Video Of The Week: A History Lesson On Why We Need Neutral Networks

My partner Brad went down to Chattanooga where they have a gigabit fiber network around the city and attended an event about connectivity and what it does for society.

In this short (~10mins) talk he gives a history lesson on how we got permissionless innovation on the Internet and why we could lose it.

Fun Friday: Year End Music List

Every year since I started this blog, I’ve shared my favorite music of the year with the AVC readers.

In the early years, I would post different album every day for ten days (or eleven) in the process of putting together a top ten list. I moved away from albums a few years ago because I just don’t listen that way very much anymore.

I’ve moved to SoundCloud playlists and today I’m publishing my Essential Tracks of 2014 playlist here at AVC. It’s also available On SoundCloud and everywhere that SoundCloud is available (your phone, your browser, your Sonos, etc, etc). Enjoy.

The Interview Mess

So Sony has decided to pull the plug on The Interview after the major theater chains decided against showing the film.

This is a fascinating story on so many levels. It is not clear  to me who was behind the hacking attack on Sony, but there are some obvious candidates. We are witnessing cyber warfare in real time. And there are real costs involved. Who knows how much Sony has lost or will lose as a result of the hacking incident and all the repercussions. But we do know that The Interview cost $42mm to make and there were “tens of millions” of marketing and distribution costs already spent as well. All of that comes from the article I linked to at the start of this post.

How will this impact the entertainment business going forward? Will they now harden all of their systems? Yes. Will the cybersecurity industry get a boost from this incident? Yes. Will it change how they think about making films and other entertainment? I would have to imagine the answer to that question is yes.

And what of the film itself? Should we allow censorship of this form to exist in our society? Should the film get released in some form?

I think the Internet, which was the source of so much harm to Sony, should also provide the answer to what happens to this film. If I were Sony, I would put the film out on BiTorrent, and any other Internet services that want it. Give it to Netflix if they want it. Give it to iTunes if they want it. Give it to HBO if they want it. Give it to Showtime if they want it. Essentially give the film to the world and let the world, via the Internet, decide what they want to do with it.

Of course this is about money to Sony. $42mm is a lot of money to write off. And it is a lot more than that given all the extra costs. But keeping the film locked away in a vault is also a cost. Both to Sony and to society. It says that the attack worked. I think the best thing Sony can do at this point is give the world the film and let us all decide what we think about it. We should not let cyberterrorist censorship have its way.

What’s Next

I am always thinking about what is next and I feel like I’m spending even more time this year thinking about this. All of us at USV seem to be pondering this question a lot right now.

I came across this nice post by Ben Thompson in which he ponders the question out loud, which is my favorite way to ponder.

Here is the money quote:

While the introduction of the iPhone seems like it was just yesterday (at least it does to me!), we are quickly approaching seven years – about the midway point of this epoch, if the PC and Internet are any indication.4 I sense, though, that we may be moving a bit more quickly: the work/productivity and communications applications have really come into focus this year, and while the battle to see what companies ride those applications to dominance will be interesting, it’s highly likely that the foundation is being layed for the core technology of the next epoch:

Ben’s framework is roughly similar to ours but his conclusions are a bit different as follows:

1) I would substitute personal mesh for wearables

2) I would substitute the blockchain stack for bitcoin

3) I would bet on messenger as the next mobile OS over anything else. We have already seen that happen in China.

But in any case, posts like Ben’s and what comes of them (this) are super helpful. Thanks Ben.

Hashtags As Social Networks

Our portfolio company Kik launched hashtags yesterday. Kik is a mobile messenger so in Kik’s model hashtags are private or public group chats.

If I send a hashtag to a friend in Kik that says let’s chat about tonight’s knicks game at #knickskik, then that becomes a private group between me and that friend (and any others who we invite). I’ve done that so the #knickskik hashtag is now private on Kik.

But hashtags can also be public. If you have the latest version of Kik on your phone (came out yesterday), type #avckikgroup into a chat and then click on that link. Up to 50 of us can be in that group.

The cool thing about Kik is that it doesn’t use phone numbers like other messengers. It uses usernames and is not tied to your phone number or Facebook username. And so Kik, unlike other messengers, is used for both chatting with people you know (like other messengers) and people you don’t know.

That makes Kik an ideal platform for these public (and searchable) group chats. You can meet people in these public chatrooms and then take your conversations private in a one to one chat in Kik.

Ted Livingston, Kik’s founder and CEO, called this “hashtags as social networks” in a blog post yesterday.  I agree with Ted that Facebook’s model of the one network to rule them all has not really worked and that many of us are using messengers as defacto social networks. My friend Kirk told me that his wife’s family uses a group in WhatsApp like their personal family facebook feed. I think that’s the phase of social networking we are now into and so Kik’s hashtag as social network model makes a ton of sense to me.

Holiday Giving

Every year at this time of the year, my office piles up with gifts that people send me. I don’t drive back and forth to work so it’s not easy for me to bring them home. So a big pile builds up and sometime in January or February, I get a big bag, come in on the weekend, and pick everything up and bring it home. As you can imagine reading this, I get annoyed by this. I know the gifts are sent with the best intentions. But sadly they are not received that way.

What I would massively prefer is a donation be made instead.

– Back a Kickstarter.

– Or participate in the Crowdrise Holiday Challenge (which The Gotham Gal and I helped make happen).

– Or help a teacher on DonorsChoose.

If you are in the giving mood, I have a specific suggestion. CSNYC, our non-profit that funds computer science classes in the NYC public schools, has a holiday wish list up on Crowdrise.

If you want to see a map of what CSNCY is funding, you can see that here.

