Posts from Uncategorized

Changing Clocks

I was in an elementary school in Brooklyn the other day and the clocks in the halls were an hour off. It was really bothersome to me. Maybe that school does not observe daylight savings time, but more likely the janitor or whomever is responsible for changing the clocks could not be bothered. Of course, the clocks in that school are now set correctly.

I’m a bit OCD about changing the clocks in our house and our cars. I hate it when a clock is set to the wrong time. And, each and every clock has its own system for changing the time. The clock in our double hung oven in our kitchen has a particularly complicated system. I had to find the manual on the Internet and look up the technique this morning after The Gotham Gal and I spent a few minutes hitting all sorts of combinations of buttons and got nowhere.

And then there are the cars. Whomever teaches people how to design user interfaces for car dashboards must have a perverse sense of humor. Each and every car has a different system for changing the clock time and each one is more clunky than the next.

But I go through all these machinations every six months because I can’t stand having clocks with the wrong times on them. Thankfully more and more of the clocks in my life are connected to the Internet and update automatically. I wish the clocks in our cars, on our ovens, and in our elementary schools would do the same.

The Pro-Rata Participation Right

I’ve touched on this subject before. It is one the “three things you must have in a venture investment“.

The “pro-rata right” is the right to continue to participate in future rounds so that you can maintain your ownership. Let’s make it concrete with an example. You invest $50k in a seed round at a $5mm cap and own 1% of the company. The next round is a $3mm round at $9mm pre, $12mm post. If you don’t participate, you will be diluted 25% and will then own 0.75% of the company. On the other hand, if you buy 1% of the round, a $30k investment, you will continue to own 1% of the company. Your “pro-rata right” in this situation is a $30k allocation in the next round.

I think this is the single most important term anyone can negotiate for in a venture capital investment. The other two in the post I linked to above are the liquidation preference, which helps on the downside but not the upside, and the right to a board seat, which is important to some investors (USV is one of them) but not to all of them. The pro-rata right helps on the upside, which is where you make all of your money in venture deals, and should be important to all investors.

The pro-rata right is something that is not typically offered in a note with cap structure in seed deals. When The Gotham Gal started investing in these kind of deals we had a long talk about it. I was negative on notes and she was positive on them. She convinced me that notes with reasonable caps are OK, but I convinced her to negotiate for a pro-rata right. She gets that on all of her deals because she walks without it. And that is just one of the many reasons I love The Gotham Gal.

I was discussing a Series A round with some founders yesterday. We talked about what they should do with their seed investors. I encouraged them to offer the seed investors the right to participate in the round. I don’t know if their seed investors have the right or not. But regardless, I feel that the founders owe it to them because their seed investors were there for them before anyone else. It just feels like the right thing to do to me.

The meta point I have come to understand about early stage investing is that a small portion of your investments produce all of the returns. In those investments, you want to own as much as you can. It’s hard to own more than your initial stake, particularly as an angel investor. But it should not be hard to maintain your initial stake. You should reserve funds to do this, you should negotiate for a pro-rata right, and you should exercise your pro-rata right when you feel like the investment is doing well.

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43North – A $5mm Business Plan Competition

The folks in Buffalo NY are serious. Last year I went up to Buffalo to visit a new business incubator and was impressed by the entrepreneurial talent and community engagement I saw. But they aren’t stopping there.

They have launched 43North, which is the largest (in terms of prizes) business plan competition in history. Here are the details:

With $5 million in cash prizes, including a top award of $1 million, six $500,000 awards and four $250,000 awards, 43North is setting out to turn the best new business ideas from around the globe into reality.

Winners also receive free incubator space for a year, guidance from mentors related to their field and access to other exciting incentive programs.

43North is open to applicants in any industry, with the exception of retail and hospitality, and winners agree to operate their business in the Buffalo, New York for a minimum of one year.

The competition includes three rounds of judging:
1.  Feb 5, 2014 to May 31, 2014: 43North accepts applications via – apply here.
2.  Sept 15, 2014 to Sept 20, 2014: Semifinalists present their plans via webinar
3.  Oct 27, 2014 to Oct 31, 2014: Finalists present their plans during a weeklong series of events in Buffalo, NY

This ambitious initiative is part of New York State Governor Andrew Cuomo’s historic pledge of $1 billion in state funding to ignite economic growth in the Buffalo, New York region.

I know the people behind this effort, Jordan Levy and Ron Schreiber. They are serial entrepreneurs and venture capitalist and are the real deal. The mentorship and coaching part of this program will be as important as the money. But getting $1mm for free to start your business isn’t a bad deal either.

If you want more information, the FAQ is here. If you want to apply, go here.

