Posts from December 2017

What Happened In 2017

As has become my practice, I celebrate the end of a year and the start of a new one here at AVC with back to back posts focusing on what happened and then thinking about what might happen.

Today, we focus on what happened in 2017.

Crypto:

I went back and looked at my predictions for 2017 and I completely whiffed on the breakout year for crypto. I did not even mention it in my post on New Year’s Day 2017.

Maybe I got tired of predicting a breakout year for crypto as I had mentioned it in my 2015 and 2016 predictions, but whatever the cause, I completely missed the biggest story of the year in tech.

If you look at the Carlota Perez technology surge cycle chart, which is a framework I like to use when thinking about new technologies, you will see that a frenzy develops when a new technology enters the material phase of the installation period. The frenzy funds the installation of the technology.

2017 is the year when crypto/blockchain entered the frenzy phase. Over $3.7bn was raised by various crypto teams/projects to build out the infrastructure of Internet 3.0 (the decentralized Internet). To put that number into context, that is about equal to the total seed/angel investment in the US in 2017. Clearly, not all of that money will be used well, maybe very little of it will be used well. But, like the late 90s frenzy in Internet 1.0 (the dialup Internet) provided the capital to build out the broadband infrastructure that was necessary for Internet 2.0 (the broadband/mobile Internet), the frenzy in the crypto/blockchain sector will provide the capital to build out the infrastructure for the decentralized Internet.

And we need that infrastructure badly. Transaction clearing times on public, open, scaled blockchains (BTC and ETH, for example) remind me of the 14.4 dialup period of the Internet. You can get a taste of what things will be like, but you can’t really use the technology yet. It just doesn’t work at scale. But it will and the money that is getting invested via the frenzy we are in is going to make that happen.

This is the biggest story in tech in 2017 because transitions from Internet 1.0 to Internet 2.0 to Internet 3.0 cause tremendous opportunity and tremendous disruption. Not all of the big companies of the dialup phase (Yahoo, AOL, Amazon, eBay) made a healthy transition into the mobile/broadband phase. And not all of the big companies of the broadband/mobile phase (Apple, Google, Facebook, Amazon) will make a healthy transition into the decentralized phase. Some will, some won’t.

In the venture business, you wait for these moments to come because they are where the big opportunities are. And the next big one is coming. That is incredibly exciting and is why we have these ridiculous valuations on technologies that barely/don’t work.

The Beginning Of The End Of White Male Dominance:

The big story of 2017 in the US was the beginning of the end of white male dominance. This is not a tech story, per se, but the tech sector was impacted by it. We saw numerous top VCs and tech CEOs leave their firms and companies over behavior that was finally outed and deemed unacceptable.

I think the trigger for this was the election of Donald Trump as President of the US in late 2016. He is the epitome of white male dominance. An unapologetic (actually braggart) groper in chief. I think it took something as horrible as the election of such an awful human being to shock the US into deciding that we could not allow this behavior any more. Courageous women such as Susan Fowler, Ellen Pao, and many others came forward and talked publicly about their struggles with behavior that we now deem unacceptable. I am not suggesting that Trump’s election caused Fowler, Pao, or any other woman to come forward, they did so out of their own courage and outrage. But I am suggesting that Trump’s election was the turning point on this issue from which there is no going back. It took Nixon to go to China and it took Trump to end white male dominance.

The big change in the US is that women now feel empowered, maybe even obligated, to come forward and tell their stories. And they are telling them. And bad behavior is being outed and long overdue changes are happening.

Women and minorities are also signing up in droves to do public service, to run for office, to start companies, to start VC firms, to lead our society. And they will.

Like the frenzy in crypto, this frenzy in outing bad behavior, is seeding fundamental changes in our society. I am certain that we will see more equity in positions of power for all women and minorities in the coming years.

The Tech Backlash:

Although I did not get much right in my 2017 predictions, I got this one right. It was easy. You could see it coming from miles away. Tech is the new Wall Street, full of ultra rich out of touch people who have too much power and not enough empathy. Erin Griffith nailed it in her Wired piece from a few weeks ago.

Add to that context the fact that the big tech platforms, Facebook, Google, and Twitter, were used to hack the 2016 election, and you get the backlash. I think we are seeing the start of something that has a lot of legs. Human beings don’t want to be controlled by machines. And we are increasingly being controlled by machines. We are addicted to our phones, fed information by algorithms we don’t understand, at risk of losing our jobs to robots. This is likely to be the narrative of the next thirty years.

