monday about it right now. What’s your philosophy on hiring?

Get the smartest people we possibly can. Engineers are really unique and they replace the roles of so many other people. It used to be you’d hire someone to do the ad buying. Now you hire an engineer to build a system that buys ads on Google using stats and with no human involvement. That’s a small example. Engineers just wear so many hats. Whether it’s some system for email marketing, something to crawl the web, or figure out prices, or send alerts. Engineers are the core. We’re all about really smart and talented engineers. We think we have a cool problem to solve. They like when we tell them we’ve got hundreds of millions of data points and all kinds of scaling issues. Plus, the front end is cool. We need to figure out how to convey our message in a useful and easy way too.

What or who influences you the most?

I mean, Paul Graham is really inspirational, very helpful and accurate. Steve Jobs is amazing for me. No one would have been able to predict how successful Apple would be. He just saw an opportunity and went after it. I’m not these guys obviously, but their approaches are powerful.

What’s your favorite startup that’s not you?

I think Thumbtack is great. It’s a marketplace for local services run by about twenty people in San Francisco. It can help you find anything you need from a plumber to a babysitter, gardener, or handyman. It’s growing super fast. I’m obviously biased because I worked there for three years.

Outside of that, I think Uber is really cool. I’m also a fan of Twilio. I think anything that makes the lives of others easier is really great.

Lawyered: Talking to Bo Yaghmaie

Bo Yaghmaie has been a lawyer in the New York venture capital and entrepreneurship spaces since 1996. He currently heads Cooley’s Emerging Companies and Venture Capital effort in New York. Besides working with his clients, Bo’s been very engaged with the local community by serving as a TechStars mentor, ER Accelerator mentor, and on Columbia’s Entrepreneurial Sounding Board. More recently, he was involved with the launch of the Digital Media Center in New York earlier this year, which you can read about below. As an integral participant in the startup space, I had to put some time on his calendar to catch up. You can find our conversation below.

                                                                                                                                                                                                       

When most people outside of the startup community think about its participants, they typically think about people like entrepreneurs, angels, and venture capitalists. Can you talk about the types of critical services you provide, and why working with someone who’s an expert in this space is so important?

First time entrepreneurs have less of an understanding of how important a professional network is to your enterprise’s successful launch and the ultimate execution of your business plan. Serial entrepreneurs, on the other hand, inevitably turn to their lawyers as the first phone call, about whatever they’re doing. Those of us who do this for a living do a lot more than the paperwork attendant to the formation of the company, protecting the company’s IP assets, and venture and other financings, even though that’s part and parcel of our day-to-day job. How we really add value is through our understanding of the ecosystem in which our clients operate, our relationships with all the players in the ecosystem, and our judgment that’s born of “been there, seen that.” In other words, you become their valued, trusted advisor because you’ve seen anything they’re going to see, time and time again. The difference between a serial entrepreneur and the first timer is the serial entrepreneur has been through the curves in the road and has inevitably learned that “Man, if I had someone on my side that knew what was coming, it would of been a lot easier for me and for the enterprise.” The first time entrepreneur doesn’t necessarily know that but more often than not learns the hard way.

In a very crowded environment, a lawyer isn’t just a lawyer when it comes to working with startups. Any lawyer can do some of the basic things that a startup needs but there are only a handful of lawyers in New York that bring the value-add we are talking about. From where I sit, the ideal partner brings together a few things. First, they need to bring a really strong platform and a robust set of capabilities across a broad range of specialties so that they can meet all of your needs, at every turn, as the enterprise grows and scales. Second, they have to have a truly deep understanding of your business and the ecosystem in which you live. And third, the person you’re working with must have a lot of experience and should serve as an advisor. They’re the person you turn to and say “Hey, I’m struggling with how to think about A, or how to present B to the board, or I was thinking about reaching out to my investors and asking them the following, what do you think?” It’s that kind of experience and judgment that makes a big difference in advising startups properly, rather than just meeting basic needs. We give entrepreneurs board-level advice about the issues they’re having and the commercial arrangements they’re pursuing day in and day out.

In early April, President Obama signed the JOBS Act into law. What type of impact do you think that will have on startups?

