Posts from VC & Technology

Why Capital Markets Matter

On a day when it is likely that the US stock markets will open down and Asian markets are in free fall, it is worth taking a second and talking about why capital markets matter and why they don’t.

If your business consumes capital and needs more of it, then changes in capital markets can affect you.

If your business produces cash flow and you can finance your business, then changes in capital markets are not likely to affect you.

This is one of many reasons that I like to see our portfolio companies get to break even and ideally producing cash flow.

I don’t remember when I said this, but I am glad I did.

Aiming Blog Posts

I got a note yesterday from a CEO I work with asking if a specific blog post was aimed at him.

I replied and told him that I try very hard not to aim blog posts at anyone or any company. 

Of course I have those temptations from time to time but I feel that using this blog as a way to send a message to someone or some company is not appropriate and I don’t do that.

I am certain that people will read stuff on this blog and think “that is about the company I work at” of “he is taking about our CEO.”

I would like to make it clear that while it’s easy to see why people would think that, that is not what is going on.

I work with a lot of companies and we see many more that we don’t end up investing in and working with. They share common traits and we see many patterns that emerge. I like to write about those patterns and when I do that I’m writing about something that I see in many companies. Your company may exhibit those characteristics but I am not writing about a specific company.

Alphabet Soup

So yesterday, out of the blue with no leaks no speculation & no anticipation, Google goes and reinvents itself.

How does the most important company in the world (note I did not say most valuable), do that?

I have always had a tremendous amount of respect for Larry Page and Sergey Brin and the senior team they surround themselves with. When it really matters, they do things right and get things right.

The way I see it, Google is the cash cow that finances all the big bets Larry and Sergey are making inside Alphabet. The public markets get the transparency of seeing how the cash cow is performing and how the entire holding company is performing.

Think about it this way. For $445bn, you get $70bn of cash, Google, which does $70bn of revenue and produces $20bn of operating cash flow (probably more now that is it not going to burdened by all of these other investments), and all of these big bets, including Google Ventures and Google Capital, which are about the biggest investors in the VC sector right now.

That’s what you got when you bought Google last month, but now it is a lot clearer what you are getting.

You could easily make the argument that buying Google at $445bn gets you all of these big bets for free because the cash cow is almost certainly worth the $375mm of enterprise value that the market is putting on it.

Makes me think seriously about going out and buying our family some of that alphabet soup. I think its going to be good.

Been There Done That

I saw the TechCrunch blurb about Blockfeed this morning and my immediate reaction was “we tried that.” Almost a decade ago, we invested in Outside.in which was trying to do something very similar to Blockfeed.

Outside.in didn’t work but that doesn’t mean Blockfeed won’t work. The volume of hyperlocal content that is created today is likely an order of magnitude larger than what was available to serve up a decade ago. And geotagging capabilities have improved significantly in the past decade as well. And consuming hyperlocal content in a feed on a geolocated device is way easier and more common today than it was a decade ago.

So I wish Blockfeed well in their attempt to build a hyperlocal aggregated news service. The idea appeals to me as a user as much as it did ten years ago.

But it doesn’t appeal much to me as an investor. Because I’ve “been there done that.” And the emotions of trying something, working really hard on it, and coming up empty can get in the way of an investor’s willingness to try something again.

I know that I should get over this tendency to reject investment ideas that I’ve tried and whiffed on before. You could have tried streaming video in 1999, lost everything on it, and then passed on YouTube when it came around, and that would have been a mistake. You could have tried delivery services in 1999 (we did), lost everything on it (we did), and then passed on the latest batch of delivery services and that might be a mistake.

But even though I understand that rationally, it doesn’t help with the emotional aversion to trying something again that didn’t work last time. And venture capital investing is not a detached cold hyper-rational exercise. It is a deeply emotional and connected experience. And thus the reluctance to go there again.

Go East Young Man (or Woman)

Here’s a fun post by Henry Ward, founder and CEO of our portfolio company eShares, about raising money last year.

From Henry’s post:

We were 0 for 21 with Silicon Valley VCs. I never got close. Most of the big firms wouldn’t even meet. A few had an associate do a Skype call even though we were 20 minutes away.

After 21 meetings in SV, I took a Hail Mary trip to the east coast and met with 3 funds. All 3 invested.

Thank god Henry came east. We are hugely excited about the company he’s building.

Henry also makes some great observations about the fundraising process. I like this one a lot:

1. Fundraising is a filtering exercise, not a popularity contest.

I could tell within 5 minutes of meeting an investor whether they would invest. Investors who invested were excited about eShares before we met. They either saw the vision and liked it. Or they didn’t.

Most didn’t but met me anyway. They spent the entire meeting hoping I would convince them eShares was a good idea. I never did.

