Posts from VC & Technology

eShares

This post is self serving to some degree as USV is an investor in eShares. But in the world of VC and startups there isn’t much that is more broken than cap table management. eShares fixes that by putting the entire cap table online and allowing your company to issue new shares and options directly from the platform. It’s kind of like writing checks directly from your accounting system. Everything gets recorded and there are no missing stock certs or broken promises.

I explained this to one of our portfolio companies last fall around the time we made our investment in eShares. One of the co-founders replied via email “we don’t need that, our cap table is all in a single spreadsheet.” A month or two later, as we were doing a round of financing, when the lawyers were doing their diligence, it came out that our cap table spreadsheet was missing some shares that had been issued but not recorded. I had a good laugh at that because it is always the case that something is not recorded. A perfect cap table is very rare, unless you are using a tool like eShares.

The VCs and angel investors aren’t hurt so much by this because our investments are large and mistakes made on our shares are easily caught. Employees are the ones who have the most to gain from eShares because they are the ones whose issuances are most often missed or not properly recorded on a cap table and these mistakes can go on for a long time before being caught. This causes issues in terms of exercise price changes and tax issues for the employee.

If you are starting a company, do yourself a favor and start building your cap table day one on eShares. If you have been managing your cap table in a spreadsheet for years and are tired of doing it that way, talk to eShares. They will help you “port” your cap table to their system. That’s part of the onboarding service they provide. And then you can start issuing shares the way you’d imagine it would be done in 2015. The way most companies is doing it is circa 1900. I’m serious about that.

If you want to learn more about eShares, contact them here.

The Rich Get Richer

The 2014 numbers for the VC category are out and it was a huge year, almost $50bn in total VC funding.

the rich get richer

But look at the numbers for “deals” vs the numbers for “dollars”.

In 2014, there were 4,356 deals vs 4,193 deals in 2013, an increase of 3.8% year over year.

In 2014, VCs invested $48.3bn, compared to $29.9bn in 2013, an increase of 61.5%.

Basically, the average deal size went from $7mm in 2013 to $11mm in 2014. But averages don’t really tell the whole story.

What is going on is that the late stage market is going crazy. There was a $100mm+ deal on average every month in 2014 and the late stage market made up 1/3 of all deals.

VCs are all about what is happening now and are not focusing as much on what will happen in five to ten years (the seed/early stage markets).

None of this should be news to those who are paying close attention. Round sizes have gone up and burn rates have gone up, but so much of this is limited to a hundred or a couple hundred companies. The rest of the market is more or less where it has been for years. The rich are getting richer. The middle class is stagnant. And the people who can’t raise a round still can’t. Only the top end of the market has really changed over the past five years.

Kind of like the entire economy, isn’t it?

Video Of The Week: How To Build An Investment Thesis

My friend Pedro Torres-Picon gave a good talk a couple weeks ago at the Pre Money Conference on “How To Build An Investment Thesis”. This is a topic we’ve discussed a lot around here so it’s familiar territory but Pedro does a good job of explaining it with some quotes from yours truly and others.

VCs as Gas Stations

I was at an event the Gotham Gal had last night for her portfolio. I was asked a number of times “when is the best time to raise money?”. In general, I believe the best time to take money is when it is being offered. To some extent, VCs are gas stations and you should fill up when it is convenient.

I don’t drive that often, and when I do mostly drive electric cars, so gas stations are not a common place for me. But when I do drive a gas powered car, I tend to fill up my car when it gets below half a tank and I use stations I like and are convenient for me.

I think this analogy works to a point for VC fundraising. You should raise money when you still have a fair bit of cash in the bank. Driving around on fumes frantically trying to find a gas station is not a great idea. Raising a round when you have a month of cash left isn’t either.

I don’t shop around for and drive out of my way to the best priced gas station. I am happy to fill up at a fair price at a place that I like and is convenient to me. I would apply the same rule to raising money. Don’t shop for the very best deal, particularly if it means an elongated fundraising process and time away from the business. If a fair deal is being offered by a firm you like and trust, shake hands, close the deal, and get back to the business.

The place the gas station analogy breaks down is that for the most part the gas is same from gas station to gas station. That’s not true with VCs. You can buy really bad gas and you can buy really good gas from VCs. Some VCs can kill your company. Some VCs can propel your business forward. And some VCs will leave you alone.

So choose your gas wisely when shopping for the VC variety. And fill up when you’ve got a half tank and you are passing by one of your favorite stations.

Product Idea: Reverse Engineering VC Investment Strategies

The other day I found myself on a VC website. I went to the portfolio page, looked at all of their investments and from that inferred what that firm’s investment strategy was by sector, stage & geography.

This is not a simple thing to do, but it can be done. It helps that I’ve been working in the VC sector a long time and understand a fair bit about VC firms and how they invest. But honestly anyone can do this if they spend enough time distilling the key facts about each and every investment and then looking at these facts across the entire portfolio across time.

Venture capital firms don’t do a great job on their websites of explaining what they invest in and what they do not invest in. Some of that is most VC websites aren’t particularly great to begin with. Some of that is investment strategies change and evolve over time. Some of that is VC firms tell themselves they do one thing but actually do another.

This is frustrating for entrepreneurs. They send me an email thinking their investment is a perfect fit for USV and then they quickly get an email back from me saying “this is not a fit for USV”. It drives them crazy.

The very best way to know what VC firms invest in is to look at what they have invested in, particularly recently (the past few years).

