The No Stack Startup

There’s been a lot of discussion in recent years that the “full stack approach” is the future of startups. My friend Chris Dixon articulated the reasons for going “full stack” very well in this post from last year. But like many things, the best approaches are at both ends of the spectrum. Either go “full stack” or go “no stack.”

My partners Andy and Albert have been writing about the no stack approach this past week and it is the topic of the week at usv.com.

At USV we have never been excited by the full stack approach. It is well suited to investors who have unlimited amounts of capital to invest and a need to put all that cash to work. We aren’t that kind of investor. We like low capital requirements and low burn rates and extremely high rates of return on invested capital. So no stack seems like it will suit us well.

Our partner Brad said in an internal email about this today, “We need to think through defensibility, margin sustainability, and not having control of some infrastructure.” So that’s what we are doing now. And if anyone would like to weigh in on this, the comments here at AVC is a good place as is the usv.com topic of the week conversation.

Well That Sucked

I just wrote a longish post on the plane to SF this morning, hit publish, and lost everything.

Normally WordPress autosaves the post when an error happens but it did not this time.

So I’m not going to have time to rewrite that post today.

So maybe we can talk about the topic instead.

I wrote about the best legal/tax structure for social entrepreneurs. I am seeing more and more social entrepreneurs adopt the for profit corporation for their social enterprise. With innovations like the B Corporation for aligning interests, and with more investors understanding that financial returns and social impact are not mutually exclusive, it seems like this may be the better structure for social enterprises that can create a sustainable business model.

The PATENT Act

Regular readers know of my longstanding concerns and frequent posts on the topic of patent trolls. They are a scourge on the startup sector, where patent trolls wreak havoc, and the innovation sector more broadly. The Senate has been working to address these issues via a non-partisan bill called the PATENT Act and a companion House bill called The Innovation Act. These are both good bills and everyone in the startup sector should support them enthusiastically. Julie Samuels of Engine wrote an excellent post about the PATENT bill in the Senate and I’m going to cut and paste it below instead of trying to do better (because I can’t).

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Today, Sens. Grassley, Leahy, Cornyn, Schumer, Lee, Hatch and Klobuchar introduced the PATENT Act, an important piece of legislation targeting a serious patent troll problem. Engine is proud to support that bill.

The PATENT Act, and the Innovation Act, its House counterpart, are effective because they are comprehensive in scope. Each contains a package of incentives that, taken together, insert balance back into patent litigation, giving troll targets the tools to fight back and ensuring that patent holders act responsibly. Importantly, they are carefully crafted to ensure that a patent holder with a high-quality patent and a legitimate claim of infringement will face no barriers to making that claim.

To understand the way these bills work, you have to understand a bit about the patent troll problem. Patent trolls are primarily armed with two weapons: low-quality, impossible-to-understand patents and the outrageous costs of patent litigation, which can easily cost a defendant well into the millions of dollars. So imagine you are a small startup, cash-strapped and hungry, and you get a patent demand from a company you’ve never heard of, claiming it owns some seemingly basic technology. (This really happens. Often. See here, here, here, and here, for example.) Your choices are: hire a lawyer and spend valuable time dealing with the problem or pay the troll to go away, usually for a sum far smaller than what it would cost to hire that lawyer or go to court.

The good news is that the Supreme Court has been busy trying to fix the problem of low-quality patents. The bad news is that we still have a long way to go. Patent litigation remains outrageously expensive and one-sided, giving a patent owner who is willing to take advantage of loopholes in the system the ability to run roughshod over defendants.

This is where Congress, and specifically today’s introduction of the PATENT Act, comes in. Its provisions help right the imbalance in patent litigation through a series of reforms:

