This is almost a year old, but most of it is still very relevant.
Posts from VC & Technology
I think selling is the hardest part of investing. Buying is, of course, critical to generating strong investment performance. Figuring out what to buy and when to buy it is what most people think of when they think of investing. But your returns will have as much to do with selling as buying. And buying is a fairly rational decision. Selling tends to be emotional. And that is why selling is the hardest part of investing.
In venture capital, thankfully, VCs don’t drive a lot of the sell decisions. I wrote about that back in 2009. Most sell decisions that really matter in a venture portfolio will be made by the founders and management of the portfolio company, including the timing of the public offering if that is where a company is headed.
But even so, I have struggled with the sell decisions, both personally and professionally, over the course of my career. I have held on way too long and watched a publicly traded stock literally go all the way to zero without selling it (ouch). And I have made the even worse decision of selling too soon and watching a stock go up three, four, five times from where I sold it.
So where I have landed on selling is to make it formulaic.
If we (USV) have to make a sell decision, we like to have a policy and stick to it. We like to distribute our public positions as soon as we can, for example. That’s a policy and we stick to it. If you look at the SEC forms we have filed as a firm over the years, you can see that is what we do. It is a formula. It doesn’t mean that it is the right decision in each instance, but it does mean that, if we stick to it, we will do the same thing every time and the law of averages will work things out. We also let the people we work with know that is our policy so they are not surprised by it. What is worse is to make each decision emotionally and get them all or most of them wrong.
Personally, I like to dollar cost average out of a stock (sell a position over time instead of all at once) and I also like to hold onto some of the position for the very long term (schmuck insurance). I have a formula for the disposition of public stocks I get via distribution from USV and the other VC funds we are invested in. We execute the formula time and time again. It takes the emotion out of the decision and it works better for us.
The thing I have learned about selling is that it is almost impossible to optimize the sell point. You need a crystal ball and you need to know something that others don’t know. That is either impossible or criminal. So I don’t try to optimize it. I try to make it formulaic and systematic. It works better for me and I think it may work better for you too.
Young companies are a bit like children. They require care and feeding.
The feeding part comes naturally to investors. Because that is what we do. We invest capital into young companies in hope of generating large returns on those investments.
The caring part comes harder to investors. At least it did to this investor.
But as I enter my fourth decade in venture investing, it is the caring that keeps me going.
Caring is exactly what it sounds like. Giving a shit. Actually caring about the company, the team, and the business.
The thing about caring, when done right, is that it means everything to the founders, the managers, and the team.
They feel it, more than you think possible.
And that allows you to encourage them to adjust their thinking, their plans, their team.
I have found that feeding doesn’t change behavior very much. It works well in the short run (do this and we will invest more money). But it doesn’t work very well in the long run.
Caring, on the other hand, has immense power to bring positive change.
I see this every day. And it encourages me to care even more.
In the summer of 2003, Brad Burnham and I set out to raise a $100mm early stage venture capital fund. We had both been successful VCs in other firms and we had a thesis that the second wave of the Internet was upon us and that large networks were going to get built in this phase. The term “web 2.0” had not yet been coined and Facebook had not yet been started (LinkedIn was being built around this time).
It took us a year and a half to raise that fund. We traveled all around the country (and to the UK too which was a total waste of our time and money). We spent our own capital raising that fund. We believed in ourselves and our thesis, but it was very hard to get others to understand it. Sometime in the spring of 2004, someone got it. And then a few others did. And by the summer, we had a group together and we were able to build to a first close in November of 2004. We had our final close in February 2005, eighteen months after we started. That was a hard raise.
But that fund, USV 2004, has been one of the very best venture capital funds ever put together. The numbers are public because many (most) of our investors are public pension funds who have freedom of information act (FOIA) obligations to report the performance of the funds they invest in. At that time (early 2000s), the big VCs in the bay area were kicking out FOIA obligated limited partners out of their funds. That was a huge win for us and we got a bunch of those FOIA obligated LPs into our fund. Without FOIA, I am not sure we would have gotten USV 2004 done. But we did.
There is a correlation between hard raises and strong performing investments. It is not a perfect correlation by any means. Some great investments are obvious (Facebook in 2010, Airbnb in 2014) and get done easily by the company and perform very well. And many hard raises are hard because they aren’t good investments.
But there are some investments that are very hard to get done that turn into incredibly strong performers. We have had a few of these in our portfolio over the past year as the expansion capital stage (Series C and D) of the venture capital market has contracted. We have seen companies need as much as six to nine months to get a financing done and we have seen founders and CEOs get rejected by more than fifty investors during that process.
I like to tell them the story of USV 2004. I believe Brad and I got over 100 rejections during that process. Rejection hurts but it is part of the game, particularly when you have a hard raise.
