Some Thoughts On Seed Investing

We (USV) raised a new venture fund at the start of last year and started investing it in the spring of 2014. It is called USV 2014. We have made six investments in it so far and five of them are seed investments. That’s a very high ratio for USV and we do not expect that ratio to continue over the life of the fund. In fact our next investment will be a classic Series A so we are already lowering the ratio. But it is a bit of a return to form for USV as half of the initial investments in our first fund (USV 2004) were made at the seed stage.

In our core early stage funds (as opposed to our Opportunity Funds), we make initial investments at the seed, Series A, and Series B stages. In an ideal world for USV, there would be a normal distribution of these entry points with the highest percentage in the Series A stage. Over the entire history of USV, that is very much true. But on a fund by fund (or year by year basis) it varies a lot. It is mostly us reacting to the market. When the later stage rounds are too expensive on a risk/reward basis, we tend to move earlier. And when we can get good risk/reward opportunities in the Series A and Series B stages, we tend to move later. The downturn of 2008/2009, for example, led us to move a bit later in our 2008 fund because we could invest in more mature (and therefore less risky) opportunities at attractive prices.

The current market environment has pushed us to invest earlier. Some of it is that the Series A and particularly the Series B valuation environment has gotten very expensive relative to the risk as we see it. And some of it is that we are in a period of flux, where it is not entirely obvious to us where the next big things are going to happen. We have some ideas, of course, and I have been exploring them here at AVC and we have been exploring them as a team on usv.com. We think that in times of flux it is attractive to make a bunch of smaller seed investments in areas we think are going to emerge as important in a few years.

So that explains the move to seed as our primary entry point last year. I think it will continue this year but maybe moderate a bit as some of these developing markets mature and become more investable at scale.

Ok. Now that I’ve explained why I’m thinking about seed investing a lot these days, I’d like to talk about how we do seed at USV. Here are the important points:

1) We do not take a shotgun approach. We do not view seed investments as “options”. We only make a seed investment if we have as much conviction on the team and the opportunity as we would at the Series A round. We are as committed to our seed investments, both in terms of the time we spend with them and the willingness to follow-on in them. They are core investments with as much stature in our portfolio and in our firm as any other early stage investment. This is critical to understand. And it is not true of many (most??) VC firms who make seed investments.

2) We like seed investments in teams and opportunities where they have built and launched a product already. We don’t like investing in a concept or participating in a round where the uses of the capital will be to build and launch a product. This means the vast majority of seed rounds are not a fit for us. We pass on a lot of seed stage opportunities because it is “too early” for us. That is a comment on the specific opportunity however, and not seed stage investing as a whole. This confuses a lot of people. They tend not to think of USV as a seed investor when in fact we do make a lot of seeds (over 80% of last year’s investments, for example).

3) We will often lead the Series A (and sometimes Series B) in companies where we did the seed investment. We led both the Series A and Series B in Etsy and we co-led (with Spark) the Series A and Series B in Tumblr. We were seed investors in both companies. We continue to do that where it makes sense for the founders and USV. That is not a requirement or an expectation, but it does happen and I believe it is a very good thing in the right circumstances.

4) We like to participate in syndicates in our seed investments. We don’t focus too much on ownership at the seed stage. We do focus on the investors coming together around a project. We like partnering with smart angels, seed funds, and even other VCs, if the other VCs are aligned with us on how they are thinking about the particular seed investment. Our investment with Spark in the seed round at Tumblr is a good example of two VC firms partnering up at the seed round and doing a good job working together and scaling into the opportunity.

USV will never be confused with a seed fund, but we sometimes act very much like one, except that we can and will invest 20-30x our initial investment over the life of the company. That combination (a committed and active seed investor + deep pockets) is unusual. You can get one of those two a lot. But rarely both. So if you are working in an area that is interesting to USV, and if you have launched something into the market already, and if you are doing a seed round, please do reach out to us. We are in the business of making seed investments and doing a lot of it these days.

Feature Friday: Back Up iPhoto To Dropbox

The Gotham Gal moved from an old macbook air to a new one about a year ago. When she moved all of her files, configurations, and settings from the old macbook to the new one, somehow her iPhoto folders didn’t come over correctly. She was missing a bunch of photos on her new laptop and could not seem to find them on the old one.

I tried to help out but quickly got frustrated. Somehow she had messed things up in her moves from mac to mac to mac over the years and she had not backed up her iPhoto properly.

She told me that there were years, maybe a decade or more, of photos of our family and such on that laptop and that she feared they were lost.

So last week I decided to take another shot at it, using a Dropbox feature that scans your iPhoto library and backs up all the photos in it to Dropbox. I installed the Dropbox for Mac client on her old machine and let it do its thing. It eventually prompted me with the option to backup all of her iPhoto library to her Dropbox. I clicked yes and it started scanning and scanning and scanning. It must have been crunching away on her hard drive for an hour or more and eventually it said it had found over 14,000 photos that it wanted to upload.

