Posts from VC & Technology

Community Ownership Of Internet Applications and Services

I kicked off the second topic of the week discussion on usv.com today with a post about community ownership of Internet applications and services.

If you want to read the post and/or join the discussion, go here and do that.

Here’s a teaser to get you interested in doing that:

With more and more web and mobile applications deriving their value mostly or completely from their user base (Facebook, Twitter, eBay, Etsy, Reddit, Kickstarter, Uber, etc, etc), there is a growing sense that the community could or should have some real ownership in these businesses.

I go on to explain a bit about why this has not happened except in very rare cases and what needs to get figured out to make it happen more frequently.

There’s a lot going on, including approaches unleashed by blockchain technology, to make this easier to do and we think this is a trend worth watching and discussing. That’s why we made it the topic of the week.

More On Seed Rounds

There was a good discussion in the comment threads to yesterday’s post. This comment from Rick made me think a follow-up post would be helpful.

Seed, Later Stage, etc. all mean different things to different people. That’s where the confusion comes from.

I wrote a post explaining how we think about seed last June. Here’s the important part from that:

The first step you need to climb is building a product, getting it into the market, and finding product market fit. I think that’s what seed financing should be used for.

The second step you need to climb is to hire a small team that can help you operate and grow the business you have now birthed by virtue of finding product market fit. That is what Series A money is for.

The third step you need to climb is to scale that team and ramp revenues and take the market. That is what Series B money is for.

The fourth step you need to climb is to get to profitability so that your cash flow after all expenses can sustain and grow the business. That is what Series C is for.

The fifth step is generating liquidity for you, your team, and your investors. That is what the IPO or the Secondary is for.

At USV, we like to invest in a company once they have launched a product and we think that they have either found product market fit or they are well on their way. If you think about the “five steps” that leads us most often to invest in the Series A stage.

But occasionally one or two people, working nights or weekends, or working in an accelerator, or working for themselves and bootstrapping, are able to get a product into the market, get adoption, and get to or close to product market fit. They don’t need $3mm or $5mm, they need $500k to $1.5mm to finish off the search for product market fit, allow them to work full time on their project, and hire a few people to help them improve the product. That is the kind of seeds we like to do at USV.

Here are some examples:

Delicious – Joshua Schachter had built Delicious working nights and weekends, launched it, got traction, and needed $1mm to leave his day job, start a company, hire some people, and scale the product.

Tumblr – David Karp and Marco Arment built Tumblr while doing consulting to others. Tumblr took off and they needed to stop doing consulting work so the two of them could focus 100% of their time on Tumblr. Spark and USV each invested $300k to help them do that.

Etsy – Rob, Haim, and Chris built Etsy themselves, launched it, and were scaling the business. They had raised a little money from two local entrepreneurs but they needed more to keep Etsy growing. We participated in a $600k seed round to help them do that.

MongoDB – Dwight, Eliot, and Kevin had invested their own money and time getting the 10gen “stack” into the market. They wanted a financial partner to help them continue to fund the effort to find product market fit. USV provided seed capital so they could do that. They ended up finding product market fit for the database, MongoDB, but not the rest of the 10gen stack and they refocused the business entirely on the database and then were able to demonstrate product market fit and get to a Series A.

Foursquare – Dennis and Naveen built the initial version of Foursquare themselves. They launched the product and started to get users who liked the product, including a bunch of folks at USV. We liked what they were up to and thought they were close to nailing product market fit. We led a seed round that allowed them to hire a bunch more engineers who essentially rebuilt the product so it could scale.

Kickstarter – Perry, Yancey, Charles, Luke and maybe a couple others got the initial Kickstarter service launched and struck a chord with it. They had raised some capital from friends who helped them get the product into the market. USV led a seed round so they could hire a team and scale into the market.

Amino – Ben and Yin built Amino, went through Techstars, got their iOS product into the market, and proved that there was a market for native mobile communities. We led a seed round to enable them to hire a few more people, get an android app into the market, and nail product market fit.

OneName – Ryan and Muneeb built and launched OneName while they were in Y Combinator. We saw what they were doing and liked it a lot. We led a seed round to enable them to flesh out the product and build out the initial use cases.

Those are not the only seed investments we’ve made at USV. We’ve made over twenty seed investments over the life of USV. But these are good examples and I think they do a good job of explaining what it is we like to fund at the seed stage at USV.

Some Thoughts On Seed Investing

We (USV) raised a new venture fund at the start of last year and started investing it in the spring of 2014. It is called USV 2014. We have made six investments in it so far and five of them are seed investments. That’s a very high ratio for USV and we do not expect that ratio to continue over the life of the fund. In fact our next investment will be a classic Series A so we are already lowering the ratio. But it is a bit of a return to form for USV as half of the initial investments in our first fund (USV 2004) were made at the seed stage.

