Reblogging An Old Post: The Word Bubble

I wrote this in 2011. I think it’s as true today as it was then. It’s interesting that Marc Andreessen, in the video I posted over the weekend, also links the word Bubble in his mind to the Internet bubble that we all lived through. I guess for a certain cohort of investors, that is a very definitive moment in our lives that we will always be scarred by.

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In all the posts over the past year or so outlining my thoughts on the financing and valuation environment in the internet sector, I’ve avoided using the word Bubble. It is intentional. For me Bubble will always be inexorably linked to what went down in 1999 and 2000 in the internet sector. And I agree with Mike Arrington that what is going on now is different. I do not think we are in a Bubble per se. That is why I don’t use the word.

But I am equally sure that we are in the glass is half full part of the cycle. Investors are focusing on the upside and ignoring the downside. That part of the investment cycle lasts for a while and then things change and investors focus on the downside and ignore the upside. Markets are defined by greed and fear. We are in the greed mode right now.

I don’t view this as whining. There is nothing to whine about. Investors are making money hand over fist. Why would I whine about that? But I do think it is important to point out the inevitability of the market cycles. There will come a time when the environment we are in will be in the rear view mirror. And entrepreneurs should be crystal clear about that. This is a time to raise money and sock it away for a rainy day. Because it will rain.

And investors should recognize that the current valuation environment will not exist at some point in the future. The companies we invest in will need to grow into these valuations or we will face writedowns and writeoffs. We should not let the greed emotions cloud our judgement. Yes, that hot deal sure looks damn good right now. But deals are actually companies and most venture investments are held for five to seven years. I’ve likened them to marriages over the years. Don’t let the lust for the deal lead to a bad marriage that you have to be in for the next decade.

I’ve made all of these mistakes. I know what happens. I am prepared for it. That doesn’t mean we aren’t investing in this cycle. We are as active as we’ve ever been. But we are investing at this stage of the cycle with our eyes wide open. And I’m writing about it in the hopes that others do the same.

Bitcoin and Taxes

If you had read Satoshi’s white paper back in October 2008, you would have said “there is no way this can work.” There were literally hundreds of reasons Bitcoin could not and would not emerge as a new form of money.

Coming up on six years later, Bitcoin has overcome many of those issues and every day looks more and more like some form of financial value. What remains unclear, though, is if Bitcoin will predominantly be a store of value (like gold) or a medium of exchange (like the dollar), or both (the best case for Bitcoin bulls).

And one important factor in determining what happens with Bitcoin is taxation policy.

In the US, the IRS has issued guidance that places Bitcoin very much in the store of value column. The IRS has said that in their eyes Bitcoin is “property” and will be treated like stocks and bonds for tax purposes. In some ways this is good as the IRS is treating Bitcoin seriously and telling everyone how to report Bitcoin transactions to them. That’s progress. But sadly, treating Bitcoin as property makes it less likely that Bitcoin will become a medium of exchange in the US. That’s because consumers and business don’t normally transact in property. It would be a massive pain to keep track of “cost basis” and “sale price” for every dollar you received and parted with in the course of a day, week, or month. The good news is that because Bitcoin is “programmable money”, it is possible to do this programmatically for consumers and the companies providing payment infrastructure for Bitcoin are slowly but surely doing just that. However, in the long run, it would be much better for the IRS to treat Bitcoin as a currency, and my hope is they will do that as soon as possible.

An even more problematic issue for Bitcoin is VAT tax policy in countries where that is the norm. Right now, Canada is considering applying VAT tax to the purchase of Bitcoin. VAT can be as high as 15% in Canada, so that would mean every purchase of Bitcoin would cost up to 15% more than the current market price. And then when you turn around and purchase something with Bitcoin (as I did yesterday with seats for Tuesday night’s Met game), you would be taxed another up to 15% on that transaction. That’s double taxation which, in my mind, is always terrible tax policy. If Canada goes with this approach, it is my view that Bitcoin as a medium of exchange in Canada is a non-starter.

