Posts from 2014

What Just Happened?

I’m not much for the rear view mirror. I like to look forward, not back. I guess that’s why I’m in the line of work I’m in.

But I’m going to force myself to look back at 2014 and explain what just happened. Doing that will help me look forward (tomorrow?) and explain what is going to happen.

This is not an attempt to be comprehensive, or accurate, or anything else. This is what I think happened in 2014:

1/ the social media phase of the Internet ended. this may have happened a few years ago actually but i felt it strongly this year. entrepreneurs and developers still build social applications. we still use them. but there isn’t much innovation here anymore. the big platforms are mature. their place is secure.

2/ messaging is the new social media. this may be part of what is going on in 1/. families use whatsapp groups instead of facebook. kids use snapchat instead of instagram. facebook’s acquisition of whatsapp in february of this year was the transaction that defined this trend.

3/ the “sharing economy” was outed as the “rental economy.” nobody is sharing anything. people are making money, plain and simple. technology has made renting things (even in real time) as simple as it made buying things a decade ago. Uber and Airbnb are the big winners in this category but there are and will be others.

4/ the capital markets have moved to the internet. we call it crowdfunding but what is really going on is raising money is a great application of a global platform that connects billions of people in real time. i don’t know the total amount of capital that was raised on the internet across all sectors (equity, debt, creative projects, charity, helping a person in need, real estate, energy, etc, etc) in 2014 but i am sure it is in the tens of billions.

5/ mobile OS has become a stable duopoly around the world. but android is splintering into google android and non google android and that may lead to new large players. 2014 was a big coming out party for xiaomi. if and when they come to the US, things will get interesting. they are the new (and better) samsung.

6/ mobile and messaging has started to impact the enterprise. slack is the poster boy for this trend in 2014.

7/ youtube became a monster. it always has been. but in 2014 youtube emerged as the place for entertainment consumption for anyone under 16. and these youngsters are going to grow up quickly. watching The Interview on YouTube was a fitting end to an amazing year for the king (and queen and joker too) of Internet video.

8/ we finally got rid of files. dropbox, google drive, soundcloud, spotify, netflix, hbogo, youtube, wattpad, kindle, and a host of other cloud based services finally killed off three letter filenames like mp3, mov, doc and xls. spending a week in the caribbean with young adults and bad internet was the tell on this one for me. they don’t even have mp3s on their iphones anymore!

9/ the net neutrality debate emerged as a national political issue with Obama’s endorsement of Title II regulation of the last mile of the internet. it is unclear how this issue will resolve itself but the public has spoken loudly and clearly and politicians understand that the internet needs to remain open for innovation and we can’t let the monopoly carriers and cable companies mess that up.

10/ cyberwarfare, cybercrime, cyberhacking, and cybersecurity was by far the dominant theme of 2014. if anyone had their head in the sand on this one before this year, they don’t anymore. this is our new normal. the US takedown of North Korea’s internet last week, and the state department official’s comment that “i guess accidents can happen” is a moment to remember as we head out of 2014 and into our future.

so that’s what happened in 2014 according to me. i am sure i left out many important things. you can add them in the comments. hopefully i’ll write a whats going to happen in 2015 tomorrow. i tried hard to keep this post backward looking and had to edit out a lot of forward looking statements as i wrote it.

happy new year everyone.

With All Due Respect

We spent the Christmas week on the beach with family and friends. Our friends John and Diana were with us and we talked about a lot of the things that are in the news at the intersection of tech and society. John asked me to take that conversation onto his TV show, With All Due Respect, and I did that yesterday. Here is the segment.

Some Thoughts On Founder Liquidity

I saw a post last week that suggested that VCs competing to win deals is leading to excess amounts of founder liquidity. We haven’t seen that sort of thing to be honest. It may happen but it is certainly not rampant.

I also saw this tweet from Sam Altman yesterday:

If you click on that tweet, you will see a long and somewhat interesting discussion of the issue on Twitter. I don’t completely agree with Sam’s tweet, as I will outline below, but as my son and his friends like to say, “he’s not wrong.”

I’ve written a bunch about this issue over the years but the search function on this blog is pretty weak and it is not easy to go find all of those posts. So I will try to summarize my thoughts in tweetstorm format:

1/ when I got into the VC business in the mid 80s, there was little to no founder liquidity. VCs largely believed that founders should get liquid when they got liquid.

