The Crunchies

I went to the Crunchies last night for the first time. The Gotham Gal was nominated for “Angel Investor Of The Year” and she said, “If by some chance I win and I’m not there to accept, then I would be a jerk.” I agreed with that logic and so we went.

Chelsea Peretti, who hosted, is great. She is very funny. She made fun of tech, SF, and a bunch of other things, but in a good way. I think she is a great choice for host.

Diversity was the theme of the night. The best move was when Slack sent out a number of their female (and african american) engineers to accept one of several awards they won last night. That sent a message to everyone else. If they can do it, so can you. Well played Slack.

But the honest to god truth is most of the winners don’t care about the Crunchies. Not one winner of the big categories showed up to accept their award. So the Gotham Gal would have been in very good company had she not showed up.

And the other honest to god truth is award shows suck. Because there is no single best of anything. No best movie. No best TV show. No best musician. No best comedian. No best VC. No best startup. No best CEO.

And the idea that there is an anathema to me. Which is why I’ve never been to a Crunchies even when I was nominated.

I know I sound like a grump. Award shows are entertainment. People like them. And last night was entertaining thanks to Chelsea and Jordan Crook, who is also quite funny and talented.

But the final thing I will say on this is the reason why award shows exist is because all of the work that everyone does who aren’t nominated and don’t win. So entrepreneurs all over the world are the reason Techcrunch even gets to put on this show. Bill Gurley said as much last night in his gracious and wonderful acceptance speech. And he is right.

Massively Multiuser Feedback

There are a number of companies that have user bases in the millions and operate public networks that encourage their users to share their opinions on everything. These companies face an interesting and challenging issue which is that their users are loud and vocal right inside their product about changes that are being contemplated or that have been made. Operating a business like this presents a unique challenge and opportunity to leverage this feedback channel but not become hostage to it.

I believe that one of Mark Zuckerberg and Facebook’s greatest strengths is that they did not let themselves become hostage to the feelings of their user base. They did what they thought was in the best interest of their users and their service. The first time I saw this was the rollout of the news feed. I don’t recall when that was but I believe it was nine or ten years ago now. The users were furious about the new interface and the revelation of “too much information” being presented and shared in it. The Facebook team hung in there and stayed the course and today the Facebook news feed is possibly the most powerful user interface on the Internet.

Etsy, a company I am on the Board of and have been an investor in for ten years now, has always had a very lively community discussion board system for its sellers (and buyers). The sellers who hang out in this community service have often been critical of Etsy’s product and policies. Sometimes these boards turn very hostile and I have watched Etsy struggle with how to both internalize and manage this feedback. On one hand it has made Etsy more sensitive and responsive to the needs of its seller community (which is a very good thing and at the core of why Etsy works) but it has at times made Etsy defensive and hesitant to make necessary changes to its product and policies. I think the Etsy team has gotten to a good place over the years on this issue but it took a lot of learning and a good deal of pain to get there.

Of course, the reason I am choosing to write about this now is the latest uprising of the Twitter user base over the algorithmic feed. The hashtag , #riptwitter, conveys both the power of the community and the hostility that it can take towards a company. 

I have been a private (before leaving Twitter’s board) and public (long after) proponent of adding an algorithmic news feed to Twitter. I know that many users and most of the hard core users prefer the reverse chronological order of the Twitter timeline. I don’t and never have. My favorite feature on Twitter is “what you have missed” and I am in love with and completely dependent on gmail’s priority inbox. For some of us, having a service surface what is most important to us is incredibly valuable. For others, it is an invasion of their control and ability to determine that for themselves. It is like conservatives and liberals. There is no right way to view the world. There are many ways and we have to appreciate that what works for some of us doesn’t work for others.

Twitter has had the technology to provide an algorithmic feed for years. They acquired a company called Julpan in the fall of 2011 which had much of the tech that was necessary to produce an algorithmic news feed. Twitter’s technology in this area is much better today than it was four or five years ago. And maybe that is why they have waited so long to roll it out. But they could have, and I would argue should have, rolled it out years ago. And, of course, they could have and should have (and will) release it with an option to keep reverse chronological order as the default timeline for those who prefer it.

Gmail doesn’t force priority inbox on its users. You can get everything in your inbox or just what gmail thinks you want to see. I prefer the latter but many don’t. 

So those Twitter users who were tweeting #riptwitter last week should chill out and understand that the company is not going to take their believed reverse chronological timeline away from them. And Twitter should both respect and acknowledge these loyal and passionate users (which Jack did) and should also have the courage to do what is right and frankly long overdue.

Finding the right balance between listening to your users and becoming hostage to them is hard. When you operate a large and public channel for these users, it is even harder. Being a CEO requires great listening skills, the ability to really hear and internalize opposing views, and then, ultimately, the courage to make the decision and go with it. That is true in terms of managing your team and your company and it is also true in terms of managing your user base.

