Posts from VC & Technology

An AI First World

Sundar Pichai said this last week on Alphabet’s earnings call:

In the long run, I think we will evolve in computing from a mobile-first to an AI-first world

That statement got a lot of pickup and attention and deservedly so.

It explains how the CEO of one of the most important tech companies thinks about where tech is heading and where his company is heading.

What does an AI first world look like?

It was easier to think about a mobile first world. That’s a smartphone centric computing environment. That is very much where we are right now.

Does an AI first world suggest we will move beyond carrying around devices? Does it suggest that computing moves into the ether and is just there when we need it “on demand”? Does it suggest that voice will emerge as the primary user interface?

I do believe AI is the most important next big thing and have been saying that here and publicly for the past few years.

I am running into AI technology more and more in my daily life. It feels like this AI first world is arriving. That’s big.

Losing Money

I remember back in the mid 90s, I used to say with some pride that I had not lost money on any of my VC investments. Then one day, someone told me “then you are not taking enough risk.” I ended that streak of not losing money on VC investments in the late 90s in a series of epic flameouts. I lost somewhere between $25mm and $30mm on one single investment. I am not proud of those mistakes. They were stupid. I am ashamed of them to be honest. But I learned a lot from them. Not only was my “winning streak” a case of not taking enough risk, it was also a case of not enough learning. The go-go Internet era of the late 90s fixed both of those things for me. I took more risk and learned a ton.

Our first USV fund, our 2004 vintage, has turned out to be the single best VC fund that I have ever been involved in. We made 21 investments. We made money on twelve of those investments. We lost money on nine of them. And we lost our entire investment on most of those nine failed investments. The reason that fund performed so well has pretty much nothing to do with the losses. It was all about five investments in which we made 115x, 82x, 68x, 30x, and 21x.

It wasn’t like we were swinging for the fences in that fund. Every single one of those 21 investments seemed like an intelligent investment decision at the time we made it. But many of them didn’t work. We lost all or almost all of our money on over 40% of our investments in that fund.

The next fund we raised, our 2008 vintage, is now eight years old and we can begin to calculate the win/loss ration on that one too. We don’t yet know the magnitude of our winners, but there will be a bunch. It will be one of the better funds I’ve been involved with. I doubt it will be as good as our 2004 fund, but it will be a very good fund. We invested in 22 companies in that 2008 fund. We have already completely written off six companies. Those are complete and total losses. And, I think there will be at least a couple more losses in that fund when it is all said and done. So it looks like something like 14 winners and 8 losers. We will likely lose all or almost all of our money on roughly 40% of our investments in that fund.

My point on sharing all of this with you is to explain that losing money is part of being an investor. It happens. As Richie, the guy who sits behind me and my friend John at the Nets game, says “you can’t make ’em all.”

But there are some things you can do with your winners and losers to drive up your performance.

The first and most important thing you can do is minimize the amount of money you invest in your losers. In our 2004 fund, we invested a total of $50mm out of $120mm of total investment in our nine losers. That wasn’t so good. We could have, and should have, recognized our bad investments earlier and cut them off. In our 2008 fund, I think we will invest roughly $35mm out of roughly $140mm of total investments in failed investments. So even though our loss ratio on “names” is around 40%, our loss ration on dollars will be around 20%. We did a good job of not allocating too much of the fund’s capital to losers in our 2008 fund. And most of those losers were mine by the way.

Ironically, another key to managing your losses is to spend more time with them, not less. By spending more time with them you can develop clarity about the investment, whether it will work or not, and you can get the founders and other investors to see the light early and not waste more of their time and/or money on it. I am a big believer in “loving your losers” in the sense that you should not orphan them and you should work hard to get to the right outcome. Enabling them with good money after bad is not loving them.

Finally, getting clarity on your losers, getting them sold or shut down quickly (with dignity for everyone), frees up more time and money for the winners. And, as our 2004 fund shows, a few really good companies can carry a fund to the moon. You must make sure you can get a disproportionate amount of your time and money invested in those great investments.

When I look at a VC to work with, recommend to LPs, or very rarely, invite into our partnership at USV, I look for someone who has made their share of mistakes. Making bad investments is humbling, frustrating, annoying, time sucking, and most of all, a big part of the VC business. I look for VCs who have done it a lot, have done it with grace and respect, and continue to learn from it. They are the best VCs to work with.

The Second Smartphone Revolution

Benedict Evans tweeted out this chart yesterday:

The first 2.5bn smartphones brought us Instagram, Snapchat, Uber, Whatsapp, Kik, Venmo, Duolingo, and most importantly, drove the big web apps to build world class mobile apps and move their userbases from web to mobile. But, if you stare at the top 200 non-game mobile apps in the US (and most of the western hemisphere) you will see that the list doesn’t look that different than the top 200 websites. The mobile revolution from 2007 to 2015 in the west was more about how we accessed the internet than what apps we used, with some notable and important exceptions.

