Posts from VC & Technology

The European Startup Market

At USV, we’ve been investing in European startups since 2008. Currently 22% of our active portfolio is in Europe. Since 2010, we’ve invested in 47 companies (roughly 8 per year) and 11 of them have been in Europe (roughly 2 per year). So over the past six years, roughly 25% of our investments have been in Europe. In 2015, we have made nine investments to date (a few have not yet been announced) and four of them have been in Europe (45%).

So what’s happening here?

Well first, we have developed an investment presence in Europe. While we don’t have an office in Europe we do have fourteen portfolio companies and every USV partner has at least two European portfolio companies. So we all travel to Europe regularly and we look at new investments when we are over here.

Second, we have developed a number of strong relationships with European venture capital firms. Serving on boards with other VCs is the number one way you build relationships in the VC business and we’ve done a lot of that with European VCs.

Third, European entrepreneurs have, for the most part, abandoned the approach of building domestic businesses in their home markets and are now targeting global customer bases from day one. That means the potential scale of European startups is as large as US startups.

Fourth, there has been a wave of new European VC firms started in the past couple years. Most of these VCs got their start in older legacy VC firms and they are now opening up shop on their own and operating in a more entrepreneurial “silicon valley” style. This reminds me very much of the period ten years ago in the US when USV, Emergence, Foundry, Spark, First Round, and a number of other high quality VC firms opened their doors in the US. This post by a leading venture fund investor in the US talking about the new European VC funds is right on the mark.

Fifth, European entrepreneurs have made money for VCs. There have been 24 billion dollar plus exits in Europe in the last five years.

When you take all of that and combine the fact that there is probably a hundredth of the VC dollars at work in Europe vs the US, you get a great market to invest in.

The Gotham Gal and I are here for the next few weeks of mostly vacation but we will get to see a few of our portfolio companies. Yet another reason to invest in Europe!

A Different Approach To VC

I wrote this to my partner the other day. I’m not going to provide the context. It doesn’t matter. It could have been about almost anything in the startup sector right now.

“the biggest thing that is wrong with the startup sector right now is entrepreneurs and their teams are too focused on valuation and not enough focused on business fundamentals”

There are a bunch of reasons why we’ve ended up in this place and my friend Bryce talked about some of them in his talk at XOXO. He posted the transcript of his talk this week. It’s a good read.

But in case you aren’t going to click through and read it, here are a few choice quotes from it:

  • I think there’s something that comes with being an outsider in an insider’s game.
  • Once you start taking other people’s money, it becomes very difficult to stop taking other people’s money.
  • they are building for investors and not necessarily building for customers
  • So we can’t talk about venture capital without talking about Unicorns, right?
  • 99.93 percent of companies are using a product, venture capital, that really doesn’t work for them.
  • you have entrepreneurs building companies, building customer bases, designing interactions with their users in order to make themselves appealing to venture capital
  • Turns out when you invest in things that VCs won’t, you end up with a bunch of companies that VCs don’t want to invest in.
  • what if we surrounded our founders with other people who weren’t focused on fundraising and valuation, but focused on revenue and customers?
  • Rather than make people move, we decided to let people bloom where they are planted.
  • The reality is we tried and weren’t able to pull it off.
  • Just last week, our largest investor passed.

Bryce is not having an easy time raising a dedicated fund. Neither did Brad and I when we raised the first USV fund in 2004. We got 20 passes for every yes.

I’m a contrarian and that tells me that Bryce is on to something. As you might imagine, the Gotham Gal and I said yes when Bryce asked us.

A Critique of VC, Founders, and Tech

This talk by Maciej Ceglowski (the founder of Pinboard among other things) is mostly a discussion of ad:tech and privacy issues. It raises a number of interesting points and echoes a view of ad blockers that my partner Albert has convinced me is correct (that they are a logical extension of the user agent concept embedded in web browsers).

But the most biting critique is saved for the end of the talk and aimed at the VC and founder communities and the tech sector more broadly.

Our venture capitalists have an easy answer: let the markets do the work. We’ll try crazy ideas, most of them will fail, but those few that succeed will eventually change the world.

But there’s something very fishy about California capitalism.

Investing has become the genteel occupation of our gentry, like having a country estate used to be in England. It’s a class marker and a socially acceptable way for rich techies to pass their time. Gentlemen investors decide what ideas are worth pursuing, and the people pitching to them tailor their proposals accordingly.

The companies that come out of this are no longer pursuing profit, or even revenue. Instead, the measure of their success is valuation—how much money they’ve convinced people to tell them they’re worth.

There’s an element of fantasy to the whole enterprise that even the tech elite is starting to find unsettling.

We had people like this back in Poland, except instead of venture capitalists we called them central planners. They too were in charge of allocating vast amounts of money that didn’t belong to them.

They too honestly believed they were changing the world, and offered the same kinds of excuses about why our day-to-day life bore no relation to the shiny, beautiful world that was supposed to lie just around the corner.

Even those crusty, old-fashioned companies that still believe in profit are not really behaving like capitalists. Microsoft, Cisco and Apple are making a fortune that just sits offshore. Apple alone has nearly $200 billion in cash that is doing nothing .

We’d be better off if Apple bought every employee a fur coat and Bentley, or even just burned the money in a bonfire. At least that would create some jobs for money shovelers and security guards.

Everywhere I look there is this failure to capture the benefits of technological change.

So what kinds of ideas do California central planners think are going to change the world?

Well, right now, they want to build space rockets and make themselves immortal. I wish I was kidding.

I don’t agree with all of Maciej’s critiques, but he is directionally correct, particularly the bit about profits, revenues, and valuations. He nailed that. There is more truth to his critique than many would like to admit. That’s why I am copying and pasting it here. It’s important to look at yourself sometimes and think you could use some work.

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 which was trying to do something very similar to Blockfeed. 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.