Small Ball

Small Ball is a style of play in basketball when a team sacrifices size/height for speed and shooting. The Golden State Warriors, the best team in the NBA this regular season, are a good example of a team that often uses this strategy.

As the venture capital business and entrepreneurs are increasingly bulking up in terms of fund sizes (VCs) and round sizes (entrepreneurs), I am decidedly a fan of small ball.

Many of our best investments at USV have been in companies that never needed to raise VC or only needed to raise one round. In these situations, the founders own/owned large stakes in their companies, often north of 50% for the founding team at exit. These companies focused on a revenue/business model at launch, they kept their headcounts low until they had scale/traction in their usage, and they reinvested the profits back into scaling the business instead of external capital. My favorite example of this is Indeed where USV had to beg the founders to let us invest, only did one round of venture capital, and exited for $1.4bn and is likely worth 2-3x that number as the business has scaled massively post exit. Kickstarter, DuckDuckGo, and Zynga are other good examples of small ball in action. Zynga did raise a lot of money but it went to the balance sheet and secondaries and never was used to fund losses.

Small ball also works well in VC. It is hard to return capital to your investors in the VC business. Exits are a long time in coming and you get diluted over time and even in the biggest exits (billion dollar plus valuations), you might only have proceeds of $100mm to $200mm. If you have a fund size in the $500mm to $1bn range (or larger!), you need many of these big exits to return the fund once. But your LPs want you to return the fund three times, or more. I could never sleep at night if USV were managing a billion dollar fund. I don’t know how we would ever get our LPs back their money plus a return. I know it can be done and has been done. But I don’t really know how it happens. Getting big exits is just so damn hard.

So in an era when VCs and entrepreneurs are going for bulk, I really like the opposite approach which favors speed and agility over pounding it inside. It allows me to sleep at night, which is not that easy in our business.

Coin Center Keynote

On Monday night, Coin Center had their annual gala dinner in NYC which coincided with the Consensus Conference. I had the pleasure of giving a keynote which I will post in its entirety.


Hello. My name is Fred Wilson. This is my One Name profile. It is verified and resident on the blockchain at onename.com/fredwilson

one name profile

I have been investing in early stage emerging technologies for thirty years as a venture capitalist. I work at Union Square Ventures and we have been interested in and investing in the blockchain sector since 2011. We have watched this set of emerging technologies develop over the past five years and we remain very excited about the potential of decentralized trust systems.

I would like to talk tonight about resilience. Resilience is a trait we admire in entrepreneurs and it is a trait we look for in technologies and systems.

I remember when I first heard about the Internet, early in my career as a VC. It was described to me as a massively decentralized system designed explicitly to survive an attack that brought down one or more of its core systems. I thought about that and it resonated with me. Here was a system that was explicitly not controlled by a single entity and was designed to be resilient and self healing. A few years later, I left the venture capital firm I was working at and started a new firm dedicated to only investing in Internet based businesses. For me, the Internet was, and is, to use a term I learned from Joi Ito, a “belief system”. I have a deep and fundamental belief in decentralized, open, resilient systems. That belief has informed what I have invested in for most of my career and it has informed what I believe in politically and economically.

So when, back in early 2011, my friend Rikki Tahta told me about Bitcoin, I was immediately smitten. Here was another technology that was designed explicitly to be resilient, decentralized, open, and available to anyone. It fit like a glove into my belief system. So I started writing about it, meeting with people who were working on it, and, eventually, investing in companies built upon this new technology. We now have a handful of portfolio companies that are building businesses on blockchain technology. This is not just my area of interest. Every one of our investment team members works on and is involved in investing in this sector. Our pace of investment in this sector is increasing.

And yet, standing here today, I cannot point to a blockbuster company that has been built on blockchain technology. There has been no lack of trying. There is no lack of funding. I am a true believer and yet I can’t help but admit that despite all the hype, all the effort, all the capital invested, there has not been anything truly transformative to society that has been built on the blockchain, except perhaps Bitcoin itself and likely Ethereum. But these are enablers. What have the enabled other than grey and black market activities?

