Posts from VC & Technology

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.

Feature Friday: Topic Pages

Yesterday we relaunched usv.com. A team inside USV has been working on it on and off over the past few months. Though it’s not perfect yet, I encouraged them to launch it and fix the inevitable bugs in public. And that is exactly what they did yesterday. Nick Grossman, who led the effort, wrote a post outlining some of the goals of the relaunch.

To summarize, we want to make usv.com less “real time” and more thoughtful. We would like less noise and more substance. We want it to be referential as opposed to news driven. And the biggest step we’ve taken in that direction are the topic pages. Here’s the blockchain topic page. Here’s the policy topic page. We’ve started with four topic pages (blockchain, policy, marketplaces, mobile) but we intend to build out a bunch more.

I think this line in Nick’s post sums up our goals for usv.com and I’m pleased to see we are moving it in that direction in the new year:

The goal of [usv.com] is to expose more of our thinking, and to do it together with others

What Is Going To Happen

Yesterday I wrote a post summing up what happened in 2014. In it I promised a post on what is going to happen. What I did not specify was how far forward I am going to look. It’s a lot easier to predict the future without a timeline on it. I think we all know, for example, we are going to have driverless cars. When that is going to be mainstream, however, is a pretty big question that I can’t answer.

But, because yesterday was about 2014, I am going to make this post about 2015. And so here is what is going to happen in 2015 according to me.

1/ The big companies that were started in the second half of the last decade, Uber, Airbnb, Dropbox, etc, will start going public. Investors will be glad to scoop up some of their shares. That will lead, in turn, to a wave of acquisitions by these newly minted goldmines.

2/ Xiaomi will spend some of the $1.1bn they just raised coming to the US. This will bring a strong player in the non-google android sector into the US market and legitimize a “third mobile OS” in the western world. The good news for developers is developing for non-google android is not much different than developing for google android.

3/ More asian penetration into the US market will come from the messenger sector as both Line and WeChat make strong moves to gain a share of the lucrative US messenger market.

4/ After a big year in 2014 with the Facebook acquisition of Oculus Rift, virtual reality will hit some headwinds. Oculus will struggle to ship their consumer version and competitive products will underwhelm. The virtual reality will eventually catch up to the virtual hype, but not in 2015.

5/ Another market where the reality will not live up to the hype is wearables. The Apple Watch will not be the homerun product that iPod, iPhone, and iPad have been. Not everyone will want to wear a computer on their wrist. Eventually, this market will be realized as the personal mesh/personal cloud, but the focus on wearables will be a bit of a headfake and take up a lot of time, energy, and money in 2015 with not a lot of results.

6/ Capital markets will be a mixed bag in 2015. Big tech names will continue to access capital easily (see 1/), but the combination of rising rates and depressed prices for oil will bring great stress to global capital markets and there will be a noticeable flight to safety around the world. Safety used to mean gold, US treasuries, and blue chip stocks. Now it means Google, Apple, Amazon, and Facebook.

7/ The Republicans and Democrats will start jockeying for position in silicon valley for the next presidential election and tech issues will loom large. Republicans will put forward their own answers on immigration and net neutrality (Title X) and the White House will meet them halfway. Both sides will claim victory, but the real winners will be the people.

8/ The horrible year that bitcoin had in 2014 will be a wakeup call for all stakeholders. Developers will turn their energy from creating the next bitcoin (all the alt stuff) to creating the stack on top of the bitcoin blockchain. Real decentralized applications will start to emerge as the platform matures and entrepreneurial energy is channeled in the right direction.

9/ the enterprise/saas sector will shine in 2015 with dozens of emerging important new companies taking advantage of the cloud and mobile to redefine what work and workflow looks like in the enterprise.

10/ cybersecurity budgets will explode in 2015 as every company, institution, and government attempts to avoid being Sony’d. VCs will pour money into this sector in the same way they poured money into the rental economy. and, yet, the hacks will continue because on the open internet there is no such thing as an impenetrable system.

11/ the health care sector will start to feel the pressure of real patient centered healthcare brought on by the trifecta of the smartphone becoming the EMR, patients treating patients (p2p medicine), and real market economies entering health care (people paying for their own healthcare). this is a megatrend that will take decades to fully play out but we will see the start of it in 2015.