Our wishlist was built with our existing donor pool in mind and AVC readers might find the specific asks a bit steep. So if you don’t find any of our wishes to your liking you can make a donation of any size here:

Fundraising Websites – Crowdrise

The Perfect Board

Last month Sam Altman wrote a post about board members and why you should want them. I read it and then tweeted it out:

In Sam’s post, he says:

Personally, I think the ideal board structure for most early-stage companies is a 5-member board with 2 founders, 2 investors, and one outsider.  I think a 4-member board with 2 founders, 1 investor and 1 outsider is also good (in practice, the even number is almost never a problem).

I’ve been serving on boards for 25 years. I’ve been in every conceivable configuration. To my mind, the perfect board is either five or seven and it looks like this:

Founder CEO, Two Independents, Two Investors

Founder CEO, Three Independents, Three Investors

If the Founder is no longer the CEO, then I like this configuration:

CEO, Founder, Two Independents, Three Investors

If you have less than three investors (yay!), then replace investors with independents in each formula and you’ve got a winning configuration.

An entrepreneur the Gotham Gal is invested in asked me this question via email a few weeks ago, and I told him this:

This is a long way of saying that you aren’t done once you put one independent on the board. You are going to need a bunch.
Finally – don’t try to satisfy your VCs. They will want “names” “trophies” and the like. Satisfy yourself. Find people, ideally peer CEOs, you like respect and want to spend time with who you know can and will add value.
A great company deserves a great board. And a great board has bunch of people on it, ideally a bunch of people who are experienced at running a business, growing a business, and dealing with all the stuff that comes with that. Do yourself a favor and build a great board for your company.

Video Of The Week: The Bubble Question

Since the LeWeb video I posted on wednesday was so long (>40mins), we are going with short and sweet today.

In late October, I did an event with City National Bank. For those that don’t know, City National is one of the banks that are active in the tech startup sector, banking and lending to startups. We did a “fireside chat” format which is really my favorite way to do a public appearance. And, of course, I got “the bubble question.”

Here is how I answered it in less than three minutes:

Feature Friday: Embedding Spreadsheets In WordPress

So yesterday morning was a bit nuts. I decided to flush out some thoughts on valuations that I had talked about on stage at LeWeb. I started writing a post that would become this. I started building a spreadsheet that would become this.

I had an 8:30am breakfast and as it got closer and closer to 8am, I realized I was screwed. I had cut and pasted certain rows from the google sheet into my post and they were not fitting properly on the screen. As I played around with the underlying code, it just got worse. I was digging myself into a hole.

So at 8:10am, I made a decision. I wrote a note to everyone that the post was messed up, jumped into the shower, and got to my breakfast about 5mins late.

When I got to the office after my breakfast, I learned that a meeting I had in my calendar was not happening. Oh happy day. I love when that happens.

So I googled for a wordpress plugin that allows the embedding of google sheets and found this one.

It is called Inline Google Spreadsheet Viewer and it gives you a wordpress shortcode that looks like this:

gdoc key

If you want to embed a google sheet in a blog post, you install the plugin, you insert that shortcode, and you put the URL of the public/open google sheet into the ” ” and that’s it.

What I could not figure out how to do was to embed different tabs from the same sheet, so I ended up creating four different sheets and embedding each one separately.

But it all worked out fine. Within ten minutes I had cleaned up my post and put that to bed. Had I known about this plugin when I started the post around 7:30am, I could have easily polished the whole thing off and even had time to shave in the shower. Fortunately, it takes days for my beard to show up :)

Revenue Multiples And Growth

When you say “the stock is trading at 20x revenues” people rightly shake their head and say “that is nuts.” I got a lot of tweets like that in reaction to my comments about the Uber valuation in the LeWeb breakfast chat.

However, what people fail to realize is these things happen in a moment in time and that stocks won’t trade at 20x revenues forever.

Let’s take a fictional company that has $1bn in revenues in 2014 and goes public at $20bn, 20x revenues. Let’s say it will double revenues in 2015, then grow 60% in 2016, and 40% in 2017, and 30% in 2018.

So here are the revenue numbers

(000s)20142015201620172018
Revs$1,000,000$2,000,000$3,200,000$4,480,000$5,824,000
Yr/Yr %100%60%40%30%

So, let’s now look at profits, since valuations are ultimately a function of profits, not revenues.

Let’s say this fictional company is breakeven in 2014, but expects to make 10% EBITDA margins in 2015, growing to 25% EBITDA margins by 2018. So here are the EBITDA numbers that fall out of that.

(000s)
2014
2015
2016
2017
2018
EBITDA Margin0%10%15%20%25%
EBITDA$0$200$480$896$1,456

Let’s say this fictional company’s stock will go up 10% a year each year until 2018. So the valuation goes from $20bn today to $29bn over five years.

(000s)
2014
2015
2016
2017
2018
Valuation$20,000,000$22,000,000$24,200,000$26,620,000$29,282,000
Yr/Yr Growth10%10%10%10%

So here are the Revenue and EBITDA multiples that fall out of this thought exercise

2014
2015
2016
2017
2018
EBITDA Muiltple110.050.429.720.1
Revenue Multiple20.011.07.65.95.0

The point of all of these numbers is to show that if a company can grow very quickly over a five year period, and become highly profitable, the stock can perform well and the multiples can come down to earth pretty quickly.

That is a bunch of “ifs”, but every once in a while this actually happens. It happened with Google which now trades at 5-6x revenues, and it is happening with Facebook which is in the middle of this kind of a story. So my point is 20x revenues is a huge number, but every once in a while, a company actually deserves it.

For anyone who wants to dig into the numbers a bit more, here’s a link to the google sheet that I built as I wrote this post.