You know you are in a unloved sector when you start getting hated on for your boosterism on Hacker News. I saw this comment there last week:

After every VC, every founder, just everybody is talking about AI and bots Fred is a bit late to the game but better late than never. Or maybe writing about the Blockchain kept him back.

I don’t approach things that way, moving from one hot sector to another. It is a recipe to be late to everything. And I don’t let the haters get to me either. But I do find it amusing, and telling, to understand the broader mood. Bitcoin, blockchain, and all of the rest of this sector are in this portion of the hype cycle curve:

Gartner_Hype_Cycle.svg circle

Which brings me back to resilience. That is what keeps me excited about the blockchain sector and that is what all of us who are true believers need to have right now.

This is a Bitcoin price chart since Jan 2013.

btc price chart

If you draw a trend line from the start of that chart to the end of that chart, it is steadily up and to the right. And during that same time, we have seen so many things that should have meant the end of Bitcoin. And yet, it just keeps chugging along. That tells you something.

This is a chart of transactions on the Bitcoin blockchain over that exact same period.

bitcoin transactions

Same thing. Up and to the right, day after day, month after month. This is a resilient system.

So just like the set of technologies we are working on developing and commercializing, we need to be resilient in our work. And personal and professional resilience starts with a belief system. We must remind ourselves of why we believe in open, resilient, distributed, and decentralized systems and the power of these systems to produce profound change for businesses, economies, and society at large.

There have been and will continue to be headwinds for blockchain based technologies. Fundamental change doesn’t come easily.

We have seen that open source communities can and do struggle to develop consensus about what changes should be made and when and how. That will continue to be a challenge. I personally believe that multiple projects with multiple open source teams developing things in parallel is the best way to manage this risk. That could be multiple teams working on Bitcoin’s core system. Or it could be multiple blockchains and cryptocurrencies. It is likely to be both.

We have seen that the companies and industries that are most threatened by these technologies will not sit idly by while the market adopts new ways to do things that they do not control. I see the wave of private blockchains and startups that build and sell them as an attempt to coopt these technologies. It may take some time for the market to see this for what it is.

And we know that governments and the elected officials and bureaucrats and regulators who work in them are uncomfortable with these technologies and can be expected to try to rein them in as much as they can. This is where Coin Center comes in and I want to personally thank Jerry and his team for all that they have done, are doing, and will do to navigate the regulatory forces for our sector and find common ground and win/win solutions that move our industry forward in a way that governments can live with. This is hard work, done largely behind the scenes, with very little fanfare. And yet without it, our industry cannot and will not succeed. So thank you Jerry and thank you to everyone who supports Coin Center and works on it.

To bastardize a phrase from Ben Horowitz, the hard thing about hard things is that they are hard. The forces at work to hold back distributed and open trust systems are firing away on all cylinders. And many of our wounds are self inflicted. It is not an easy time to be a believer. It is not an easy time to be an entrepreneur who has decided to focus completely on this sector. It is not an easy time to be an investor in and cheerleader for this sector. I am being made fun of. Maybe you are too.

But let me tell you this. If they aren’t laughing at you, you aren’t working on the right things.

We are working on the right thing. It is taking longer than I thought and than you thought. It still isn’t clear to me how this market will eventually break out. But all the signs that I look at are moving up and to the right, day after day, month after month, year after year. The technology is working. And our breakthroughs will come. Maybe they are right around the corner. Or maybe they are years off. But if we stay resilient, like the systems we are working on, we will prevail.

Thank You.

Tech:NYC

Yesterday was the launch of a new organization in NYC that I have been working on since last fall. This new organization is called Tech:NYC and will be led by Julie Samuels. It will be co-chaired by Tim Armstrong and me.

For years the tech sector has been represented in the city and state and with local civic organizations by a loose and informal group of well known entrepreneurs, CEOs, VCs, and engaged members of the tech sector. I have been one of them.

Lately, as the tech sector has grown in importance in the local economy, this approach has become unsustainable. The same small group of people keep showing up at meeting after meeting.