It is also true that VAT tax on the purchase of Bitcoin would be problematic for the store of value use case. Most investors aren’t going to pay a tax of up to 15% on the acquisition of investment property (like stocks and bonds). So why would they do that with Bitcoin?

The UK went down this path with Bitcoin and VAT last year and then, after careful consideration, the HMRC decided that VAT would not apply to Bitcoin acquisition, but VAT would be applied when Bitcoin was used to purchase goods and services, just like the British Pound.

If we had to pick a country that has taken the most thoughtful and helpful policy toward Bitcoin, it would be the UK. In fact, last week the Chancellor of the Exchequer announced an effort to make the UK the leading center of Bitcoin innovation in the world. That’s forward thinking. That’s what the US and Canada should be doing. But they aren’t. Instead they are stifling innovation in and around Bitcoin with their taxation and other policy initiatives.

I am sure many policy makers would prefer to see the Bitcoin genie put back in the bottle. But that’s not going to happen. Not only is Bitcoin alive and well, it is a global phenomenon, so even if you stifle it in your country, it can and will grow and thrive in other parts of the world. And so you are eventually going to have to deal with Bitcoin, what it means, and what it enables.

It is my view that treating Bitcoin like a currency is the most helpful approach. That will allow Bitcoin to find its best use cases without overly burdensome taxation and other regulatory requirements. I’m very pleased that the UK has found it’s way there and my hope is other major economies like the US and Canada will follow suit as soon as possible.

Kitchensurfing

There is only one company to date that the Gotham Gal has made an angel investment and subsequently USV has invested in and that is Kitchensurfing. I was not involved in either investment decision. The Gotham Gal made the angel investment herself. And because I was conflicted, by virtue of her investment, I recused myself from USV’s investment decision. So I don’t know as much about this company as many others in the USV portfolio.

But I know this much, it’s a fantastic service. Last night we had a dozen people at our beach house. The Gotham Gal is a great cook but she wasn’t really down with the idea of cooking and cleaning up for that large of a group. So we went with Kitchensurfing.

We wanted to eat healthy, lots of farm fresh foods, cooked without any heavy sauces or spices. We selected Chef Warren and he came through for us. He picked up some chicken at the local chicken farm. And he brought all sorts of fresh vegetables.

Our meal wasn’t one of the standard menus on his Kitchensurfing page. But it was pretty close in terms of price and selection to this one. We obviously customized it.

He grilled everything up to perfection, served it buffet style, and cleaned up everything and left the kitchen and grill as he found it.

I tweeted this out as dinner was served:

If you find yourself in a similar situation, with a house full of guests, without a desire to cook and clean, and are willing to spend what you’d spend if you went out to eat, try Kitchensurfing. It’s great.

Fun Friday: A Blast From The Past

Last week I came into the USV office after being away for most of the prior week and Lauren said “I’ve got some photos of you on my desk.” I wasn’t expecting any photos so I was curious. She handed me a manilla envelope and it was from Euclid Partners, the first venture capital firm I worked at. I guess they were cleaning up their files and found some old marketing materials and sent over the photos of me.

This is me in 1988 or 1989.

FW Euclid

 

I was 27 or 28 and the Gotham Gal and I were just married. I worked in Rockefeller Center (you can see some of the Rock Center buildings in the background). I wore a suit and tie to work every day. And the device behind me is the Information Appliance, built by Jef Raskin, who designed the original Macintosh before Steve Jobs pushed him out of Apple and took over the project. Euclid Partners was one of the VCs behind Jeff’s startup, Information Appliance, and I had one of them on my desk. I would have preferred if Euclid had sent me that computer. It would be a mighty fine addition to my collection of failed devices. But this picture isn’t too bad either.

Since it’s friday, let’s do a fun friday and post throwback photos of all of us in the comments. This should be a blast.

Figure1

Last week I wrote the Dentist Office Software Story and the top comment on that post was this from LIAD:

….along comes Sevin Kystrom, he only cares about looking at photos of teeth. he unbundles photos from denstry.com by creating a standalone app called teethagram. users love it. he sells it back to dentistry.com for $1bn

I kind of flipped out when I saw that comment because it describes our most recent investment, Figure1, which my partner Andy blogged about at usv.com yesterday. We had closed but had not yet announced the Figure1 investment when LIAD made that comment.