The Dan Primack Interview

Dan Primack and I did a fireside chat at the Upfront Summit this past week. It generated a few news stories that went a bit viral. It is easy to take a few comments out of the context of an overall discussion and turn them into more than they were. I think that is what happened with this interview. But it’s online now and so people can come to their own conclusions about that. Here it is in its entirety. It is about 25mins.

Feature Friday: Track Stations

Our portfolio company SoundCloud quietly launched something this past week that has quickly become my go to music discovery experience. It is called “track stations” and the concept is not new but they have applied it a bit differently. Like Pandora, you can enter a song you like and get a radio like listening experience.

The difference is that SoundCloud has something like 110 million tracks in it versus something like 2 million tracks in Pandora. That’s important because it means that there are way more tracks to start stations with but even more importantly, the track stations give you access to a long tail of content that you can’t really access any other way. Using algorithms and data science to take you from the head of the curve content to the long tail is an interesting idea across many content categories, but it is particularly interesting in music and podcasting.

I started a track station one morning this past week in my car and within 30 minutes, I had added five or six tracks to my favorites. And I didn’t know any of the artists who made any of the tracks I favorited.

It works like this. You open the SoundCloud app on iOS or Android and search for a track you know and like:

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Then you click on the track to start playing it:

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On the lower left are three dots. If you click them, you get:

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And if you click on “start a track station”, you get:

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If you go to your collections in the app, you will see all the track stations you listen to regularly:

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But here’s where it gets really interesting. You can use the same technique to find new podcasts to listen to. If you start a track station with a podcast you like, like this one:

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You can swipe through to find similar podcasts like these:

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So that’s it. If you have SoundCloud on your iPhone or Android, find a track you like and start a track station. It’s a great way to find new things to listen to.

Right now, track stations is only available on SoundCloud’s mobile apps. It will be coming to their web app and other apps soon.

The Brooklyn Queens Connector

As the NYC tech sector grows, it has been moving beyond Manhattan and into the outer boroughs. And the most popular destinations have been the Brooklyn and Queens waterfront neighborhoods like Dumbo, Williamsburg, Long Island City, The Navy Yard and Gowanus. But getting to and from these locations by mass transit has not been easy and has slowed down this movement of tech companies to embrace the outer boroughs.

Mayor de Blasio will announce a very important initiative in his State Of The City speech today called The Brooklyn Queens Connector (BQX) that will do a lot to solve this mass transit problem. It’s a light rail system that runs along existing streets from the Brooklyn waterfront neighborhoods to the Queens waterfront neighborhoods. It will look like this:

sreetcar

And here is the proposed route:

bqx

This is a big deal for NYC and a big deal for the NYC tech sector. Fixing the transportation problems into these developing neighborhoods will bring people and jobs and new vitality to these waterfront neighborhoods. This is such a good idea. I applaud Mayor de Blasio for his leadership on this issue and look forward to riding the BQX from a board meeting in Sunset Park to a board meeting on the Cornell Tech Campus in a few years.

Biggest Technology Change In The Next Five Years

The Upfront Summit is happening here in LA over the next two days. The folks at Upfront asked a number of well known VCs (me included) a bunch of questions. One of them was “What will be the biggest technology change over the next five years?”. Here are the answers in a short two minute video.

Fund Level Vs Deal By Deal Carry

In a venture fund, the general partners will make something like twenty or twenty five investments. There are outliers for sure. A few venture funds will make less investments than that. And there are seed funds that will make significantly more investments than that. But that’s not the point of this post.

The thing I want to talk about is how losses (and gains) are treated in a venture fund. A traditional venture fund will take its losses on a given portfolio of twenty to twenty five investments and earn them back with their gains before calculating their carried interest. The carried interest is the primary way a venture capital firm makes money. At USV we take a 20% carry. There are firms in the VC business that take a larger carry (25% and 30% being the other common numbers). But we are happy with 20% and do not feel the need to charge more.

Let’s do some math to make this clear. Let’s say a VC firm makes twenty investments of $2.5mm each. That’s $50mm of invested capital. We will ignore management fees for this exercise to make it simple. Let’s say seven are complete losers and seven get their money back and six are winners returning 5x on each. So the seven losers produce $17.5mm of losses. And the six winners produce $60mm of gains ($75mm in proceeds less $15mm of cost). So the fund’s total gains are $42.5mm ($60mm of gains minus $17.5mm of losses) and a 20% carry on that will produce $8.5mm of profits for the VCs on that fund. The limited partners will get back $84mm on their $50mm investment, a gain of $34mm which produces a 1.68x multiple on their investment. This is not a great venture fund. But it is way more typical than people think.

Here is the spreadsheet I used to do all of this math.

There are investors who get what is called a “deal by deal carry.” In that model they do not have to account for their losses in the calculation of carry. So they take 20% on their successful deals and don’t have to net out their losses. In the example above, those investors would make $12mm in carry on the same portfolio and the limited partners would get back ~$80mm or 1.6x.