In our core early stage funds (as opposed to our Opportunity Funds), we make initial investments at the seed, Series A, and Series B stages. In an ideal world for USV, there would be a normal distribution of these entry points with the highest percentage in the Series A stage. Over the entire history of USV, that is very much true. But on a fund by fund (or year by year basis) it varies a lot. It is mostly us reacting to the market. When the later stage rounds are too expensive on a risk/reward basis, we tend to move earlier. And when we can get good risk/reward opportunities in the Series A and Series B stages, we tend to move later. The downturn of 2008/2009, for example, led us to move a bit later in our 2008 fund because we could invest in more mature (and therefore less risky) opportunities at attractive prices.

The current market environment has pushed us to invest earlier. Some of it is that the Series A and particularly the Series B valuation environment has gotten very expensive relative to the risk as we see it. And some of it is that we are in a period of flux, where it is not entirely obvious to us where the next big things are going to happen. We have some ideas, of course, and I have been exploring them here at AVC and we have been exploring them as a team on usv.com. We think that in times of flux it is attractive to make a bunch of smaller seed investments in areas we think are going to emerge as important in a few years.

So that explains the move to seed as our primary entry point last year. I think it will continue this year but maybe moderate a bit as some of these developing markets mature and become more investable at scale.

Ok. Now that I’ve explained why I’m thinking about seed investing a lot these days, I’d like to talk about how we do seed at USV. Here are the important points:

1) We do not take a shotgun approach. We do not view seed investments as “options”. We only make a seed investment if we have as much conviction on the team and the opportunity as we would at the Series A round. We are as committed to our seed investments, both in terms of the time we spend with them and the willingness to follow-on in them. They are core investments with as much stature in our portfolio and in our firm as any other early stage investment. This is critical to understand. And it is not true of many (most??) VC firms who make seed investments.

2) We like seed investments in teams and opportunities where they have built and launched a product already. We don’t like investing in a concept or participating in a round where the uses of the capital will be to build and launch a product. This means the vast majority of seed rounds are not a fit for us. We pass on a lot of seed stage opportunities because it is “too early” for us. That is a comment on the specific opportunity however, and not seed stage investing as a whole. This confuses a lot of people. They tend not to think of USV as a seed investor when in fact we do make a lot of seeds (over 80% of last year’s investments, for example).

3) We will often lead the Series A (and sometimes Series B) in companies where we did the seed investment. We led both the Series A and Series B in Etsy and we co-led (with Spark) the Series A and Series B in Tumblr. We were seed investors in both companies. We continue to do that where it makes sense for the founders and USV. That is not a requirement or an expectation, but it does happen and I believe it is a very good thing in the right circumstances.

4) We like to participate in syndicates in our seed investments. We don’t focus too much on ownership at the seed stage. We do focus on the investors coming together around a project. We like partnering with smart angels, seed funds, and even other VCs, if the other VCs are aligned with us on how they are thinking about the particular seed investment. Our investment with Spark in the seed round at Tumblr is a good example of two VC firms partnering up at the seed round and doing a good job working together and scaling into the opportunity.

USV will never be confused with a seed fund, but we sometimes act very much like one, except that we can and will invest 20-30x our initial investment over the life of the company. That combination (a committed and active seed investor + deep pockets) is unusual. You can get one of those two a lot. But rarely both. So if you are working in an area that is interesting to USV, and if you have launched something into the market already, and if you are doing a seed round, please do reach out to us. We are in the business of making seed investments and doing a lot of it these days.

Topic Mining AVC

So I’m on sitting on the couch waiting to go out to dinner with the Gotham Gal and friends last night, and wasting time by scrolling through Twitter and I came across this tweet:

I didn’t have time to check it out, so I favorited it and made a note to come back to it. And I did that this morning.

Bugra is a Data Scientist ; he likes machine learning, data, Python and NLP, not necessarily in that order. He did some data science on this blog, starting on September 23rd, 2003, which is when I wrote the first post here.

Here is his post. It’s worth a full read but I’m going to gank a few images from it to summarize his findings for those who don’t feel like clicking over to it (you should).

Bugra mined 22 topics based on things I wrote most about and then did some analysis on those topics. Here is a frequency graph of them:

topic-frequency

But of course my interest in these things rises and wanes over time.

I mentioned at year end 2014 that I thought social media had become uninteresting. Well the data on what I write about proves that:

social-media-topic-trend

Sometimes it’s a lack of interest. But it could also be a conscious decision to stop writing about something. As the readership of AVC grew, it became a lot less personal. That was a conscious decision on my part.

family-topic-trend

Not everything has gone down over time.

I’ve become a policy wonk (thanks to my partner Brad mostly):

internet-regulation-topic-trend

And some topics just reflect the changing landscape we operate in, like this one:

mobile-apps-topic-trend

And some topics reflect the changing patterns of my blogging, like the rise and fall of MBA Mondays:

company-management-topic-trend

Anyway, I found Burga’s post fascinating. I would like to see him add a few more topics, like bitcoin/blockchain, education, healthcare, and crowdfunding. Those are all things that I think a lot about and I’d be very curious to see how my interest in them has risen and/or fallen over the years.

In closing, I’d like to thank Burga for his work. It is valuable and revealing to me. Thank you Burga.

