Posts from October 2017

Ledger Nano S

I got my hands on a Ledger Nano S last week and set it up over the weekend.

The Ledger Nano is a “Cryptocurrency Hardware Wallet” which means it is a device you can store your Bitcoin, Ethereum, and other crypto assets on. It costs $95 on Amazon.

It looks like this:

It is about the size of your average thumb drive/USB Stick.

The screen you see in that photo is quite small and the UI that runs on it is pretty bare bones as a result.

There are Chrome Apps that run in your browser and connect to the Ledger and provide the basic wallet functionality that you have gotten used to on Coinbase or some other hosted or software wallet (balance, send, receive, etc).

I was able to set up the Ledger Nano and get it working without too much hassle. The instructions are pretty good. But the security precautions (which are absolutely necessary) are a bit of a pain to deal with and it is not the simplest experience. It doesn’t take a long time to set up, it’s just a process you have to go through.

There is a USB cable that you use to connect to your computer and put the device online. You can then send and receive crypto assets and use the wallet apps to see the activity on the device.

When the device is disconnected and saved somewhere safely, it is offline.

Many crypto purists believe that you must own a hardware wallet and that your assets are not really yours unless you control the keys and the device on which you store your assets. For those who feel that way, the Ledger is a great solution.

I personally am happy to store my crypto assets with our portfolio company Coinbase in the cloud, particularly in their vault offering which provides delayed withdrawal and multi-sig on the account.

But I do understand those who feel that storing your assets on your own device is the right answer.

Where I find value in the Ledger is as a solution to store crypto assets that aren’t supported by Coinbase and/or some other trusted hosted storage provider.

What many people do is store their “alt-coins” on the exchanges that support those coins. That has turned out to be a dicey option as many exchanges have been hacked over the years.

What I advise, and do, is to store these “alt-coins” on a hardware wallet, like the Ledger, and then move them onto an exchange to trade them, and then back off after the trade clears.

The idea is to limit your assets in “hot storage” as much as possible and maximize your assets in “cold storage” as much as possible.

And for that, the Ledger Nano is a great solution.

The Best Time Of Year For Sports

It rained like crazy in NYC yesterday. So we stayed home and worked and watched TV and had dinner with our family.

And we watched football, basketball, and baseball. This is the best time of the year for sports. You get the Series in baseball, the start of basketball season when you can still hope, and the middle of the season in football when games still matter for everyone.

I will admit that I did not make it to the end of that World Series game. Had I know how it was going to end, I would have stayed up but I did not. Even so, the innings I saw were awesome. How good is baseball right now? I thought last year’s Series was not going to be beat for a long time and this year may be even better.

The Knicks got a win on the road over an absolutely terrible Cavs team. Our two big scores Zingo and Tim Jr both went for 30+. I’m not getting my hopes up but this Knicks team is a lot more fun to watch than the late Melo years which were awful.

And the Jets figured out how to lose a lead for the third week in a row. This one is the hardest for me. I want to hate the Jets but there is something about this team that I can’t give up on. And the NFL is a mess. It sure feels like a league that is losing its way.

And in the middle of all of that sports, we got in another Ken Burns Vietnam episode. We’ve now made it through seven. It’s great. If you haven’t watched it and care about America, the world, war, suffering, surviving, and history, it is absolutely worth watching.

I Scam Yous

I read a Nathaniel Popper piece in the NY Times today about celebrities endorsing ICOs. It made me want to throw up.

Readers know that I have been and continue to be excited about the emerging blockchain/crypto/token opportunity and I believe it represents the next big wave of innovation in the tech sector, upon which many important companies, products, and technologies will be built. I’ve been saying that since I started blogging about Bitcoin here on AVC in 2011.

I have also written a lot about our portfolio companies that are working in this sector and have even mentioned the tokens that they are issuing. But I have never and will never promote a token offering here at AVC. I believe that these are very risky investments that require a lot of diligence and patience. These are very similar to the kind of seed investments we make at USV. We know that that vast majority of them will not work out and we build a portfolio based on that understanding.

I have also written a lot about the need for diversification and that I expect this sector will come unglued at some point, like the Internet sector did in 2000/2001. If you read Carlota Perez, you will understand that most important technological revolutions have been fueled by rampant speculation that almost always comes undone right as the sector is moving from the installation phase to the deployment phase. That framework is almost certainly playing out again in crypto.

