Seattle

I called Seattle a “third tier startup city” in a blog post earlier this week.

Which generated this series of tweets:

After reading them, I thought “geez, I really screwed that up” and replied with this series of tweets:

Here’s the thing that is amazing about Seattle. It doesn’t rank as high as NYC, LA, or Boston in the number of startups funded or capital invested. Here are the NVCA numbers for the first three quarters of 2015:

  1. San Francisco, $9.32 billion, 506 deals
  2. San Jose, California (Silicon Valley), $3.78 billion, 237 deals
  3. New York, $3.05 billion, 272 deals
  4. Boston, $1.05 billion, 158 deals
  5. Los Angeles-Long Beach, California (Silicon Beach), $768 million, 105 deals
  6. Oakland, California, $510 million, 41 deals
  7. Seattle-Bellevue-Everett, Washington, $471 million, 56 deals
  8. Provo-Orem, Utah, $462 million, nine deals
  9. Washington D.C., $456 million, 77 deals
  10. Chicago, $402 million, 57 deals

But the companies that have come out of Seattle over the past thirty years put NYC and LA and probably even Boston to shame. So on a dollars in/dollars in, Seattle outperforms. By a lot.

The Aspirational Investor

I am reading my friend Ashvin Chhabra’s book The Aspirational Investor. I am not much of a fan of business books or books about investing so you might ask “why are you reading that book?” And that would be a great question.

I studied finance at Wharton and learned a bunch of modern finance, investing and portfolio theory. I understand how people on wall street and the world of modern asset management approach investing but we have never embraced it on our own investing.

We earned all of our wealth taking highly concentrated positions in startups. We gave most of it back in the 2000 crash which is what happens when you take highly concentrated positions in risky assets. Then we earned it back the same way. We have diversified over the past decade but almost entirely into self owned and operated real estate and cash. We don’t own public stocks other than shares of public companies we backed when they were startups and Google. We don’t own bonds.

So I was attracted to Ashvin’s thinking on finding a wealth creation and management strategy that aligns with your own personal goals and needs and desires instead of one that is cookie cutter, formulaic, and generic. That is what we have done. And I am seeking to validate our strategy or at least understand what is right about it and what is wrong about it. After all, we created it on our own based on what felt right to us.

Ashvin’s Wealth Allocation Framework “shifts the focus of investment strategy from portfolios and markets to individuals and the objectives that really matter: things like protecting against unexpected financial crises, paying for education or retirement, and financing philanthropy and entrepreneurship”.

That sounds smart to me and so I am reading his book and enjoying it very much. If you think about investing differently or want to, you might enjoy it too. You can find it on Amazon.

Second and Third Tier Markets And Beyond

I am in Nashville for a couple days with The Gotham Gal who is giving a keynote at a startup conference today. I mostly came along for a chance to spend a couple days in Nashville. But I will also be at the conference later today to see her do her thing.

Last night we attended a cocktail party with investors from the southeast and then had dinner with an entrepreneur in Atlanta that The Gotham Gal backed a few years ago. At both we talked about entrepreneurship in the southeast and the funding environment for companies in this part of the world.

The way I think about the startup sector in the US is that the first tier is Silicon Valley. More than half of all startup activity and startup funding activity happens in the Bay Area which now includes SF and the east bay. You could simply focus on Silicon Valley and ignore every other part of the US and the world and do just fine as an investor. Many do.

The second tier is NYC and LA and Boston. Between these three cities, another third of startups and investment capital reside. All three of these startup cities are vital and growing rapidly. You could simply focus on NYC, LA, and Boston and ignore the bay area and other parts of the US and the world and do just fine as an investor. I am not aware of any firm that has that strategy as it doesn’t really make sense. But it could easily be done.

The third tier includes Seattle, Chicago, Atlanta, DC, and a few other smaller places like Boulder and Austin. I am doing this entire post from my head and not referring to any survey. There are a bunch of these surveys and I’ve read them all so I am sure this is directionally correct but I am also sure that I am missing a place or two.

This third tier is a decent place to be an entrepreneur and an investor. But there are challenges. Entrepreneurs in the third tier can access the talent and capital they need to be successful in these third tier markets but it is a bit harder to do both. Investors can be focused on these markets if they keep their fund sizes small enough or they can take a hybrid approach by being focused on these markets and also investing in the first and second tier markets. The latter is how we have always approached being a NYC centric investor.

But there is a dynamic that goes on in these third tier markets where the local investors look to investors in the first and second tier markets to come down and “validate” their investments. And the investors in the first and second tier markets won’t come down and do that without a strong local lead. This game of “chicken” happens ways too often in these markets and is incredibly frustrating to entrepreneurs in these markets. These third tier markets need a few strong Series A focused VC firms who have large enough fund sizes to be aggressive lead investors and also have the conviction and stomach to play that game. That is what USV, and Flatiron before it, did in NYC. That is what Foundry did in Boulder. That is the game Upfront is playing in LA. Every third tier market needs a few VC firms like that. And being that investor is a terrific way to make a lot of money.

Beyond the third tier lies a lot of even smaller markets. I am in one today in Nashville. It has a huge health care sector that produces a lot of entrepreneurial and executive talent. It has a decent amount of local seed capital. But it is not a major VC destination. The southeast VCs will come here regularly looking for opportunities. But it suffers even more from the issues I talked about in the third tier. The same is true of places like Pittsburgh, Des Moines, and Kansas City. I mention those three cities because USV has investments in companies in all three places.