I thought “14,000!!, that must be all of her lost photos” and went upstairs to tell her the good news. It took over a day to upload all of the photos and it seems that Dropbox found some old buried folders that I could not find myself that contained all that she had thought had been lost.

We haven’t taken a deep dive yet on the 14,000+ photos to see if they include everything she thought was lost. But I have a strong hunch that we have.

It’s a great ending to a frustrating story. If you had a fire in your house and you had to choose the few things you wanted to get out before everything went up in flames, family photos would likely be near the top of the list, after people and pets. So losing them, or thinking you lost them, is a terrible feeling. And finding them is an amazing one.

Deep Web Marketplaces

Last week Joel sent everyone at USV an email outlining his journey through and exploration of the Dark Web which ultimately resulted in a purchase of a pair of boots for his girlfriend. Jonathan replied to all with “this is the best thing I’ve read on the Internet this year” to which I replied “except it isn’t on the Internet. it should be”.

Joel got around to posting it to the Internet earlier this week. It is here.

If you haven’t used Tor, if you haven’t bought stuff from these anonymous marketplaces, if you haven’t laundered your bitcoin, if you haven’t arranged for an untraceable shipment, you might want to read how all of this goes down on the Dark Web.

As my partner Brad explained in a follow up post on the topic of the week thread on usv.com, we were so fascinated by Joel’s exploration of these Dark Web marketplaces because it feels like a trip into the future in some ways. Brad said:

The really interesting thing about Joel’s analysis is what it tells us about the future of open, transparent and legal markets on the Internet.

and

All this leaves me wondering not so much if the world will move toward decentralized, and disaggregated marketplaces, but when and why. Because the activities on the dark web are largely illegal, there is no other choice. For the rest of us, we are still generally willing to depend on a centralized platform for discovery, and identity management. For the moment, we are also still willing to accept the fees, the terms of service, and the bundling, these platforms enforce. My guess is the models pioneered on the dark web will come into the light first as leaner more efficient competitors to the first generation of peer economy companies, but the question I am still struggling with is where to look. Are there legal markets where the value of a decentralized market is greater so this transition will happen sooner, or will it happen first in any market where a first generation peer economy company goes too far by economically and politically disenfranchising the value creators at the edge of their network?

This conversation gives me some small desire to go on a shopping spree myself because its easier for me to understand something with my hands than my eyes. If and when I do, I’ll report back here, as always.

A Lens Into The Future Of Enterprise Software

I’ve been working with our portfolio company Work Market for four years now. It’s been a real learning experience for me as enterprise and SAAS has never been my long suit. We were attracted to Work Market because, as their name implies, they use a marketplace model to help enterprises get work done. Specifically, they created and are the leader in the Freelance Management System market. We like software that has a network effect built in because it is harder to commoditize. A marketplace of freelance workers inside an enterprise software application seemed to us to be exactly that. And that has been true. But along the way we’ve learned quite a few other things:

1) Mobile matters, a lot. I mentioned in my What Just Happened post that mobile is starting to really impact the enterprise software business.

At Work Market, the freelancers want to get work, accept work, and close out work on their phones. So mobile app development has become a huge part of what the Work Market engineering team has to work on. At some point, the enterprise will likely want to issue work orders on their phones too.

2) Freemium and transactional business models work in the enterprise just as well as they work in consumer. Work Market has a free tier with a transactional revenue model for enterprises that want to try the system or plan to be an occasional user.

WM pricing

We know that “freemium SAAS” works well for horizontal enterprise applications like Dropbox, Slack, Google Apps, etc and I believe we will start seeing freemium SAAS models applied to vertical applications as well. We already are.

3) Enterprise applications must also be platforms if they want to scale into the largest enterprises. Salesforce is the poster child for this trend. They have become a very powerful platform and distribution partner for SAAS applications. But every SAAS application should have APIs that allow their users to plug enterprise software together. Work Market can talk to the other large applications that enterprises use for managing talent (HR, VMS, etc) and that is a requirement for the largest deals. It will soon be a requirement for all deals.

I am seeing a bunch of new SAAS companies get started whose entire value proposition is building on the open APIs that most enterprise SAAS products have released in the past few years. If you are in finance, or HR, or marketing, or sales, you are now using a host of SAAS applications to get your job done and a big trend in the market is new applications that tie all of those together (via APIs) so that you can have a single view into your workflows. This is the “platformization” of SAAS and it is upon us.

The big takeaway for me is that all the things we have seen happen in consumer web and mobile software are happening in the enterprise and the impact of that is already being felt. I am seeing it up close at Work Market and fortunately they got started recently enough that they have been able to take advantage of all of these trends (marketplaces, mobile, cloud, freemium, platform) as they go to market and build their business. That is, among many other reasons, why we recently led a growth round to help Work Market’s new CEO, Stephen DeWitt, scale into the freelance management system market opportunity that they created a few years ago.