But the next 2.5bn people to adopt smartphones may turn out to be a different story. They will mostly live outside the developed and wealthy parts of the world and they will look to their smartphones to deliver essential services that they have not been receiving at all – from the web or from the offline world. I am thinking about financial services, healthcare services, educational services, transportation services, and the like. Stuff that matters a bit more than seeing where you friends had a fun time last night or what it looks like when you faceswap with your sister.

Benedict is right. We aren’t done with the mobile revolution. But we are mostly done with it in the developed world. So where do we go to find the big mobile opportunities of this second revolution? Do we go to asia where they are having a very different looking mobile revolution? Do we go to latin america, the middle east, africa, eastern europe, and southeast asia? Or do we think that entrepreneurs in the US and other parts of the developed world will build and deliver these important new services to the developing world? I am not so clear on that. We are seeing a bit of all of this right now. I would like to believe that entrepreneurs all over the world now have the capabilities (both technical and financial) to build game changing and disruptive new services and launch them in their countries and regions of the world.

However, there are still many roadblocks for entrepreneurs in these emerging economies. It is not lost on me that Mpesa was launched by and is owned by the dominant local carrier in Kenya. It is not lost on me that Russian lawmakers are proposing a seven year jail sentence for bitcoin use. It is not lost on me that war and strife in the middle east will make building companies there harder.

But the thing that is particularly exciting about new services in the developing world is that they may come with fundamentally new business models. And, it turns out, new business models are even more disruptive than new technologies. Microsoft can copy Netscape. But copying the Linux business model is harder. Chase can copy Venmo’s app, but copying Venmo’s business model is harder.

So I am excited to watch this second mobile revolution unfold. It may be an opportunity for US-based VCs like me. But more likely it will be an opportunity for VCs and early stage investors who have had the courage and foresight to set up shop in these emerging locations. The investors who had the courage and foresight to set up shop in China in the late 90s and early 00s have been rewarded fabulously for that. If you ask me where the next big whitespace for VC is, I would point to the developing world. It doesn’t come without its risks and roadblocks, but it feels to me that it has enormous potential.

Hallway Chat

Yesterday I hung out (virtually) with Bijan and Nabeel at Spark Capital and joined them in their podcast they call Hallway Chat.

Here’s what we talked about:

-questions from Twitter, including how Fred started investing in social media, & YC’s recent move to recommend exercising options from 90 days to 10 years

-Fred’s post, “The New Entertainment Bundlers

-Chris Dixon’s, “What’s Next In Computing?

-Why haven’t we seen a new breakout consumer app

-AI

-Steph Curry vs Michael Jordan

So, here’s our “hallway chat”

Startup Porn

I like Bryce‘s post so much I am cross posting here in its entirety.

The Problem With Startup Porn

I found a box of old Playboy magazines buried in the woods behind my house. I couldn’t have been older than 10 or 11 years old at the time. I spent that afternoon flipping through the pages, discovering a whole new world of excitement, curiosity and wonder.

Hours later, as I warmed my hands by the fire of these same magazines my mom set ablaze, I was left only with the images of naked ladies dancing in my heads.

In my haste, I did not read the articles.

At the end of last year, Playboy announced that they would no longer be printing photos of the naked ladies they’d built so much of their brand around.

Their rationale for such a radical shift- images of naked women, no matter how tastefully done, had simply become too passé.

“You’re now one click away from every sex act imaginable for free. And so it’s just passé at this juncture.”

Now every teenage boy has an Internet-connected phone instead. Pornographic magazines, even those as storied as Playboy, have lost their shock value, their commercial value and their cultural relevance.

What began as simple, racy images of women spiraled into a web of extreme images and acts mere clicks away. At each step the visuals required to elicit a reaction, or even register a response, became so much more graphic than the last that the originals hardly elicit a speeding of the pulse.

As porn goes, so goes Startupland.

It begins with entrepreneurs in the press as heros of creation and innovation. Then comes the stories around how much money these heros are raising. Feel

Feel your blood racing yet?

Then on to quantifying the net worth of these founders and the valuations of their companies. Finally, they’re christened as Unicorns even Decacorns!

Wait for it.

Then Unicorpses.

At each stage the reader becomes more desensitized to the imagery and storyline. They need more. A billion isn’t cool. A unicorn is passé.

So the tables turn and they turn quickly.

5 months ago we saw the advent of the Unicorn Leaderboard.

Yesterday we welcomed the Downround Tracker.

As exciting and evocative as the headlines are while the market heats up, they’re going to need to be even more salacious going down.

That’s the nature of porn, startup or otherwise.

What’s Next In Computing

Chris Dixon posted an excellent roadmap for thinking about what is next in computing.

I particularly like this visual from Chris’ post:

steadily smaller

My big takeaway from Chris’ post is that these cheap embedded processors are going to be built into everything in the coming years (cars, watches, earpieces, thermostats, etc) and advances in AI will make all the data they produce increasingly useful and disruptive. Chris goes on to tie this megatrend to things like self driving cars, drones, wearables, and VR.