The Berkshire Hathaway Annual Report Letter

On Friday, Berkshire Hathaway published their annual report. I always like to read the shareholder letter that fronts the report. It is available here.

The Gotham Gal and I are not, and have never been, shareholders of Berkshire Hathaway. I guess that is a mistake but we’ve done alright anyway. You don’t have to be a shareholder of Berkshire Hathaway to benefit financially from the brilliance of their managers, Warren Buffet and Charlie Munger. I look up to both of them and have internalized as much of their thinking as I can. Reading the annual shareholder letters is a good way to get inside their heads.

In this year’s letter Warren tells the story of two real estate purchases he made in 1986 and 1993. One is a Nebraska farm and one is piece of NYC real estate in Greenwich Village. Here’s how he ends each story.

The Farm – I still know nothing about farming and recently made just my second visit to the farm.

The NYC Real Estate – I’ve yet to view the property.

But in each case, he went through an analysis of the earning power of the asset, concluded that it was much higher than current performance, and further concluded that it would yield an acceptable return on the purchase price on current performance.

Here is what Warren says about those two investments and the “fundamentals of investing”:

  • You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  • Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
  • If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
  • With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
  • My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

I don’t agree with all of those points, particularly the argument against macro thinking. I use macro thinking to find assets that will perform well in the future and avoid assets that will underperform in the future. But the basic idea that what matters most is the asking price of the asset and its future earnings power is something that I totally and completely believe in and I’ve learned that over and over and over from reading these letters over the years.

The Berkshire Hathaway Annual Report Letter is a gift to investors and if you are one, I would encourage you to read them. You can start with this year’s version.


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Online Identity and Brand

In celebration of the return of my avatar to the front page of AVC (and now integrated into the AVC logo), I thought I’d post about online identity and brand today.

I really like this slide from Disqus‘ presentation materials.

disqus slide

Obviously any slide with Fake Grimlock in it is a good slide. But beyond that, the idea that all three of these types of people can co-exist in an online community is important. I would argue that a healthy online community will, by definition, have all three types in it.

Pseudonyms like Fake Grimlock most obviously lead to the use of an avatar. Real names often come with a photo of the person. But I’ve always liked the idea of a real name (I am fredwilson on almost every service out there) plus an avatar. I think it builds brand in a way that a name and a photo cannot.

Like most things, I came to all of this without a lot of advance thinking. I was an early user of AOL and went with fredwilson for my username there. I still maintain [email protected] for some reason, but I never check my mail there. And when the web came along, I started using fredwilson everywhere. I’ve continued to do that and as long as I can get to a service early, I can get that username. It’s an incentive to get to services early which can be an advantage in my business.

The avatar was also an unplanned thing. I’ve posted the story of it here before and you can go read it if you’d like. But over time, I just started using it everywhere. And I do mean everywhere. Including LinkedIn.

The combination of my name and my avatar is now my online identity and brand. It could, of course, be faked. And Twitter’s verified accounts are a nice way to deal with that sort of thing. But when you come across a comment, a profile, or some other object online with my username and my avatar next to it, you can pretty much assume that its me. And that’s a really good thing. Because systems need some sort of identity to flourish over the long term. And users benefit from the brand they can build up around their identity over time. The two go hand in hand and work together to make a large global distributed system like the Internet work better for everyone.

What Comes Next?

Andy posted this fascinating Playboy interview with Nick Denton on yesterday. I read it this morning over a Cortado at Kava. I loved every bit of it. Nick is opinionated, intelligent, and interesting.

Here is one part of the interview that got me thinking.

PLAYBOY: What will be the life-changing or society-changing technologies that we’re just starting to see now?

DENTON: The internet is it for this century, maybe the next one too. People ask what comes next too quickly. To the extent there is some kind of message in the valuation that the market has given Twitter, it is that communication, information and media are at the heart of this phase, this cycle, and it’s a long, long cycle that could last 50 or 100 years. When you have an innovation as profound as the networking of sentient beings.… Those delusional futurists who talked about Gaia, the planetwide intelligence? They were spot-on. It’s totally happening, and everything else comes out of that.

PLAYBOY: By “everything else,” do you mean wearable computing, self-driving cars and that stuff?

DENTON: Who gives a fuck about wearable computing? That’s just a detail. I mean improvement in biotech, curing cancer, efficient travel into orbit, better device storage, solving carbon emissions. All these other problems will be solved by the internet by harnessing the collective intelligence. Everything else will fall out with that.

PLAYBOY: That definitely sounds utopian. To be clear, you just said the internet is going to solve global warming, correct?

DENTON: Yeah. Intelligence connected to human beings will achieve rates of technological progress that would have been impossible in previous eras. Of course we’ll solve problems more quickly.

