Posts from VC & Technology
As part of the hiring process for our two year analyst position, we asked everyone who has worked at USV in an investment team role to make a two minute video (the same thing we ask applicants to do). We asked them to answer these two questions – when did you join USV and how has your perspective on tech changed since then? Here’s a compilation of all of the two minute videos. In its entirety it is about 25 mins long.
We are living in a time of great experiments. They are not happening in the lab. They are happening in the real world. And they are being financed by real people. We are witnessing the de-institutionalization of experimentation. We are returning to a time when anyone can be an inventor and innovator. Some of this has happened because of the explosion of venture capital, both in the US and also around the world. Some of this has happened because entertainment and culture has embraced the world of experimentation and innovation (Shark Tank, Silicon Valley). Some of this has happened because the tools for innovation and experimentation have become mainstream and anyone can use them.
I am not thinking of one thing. I am thinking of many things. I am thinking of The DAO. I am thinking of Bitcoin and Ethereum. I am thinking of Oculus getting financed on Kickstarter. I am thinking of the launch of equity crowdfunding for everyone in the US last week. I am even thinking of things like Theranos.
All of these things are great experiments that will produce great benefit to society if they succeed. But by their nature experiments often fail. They need to fail. Or they would not be experiments.
And one of the challenges with the de-institutionalization of experimentation is that some of these failures will be spectacular. Combine that with the idea that these experiments are being funded by real people and the idea that the world of media/entertainment/culture has injected itself right in the middle of this brave new world and you have the recipe for scandal. And scandal will naturally result in efforts to put the genie back in the bottle (Sarbanes Oxley, Dodd Frank). And these regulatory efforts will naturally attempt to re-institutionalize experimentation.
I find myself wishing we could keep the dollars invested and hype down when we do these massively public experiments. But the dollar/hype cycle is a natural part of being human. Some dollars are invested. We get excited about this investment. We talk it up. More people find out about it and more dollars are invested. More of us get excited about this investment and we talk it up more. Rinse, repeat, rinse, repeat and you get unicorns and distributed autonomous funding mechanisms entrusted with hundreds of millions before anything has even been funded. Eventually some of that gets unwound and the tape is full of red.
Don’t get me wrong. I am all for distributed autonomous organizations and the innovation behind them and in front of them. There isn’t much out there that I am more excited about. But I am also very fearful that this could end badly. And even more fearful of what may be foisted on us by well meaning regulators when that happens.
So let’s celebrate this incredible phase of permissionless innovation we are in. And let’s all understand that we will have many failures. Some of them spectacular. Money will be lost. Possibly hundreds of millions or billions. Let’s expect that. Let’s build that into our mental models. So when that happens, we can suck it up, deal with it, and keep moving forward. Because an open permissionless world of innovation that everyone can participate in is utopia in so many ways. The good that will come of it will massively outweigh any bad. But bad there will be. I can assure you of that.
I was in meeetings all day the past couple days and missed all the news coming out of Google’s big event.
So I am getting my friends Bijan and Nabeel to explain it all to me.
You can do that too by hitting the play button below.
I’m still not feeling great. So I’m taking the day off and posting a video from Disrupt featuring my partner Andy, Josh Kopelman (one of my favorite VCs), and one of Josh’s limited partners Chris Douvos. They discuss the challenges of operating in an environment with rising valuations and decreasing liquidity.
Small Ball is a style of play in basketball when a team sacrifices size/height for speed and shooting. The Golden State Warriors, the best team in the NBA this regular season, are a good example of a team that often uses this strategy.
As the venture capital business and entrepreneurs are increasingly bulking up in terms of fund sizes (VCs) and round sizes (entrepreneurs), I am decidedly a fan of small ball.
Many of our best investments at USV have been in companies that never needed to raise VC or only needed to raise one round. In these situations, the founders own/owned large stakes in their companies, often north of 50% for the founding team at exit. These companies focused on a revenue/business model at launch, they kept their headcounts low until they had scale/traction in their usage, and they reinvested the profits back into scaling the business instead of external capital. My favorite example of this is Indeed where USV had to beg the founders to let us invest, only did one round of venture capital, and exited for $1.4bn and is likely worth 2-3x that number as the business has scaled massively post exit. Kickstarter, DuckDuckGo, and Zynga are other good examples of small ball in action. Zynga did raise a lot of money but it went to the balance sheet and secondaries and never was used to fund losses.
Small ball also works well in VC. It is hard to return capital to your investors in the VC business. Exits are a long time in coming and you get diluted over time and even in the biggest exits (billion dollar plus valuations), you might only have proceeds of $100mm to $200mm. If you have a fund size in the $500mm to $1bn range (or larger!), you need many of these big exits to return the fund once. But your LPs want you to return the fund three times, or more. I could never sleep at night if USV were managing a billion dollar fund. I don’t know how we would ever get our LPs back their money plus a return. I know it can be done and has been done. But I don’t really know how it happens. Getting big exits is just so damn hard.
So in an era when VCs and entrepreneurs are going for bulk, I really like the opposite approach which favors speed and agility over pounding it inside. It allows me to sleep at night, which is not that easy in our business.
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.
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.
Benedict Evans tweeted out this chart yesterday:
We sometimes think of the shift to mobile as finished, or almost finished. It isn’t. pic.twitter.com/l5gaiMlaoU
— Benedict Evans (@BenedictEvans) March 12, 2016
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.