[FoRK] Silicon Valley's 'Pixar': Why The Startup Studio Behind Hims' Breakout Success Just Raised $150M
drernie at radicalcentrism.org
Mon Jan 14 16:19:21 PST 2019
I think they’re right:
“Silicon Valley is in a cycle of business innovation more than technological. “Ideas are a dime a dozen. It’s all execution,” Bangash says.”
Silicon Valley's 'Pixar': Why The Startup Studio Behind Hims' Breakout Success Just Raised $150M
Atomic’s team, with partners Andrew Dudum, Jack Abraham and Chester Ng at front, are looking to change how startups are created.Atomic
When direct-to-consumer men’s health startup Hims launched in November 2017, it seemed to come out of nowhere. Offering easy-access prescriptions for men’s issues like hair loss and erectile dysfunction through a quick online doctor consultation, Hims had sleek branding and eye-popping numbers for a debutant: $1 million in first-week sales and $7 million in funding right out of the gate from blue-chip investors including Kirsten Green and Josh Kushner.
Even in Silicon Valley’s hard-charging startup culture, Hims’ momentum stood out. Less than a year later, Hims has raised another $90 million at a reported half-billion-dollar valuation, with tens of millions in sales. Its torrid pace has made CEO Andrew Dudum look brilliant—or at least very, very lucky. “We were excited about how men interacted with the healthcare system,” Dudum tells Forbes. “I don’t think anybody expected how fast this would grow.”
But Hims’ apparent overnight success was no accident. It was the result of months of planning and testing at a startup studio called Atomic, quietly run by Dudum and entrepreneurs Jack Abraham and Chester Ng. Based in San Francisco’s leafy Presidio enclave, Atomic’s team of founders, marketers and operations experts poured months of work into Hims before it burst onto the public scene. And for all its rapid growth, Hims still operates out of Atomic’s office and shares back-office services with its other companies.
If all goes according to Atomic’s plan, Hims will prove to be just one in a string of startup successes. In less than five years, Atomic has launched 10 companies including Hims out of a $20 million first fund, enjoying one exit (TalkIQ) and returning its cash to investors like Marc Andreessen and Peter Thiel in less than five years—good for an internal rate of return of more than 70% so far.
Now, with a much larger, $150 million second fund, Atomic is looking to double down on its studio approach. Atomic will be staffing up in the coming months and adding a fourth partner as it aims to co-create 20 more companies like Hims. But Dudum, Abraham and Ng have a more disruptive goal at heart: to turn what we know about startup creation upside down.
In Atomic’s San Francisco headquarters, Abraham and Ng lays out Atomic’s ethos from a small office as employees from Hims, Atomic and other startups mingle outside. “It’s something I’ve been thinking about since I was 12,” Abraham says. “The intersection of big opportunities and the right people to work on them—in our view it’s pretty small. It’s driven by randomness, almost like Powerball.” To Abraham, startup cofounders meeting in college or while working at a big tech employer isn’t serendipitous or romantic—it’s wasteful. People with the right talent for an idea may never meet. Or they could waste years on the wrong one. “You can take someone who is extraordinarily effective at execution, and they’ll bang their head on the wall for the rest of their lives,” Abraham says. “We all fundamentally believe company creation is broken,” says Ng.
Atomic looks to fix what it believes is the biggest pain point in that process in a novel way: matching founders to an idea after it’s already hatched. From its first days, Atomic’s partners have developed a database of potential startup ideas, adding to it as they talk to entrepreneurs and investors and study market trends. Instead of holding partner meetings to discuss investments, Atomic’s three partners meet up to brainstorm about promising ideas from that list, now swelled to more than 500, on a white board. The ones that stand out are flagged for testing that can run weeks or months, while Atomic looks internally and through its network of contacts for potential CEOs to take over the business if it demonstrates traction.
Hims early traction makes it one of Atomic’s best-known portfolio companies to date.Atomic
With Hims, Atomic spent a weekend building a crude prototype, then allocated $50,000 to market it online and through social media. The partners say the first version of Hims was so rough—a few screens and then a prompt to input a credit card—that they almost never ran the test. “It wasn’t a good app,” Dudum says. “But we thought, if this works, we will have to build it. Because then we’d have customers climbing over walls to get access.”
Arguably the most difficult part of assembling a startup happens when demand is evident and it’s time to form a team around the prototype or pitch. Dudum joining Hims as CEO while still a partner at Atomic is the exception so far. Typically entrepreneurs will spend time in residence with Atomic, or Atomic will seek out potential leaders with relevant operating expertise. That’s been the case with Bungalow, a residential real estate product for young professionals that Atomic cofounded with Andrew Collins last year; the company has since announced a total of $64 million in funding from firms including Founders Fund and Khosla Ventures. Another project, Terminal, helps companies build remote engineering teams at campuses in places like Waterloo, Ontario; Toronto; Montreal; and Vancouver. Atomic’s own portfolio uses Terminal—but also Eventbrite and Dialpad, which acquired Atomic company TalkIQ in May 2018.