2/ that started to change in the late 90s when the VC market went bonkers and to some extent it was a good thing. to some extent it was not.

3/ i have evolved my point of view on this issue a lot over the years and i now believe that providing some founder liquidity, at the appropriate time, will incent the founders to have a longer term focus and that will result in exits at much larger valuations because, contrary to popular belief, founders drive the timing of exit way more than VCs do

4/ figuring out the “appropriate time” is tricky and there is no hard and fast rule. the twitter discussion on Sam Altman’s tweet focuses on how many years the company has been in business and i think that is a very flawed metric

5/ instead i would focus on whether the company has achieved sustainable and lasting enterprise value, meaning that there is no question it will exit at a significant number that is well in excess of the capital invested at some point in the future

6/ passing that test means that the common stock is “good money” and that the choice of the founder to sell it is not mitigation of risk issue as much as it is an asset allocation issue

7/ i am not a fan of founder liquidity sales that result in more than 10% of the founder’s position being liquidated at any one time

8/ an important exception to that rule is when a founder is leaving the company, particularly at the wishes of the board. in that situation i believe, if the test I outlined in #5 is passed, it is prudent for all involved to provide some liquidity to the departing founder and the 10% rule is not really valid in this situation

9/ i generally prefer that founder liquidity be provided by funds that are set up to do that sort of thing and not by the VCs who have been providing primary capital to the business. i believe that our capital should be used to continue to support the business and reserved for that until the company has become sustainably profitable

10/ once a company has become sustainably profitable, which in and of itself is a bit tricky to measure (GAAP Net Income positive?, EBITDA positive?, Adjusted EBITDA positive? cash flow positive?), I am more comfortable with the VCs buying in founder liquidity sales

11/ EOTS

I have seen too much founder liquidity too early in a company’s life mess things up. You do have to be very careful about this sort of thing.

And founder liquidity inevitably leads to questions about employee liquidity and angel liquidity. Like all things in life that involve money (and many that don’t), actions have consequences that are much broader than you might imagine. So once you start providing liquidity to founders, you need to at least start thinking about a liquidity plan for others as well.

What we have done in a number of our most successful portfolio companies is to wait until the company is sustainably profitable (this is such an important moment in a company’s evolution) and then think about tender offers to founders, employees, and early investors/angels. Interestingly, in these sales the employees and founders tend not to be particularly aggressive in their selling. The early investors and angels tend to be more aggressive than the insiders. Which makes a lot of sense if you think about it.

I will end this post with a quote The Gotham Gal shared with me yesterday from J. Robert Beyster, the founder of SAIC:

I have found that employees are more patient investors than the public. They are willing to wait longer for returns because they want a good place to work. They allow the company to invest in long-term growth and not just short-term gains.

So whatever you do, don’t let your company become owned too much by investors and not enough by founders and employees. It’s the folks who work at the company that make it tick and if they are not deeply invested in the business, you have a recipe for failure.

PS: There is a difference between a company “having created lasting sustainable value” and “being sustainably profitable”. The latter almost always means the former is true. But the former does not require the latter to be true. I could get into why this is so in more detail but this post is long enough already.

There’s Something About Twitter

I watched a friend of my son sign up to Twitter this past week and get completely smitten within minutes. There’s something about Twitter. It sort of reminds me of the 1998 Farrelly Brothers comedy featuring Cameron Diaz, Ben Stiller, Matt Dillon, and Brett Favre and Jonathan Richman! Any film that features Jonathan Richman is a winner in my book. But I digress.

Almost every male character in this film falls in love with Mary. Each for a different reason and at a different time. But they all fall for her.

I fell for Twitter in April 2007. Josh’s friend fell for Twitter this past week. His use case is very different from mine but the experience is similar. He has 22 followers and I have a lot more than that. But there’s something about being able to have a public conversation with friends and strangers in real time. There’s something about the follower thing. There’s something about the hashtag thing. There’s something about the humor that works on Twitter. There’s something about the behavior that happens on Twitter. Twitter is fun.

I know that Twitter is not for everyone. Someone called it “niche” recently in a comment thread I read somewhere. If “niche” is 300mm logged in monthly users around the world, then I would agree. It is most certainly not for everyone the way Facebook is. But it is also not boring the way Facebook is. Twitter has edge. It has attitude. People get into real fistfights because of Twitter.

Twitter is getting a lot of negativity these days, particularly from the investor community. Maybe they thought it was the next Facebook. If so, they are wrong about that. Twitter is something entirely different. And I love it today the way I loved it in the spring of 2007 when I first fell for it.