I wake up most mornings thinking “what comes next?”. That is the business we are in. We’ve gotten it more or less right on social networking, mobile, crowdfunding, and maybe bitcoin.

But, as Nick points out, these are not the “next things”. These are just the ongoing evolution of the Internet and all that it opens up in terms of innovation. And Nick goes on to suggest that the way our society will solve cancer, space travel, and environmental issues is “intelligence connected to human beings”. Collective intelligence at work. That’s a big assertion but he may well be right.

At USV, we don’t invest in health care, but we are certainly, and increasingly, interested in the way networked humans can impact health care. We don’t invest in clean tech either. But we are certainly, and increasingly, interested in the way networked humans can impact the environment.

I hope Nick is right that “the Internet is it for this century, and maybe the next one too”. That means our investment strategy has a lot of legs.

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What’s So Special About

So Fast Company has selected as one of its most innovative companies and on top of that, they decided to put DonorsChoose founder Charles Best on the cover of the magazine and write a longer article about them as well. It’s pretty unusual that a non-profit would be selected for such a list and highlighted in this way. But then again, DonorsChoose is a pretty unusual non-profit. I’ve been fortunate to have been involved with DonorsChoose for the past seven or eight years and have been on their board for the past three or four. So I thought I’d list some of the things that DonorsChoose has done to illustrate the point.

- DonorsChoose launched a crowdfunding service and business model in 2000, fourteen years ago. To my knowledge they were the first crowdfunding service launched on the Internet, long before the leaders of the category like Kickstarter, Lending Club, and other emerged.

- DonorsChoose has built a network of almost 200,000 teachers, over 10mm students, and over 1mm funders. That network has brought $227mm of funding into public school classrooms but it is being used for a lot more. Entrepreneurs are using it to get things like 3D printers, underwater robots, and computer science classes into schools. DonorsChoose has become a distribution network in addition to a funding network.

- DonorsChoose has open data sets and an API that allow anyone to analyze what resources teachers and students are seeking. Increasingly policy makers are accessing this data to determine what resources are most needed in the public schools.

- DonorsChoose is a sustainable non-profit. They apply a take rate like every other commercial marketplace (it is currently about 13% and donors can, but usually don’t, opt out). This revenue scales as giving scales and has been covering the costs of the operating the business for a number of years now. Any profits they make above covering their costs are given back into the marketplace, usually in the form of match offers.

- DonorsChoose looks like, acts like, and is a startup. When I walk into the DonorsChoose office, it feels just like walking into the Etsy, Kickstarter, or Twitter office. People are active, animated, and energetic. They have a large software and product team. They could easily fit into the USV portfolio and if they did, they would be one of our star companies.

Networks are replacing hierachies as we enter the information era. And in the world of non-profits, the DonorsChoose network can and should be a model of how you can build an organization with huge impact using a networked model.

Another node on the DonorsChoose network are corporations and their marketing and corporate social responsibility teams. Corporations and their brands have a place on DonorsChoose as well. They provide match and challenge funding in all sorts of interesting and innovative ways. If you are involved in these kinds of programs and want to work with DonorsChoose, you can go here and learn more and contact them.

It’s very satisfying to see Charles and DonorsChoose get this kind of recognition. They are one of the most innovative organizations I work with. And I work in the innovation business. Congratulations DonorsChoose.

The Purity Of Angel Investing

Though I have made a few angel investments here and there over the years, it has never been my primary approach to investing in startups. I joined a venture capital firm when I was 25 years old and have been working at a venture capital firm ever since. I grew up in the business of investing other people's money and that is how I have gone about investing in startups ever since.

Over the past five years, I have watched The Gotham Gal build a portfolio of angel investments. She has invested in almost fifty companies in the past five years and if you include things like restaurants and retail establishments, that number grows to closer to sixty five. She is investing our capital but these are her investments. 

As I watch her select her investments and then work with them, I am impressed with the purity of intent that comes with being an angel investor. She invests in people she has confidence in and she invests in businesses that make sense to her. When she engages with her investments, she is giving her advice.

Compare and contrast that with a venture capital firm. A venture capital firm is in business to make money for its investors. They must invest in things that they believe will make money and they must be able to rationalize and explain their investments and their investment strategy. A venture capital firm has multiple partners and its investment decisions are based on the consensus of those partners. The advice an entrepreneur gets post investment reflects the inputs of all of the partners of the firm, not just the partner managing the investment.

There are some great strengths that come from the venture capital firm approach. At USV we have benefited greatly from our work to develop an investment thesis and then evolve it over time and be rigorous in our application of it. We also benefit from the collective insights and intelligence of our partnership and broader investment team.