It’s obviously too soon to have a real sense of how the JOBS Act will play out but there’s no question it removes some barriers to fundraising for smaller companies and fundamentally alters the pathway to an IPO. Clearly, taking some of the regulatory hurdles out of the way of capital formation will inevitably enhance those capital markets. We’re in a uniquely dynamic market for venture capital and early stage investing in New York where some of these additional incentives, like crowd sourced funding exemptions, aren’t necessarily required to create an impetus for additional investments. So exceptions for crowd sourced funding, raising the limits on number of investors before you’re required to register for the ‘34 Act, some of the flexibility you have around solicitation, those are all great but they would be a lot more valuable if we were in a tight investment environment. It’s hard to know how these changes will play out because there’s already so much capital in play in the system. It’s the really challenged companies that will need to go to crowd sourcing, because honestly, it’s not that hard to raise half a million dollars of seed or angel money if you’ve got a good idea. There’s no question the JOBS Act is great for emerging growth companies, particularly for later stage companies that have an IPO in their 12 to 18 month plan. I think the flexibility around confidential filings and the more limited requirements around financial disclosure and controls create a lot of flexibility that will ultimately be highly valuable.  We are already seeing a tremendous amount of activity across the firm for issuers that are gearing up to move forward with an IPO, despite little visibility into the whether or not the markets will be there.  That’s largely because there’s no reason to not pursue a confidential filing and be ready if you are essentially there on business metrics that the market is expecting to see.

Every other day there’s an article about whether or not the startup markets are overheated or if we’re in a bubble. A lot things point to yes and here’s a few: Instragram’s billion dollar buyout without a dollar of revenue, constantly rising valuations, and Bravo’s new reality TV show “Silicon Valley.” From what you see on a daily basis, do you think the pundits are correct?

The markets have been extremely active so it’s definitely a concern. There are too many dollars in the system funding too many companies in each of the verticals that we play in. Now is that good or bad? Companies are getting funded even though they haven’t gone through the typical analytical process that’s long been an integral part of venture investing. That’s the bad. The good is that clearly this additional capital, particularly in New York, has enhanced the viability of the ecosystem. It’s created a fertile ground for entrepreneurship. Fundamentally the markets will determine who the winners will be; I think that’s a good thing. Sure, you have four or five companies getting funded simultaneously that are tackling a similar challenge, and not all of them will survive to raise a B, C or D round. But that additional funding creates an additional layer of competition in the markets so entrepreneurs and companies are forced to produce the best products to win. It’s not all bad. Is it bad that valuations are on the rise and people are going to get burnt? Yes. The venture community understands that. They invest on a thesis that out of every ten investments, they only need one or two big winners and two or three okay returns, and the rest aren’t going to play. On the entrepreneur’s side, in my experience, the best entrepreneurs are the ones who have started a business and failed. This market will provide enough learning experiences like that. In the end though, this excess capital is fueling a really vibrant ecosystem for entrepreneurship. Net-net that’s a very good thing, especially in New York.

You advise a lot of venture backed companies and many of them are seeking exits. What types of exits are most common right now and are people finding it easy to reach them?

Couple of things. One challenge over the last few years has been that the public capital markets weren’t a viable exit for late stage companies. That’s changed. We’ve got a lot of companies in the IPO pipeline looking at valuable exits. By definition, that puts pressure on buyers in the market to act and take some of these companies out before they’re public. I think that dynamic has fundamentally enhanced the likelihood of liquidity events for companies with enough traction to pursue an IPO. Therefore, the folks that have the balance sheet are going to be more motivated to act. The truth is at the end of the day, most venture guys prefer M&A exits. They’re a lot cleaner and easier than IPOs. The notion of being a reporting company that lives quarter to quarter and having insider limitations does not have the same appeal to venture investors as a meaningful sale with meaningful liquidity. Overall, we are seeing a lot of vibrancy in the IPO markets, with clients like LinkedIn, Zynga, and Yelp that have gone out and done very well, and that flows downstream. As VCs see liquidity in some assets they’ve been sitting on for five, six, or seven years when there wasn’t a vibrant M&A or IPO market, they then have a greater ability to put more money to work. There’s a network effect that hopefully leads to relatively stronger market opportunity for emerging companies.

You’ve been doing this for a long time and across multiple business cycles. Can you talk about how the venture and startup scene has changed in New York over time?

I’ve been doing this in New York going back to ‘96. I was here when there was nothing going on and then I saw the dot com boom and bust in 2000-01. Now we’re seeing the emergence of really good companies and a completely different level of activity in New York. Some people parallel it to the dot com bubble but it’s very, very different. What we have in New York is a true baseline ecosystem. Back in the last iteration, there were a handful of companies that raised a lot of money in the public markets without a viable business model that could survive without additional funding. More importantly, there ultimately wasn’t a real deep ecosystem of entrepreneurship. Since then, there’s been a confluence of factors that have really changed the market dynamics in New York.  First, some very exciting companies in New York emerged in the mid-2000’s and got the attention of venture luminaries in the west coast and Boston. In addition, you had venture funds anchor in New York and invest in some really high growth companies. As a result, the markets started looking at New York for good, new exciting opportunities – almost a green field –  and you saw an influx of capital. At the same time, there was the Lehman collapse and the financial meltdown. A lot of the talent that by default used to go to Wall Street all of a sudden didn’t have that opportunity. Some really smart young kids said hey, let me try my hand at a startup instead.  And, that was the moment when things changed – the spark that set New York on fire.