So an automated tool that crawls VC websites, pulls the links to each and every portfolio company, categorizes these investments by stage, sector, geography, and ideally a host of other things, would be incredibly useful.

There are a few things that will be tricky about doing this. Figuring out when the VC made the initial investment is one of them. You look at Etsy on the USV portfolio page and you might think “USV invests in late stage marketplace businesses” but the fact is that we made that investment in early 2006 when Etsy was less than a year old. The correct determination would be “USV invests in seed stage marketplaces that have launched and are getting good traction.” A good way to solve this issue is to also crawl other websites, like Crunchbase, where you can triangulate to figure out when the initial investment was made.

It is also important to look at the data across time to see how the VC firm’s strategy is evolving. Starting in 2010, USV raised an Opportunity Fund and we will now occasionally make late stage/growth stage investments. We don’t do it very often, but we do it. Picking that up will be tricky unless you time sequence the data.

If such a tool existed, then an entrepreneur could point the tool at his/her website, generate some data about stage, geography, and sector, and then generate a list of VC firms that are good targets. The list could also generate a list of firms that have made competitive investments and should be avoided.

I honestly don’t think this would be that hard to build. And I think entrepreneurs who are going out to raise capital would find it incredibly valuable. There isn’t a huge market for such a product, but there is a market. The PWC Money Tree report says that 4,356 startup investments were made in 2014. So I imagine that somewhere between 5,000 and 10,000 entrepreneurs are going out to raise VC money on an annual basis right now. If we take the middle of that range (7,500) and assume that an entrepreneur would pay $100 for such a report (probably a lot more but I’m being conservative), then the total available annual market for a service like this would be $750,000 a year. If you could reach 20% of that market, then you have $150,000 a year of income. This is the perfect lifestyle business for someone. Hopefully they are reading this blog.

Deliberation

Wikipedia has this to say about Deliberation:

Deliberation is a process of thoughtfully weighing options… Deliberation emphasizes the use of logic and reason as opposed to power-struggle, creativity, or dialog. Group decisions are generally made after deliberation through a vote or consensus of those involved.

I’ve always liked the notion of deliberation and deliberate decision making. I particularly like the notion of using logic and reason as opposed to power-struggle.

Deliberation is the process we use to make decisions at USV. We use our weekly Monday Meetings (something many/most VC firms do) to facilitate the deliberate decision making process. Though it can be frustrating to me at times, the use of “power” or tenure in our firm is not particularly effective. A logical and reasoned argument works much better. Including when it is made against you.

We don’t vote at USV. We use consensus after deliberation to make decisions. The trick to making that work is forcing a decision. The market often forces that on us and, frankly, that is quite helpful. But even without the market forcing our hand, we have developed a sense of urgency in our decision making. Our culture doesn’t like to allow decisions to hang out there. So we discuss, deliberate, and decide.

Partnership driven decision making is not easy. Having a “decider”, as George W Bush liked to say, is a lot easier. But I’ve been working in partnerships for about thirty years now so it’s the way I’ve always worked. And when you get the process right, in our case discuss, deliberate, and decide, it works quite well.

Kingpins 2015

Insite is a great program that connects graduate students at leading universities to the startup community around them. It started in NYC and has been connecting graduate students at NYU and Columbia to the NYC startup community for well over a decade. It is now active in other startup communities around the US.

They raise money each year for their NYC programs with a bowling event called Kingpins. Startup companies and VC firms buy lanes and half lanes and the result is a fun night of eating, drinking, and bowling. The startups and VCs mingle with the Insite fellows and all sorts of good things happen.

This year’s event is Monday, April 13th, from 6pm to 9pm, at Chelsea Piers. Half lanes are $1000 and full lanes are $1800. If you are a VC firm and want to support the local community, Insite, and meet startups, you should buy a full lane. If you are a startup and want to drink beer with VCs, think about a half lane. If you are just a regular community member and want to joint the fun, you can buy a single ticket for $150.

The details and tickets are here.

Video Of The Week: My Chat With Jason

I’ve known Jason Calacanis for twenty years. We met when he was in his early 20s and I was in my early 30s. A lot has happened in those twenty years and Jason and I sat down to talk about that at his Launch Festival last week in San Francisco. It’s a long talk, almost 60mins, with no Q&A from the audience. We cover a lot of territory and I was as candid as can be with Jason. I think this chat reveals a lot about where my head is at right now, which is a credit to Jason and our long friendship.

Numbers Can Ruin A Good Story

As I was reading Josh Kopelman‘s excellent post on the seed boom and Series A bust, I got thinking of some words of wisdom Mike Arrington once shared with me. He said “numbers always ruin a good story.”

What Mike meant by this is you can raise a seed (or Series A) on a story. But at some point, you will have numbers; users, user growth, revenues, and revenue growth. You will also have a burn rate. And those numbers will become the thing you are judged on and your nice story will be “ruined” by the numbers.

Now this is not always true. You might be one of the few entrepreneurs on a real rocket ship and your numbers will be your friend. If that is true, raise while the numbers are great. Because they might not always be.

But, particularly at the Series A stage which Josh’s post is all about, the numbers aren’t always so great. And your story will conflict with the numbers. And so you’ll have to change the story to reflect the numbers. Because you can’t change the numbers to reflect the story you really want to tell.

It’s a painful experience. But as Josh explains, it’s like skinning your knee as a child. Painful but necessary.