Posts from VC & Technology

Video Of The Week: The USV Berlin Conversation

For the second year in a row, USV did an event in Berlin in November and invited entrepreneurs to attend a moderated discussion. Our friends at Tech Open help us produce these events.

This year the USV partners who were able to attend this event were Brad, Albert, and John. The conversation was moderated by Ciaran O’Leary, who is one of our favorite VC co-investors in Europe.

Here’s the video of that moderated discussion. It’s long, at almost one hour, so you might want to chromecast this one to your TV and watch “on background.”

Mantra

Having a mantra for your work is helpful.

Mine is “the VC’s job is to help entrepreneurs realize their goals and dreams.”

That doesn’t mean that every VC should have that same mantra.

To each his or her own.

But the longer I work in VC, the more I see misalignment between investors and founders.

And misalignment gets in the way of getting somewhere.

The Evolution Of The USV Thesis (and usv.com)

USV is a thesis driven venture capital firm. Brad and I locked into that notion at the very start of our partnership in the summer of 2003. We decided that we would have a thesis, stick to it, and evolve it. And we have done that. We and the partners who have joined us over the years are very proud of that.

Our partner Andy has now written two blog posts outlining our thesis. He published the first one in May 2012 and he published an updated one yesterday. I encourage everyone to head over to the updated usv.com and read it.

The thing about our investment thesis it that it evolves over time. We stick to it but we evolve it. And we do it consciously. Writing it down forces us to be clear in our thinking and draw distinctions that matter. The evolution sometimes includes leaving a sector (like ad:tech which we have not invested in for almost ten years now). But mostly it involves adding new areas while maintaining others.

This chart from Andy’s post shows how we have evolved our thesis over time. This is a chart of active investments so anything we have exited or has shut down is not included in this chart.

ACtive_USV_Investments_by_Thesis_Over_Time

Andy’s post explains how we have evolved to this set of investment theses over time. This is where we are right now, but if there is one thing I am certain of, it is that this is not where we will be a few years from now. The evolution will continue.

Speaking of evolution, we have also evolved our website. It started out as an online brochure in 2003 when we started raising our first fund. Then in 2005, we turned it into a blog. I think we were the first VC firm to make our homepage a blog. But we didn’t blog that frequently on usv.com so the page was not that lively. We tried to fix that with a redesign we launched in 2009. That was a lot better but we still didn’t have enough action on the page so in 2012 we started a process to reimagine our website. That led to a linkblog that we launched in 2013. Ultimately that didn’t work that well for us either. So this summer Jonathan and Nick started hacking on another idea, which is to focus the home page on the topics that are most interesting to us right now.

Our topic centric website is now live at usv.com. We have a new design and color scheme. But mostly we have a new way of showcasing our thoughts and interests. I think it will work much better for us and hopefully for the entrepreneurs who show up at usv.com and want to know a bit about us. Give it a spin and follow some topics that you share an interest in with us.

Advice And Money

I was chatting with my friend Maurya yesterday. She runs a non-profit called ScriptEd and has been figuring out the raising money thing over the past few years. She said to me “I have found that a good way to get funding is to go in and just ask for advice.”

I chuckled and told her that there is a saying about VCs, “Ask a VC for money and you will get advice, Ask a VC for advice and you will get money.”

And I am guilty of this as much as any other VC. When it’s clear the founder only wants your money and has no interest in your advice, it is hard to get excited about the investment. When it seems that all the founder wants is your advice and isn’t worried about getting money, it makes you want to work with that founder.

Of course, the secret sauce of the investor:founder relationship is “advice AND money”. The way investors get paid for our advice is that we get to buy a piece of the founder’s company and go along for the ride. We pay for the right to give advice!

The easier part of this duality is the money part. There is a well understood system of how money is exchanged for equity upside. Founders and investors don’t have to figure that out.