We need a formal mechanism that allows the entire tech sector to be engaged with local government and civic organizations and we need to get the right people to the right meetings instead of the same small group meeting after meeting.

Tim and I explained all of this in a blog post that aired yesterday on Tech:NYC’s website.

Tech:NYC will be member supported. We would like every tech company, large and small, to join and be represented and engaged. Membership details are here and startups with less than 20 employees can join for free.

If you run a company in NYC, we hope you will sign your company up to be a member of Tech:NYC. If you work at a company in NYC, we hope you will encourage your leaders to join Tech:NYC.

The Business Blockchain

the business blockchainI’ve been reading The Business Blockchain this weekend. It was written by AVC community member William Mougayar.

This book started out as a Kickstarter project which I blogged about at the time. If you backed that project you will get a copy of this book. If not, you might want to get a copy on Amazon.

I am not done with it yet, but the book makes a complex subject, blockchain technology, accessible for the non-technical. It also lays out some of the more obvious uses cases for the technology and explains how the blockchain technology market is evolving.

If you think you might want to start a business based on blockchain technology or if you think blockchain technology is going to reshape a market you are working in, or if you just want to understand this thing that your son or daughter is obsessed about, then this is a great book to read.

I am also quite proud that the conversations we have had on this blog on this topic over the past five years have shaped William’s work and certainly had something to do with his interest and his growing expertise and reputation in this area.

This blog community is a talented group and we have helped each other grow and develop. This book is just one of many examples of that.

Trends

I like to look at Google Trends from time to time to see what it can tell me about things. I realize that search keyword activity is only one data point in a complex system and that with the move to mobile, it is less important than it was in the web only era. And people search for things when they want them. Once they have them, the search volume goes down. But I still think Google Trends can reveal some interesting things.

Here are some queries I ran today:

Facebook and Google are battling it out for video supremacy, but this query really doesn’t tell us very much about where that battle is going and how it will end. It is interesting to note that YouTube has been a mature but stable business for a long time now.

Twitter and the smartphone seem to have risen with a similar curve and are now in decline, with Twitter falling a bit faster than smartphones.

We see a similar shaped curve with Facebook, but the order of magnitude is quite different which is why I did not combine it with the previous chart.

December 2013 sure seems like the high water mark for the mobile social sector.

But not all boats go out with the receding tide.

Here is Snapchat and Instagram, with Twitter thrown in for scale comparison

It will be interesting to see when Instagram and Snapchat start flattening off. My gut tells me Instagram may already be there but we just don’t see it in the data yet.

Moving on from the past to the future, here are some of the sectors that entrepreneurs and VCs are betting on as the next big thing:

If you take out the VR term and look at the other three, you see something that looks like the NCAA football rankings over the course of a season. Each team/term has had a moment at the top but it remains unclear who is going to prevail.

If we look at one of the most interesting coming battles in tech, the voice interface race, the data is less clear.

I think we haven’t really gotten going on this one. But it is an important one as Chris Dixon explained in a really good blog post last week.

My semi regular Google Trends session today confirms what I’ve known for a while and have written here before. We are largely moving on from mobile and social in terms of big megatrends, video is being played out now, and its not yet clear what is going to emerge as the next big thing. Google is betting on AI and I tend to agree with them on that. Voice interfaces may be a good proxy for that trend.

Video Of The Week: The Nitty Gritty Podcast

Bond Street, a startup company that makes small business loans, has started a podcast to tell stories about small business entrepreneurs and the companies they create and run. They call it the Nitty Gritty Podcast.

The first episode features an entrepreneur who is also a friend of ours, Gabe Stulman.

Gabe is a restaurant operator in the west village of Manhattan, where we live. We started our relationship with Gabe as regulars at his first restaurant and we have gone on to be investors in all of his current restaurants, as well as good friends with him.

Here is Gabe’s story. It’s a good one.

Funding Friday: Three Noteworthy Projects

It’s funding friday again. Here are three projects I thought you all should know about.

Black Medicine Iced Coffee – This is an equity raise on CircleUp for a new iced coffee brand. Not only does the product look great but you can get a $1.3mm pre-money valuation for a product that did over $300k in sales last year and is growing rapidly.

