Posts from August 2009

Consumer Centric Health Care

I am for universal health care. To me that means that everyone in this country can obtain medical care when they need it.

That said, I dislike our current form of healthcare delivery in this country and always have. I'd like to see either single payer if we must have it or even better, a consumer centric health care system.

Yesterday I saw my friend Kurt Andersen send out this twitter message:

The new Atlantic's cover story on health care is a must-read. Proposes a radical, paradigm-shifting Third Way http://tinyurl.com/lquswk

I clicked thru, saw a long six page article and then figured out (with the help of twitter) how to send it to my Kindle. I read the whole thing last night and this morning.

The author, David Goldhill, makes a very compelling case for a new kind of healthcare in this country that he calls "consumer centric".

You really should read the entire piece, but this paragraph near the end sums it up for me.

The most important single step we can take toward truly reforming our
system is to move away from comprehensive health insurance as the
single model for financing care. And a guiding principle of any reform
should be to put the consumer, not the insurer or the government, at
the center of the system. I believe if the government took on the goal
of better supporting consumers—by bringing greater transparency and
competition to the health-care industry, and by directly subsidizing
those who can’t afford care—we’d find that consumers could buy much
more of their care directly than we might initially think, and that
over time we’d see better care and better service, at lower cost, as a
result.

Health insurance has never made any sense to me as a way to pay for regular health care expenditures. We pay for our own every day dental bills (because our firm does not provide dental insurance) and my wife and I can handle that as part of our annual expenses. Why shouldn't we pay for our every day medical bills the same way?

David Goldhill makes the point that we are using insurance for the wrong things in this country. We are using it as a way to finance healthcare broadly when it should only be used to fund catastrophic situations that cannot be paid for any other way (which is what insurance is designed for).

The benefit of a consumer centric health care system is we all would start paying attention to what all of this costs and negotiating ourselves for better prices and/or shopping around. That never happens except in the cases where the procedures aren't covered. And Goldhill makes a compelling argument that uncovered procedures have shown the benefit of a competitive market at work:

By contrast, consider LASIK surgery. … The surgery is seldom covered by insurance, and exists in
the competitive economy typical of most other industries. So people who
get LASIK surgery—or
for that matter most cosmetic surgeries, dental procedures, or other
mostly uninsured treatments—act like consumers. If you do an Internet
search today, you can find LASIK
procedures quoted as low as $499 per eye—a decline of roughly 80
percent since the procedure was introduced. You’ll also find sites
where doctors advertise their own higher-priced surgeries (which more
typically cost about $2,000 per eye) and warn against the dangers of
discount LASIK. Many
ads specify the quality of equipment being used and the performance
record of the doctor, in addition to price. In other words, there’s
been an active, competitive market for LASIK surgery of the same sort we’re used to seeing for most goods and services.

Goldhill's proposal is radical and to my untrained eye, it sounds right:

A more consumer-centered health-care system would not rely on a single
form of financing for health-care purchases; it would make use of
different sorts of financing for different elements of care—with
routine care funded largely out of our incomes; major, predictable
expenses (including much end-of-life care) funded by savings and
credit; and massive, unpredictable expenses funded by insurance.

The details of how to do all of this, including the important questions of what to do with the people who truly cannot afford to pay for their healthcare, are on the last page of the article, in the section called "A Way Forward".

As I said, I have an untrained eye on this subject and am no expert. Maybe this approach is flawed. And of course, as a wealthy person who can afford to pay for his family's healthcare even without insurance, I am somewhat immune to all of this.

But I believe in markets and competition. And I believe that our current approach of using big fat bureaucratic insurance companies to finance and manage healthcare is badly flawed. I'd prefer the government run the healthcare system to the way we are doing it now. But an even better approach would be to let us run it ourselves.

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Is Speculating On What Private Companies Are Worth A Good Idea?

Robert Scoble wrote a post at 4am on the road in Indianapolis last night proclaiming that Twitter is "probably worth $5bn to $10bn." This is not the first time that someone has used a blog post to speculate on what a private company is worth. Facebook is probably the poster child for this activity.

Earlier this year TechCrunch posted that Facebook had received a term sheet valuing it at $2bn. Not much more than a month later, Facebook announced that it had taken an investment from Digital Sky that valued the company at $10bn.

Is all this speculation good or bad? I'm honestly not sure. But I think we will see more of it, not less. This morning Howard Lindzon noted on his blog that Stocktwits has established tickers for Facebook and Twitter. So now you can tweet about what you think about $fbook and $twit, the stocks not the companies.