  • Transparency and Heightened Pleading: Currently, someone can file a patent suit without providing almost any basic details about his or her case, information like how a patent is infringed, what products allegedly infringe it, and even who owns that patent. This information is easily known to any patent holder at the outset of a case, especially those who engage in a responsible amount of due diligence prior to filing a case. However, getting this information can cost a party being sued tens or even hundreds of thousands of dollars. The PATENT Act would fix that, requiring patent holders to provide this basic information at the outset of litigation and also require patent holders to tell the Patent Office when they transfer a patent. Only with this basic information can parties make informed decisions about how they should proceed. If a party legitimately cannot find some of this information after making a “reasonable inquiry”, it may still file a suit, an important caveat protecting the responsible patent holder.
  • Fee-shifting: Currently, little incentive exists for a party to defend itself in court. After years and millions of dollars spent litigating, a successful party will often be sent on its way with nothing more than a Pyrrhic victory. The PATENT Act remedies this by awarding fees to a winning party when a court determines that a losing party’s position was not “objectively reasonable”. This provision carefully strikes a balance between deterring those who bring crappy, unsubstantiated lawsuits and those who bring reasonable, good-faith cases. It also includes important provisions that would effectively end the practice of using shell companies with little or no assets to avoid responsibility. Specifically, a party who doesn’t make or sell anything with its patents will have to show that it can pay for fees if they are awarded. Only with this incentive can many startups afford to take on a troll threat, discouraging those trolls from bringing frivolous cases.
  • Demand Letter Reform: Currently, trolls send vague demand letters full of legalese, targeting small businesses and even individuals. Because this takes place before a lawsuit is even filed, there is no public record of how often it happens. We know it is common practice, so we also know that we can’t even properly understand the scope of the entire patent troll problem. The PATENT Act will help fix this by requiring that such letters include certain basic information about the infringement claim and that they do not make false claims about the patent holder’s rights with regard to the patent. Only with these requirements will startups be able to make informed decisions about whether they should respond to or ignore a demand letter and whether they should hire a lawyer.
  • Discovery Reform: Currently, discovery is by far the most expensive part of litigation for any party facing suit. For a patent troll who doesn’t make or sell anything, the cost of discovery is next to nothing. However, it can use abusive discovery practices to drive the costs of litigation even higher than they already are. The PATENT Act would curb some of the worst of these practices by staying discovery until a party has had a chance to try to have a case dismissed. It also makes further recommendations to shift some of the discovery burden from the party producing information to the party requesting it. Only with these reforms can small companies and startups afford to litigate.
  • Customer Stay: Currently, trolls love to target a company’s customers, claiming that by using off-the-shelf technology those customers are liable for infringement. This can put enormous pressure on companies that provide products and services (e.g., every company). The PATENT Act provides tools to both the customers and the companies in this dangerous situation, allowing the company to fight the litigation on behalf of its customers. Only with this provision will startups be able to protect their customers.

To be certain, the PATENT Act is not perfect. There are a number of areas where the bill could be made stronger. For instance, we wish the discovery reforms went farther, clearly providing in-statute limits on discovery to those documents directly related to the litigation and requiring a party seeking documents to cover the costs of getting those documents. We’d also like to see the bill more directly address venue and make it easier for parties to move a case out of the Eastern District of Texas, where so many cases are brought and where judges are notoriously plaintiff-friendly. Likewise, we remain concerned that the current customer stay provision only kicks in when the manufacturer is already involved in litigation. We think improvements could be made to make it any easier for that manufacturer to actively step in on behalf of its customers. Finally, we think the bill could also make it easier and cheaper for parties to challenge low-quality patents at the Patent Office through a process called inter partes review (IPR). For many parties, seeing a case all the way through to a final decision is not an economic reality, even with the above-discussed reforms. IPR provides a valuable means for a startup or party with limited financial resources to invalidate or narrow the scope of an otherwise overly broad patent.

All that said, we remain proud to support this bill. The heart of it—the litigation reform provisions—represent a hard-fought compromise, spearheaded by Sens. Schumer and Cornyn, who tirelessly worked to get this done. We will continue to work to improve the PATENT Act where we think it needs improvement, and fight off any efforts to water down its provisions. We look forward to seeing this become law.

Volunteering

Philanthropy is most often seen as giving money to a cause and that is something we should all celebrate and do within our means to do so. But giving your time is just as important and it is something that way more of us can do.

This weekend I attended the ScriptEd Hackathon in the Google Cafeteria in the Google NYC offices. ScriptEd runs in-school and after-school coding classes in something like 15 NYC public schools.

These schools sent students to the Hackathon where they formed teams and built software projects around the theme of music.

In this photo I took of the event you will see people wearing blue shirts and orange shirts. The blue shirts are the students and the orange shirts are the volunteers.

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There were almost as many volunteers as students at this event. Maybe that’s why the hacks were universally so good.

The winning team made a space invaders style game that dropped beats from Soundcloud tracks and the players needed to grab them as they came raining down.

Here is a photo of the winning team pitching me on their project.
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I love Hackathons because they teach multiple things at the same time; building something quickly, working in teams, and pitching. That latter thing, explaining what you built, is such an important life skill and these kids are learning it in high school.

If you have some free time that you can volunteer, I highly recommend it. If you want to help kids learn to code, ScriptEd and Teals are two great programs to work with. They are doing important work.

Mother’s Day

It’s mother’s day and I find myself thinking about my girls, who are not mothers at this time in their lives. And yet they both have been working on projects involving motherhood this spring.

Emily wrote her bachelors thesis on the challenges of balancing motherhood and careers. She called it “Life Sequencing: A Viable Solution To Work-Life Conflict For High-Achieving Women” and it was a thorough investigation of the challenges of balancing work life issues and some possible answers.

Jessica has been making an Oculus Rift based immersive experience for an art show called Dear Mama where young artists are showing work  “in honor of Mother/s, mothering, motherhood: incl. all the shapes that role may take.”

Each, in their own way, are honoring their mother with their work and it is very satisfying for me to see that. Joanne is many things, but first and foremost she is a wonderful wife and mother, and it pleases me to no end to see her fine work reflected in our girls.