One of the reasons hard raises can turn into great performers is that they often mean you are doing something others aren’t doing, you are early to an opportunity and others don’t see it. That certainly was the case with USV 2004. That’s the contrarian bet in action.
Another reason hard raises can turn into great performers is that you learn something from all of that rejection. Brad and I learned that we weren’t explaining the opportunity clearly and crisply enough. We went and read Carlota Perez on a friend’s suggestion and she helped us frame the “second wave” argument in a much cleaner and clearer way. And once we started investing the capital, we had a framework, influenced by Carlota’s work, that we could execute against. The fundraising process, and all of that rejection, helped harden our investment thesis to great effect.
It is this second reason that I am seeing in action in our portfolio. As these expansion stage companies struggle to raise capital, they are forced into a cathartic (and at times painful) process of self reflection. What is their sales process? Is it efficient? What is their unique value proposition? Is it really unique? What kind of company are they building? Will it be large enough to justify all of this investment?
And as a result, these companies are coming out of these hard raises with better businesses, better operating models (lower burn rates!!), and bigger visions to go execute against.
And I suspect that many of these rounds that have taken six to nine months to get done are going to turn into really strong performers for the investors who have ultimately decided to get behind them. We are using these opportunities to “lean into” these investments with our funds. We are always deeply reserved for our portfolio and believe in doubling down on investments when we have conviction. And, as an investor, you should always be open to having conviction around an investment that is having a hard time getting done. Because they can, at times, be among the strongest performing investments out there.
Regular readers know that I am a big fan of Bill Gurley. He and I are in the same generation of VCs. We started our careers in the PC era and learned VC in the first generation of the Internet era. Bill and I also bring a “fundamental investor mindset” to our work which is not the only mindset in the VC business. We’ve never worked together on an investment, which is too bad, but I have tremendous respect for Bill and all of the partners at Benchmark.
USV is a revolving door when it comes to our analyst program. We hire the smartest young people we can find (Jennifer and Jacqueline are our newest hires) and ask them to spend two years with us learning the VC business and helping us make and manage our investments. Then we ask them to move on to bigger and better things. It’s a great deal for both parties. We get really smart people early in their career on a steep learning curve throwing themselves at our business. And they get to learn from partners who collectively have been doing VC for something approaching 100 years.
But when an analyst walks out the door on their last day, I always ask myself privately “what the hell are we thinking.” That’s how it was yesterday with Jonathan who is leaving to be the first product manager at our portfolio company Figure1. It’s a perfect match for Figure1 and Jonathan. In fact, when he interviewed for the analyst job, Jonathan suggested we invest in Figure1, not knowing that we already had or were about to. That’s how we knew he’d be great at the job. And he was. Although, as he wrote in this fantastic post, the job was not always easy on him and it took time to learn the things you need to learn to be successful at USV.
Even though I ask myself what we are thinking letting these amazing people go through the revolving door, I remain convinced that it is the best thing for them and for USV. The USV analyst program alumni group is an incredibly impressive group of people who have gone on to do substantial things. Things they maybe would not have done if they had stayed at USV. And I remind myself that leaving my first VC job was the beginning of my evolution into who I am today.
So while I remain convinced that it is the right thing to have a revolving door at USV, I am going to miss Jonathan, as I miss Charlie, Andrew, Eric, Christina, Brian, Zander (and Gary and Brittany too).
Jonathan Libov has spent a couple years at USV in our two year analyst program and is about to move on to his next thing.
He took the time this week to write down some thoughts on what he has learned as a “junior VC” and it’s worth reading for both investors and entrepreneurs.
I particularly like where he ends the post, talking about “messing around on the fringes”:
But more importantly, talk to people who are building things. Don’t just talk to founders of investible companies, but also talk to people who are experts in their field or following modes of thought that contravene mainstream thinking. Play with their API’s and go deep in forums, even if there’s no investment in sight. Mess around in the corners of the internet.
Just as wading in the muck of cap tables and share purchase agreements is the best way for an analyst to learn the mechanics of venture investing, wading in code and API’s and forums is the best way to discover the things that others have not discovered yet. To frame it more practically: This will help you identify the opportunities that others don’t appreciate yet, and that will help you to invest at attractive prices.
Lastly, it is important to emphasize who this post is aimed at: Junior VC’s. The partners at your firm benefit from having established networks that will pass along interesting, valuable opportunities. Your job is to complement those investments with the ones they and their network would not see because they’re don’t fit the patterns they’re accustomed to. You have more freedom than they do to mess around on the fringe. Don’t waste it.
