Posts from genetics

The End Of The Level Playing Field

I am old enough to remember the gogo days of cable TV when entrepreneurs who wanted to launch a new cable channel would go, hat in hand and cap table in tow, to the big cable companies and beg to get distribution on their networks. 

When the Internet came along in the early 90s, we saw something completely different. Here was a level playing field where anyone could launch a business without permission from anyone. 

We had a great run over the last 25 years but I fear it’s coming to an end, brought on by the growing consolidation of market power in the big consumer facing tech companies like Google, Apple, Facebook, Amazon, etc, by the constricted distribution mechanisms on mobile devices, and by new leadership at the FCC that is going to tear down the notion that mobile carriers can’t play the same game cable companies played.

Here is a quote from the incoming FCC Chair:

“Today, the Wireless Telecommunications Bureau is closing its investigation into wireless carriers’ free-data offerings,” FCC Chairman Ajit Pai said in a statement. “These free-data plans have proven to be popular among consumers, particularly low-income Americans, and have enhanced competition in the wireless marketplace. Going forward, the Federal Communications Commission will not focus on denying Americans free data. Instead, we will concentrate on expanding broadband deployment and encouraging innovative service offerings.”

It is certainly true that consumers, particularly low-income consumers, like getting free or subsidized data plans. There is no doubt about that. But when the subsidies are coming from the big tech companies, who can easily pay them, to buy competitive advantage over that nimble startup that is scaring them, well we know how that movie ends.

It is sad to see this era ending. It was a lot of fun and quite profitable too. I am hopeful that some new competitive vector, like the Internet, will come along and make all of this moot and we are spending a lot of our time looking for it. Because backing startups on a field tilted in the favor of the incumbents is not fun and not particularly profitable either.

What Is Going To Happen In 2017

Happy New Year Everyone. Yesterday we focused on the past, today we are going to focus on the future, specifically this year we are now in. Here’s what I expect to happen this year:

  • Trump will hit the ground running, cutting corporate and personal taxes, and eliminating the preferential treatment of carried interest capital gains. The stock market has already factored in these tax cuts so it won’t be as big of a boon for investors as might be expected, but the seven and half year bull market run will be extended as a result of this tax cut stimulus before being halted by rising rates and/or some boneheaded move by President Trump which seems inevitable. We just don’t know the timing of it. The loss of capital gains treatment on carried interest won’t hurt professional investors too much because the lower personal tax rates will take the sting out of it. In addition, corporations will use the lower tax rates as an excuse to bring back massive amounts of capital that have been locked up overseas, producing a cash surplus that will result in an M&A boom. This will lead to an even more fuel to the fire that is causing “old line” corporations to acquire startups.
  • The IPO market, led by Snapchat, will be white hot. Look for entrepreneurs and the VCs that back them to have IPO fever in 2017. I expect we will see more tech IPOs in 2017 than we have since 2000.
  • The ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost. It will be nearly impossible to raise money for an online advertising business in 2017. However, there will be new players, like Snapchat, and existing ones, like Twitter, that succeed by offering advertisers a fundamentally different offering than Facebook and Google do.
  • The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.
  • AI will be the new mobile. Investors will ask management what their “AI strategy” is before investing and will be wary of companies that don’t have one.
  • Tech investors will start to adopt genomics as an additional “information technology” investment category, blurring the distinction between life science and tech investors that has existed in the VC sector for the past thirty years. This will lead to a funding frenzy and many investments will go badly. But there will be big winners to be had in this sector and it will be an important category for VCs for the foreseeable future.
  • Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. It will be Microsoft redux and the government will seek remedies which will be futile. But as in the Microsoft situation, technology, particularly decentralized applications built on open data platforms (ie blockchain technology), will come to the rescue and reduce our reliance on these monopolies. This scenario will take years to play out, but the seeds have been sown and we will start to see this scenario play out in 2017.
  • Cyberwarfare will be front and center in our lives in the same way that nuclear warfare was during the cold war. Crypto will be the equivalent of bomb shelters and we will all be learning about private keys, how to use them, and how to manage them. A company will make crypto mainstream via an easy to use interface and it will become the next big thing.

These are my big predictions for 2017. If my prior track record is any indication, I will be wrong about more of this than I am right. The beauty of the VC business is you don’t have to be right that often, as long as you are right about something big. Which leads to going out on a limb and taking risks. And I think that strategy will pay dividends in 2017. Here’s to a new year and new challenges to overcome.

The Dangers Of Being Too Early

I have been reading Whiplash, a book I recommended here last week. It starts with the story of the Lumiere brothers, who are credited with the invention of “the moving picture.”

As told in Whiplash, the Lumiere brothers started showing films to audiences in 1895 using their patented cinematograph. But by 1900, they were out of the film business and had moved on to color photography. The industry they helped to start went on to be one of the biggest new industries of the 20th century.

I often think of the formative years of the Internet, in the early/mid 90s. There are a lot of people from that era that remind me of the Lumiere brothers.

I was in a Board meeting on Friday in my office and one of the executives of the company that was having the Board meeting left to get coffee or use the rest room. When he came back, he said “why do you have one of the Josh Harris Gilligan paintings in your office? I explained that the reason Gilligan hangs in my USV office is to remind me that being first to something doesn’t mean you will profit from it. Josh Harris was the first person to show me audio streaming over the Internet. Josh was the first person to show me video streaming over the Internet. He did both of those things at his Pseudo Programs company that he started in 1993. Around the same time, 1993 ish, Josh predicted to me that auctions would be one of the first big businesses to take shape on the Internet. That was roughly two years before eBay was founded. Josh didn’t profit much from any of his visionary efforts or insights. But there is a Josh Harris painting in my office because I respect being early more than I respect making profits. I think the latter is easier than the former.

Which takes me to some things we have been thinking a lot about at USV recently. Things like Blockchain and Genomics. We think we are very early in these two important technological revolutions. We are investing actively (but not heavily) in one of them (blockchain) and trying to find the right entry point to the other one.

I think that the investing we are doing in these sectors right now is more likely to be like Psuedo Programs than YouTube or SoundCloud.

But I also think that you have to be early to learn the technology and the markets and build the networks and relationships that will allow you to see, understand, and invest in YouTube when it shows up. What you don’t want to do is lose patience or interest and move on, like the Lumiere brothers did.  Early stage VC is a marathon, not a sprint. That is true in everything, from the hold periods, to the work you do with a portfolio company, to the patience you must show towards a sector you think will be important. It is hard to sustain the enthusiasm sometimes, but if you have conviction about something, you have to stay the course.