The harder part is the advice part. Founders need to figure out the best way to get advice in a way that it is useful and actionable for them. Investors need to figure out how to provide advice that is useful to the founder. Because we are talking about two people communicating and building a relationship together, this means that each investor:founder relationship is going to be different and what works for one relationship is not likely to work for another.

It is also true that a founder might have dozens of investors in their company and getting advice from dozens of people all the time is overwhelming. So founders need to figure out which investors to focus on and that doesn’t always mean the ones who wrote the biggest checks.

What I have learned over the years from working with hundreds of founders is that you need to earn the right to be listened to and writing the check is not enough. You earn the right to be listened to by giving good advice. You also do that by not forcing the founders to act on your advice. You have to be OK with a founder deciding to ignore you or delay acting on your advice. You can’t take it personally. You have to keep being positive, supportive, constructive, and encouraging. Over time, if you turn out to be a good source of advice, you will see things you suggest being acted on. And you will see the founder reaching out for advice more frequently. You will become a trusted advisor.

Getting to that point is the holy grail of the investor:founder relationship. It can take years to achieve. Or it can never happen. When it does, it’s a special thing and it is the thing that keeps me in this game after thirty years of doing it.

Video Of The Week: Steve Jurvetson

I’ve taken to turning on the Bloomberg TV channel with the sound off in my home office. Yesterday I was working on some stuff and I saw Steve Jurvetson talking to Emily Chang. So I turned up the audio and listened. I don’t invest in the same stuff Steve does, but I respect his focus on areas that are “out there” and not in the conventional VC investment universe. That is a recipe for success. I also like his observation that five partners is about the max for a well functioning venture capital partnership. I totally agree with that.

Here’s the entire interview:

Power Law And The Long Tail

If you look at the distribution of outcomes in a venture fund, you will see that it is a classic power law curve, with the best investment in each fund towering over the rest, followed by a few other strong investments, followed by a few other decent ones, and then a long tail of investments that don’t move the needle for the VC fund.

But that long tail is comprised of entrepreneurs and their teams. People who have given years of their lives to a dream that was ultimately not realized.

And as I have written many times over the years on this blog, I spent the majority of my time on that long tail. This is irrational behavior if you think about fund economics, but I believe it is rational behavior if you think about firm reputation.

The best thing you can do for this long tail is find a good home for the portfolio company. That could be everything from a modest acquisition to an acqui-hire. If you have to do a shutdown, then I like to see it done on terms the entrepreneur can live with.

All of these actions require irrational economic behavior from the investor(s). The goal is to get an exit that everyone can feel good about. The goal is not to maximize the VC’s returns from a failed investment. Because it doesn’t matter to the fund economics one bit but it can matter a lot to the entrepreneur and his or her team.

The Blurring Of The Public And Private Markets

Five or six years ago, as the USV team was discussing the evolution of late stage financings and secondaries on the venture landscape, our partner Albert described something to us that was, in hindsight, very prescient. He said “there is no reason why there is such a bright line between public and private markets, we should have one market where the more a company discloses, the more liquid their security becomes” (or something like that). His point was that the only thing that really matters is how much information a company is willing to disclose.

We are increasingly seeing what Albert described to us come to pass. The ability to raise large sums of capital from public market investors has been available to privately held companies for a number of years now. There is no real difference between the public markets and the late stage growth markets in terms of availability of capital. That was not true a decade ago.

With the recent SEC adoption of Title III of the Jobs Act, non-accredited investors can start investing in private companies. There are limitations and reporting requirements which will certainly limit the adoption of Title III fundraising, but even so, we have crossed a threshold here that should lead to more individuals investing in privately held businesses over time.

Privately held companies are increasingly using electronic stock ledgers (like the one our portfolio company eShares offers) which allow them to easily manage a large and rapidly changing cap table, much like the function that brokers and transfer agents provide in the public markets.

So, as you can see, we are slowly witnessing the blurring of the lines between the public and private markets.