The Reboot Podcast

A few weeks ago Jerry Colonna and I got on Skype and had a 40min chat about startups and what goes on in them. As most of you know, Jerry and I started a venture capital business together in the mid 90s and have been close friends since then. So this is a public conversation between friends, which is usually a recipe for a good discussion.

The first five minutes is some stuff about Jerry’s new business, Reboot.io. It’s worth listening to, but if you want to skip it, click on the soundwave at 5mins in and you will get to the start of our conversation.

Ethics and Morals

At the end of the Berlin talk I posted yesterday, there was a question about ethics. It was directed at startups and how they build a culture of ethical behavior.

But ethics and morals is an issue that extends beyond startups. It is an issue for all businesses and business people.

The Gotham Gal recently told me a story about one of her portfolio companies. I am going to leave names out of this post because I don’t want to get in the middle of something that, at least right now, is between the parties involved.

Her portfolio company went out to raise an early Series A for a business that was in market and ramping. They met with a VC who passed on the deal. A few months later they saw a competitor emerge in the market with an identical business plan and a website that was eerily similar to their own. The CEO of the competitor was the son of the VC who passed on the deal. And the VC was the seed investor in the competitor.

There was no NDA or non-compete between the parties involved so it is not clear that anything illegal transpired here. But it sure feels unethical to me. And I bet it feels unethical to you too.

At USV, we work very hard to avoid these sorts of things. We do not start or incubate businesses. We do not have EIRs sitting in pitch meetings while they think up their next startup. We put big moats around our existing portfolio and try hard not to invest in anything competitive. If we are looking at investing in a competitor, we let the entrepreneur know that before we meet with them.

I am sure we have messed up a little bit here and there over the years on these rules. But we try really hard to live up to our ethics, values, and morals and I think we do a decent job. And we get to see great deals because of that.

This unnamed VC will not see great deals if this behavior continues. You can’t behave this way for long before the market becomes aware of it. So even if the legal system can’t take care of this situation, I believe the market will. As it should.

Asking Questions vs Positing Answers

Both Benedict Evans and I wrote posts about the year we are now in, 2015, as we enter it.

Here is mine

Here is Ben’s

My approach was to take a swing at some predictions. They generated a ton of conversation and are still generating it. It seems that people really love to debate predictions.

Ben’s approach is to put forward a bunch of questions that will likely be answered this year. In many ways, his approach is more helpful. He raises the issue without giving the answer, forcing all of us to think about how to answer it. I suspect Ben has opinions on how all of these questions will be answered, but he left his opinions out so that we can form our own.

That’s not entirely true however. My favorite of his questions was this one:

Is this the year that the Bitcoin blockchain starts producing real consumer products? If so, they’ll be on mobile first

And there you can see his opinion coming out in the latter part of that question. And I agree with him, bitcoin is easier to grok and use on mobile. A native mobile application using bitcoin and the blockchain does seem likely to be the first killer application for this technology. I referenced that a bit in this post from a few months ago.

I don’t regret taking a shot at predicting the future. That’s what we do all day long to be honest. And if we end up with a career batting average of .333, we will go to the hall of fame. I am sure I will be wrong on many (most?) of my predictions. But that’s how it goes. Asking the questions is safer for sure. But answering them is more fun. So when you look at Ben’s questions, try to answer them. It’s a good exercise for everyone to undertake as we enter the new year.

Broken Cap Tables

A “cap table” is a schedule of all the shares outstanding for a specific company. Here’s an MBA Mondays post I wrote back in 2011 on the subject of cap tables. If you want to know how much of a company you own, a cap table is the best way to figure that out.

Cap tables are almost always prepared and kept in spreadsheets, usually excel, but also increasingly google sheets. And, it turns out, they are often wrong.

Henry Ward is the founder and CEO of a company that is aiming to fix that called eShares. Last month USV led a Series A round in eShares and my partner John Buttrick wrote a bit about that investment today on the USV blog.

The reason I tell you this is that yesterday Henry wrote a great post about broken cap tables that everyone in the startup world should read. Here are the four big takeaway’s from Henry’s post:

  1. Most cap tables are wrong
  2. Most investors don’t track their shares
  3. Note holders are often forgotten
  4. Employees suffer most

How does Henry know this? Well part of eShares’ business is converting cap tables from spreadsheets into their cloud based application and reconciling everything to make sure it is correct. They onboard about 100 companies a month right now and they see a ton of cap tables.

Tracking everyone’s ownership in companies is a perfect application for a cloud-based network of owners and issuers. If every company used a platform like eShares, and if all these platforms talked to each other, if there was a common identity standard, then as you move from one company to another over your career, collecting equity along the way, you could access and manage all of your ownership interests in a single dashboard.

This is a service that is incredibly useful to startups and angel investors and VCs. But as Henry outlines at the end of his post, it will ultimately help employees the most. And, as we have discussed here before, employee equity is certainly more broken than cap tables are. Fixing that is a worthy mission for a startup and that is what Henry and his team intend to do.