So this ugly speculative phase comes with the territory and always has. But that doesn’t mean I have to like it. I hate it. Most ICOs, like the ones mentioned in Nathaniel’s piece, are scams. And the celebrities and others who promote them on their social media channels in an effort to enrich themselves are behaving badly and possibly violating securities laws.

The worst of it, as Peter VanValkenburgh, the director of research at Coin Center, told Nathaniel is:

It’s undeniable that a celebrity endorsement brings a new audience into the world of crypto currencies. But I’m not certain that celebrity endorsements are doing a good job of bringing attention to the legitimate projects.

I am certain that celebrities are not doing a good job of bringing attention to the legitimate projects. A legitimate project has these characteristics:

  1. A relationship between the amount of money being raised and the complexity of the project.
  2. A very clear use case that requires the decentralization approach brought by blockchain technology.
  3. A reasonable valuation based on the size of the opportunity being pursued.
  4. A credible team.
  5. The technology has been built, at least to a point where it is demonstrable.

We have looked at hundreds of token offerings at USV and have only participated in one token offering to date. We do have five portfolio companies that either have done or will do token offerings so you can add them to the list of tokens we have exposure to. And USV is an investor in a number of token funds like Polychain which I blogged about yesterday. But the point I am trying to make is we have passed on most everything that is going on in this sector. We will keep looking for legitimate projects and we will certainly buy into token offerings. But we are being very careful and I would hope and expect that all of you are too.

When it comes to ICOs, understand that most are scams and that you must be careful to avoid them. As I said in that post I linked to above, the operative term when it comes to ICOs is “Buyer Beware.”

Video Of The Week: Polychain

Late last year, USV funded a new hedge fund called Polychain Capital, which invests only in crypto-assets.

I talked about the reasons for that investment in this blog post.

In the video of the week, Polychain founder Olaf Carlson-Wee talks about his belief in crypto assets and how he developed it.

Blockstack – A New Decentralized Internet

Our portfolio company Blockstack is building a development platform for decentralized applications built on top of the blockchain.

This video explains what they are doing and they just published a whitepaper outlining how their token works to support this application ecosystem.

I think that most people would agree that a more secure Internet with identity that users control built-in from the start is a better approach. But how one bootstraps that kind of Internet has been a challenge. Tokens as incentive systems are likely a solution to the bootstrap problem and it is exciting to me to see how this works.

NYCx

NYC announced a challenge program this week that is aimed at getting innovators, designers, technologists, entrepreneurs, etc focused on solving some of NYC’s most interesting problems. It is called NYCx and you can learn more about it here.

The first three challenges are up and are here.

They are:

The Governors Island Connectivity Challenge

Increasing Recycling In Brownsville Public Housing

Creating Safe Nightime Corridors In Brownsville

The City will continue to roll out these NYCx challenges in the coming months and years.

If you think you can solve one of the three existing challenges, you can apply on the links above.

IPOs Are Back In Favor

I read this piece on Reuters claiming that the huge megafunds in venture and growth equity are “stalling IPOs.”

And while it makes sense at some level, the truth is the exact opposite.

Based on everything I am seeing, hearing, and reading, 2018 and 2019 will be bumper years for tech IPOs, assuming the markets behave.

Uber’s new CEO Dara Khosrowshahi has promised an IPO in 18-36 months. That says 2019 to me.

Hot companies like Stitch Fix are filing to go public this year.

We have a pipeline of strong mature (and increasingly profitable) companies in our portfolio that will head to the public markets in 2018 and 2019.

So when you read stuff on the Internet, don’t take it as correct.

The truth is often the exact opposite.

Reset

I read Ellen Pao’s book Reset on my trip.

I know a lot of the people in the book and I am not into taking sides or making judgments about what happened in the case.

But I would recommend that every male VC read this book.

A lot of what we do, how we do it, and why we do it is unconscious.

Reading this book and others like it will help us to avoid doing those things.

And that will be a very good thing for the VC world, for entrepreneurs, and for the tech sector more broadly.

Our Model

This past week our portfolio company MongoDB went public. I think that occasion presents an opportunity to talk about USV’s model.