But the more people you put around a table, the harder it is to make really gutsy investments. And the more you stick to your disciplined investment strategy, the more you say no to people and projects you like personally.

When people ask me about the startup investments I am most impressed with, the Mike Markkula investment in Apple and the Andy Bechtolsheim investment in Google are the ones I always talk about. These were people who took out their own checkbook and backed some people with an idea they thought had merit. And they were rewarded handsomely for these investments. They took 100% of the risk and got 100% of the rewards.

Yesterday at lunch my daughter Emily asked what I plan to do when I retire in the next ten or fifteen years. I replied that "I plan to do what Mom does". It looks like a lot of fun and I think I might be pretty good at it. 

Fun Friday: My Favorite Songs Of 2013

As promised in last friday's post, I am going to share with all of you my favorite songs of 2013. This list is a mix of indie, pop, and hiphop. That's what I listen to. There are 17 songs on it – one cover, and sixten originals. The record of the year for me was the Arctic Monkey's AM and there are two songs on here from it and we kick it off with a Drake cover from Alex. And in another homage to the boys from Sheffield, it is called Mad Sounds of 2013. Enjoy.

What Makes For The Most Productive Management-VC Partnership?

My friend Matt Blumberg
and I are co-teaching a class at Princeton in a few weeks. The subject
of the class is the VC/entrepreneur relationship. As part of doing this
class, Matt and I are doing two posts each in a point/counterpoint
model. Today is the second of these two co-posts about getting along post investment. Matt's post on today's topic is here and should be read directly before or after this post.


I honestly can't think of a more important topic for VCs. It's pretty important for entrepreneurs as well. But entrepreneurs can build companies without VCs. It's not possible to be a great VC without being really good at working with entrepreneurs.

Having good personal chemistry helps a lot. Both VC and entrepreneur should consider that carefully before getting into business together. That was the subject of last thursday's post.

Once you've signed the documents and started working together, my number one suggestion is frequent face to face communication. If you can't do face to face, then I suggest hangouts or skype. And do it regularly. Make it a routine. I have breakfast every two weeks with quite a few of the entrepreneurs I work with. For those who get up late, we do afternoon meetings or hangouts.

Email is great for information sharing. But for building a relationship, I can't think of a good substitute for frequent face to face communication. So make the effort. Take the time. Get together often. Break bread if you can.

My second suggestion is figuring out how to be frank and honest with each other without making the other person defensive. I like to say "do you think your tech co-founder is up for the job of leading a ten person engineering team" instead of "I don't think your tech co-founder is up for the job of leading a ten person engineering team". You communicate the same thing with both lines but one leads to a conversation and the other puts the entrepreneur in a position where they are inclined to defend their co-founder. And then they box themselves in. Which is really bad for both parties.

However you figure out how to communicate, it is important to be honest early and often. If you feel that something is a problem, put it on the table. Don't push for a decision right away. But put the issue on the table, talk it through, let it sit there for a while. Most entrepreneurs will make the right call if given the time to make the decision themselves.

Which leads me to my third suggestion. Do not ever act like the entreprenur works for you. Because they don't. If anything, the VC works for the entrepreneur. So the relationship must be as peers who respect each other and are working together to get to the right anwers. This is a partnership not a boss/subordinate relationship.

My final suggestion is to help the companies as much as you can. When you help an entrepreneur you get karma points. Get lots of them. Because you will need them at times of crisis and conflict. So if an entrpreneur asks you to help recruit an engineer, help close a deal, fly to Seattle and back on a sunday (my partner Albert did that a week or two ago), come give a pep talk to the team, make an important intro, or even use an iPhone so you can try out their new product, you have to say yes. You have to work every day to help entrepreneurs succeeed. That is your job.

It is very easy as a VC to get frustrated with the people that start and lead the companies you invest in. I am constantly frustrated with the companies I work with. That frustration comes from caring a lot. Not just financially. It is an emotional thing. There comes a time when you've made a lot of money as a VC and your track record is secure. I am there. But I am still as frustrated as ever. I want these companies to live up to the dreams and vision that the founder described to us when we invested. And most of them won't. That reality is incredibly frustrating.

So they key is to keep the frustration to yourself. Be positive. Be honest. Be critical but always constructively. Help the companies as much as you can. And learn to take a deep breath, bite your tongue, and wait a few seconds before you speak. It took me forty some years to learn how to do that. It comes in handy. It has made me a better VC.

A company is a bit like a family. You can't have a happy family if the parents are fighting all the time. Same with a startup. The entrepreneur and the VCs have to get along. When they do, it leads to a better company. And that's what is in the best interests of everyone.