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.

Rebecca Kaden

USV added a new partner today. Her name is Rebecca Kaden and she introduced herself to our world on the USV blog just now. Rebecca joins a team of fifteen people; our network team, our analysts, and our fantastic administrative team. We are all excited to have her join us.

It took us a year to find the right person to add to our partnership. We have only added three people to our partnership in the fourteen-year history of USV. Albert joined USV in 2008, after doing a two-year stint as a Venture Partner at USV, and after spending almost a decade doing early-stage investing in a number of firms. John joined USV in 2010 to help us with the newly formed Opportunity Fund after spending about a decade in private equity and public market and angel investing. And Andy joined USV in 2012 with thirteen years of VC experience at Dawntreader and as a founding partner of Betaworks.

Albert and Andy took over running USV a year and a half ago and led this search. They did a great job. With Rebecca, we now have the start of the next generation after Andy and Albert.

A venture capital firm, at least our venture capital firm, is at its core, a group of like-minded investors who come together around a shared investment thesis to work collaboratively to help entrepreneurs build companies. When you get the people right, as we have over the last fourteen years, it is magic. When you get the people wrong. it sucks for everyone, including the entrepreneurs. So we took this search very seriously and I am confident that we found the right person in Rebecca. She is experienced, loved by the entrepreneurs she works with, curious, funny, and has the personality and temperament to fit into our partnership. I am excited to work with her every day.

Rebecca grew up in a venture capital firm as did I. She spent almost six years at Maveron, a firm we deeply respect. Maveron, like USV, has stayed small, continued to focus on seed and Series A investments, and has stuck to its thesis around consumer investing. Everyone knows what a Maveron deal is and what it isn’t. That is my favorite kind of venture capital firm. Venture capital is an apprenticeship business and Rebecca is very fortunate to have learned the business from her partners at Maveron.

I would be remiss if I did not address the diversity issue. A number of us have been public about the fact that we wanted to add some diversity into our partnership and that is what we have done. And we are not done. We will continue to look for diversity across our organization and that means diversity of all kinds. We are not doing this for optics or public pressure. We believe that different perspectives, life experiences, and orientations in a partnership will lead to better decisions. But that said, this will take time. We don’t add partners very often and when we do, we are very careful about who we add. We probably won’t look very different a year from now but we will probably look very different a decade from now.

Each partner who has joined USV has done two things very well. First they have figured how to operate inside of our shared investment thesis. And second they have figured out how to stretch it. Albert taught us that developer platforms like MongoDB, Twilio, and Stripe could be networks and that stretching of our thesis has worked out exceptionally well. John taught us that financial services like Lending Club and C2FO and eShares were networks and that stretching of our thesis has worked out equally well. Andy has helped us understand how networks like Figure1, Nurx, and Science Exchange are impacting health care and that is turning out to be extremely promising. Rebecca will stretch our thesis some more and we are excited to work with her and support her as she does that.

If you didn’t click over to the USV blog and read Rebecca’s introduction of herself already, I would encourage to you do that now. She ends it with her email address and a call out to entrepreneurs to come work with her at USV. As it should be.

The Great Firewall

We arrived in Shanghai late Monday night after a long four-airport three-flight day and all I wanted to do was crash. The Gotham Gal wanted to check her email so she logged onto the hotel WiFi and attempted to do that. As I was falling asleep I heard her call down to the front desk and complain that the Internet wasn’t working. I told her we could deal with it in the morning.

So when we got up, we grabbed our laptops and went downstairs to have breakfast and fix things.

I set up VPN software on both laptops and the Gotham Gal’s iPhone. For some reason that I don’t entirely understand, my Pixel with a TMobile SIM card seemed to be able to bypass the great firewall and access Google and Twitter without need for a VPN.

But even with firewall software on our devices, accessing western Internet services in Shanghai was flaky. Sometimes things worked, sometimes they didn’t and it wasn’t entirely clear why.

But more than the inconvenience, and it wasn’t a big one, the entire notion that China has chosen to block some of the world’s most essential services inside of China’s borders seems crazy to me.

I understand the value of protecting home grown services from competition from Google, Facebook, and Amazon. But the local versions of those services have grown so powerful over the past decade and cultural norms (like WeChatting) have taken hold so strongly that the protection seems unnecessary at this point.

Of course there are the censorship issues, which the New York Times recently shamefully heralded, but how hard is it to get a VPN if you want to check Twitter and search Google for uncensored news?

Xi Jinping heralded the dawn of a New Era for China in his talk at the 19th Party Congress this week. He asserted that China is strong and ascendent and those are both certainly true.

I would argue that China is strong enough now to fully join the Internet without any controls or constraints on it, like the dominant modern society that it wants to be and, frankly, already is.