While I think all of those things are coming and investable, I wonder if there is something more fundamental in the combination of ubiquitous computing and artificial intelligence that would be the next big computing platform. We are due for one soon. This visual is also from Chris’ post.

every 10-15 years

What is the dos/windows, netscape, and iOS of this coming era? If we can figure that out, then we are onto something.

Maybe it looks like this, or this, or this?

Orphaned Investments

There are two intertwined things that entrepreneurs and their companies get from VCs – money and attention. You need both. And they feed on each other. Attention begets more money if necessary. And more money is usually necessary. Everyone always underestimates how much money a startup will require to get to breakeven and how long it will take. That includes the VCs. And we should know better. But entrepreneurs are even more guilty of seeing the light at the end of the tunnel when it is actually a train coming.

Which brings me to the subject of orphaned investments. Of all the bad things that VCs do on a regular basis, and that list is long, orphaning their investments is at the top of my list of bad behavior. I have never done it. I’ve wanted to. Trust me. I dream of doing it. But I won’t.

And the reason I won’t do it is that I have lived with the costs. I have sat on boards where two or three of the seats are vacant at every meeting. I have put together rounds where two or three of the syndicate members won’t participate. I have sat with an entrepreneur and explained that life is not fair and it is what you do after you realize it that really matters.

Orphaning an investment is when a VC firm decides that it doesn’t really care about an investment any more and stops paying attention. The primary cause is when a partner leaves a firm and nobody picks up coverage of his or her investments. The VC firm says that “so and so” is covering the investment now. Yeah, if you call reading an occasional email “covering.” But it can also happen when a VC loses interest in an investment they made and causes their firm to lose interest as well. It’s easy to not care about an investment if your partner who made it doesn’t care anymore.

And this brings me back to the link between attention and money. If you aren’t getting attention from a VC, you aren’t going to get money from that VC either. When a VC writes off an investment, either emotionally or literally on their schedule of investments, they are closing their wallet to it too. This rule works in bull markets and bear markets. But it is more painful for entrepreneurs in bear markets.

So how do you avoid being orphaned? Like most things, it comes down to picking your partners carefully. Ask around. Find out how they have acted in tough situations. Find out how solid the VC’s position is in their firm. You need to reference both the partner and the firm. The person is important but if they leave you will find out a lot about the firm.

This is the kind of post that after I write it, I get a ton of inbound email saying “you are talking about this company”, “you are talking about this VC”, “you are talking about this VC firm.” So I will say right now that this post is not about anybody, any firm, or any investment. I have been thinking about writing this post for months. I have nobody in mind right now. Other than entrepreneurs and their companies out there that are orphaned, or are going to be orphaned.

You can survive being orphaned. But it will require rebuilding your investor syndicate, it will require the other VCs involved to increase their support and attention, and it will require you to forget about life being fair and get on with it. Getting orphaned is not a time for feeling sorry for yourself. It is a time for doing something about it.

When the going gets tough, the tough get going

It sure feels like the long awaited headwinds have arrived and the tailwinds are behind us for now. A friend sent me this chart today.

You could create a similar chart out of many tech sectors right now but SaaS is as good of an indicator of what’s happening out there as any.

I welcome this new environment. You might think “of course you do, you can buy things less expensively” but I would remind you that USV has a portfolio of investments that are unrealized at this point and subject to a chart like that.

I think any benefits we might get from a better buying environment are negated by the impact on our current positions.

The real reason I welcome the tougher environment is that it will make all of us better. We will have to make better decisions.  The market won’t bail us out. We will have to earn our returns instead of being handed them.

And I’m not just talking about investors. I’m talking about everyone working in tech startups. The going is getting tougher. Time for the tough to get going.

The Crunchies

I went to the Crunchies last night for the first time. The Gotham Gal was nominated for “Angel Investor Of The Year” and she said, “If by some chance I win and I’m not there to accept, then I would be a jerk.” I agreed with that logic and so we went.

Chelsea Peretti, who hosted, is great. She is very funny. She made fun of tech, SF, and a bunch of other things, but in a good way. I think she is a great choice for host.

Diversity was the theme of the night. The best move was when Slack sent out a number of their female (and african american) engineers to accept one of several awards they won last night. That sent a message to everyone else. If they can do it, so can you. Well played Slack.

But the honest to god truth is most of the winners don’t care about the Crunchies. Not one winner of the big categories showed up to accept their award. So the Gotham Gal would have been in very good company had she not showed up.

And the other honest to god truth is award shows suck. Because there is no single best of anything. No best movie. No best TV show. No best musician. No best comedian. No best VC. No best startup. No best CEO.

And the idea that there is an anathema to me. Which is why I’ve never been to a Crunchies even when I was nominated.

I know I sound like a grump. Award shows are entertainment. People like them. And last night was entertaining thanks to Chelsea and Jordan Crook, who is also quite funny and talented.

But the final thing I will say on this is the reason why award shows exist is because all of the work that everyone does who aren’t nominated and don’t win. So entrepreneurs all over the world are the reason Techcrunch even gets to put on this show. Bill Gurley said as much last night in his gracious and wonderful acceptance speech. And he is right.