But maybe the biggest “tell” is the recent brouhaha over Fidelity’s public markdowns on its holdings of well known startups. One of the many reasons companies don’t want to go public is they don’t want to have to deal with a valuation that moves around all the time without their ability to manage it. Well guess what? If you raise from certain investors in the late stage growth market, you are doing that, even if you didn’t realize it.

I don’t think we will see less of these public markdowns. I think we will see more of them. And we VCs are now facing the choice of whether to markdown our portfolios in reaction to Fidelity’s markdowns or explain to our investors and auditors why we did not do that. Since our quarterly holding values don’t really matter to us (cash on cash returns are what matters), it’s easier to markdown than discuss why we didn’t do that.

It’s interesting and noteworthy that when the private capital markets got the benefit of large pools of capital coming in, that came with increasing transparency. Of course it did. We just didn’t realize that was going to happen. Staying private won’t shield you from the pains of going public. Because the lines are blurring between the private and public markets and we are in for more blurring and it will come faster in the coming years. Be careful for what you wish for, you may just get it.

Startup Physics

I have used the word “physics” to describe a few things here at AVC over the years. I am tempted to write a “textbook” on this topic as I have observed many “formulas” over the years that seem to repeat themselves again and again.

A few examples are this post on the relationship between monthly actives, daily actives, and concurrent users, or this one on the elasticity of paid vs free services. I also wrote one about the numeric relationship between creators, curators, and consumers on a platform but I’m having trouble finding it and linking to it right now.

Yesterday I suggested another to William Mougayar via Kik when he observed to me that valuation mania has emerged in the blockchain for financial institution space.

I told him that when you are looking at financial manias, the amplitude of the mania is inversely correlated to its duration.

I like to think of these manias as waveforms. When they build slowly they last longer. When they develop overnight, they dissipate quickly as well.

This rule also works pretty well for consumer internet services.

Software Is The New Oil

I was with some friends this weekend and one of them was talking about an investment committee meeting he attended and there was a discussion at that meeting about some of the threats out there in the macro investment landscape. One of them was “vanishing liquidity” and the significant change in net cash flows from the global oil sector. Oil producing regions have gone from being a massive cash generator to a relatively small one in the past few years. Now this could well be a temporary thing as the oil market adjusts to some new realities. This post is not really about oil, even though that word is in the title of this post.

As I pondered that, I thought about oil’s role as the thing that captured the economic surplus of the industrial revolution. You can’t run factories, railroads, trucks, etc without carbon-based products and in particular oil. So oil has been a cash/capital magnet for the wealth that the industrial revolution produced. Those that owned oil producing assets (or better yet, oil producing regions) sat back and collected the economic surplus of the industrial revolution and that has been a path to vast wealth and economic power.

What is that same thing in the information revolution? And where is cash piling up around the world? On tech company balance sheets, of course. Apple has $200bn of cash on its balance sheet and produced $53bn of cash in the six months ending March 2015. Microsoft has $110bn of cash on its balance sheet and produced $30bn of cash in the year ended June 2015. Google/Alphabet has $70bn of cash on its balance sheet and produced $14bn of cash in the six months ended June 2015. Facebook could have $20bn of cash in the next year and could be producing $20bn of cash a year soon. Amazon, the company that “will never make money” surprised Wall Street last week with strong profits and it seems to me that they are going to start producing cash like these other big tech companies now.

It makes sense to me that software is the oil of the information revolution. Companies that control the software infrastructure of the information revolution will sit back and collect the economic surplus of the information revolution and that will be a path to vast wealth and economic power. It has already happened but I think we are just beginning to see the operating leverage of these software based business models. The capex spending necessary to be a software infrastructure provider at scale has shielded the cash producing power of these companies (and many others) and may continue to do that for a time, but I suspect at some point the profits are going to overtake the capex at a rate that the cash will be flowing out of software companies the way that oil flows out of wells.

Full Disclosure: The Gotham Gal and I own a lot of Alphabet stock and also shares in several hundred other software based businesses. We are long software.