Category Archives: Technology – Insights

Five Lessons From The +$15B Virtual Goods Economy

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While it’s tempting to dismiss virtual goods as a niche product category limited to online role-playing games or emoji “stickers,” the impact of this market is actually much bigger than you might think. Dating back to the earliest social networks, virtual goods have played a critical role in shaping the behaviors and business models behind major trends in online engagement. Here are five ways developers and entrepreneurs can directly benefit from those learnings.

Lesson #1: Maintain Flexibility In Your Business Model
Like many online publishers, some of the earliest social game developers focused on monetization opportunities via digital advertising. Launched in 2001, one of the first to gain traction with this approach was a massive multiplayer online (MMO) role-playing game called Runescape.
The game was set in a medieval fantasy world, and featured an inventory of hundreds of virtual items which players could use to level-up their characters — attainable by completing missions or bartering with each other.

Even in the earliest days, some of the most active players expressed a willingness to pay for these items in order to enhance their experience. In fact, three surveys conducted between 2005 and 2009 suggested that at least one in five MMO players already traded game goods for real money.
Unfortunately, a sizeable portion of this trading was taking place in “black markets.”
The developers behind Runescape had certainly taken note of the behavior, but chose to clamp down on it in order to preserve the “sanctity” of their game. The official policy was to actively prohibit the buying of gold, items, or any other products linked with the game, for real world cash.
As a result, players found ways to build their own secondary markets — effectively achieving a hacked-together style of freemium economics.

Today’s modern startups have learned that ignoring the behaviors of their most engaged customers comes at a great risk. While Runescape earned its developer a respectable $30M in advertising revenue in 2008, that figure paled in comparison to an overall virtual goods market that was already valued at over a billion dollars annually (based primarily on the gaming market).
Quite a missed opportunity for a game that Guinness World Records crowned the “World’s Most Popular Free MMORPG” (2008) that same year!

Lesson #2: Fringe Behaviors Can Open Up New Markets
Runescape may have been one of the first major MMOs to fuel a “black market,” but it certainly wasn’t the last. With the rise of games like World of Warcraft, the unofficial market for virtual goods transactions grew considerably.
Among the most notable outgrowths of this trend was the practice of gold farming, whereby some players focused their time solely on accumulating in-game currency for resale. In effect, these players approached the game as their primary employment, with a relatively predictable minimum wage.

To get a sense of scale, it was estimated that the gold farming market was already worth nearly two billion non-virtual dollars globally by 2009. One article in the New York Times from 2007 estimated that 100,000 people were employed in this practice in China, with worker salaries ranging from $40 to $200 per month.
Often these operations were run as small businesses, with “bosses” earning a profit of nearly 200% on top of worker costs. In fact, this practice became so lucrative that at one point prison inmates in China were forced to play World of Warcraft in lieu of manual labor.
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In addition to gold farmers, the demand for illicit virtual goods also gave rise to third-party platforms focused solely on facilitating exchanges between players. In a testament to how mainstream this market was as far back as a decade ago, a significant portion of this industry initially migrated to eBay.
However, citing a violation of its terms of service, the auction site began cracking down on virtual goods sales in 2007. This move pushed virtual goods transactions towards less transparent destinations such as Internet Gaming Entertainment (IGE).
Today there are hundreds of platforms offering “secure” opportunities to buy and sell everything from in-game currency to entire player accounts. We’re even witnessing the emergence of these transactions for casual mobile games. Days after the launch of Pokemon Go, there were already a bevy of leveled-up accounts for sale across dozens of sites. Although sales of mobile game accounts are still a small component of the secondary market, they will likely take on far more significance in years to come.

