Posts from VC & Technology

Best Seed Pitch Ever

I read yesterday evening that our portfolio company Twilio, which priced its IPO last night, is going to live code from the NYSE this morning. That brought a powerful flashback to the first time I met Jeff Lawson, founder and CEO of Twilio.

It was 2008 in our old offices on the 14th floor of the building we still work in. My partner Albert, who led our investment in Twilio, had met Jeff and was impressed with him and his vision for Twilio. He asked me if I would meet with him and so I did.

Jeff came into the conference room, sat down, and said “we have taken the entire messy and complex world of telephony and reduced it to five API calls”.

I said “get out of here, that’s impossible.”

Jeff proceeded to reel them off and I said “wow”.

He then pulled out his laptop, fired up an editor, and started live coding an app. He asked me for my cell phone number and within 30 seconds my phone was ringing.

I said “you can stop there. that’s amazing”.

It was, and remains, the best seed pitch I’ve ever gotten. I’ve told him that many times and have told this story many times. I am not sure why it has never made it to this blog. But this morning is a great time for that to happen.

USV 2016

My partner John has a post up on USV this morning talking about our new fund, USV 2016, which we quietly raised earlier this year. We added our final portfolio company in USV 2014 last week and we are making our first investment in USV 2016 this week, led by John. In John’s post he addresses some changes we are making at USV, most notably the elevation of Albert and Andy to managing partners of our firm. This role has been held by Brad and me since we started USV in 2003.

This sounds like a big change and in some ways it is. Andy and Albert are the future of USV, at least the near term future. They have been providing this leadership role for a while now but it is time to formally acknowledge it. John, Brad, and I remain actively involved in making investments, managing investments, and driving our investment strategy. We all plan to make investments in the 2016 fund, as John is doing this week.

The VC business is a long term game and VC funds have a long time horizon, ten years in most cases, but generally they get extended for a few years more as it takes a long time to liquidate these funds. We are on our second extension on our 2004 fund and I doubt it will be totally wrapped up until the latter part of this decade. What this means for a venture capital firm is that you need to anticipate succession on a longer time horizon. At some point, Brad, John, and I will not want to sign up for investing a new fund. But well before that happens, we need to establish the new leadership at USV and start building the next generation. We have done the former and at some point in the next several years we will start thinking about the latter. Again, we are doing all of this over a long time horizon as is appropriate for our kind of business.

When Brad and I started USV, there were a bunch of things we did not want to do. One of them was stick around too long, taking too much carry, and holding on to too much control. We have seen so many VCs do this at the firms they started and we did not want that to happen at USV. With this change, we are showing ourselves, our partners, and our LPs that we were serious about that.

What we are not doing is retiring. I know there are rumors out there that I have retired, I am retiring, or I will soon retire. I don’t really care about them and have ignored them for the past year or so. But our portfolio companies hear them and it bothers them. And I understand that. So rest assured, I am not retiring. I am handing over the keys to the car and getting into the back seat. It feels good. And I am so excited to see where Albert and Andy drive the car. I know it will be to amazing places. It already is.

Strong Views Weakly Held

As Andy talked about in the podcast I posted yesterday, the style we use to decide what to invest in at USV is extremely conversational. We discuss, debate, discuss, debate, and eventually decide. It is a group thing. We don’t really make individual investment decisions at USV. We make group investment decisions. And so the group dynamic is critical. We have various personality types. And you need that.

My personal style is “strong views weakly held.” I didn’t come up with that term. My friend Jeremy introduced the concept to me. But it describes me accurately. When an investment opportunity is surfaced, I will immediately have an opinion and I will voice it, often strongly. My colleagues understand that is my style and don’t let me bully the conversation. Because they also know I will fold quickly when the facts prove I am wrong. And I don’t require too many facts to prove that to myself.

But it is helpful to have a number of people in a group who behaves as I do. It gets the discussion going. It fuels the debate. And, because everyone knows I will fold quickly if wrong, they are happy to make the investment in proving me wrong.

Strong views are quite helpful if weakly held. Strong views strongly held are only helpful if they are actually correct and even then they can stifle debate. So while we like everyone at USV to have strong views, we also like them to concede the point when facts suggest they aren’t actually right. And happily our culture encourages and rewards that.

Seattle

I called Seattle a “third tier startup city” in a blog post earlier this week.

Which generated this series of tweets:

After reading them, I thought “geez, I really screwed that up” and replied with this series of tweets:

Here’s the thing that is amazing about Seattle. It doesn’t rank as high as NYC, LA, or Boston in the number of startups funded or capital invested. Here are the NVCA numbers for the first three quarters of 2015:

  1. San Francisco, $9.32 billion, 506 deals
  2. San Jose, California (Silicon Valley), $3.78 billion, 237 deals
  3. New York, $3.05 billion, 272 deals
  4. Boston, $1.05 billion, 158 deals
  5. Los Angeles-Long Beach, California (Silicon Beach), $768 million, 105 deals
  6. Oakland, California, $510 million, 41 deals
  7. Seattle-Bellevue-Everett, Washington, $471 million, 56 deals
  8. Provo-Orem, Utah, $462 million, nine deals
  9. Washington D.C., $456 million, 77 deals
  10. Chicago, $402 million, 57 deals

But the companies that have come out of Seattle over the past thirty years put NYC and LA and probably even Boston to shame. So on a dollars in/dollars in, Seattle outperforms. By a lot.

Second and Third Tier Markets And Beyond

I am in Nashville for a couple days with The Gotham Gal who is giving a keynote at a startup conference today. I mostly came along for a chance to spend a couple days in Nashville. But I will also be at the conference later today to see her do her thing.