Of course, many other things will happen this year. A lot of them will be things we could never see or predict. And this list is biased by what interests me and what we’ve invested in. It is, as someone said in the comments yesterday, “biased”. But then so is every single word ever written on this blog. As it should be.

Happy New Year everyone. Here’s to a great 2015.

What Just Happened?

I’m not much for the rear view mirror. I like to look forward, not back. I guess that’s why I’m in the line of work I’m in.

But I’m going to force myself to look back at 2014 and explain what just happened. Doing that will help me look forward (tomorrow?) and explain what is going to happen.

This is not an attempt to be comprehensive, or accurate, or anything else. This is what I think happened in 2014:

1/ the social media phase of the Internet ended. this may have happened a few years ago actually but i felt it strongly this year. entrepreneurs and developers still build social applications. we still use them. but there isn’t much innovation here anymore. the big platforms are mature. their place is secure.

2/ messaging is the new social media. this may be part of what is going on in 1/. families use whatsapp groups instead of facebook. kids use snapchat instead of instagram. facebook’s acquisition of whatsapp in february of this year was the transaction that defined this trend.

3/ the “sharing economy” was outed as the “rental economy.” nobody is sharing anything. people are making money, plain and simple. technology has made renting things (even in real time) as simple as it made buying things a decade ago. Uber and Airbnb are the big winners in this category but there are and will be others.

4/ the capital markets have moved to the internet. we call it crowdfunding but what is really going on is raising money is a great application of a global platform that connects billions of people in real time. i don’t know the total amount of capital that was raised on the internet across all sectors (equity, debt, creative projects, charity, helping a person in need, real estate, energy, etc, etc) in 2014 but i am sure it is in the tens of billions.

5/ mobile OS has become a stable duopoly around the world. but android is splintering into google android and non google android and that may lead to new large players. 2014 was a big coming out party for xiaomi. if and when they come to the US, things will get interesting. they are the new (and better) samsung.

6/ mobile and messaging has started to impact the enterprise. slack is the poster boy for this trend in 2014.

7/ youtube became a monster. it always has been. but in 2014 youtube emerged as the place for entertainment consumption for anyone under 16. and these youngsters are going to grow up quickly. watching The Interview on YouTube was a fitting end to an amazing year for the king (and queen and joker too) of Internet video.

8/ we finally got rid of files. dropbox, google drive, soundcloud, spotify, netflix, hbogo, youtube, wattpad, kindle, and a host of other cloud based services finally killed off three letter filenames like mp3, mov, doc and xls. spending a week in the caribbean with young adults and bad internet was the tell on this one for me. they don’t even have mp3s on their iphones anymore!

9/ the net neutrality debate emerged as a national political issue with Obama’s endorsement of Title II regulation of the last mile of the internet. it is unclear how this issue will resolve itself but the public has spoken loudly and clearly and politicians understand that the internet needs to remain open for innovation and we can’t let the monopoly carriers and cable companies mess that up.

10/ cyberwarfare, cybercrime, cyberhacking, and cybersecurity was by far the dominant theme of 2014. if anyone had their head in the sand on this one before this year, they don’t anymore. this is our new normal. the US takedown of North Korea’s internet last week, and the state department official’s comment that “i guess accidents can happen” is a moment to remember as we head out of 2014 and into our future.

so that’s what happened in 2014 according to me. i am sure i left out many important things. you can add them in the comments. hopefully i’ll write a whats going to happen in 2015 tomorrow. i tried hard to keep this post backward looking and had to edit out a lot of forward looking statements as i wrote it.

happy new year everyone.

With All Due Respect

We spent the Christmas week on the beach with family and friends. Our friends John and Diana were with us and we talked about a lot of the things that are in the news at the intersection of tech and society. John asked me to take that conversation onto his TV show, With All Due Respect, and I did that yesterday. Here is the segment.

Some Thoughts On Founder Liquidity

I saw a post last week that suggested that VCs competing to win deals is leading to excess amounts of founder liquidity. We haven’t seen that sort of thing to be honest. It may happen but it is certainly not rampant.