Lesson #3: Adapt To New Platforms
Over the past several years, it has become clear that smartphone screens have become the most important battleground for consumer attention. As of 2014, the number of mobile users officially surpassed the number of desktop users, and the gap continues to widen.
Mobile gaming has become a strong beneficiary of this trend. Not only have mobile games already surpassed console games in terms of total revenue, but they’re also growing at nearly five times the rate.
In fact, mobile gaming currently represent a staggering 85% of all app revenues, in any form.
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According to a recent study by Slice Intelligence, the average paying player on mobile spends $86.50 per year on in-app (virtual goods) purchases. Some games far exceed that, with Game of War: Fire Age bringing in a whopping $549.69 per paying user, and over $2M in total revenue per day at its peak.
With those kinds of economics, it’s no wonder the game’s developer, Machine Zone, could afford to drop $40M on an ad campaign featuring Kate Upton.
The rapid acceleration of this market is evidence that the appeal of virtual goods has successfully made the jump from desktop experiences to the casual smartphone market. In fact, it’s no coincidence that the same freemium model of gameplay demanded by early MMO players has emerged as the dominant framework among mobile games.
By tweaking the same model for games with shorter duration, developers successfully leveraged virtual goods in opening up an entirely new base of casual users.

Lesson #4: Engage Your Community of Makers
While developers dictate the structure of a game, users dictate its culture. Following the patterns of social engagement across the web, there is often a small subset of highly engaged players who create the customs, quirks and content that imbue a game with its lasting appeal and sense of community.
When given the tools to make things and earn recognition, this subset of users can unlock creative new experiences for all players.
One great example of this trend comes from the world of Second Life, which grew to over 1M monthly active users since its launch in 2003. Much like earlier social networks and immersive worlds, it was free to create an avatar on the platform and engage with other users. The twist came in the form of the company’s revenue model.
Second Life charged users for the purchase and rental of virtual real estate, on which landowners could build businesses (such as nightclubs and fashion outlets) and potentially earn a profit from other players. In addition, users were given the opportunity to create and sell unique virtual goods to each other.

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Empowering the creativity and entrepreneurial spirit of the platform’s makers gave rise to a massive market for virtual goods. In 2009, the total size of the Second Life economy reached $567M, and by the platform’s 10 year anniversary, Linden Labs estimated that approximately $3.2 billion dollars (USD) worth of transactions had taken place. A handful of top users were reportedly cashing out over $1M in earnings per year from virtual businesses in real estate, fashion, and events management.
More recently, Valve has benefited from this phenomenon within its Steam platform for PC gaming. As of January 2015, the company announced cumulative payouts of $57 million to community members that had made in-game items, with average earnings of $38,000 per contributor. As an additional signal of market potential, Steam even announced it would facilitate the sale of virtual items for third-party games outside of its ecosystem.
Both examples demonstrate that by allowing a subset of creative users to take greater control of product experience, developers can exponentially increased both the scope of their products and community engagement.

Lesson #5: Social Capital Is An Effective Motivator
Following on the success of Second Life, Minecraft rode a similar wave into mainstream popularity after its launch in 2009. Often referred to as a “sandbox game,” Minecraft is a virtual environment where users can create their own maps and experiences using building blocks, resources discovered on the site and their own creativity.
Since launch, the game has reached 100M registered users, of which about 60M use a paid version.
Like Second Life, much of the content that makes Minecraft unique comes from its players. However, the two worlds differ in terms of the nature of incentives those players are offered. While some have managed to charge other players to engage with their content, Minecraft’s developers actually started discouraging the practice. Instead, Minecraft’s appeal was in the robustness of its creation tools, the ability to co-create with other community members, and the recognition for building something truly amazing.

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Another unique attribute of the Minecraft community was that makers took their engagement beyond the virtual world itself. According to Newzoo, Minecraft-related YouTube videos were watched 4B times in May of 2015 alone. The community even crowdsourced support for an official Minecraft LEGO set, which sold out almost immediately upon release.
While Minecraft may not have directly pushed users to create external content, it acknowledged their passion for self-expression, collaboration and even bragging rights. In doing so, the game touched off a broader movement among makers that exponentially improved the experience for everyone involved.
A Look Ahead
Since their initial adoption nearly two decades ago, virtual goods have come to represent a core part of our engagement on the web. From in-game items to full-blown currency, they have been adapted by online communities to promote an ever-expanding set of experiences. By continuing to monitor their evolution, we’ll undoubtedly gain valuable insight into the changing rulebook for building lasting digital products.