At the same time as all this speculation is raging in the blogs (and even traditional media), we have secondary markets cropping up like SecondMarket, Sharespost, and a bunch more. I've even read research reports on Sharespost about private companies that attempt to project revenues and earnings and do valuations.

On one hand, I think the transparency into the world of private investments is good. Entrepreneurs benefit from having their companies discussed and valued in "the market".

But I think all the focus on what a company is worth can be bad. These companies are private for a reason. Most of them aren't mature enough to be public companies. They often don't have full management teams and some don't even have revenues. The focus inside these companies needs to be on building the company, the product, and the business. And endless discussions about what their company is worth can be terribly distracting.

I saw this in action back in the late 90s when a bunch of our portfolio companies went public before they were ready. The employees spent too much time focused on the stock price and too little time focused on the business. Many employees starting counting their net worth in stock that was not liquid and eventually was worth pennies on the dollar of what they thought it was worth.

At the end of the day, this speculation about what companies are worth is useful if everyone keeps it in context. It's a lot like fantasy baseball. Your team might be doing great, but at the end of the day, you really don't own a major league baseball team. It's just a game.

But in the case of startups and company building, it isn't always a game. When your company grows up, becomes a real business, and goes public, you can reap the benefits of all the work you've done. Just don't count the chickens before they roost.

Quitters

The NY Times Magazine has a short piece this weekend called The Facebook Exodus. In it the author, Virginia Heffernan, cites a number of anecdotes about people quitting Facebook. I am sure there are people quitting Facebook.

But the most recent comScore numbers tell another story.
Facebook comscore
In the month of July 2009, almost 370 million people worldwide visited Facebook, up 155% from July 2008. Facebook is a global juggernaut. It is the fourth most popular website in the world after Google, Microsoft, and Yahoo!

This reminds me of all the Twitter Quitter stories I've read. People do quit Twitter. A lot of them. But here are the July comScore numbers for Twitter.
Twitter comscore
In the month of July 2009, about 52mm people worldwide visited Twitter, up 1880% over July 2008 and Twitter is the 47th most popular website in the world according to comScore.

Here's the deal, churn is part of online media, particularly social media. People come and go. Some stick around, some don't. These stories about quitters are true of course, but they miss the big picture. More and more people are using these services every day.

Of course, Facebook and Twitter and every other web service out there should pay a lot of attention to why people are quitting their services and address those issues. The best services reduce churn over time. I don't know the exact numbers, but when we first invested in Twitter, it seemed like only 10% of first time users stuck around. Now that number is much higher and is one of the reasons why the service is growing faster.

So when you read these quitter stories, take them with a grain of salt. And make sure to look at the bigger picture at the same time. It may look very different.

Disclosure: For those that don't know, our firm is an investor in Twitter and I am on the board of the Company.

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Equity Grant Math

I saw a tweet yesterday that said:

is @cdixon the new @fredwilson?

I wasn't sure how to take it, so I took it as a compliment, particularly given the roll that Chris is on right now on his blog.

His most recent topic is equity grant math. In that post Chris states:

The one number you should know about your equity grant is the percent of the company you are being granted (in options, shares, whatever – it doesn’t matter – just the % matters).

Chris is right that the most important number in a grant of equity is the percent of the company that is being granted to you. Earlier this week I got an email from one of our portfolio companies with option grants to approve. It listed each person's name, their job description, and the number of shares they were being granted. It was a nice presentation but I couldn't approve the grants because it did not show what percent of the company each grant represented. I had to go look up the latest cap table, get the fully diluted number of shares outstanding, and add another column detailing what each grant was in terms of percent of the company. Then I was able to approve the grants.

But I need to differ with Chris on one thing. The total number of options or shares being granted isn't totally meaningless. If you multiply them by the share price paid by investors in the most recent financing, you'll get a sense of the "investment value" of the grant. That's the "money at work" you have in the deal by virtue of your employment.

Some will say you should multiply the number of options or shares being granted by the exercise price, but the exercise price is often much less than the last round financing price. That difference between financing price and exercise price is valuable to the option grantee and represents the difference between the value that the company was able to get a valuation firm to place on its common stock and the value that the company was able to get an investor to invest in preferred stock. It is certainly true that common stock isn't worth as much as preferred stock, but it is also true that the third party valuations that companies obtain are often conservative.

The other thing that you need to know is this percentage is likely to decline over time as the company dilutes to raise additional capital and recruit additional people. It is very hard to say what an appropriate amount of dilution you should expect. It depends a lot on what stage of the company is at when you join. If it's getting close to an IPO or exit, you may be spared any dilution. If you are one of the first ten employees, count on being diluted at least in half and possibly more. Everything else is in between the two.