I also saw this tweet from Sam Altman yesterday:

If you click on that tweet, you will see a long and somewhat interesting discussion of the issue on Twitter. I don’t completely agree with Sam’s tweet, as I will outline below, but as my son and his friends like to say, “he’s not wrong.”

I’ve written a bunch about this issue over the years but the search function on this blog is pretty weak and it is not easy to go find all of those posts. So I will try to summarize my thoughts in tweetstorm format:

1/ when I got into the VC business in the mid 80s, there was little to no founder liquidity. VCs largely believed that founders should get liquid when they got liquid.

2/ that started to change in the late 90s when the VC market went bonkers and to some extent it was a good thing. to some extent it was not.

3/ i have evolved my point of view on this issue a lot over the years and i now believe that providing some founder liquidity, at the appropriate time, will incent the founders to have a longer term focus and that will result in exits at much larger valuations because, contrary to popular belief, founders drive the timing of exit way more than VCs do

4/ figuring out the “appropriate time” is tricky and there is no hard and fast rule. the twitter discussion on Sam Altman’s tweet focuses on how many years the company has been in business and i think that is a very flawed metric

5/ instead i would focus on whether the company has achieved sustainable and lasting enterprise value, meaning that there is no question it will exit at a significant number that is well in excess of the capital invested at some point in the future

6/ passing that test means that the common stock is “good money” and that the choice of the founder to sell it is not mitigation of risk issue as much as it is an asset allocation issue

7/ i am not a fan of founder liquidity sales that result in more than 10% of the founder’s position being liquidated at any one time

8/ an important exception to that rule is when a founder is leaving the company, particularly at the wishes of the board. in that situation i believe, if the test I outlined in #5 is passed, it is prudent for all involved to provide some liquidity to the departing founder and the 10% rule is not really valid in this situation

9/ i generally prefer that founder liquidity be provided by funds that are set up to do that sort of thing and not by the VCs who have been providing primary capital to the business. i believe that our capital should be used to continue to support the business and reserved for that until the company has become sustainably profitable

10/ once a company has become sustainably profitable, which in and of itself is a bit tricky to measure (GAAP Net Income positive?, EBITDA positive?, Adjusted EBITDA positive? cash flow positive?), I am more comfortable with the VCs buying in founder liquidity sales

11/ EOTS

I have seen too much founder liquidity too early in a company’s life mess things up. You do have to be very careful about this sort of thing.

And founder liquidity inevitably leads to questions about employee liquidity and angel liquidity. Like all things in life that involve money (and many that don’t), actions have consequences that are much broader than you might imagine. So once you start providing liquidity to founders, you need to at least start thinking about a liquidity plan for others as well.

What we have done in a number of our most successful portfolio companies is to wait until the company is sustainably profitable (this is such an important moment in a company’s evolution) and then think about tender offers to founders, employees, and early investors/angels. Interestingly, in these sales the employees and founders tend not to be particularly aggressive in their selling. The early investors and angels tend to be more aggressive than the insiders. Which makes a lot of sense if you think about it.

I will end this post with a quote The Gotham Gal shared with me yesterday from J. Robert Beyster, the founder of SAIC:

I have found that employees are more patient investors than the public. They are willing to wait longer for returns because they want a good place to work. They allow the company to invest in long-term growth and not just short-term gains.

So whatever you do, don’t let your company become owned too much by investors and not enough by founders and employees. It’s the folks who work at the company that make it tick and if they are not deeply invested in the business, you have a recipe for failure.

PS: There is a difference between a company “having created lasting sustainable value” and “being sustainably profitable”. The latter almost always means the former is true. But the former does not require the latter to be true. I could get into why this is so in more detail but this post is long enough already.

College and Entrepreneurship

After I tweeted out a link to yesterday’s post, I had this twitter exchange:

I took some time today to look through our portfolio and estimate the percentage.

I believe 21 founders out of a total of 72 that we have backed in the history of USV did not graduate from college. That’s about 30%.

However, I believe 17 founders have advanced degrees, including a few PhDs. So roughly a quarter of the founders we’ve backed have invested heavily in their higher education.

There are no specific credentials required to get funded by USV or most other VC firms. You need to be credible as an entrepreneur. That means being able to see, recruit, make, and sell. If you can do that, and if you can prove you can do that to investors, you’ve got a great shot at getting funded.