But leaving aside the math between the limited and general partners, the other thing about deal by deal carry is how it changes the incentives. If investors don’t have to worry about the 2/3 of the portfolio that produces disappointing outcomes, they will pay all of their attention on the winners and work to make those investments as successful as possible. That might be good. The VC economics already trend toward incenting that behavior because all of the gains come from a small portion of the portfolio. Deal by deal carry just amplifies that.

Deal by deal carry has not been common in the VC business. It is more common in private equity where the distribution of outcomes looks very differently. But with the rise of syndicates being raised on venture capital marketplaces, we are seeing an increasing number of angel and early stage investors who have deal by deal carry.

As I said, there are pros and cons to both compensation models. I don’t want to say that one is better than the other. But they do produce different kinds of behavior and entrepreneurs should understand how their investors are being compensated. It will explain their approach and behavior.

Do You Want Better Board Meetings? Then Work The Phone

I was talking to the CEO of one of our portfolio companies last week. He was preparing for a board meeting that is coming up. He told me that he had scheduled calls with all of his board members and investors that attend his meetings and had completed most of them. He had gotten feedback on what they were thinking about his company, what they are excited about, what they are concerned about, things they want to discuss, etc. He said it had made a big difference in his preparation for the meeting.

I think it will also make a big difference in the meeting and make it a lot better. Soliciting your board member’s input on your agenda is important. But it is also really helpful to have these “one on ones” in advance of the meeting so you can update each board member on the things that they are concerned about. The board members will arrive at the meeting more prepared, they will be more comfortable, and they will also be able to help more. And the CEO will be highly attuned and attentive to the issues that matter most to the group.

This kind of preparation is time consuming. Who wants to work the phones in the SMS era? Nobody to be honest. But it pays huge dividends and I recommend it strongly.

You can keep the calls on the short side, 15-30mins each, and that means it is two to three hours of work for most board sizes and investor groups. I would recommend doing these calls one to two weeks before the meeting so you have time to collect all of the feedback and incorporate it into the agenda and the board materials. But don’t do it too far in advance because you also want your board members and other attendees to be “fresh” in terms of their understanding of what’s going on in the business.

If you have never done this, give it a try on your next meeting. I bet you will be pleased with how well it works. If you do this already, then keep doing it. Because it works.

Global Venture Capital Distribution

Richard Florida published some stats on the distribution of global venture capital investment last week. His work focused on 2012 numbers so the data is a bit dated, but I am sure it is still directionally correct.

This map summarizes his findings:

global VC investment

The bay area numbers are stunning. SF proper and the broader bay area make up 25% of the global venture capital investment activity (~$10bn out of $42bn).

SF, Boston, NYC, and LA are the top four (or five if you count SF and the bay area as two different locations).

London and Beijing crack the top ten. Ten of the top twenty cities are outside of the US. Berlin, a city that USV invests a lot in, was not in the top twenty in 2012 but I bet it is now.

The most interesting thing about Richard’s data are his conclusions about “dense urban cities.” He writes:

The upshot is this: While some smaller places, mainly in the U.S., do well on a per capita basis, venture capital increasingly flows to large global cities, with all their density and dynamism. The leading centers remain the Bay Area and the Boston-New York-Washington Corridor, while a number of global cities outside of the U.S. have become significant centers for venture capital-backed high-tech startups: London, Paris, and Moscow in Europe; Toronto in Canada; Beijing and Shanghai in China; and Mumbai and Bangalore in India. Across the world, the top 10 metros account for more than half of global venture investment, the top 20 metros account for almost two-thirds, and the top 50 account for more than 90 percent. Ultimately, global venture investment ishighly uneven and spiky, concentrated in a small number of leading cities and metros around the world.

Although venture capital investment has certainly “gone global” by spreading to places like China and India, the dominant centers remain large U.S. cities that combine density, great universities, and the open-mindedness and tolerance required to attract talent from across the world. While cities like Mumbai, Bangalore, Beijing, and Shanghai have certainly shown their ability to attract venture investment and create start-up ecosystems, their levels of venture capital remain well below that of the Bay Area, New York, and Boston. As of yet, these former cities are hamstrung by their inability to attract the world’s top talent. Outside of the U.S., the places that seem to have the brightest future as start-up hubs are dense, diverse, global cities like London, Toronto, and Paris, which can effectively compete for talent on an international scale.

This uneven or spiky nature of investment and its flow to great cities marks a broader transition away from sprawling suburban campuses, or “nerdistans.” In recent years, innovation and entrepreneurship have returned to the great global cities and dense, diverse urban areas that have long served as fonts of creativity and invention. What once seemed like a shift toward suburban innovation and startup clusters in the late 20th century has proven to be a brief aberration from the long-held connection between density and innovation.

I would add one more thing to Richard’s analysis. Transportation convenience matters a lot. You can fly direct multiple times a day to and from all of the cities on Richard’s top ten list. Investors value their time and focus it on markets that they can get in and out of easily. I think that has a big impact on where money flows.

But regardless of the reason, I agree with Richard’s conclusion. VC has gone urban. And I think that trend will continue as far as I can see.