I’m also fortunate to have a loving mother of my own. I plan to call her this morning, then head to brunch with Joanne and Jessica, then to Jessica’s show to bask in art about motherhood.

Happy mother’s day everyone.

Feature Friday: Google Calendar for Android

Since moving back from iPhone to Android, the thing that has been the most pleasing to me is the evolution of Google Calendar. It has gotten a lot better and it keeps getting better seemingly every day.

It is starting to understand things about my day that it did not understand before, like people, places, and things I do.

Here are some examples:

In this calendar entry, Google Calendar understands that I am going to this event with Joanne and inserts her photo into the calendar entry.

people in my calendar

In this calendar entry, Google Calendar knows where this event is and puts a picture of the place right into the calendar so I know what it looks like.

places in my calendar

In this calendar entry, Google Calendar knows where this event is and puts a map image right into the calendar so I know where I’m going.

maps in my calendar

In this calendar entry, Google knows what Yoga is and puts an image of a yoga mat right into the calendar entry.

yoga mat on calendar

And, naturally, I am getting notifications on my phone that are smart like “it’s time to leave for your breakfast in brooklyn.”

It might seem like a little thing to have a smarter calendar but to me it’s so fantastic. I love what Google is doing with this product and it’s a joy to use it.

Survata

We’ve been using a tool at USV recently that I like. It is called Survata and it allows to you to create a survey and then target it at whatever number of completes you want. You can target it to respondents in 17 countries “by age, gender, geography, and custom attributes.”

It is helpful for us to get a sense of what is going on in a market quickly. We generally go for thousands of completes and we get results within three to seven days. We have been paying between $1 and $2 per complete which, for us, is not a lot to get some answers quickly.

I am sure there are many services out there that do something like this. It’s not particularly difficult to offer a service like this. But the Survata user experience is simple, easy, fast, and affordable. We like it and are using frequently. I thought I’d share that with all of you.

Valuation As A Scorecard

When you set out to build a great company, it’s hard to know how you are doing along the way. There does come a time when you know you’ve done it. Apple, Google, Facebook, Amazon, Salesforce, Tesla, etc got there. We know that. And the founders of those companies know that too.

But two years in, three years in, four years in, it’s hard to know how you are doing. The market moves quickly. Customers are fickle. Competition emerges. Trusted team members leave. Your investors flake out on you. And so on and so forth.

So entrepreneurs want something they can hang on to. They wants a scorecard. A number. Validation that they are getting there.

And that thing is often valuation. If the “market” says you are now worth $1bn versus $500mm a year ago and $200mm two years ago and $50mm three years ago, then you are making good progress. The numbers tell you so. And it feels good.

Valuation can also be used to compare how you are doing against your friends. Your YC classmate got $100mm and you got $200mm. You are doing twice as well as she is. That feels good, at least it feels good to you.

Valuation is an entrepreneur’s scorecard. It has always been this way in startup land, but it is even more so these days when financings and the valuations are reported every day as the most important news items in the tech blogs. Tech blogs are the stock ticker of startup land. And entrepreneurs and everyone else around them watch the ticker waiting for the next “unicorn” to be printed.

I hate the word unicorn. It’s using fantasy to describe something very much reality. But I don’t want to digress from the larger point I’m making to go down the unicorn rat hole. Just please don’t use that word around me. I will likely throw up and that won’t be pleasant.

This obsession with valuation as the thing that tells you and the world how you are doing has a dark side. And that is because valuation is just a number. Unless you sell your business for cash at that price, valuation is just a theoretical value on your company. And it can change. Or you can get stuck there trying to justify it year after year all the while doing massive surgery to your cap table to sustain it.

And the markets can move on you and one day you are worth $2bn and the next day your are worth $500mm. Did you just mess up by 75%? No. The market moved on you.

The message of this post is don’t let yourself get sucked into a world where a number is your measure of self worth. Because you don’t control that number. The market does. And some days the market is your friend and other days it is most decidedly not your friend.

Measure yourself on whether your employees are happy. Measure yourself on whether your customers are happy. Measure yourself on how much free cash flow your business is generating. Measure yourself on how your brand is known and appreciated around the world. Measure yourself on how your spouse and children feel about you when you come home from work each day. You control all of those things, at least to some degree.

But please don’t measure yourself on valuation. It might make you feel good today. But it won’t make you feel good every day.

My CNBC Appearance

I spoke at Techcrunch Disrupt yesterday and several media outlets had crews there. I was asked to speak to a few of them and I said yes. I was on CNBC and ABC News yesterday morning. To my knowledge the ABC News clip is not yet up. But CNBC put up three clips that I believe, in their totality, make up my entire appearance. So here they are in order and sorry about the pre-roll videos in front of all three. I looked for a single clip for the entire interview but could not find it.