Amino’s Next Phase

Last year, we announced our Series A investment in Amino, a network of mobile-only communities focused on passion and interest verticals. The team has done a great job executing on the first phase of the business, which was to create standalone apps for communities. The communities range from large fandoms that many of us already know such as fans of Star Wars, Anime, and Pokemon to more niche communities like fans of nail art, Furry, or Undertale. Many of these communities started to grow rapidly and becoming strong self-sustaining communities, which led to the beginning of the second phase of Amino.

In July, they launched a mobile app that allows anyone to create and manage their own community. This gives everyone the power to create and build communities around the passions or interest that they care most about and find others around the world who share those same passions. As individual communities reach meaningful scale, they get spun out of the Amino app and become their own stand-alone app in the App Store. In just the first 60 days, 150,000 new communities were created. Today they are announcing that their users have created more than 250,000 communities on the platform. In addition Amino already operates a portfolio of more than 250 stand-alone apps, with hundreds or even thousands more expected in the future, created and moderated solely by their users.

The growth over the last few months has been quite impressive, but even more impressive has been the level of engagement among the Amino community members. The average user is spending over 60 minutes per day in their community or communities of choice. In comparison the average time spent per day on Facebook, Instagram, and Facebook Messenger combined is 50 minutes per day. This amazing level of engagement, coupled with the tremendous growth got other investors also excited and today Amino is also announcing their $19M Series B raise.

I’ve been continuously excited by what Ben, Yin and the team have accomplished in the last 15 months and am even more excited by what’s to come. I’m sure you have your own passion or interest that you would like to dive into so feel free to download Amino and find your community and if it doesn’t exist create it!

The Future Of Mobile Communities at Amino

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Last September, we were excited to announce our investment in Amino, a network of mobile-only communities focused on passion verticals. The company has made some great progress since then and today is announcing a new Series B fundraising and revealing updated metrics.
Amino’s belief, led by founders Ben Anderson and Yin Wang, is that every passion vertical deserves a dedicated and vibrant mobile community. They started by releasing stand-alone apps for many teen-specific topics, like anime, cartoons, and Minecraft. Those individual communities took off and quickly became healthy communities.
This summer, they launched a mobile app that allows anyone to create their own community. In just the first 60 days, 150,000 new communities were created. Today they are announcing that their users have created more than 250,000 communities on the platform, from Walking Dead and Vegan to Marilyn Manson and Five Nights at Freddy’s.
As each of these new communities reaches a particular scale, they get spun out of the Amino app and become their own stand-alone app in the App Store. Already, Amino operates a portfolio of more than 250 stand-alone apps, with hundreds or even thousands more expected in the future, created and moderated by their users.
As you would expect to see with vibrant communities, the engagement and usage time is very high — individual users join an average of six communities and spend an average of 60 minutes per day on the platform. As a comparison, users spend around 85 minutes per day on Reddit, an average of 50 minutes per day on Facebook, Instagram and Messenger combined, about 30 minutes per day on Snapchat and somewhere between 14 and 30 minutes per day on Tumblr.

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Today, Amino is announcing a $19 million Series B fundraise led by our friends at GV (M.G. Siegler). We are welcoming Goodwater Capital (Chi-Hua Chien) and Time Warner Investments (Allison Goldberg) as new investors, and of course USV and Venrock were thrilled to participate in the round again.
We are all thrilled with Ben, Yin and the team’s substantial progress and are excited to help them realize their dream of tens of thousands of mobile communities — one for every interest and passion you can think of.

A Q&A with David Pakman

Before David Pakman joined Venrock’s New York office in 2008, he spent 12 years as an Internet entrepreneur heading up eMusic and Apple Music Group. Having been a founder himself, David became a venture capitalist to partner with entrepreneurs and help them achieve their dreams of world domination.

We asked David a couple of questions to get to know him better.

Q: Music has always been a big part of your life. When are you going on tour? Ok, seriously though. What role does music play in your life today?

Music has been the pulse of my life. It has been ever-present since I was a kid. I listen every day, think about song structure, and dream of being an actual songwriter. I bang on my drums to get rid of life’s tensions and I DJ from time to time to see if I can make people dance and feel the intensity I feel. Lately, I am starting to see some of this present in my kids, and it is fascinating to see music affecting them in somewhat similar ways. For me, music expresses the complexities of emotions in ways words cannot.