How do we cope with this? My platform would be:

  1. Computer literacy for everyone. That means making sure that everyone is able to go into GitHub and read the code that increasingly controls our lives and understand what it does and how it works.
  2. Open source vs closed source software so we can see how the algorithms that control our lives work.
  3. Personal data sovereignty so that we control our data and provision it via API keys, etc to the digital services we use.
  4. A social safety net that includes health care for everyone that allows for a peaceful radical transformation of what work is in the 21st century.

2017 brought us many other interesting things, but these three stories dominated the macro environment in tech this year. And they are related to each other in the sense that each is a reaction to power structures that are increasingly unsustainable.

I will talk tomorrow about the future, a future that is equally fraught with fear and hope. We are in the midst of massive societal change and how we manage this change will determine how easily and safely we make this transition into an information driven existence.

Video Of The Week: Token 1.0 vs Token 2.0

AVC community member William Mougayar sent me a video of a talk he recently gave in Moscow.

I really like the framework he articulates about half way through the talk regarding token 1.0 (where we are now) and token 2.0 (where we need to be before we will see real sustainable disruptive value creation with blockchain technologies).

Here is that bit:

If you’d like to watch the entire talk, you can do so here.

Funding Friday: The Merry Merkle Tree

Our friends at TrueBit are trying to raise $250k to support Covenant House Toronto.

They have built a virtual Christmas tree and are accepting donations in Ethereum here.

The Gotham Gal and I have donated 5.5 ETH. Our donation may take a few days to show up on the leaderboard.

I am hoping those of you out there who are holding a lot of ETH might part with a little bit of it to help a great cause.

You can do that here.

The Digital Advertising Duopoly

This chart from eMarketer really brings it home.

We have a digital advertising duopoly.

The difference between second and third place is massive.

I don’t want nor do I expect any governmental response to this market failure.

I want to see the technology industry adopt new approaches to monetization, ideally not attention based models, to combat this.

I don’t think subscriptions are the only answer here, as many do.

We need models that support free consumption of media for many reasons.

I think the crypto sector has some answers for us but I am also looking elsewhere.

We need new approaches and we need them now.

A Fun Way To Learn To Create Dapps In Solidity

One of the reasons I am rooting for the Ethereum community to address many of its current issues (scalability being the big one) is that there is a clear developer platform opportunity for Ethereum. The Ethereum programming language Solidity is relatively easy to learn and Ethereum was designed from the ground up as an application platform. Ethereum applications, called Dapps (for decentralized apps), are starting to launch pretty regularly.

If you want to learn how to create a Dapp in Solidity, you might try out this interactive coding game called Cryptozombies:

CryptoZombies is an interactive code school that teaches you to write smart contracts in Solidity through building your own crypto-collectables game.

Thanks to AVC community member William who showed this to me yesterday.

There is a lot of naysaying out there suggesting that public blockchains and crypto aren’t good for anything other than speculating on token prices.

That is dead wrong, but it is true that the immature state of the technology has made building useful things on top of this technology very hard.

What we need to look for are efforts to make public blockchains more reliable, faster, and easier to build on. Those projects are out there and the fruits of all of that labor will come in due course.

In the meantime, it might be a fun and productive use of your time to learn to build a Dapp in Solidity and have some fun at the same time.

The Second Quartile

As I have written about here on AVC many times, early stage venture portfolios produce a wide range of outcomes. A few investments produce the vast majority of the returns while many investments return nothing. Managing a portfolio with power law dynamics is a challenge.

At USV, we tend to make 20-25 investments per early stage fund.

The best four to five investments per fund will usually produce greater than 80% of the total returns of a fund (the top quartile). This is where you might imagine that we spend all of our time, but the truth is that these investments generally go well and while we certainly do everything we can to help these companies, they often do not demand a lot of our time. When they do require a lot of our time, it tends to be situational.

There will be roughly ten investments per fund that will return maybe 5% of the fund (the third and fourth quartile). We spend a lot of time on these investments and it is difficult work that I have written a lot about over the years. The time and money we spend on these investments is not rational but we do it anyway.

And then there is the second quartile that will produce roughly 15% of the returns of the fund.