I try to hang out on the fringe as much as I can and also try to avoid being pulled into the mainstream as much as I can. I think Jonathan’s advice, while aimed at “junior VCs”, is great advice for entrepreneurs and investors alike. The next big thing is almost certainly a fringe thing today. That’s how it always is.
I saw Joe Fernandez‘ tweet a few days ago and thought “he is making an important point.”
too many young entrepreneurs talk about vc’s like they’re heroes and their blog posts are scripture
— Joe Fernandez (@JoeFernandez) August 19, 2016
VCs are not heroes. We are just one part of the startup ecosystem. We provide the capital allocation function and are rewarded when we do it well and eventually go out of business when we don’t do it well. I know. I’ve gone out of business for not doing it well.
If there are heroes in the startup ecosystem, they are the entrepreneurs who take the biggest risks and create the products, services, and companies that we increasingly rely on as tech seeps into everything.
VCs do have a courtside seat to the startup world by virtue of meeting and getting pitched by hundreds of founding teams a year and sitting in board meetings for many of these groundbreaking tech companies. We get to see things that most people don’t see and the result of that is that we often have insights that come from this unique view we are given of the startup sector.
Another thing that is important to know about VCs is that we operate in a highly competitive sector where usually only one or two VC firms are allowed to make a hotly contested investment. So in order to succeed, VCs need to market ourselves to entrepreneurs. There are many ways to do that and the best way is to back the most successful companies and be known for doing that. There is a reason that Mike Moritz and John Doerr were invited to lead Google’s initial VC round. By the time that happened, they had established themselves as the top VCs in the bay area and their firms, Sequoia and Kleiner Perkins, had established themselves as the top firms in the bay area.
Another way that VCs market ourselves to entrepreneurs is via social media. And blogging is one of the main forms of social media that VCs can use to do this. And, given that VCs have this unique position to gather insights from the startup sector, we can share these insights that we gain from our daily work with the world, and in particular entrepreneurs. If anyone has played this blogging game well enough to get into the top tier, it is me. I know of what I speak.
So how should entrepreneurs use this knowledge that is being imparted by VCs on a regular basis? Well first and foremost, you should see it as content marketing. That is what it is. That doesn’t mean it isn’t useful or insightful. It may well be. But you should understand the business model supporting all of this free content. It is being generated to get you to come visit that VC and offer them to participate in your Seed or Series A round. That blog post that Joe claimed is not scripture in his tweet is actually an advertisement. Kind of the opposite of scripture, right?
But you should also know that there is data behind that blog post, gained from hundreds (or thousands) of pitches and dozens (or hundreds) of board meetings. If VCs are good at anything, we are good at pattern recognition and inferring what these patterns are leading to. And so these blog posts that are not scripture, and are in fact advertising, can also contain information and sometimes even wisdom. So they should not be ignored either.
What I recommend to entrepreneurs is to listen carefully but not act too quickly. Get multiple points of view on important issues and decisions. And then carefully consider what to do with all of that information, filter it with your values, your vision, and your gut instinct. That’s what we do in our business and that is what entrepreneurs should do in their businesses.
If you are at a board meeting and a VC says “you should do less email marketing and more content marketing”, would you go see your VP Marketing after the meeting and tell them to cut email and double down on content? I sure hope not. I hope you would treat that VC comment as a single data point, to be heard, but most likely not acted on unless you get a lot of similar feedback.
VCs are mostly not idiots and can be quite helpful. But we are not gods and our word is not scripture. If you treat us like that, you are making a huge mistake. And I appreciate Joe making that point last week and am happy to amplify it with this post.
Winning a medal at the Olympics is a big deal for athletes all around the world. Obviously a gold medal is better but silver and bronze are pretty awesome too.
In startup land, it works out pretty similarly. In each and every big “winner takes most” market there is one big winner (the gold medal winner) and a few other big companies (silver and bronze) and then not much more.
If you look at web search, Google won the gold medal and has a $550bn market cap to show for it.
In social, Facebook won the gold medal and has a $360bn market cap to show for it.
In ridesharing, Uber won the gold medal and has a purportedly $60bn market cap to show for it.
You can do well with silver and bronze. Twitter is worth $13bn. Lyft is supposedly worth $5.5bn. But coming in second or third in a big market is generally an order of magnitude (or two) less valuable in the long run.
And you had better get on the stand and get a medal if you are working in a big “winner take most” market because fourth or fifth or sixth is rarely worth much, if anything.
These are high stakes markets where winning is everything and losing is nothing. And things play out pretty quickly. Within five years, we generally know who won, who placed, who showed, and who whiffed.
It is possible that with the emergence of decentralized networks these dynamics will change and we will be on to a very different market dynamic. But for now this is how it goes. Go big or go home.