Rinse And Repeat

I’d like to call out a really great blog post (and talk) my colleague Nick Grossman delivered last week. He called it Venture Capital vs Community Capital, but to me its about the endless cycle of domination and disruption that plays out in the tech sector. This bit from the post rings so true to me:

So there’s the pattern: tech companies build dominant market positions, then open technologies emerge which erode the the tech companies’ lock on power (this is sometimes an organized rebellion against this corporate power, and is sometime more of a happy accident).  These open technologies then in turn become the platform upon which the next generation of venture-backed companies is built.  And so on and so on; rinse and repeat.

So, all that is to say: this is not a new thing.  And that seeing this as part of a pattern can help us understand what to make of it, and where the next opportunities could emerge.

Nick wrote the post and did the presentation for the OuiShareFest, an international gathering of folks interested in the peer economy. Nick starts out noting that the early enthusiasm for the peer economy has moderated with the understanding that a few large platforms have emerged and have come to dominate the sector.

Nick’s presentation and post, therefore, was a reaction to those emotions and a reminder that what goes around comes around eventually. That is certainly what I have observed in the thirty plus years I’ve been working in tech. Rinse and repeat. Same as it ever was.

The Apple Watch – How Is It Doing?

Continuing my obsession with the Apple Watch, a device I don’t own and don’t intend to own, I’m curious how its doing.

I read a report yesterday that suggested the early sales are disappointing and that a respected research firm has cut first year sales projections to 15mm watches although Morgan Stanley still has their estimate at 36mm watches.

But more than how it is selling, I am curious how it is doing with those of you out there that bought it.

If you own an Apple Watch, please complete this short survey. I appreciate it. I will post screenshots of the results as they come in.

CSNYC At Two

Next Wednesday night, at Civic Hall in New York City at 6:30pm, CSNYC will celebrate its second anniversary. For those that don’t know, CSNYC is a non-profit dedicated to the idea that every child who goes through the NYC public school system should encounter computer science along the way, in elementary school, in middle school, and in high school, and those that want to do a deep exploration of computer science should be able to do that before they graduate high school. The idea is not to turn every student into a software engineer, although it would be good if a bunch of students decided to do that. The idea is that every career will require a working knowledge of coding in the world we are heading into and that we ought to make sure our children have that.

In two years, we have increased our school coverage from one to over 120 schools. We are very proud of that accomplishment and will be showcasing those schools, the programs that are in them, and the students who are benefiting from this effort next Wednesday night. This event is also a fundraiser since we’ve got a lot of work ahead of us. Though we are in 120 schools, there are 1700 in the NYC public school system. At its core, CSNYC is funding teacher training and development. The only scalable way to get all children to learn computer science is to train the best teachers out there how to teach computer science. I figure it will require somewhere between 3500 and 4000 teachers trained in teaching computer science in order to reach all 1700 schools in NYC and achieve our goals. That will require a fair bit of money.

If you would like to attend CSNYC at Two next wednesday night, go here and RSVP. Individual tickets are $250. But if you have the means, you could also buy a $1000 ticket that is for two guests, or a table for $10,000, $25,000, or $50,000.

It’s going to be fun, optimistic, and exciting evening. I hope to see some of you there.

Digital Gold

Nathaniel Popper‘s Digital Gold, a history of the people who built Bitcoin into a global distributed transaction network that is not controlled by any person or any company, is available for purchase today. I’ve been reading it and enjoying it very much. Even though I have been involved in and closely following the sector since 2011, I did not know all the details of the early days and Nathaniel captured them well.

In celebration of the book being out, The New York Public Library is hosting a conversation between Nathaniel, Gavin Andresen, and me tonight. It will be moderated by Andrew Ross Sorkin. The event is sold out and has been for a long time, but the details are here. The livestream for the event tonight is here.

A lot of people ask me “are you still bullish on Bitcoin” and that question irritates me. Because it suggests that Bitcoin is simple. Bitcoin is not simple, it is not going away, and it continues to fascinate me more than almost anything out there in the tech sector. I’m excited to have a chance to talk about it in public with people who understand it better than I do.