I find that it is this cohort of investments that is the most challenging to manage. The companies in the second quartile are usually very good companies but they lack the explosive value generation characteristics of the top quartile. They tend to have a harder time attracting top talent and financing their businesses at attractive valuations. We often do insider-led rounds for companies in the second quartile as the venture industry is hard wired to invest in the top quartile, particularly the later stage/growth investor community.

But there is a lot of value in the second quartile. The exits in the second quartile tend to be in the $100mm to $500mm range which is not a small amount of value to anyone other than a VC managing a billion dollar fund. The founders and management teams that are building these companies stand to make a lot of money if they execute the opportunity well. And an early stage VC can make a lot of money too. At USV, we tend to own between low to middle teens and twenty percent of our portfolio companies at exit, so the proceeds at exit to us of an investment in the second quartile cohort can be $50mm or more. A few of those and that is the difference between a 3x fund and a 5x fund for us. So managing the second quartile is super important.

But the second quartile will try your patience and your conviction. These investments often take longer to realize. And you will have to take endless calls from friends in the VC passing on the investment for all sorts of good reasons, but always come down to “it’s just not exciting enough to us.” You will have to talk your management team off the ledge countless times. You will work harder to recruit new talent. You will put more money into them than you want to. You will struggle to get the business profitable. You will wonder if you have lost your objectivity.

And then one day, you will get an offer from a buyer to acquire the company for hundreds of millions of dollars. And then all of that effort and conviction will have been worth it.

The tech sector’s obsession with the billion dollar companies emerging from startup land is irritating to me. That narrative ignores a lot of great companies and terrific work being done by founders and management teams. And it makes it harder to build a company that isn’t in that top cohort.

I understand why the attention is focused on the big winners to the detriment of everything else. But I can assure you that is not how we operate at USV, and it is not how the best early venture capital firms operate. When you start a company, you want to find an investor who will be there with you through thick and thin. Do yourself a favor and look at how the firms you are talking to behave toward their second and third quartile portfolio companies. That will tell you all you need to know.

Happy Holidays and Merry Christmas

I am publishing my annual year end playlist as a holiday gift to the AVC community.

I did 21 songs last year but 2017 was a great year for music, so I thought I would double that to 42.

And then I threw in Man’s Not Hot at the end for kicks.

It starts with a great Chance The Rapper holiday song and goes on from there. It’s hip hop in the beginning, moves to electronic, indie, folk, and R&B in the middle, and finishes with the big hip hop songs on SoundCloud this year.

There are a few SoundCloud Go+ tracks on it and if you aren’t a subscriber, you will get 30 second previews. I’m sorry about that but most of the songs are free and clear.

Happy Holidays Everyone

Putting The Year In The Review Mirror

I’m in the process of going over all of the songs I favorited this year and putting my top ones into a playlist and then culling that list. I’m planning on posting it at some point this coming week, maybe as soon as tomorrow as a Christmas gift to the AVC community.

That’s a precursor to a larger effort of looking back on 2017 that will result in a What Happened post on New Year’s Eve followed by a What Will Happen post on New Year’s Day.

This stuff is fun for me but it is also a great mental exercise to go through. It forces me to reflect, think, and focus on what is/was most important.

There is so much that blogging does for my brain. I am not sure how I would do my work without it. The daily routine of writing something for public consumption is a discipline that brings clarity in a confusing time. The bigger posts that come every now and then, and the year end ones, are particularly valuable to write.

So I am looking forward to spending the coming week reflecting on the year that is ending and looking forward to the year that is about to begin. I will do that while celebrating the year end holiday with our family skiing in the rockies.

And the year in review thing is already in swing in VC blog land. Semil Shah posted his year in review a few days ago and it is a good read.

There won’t be much in any of these year in review posts that you don’t already know. But it is the context and reflection that comes with them that are so valuable.

Video Of The Week: The Token Summit Conversation

As I start thinking about 2017 and what happened this year in the world of startups and tech, I am going back and watching and reading things that stayed with me this year.

This talk between William and me at Token Summit captures much of what I have been thinking about the blockchain/crypto sector this year (and beyond).

It was fun to watch it again six months later. It is about 30mins long.

Feature Friday: Quote Retweet

One of my favorite features on Twitter is the ability to retweet something with added context.

Like this:

I do this a lot:

You get my point.

There are a lot things Twitter can do to make Twitter better but getting rid of the Quote Retweet is not one of them.