Like all great blog posts, the comments to Chris' post are fantastic. Make sure to read them when you read his post (and you should read his post).

If after reading Chris' post, his comments, and this post, you are still confused about how this works, please let me know in the comments and I'll do my best to explain it.

We Live In Public Opens In NYC This Weekend

Friday night at the IFC in the Village will be the place to be if you are in NYC and care about web stuff and great documentary film making.

The director, Ondi Timoner, and the “character”, Josh Harris, will both be there for a Q&A session after the film. It should be a fun night. I wish I could be there.

Here’s a widget that links out to everything you need to know about the film and the opening friday night.

The Biggest Loser Can Be The Biggest Winner

Bill Gurley has a great post on Above The Crowd called "What Is Really Happening To The Venture Capital Industry?"

Let's start with his picture. It tells a thousand words.
Biggest-loser-eric-chopin1   
I don't think the VC industry is going to be the biggest loser though. I think we'll be the biggest winner. Just like someone who takes off 100 pounds and gets healthy again.

Bill's assertion is that a few brilliant investors raised their allocations to alternative assets in the early 90s from low single digits (say 5%) to high double digits (sometimes as high as 25%) and supercharged their returns. Everyone saw the results and copied them. What worked in a small way with a few investors doing it failed to scale (as always) and the alternative asset classes got overfunded and returns plummeted.

Bill makes the related point that venture capital is actually a small player in this story and the buyout business is the big player. He predicts that as this overfunding of alternative assets unwinds over the next decade, we will see dollars flowing into buyouts and venture capital decline by at least 50%.

I think Bill's analysis is spot on, but we also need to add the fact that all of this happened in parallel with the Internet and Telecom revolutions. Around the same time that smart investors were scaling up their commitments to venture capital and buyouts, the venture capital business had some of its best years ever. Venture capital funds that were raised between 1994 and 1997 put up fantastic returns. So these smart investors who doubled, tripled, or quadrupled down on VC and buyouts also timed those bets brilliantly.

None of this was repeatable or sustainable at scale. The venture capital business has now produced ten years of single digit returns (at best) and people are calling it "broken".

Regular readers of this blog have heard me opine on all of this ad naseum and you know where I stand on it. We need to get the venture capital business back to raising and investing less than $20bn per year on a sustainable basis. We are there now in terms of dollars being invested in startups. The last quarterly numbers were sub $4bn. And the amount of money coming into the VC business this year will be even less than what is going out.

The diet has begun. We are getting healthy again. I can see it in the market and I believe we will see it in the returns soon enough.

What We Can Learn From Mess

Gary Wolf wrote a Wired cover story about craigslist called "Why Craigslist Is Such A Mess". It's a somewhat strange article because it is highly critical of craigslist's design, management, and lack of innovation. But you cannot read that article and not come away impressed with Craig Newmark, Jim Buckmaster, and the ethos of craigslist.

Here are some stats I pulled from the piece:

this site not only beats its competitors—Monster, CareerBuilder,
Yahoo's HotJobs—but garners more traffic than all of them combined

With more than 47 million unique users every month in the US
alone—nearly a fifth of the nation's adult population—it is the most
important community site going and yet the most underdeveloped

One recent report, from a consulting firm that counted the paid ads,
estimates that revenue could top $100 million in 2009. Should
craigslist ever be sold, the price likely would run into the billions

Craigslist gets more traffic than either eBay or Amazon.com. eBay has
more than 16,000 employees. Amazon has more than 20,000. Craigslist has
30

Only programmers, customer service reps, and accounting staff work at
craigslist. There is no business development, no human resources, no
sales. As a result, there are no meetings.

Craigslist has done this by doing very little. As Gary points out, the service's interface has not changed in a very long time, if at all. The company has no marketers. To quote Gary again, "By eliminating marketing, sales, and business development, craigslist's
programmers have cut out all the cushioning layers that separate them
from the users they serve."

I do not believe we should criticize a company that operates like this. We should learn from it. Of all the Internet companies out there, the one that serves as the most iconic for our firm is craigslist, not Google. We dream of funding a company that can be worth a billion dollars with only 30 employees. We've never done it and I don't know if we ever will. But we are going to try again and again and again.

My partner Brad wrote a post on the USV blog recently about the freeconomics debate and he ended with this observation.