Board Decks Best Practices

At our portfolio company CEO Summit this spring, the 60 or so leaders in attendance asked us if we could figure out a way to aggregate some insights across our entire portfolio and share the data with them. We said we would see about that.

So this summer, we hired Max Heald for a three month stint after he graduated from college and tasked him with figuring out how to do this. The first constraint was that we were not going to ask our portfolio companies for data. They have businesses to run and they don’t need us dumping a big data request on them.

So we pulled together all the data we already had on our portfolio companies, the spreadsheets, the pitch decks, the board decks, the financial reports, etc and asked Max to comb through it and see if there were insights in the aggregate data.

Of course there was. Here’s an example of something we were able to determine via this effort.

I have been telling the companies I work with to plan on eighteen months of runway from a financing and three to six months to raise the next round for years. But it is nice to see that advice validated in data.

Along the way Max saw a lot of board decks and asked us if he could write a post on the USV blog describing some of the best practices he saw. We encouraged him to do that and he published it today. Check it out.

A Better Way To Do Bike Share

I’m a big Citibike user in NYC. I take it to and from work sometimes. I take it to and from the ferries a lot. And I use it to get twenty or thirty blocks in 5-10 mins when I don’t have the time to walk it.

But one thing I don’t like about Citibike is the anxiety around having an empty docking spot at your preferred destination kiosk. If there are no empty docks, you have to go to the nearest one in search of an empty dock. I’ve sometimes had to try three or four kiosks which is very frustrating.

Here in Shanghai, they do things a bit differently, and I think a bit better.

The bike share bikes are everywhere that we’ve been in Shangahi but they don’t dock in kiosks. They just lock up when you end your ride and the next person unlocks them with an app on their phone.

Here are what the bikes look like when they are waiting for someone to take them out.

Sometimes they are lined up almost like a Citibike kiosk.

And sometimes they are just dropped off a bit more randomly.

And here is the QR code you read into an app on your phone to get the code to unlock the bike.

I sure hope that the NYC Citibike system moves to this approach as soon as practical. It would make the system a lot better.

Southeast Asia

We spent the last nine days in Southeast Asia, in Vietnam, Cambodia, and Laos. If you want the play by play version of our trip, head on over to the Gotham Gal’s blog where she does that and has has done for every trip we’ve taken over the last fifteen years.

As an aside, if you ever want travel tips to many destinations around the world just Google for the city and add gothamgal.com to the end of the search query and there’s a good chance you will find a host of blog posts that she has written about that location.

But I digress.

Throughout our trip in Southeast Asia over the last nine days, I was struck by the palpable feeling of economic growth and entrepreneurship. It felt like a region that is pulling itself out out of poverty by it’s bootstraps.

There is a long way to go for sure. Annual per capita GDP in Vietnam is roughly $7000US, that number is roughly $6000US in Laos, and roughly $4000US in Cambodia.

But there is a vitality everywhere you go. People are on the go. Construction projects abound. Commerce is everywhere. People have phones and motor scooters.

Most of all you see children and young adults. This is a region that lost much of my generation to war and genocide. But they are regenerating their families and societies. In Vietnam, 50% of the population is under 30. In Cambodia, 70% are under 22.

The people are nice. They welcome the tourists and understand the economic support it brings to their cities and country.

So I’m very optimistic about these countries. They are on the move. It was exciting to see that.

Crypto Asset Allocation

Coindesk did me a disservice with this blog post:

It made it seem like I was predicting an imminent crash which I was not.

But just as bad, it has led to a lot of tweets like this one suggesting that I also said that people should have 10-20% of their net worth in crypto:

What I did say is that “true believers” in crypto might want to have 10-20% of their net worth in crypto assets. For many of these true believers that would be down from 80-100%.

So, what do I think is a reasonable asset allocation to crypto for the average investor?

Well to start, as I mentioned in that blog post, The Gotham Gal and I have about 5% of our net worth in crypto assets, across a number of vehicles; direct holdings, USV funds, token funds, etc. We have a fairly diversified crypto portfolio, likely much more diversified than most folks could do on their own.

I think that’s likely at the high end of what the average person should have, but I also think its not a ridiculous number for the average person to have.

Many endowments, pension funds, etc allocate 3-5% of their portfolio to venture capital. They know its a risky asset but it has the potential for outsized returns. The largest allocation I have seen to venture capital from a big endowment or pension fund is 10%. So that gives you a sense of what sophisticated investors do with risky asset classes.

If you had to pin me down on a number, here is where I would end up:

  • young, aggressive risk taker – 10% of net worth in crypto
  • sophisticated investor seeking a high performing portfolio – 5% of net worth in crypto
  • average investor, slightly conservative, but with some appetite for risk – 3% of net worth in crypto
  • retiree seeking to preserve portfolio value and generate income – 0% of net worth in crypto

Hopefully this will set the record straight. It makes me very nervous when I see folks tweeting out “advice” that I did not give.