Posts from VC & Technology

I saw this tweet in my feed yesterday and read the New Yorker piece when I woke up this morning:

Here’s what I think. There is more truth to that article than anyone in the venture capital industry wants to admit.

The idea that capital alone can create a strong company is a flawed idea that the VC industry pursued with a lot of passion for most of the last decade. The flameout of WeWork and the tarnished stories around other “fundraising as a strategy” startups will hopefully put an end to that approach of building companies, but I won’t hold my breath until that happens.

It is true that we VCs enable the bad behaviors outlined in that piece and we must look a little more carefully at ourselves in the mirror in the morning and, as the Gotham Gal likes to tell me, “get over ourselves.” I won’t hold my breath until that happens either.

All of that said, the vast majority of VC-backed companies are not WeWork. The vast majority of VC-backed companies are innovative, led by good people, and are creating value the old fashioned way, by supplying their customers with high quality products and services. We should not let a few bad apples spoil the whole bunch.

Cautionary tales like WeWork and the others outlined by Charles Duhigg are healthy. But they are not the entire story, thankfully.

There are many ways to invest successfully. Public stocks, bonds, private equity, real estate, venture capital, etc. And within each category, there are so many different investment opportunities.

In public stocks, there are something like 5,000 listed stocks in the US. In venture capital, there were something like 30,000 companies that raised venture capital in 2019.

How do you make sense out of all of that opportunity?

I’ve always been a fan of knowing what you are looking for and ignoring everything else. We call that thesis based investing at USV, but it is actually more than that.

We can say that we are looking to back trusted brands that increase access to capital, wellness, and knowledge, and we do. But we do more than that. In each of those sectors, we go deeper and identify specific areas within them that we want to target. We call those “deep dives.” We identify areas we want to focus on and areas we don’t want to focus on.

All of this is a relentless effort to figure out what we are looking for and then go out and find it. It is not a static thing. It is a dynamic thing. A pandemic comes along and rocks our world. Time to revisit the thesis and the deep dives. When the pandemic ends, and it will, we will factor that into our thinking too.

In a world with so much opportunity, it pays to ignore the vast majority of it and focus on a tiny bit of it. That may seem counterintuitive, but I am certain that it is the right thing to do.

I was looking at the numbers on an early-stage VC fund that the Gotham Gal and I are invested in. I am not very familiar with the portfolio but this fund was formed in 2012. There are 24 names (investments) in the portfolio and 3 of them have produced 92% of the value in the fund.

This is more or less the pattern of every early-stage venture capital fund I have helped to manage and every early-stage venture capital fund I have invested in over the last thirty years. I believe it is a fundamental law of early-stage investing that a small number of investments will produce that vast majority of the returns.

But here is the thing. You may get your returns from a small number of names, but you cannot simply focus on them.

I liken it to a teacher and a class full of students.

There will always be the “star pupils” but the teacher’s job is to serve all of the students. The reward may be to watch the star pupils shine, but the job is not. The job is to serve all of the students equally, or possibly to help the students who are struggling more than the others.

That mindset has helped me navigate this challenging issue in the early stage venture capital business. The work is often in one place and the rewards in another.

There was a good Twitter discussion of this issue over the weekend between some folks who work in the VC sector. I think it is worth sharing more broadly.

Here it is as a Twitter Moment.

I read Alex Konrad’s profile of Fred Ehrsam and Matt Huang of Paradigm yesterday and was reminded of my own career.

In 1996, after almost a decade at Euclid Partners, I left to start Flatiron Partners with Jerry Colonna. I was 35. Jerry was 33. We had a lot to learn but we did know one thing. We knew that the Internet was upon us and it was going to be big.

We had absolutely no clue how big it was going to be. But that did not matter. We got to work investing in Internet companies and we did very well until the bubble and crash.

If you read Alex’s profile of Fred and Matt, you will learn that they are 32 and 31, and that they believe that crypto will be big.

The Gotham Gal and I are investors in Paradigm, so I am biased, but I believe that Fred and Matt are right and that, like Jerry and me, they have no idea how big it will be.

