New Economics

I am tired of the classic left/right perspective on society, policy, and politics. I realize that markets are an incredible tool to allocate resources efficiently. And I also realize that markets are subject to failure and we need to protect our society from these market failures. I am not a purist on either side of this debate and I find the hard core advocates on the far left and the far right impossible to take. I believe orthodoxy is one of the worst human traits.

So I enjoyed reading this post on “new economics” and I particularly like this table that shows the difference between traditional economic thinking and new economic thinking:

The post goes on to explore how these new economics thinking will eventually impact politics, policy, and society at large.

One particular example reminds me of our work at USV on “Regulation 2.0”:

First, rather than predict we should experiment. Policymaking often starts with an engineering perspective – there is a problem and government should fix it. For example, we need to get student mathematics test scores up, we need to reduce traffic congestion, or we need to prevent financial fraud. Policy wonks design some rational solution, it goes through the political meat grinder, whatever emerges is implemented (often poorly), unintended consequences occur, and then – whether it works or not – it gets locked in for a long time. An alternative approach is to create a portfolio of small-scale experiments trying a variety of solutions, see which ones work, scale-up the ones that are working, and eliminate the ones that are not. Such an evolutionary approach recognises the complexity of social-economic systems, the difficulty of predicting what solutions will work in advance and difficulties in real-world implementation. Failures then happen on a small scale and become opportunities to learn rather than hard to reverse policy disasters. It won’t eliminate the distortions of politics. But the current process forces politicians to choose from competing forecasts about what will and won’t work put forward by competing interest groups – since it is hard to judge which forecast is right it is not surprising they simply choose the more powerful interest group. An evolutionary approach at least gives them an option of choosing what has been shown to actually work.

I also like this bit about the tolerance for failure:

A major challenge for these more adaptive approaches to policy is the political difficulty of failure. Learning from a portfolio of experiments necessitates that some experiments will fail. Evolution is a highly innovative, but inherently wasteful process – many options are often tried before the right one is discovered. Yet politicians are held to an impossibly high standard, where any failure, large or small, can be used to call into question their entire record.

I don’t think the way we do things in startup land should be a model for how everything should work, but there is a lot to be learned from the way the tech sector works. Innovating, trying new things, measuring the impacts of these new things, and evolving leads to forward progress. And when something fails, we accept is as a lesson learned, not something to be embarrassed about (or fired for).

If the worlds of economics and politics are moving in our direction, I am very pleased and optimistic about that.

Happy Hanukkah and Merry Christmas

I’m not writing today and tomorrow as we are celebrating the year end holidays with family. Happy Hanukkah and Merry Christmas to all of you.

Fixing The Internet

Walter Isaacson wrote a blog post last week suggesting that the Internet is broken and outlining how he would fix it. I think that most of his suggestions are currently being built using blockchain technologies. Here is his list (in italics) and my reactions to it.

1) Create a system that enables content producers to negotiate with aggregators and search engines to get a royalty whenever their content is used, like ASCAP has negotiated for public performances and radio airings of its members’ works.

While not “a system to negotiate”, services like our portfolio company Mediachain‘s platform will provide much of the underlying infrastructure for this to happen.

2) Embed a simple digital wallet and currency for quick and easy small payments for songs, blogs, articles, and whatever other digital content is for sale.

Bitcoin.

3) Encode emails with an authenticated return or originating address.

While not blockchain based, standards like DKIM and SPF in the email sector provide some of this today. I am also excited about a blockchain based identity later like the one being built by our portfolio company Blockstack.

4) Enforce critical properties and security at the lowest levels of the system possible, such as in the hardware or in the programming language, instead of leaving it to programmers to incorporate security into every line of code they write.

Blockchain based applications can use the underlying security of the blockchain (using sophisticated cryptography) to achieve higher levels of security in their applications.

5) Build chips and machines that update the notion of an internet packet. For those who want, their packets could be encoded or tagged with metadata that describe what they contain and give the rules for how it can be used.

I am not sure you would need a chip or a machine to do this.

The bottom line for me is that we don’t need to build a new Internet to fix the issues Walter articulates in his blog post. We just need to continue to build new capabilities on top of our existing Internet. And, right now, the biggest potential contributor to those new capabilities is the blockchain.

What Has Gotten Into Bitcoin?

Bitcoin is up 16% this month:

And it is up 86% YTD 2016:

Obviously there is more demand for the leading digital currency than there is supply of it right now.

My guess is this is speculation driven (the more it goes up the more traders want to bet on it) and does not represent any fundamental change in the usage of Bitcoin. The USD transaction chart doesn’t show any massive increase in transaction volume this year.

But whatever the cause, Bitcoin is on a tear going into the end of 2016. Seven years in, there are no signs of this slowing down.

Going Back In Time

I woke up to an awesome holiday gift today. Sitting in my inbox was an email from Greg Galant. Greg had read about the missing Positively 10th Street podcasts from 2005-2007 here on AVC a few weeks ago. So he dug up an old hard drive and found five episodes in his iTunes folder. And he sent them to me.

I just listened to the first episode of the bunch which we did with our kids right after they came back from eight weeks at summer camp in August 2005. It was like going back in time. USV had just gotten going, Twitter didn’t exist but that team was working on a podcasting service called Odeo.

Podcasting has come a long way since then and so has our family. But like pulling out an old family photo album, the ability to go back and hang out with our family as it was eleven years ago is pretty fantastic. So thanks Greg.

And if you happen to have any files in your iTunes folder with a name like this [8-21-05 Positively 10th Street.mp3], please send them my way. I have renewed hope that I may be able to collect all of them eventually.