Last night we attended a cocktail party with investors from the southeast and then had dinner with an entrepreneur in Atlanta that The Gotham Gal backed a few years ago. At both we talked about entrepreneurship in the southeast and the funding environment for companies in this part of the world.

The way I think about the startup sector in the US is that the first tier is Silicon Valley. More than half of all startup activity and startup funding activity happens in the Bay Area which now includes SF and the east bay. You could simply focus on Silicon Valley and ignore every other part of the US and the world and do just fine as an investor. Many do.

The second tier is NYC and LA and Boston. Between these three cities, another third of startups and investment capital reside. All three of these startup cities are vital and growing rapidly. You could simply focus on NYC, LA, and Boston and ignore the bay area and other parts of the US and the world and do just fine as an investor. I am not aware of any firm that has that strategy as it doesn’t really make sense. But it could easily be done.

The third tier includes Seattle, Chicago, Atlanta, DC, and a few other smaller places like Boulder and Austin. I am doing this entire post from my head and not referring to any survey. There are a bunch of these surveys and I’ve read them all so I am sure this is directionally correct but I am also sure that I am missing a place or two.

This third tier is a decent place to be an entrepreneur and an investor. But there are challenges. Entrepreneurs in the third tier can access the talent and capital they need to be successful in these third tier markets but it is a bit harder to do both. Investors can be focused on these markets if they keep their fund sizes small enough or they can take a hybrid approach by being focused on these markets and also investing in the first and second tier markets. The latter is how we have always approached being a NYC centric investor.

But there is a dynamic that goes on in these third tier markets where the local investors look to investors in the first and second tier markets to come down and “validate” their investments. And the investors in the first and second tier markets won’t come down and do that without a strong local lead. This game of “chicken” happens ways too often in these markets and is incredibly frustrating to entrepreneurs in these markets. These third tier markets need a few strong Series A focused VC firms who have large enough fund sizes to be aggressive lead investors and also have the conviction and stomach to play that game. That is what USV, and Flatiron before it, did in NYC. That is what Foundry did in Boulder. That is the game Upfront is playing in LA. Every third tier market needs a few VC firms like that. And being that investor is a terrific way to make a lot of money.

Beyond the third tier lies a lot of even smaller markets. I am in one today in Nashville. It has a huge health care sector that produces a lot of entrepreneurial and executive talent. It has a decent amount of local seed capital. But it is not a major VC destination. The southeast VCs will come here regularly looking for opportunities. But it suffers even more from the issues I talked about in the third tier. The same is true of places like Pittsburgh, Des Moines, and Kansas City. I mention those three cities because USV has investments in companies in all three places.

The truth is you can build a startup in almost any city in the US today. But it is harder. Harder to build the team. Harder to get customers. Harder to get attention. And harder to raise capital. Which is a huge opportunity for VCs who are willing to get on planes or cars and get to these places.

There is a supremacism that exists in the first and second tiers of the startup world. I find it annoying and always have. So waking up in a place like Nashville feels really good to me. It is a reminder that entrepreneurs exist everywhere and that is a wonderful thing.

Filling Out A Round: When It Matters, and When It Doesn’t

Almost every financing I’ve been involved with over the years (seed, VC, growth, raising a VC fund) goes mostly like this:

  • Struggle like hell to find a lead
  • Come to terms with the lead
  • Turn your attention to filling out the round
  • The deal gets oversubscribed as all the investors that could not summon up the courage or did not have the checkbook to lead the deal scramble to get into what is now a “hot deal”
  • You end up saying no to a lot of people you wish you could say yes to

So how do you decide who to let into the round and who to say no to?

Well the truth is that it sometimes matters a lot and sometimes doesn’t matter at all.

There are two primary factors that I like to focus on when choosing who to let in and who to say no to:

  • Do they have deep pockets and have they shown a history and a propensity to follow on in future rounds. Yes means try to let them in. No means prioritize others over them at the margin.
  • Can they add value and/or will they cause harm in any way. Adding value is a plus. Doing harm is a negative (obviously). Harm should be avoided at all costs. Adding value is a nice to have but not a must have. And investors always claim to be able to add value and very few actually do. If someone has already added value without even being in the deal, that’s a strong signal that carries a lot of weight with me.

There is one other factor that is worth considering. If someone is a friend, a former colleague, a person you know, trust, like and would like to have along for the ride, that is as good of a reason as any to let them in. But just remember that having friends in a deal that goes bad is a good way to lose friends. So make sure these are friends who have lost money, can take the hit, and aren’t going to hold it against you.

So here is when it matters and when it doesn’t.

  • Seed investors aren’t likely to follow round after round and while some can add value, many don’t. I would not sweat the allocations/syndication decisions that much in a seed deal other than avoid troublemakers at all costs. Otherwise, get the money and move on.
  • VC rounds (Srs A, Srs B, Srs C) are generally where the syndicates matter the most. Find a strong lead who will take a board seat, manage the syndicate, and help you. Then if there is money left over find VCs who have deep pockets, who have demonstrated a bias to follow on in round after round, and are willing to follow your lead.
  • Growth rounds are generally where everyone wants to pile in and there aren’t a lot of board seats or governance issues to deal with. You may find investors that can help in these rounds but they are mostly about getting the money at a good price and getting back to business.

I have seen entrepreneurs try to optimize these decisions and spend a lot of time on them. Investors scrambling to get into the deal will fill your head with all sorts of promises, arguments, and the like. Which makes it even more tempting to spend time on the decision and make the best one.

My advice is to make good decisions and not try to make the very best ones. Focus on deep pockets who are known to follow on and be supportive and avoid troublemakers. Everything else is a nice to have but not a need to have.