Women Entrepreneurs

There is gender bias in the startup sector. Anyone who believes otherwise has their head in the sand. And yet there are vast numbers of women entrepreneurs out there. The Gotham Gal has been profiling one a week on her blog (Women Entrepreneur Mondays) for five years and never has a shortage of women entrepreneurs to profile. So the truth is women are starting companies every day and participating in the startup sector. But it isn’t easy to be a women entrepreneur and they face a set of challenges that is unique to their situation.

Sukhinder Singh Cassidy, a serial entrepreneur in Silicon Valley and a former Google executive, surveyed a bunch of successful women entrepreneurs and penned a post with all that she learned from that work. It’s a good read and full of stats about the differences between men and women entrepreneurs. It also has a great list of actions we can all take at the end to make things a bit easier for women in startup land.

Through the work of women, like Sukhinder and Sheryl Sandberg, and my favorite – The Gotham Gal – women are making their voices heard in startup land and things are changing for the better. But there is still a lot of work to be done and Sukhinder’s list is a good place to start if you want to help make a difference on this issue.

What Will Make Solar Take Off?

Our house in LA where we spent two and a half months this past winter has a solar panel on its roof. That panel generates enough electricity to heat and cool the house and charge the Tesla we own so that when I’m driving around LA, I’m using non-carbon based energy to get around. I would bet a lot of electric car owners in Southern California charge their cars with solar energy.

I have told this little tidbit to many people since this winter because I feel like its a glimpse into the future. And the reaction I often get is “that is awesome. I want to do that.”

If electric cars are the future, will they also be the thing that finally makes solar take off? Or will there be some other catalyst?

The economics of solar has always been challenging. Ten year paybacks are not the path to rapid adoption. I believe that the cost of solar has come down a lot and that might reduce the payback times but energy costs have also come down a lot too so I don’t know if we’ve really seen payback times decline that much.

We don’t invest in cleantech at USV so I am not particularly well versed in this topic. But instinctively it feels to me that wide adoption of solar is inevitable and we just need a catalyst to make that happen.

Maybe that will be electric cars. Or maybe it will be something else. I’m interested in what folks here at AVC think about this question.

What VC Can Learn From Private Equity

It is friday and that usually means a fun friday or a feature friday but I’m stuck on a plane flying back from a week on the west coast and have the time and inclination for a longer post. So we will return to our regularly scheduled friday programming next week.

I spent a week in Europe a few weeks ago with our friend Eric who is a managing partner in a private equity firm. We talked a lot about his business and our business that week and I’ve been ruminating on it since. I’ve also had the pleasure of working on a board of one of our portfolio companies with a private equity investor who is making a few minority investments. I’ve been able to learn a fair bit from watching how he thinks about investments and works on them. Finally, the first venture capital firm I helped start, Flatiron Partners, was backed by and initially housed inside a private equity firm, Chase Capital Partners, and Jerry and I learned a lot from attending their weekly investment meetings and listening to them talk about their business.

Venture Capital and Private Equity are very different investment disciplines. Both are purchasing stock in privately held businesses with the hope that you can sell the stock at higher prices in a merger/sale transaction or a public offering. Both involve investors taking board seats to monitor and manage their investment. That is about where the similarity ends. I’ve seen venture capital firms morph into private equity firms over time so there are clearly some skills that translate from one investment discipline to the other. But even so, I think they are fundamentally different investment disciplines and here are some of the biggest contrasts:

1/ Private equity is control investing. Venture Capital is minority investing.

2/ Private equity can’t afford to lose money on an investment. Venture Capital requires it.

3/ Private equity generates leverage from financial engineering. Venture Capital generates leverage from technology driven disruption and the opportunities that presents.

So what can Venture Capital learn from Private Equity? Here are a few things that have struck me as I’ve thought about it over the past few weeks.