The Tell Of The Proprietary First Movers

I spent some time today on the new usv.com. We launched it on New Year’s Day and then pushed another rev of it last week. It’s pretty damn good, if I must say so myself.

Anyway, I read two posts back to back. Joi Ito’s post comparing the early days of the Internet to the early days of the Blockchain. And William and David Cohen’s post on The Trust Web.

Joi makes the point that interoperable email was the first killer app of the Internet and that Bitcoin is likely to the be the first killer app for the Blockchain. He talks about how we were able to send email on the proprietary online services like Compuserve, Prodigy, and AOL, but only to other users of those services. And then these services implemented connections to Internet email and all of a sudden we could talk to anyone. I remember that moment vividly. It was one of the many “aha moments” that I had in the mid 90s that led me to leave Euclid and start Flatiron with Jerry. I could see that something important was afoot and I needed to get in on it.

William and David talk in their post about SMS based banking and payment services in the developing world:

To peer into the future of decentralized banking for the masses, look no further than the success of easypaisa in Pakistan and M-Pesa in Kenya

It seems to me that easypaisa and M-Pesa are the equivalents to Compuserve, Prodigy, and AOL. They are the proprietary closed networks that deliver on much of the value of Bitcoin but are not open and interconnected to everything else. Their very existence, however, is the tell that we are on the cusp of something similar that is open, global, and interconnected. I know that people are working to connect easypaisa and M-Pesa to Bitcoin and the Blockchain. That’s an obvious but important step to get to “decentralized banking for the masses” as William and David call it.

As Mark Twain supposedly said, “history doesn’t repeat itself, but it does rhyme.” I’m banking on that to be true.

Topic Mining AVC

So I’m on sitting on the couch waiting to go out to dinner with the Gotham Gal and friends last night, and wasting time by scrolling through Twitter and I came across this tweet:

I didn’t have time to check it out, so I favorited it and made a note to come back to it. And I did that this morning.

Bugra is a Data Scientist ; he likes machine learning, data, Python and NLP, not necessarily in that order. He did some data science on this blog, starting on September 23rd, 2003, which is when I wrote the first post here.

Here is his post. It’s worth a full read but I’m going to gank a few images from it to summarize his findings for those who don’t feel like clicking over to it (you should).

Bugra mined 22 topics based on things I wrote most about and then did some analysis on those topics. Here is a frequency graph of them:

topic-frequency

But of course my interest in these things rises and wanes over time.

I mentioned at year end 2014 that I thought social media had become uninteresting. Well the data on what I write about proves that:

social-media-topic-trend

Sometimes it’s a lack of interest. But it could also be a conscious decision to stop writing about something. As the readership of AVC grew, it became a lot less personal. That was a conscious decision on my part.

family-topic-trend

Not everything has gone down over time.

I’ve become a policy wonk (thanks to my partner Brad mostly):

internet-regulation-topic-trend

And some topics just reflect the changing landscape we operate in, like this one:

mobile-apps-topic-trend

And some topics reflect the changing patterns of my blogging, like the rise and fall of MBA Mondays:

company-management-topic-trend

Anyway, I found Burga’s post fascinating. I would like to see him add a few more topics, like bitcoin/blockchain, education, healthcare, and crowdfunding. Those are all things that I think a lot about and I’d be very curious to see how my interest in them has risen and/or fallen over the years.

In closing, I’d like to thank Burga for his work. It is valuable and revealing to me. Thank you Burga.

Feature Friday: US Dollar Wallet

My colleague Joel told me he doesn’t own any bitcoin right now. Instead he has a “USD Wallet” on Coinbase and when he needs to spend or send bitcoin, he just does that out of his USD wallet.

So I decided to set one up myself. I now have three accounts on Coinbase. A bitcoin denominated wallet, a USD denominated wallet, and the vault where I keep most of my bitcoin (I don’t own much, around 30 bitcoin in total).

The recent slump in price for Bitcoin revives the issue for many of the price volatility of owning bitcoin. Some want that. They are speculators who think the price of Bitcoin will increase substantially as the technology is broadly adopted. That may well happen. But others, like me, hold bitcoin so that I can use to it spend money and send money. For them, having their bitcoin denominated in dollars makes a lot of sense. Joel is one of those people. I could become one, but for now I’m happy to do it both ways.

Coinbase has had a USD wallet since October 2014, but it has not been available in many states as a result of regulatory issues. Coinbase recently added New York State customers to the USD wallet which is why I was able to add it to my account.

If you own a lot of bitcoin and are concerned about price volatility, you might consider putting it in a dollar denominated account on Coinbase. You can still do everything with your bitcoin you want to do, but you can now do it in dollars. If you have stayed away from bitcoin because of the price issues, you now have a way to “pay with bitcoin” without taking price risk.

If you want to try it you visit your account or set up an account at Coinbase.