At one of Atomic’s newest, and still stealth, companies, CEO Nikki Pechet was pregnant and not looking to leave her senior role at professional services site Thumbtack when Atomic reached out through a mutual friend. “The reasonable plan was, have the baby, be an advisor, and maybe start something next year,” she says. “But I completely fell into it.” The real estate problem Atomic was proposing to solve was one Pechet felt personally; even better, Atomic had already lined up contracts on preorder. Tempted to start a similar business on her own—which would allow her to keep 100% of the equity—Pechet decided that having Atomic’s team to support her through pregnancy and maternity leave, as well as the staff Atomic already had working on the idea, was too good an offer to pass up. She negotiated an ownership stake comparable to that of a CEO who has other cofounders, she says, and got to work. “This will be my company for the next decade, and it’s my team and my strategy,” she says. “Atomic is my partner in getting it done.”
Under Atomic’s model, startups like Pechet’s will launch with the equivalent of seed funding secured. But as Hims proved, traditional VC investors can be quick to follow-on into its companies. Thrive Capital reached out to Atomic after a one of its team members was targeted on Instagram for Hims’ prelaunch beta test, before joining Forerunner Ventures, SV Angel and others in its first fundraise last year. “They are unique in that they are founders at heart but have built an efficient machine to support their ideas and the companies they create,” says Kushner at Thrive. “I see them as an important partner to us in the ecosystem,” says Alex Bard, whose firm Redpoint invested in Hims’ next round.
At Trusted Insights, an investor in Atomic’s fund, limited partner Alex Bangash says he’s confident that Atomic will produce returns on par with those of a more traditional VC firm. Atomic’s model, he says, enables startups to eliminate much of the risk in investing in technology and team, echoing one of Abraham’s overarching theses: that Silicon Valley is in a cycle of business innovation more than technological. “Ideas are a dime a dozen. It’s all execution,” Bangash says.
But sustained execution is never a guarantee. While a number of groups, such as Betaworks in New York and Science in Los Angeles, have found long-term footing with the studio model, other studios have launched and quickly faded—either because of poor early results or because their founders used them as a vehicle to find and then lead one promising company. Twitch cofounder Justin Kan announced and then abandoned a studio plan after leaving Y Combinator in order to focus on startup Atrium; Max Levchin, though he still operates startup lab HVF, now works full-time as CEO of fintech startup Affirm.
A structural difference that could help Atomic is that it has three lead partners (Ng joined a bit later when Atomic had three portfolio companies under way). That means it isn’t dependent on one person or one idea, says Jules Maltz, who has co-invested with Atomic from growth-stage VC firm Institutional Venture Partners. “They’re like Pixar is to movies,” he says. “They’re more like a self-propagating group of entrepreneurs.”
Unlike some VC firms, all of Atomic’s partners have entrepreneurial and operating backgrounds. Abraham founded and sold local shopping site Milo to eBay in 2010. Ng ran his own startup, app distributor SweetLabs, out of San Diego until 2015. And Dudum, a college friend of Abraham’s at the University of Pennsylvania’s Wharton School (both dropped out, bit by the startup bug), founded a nonprofit micro-loan site and ran product at video startup TokBox.
If Atomic’s team gives it a competitive advantage, Hims’ continued growth could test the resiliency of the partner dynamic. At some point, Hims will need its own office space. While Dudum says he’s still active with Atomic, some of his investors have the impression that he’s working on Hims more-or-less full-time. Asked whether he would return to serving as a full-time partner at Atomic should Hims continue to find success, Dudum wouldn’t rule it out. “Atomic is built on us being aware of what we are good at,” he says. “My approach with Hims is, ‘Run it until you can find someone uniquely better to do it.’” Though no one will complain while the business is growing like a weed, Dudum may eventually need to make a difficult choice. “I don’t think it’s viable to outsource leadership or turn over DNA before the founder imprint is made,” says Forerunner’s Kirsten Green. “With Andrew making a full-time commitment to the company, the Atomic platform felt like a notable added benefit.” Maltz puts it more plainly: “I don’t think you mess up a good thing.”
If Atomic can’t keep the band together as its companies mature, the pressure will be on Abraham, Dudum and Ng to bring in new partners who can keep up. Having 500 ideas is valuable only if you choose the right ones and put the right people behind them. With the new, larger fund, Atomic plans to hire more support staff for its own operations and the shared back-end needs of its portfolio. Top of mind will also be bringing on a fourth partner, including interviewing female candidates to break up the all-male flavor of the leadership team. One thing Abraham says he isn’t concerned about is managing the egos of founders and startups whose success and recognition may eventually outpace the studio and its partners. “We’re okay with that. We’d love to be kingmakers or queenmakers,” he says.
One benefit of a bigger new fund: The 20 new companies Atomic plans to eventually launch will have more capital at the start, meaning the next Hims may skip straight to the $90 million-type investment round. For VCs, that could mean doing business with Atomic just got more expensive. Therein lies one of Atomic’s competitive advantages: Its partners can build ownership in potentially massive businesses while investors debate and schmooze. “A VC, their day is stacked back to back with pitches and meetings and emails. There’s a lot of defense,” says Ng. Abraham finishes his thought: “We spend all our time building companies.”
I'm an associate editor at Forbes covering venture capital, cloud and enterprise software out of New York. I edit the Midas List, Midas List Europe, Cloud 100 list and 30…MORE
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