Full Disclosure: Our family is very long Twitter. We have a material financial interest in its success. This post is not about that or in reaction to that. But it may be yet another reason I love Twitter.

Video Of The Week: The Interview

I think it’s hard to argue that this was not the video of the week. So I’m making it so.

There’s just something about a major length feature film being viewable (and embeddable) on the web on the same day as it hit the theaters. I think that’s a big deal.

Feature Friday: Password Management

I posted about The Interview last Thursday and the next morning I woke to a message from Facebook:

suspicous login attempt

I can’t imagine the login attempt on my Facebook was in reaction to my blog post about The Interview, but as Andy Grove famously said “only the paranoid survive” and so I spent some time changing passwords that morning.

I don’t want to get too much into my personal security setup but I will say this. I try out a bunch of services every week and many of them ask me to create a login. I use a fairly basic login for those services. But for anything that is serious, I like strong passwords that are unique for each service.

I find a password manager to be helpful in managing all of them. The big issue with a password manager is you are creating a single point of failure by using one. But if the alternative is easy to guess passwords that you use frequently, I think going with a password manager is the better alternative. A couple popular ones are Dashlane and 1Password.

I also use two-factor authentication on services that offer it and, as I have posted here, I like using the Authy app to generate the tokens for me on my phone.

One thing I have decided to change in the wake of that Facebook login attempt is to treat social media services differently. I used to think that social media services weren’t “serious security issues” and did not worry too much about them. I’ve decided that isn’t right and I now treat social media services similarly to banking and productivity services (like email and cloud storage).

But even if you lock down your own services tightly, you still have to be worried about what you put into email and other messaging apps because the person you send the messages to you may not be as secure as you are. That’s one of the many lessons from the Sony hack. A friend of mine told me she only puts into email things she is prepared to have read on the nightly news. That’s a high standard and one that I am going to strive for myself. Given the nature of my work, it’s going to be a hard one to reach.

I think we can expect hacking and other forms of attacks on our personal data and systems to increase significantly in the next five years. If you are looking for a good new year’s resolution, I think taking security more seriously, and specifically using unique strong passwords and two-factor auth on all of your important services would be a good one. I already do that but I am always looking to do more of this sort of thing. Andy Grove’s mantra is a good one in this regard.

Merry Christmas Everyone

It’s Christmas Day, a holiday in much of the world and one of the biggest religious holidays of the year. We are spending it with family and friends on a beach in the caribbean. I hope that all of you are spending the day with friends and family. I know that Christmas is a tough day for some and I hope that you have someone close to you to spend it with.

If you are looking for something to do, I would suggest watching The Interview, which we discussed here last week. I have no idea if this movie is any good or not. What I do know is that a massive online viewership on “day and date” would be a big thing for the film industry. First and foremost, it sends a message to whomever hacked Sony that attacking a film studio is not going to stop a film from being shown. That, in and of itself, is an important message to be sent and we can all send it by watching this film.

Sadly, The Interview is only available to be viewed/downloaded in the US today. This is from the website:

While we do hope to see the release of The Interview across the globe, for the time being this is limited to the USA only. You can only purchase the movie with a US card, and can only stream it from a US IP address.

That’s a bummer and highly relevant to what we discussed here yesterday. I’m going to use a VPN to spoof our IP so we can watch it today. But this whole geo blocking stuff is so annoying.

But there is something else important going on here. The theater operators have to date been very hostile to the idea that a film studio would put a film out directly to viewers over the Internet on the same “day and date” that the film is released in the theaters. If Sony has a massive online viewership of The Interview today, that could change the dynamic between the film studios and the theater industry. And that would also be a good thing.

So I’m going to figure out how to download and watch The Interview today. I hope everyone who cares about this stuff joins me. This could be a watershed moment for over the top online film distribution.

The Not So Global Internet

We’ve talked about this stuff before, but not lately. The promise of the Internet is you can connect a server to the Internet anywhere in the world and reach users anywhere in the world. You can login to the Internet anywhere in the world and reach services anywhere in the world. In reality it doesn’t work like that in many places for many services.

We are in the caribbean this week celebrating the year end holiday with friends and family. Yesterday we installed a VPN client so that the Gotham Gal could do some online shopping on a website that only sells to users in the US. We also installed a bittorrent client so that a friend of my son could watch films he had rented on iTunes before he came down here.