I wrote yesterday, about the quarterly numbers for VC investing activity:

If this was a student coming home with a report card, it would be straight As.

Well, I missed something in the data that was subsequently reported on by PitchBook, one of the authors of the report:

Venture funding for female founders has hit its lowest quarterly total in three years.

Firms invested a total of $434 million in Q3—the lowest figure since the second quarter of 2017, according to PitchBook data. The third quarter total also amounts to a 48% drop in funding from Q2, when female founders received $841 million across 132 deals.

https://pitchbook.com/news/articles/vc-funding-female-founders-drops-low

I hope Q3 is an anomaly and not the reversal of a trend that has mostly been “up and to the right” in recent years.

We continue to see, and fund, great woman founders so I am hoping that there is not some fundamental change to the market that is hurting women founders. But it is possible that there is and I missed that in my blog yesterday. I will give myself an F for that.

I’ve seen a few replies on Twitter that suggest the same is true for underrepresented minorities. I have not seen the data to back that up but if it is true, that is also a failing grade for the VC sector.

I have been encouraged by what I have seen in the VC/startup sector regarding opening up access to women founders and founders of color. It feels like positive change is happening. But we have to see that in the numbers or it is just talk.

And apparently we did not see it in the numbers last quarter.

The NVCA and Pitch Book are out with their Q3 report on the VC industry and what they report is that the VC industry continues to be very active throughout the pandemic. Deal counts and deal values are stable to up over last year. The massive expansion of later-stage private capital continues unabated. Valuations continue to rise. And exits have been very robust.

If this was a student coming home with a report card, it would be straight As. The startup economy is alive and well during the pandemic.

Over the last decade, the Gotham Gal and I have moved away from oil and gas in our homes and have installed solar panels for electricity and heat pumps for heating and cooling. It has gotten less expensive to do this swap out as solar and heat pump costs have come down. My partner Albert told me that when you factor in the financing costs of this swap, the average home in the Northeast United States could save $1000 to $2000 a year by doing this swap.

What this means is that homeowners can and should go to the bank and borrow the money to remove oil and gas powered boilers and replace them with energy efficient heat pumps and put solar on their roofs to power them. They should do this not just because it is good for the climate, but because it is good for the bank account. That’s a big deal.

I saw this chart in Azeem Azhar’s excellent Exponential View newsletter this week:

Electricity generation and consumption in the US has stabilized over the last twenty years and the use of coal to generate electricity is plummeting. In another twenty years this chart will have a huge amount of green and almost no red in it.

The de-carbonization of the economy is a megatrend that is already underway and is highly investable because the unit economics of renewables and energy efficient electrical equipment is now superior to the unit economics of carbon and mechanical equipment. We can see this in cars (EVs>Gas) and heating/cooling systems and many other aspects of our economy.

The narrative somehow has been that addressing the climate crisis is going to hurt our economy. I believe that is plain wrong. I believe it will power a huge economic boom that will look much like the boom that powered the carbon/mechanical/industrial economy from the late 19th century to the late 20th century.

So let’s get on with it.

I explained this last week on a call with some of our investors and I thought it might be useful to explain it more broadly.

Most of USV’s big wins have been in companies where we were the first institutional VC to talk to the company or where we had way more conviction about the opportunity than other investors at the time of our investment.

There was no social proof on these investments other than the fact that nobody else wanted to make the investment as much as we did. You can call it negative social proof.

I like to tell the story of when I met Brian Armstrong, the founder of our portfolio company Coinbase in the summer of 2012. Paul Graham had asked me to do office hours at Y Combinator and so I came to their offices and spent four hours meeting sixteen companies in back to back 15 minute pitches. At the end of the four hours, I walked out of the conference room and Paul was waiting for me. He asked “which ones did you like best?” and I replied “I like Coinbase. I think Brian Armstrong is on to something big.” He was surprised and said “You are the first VC to say that.” And I said “Then its going to be huge. Please make sure we get the call when they want to raise.”

That’s negative social proof. When nobody else likes the deal but you. That’s how you win big.