Excited investors (and the ones who invested) were different. They didn’t let me pitch. Instead, they asked questions to assess risk. They tried to find reasons not to invest. That is the pitch-paradox. The investors who won’tinvest will ask you why they should . The investors who will invest ask you why they shouldn’t. Your job is to make sure you don’t have reasons that they shouldn’t.

Fundraising is simple: find investors that get excited about your company. It is a filtering exercise. Too many founders believe they have the wrong pitch instead of realizing they have the wrong audience. On that note…

You’ve now read half the post here at AVC. To read the rest, go here.

Anxious Investors

Anxiety is something all investors feel at one point or another. Investing is a mix of greed and fear. When things aren’t going great, anxiety sets in.

In public equity when you get nervous about a stock, you can usually sell the position and move on.

In private equity, you are stuck with the investment. So anxiety sets in.

Entrepreneurs might mis-diagnose anxiety as something else. If your investors are all of a sudden meddling in the business, you might be seeing anxiety. If your investors are asking for endless amounts of data, you might be seeing anxiety. If your board meetings have become tense and difficult, you might be seeing anxiety.

You can’t just suggest they take a pill and chill out. Though I’ve seen entrepreneurs do that before.

Here are a few suggestions for managing anxious investors

1) Increase the frequency and duration of the communication. There is nothing that amplifies anxiety like a lack of communication. So do the opposite. Overcommunicate.

2) Have a frank and candid conversation with your investors about the source of their anxiety.  Getting them to articulate what they are worried about will help a lot. Then you can address the issues directly.

3) Get more face time with the rest of an investor’s firm. Often the anxiety comes from the investor’s relationship with and place inside of their firm. This is particularly true of junior partners or associates. Offer to come talk at the weekly team meeting. Or suggest that an investor bring one of their colleagues to a meeting. This one can backfire because if things are truly messed up you might amplify and multiply the anxiety inside the firm. But if you believe the anxiety is misplaced, this approach can be helpful.

4) Get some independent directors on your board. If your board is full of investors and you don’t have any independents, you are setting yourself for an anxious board. Get investors on your board who are less susceptible to get anxious when things go wrong and the dynamic of your entire board will improve.

5) Fix the problems in your business. Nothing helps to reduce the anxiety level in an investor than strong performance.

I am an anxious investor myself. I was worse when I was younger and everything was riding on my performance. I’ve eased up over the years. But I still wake up in the middle of the night anxious about a particular company/investment. It’s how I’m wired up. And I think its part of what makes me a good investor. It is also what makes me potentially a problem. I try to be self aware of the anxiety and manage it so it doesn’t impact our portfolio companies. But I know it can and it does.

Entrepreneurs need to learn how to manage anxious investors. It’s an important skill that will come in handy many times.

The No Hands Syndrome

Last week I saw this tweet from Dan Primack who covers the VC sector for Fortune:

I replied to it and I also mentioned it in a comment thread here at AVC recently.

Here’s what I can’t reconcile.

Bitcoin/Blockchain is one of the fastest growing sectors in startupland. Here’s a chart from VC Tom Tunguzblog.

fastest_growing_investment_categories

I know that measuring something using y/y growth rates can be misleading because of the small numbers involved. But Bitcoin is the fastest growing area in startup investing over the past three years.

And yet not one VC in a room full of them (90 of them) raised their hands when asked how many would invest in a bitcoin startup.

Maybe the distinction is bitcoin vs blockchain. I understand that. But bitcoin and blockchain are joined at the hip. You don’t get one without the other. So I’m still scratching my head.

But I do know one thing. When not one hand goes up in a room full of VCs, go there. It is going to be profitable.

Maybe They Do Understand Your Business

Farhad Manjoo has a piece in the NY Times discussing something we’ve been talking about ad nauseam here at AVC in the past year or two, namely that venture backed tech companies are waiting much longer to go public and in the process creating a “private IPO” market which in turn is increasingly putting huge valuations on a large number of venture backed companies, including a bunch of USV portfolio companies.

There is an unfortunate quote in Farhad’s post which suggests that the public markets are clueless:

If you can get $200 million from private sources, then yeah, I don’t want my company under the scrutiny of the unwashed masses who don’t understand my business

First, the public markets are not “unwashed masses.” They are full of very sophisticated investors who, I suspect, do understand these businesses very well.

It is true that Wall Street will not be tolerant of missed expectations. It is true that Wall Street may focus too much on short term numbers. It is true that you may not be able to control what numbers Wall Street decides to obsess over when it comes to valuing your company.

But I think tech sector is making a huge mistake in thinking that they know their companies and how to value them better than Wall Street. That kind of thinking is arrogance and pride comes before the fall.