Figure1 is “instagram for doctors.” It’s not for dentists, as LIAD’s fictional company teethagram is, but other than that, and the sale for $1bn, the story is pretty much the same.

We have believed that simple, easy to use, photo centric apps on mobile have the potential to become very large businesses for a host of reasons. First and foremost, as Brian Watson taught me, photos are the atomic unit of mobile. It’s easier to snap a photo and post it/send it, than it is to do anything else, including write something. And, as the old adage explains, a picture tells a thousand words.

A doctor can say “I’ve got a patient with a very rapid A-fib” or she can send this to her colleagues:

A-fib

There’s a hell of a lot more info in that EKG than a doctor could type into a text message or email.

But the even better thing is the conversations that instantly develop around these images, like this one:

I think it’s rapid a-fib. I think the ischemic changes are due to the rate. Give them some #Amiodarone and see what happens when the rate sloes down.

Instagram is a powerful product. And most people know how to use it and the value of the interactions around photos that it produces. Like our portfolio company Edmodo, which took the Facebook UI and applied it to teachers and students in K-12 education, Figure1 takes a popular and effective UI and applies it to an industry in desperate need of change.

I’m super excited about the value Figure1 provides to doctors and their patients and I am really pleased that the Figure1 team agreed to work with USV as they build their business.

The New Foursquare

Today our portfolio company Foursquare is launching the all new Foursquare. You can download it here.

There’s a really interesting lesson for entrepreneurs and developers in the Foursquare story. The initial product was very innovative and it brought to market the notion of checkins, being able to see where your friends were, recommendations of places by your friends instead of strangers, and a social feed based on location.

Since Foursquare launched, over 50 million people worldwide have checked into a place on Foursquare, creating over 6 billion checkins, and millions of new checkins are created every day. And yet for many, the initial Foursquare was a challenging product. Last year, the Foursquare team took a step back and analyzed why such a groundbreaking product was so challenging for so many.

This analysis told them a few important things:

1) Foursquare had to support two separate privacy models. While you probably want every Foursquare user to see your tips and recommendations, you definitely don’t want them to all know where you are. So that required two privacy models. Most users find two privacy models in one app to be quite confusing. 

2) A hard core of Foursquare users love to checkin. I am one of them. I want to database my life, the places I go, and what I see and do there. I have checked in a total of 6,342 times since I started using Foursquare.

3) Most Fourquare users don’t want to checkin. Like Twitter, where many users don’t tweet (or don’t tweet often), many Foursquare users don’t checkin. They use the app to find a place to go based on where they are and what they like to do.

So those key learnings and many more told the Foursquare team that they had two primary use cases and they needed two apps to satisfy them. Foursquare for everyone. And Swarm for those users who like to checkin. The all new Foursquare has the Twitter privacy model (default public). And the Swarm app has the Facebook privacy model (default private).

Foursquare and Swarm are an “app constellation.” They work tightly with each other if you have both of them. If you only have Foursquare, then it’s a different and lighter experience.

If you are like most people and don’t want to checkin but do want to know where to go and what to do when you are somewhere new and different or just looking for some inspiration, download the new Foursquare. It’s powered by those 6bn and growing checkins. It has incredible data based on “what they do instead of what they say” and the recommendations are great. I’ve been using the new Foursquare in tandem with Swarm for the past month and I love the combo and what each brings to my life.

Get Lucky

I’ve always thought of myself as a lucky person. I’ve had a tremendous amount of good fortune in my life; a happy marriage, great kids, a fantastic job, several great partnerships, and lots of financial success.

So it was with interest that I read this post about some research a psychologist named Richard Wiseman did on lucky and unlucky people. Wiseman concludes that luck (and unluck) is a function of state of mind (positive vs negative), being open minded, and trusting your gut.

