Feature Friday: Track Stations

Our portfolio company SoundCloud quietly launched something this past week that has quickly become my go to music discovery experience. It is called “track stations” and the concept is not new but they have applied it a bit differently. Like Pandora, you can enter a song you like and get a radio like listening experience.

The difference is that SoundCloud has something like 110 million tracks in it versus something like 2 million tracks in Pandora. That’s important because it means that there are way more tracks to start stations with but even more importantly, the track stations give you access to a long tail of content that you can’t really access any other way. Using algorithms and data science to take you from the head of the curve content to the long tail is an interesting idea across many content categories, but it is particularly interesting in music and podcasting.

I started a track station one morning this past week in my car and within 30 minutes, I had added five or six tracks to my favorites. And I didn’t know any of the artists who made any of the tracks I favorited.

It works like this. You open the SoundCloud app on iOS or Android and search for a track you know and like:

2016-02-05 07.46.30

Then you click on the track to start playing it:

2016-02-05 07.47.07

On the lower left are three dots. If you click them, you get:

2016-02-05 07.47.12

And if you click on “start a track station”, you get:

2016-02-05 07.47.18

If you go to your collections in the app, you will see all the track stations you listen to regularly:

2016-02-05 07.49.54

But here’s where it gets really interesting. You can use the same technique to find new podcasts to listen to. If you start a track station with a podcast you like, like this one:

2016-02-05 08.21.14

You can swipe through to find similar podcasts like these:

2016-02-05 08.00.25 2016-02-05 08.00.32 2016-02-05 08.00.38

So that’s it. If you have SoundCloud on your iPhone or Android, find a track you like and start a track station. It’s a great way to find new things to listen to.

Right now, track stations is only available on SoundCloud’s mobile apps. It will be coming to their web app and other apps soon.

The Brooklyn Queens Connector

As the NYC tech sector grows, it has been moving beyond Manhattan and into the outer boroughs. And the most popular destinations have been the Brooklyn and Queens waterfront neighborhoods like Dumbo, Williamsburg, Long Island City, The Navy Yard and Gowanus. But getting to and from these locations by mass transit has not been easy and has slowed down this movement of tech companies to embrace the outer boroughs.

Mayor de Blasio will announce a very important initiative in his State Of The City speech today called The Brooklyn Queens Connector (BQX) that will do a lot to solve this mass transit problem. It’s a light rail system that runs along existing streets from the Brooklyn waterfront neighborhoods to the Queens waterfront neighborhoods. It will look like this:

sreetcar

And here is the proposed route:

bqx

This is a big deal for NYC and a big deal for the NYC tech sector. Fixing the transportation problems into these developing neighborhoods will bring people and jobs and new vitality to these waterfront neighborhoods. This is such a good idea. I applaud Mayor de Blasio for his leadership on this issue and look forward to riding the BQX from a board meeting in Sunset Park to a board meeting on the Cornell Tech Campus in a few years.

Biggest Technology Change In The Next Five Years

The Upfront Summit is happening here in LA over the next two days. The folks at Upfront asked a number of well known VCs (me included) a bunch of questions. One of them was “What will be the biggest technology change over the next five years?”. Here are the answers in a short two minute video.

Fund Level Vs Deal By Deal Carry

In a venture fund, the general partners will make something like twenty or twenty five investments. There are outliers for sure. A few venture funds will make less investments than that. And there are seed funds that will make significantly more investments than that. But that’s not the point of this post.

The thing I want to talk about is how losses (and gains) are treated in a venture fund. A traditional venture fund will take its losses on a given portfolio of twenty to twenty five investments and earn them back with their gains before calculating their carried interest. The carried interest is the primary way a venture capital firm makes money. At USV we take a 20% carry. There are firms in the VC business that take a larger carry (25% and 30% being the other common numbers). But we are happy with 20% and do not feel the need to charge more.