We are a small firm. We raise modest sized funds (by modern VC standards). Our first fund was $125mm, our second fund was $150mm, and we have now settled on $175mm as a good number and our past three funds have been that size.

Our typical entry point is Seed or Series A although we have an Opportunity Fund that allows us to enter later when that is appropriate. We do that once or twice a year on average.

We make between twenty and twenty five investments per fund and we expect, hope, and work hard to make sure that two or three of those investments turn into high impact companies that can each return the fund.

Although our entry point is typically Seed or Series A, we continue to invest round after round to both protect and add to our ownership. We have no requirements on ownership, but we typically end up owning between 15% and 20% of our high impact portfolio companies.

If you do the math around our goal of returning the fund with our high impact companies, you will notice that we need these companies to exit at a billion dollars or more. Exit is the important word. Getting valued at a billion or more does nothing for our model. We need these high impact companies to exit at a billion dollars or more.

Because we invest early, it generally takes seven or eight years for an investment to exit. We closed our first fund, USV 2004, in November 2004, and our first high impact exit came almost exactly seven years later when Zynga went public in late 2011.

Mongo DB represents the eighth high impact exit that USV has had. They are:

Zynga – IPO – 2011

Indeed – Sale to Recruit – 2012

Twitter – IPO – 2013

Tumblr – Sale to Yahoo -2013

Lending Club – IPO – 2014

Etsy – IPO – 2015

Twilio – IPO – 2016

MongoDB – IPO – 2017

Although MongoDB won’t be an exit until the lockup comes off and we are truly liquid, every other one of these impact investments has returned the fund it was in (or much more in the case of Twitter, Lending Club, and Twilio).

We were the lead investor in the Seed or Series A round in seven of these eight high impact companies and three of them came from seed investments. It’s easier to identify high impact companies in the late rounds, but not so easy to do that in the early rounds. That’s where our thesis based investing comes into play.

It is also important that all of our partners participate in this model. It takes seven or eight years before we can expect a new partner to contribute and Albert, who joined us in 2008, has produced the last two high impact exits with Twilio and MongoDB. John, who joined us in 2010, has already contributed one in Lending Club. I have no doubt that Andy, who joined us in 2012, and Rebecca, who joined us this week, will produce their share of high impact exits. Andy already has several in the pipeline.

So this is our model. Keep the fund sizes small. Make investments early so we can buy meaningful ownership for not a lot of money. Keep investing round after round to maintain and/or grow our ownership. And have enough high impact portfolio companies that we can get two or three of them per fund.

We have a good pipeline of high impact companies in our various portfolios so that we expect this model will keep working for the foreseeable future.

This model has more or less been the model of all three venture funds I have worked in over my thirty year period. It is time tested and it works when applied with focus and discipline and a strong investment thesis.

But with a new model, tokens, in its infancy, it begs the question of how it will impact our approach. We already have four portfolio companies that either have done or have announced intentions to do token offerings; Protocol Labs/Filecoin, Kik/Kin, Blockstack/Stack, and YouNow/Props. So we are going to figure this out in a few years. I expect the hold periods will come down as token offerings come early in a company’s life, not later. So we should know more about how this new model works in three to five years.

There are a bunch of questions that come to mind. Here are a few of them:

  1. Can a token based investment return a fund with more or less frequency than an equity based model?
  2. How long are the hold periods going to be in a token based model?
  3. Will the 10-15% high impact percentage that we see in our equity based portfolios be similar in a token based model?
  4. What are the appropriate ownership levels for a token based investment vs an equity investment?

We are going to continue to execute our equity based model in parallel with our token investments, at least for as long as that seems like the right approach. We have a good thing going with the equity based model but we understand that we have to adapt and react to changes in the market and we are doing that, fairly aggressively, with tokens.

It is an interesting time to be in the venture capital business. The decade that came after the internet bubble burst turned out to be a fantastic time to make early stage venture capital investments and we have been fortunate to participate in those good times. But the market has changed a lot with large incumbents taking up more and more white space in the internet sector as we have known it. At the same time, an exciting new sector and model, crypto/tokens, has emerged which gives us a lot of optimism about the opportunities ahead of us.

We will see how our model needs to evolve over time to make sure we can continue to deliver the results we want to deliver to the entrepreneurs and companies we back and the to the investors whose capital we manage.