Q: What led you to venture capital?

From my earliest days of working in the Valley, many of my mentors followed the path of big company -> startups -> VC. That path became somewhat burned into my career trajectory, so I followed it. I am glad I did, because I love it. I love working with entrepreneurs more talented than I was, and helping them avoid the many pitfalls I saw up close. I also like helping them get as close as possible to their dreams of grand success.

Q: You see hundreds of business plans and pitches every year. What makes an entrepreneur or idea stand out?

Supreme ambition. One cannot be successful without it. Everything big starts with big ambition, and it’s exciting to find founders who are dreaming big.

Q: What industries are ripe for disruption?

Every industry is vulnerable at this point in the tech cycle, but in particular, industries who don’t have direct relationships with their customers and in for a doozy. They lack the data and customer knowledge to feed into machine learning systems which produce insights and product features not possible before.

Q: What keeps you up at night?

The fear of never finding another great deal.

Q: In other interviews, you’ve talked about using Twitter as a way to join in conversations with tech leaders. Aside from you, whom should we be following? 

Ahh there are so many great folks on Twitter! Let’s see… I think Maya Kosoff (@mekosoff) at VanityFair is brilliantly sarcastic and also in touch with millennial consumer activity. I follow Matt Blaze (@mattblaze) from Penn to learn the truth about InfoSec, Jean-Louis Gassée (@gassee) my old colleague from Apple to help me understand the big tech companies’ moves, @YouNow to learn who the best new livestreamers to are, and @savedyouaclick and @mikeisaac because they crack me up.

 

In Strangers We Trust: Thoughts On The Sharing Economy

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Having stayed in my fair share of Airbnb’s over the years, I can vouch for the value of the human element. At one apartment in Palo Alto, my host handed me a personalized guidebook of local restaurants, annotated with suggestions from recent visitors. At another in London, my hostess proudly showed off her most prized possession — a map of the world covered in pins representing the home-towns of prior guests. In each case, these gestures made me feel like part of a community, and reduced any awkwardness I might have felt from staying in a stranger’s home. They also influenced my decision to leave highly positive reviews.
More than just a clever marketing tactic, building a feeling of community is a vital step towards enabling the sharing economy. Although it’s easy to get swept up in the economic narrative of unlocking value from our existing resources (homes, cars, savings, etc.), it’s equally important to focus on the human element that allows it to scale — trust.
The transportation market is a great example of this. Cars remain one of the most underutilized assets we own — operating at about 5% of existing capacity. Just think of the benefits we could unlock by pooling them into a shared network: transforming parking lots into public parks, reducing emissions, cutting the cost of mobility, and the list goes on! But before any of these gains can be realized, consumers have to trust autonomous vehicles enough to use them.
For those of us immersed in technology trends, trusting in automation comes more naturally than it does to the general public. According to a recent survey from AAA and the University of Michigan, three out of four drivers said they would be afraid to ride in a self-driving car. Over 80% of people surveyed said they trusted their own driving skills more than autonomous technology. And these concerns have likely grown in the wake of Tesla’s first fatal autopilot crash.
While the Federal government has made some strides towards establishing clearer safety guidelines, this still only addresses part of the problem. Having a high average rating on on Airbnb doesn’t just signal an apartment’s safety, but also its quality and reliability — two critical components in scaling trust across a large base of users.
This is an issue that Uber has been wrestling with over the last several years. While much has been written about the company’s investment in AV’s from the perspective of cost savings, the technology would also address much more immediate issues in its customer experience. For example, the most common user complaint by far stems from drivers taking bad routes in reaching a given destination.

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With the exception of car quality, autonomous vehicles can eliminate four out of the top five experience issues faced by customers. However, the technology alone isn’t a magic bullet. Eliminating the driver doesn’t eliminate the need for a rating system that communicates these improvements via a community of peers. If Uber can get both of these right, it would go a long way towards building trust with an even larger base of new and repeat users.
While transportation may be one of the most talked-about markets poised for disruption via the sharing economy, it certainly won’t be the last. The next decade will undoubtedly see an acceleration of collaborative consumption models into new verticals and across more participants. Along the way it’s important for founders to remember that success depends as much on figuring out empathy as it does efficiency.