Let’s do some math to make this clear. Let’s say a VC firm makes twenty investments of $2.5mm each. That’s $50mm of invested capital. We will ignore management fees for this exercise to make it simple. Let’s say seven are complete losers and seven get their money back and six are winners returning 5x on each. So the seven losers produce $17.5mm of losses. And the six winners produce $60mm of gains ($75mm in proceeds less $15mm of cost). So the fund’s total gains are $42.5mm ($60mm of gains minus $17.5mm of losses) and a 20% carry on that will produce $8.5mm of profits for the VCs on that fund. The limited partners will get back $84mm on their $50mm investment, a gain of $34mm which produces a 1.68x multiple on their investment. This is not a great venture fund. But it is way more typical than people think.

Here is the spreadsheet I used to do all of this math.

There are investors who get what is called a “deal by deal carry.” In that model they do not have to account for their losses in the calculation of carry. So they take 20% on their successful deals and don’t have to net out their losses. In the example above, those investors would make $12mm in carry on the same portfolio and the limited partners would get back ~$80mm or 1.6x.

But leaving aside the math between the limited and general partners, the other thing about deal by deal carry is how it changes the incentives. If investors don’t have to worry about the 2/3 of the portfolio that produces disappointing outcomes, they will pay all of their attention on the winners and work to make those investments as successful as possible. That might be good. The VC economics already trend toward incenting that behavior because all of the gains come from a small portion of the portfolio. Deal by deal carry just amplifies that.

Deal by deal carry has not been common in the VC business. It is more common in private equity where the distribution of outcomes looks very differently. But with the rise of syndicates being raised on venture capital marketplaces, we are seeing an increasing number of angel and early stage investors who have deal by deal carry.

As I said, there are pros and cons to both compensation models. I don’t want to say that one is better than the other. But they do produce different kinds of behavior and entrepreneurs should understand how their investors are being compensated. It will explain their approach and behavior.

Do You Want Better Board Meetings? Then Work The Phone

I was talking to the CEO of one of our portfolio companies last week. He was preparing for a board meeting that is coming up. He told me that he had scheduled calls with all of his board members and investors that attend his meetings and had completed most of them. He had gotten feedback on what they were thinking about his company, what they are excited about, what they are concerned about, things they want to discuss, etc. He said it had made a big difference in his preparation for the meeting.

I think it will also make a big difference in the meeting and make it a lot better. Soliciting your board member’s input on your agenda is important. But it is also really helpful to have these “one on ones” in advance of the meeting so you can update each board member on the things that they are concerned about. The board members will arrive at the meeting more prepared, they will be more comfortable, and they will also be able to help more. And the CEO will be highly attuned and attentive to the issues that matter most to the group.

This kind of preparation is time consuming. Who wants to work the phones in the SMS era? Nobody to be honest. But it pays huge dividends and I recommend it strongly.

You can keep the calls on the short side, 15-30mins each, and that means it is two to three hours of work for most board sizes and investor groups. I would recommend doing these calls one to two weeks before the meeting so you have time to collect all of the feedback and incorporate it into the agenda and the board materials. But don’t do it too far in advance because you also want your board members and other attendees to be “fresh” in terms of their understanding of what’s going on in the business.

If you have never done this, give it a try on your next meeting. I bet you will be pleased with how well it works. If you do this already, then keep doing it. Because it works.

Global Venture Capital Distribution

Richard Florida published some stats on the distribution of global venture capital investment last week. His work focused on 2012 numbers so the data is a bit dated, but I am sure it is still directionally correct.

This map summarizes his findings:

global VC investment

The bay area numbers are stunning. SF proper and the broader bay area make up 25% of the global venture capital investment activity (~$10bn out of $42bn).

SF, Boston, NYC, and LA are the top four (or five if you count SF and the bay area as two different locations).

London and Beijing crack the top ten. Ten of the top twenty cities are outside of the US. Berlin, a city that USV invests a lot in, was not in the top twenty in 2012 but I bet it is now.

The most interesting thing about Richard’s data are his conclusions about “dense urban cities.” He writes:

The upshot is this: While some smaller places, mainly in the U.S., do well on a per capita basis, venture capital increasingly flows to large global cities, with all their density and dynamism. The leading centers remain the Bay Area and the Boston-New York-Washington Corridor, while a number of global cities outside of the U.S. have become significant centers for venture capital-backed high-tech startups: London, Paris, and Moscow in Europe; Toronto in Canada; Beijing and Shanghai in China; and Mumbai and Bangalore in India. Across the world, the top 10 metros account for more than half of global venture investment, the top 20 metros account for almost two-thirds, and the top 50 account for more than 90 percent. Ultimately, global venture investment ishighly uneven and spiky, concentrated in a small number of leading cities and metros around the world.