The latter experience was particularly frustrating. My son’s friend rented the films on iTunes in NYC, flew down here, then when he tried to play them, they would not play because of IP blocking, but the rental clock (24 hours) started ticking anyway and he lost the rental rights he had paid for.

So we installed a bittorrent client, downloaded the films, and watched them. We figured that my son’s friend had paid for them so we might as well watch them.

I’m not really down with spoofing my IP address or pirating films. I would way rather do things on the up and up on the Internet. But when companies break the Internet to enforce some random geography restriction, and when there are easy to use workarounds, it’s human nature to use them.

The worst thing about all of this, as I’ve blogged before, is that these restrictions teach us the workarounds. The Gotham Gal had never used a VPN before. My son’s friend didn’t have a bittorrent client on his computer. Now they are well versed in these technologies. That’s life on the Internet in late 2014. I’m hoping someday it won’t be like that.

College and Entrepreneurship

After I tweeted out a link to yesterday’s post, I had this twitter exchange:

I took some time today to look through our portfolio and estimate the percentage.

I believe 21 founders out of a total of 72 that we have backed in the history of USV did not graduate from college. That’s about 30%.

However, I believe 17 founders have advanced degrees, including a few PhDs. So roughly a quarter of the founders we’ve backed have invested heavily in their higher education.

There are no specific credentials required to get funded by USV or most other VC firms. You need to be credible as an entrepreneur. That means being able to see, recruit, make, and sell. If you can do that, and if you can prove you can do that to investors, you’ve got a great shot at getting funded.

Finding ROI In Higher Education

The news is full of stories where students paid hundreds of thousands of dollars to go to college (and beyond) only to find themselves stuck in dead end jobs and unable to pay off the cost of student loans. We have a crisis in the US in higher education. The costs have risen and the benefits have declined.

It has gotten to the point where I believe if you have to personally shoulder the cost of your higher education, you should think twice about the traditional model. If you can get scholarships or if your parents are willing to pay the tuition bills, I still think its a valuable experience, but sadly it is not one that makes sense if you have to make the investment personally.

So what are we going to do about that? We need to find new models. And one new model that is working in NYC is The Flatiron School. The Flatiron School started two years ago and teaches students, both high school grads and college grads, how to become software engineers in a twelve week course that costs $15,000. Scholarships are available for students who cannot afford that investment.

Today The Flatiron School has published an audited report that validates the notion that their model produces graduates who can find high paying jobs. Here is a summary of the report and this is the “money slide” from it:

cost and benefit of flatiron

So for a high school graduate, the tuition at Flatiron can be paid back with six months of after tax income. For a college graduate, you can increase your pay by ~$30k by spending $15k. You get that payback in one year of after tax income.

For the average college grad, it takes roughly three years of all of your after tax income to pay off your college costs. If you go on and do Flatiron, you can pay off everything with two years of after tax income.

Anyway you cut the numbers, The Flatiron School is a great investment. Part of it is that the students learn a valuable skill – software development. Part of it is that the cost of delivering that education are very reasonable. And it isn’t that they do this on the cheap. Here is the work required from a student at The Flatiron School:

educational activity at Flatiron

There’s been a lot of talk that online education is the answer to lowering the costs of higher education. The huge investment in MOOCS that happened a few years ago was based on that notion. The reality is that online education is a part of the answer but not the silver bullet that some thought it would be. I gave a talk at Wharton a couple years ago about this.

The answer to lowering the cost and increasing the benefits of higher education requires a multitude of changes to the current model. And one of them is teaching students skills that are directly related to job requirements. Doing that makes students more employable and more valuable.

This is not a criticism of the liberal arts model, per se. As Steve Jobs said in this interview, learning to code is a liberal art. This is a criticism of administrations and faculties that are rigid in their interpretation of what liberal arts and education should mean. This is a criticism of not evolving and changing with the times. This is a criticism of thinking what worked yesterday will work tomorrow.

And mostly this is a criticism of not making hard choices. Schools that are happy to add courses, faculty, and buildings are not willing to eliminate courses, faculty, and buildings. When you always add and never subtract, you get cost structures that are not sustainable.

The Flatiron School is an example of what can be done with a blank slate. They have figured out how to give students highly relevant and valuable skills at a cost that is both affordable and recoupable very quickly. Adam, Avi, Sara and the entire team has created a model that should be an inspiration for others.