Here’s the money quote from the post:

My research revealed that lucky people generate good fortune via four basic principles. They are skilled at creating and noticing chance opportunities, make lucky decisions by listening to their intuition, create self-fulfilling prophesies via positive expectations, and adopt a resilient attitude that transforms bad luck into good.

I have heard similar things over the years and these findings certainly resonate with me. I can’t stress enough the importance of the last point – “a resilient attitude that transforms bad luck into good.” If you always look on the bright side of life, to quote Monty Python, you will have much greater success.

And, of course, it turns out you can learn to be lucky. Wiseman ran a “luck school” and less than a month he turned unlucky people into lucky people. So if you aren’t feeling it, get lucky. You can do it.

A Comment About Comment Spam

The AVC blog has been hit with a rash of comment spam in the past several weeks. Every day we take down at least five or ten of these annoying things. And some days, we take down a lot more.

The “we” is me, William, and Shana. I really appreciate their help with this chore. They’ve been helping me moderate and manage the comments here at AVC for several years now. It’s an unpaid and mostly unnoticed job. I really appreciate their help on it.

I honestly don’t understand why these spammers do this. The Disqus system has its own filters and very little of it actually gets through and into the comments. And the stuff that does get through gets taken down by us.

These past few weeks has been particularly bad. I am not sure if the problem is an increase in spam attacks or some sort of change in the Disqus filters. But whatever is causing the increase in spam, it’s pissing me off.

If you leave comments here regularly, you will certainly have experienced getting a reply that is spam. So you know how I feel about this stuff.

One of the many reasons I moved away from Typepad comments and to Disqus back in 2007 was to manage comment spam. I could not manage it on Typepad and the old AVC comments were full of the stuff. That’s why I left all of those old comments behind on Typepad when I moved to WordPress. I am not going to let that happen again.

The fight against The Internet Axis Of Evil never stops but it does change. When I wrote that post a decade ago, it was mostly about email spam and viruses. I don’t think so much about those scourges now. We’ve moved on to getting hacked and DDOS’ed and worse. The good thing about the Internet is you can do what you want on it. The bad thing about the Internet is you can do what you want on it.

So if you’ve noticed an increase in comment spam recently, you are correct in your observation. We are taking it down as fast as it comes in. Maybe the spammers will move on to somewhere more fruitful for them. Or maybe Disqus will tighten their filters a bit. Either way, we are going to keep this bar clean of that stuff. I promise you that.

Tearing Down The Teardown

CB Insights published a “teardown” of USV’s investment strategy last week. It’s a pretty solid piece of work considering they did not have access to any of our internal data.

The got some stuff wrong, however.

1) We did not participate in Zynga’s “megaround” in Feb 2011.

2) We only have six main investment vehicles;

USV 2004 – $125mm

USV 2008 – $160mm

USV Opportunity Fund – $125mm

USV 2012 – $200mm

USV 2014 – $175mm

USV Opportunity 2014 – $175mm

3) We have invested in a lot more than four YC companies. I think the number is closer to ten. I think YC is by far the investor we follow the most, particularly in recent years.

But, as I said, they did a pretty good job considering they don’t have access to our internal data. And I do not believe our limited partners are sharing our reports with them.

What this shows is that the venture capital business is becoming more transparent because so much of our investment activity, and the activity of our peers, is being tracked as it happens. When we raise a fund, that is reported (we must disclose that fact due to securities regulations). When we make an investment, that is generally announced by the portfolio company. And there are reporting requirements for that too. It is possible to do a stealth financing, but it’s not easy. When we make a follow-on investment, that is often announced and/or disclosed. And most exits are disclosed.

What is harder to figure out is what our ownership levels are in our portfolio companies. If you knew the amount we invested and the valuation of the round, you could figure that out. But that would be very hard to do accurately and consistently. I don’t think anyone is going to be able to do a teardown of a VC fund and its returns any time soon.

But even so, it’s impressive what CB Insights and others are doing to track and measure and report on VCs and their investment activities. Entrepreneurs should be able to get some third party assessment of the quality and performance of the VCs they might work with. That’s totally possible now and I think that’s a good thing.