Kik Group Video Chat

It seems that adding group video chat is the thing right now. Yesterday our portfolio company Kik added group video chat to its popular mobile messenger and Facebook did the same with its Messenger application on the very same day.

Here’s a screenshot of me and AVC regular William Mougayar video chatting in Kik just now.I was in an Uber (as you can see from my notifications). I believe William was in his home office.

My friend and former colleague Jonathan told me this morning that video chat is now “table stakes” for mobile messengers. That may well be true but it’s more impressive when a small company can keep up with the big ones as a Kik employee tweeted yesterday:

Venture Deals 3.0

Like a great software product that keeps getting better and better as it ages, the classic book by Brad Feld and Jason Mendelson, Venture Deals, is now on its third version.

Here is the forward I wrote for the first version of the book and that continues to provide the opening context for it:

I remember the first week of my career as a VC. I was 25 years old, it was 1986, and I had just landed a summer job in a venture capital  firm. I was working for three experienced venture capitalists in a small  firm called Euclid Partners, where I ended up spending the first 10 years of my VC career. One of those three partners, Bliss McCrum, peeked his head into my office (I had an office in Rockefeller Center at age 25) and said to me, “Can you model out a financing for XYZ Company at a $9 million pre-money, raising $3 million, with an unissued option pool of 10%?” and then went back to the big office in the rear he shared with the other founding partner, Milton Pappas.
 
I sat at my desk and started thinking about the request. I understood the “raising $3 million” bit. I thought I could figure out the “unissued option pool of 10%” bit. But what the hell was “pre-money”? I had never heard that term. This was almost a decade before Netscape and Internet search so searching online for it wasn’t an option. After spending ten minutes getting up the courage, I walked back to that big office, peeked my head in, and said to Bliss, “Can you explain pre-money to me?”
 
Thus began my 31-year education in venture capital that is still going on as I write this.
 
The venture capital business was a cottage industry back in 1985, with club deals and a language all of its own. A cynic would say it was designed that way to be opaque to everyone other than the VCs so that they would have all the leverage in negotiations with entrepreneurs. I don’t entirely buy that narrative. I think the VC business grew up in a few small of offices in Boston, New York, and San Francisco, and the dozens—maybe as many as a hundred—of main participants, along with their lawyers, came up with structures that made sense to them. They then developed a shorthand so that they could communicate among themselves.
 
But whatever the origin story was, the language of venture deals is foreign to many and remains opaque and confusing to this day. This works to the advantage of industry insiders and to the disadvantage of those who are new to startups and venture capital.
 
In the early 2000s, after I wound down my first venture capital  firm, Flatiron Partners, and before we started USV, I started blogging. One of my goals with my AVC blog (at www.avc.com) was to bring transparency to this opaque world that I had been inhabiting for almost 20 years. I was joined in this blogging thing by Brad Feld, a friend and frequent coinvestor. Club investing has not gone away and that’s a good thing. By reading AVC and Feld Thoughts regularly, an entrepreneur could get up to speed on startups and venture capital. Brad and I received a tremendous amount of positive feed- back on our efforts to bring transparency to the venture capital business so we kept doing it, and now if you search for something like “participating preferred” you will find posts written by both me and Brad on that first search results page.
 
Brad and his partner Jason Mendelson (a recovering startup lawyer turned VC) took things a step further and wrote a book called Venture Deals back in 2011. It has turned into a classic and is now on its Third Edition. If Venture Deals had been around in 1985, I would not have had to admit to Bliss that I had no idea what pre-money meant.
 
If there is a guidebook to navigating the mysterious and confusing language of venture capital and venture capital financing structures, it is Venture Deals. Anyone interested in startups, entrepreneurship, and angel and venture capital financings should do themselves a favor and read it.
 
Fred Wilson
USV Partner
July 2016

AI: Why Now?

UK-based VC David Kelnar wrote an excellent primer on Artificial Intelligence that is a relatively quick read and helps explain the technology and its advancement over the past sixty years since the term was coined in the mid 1950s.

I like this chart which explains the relationship between AI, machine learning, and deep learning.

But my favorite part of David’s post is his explanation of why AI has taken off in the past five years, as this chart shows:

Like most non-linear curves, it is not one thing, but a number of things happening simultaneously, that is causing this explosion of interest. David cites four things:

  1. Better algorithms. Research is constantly coming up with better ways to train models and machines.
  2. Better GPUs. The same chips that make graphics come alive on your screen are used to train models, and these chips are improving rapidly.
  3. More data. The Internet and humanity’s use of it has produced a massive data set to train machines with.
  4. Cloud services. Companies, such as our portfolio company Clarifai, are now offering cloud based services to developers which allow them to access artificial intelligence “as a service” instead of having to “roll your own”.

I feel like we are well into the “AI wave” of technology right now (following in order web, social, and mobile) and this is a wave that seemingly benefits the largest tech companies like Google, Facebook, Amazon, Microsoft, IBM, Uber, Tesla which have large datasets and large userbases to deploy this technology with.

But startups can and will play a role in this wave, in niches where the big companies won’t play, in the enterprise, and in building tech that will help deliver AI as a service. David included this chart that shows the massive increase in startup funding for AI in the last four years:

I would like to thank David for writing such a clear and easy to understand primer on AI. I found it helpful and I am sure many of you will too.

Audio Of The Week: Three Time Social Entrepreneur

Entrepreneurship is not only about making money. It can also be used to create social change. Three time social entrepreneur Nancy Lublin has made a career out of starting non-profits to do exactly that. Last week she sat down with the Gotham Gal and talked about lessons she has learned along the way, most of which apply as much to for profit startups as non-profits.