Black Medicine

To learn more about this equity crowdfunding opportunity, visit the Black Medicine CircleUp page.

 

Blue Sky Lab – This is a charitable crowdfunding project on Crowdrise. Xibei Li is running a marathon at the North Pole to raise money for a non-profit that works on reducing urban pollution in China.

Blue Sky Lab

To learn more about this fundraise, visit the Blue Sky Lab Crowdrise page.

 

In Search Of Truth – This is a Kickstarter project in which the creator, an artist named Hank Willis Thomas, proposes to take his “Truth Booth” to all 50 states in the US.

Truth Booth

To learn more about this project, visit the In Search Of Truth Kickstarter page.

The “Losing Jobs To China” Discussion

I am bothered by the ongoing discussion about how the US has allowed China (and other lower cost countries) take our manufacturing jobs. That is true, of course. But it does not address the larger context which is that manufacturing is becoming more and more automated and many of these jobs will not exist at all anywhere in a few more decades.

We are now well into a transition from an industrial economy to an information economy. It seems to me that part of that transition was the move of industrial jobs to lower and lower cost regions in an ongoing march to reduce costs. But that march may end with massive automation and very little labor in the manufacturing process. That means that these low cost regions that “stole our jobs” will also lose these jobs eventually.

The US and a number of other countries around the world are building new information based economies. That is the long term winning strategy.

So while we can critique our leaders (business and political) for giving up on the manufacturing sector a bit too early, I think the US has largely played this game correctly and will be much better off than the parts of the world that have taken the low cost manufacturing jobs from us.

But we don’t hear any of our political leaders explaining this. I wish they would.

The New Boss

I got an email from a friend who is starting a CEO job. He said to me “I’d love any thoughts or advice you have as a new CEO joining a company.”

I have reached out to a number of CEOs I know who have taken over companies recently and am compiling a list of suggestions.

But given the number of great CEOs in the AVC community, I would be remiss if I didn’t pose this question to all of you as well.

What are the one or two pieces of advice you would give a friend who is taking over as CEO of a new company?

I suspect this is going to be a great comment thread.

Generally Accepted Accounting Standards (GAAP)

I understand and appreciate the need for rigorous accounting standards and I appreciate that our financial system and our capital markets in the US enforce the use of generally accepted accounting standards (GAAP) for the reporting of company financial information. Without standards rigorously applied, investors would not be able to understand what is going on in the companies. That would be awful.

But when I read Gretchen Morgenson’s recent article in the New York Times accusing companies of “spinning losses into profits” my eyes rolled.

The truth is the the accountants who run the accounting standards have forced companies into reporting their financials in a certain way that neither the companies nor the sophisticated investors who own many of these companies’ shares believe accurately represents the financial condition of the reporting companies.  Gretchen quotes this stat in her piece:

According to a recent study in The Analyst’s Accounting Observer, 90 percent of companies in the Standard & Poor’s 500-stock index reported non-GAAP results last year, up from 72 percent in 2009.

That sure feels like the market speaking. When 90% of your customers order the scrambled eggs differently than you normally serve them that tells you something.

My pet issue is stock based compensation. When a company issues options to an employee, accounting standards require that the option be valued (usually by a formula called Black Scholes) and expensed over the vesting period. That sounds reasonable. But the truth is that that option may end up being worth nothing. Or it may end up being worth 10x the value that it was expensed at. By taking out the stock based comp expenses and reporting an “adjusted EBITDA” number that does not include it, companies are giving investors an idea of what the earnings power of the company is without this theoretical expense. And that stock based compensation expense is a non-cash expense meaning that even though it theoretically costs the company something, it is not paid in cash but in dilution of the total number of shares outstanding.

This is not a cut and dried issue. Different investors will approach it differently depending on whether they care about cash flow, long term dilution, or something else. But the accountants who control the accounting standards board require a certain way of presenting these numbers and that is that.

So investors and the reporting companies offer other ways of looking at these accounting issues. That is not bad. That is not spinning. That is transparency and it is good.