The truth is you can build a startup in almost any city in the US today. But it is harder. Harder to build the team. Harder to get customers. Harder to get attention. And harder to raise capital. Which is a huge opportunity for VCs who are willing to get on planes or cars and get to these places.

There is a supremacism that exists in the first and second tiers of the startup world. I find it annoying and always have. So waking up in a place like Nashville feels really good to me. It is a reminder that entrepreneurs exist everywhere and that is a wonderful thing.

Filling Out A Round: When It Matters, and When It Doesn’t

Almost every financing I’ve been involved with over the years (seed, VC, growth, raising a VC fund) goes mostly like this:

  • Struggle like hell to find a lead
  • Come to terms with the lead
  • Turn your attention to filling out the round
  • The deal gets oversubscribed as all the investors that could not summon up the courage or did not have the checkbook to lead the deal scramble to get into what is now a “hot deal”
  • You end up saying no to a lot of people you wish you could say yes to

So how do you decide who to let into the round and who to say no to?

Well the truth is that it sometimes matters a lot and sometimes doesn’t matter at all.

There are two primary factors that I like to focus on when choosing who to let in and who to say no to:

  • Do they have deep pockets and have they shown a history and a propensity to follow on in future rounds. Yes means try to let them in. No means prioritize others over them at the margin.
  • Can they add value and/or will they cause harm in any way. Adding value is a plus. Doing harm is a negative (obviously). Harm should be avoided at all costs. Adding value is a nice to have but not a must have. And investors always claim to be able to add value and very few actually do. If someone has already added value without even being in the deal, that’s a strong signal that carries a lot of weight with me.

There is one other factor that is worth considering. If someone is a friend, a former colleague, a person you know, trust, like and would like to have along for the ride, that is as good of a reason as any to let them in. But just remember that having friends in a deal that goes bad is a good way to lose friends. So make sure these are friends who have lost money, can take the hit, and aren’t going to hold it against you.

So here is when it matters and when it doesn’t.

  • Seed investors aren’t likely to follow round after round and while some can add value, many don’t. I would not sweat the allocations/syndication decisions that much in a seed deal other than avoid troublemakers at all costs. Otherwise, get the money and move on.
  • VC rounds (Srs A, Srs B, Srs C) are generally where the syndicates matter the most. Find a strong lead who will take a board seat, manage the syndicate, and help you. Then if there is money left over find VCs who have deep pockets, who have demonstrated a bias to follow on in round after round, and are willing to follow your lead.
  • Growth rounds are generally where everyone wants to pile in and there aren’t a lot of board seats or governance issues to deal with. You may find investors that can help in these rounds but they are mostly about getting the money at a good price and getting back to business.

I have seen entrepreneurs try to optimize these decisions and spend a lot of time on them. Investors scrambling to get into the deal will fill your head with all sorts of promises, arguments, and the like. Which makes it even more tempting to spend time on the decision and make the best one.

My advice is to make good decisions and not try to make the very best ones. Focus on deep pockets who are known to follow on and be supportive and avoid troublemakers. Everything else is a nice to have but not a need to have.

Fun Friday: NBA Finals

It’s easy to say this series is going to be a blowout after watching last night’s game.

But I’m not ready to do that.

I think the Cavs will defend their home court and this will go seven games.

What do all of you think?

The Buy Bitcoin Button

If you have an app that uses Bitcoin for something, like virtual goods in a game, you need to give your users an easy way to buy the Bitcoin.

Our portfolio company Coinbase has a solution for that problem. It is a “Buy Bitcoin” button, powered by the Coinbase API.

There are some limitations to the buy button right now, which Coinbase hopes to remove over time. They are:

The Buy Widget is currently limited to customers in the United States using debit cards. To enable instant buys with limited KYC, the Buy Widget supports buys up to $5 per day. Each user has also a lifetime limit of $50 after which they are asked to set up a full Coinbase account. These limitations are only temporary and we’ll be adjusting them and adding more payment methods over time to increase limits.

I think that virtual currencies, like Bitcoin and Ethereum, are a great way to create “economies” in your app. So if you want to experiment with this idea, try out the Coinbase Buy Bitcoin button. Details for developers are here.

Critics, Haters, Voyeurs

Jeff Bezos had some great advice on critics, haters, and voyeurs who cover him and other tech luminaries:

I would say that as a public figure, the best defense to speech that you don’t like about yourself as a public figure is to develop a thick skin, because you can’t stop criticism. You are going to get it. If you’re doing anything interesting in the world, you are going to have critics. You can’t stop it. Move forward. It’s not worth losing any sleep over.

That is so good and I agree completely with it. When I find stuff written publicly about me that is hateful, spiteful, jealous, and/or mean, I often favorite it. I share it sometimes with my kids. We laugh about it.

I’m not saying I’m in Jeff’s league, or anyone else’s either. I am just saying that I have experienced this stuff personally. It can be painful if you let it be. But you don’t have to. You can laugh it off. And you should.

As Jeff said, there are many more important things to be thinking about, sleeping on, and obsessing over.

A Nice Way To Celebrate Memorial Day

In addition to remembering those who gave their lives serving our country today, it’s also a nice thing to assist those who made it home and are transitioning to civilian life.

I just backed a Kickstarter project which is attempting to rase the funds to build a “digital library” of educational videos to assist veterans in obtaining the necessary skills to transition to a job in the high growth tech sector.

Here’s the project video. Check it out and if you like the idea as much as I do, hopefully you can support it.