The much more interesting conversation is about the appropriate
economic model for a social network that depends on the contributions
of its participants and increases in value as more people use it. One
possibility is that the economic models of these networks will look
more like Craigslist than Yahoo. Recent estimates peg Craigslist's
revenue at more than $100,000,000. Not much compared to Yahoo's
billions, but Craigslist still employs only 28 people. Even allowing
for substantial bandwidth, and server costs, it is still hard to
imagine how their costs are more than $5,000,000. Since Craigslist
collapsed a multibillion dollar classified advertising business into a
fabulously profitable $100,000,000 business, perhaps we should be
talking about the potential deflationary impact of more "zero billion
dollar" businesses. As the radical efficiencies of the web seep into
more sectors of the economy, and participants in social networks
exchange attention instead of dollars, will governments at all levels
need to make do with less tax revenue? That's a scary thought in an era
of high deficits unless traditional governments can learn from the
efficent governance systems of social networks and provide more for
less.

And of course, that is exactly Craig's point:

"People are good and trustworthy and generally just concerned with
getting through the day," Newmark says. If most people are good and
their needs are simple, all you have to do to serve them well is build
a minimal infrastructure allowing them to get together and work things
out for themselves. Any additional features are almost certainly
superfluous and could even be damaging.

A system like Craigslist does result in a lot spam, fraud, and abuse. But it is also certainly the most efficient and cost effective way to make a market. We should all be studying this system, understanding why it works so well, and how we can replicate it on our businesses, institutions, and governments. I think we have no other choice.

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The Ideal First Round Term Sheet (continued)

So Adeo Ressi of The Funded has posted his version of the idea first round term sheet. TechCrunch blogged about it here.

I have not had a chance to go through the term sheet line by line and evaluate it against other versions I've seen. I do think it is progress that we've got a discussion going on about this issue and I hope we'll coalesce around something standard that we can all use.

But I thought I'd address the three terms that TechCrunch highlights about The Funded's term sheet:

- A 1X liquidation preference – I am all for this. I cannot imagine why anyone would want a multiple liquidation preference in a first round term sheet. There are reasons why that might make sense in a late round financing, but not in a first round.

- Elimination of participating preferred – I prefer a straight preferred but there are times when a participating preferred makes sense, even in a first round. When the valuation gets bidded up to a price that would not allow the investors to make a return on an exit in the short term, and when the entrepreneur wants to control the exit, it makes to issue a participating preferred so that the investors can still get a return on their capital in the event of an early exit (the quick flip). If a participating preferred is used, it should go away at some multiple of the price paid (I prefer 3x).

- Single trigger acceleration – I don't like this provision for a lot of reasons. Chris Dixon, who started this whole discussion off last week, describes it well in this blog post. Chris recommends a double trigger with a partial single trigger acceleration:

you should have full acceleration on “double trigger” (company is
acquired and you are fired).  In addition you should have partial
acceleration on “single trigger” (company is acquired and you remain at
company).  I prefer a structure where you accelerate such that you have
N months remaining (N=12 is a good number).  This gives the acquirer
comfort that the key people will be around for a reasonable period of
time but also lets the founders get the equity they deserve without
spending years and years at the acquirer.

Chris also has some thoughts on his blog today regarding The Funded's proposed term sheet.

There are now about a half dozen templates out there for the ideal first round term sheet. There is the Y Combinator version, the Wilson Sonsini version, the Cooley version, the Gunderson version, and now the Funded's version. I am on vacation today and trying to unplug as much as possible so I am not going to hunt all these down and link to them. Maybe someone will do that in the comments.

The bottom line is this is a great conversation and we are headed to a place where we will see more standardization of terms, lower legal fees, and better terms for entrepreneurs. But there are times when you need to veer off the standard form and it's important to recognize when that is and why.

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Books For Entrepreneurs

Last week an entrepreneur named Stephen who reads this blog regularly asked me for recommendations that budding entrepreneurs should read. I gave him a list and then forwarded it to my friends Brad Feld and Jerry Colonna who I knew would appreciate the list.

That led to this post by Brad where he lists his top three book suggestions for entrepreneurs. Go read that post. It's great.

As I was reading Brad's post, I realized that I should have shared my list with everyone, not just Stephen.

So here it is:

Kavalier and Clay

Atlas Shrugged

The Prince (Machiavelli)

any and all of shakespeare's tragedies and histories

Brad's suggestion of Zen and the Art of Motorcyle Maintenance is a great one and I'll include that in the future when asked this question.

The point of this list is that there is way more insight to be gained from stories than from business books. And these are some amazing stories.

If you've got suggestions to add to the list, please leave them in the brand new comment section.

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