So when venture money, availability of capital, and a rich pool of human capital combined in one place, you saw a lot of great companies get formed in some important verticals: media, adtech, fintech, e-commerce, mobile and social. As these companies have grown, there’s now a real network that’s been built. You have companies founded 5 or 6 years ago that are really far along and now some of those founders have peeled off and started something new. We’ve never had that before. The first bubble was like a big party where someone came in and turned the lights on. All of a sudden everyone had a hangover and no one wanted to go out for a long, long time. This time it’s very different. Sure, a lot of companies aren’t going to make it in this environment either. They won’t be able to meet their milestones to raise additional capital. But that’s okay, not every venture investment is going to be a 7x. Most of them end up being write-downs and write-offs, which is why it’s called venture capital. Some of these companies will build great things and have great value, and that’s where the returns are. They’re here in New York and coming up through the ranks.  But more importantly, the pool of human capital that is being built, regardless of whether the companies are winners or losers, that is here to stay and is now built to last.  That’s a very different environment than any other time in New York because the overall ecosystem is more mature, and there’s a lot more talent and capital deployed in it. This results in an ecosystem that can host great startups that go onto do even greater things.

It’s a pretty frequently discussed topic, but how does the New York scene compare to Palo Alto and Silicon Valley?

The Official Seal of Palo Alto, CA. (Photo credit: Wikipedia)

Truth is, New York is not on equal standing with Palo Alto or the Valley and won’t for a long time. If you look at the numbers of companies started, funded, or with great outcomes, the valley outhits New York by about a 3-to-1 margin. Palo Alto and Silicon Valley will be the hub for tech innovation for the foreseeable future. Over the past three to four years though, New York has emerged from being a second tier tech and emerging company hub to a real first tier player. We’re now on equal footing with cities like Boston and San Francisco, and we can actually hold our own in certain verticals against the Valley, at large.  If you look at internet based business, you see that New York and San Fran are the leaders. But for the overall emerging company ecosystem, Palo Alto is still significantly larger because there’s a lot of tech innovation coming out of places like Stanford, as well the great tech companies anchored out there – Apple, Cisco, Google, Facebook, Intel and the list goes on. You just need to drive by their campuses to be amazed. They have the machine built but it wasn’t built over night.  They’ve been at it in earnest since the 60s.

There will be a day when we’re a lot closer.  I have no doubt about that.  It won’t be four or five years, because that’s not realistic. But if you look at our growth trajectory, the hockey stick is at a much steeper angle here than the Valley. What’s really exciting is that New York is at the heels of Boston when Boston and Route 128 have long been the east coast hub for venture activity and emerging growth. To have New York in the same league as Boston and even in the same conversation as the Valley is really exciting and flattering for the community. My view is that’s going to remain a consistent theme. If things do continue in this trajectory, New York will outpace Boston in the next decade. Silicon Valley is safe for quite some time though.

I know that you’ve been very involved in the launch of the Digital Media Center (DMC) earlier this year. What exactly is it and why have you and Cooley gotten involved?

One of the things we do at Cooley is spend a lot of time and energy supporting key groups and areas that will bolster and support entrepreneurship and create a community that can help entrepreneurs thrive. It’s part of our real investment in the community and its core to who we are at Cooley. The DMC is an example of that. Together with Silicon Valley Bank, Deloitte, and NASDAQ, we wanted to create a forum for companies in the digital media space to get together and share ideas and have an unfiltered, substantive, valuable, peer-to-peer exchange of information and ideas. There’s so much noise in the market that we thought it’d be great to create a forum for the thought leaders to share ideas and challenges and create that dialog. We support a whole host of forums, including TechStars, ER Accelerator, DreamIT and other smaller accelerators, and a variety of groups. We have startup leadership programs with Harvard Business School Angels and Insite. There’s a long litany of community organizations that we support. DMC is a relatively high profile example of that, and we’ve got high aspirations for what it can do for the community.

What’s one free piece of advice you have for people involved with startups?

First and foremost, be true to yourself and your idea. Pick your partners carefully. Whether it’s your founding team, venture investors or the professionals you work with. That matters in a big way.  And, make sure you avoid some of the hubris that goes around in this ecosystem when capital is plentiful.  We are ultimately playing in a very small sandbox and you’ll be surprised how much smaller the sandbox gets when the markets get tough.  So ultimately, build a business based on trusted relationships. I think it’s that simple.