1/ Many venture capitalists and venture capital firms go “along for the ride” with the entrepreneur and don’t do much to change the trajectory of the investment. Some VCs don’t even take board seats on their investments. There is a lot of talk about “value add” from VCs but often that is just for show during the process of winning the deal. The number of VCs who actually add a lot of value to their investments is much smaller than you would think. Private equity, on the other hand, is all about adding value to the business. For one thing, the private equity firm owns the business. If the business gets messed up, it’s on them and nobody else. The buck stops there at the partners desk. This mindset is refreshing for me to witness. The level of care and attentiveness to the business is very high in the private equity business. The firms and partners that are good in private equity are fantastic operators and game changers for the companies they work for/on. After my week with Eric, I made a mental note to do more of that for our companies. It’s powerful.

It is easy to cop out and say “well we don’t control the business. we don’t have the ability to change management if we want to. we don’t want to get sucked into operating the companies we invest in.” And I agree with all of that. But you don’t need to control a business to be able to meaningfully impact its management team, its strategy, and its operations. I believe if you are trusted by management, if you are there for them when they need you (and when they think they don’t), and if you have done the work to truly understand the business, the team, the market, and the opportunity, that you can by force of intellect and will have a very substantial impact on the business. I want to do more of that with my time and energy and I think all VCs should do that.

2/ Private equity firms don’t normally invest in syndicates. A single firm makes the investment and takes responsibility for making it work. This one is not so cut and dried for me as the first observation. Syndicates, when they are functional and small, are quite powerful. But many times syndicates are large, unwieldy, and dysfunctional. And then there is a ton of finger pointing, or worse, abdicating responsibility to another director. For the CEO, there is often a question of who to listen to, what to do with conflicting direction from the investors, and how to manage this unwieldy mess. The beauty of one firm calling all the shots makes me jealous of the private equity world at times. It is helpful for everyone to know who is the boss and who is making the calls. Venture capital syndicates and board often suffer from a lack of that clarity and if you have a weak or inexperienced CEO, it is a really bad combination.

3/ Private equity firms make the call when to sell. In VC, entrepreneurs will make the call when they are in charge or the board will when they are not. In any case, a VC firm is rarely in a position to make the call on when to sell. Marc Andreessen makes the claim in the recent Tad Friend profile of him in The New Yorker that Accel wanted to sell Facebook to Yahoo! for $1bn but Mark Zuckerberg really didn’t want to (and that Marc Andreessen urged him not to). I’m not sure if that is accurate or revisionist history (which the startup sector is full of), but in any case it is sometimes for the best that the VC firm doesn’t make the call on when to sell. A lot of big independent public companies would not exist if VCs made the call on when to sell. However, that is really only true when the investment is a breakout success. There are many venture portfolios (ours included) full of good but not great companies that would be best sold to a consolidator so that everyone, the entrepreneurs, the employees, and the investors can move on to other things. That doesn’t happen as much in VC because no one person can make this call all by themselves.

4/ Private equity firms are great at digging into the business and figuring out what is broken and how to fix it. We don’t do so much of that in the VC business. For one, the CEOs feel that we are being disruptive when we do that. And also, VC firms don’t normally have the armies of associates and junior partners who do that work in private equity firms. I’ve watched a private equity partner engage in a minority growth investment and I am impressed by the insights they can provide the management when allowed to do a deep dive on the business. VCs often lose interest as a company grows and turns into a big operating company, when this kind of “consulting” work is most valuable, whereas private equity gets its juices flowing on these sorts of situations.

I’ve come to realize that I need to be more attentive to this phase of a company’s development because our returns mostly come from the big breakout companies and if we can help make them 2-3x more valuable (as a private equity firm would seek to do), that can drive our returns on these big winners from 50x to 150x. And that’s a huge difference. So while I don’t see myself equipping myself with an army of analysts and consultants and doing deep dives on our biggest companies, I do see myself trying to ask harder questions and force more instrumentation into the businesses so that the boards I am on can add more value.

The main thing I’ve come away with from this several week long rumination on private equity is the value of having very clear lines of responsibility, crisp decision making, clarity of who is calling the shots, and, mostly, a deep feeling of ownership and responsibility for the businesses we invest in. It’s not possible for one VC partner to do this for more than about eight to ten companies, and most VCs take on way more portfolio companies than that in an effort to scale their businesses and get to better economics. But I think we can learn a lot from what works so well in private equity. I think we can borrow some of their tactics to produce better outcomes for the entrepreneurs we back and the companies they create.