On Joining Venrock & The Secret To a Good Career Pivot

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In March of 2012 I found myself pacing back and forth on the tar-covered rooftop of my LA apartment building, trying to figure out what I wanted to do next. I’d recently hit my 9 month anniversary on the west coast and come to the reluctant conclusion that I was just too much of a New Yorker to trade in my walking shoes for highway miles much longer. Besides, I’d spent the last several years working in finance, and I was starting to feel nostalgic for conversations that didn’t involve pretending to understand what a “show runner” was or tallying up my celebrity sightings.

Since 2008 I had worked for the same boutique investment bank, and following in the footsteps of some of my fellow classmates, I started putting feelers out to the typical cast of financial employers.
Just as interviews were starting to ramp up, I received an email out-of-the-blue from my friend Alex, introducing me to a marketing executive by the name of Saneel Radia. At the time, Saneel had been actively working on an idea to start a new breed of innovation company — focused on helping some of the world’s largest brands develop new digital products. Despite the fact that Saneel had about a decade more experience than I did, Alex convinced him that I might make a good partner.

Over the course of several months my conversations with Saneel steadily got more serious, and on the day I found myself pacing back and forth in the mild afternoon sun of West Hollywood, I realized that it was time to make a decision. Did I stick with the well-worn finance career path, or potentially leave it forever to try something altogether different?

As I described the situation to a good friend on the phone that day, he stopped me mid-sentence and said “put aside your concerns about the job or the ‘ladder’ and tell me about your partner.” In response, I said that I thought Saneel was brilliant. I was confident I’d be able to learn a lot from him and that I had the feeling we’d work well together. “Well then, I think you have your answer” he replied. And he was right.
Just as with products at early stage startups, “iterating” on your career plans can prove incredibly beneficial. These changes represent an opportunity to rediscover excitement in your work, broaden your perspective, and unlock new value from existing skills. However, getting them right requires first finding a team of people committed to helping you succeed.

In the first few years of Finch15, we learned a lot about the innovation landscape, pitching major corporations, and defining the strengths that made us unique. Getting there certainly entailed its share of speed bumps. For example, when I got so nervous during our first client pitch that I managed to mispronounce my own name. Thankfully, the culture we had built was one based on candor, mutual respect and a focus on our collective progress. We eventually hit our stride as a company, largely because we felt comfortable experimenting and getting some things wrong.
Four years after starting Finch15 (which went on to become part of the Publicis Groupe family), I find myself fortunate enough to have another opportunity to continue my career journey down a new path in Venture Capital. I’m proud to announce that beginning this month, I’ll be joining Venrock as a Vice President in the New York office — focused on early stage investments across IT sectors.

While the decision to join Venrock involved a lot less pacing, my rationale in making it was very similar. In the time I’ve gotten to know the team here, I’ve developed a tremendous amount of respect for their depth of expertise, work ethic, and willingness to mentor. These attributes take root a 50 year legacy of helping build some of the most valuable technology companies in existence.

As I look ahead to the next few years, I’m excited to not only learn from and contribute to this team, but also extend that same support to the community of passionate entrepreneurs we work with. If you happen to be one, please don’t hesitate to reach out!

Lyra Health: Tackling Behavioral Healthcare

By Bob Kocher and Bryan Roberts

Chances are, you or someone you love has faced a behavioral health issue that required help from a professional. Many of you, though too few given nearly 70% of people in need go undiagnosed and untreated, then found yourself attempting to navigate the system to identify the clinicians and services to match your needs, only to encounter a fragmented maze of information that is not specific, actionable, or up-to-date. With 50 million Americans suffering from behavioral health conditions – anxiety, depression, substance abuse – this is a massive problem. A massive problem that also leads to needless medical costs and complications for patients with untreated behavioral health conditions.

Today, Lyra Health emerged from stealth mode, with seed funding from Venrock. This company lies at the intersection of two of our favorite things: killer teams and large, difficult problems. Led by David Ebersman, Lyra is bringing together terrific talent from Castlight and LinkedIn to transform behavioral health to better serve patients, help patients get better faster, and to learn from the experiences and outcomes of each patient to benefit future patients.