Although venture capital investment has certainly “gone global” by spreading to places like China and India, the dominant centers remain large U.S. cities that combine density, great universities, and the open-mindedness and tolerance required to attract talent from across the world. While cities like Mumbai, Bangalore, Beijing, and Shanghai have certainly shown their ability to attract venture investment and create start-up ecosystems, their levels of venture capital remain well below that of the Bay Area, New York, and Boston. As of yet, these former cities are hamstrung by their inability to attract the world’s top talent. Outside of the U.S., the places that seem to have the brightest future as start-up hubs are dense, diverse, global cities like London, Toronto, and Paris, which can effectively compete for talent on an international scale.

This uneven or spiky nature of investment and its flow to great cities marks a broader transition away from sprawling suburban campuses, or “nerdistans.” In recent years, innovation and entrepreneurship have returned to the great global cities and dense, diverse urban areas that have long served as fonts of creativity and invention. What once seemed like a shift toward suburban innovation and startup clusters in the late 20th century has proven to be a brief aberration from the long-held connection between density and innovation.

I would add one more thing to Richard’s analysis. Transportation convenience matters a lot. You can fly direct multiple times a day to and from all of the cities on Richard’s top ten list. Investors value their time and focus it on markets that they can get in and out of easily. I think that has a big impact on where money flows.

But regardless of the reason, I agree with Richard’s conclusion. VC has gone urban. And I think that trend will continue as far as I can see.

Fun Friday: Twitter

I don’t think there is a company we’ve discussed here more than Twitter. And since it is Fun Friday, we are going to talk about it some more.

I tweeted this out yesterday after reading the zillionth blog post claiming to know what is wrong with Twitter and how to fix it. Instead of puking, I tweeted. Ah, the irony of it all.

So let’s get to the discussion. Is the negativity too high right now? Does Twitter know what is wrong and how to fix it?

Full disclosure: We own a lot of Twitter. It is our largest personal holding and a material portion of our net worth.

Is This You?

I caught an early flight out of LAX yesterday morning. I sat next to a woman who slept all the way to SF. I am always jealous of people who can do that. I don’t sleep much on planes.

When we landed in SF and were taxiing to our gate, she woke and checked her phone. She landed on my daily email, read the bit about flying to SF, and turned to me, showed me the AVC email, and said “is this you?” I replied “yes.”

It turns out she works for a startup and knows people who have worked for various USV portfolio companies. And she uses Foursquare.

We had a nice chat, I bought one of her company’s products, I am mulling over the idea of buying another one, and I pitched a BD partnership between her company and one of Gotham Gal’s portfolio companies.

Why am I telling this story? Because it’s good to have a calling card in business and this blog is mine. It pays off all the time. It widens my network constantly. 

I am not saying that everyone should blog. That’s not going to work for most people. But finding some way to connect to the people you should know is huge. It could be public speaking, it could be publishing research, it could be going to conferences all the time. Whatever it is, getting out there and networking and meeting people is the secret to building a big rolodex. And a big rolodex is an incredible asset to have.

Foursquare Trip Tips

One of the things I love about Foursquare is the focus on tips. Not ratings, not reviews, but tips. It’s the power of the positive over the negative. Tips from friends are even better.

So this week, Foursquare (which is a USV portfolio company) rolled out something called Trip Tips. You go to Trip Tips, you say where you are going, and you tweet it out to your followers on Twitter or your friends on Facebook.

I am at LAX, headed to SF today. So I entered San Francisco into Trip Tips, like this:

sf trip tips

And I got these share options:

trip tips URL

I decided to tweet the trip tip out like this:

My SF list is already filling up and the best part is its immediately available on my mobile phone in the Foursquare app lists tab (bottom left):

foursquare trip tips in my list tab

And here is the list as it stands (less than ten mins after my tweet!):

my sf trip tips

Give it a try with a trip you are planning to take soon. It’s a lot of fun.