Health IT has been booming recently with much of the focus on lowering healthcare costs by helping patients with chronic diseases get better medical care. Unfortunately, over 35% of these patients also suffer from behavioral health issues, which materially impedes the efficacy of their medical care, while dramatically increasing the associated costs. Working on improving behavioral health for them, as well as the millions of others who suffer from primary mental health issues, will improve health in these patients and spare billions in costs.

Lyra is going to change how people access and participate in their behavioral healthcare. The company will use software and service to bring the best solution to those in need. With each encounter, Lyra will get better at matching patients to providers, learning which approaches work most effectively, and when to intervene if patients are not improving. Like many of our other health IT investments – Athenahealth, Aledade, Doctor on Demand, Castlight, Grand Rounds, Stride Health, Zenefits – Venrock is lucky to partner with amazing entrepreneurs at the company’s formative stages in order to create a product and service that can help so many people.

 

 

 

 

 

Venrock 7: Looking Back & Forward

Last week, we completed the fundraising for Venrock 7, a $450 million pool of capital to deploy as we partner with some terrific entrepreneurs to build great technology and healthcare companies. The establishment of a new fund feels like one part cause for proud announcement and 99 parts assumption of a decade or more of responsibility to relentlessly strive for excellence for our two crucial constituencies – the founders, entrepreneurs and teams in whom we invest and the limited partners who have invested in us.

Venrock got started, depending upon how you look at it, either 76 or 45 years ago.  In 1938, Laurance Rockefeller started doing what we would today call venture investing when he provided the initial capital for both Eastern Airlines and McDonnell Aircraft.  Laurance continued making a new investment or two each year for the next 30 years, at which time the financial construct of venture investment vehicles led to the creation of some of the iconic early venture firms, Venrock among them. “Fund” numbers in this case are a bit misleading in terms of history as, in addition to 30 years of Laurance’s checkbook, Venrock 1, whose portfolio included companies like Apple and Gilead Sciences, was an evergreen fund for the Rockefeller family that invested in new companies over a 30 year period, rather than the 3 – 4 year new investment period that is typical today.

While our core mission and values – to generate great returns by partnering with world-class talents to build businesses that change the way we live – have remained remarkably consistent, most everything else has changed over time.  The areas of compelling investment, the depth of partnership and involvement with entrepreneurs and the competitive dynamics of the ecosystem are nearly unrecognizably altered.  With each of these Darwinian “opportunities” to evolve (and the terrific legacy of Laurance Rockefeller and the early Venrock partners as the standard to which we aspire), we reinvented the Venrock culture and investment team over the last 10 years.  Change and continuous improvement will absolutely be an ongoing effort, but today we are a cohesive, “do the right thing” focused team intensely committed to our partner entrepreneurs and LP’s.

We’ve enjoyed some recent success, though certainly not as much as we hope to create in the future. We have been an investor in eight companies with $1B+ exits over the past five years and, in 2014, have had five IPOs and five M&As, including Castlight Health and Nest. The current portfolio holds promise across a variety of industry sectors – AppNexus, Ariosa Diagnostics, CloudFlare, Dollar Shave Club, Grand Rounds, and Intarcia to jinx only a few.

Going forward we are really excited about what’s happening at the intersection of healthcare and technology, as the opportunity to dramatically remake our healthcare system attracts a quality and breadth of entrepreneurial talent that is truly staggering.  We have doubled down in New York to take advantage of the increasing opportunities in the very fertile, growing New York startup ecosystem. We also see data-driven solutions bringing true value across a spectrum of use cases as massive amounts of data are finally corralled and synthesized to produce real insights and ROI. And we are always trying to keep an eye on what’s around the next corner, experimenting and exploring to latch onto the next interesting area for innovation and growth.

I like our odds, but building companies is hard work. We will catch some breaks and will definitely lose some.  We will make mistakes and do our best to minimize their repercussions – that’s a lot more productive than trying to avoid them all together.  But most of all we will devote ourselves to partnering with really passionate, visionary entrepreneurs and serve them in any way we can to give them an unfair advantage on their road to success.