A Range Not A Price

Entrepreneurs often struggle with how to signal their valuation expectations to investors.

Investors rightly want to know what the entrepreneur’s price expectations are before investing significant time on the opportunity.

But entrepreneurs don’t want to negotiate against themselves and certainly don’t want to undervalue themselves.

So what I always recommend to the entrepreneurs we work with and, frankly, anyone who asks is to “give a range, not a price.”

Let’s say you are raising a Series A round and have an aspirational valuation in mind of $30mm pre-money, raising $6mm.

But you know that is an aggressive valuation and you may have to accept something materially less in order to get a deal done.

Then I would tell investors “we want to raise $4mm to $6mm and don’t want to dilute more than 20% including any increases to the pool.”

An investor could read that as you would accept $4mm at $16mm pre-money but you have signaled that $30mm post-money is where you are aiming.

And, because you said “don’t want to dilute more than 20%”, you have left some room for your aspirational valuation of $30mm pre-money in which $6mm would dilute the company roughly 17%.

Try this the next time you are asked for a valuation from an investor. It works well.

Time Will Tell

There is a lot of excitement about Bitcoin Cash. It became a thing yesterday and is up almost 100% in the last 24 hours according to Coin Market Cap.

It reminds me of the way hot IPOs trade. Snap went public at $17/sh, traded up to north of $24/share on it’s first day, and is currently trading at just under $13/sh.

I am not comparing BTC Cash to Snap. I am just saying that time will tell whether BTC Cash, or frankly any ICO, is going to be valuable long term.

But one thing is for sure, hard forks create something from nothing and we will see more of them as a result.

Unrelenting Stress

I saw this Elon Musk tweet yesterday:

What he describes in that tweet is the life of an entrepreneur. And also, to some extent, the life of a VC who cares.

The unrelenting stress is the hardest of the three in my opinion.

Stress is part of life, we all have it.

But starting and running companies brings stress that seemingly never stops.

Managing that so that it doesn’t eat you up and mess up your relationships is super hard.

Some things that I have seen work well for people are regular (daily?) workouts, eating and drinking healthy, having a coach, and most of all, having a spouse who keeps it all in check.

There is no better work, from where I sit, but it comes at a cost, particularly if you let it.

On Forks

Last year Ethereum forked and we got a new crypto asset called Ethereum Classic. I own Ethereum. I don’t own Ethereum Classic.

I could buy Ethereum Classic but I have not been interested in doing that as of yet. That may change.

Next week Bitcoin will fork. If you hold your Bitcoin directly, you will get Bitcoin Cash, the fork of Bitcoin, in addition to your Bitcoin.

If you hold Bitcoin at a hosted wallet or exchange that will not support the fork, like our portfolio company Coinbase, you will not get Bitcoin Cash.

I am going to keep my Bitcoin at Coinbase and pass on the opportunity to get some free Bitcoin Cash.

If, over time, Bitcoin Cash becomes interesting, I could buy some and maybe I will do that. Like I might buy some Ethereum Classic.

Yes, passing on the opportunity to get some free crypto is a missed opportunity.

But I am not sold on Bitcoin Cash, like I am not sold on Ethereum Classic. I would like these crypto assets to prove themselves in the market before I take ownership of them.

All of that said, I think forks are valuable. They allow for innovation. They allow for others to try a different model. They allow for the market to decide what is valuable and what is not.

Forks are a pain for the companies that provide the infrastructure for these crypto assets. Forks introduce instability for a period and the Ethereum fork last year is a good example of what can happen.

But all in all, I think forks are a feature not a bug in the blockchain sector. There is more good that comes from them than bad.

Startup Churn

We encourage all of our portfolio companies to measure their churn rates by cohort. It is very revealing.

I saw this tweet by Liad this morning that shows startup churn by cohort.

I don’t know the source, but the data is sobering.

Some of the churn is companies getting sold. Some of the churn is companies getting profitable. But most of the churn is companies failing.

We have looked at our portfolio this way and our portfolio has performed much better than this. Some of that is selection. Some of that is support. And some of that is tenacity of the founders.

But, as Liad says in his tweet, startups are no cake walk.

The SEC Speaks On Tokens

Yesterday the SEC issued a report of investigation finding that DAO Tokens are securities under U.S. law. This report sent shock waves across the crypto sector leading to roughly 10% declines in the major cryptocurrencies. I must have received a dozen or more emails from people saying that “ICOs are over.”

I don’t think ICOs are over. I think regulatory clarity is going to be good for the crypto sector long term and while this report does not give us total regulatory clarity, it does give us some very valuable insights into what the SEC is thinking about tokens.

Specifically, we now know that:

  1. The Howey test is the regulatory framework through which to evaluate whether a token is a security.
  2. A token that return profits to holders will be considered a security.

We likely know a lot more regarding jurisdictional issues and what the SEC is going to regulate and what they are not. But I will leave it to the lawyers and other SEC watchers to weigh in on that. I am not a professional and don’t want to pretend to be.

At USV, we have been urging our portfolio companies and others in the crypto sector to get good legal advice before embarking on an ICO, investing in ICOs, and more. That legal advice, given as far back as several years ago, more or less anticipated much of what was in this report.

You could see this coming if you did your homework. None of this is surprising to me and to most of the folks in the crypto sector who have sought legal counsel on these matters.

In fact, if you look at all of the regulatory actions that have been taken in the US over the life of cryptocurrencies, you will see that it has mostly been straightforward application of existing laws, on AML, KYC, taxes, securities, etc. Almost all of this could be, and in many cases, was anticipated by those who took the time to consider what the regulators might do and would do.

None of this means that the crypto sector in the US (or elsewhere) won’t be harmed by bad regulations. That has always been a big risk to the sector and remains one. Regulators must be careful to “do no harm”, here in the US and elsewhere. To date, I would say they have done a good job on that. I encourage them to continue that track record.

But mostly I would encourage all entrepreneurs, investors, and others who are actively participating in the crypto sector to get good legal advice before doing anything significant. The regulators are watching. Closely. So know the rules and play by them.

Zemanta – From SeedCamp to Outbrain

In the summer of 2008, I attended the SeedCamp in London and the winner of that class was a company called Zemanta, out of Ljubljana Slovenia. I was taken with everything about Zemanta; a small team (three founders), out of a place that I had never been to and had barely heard of, winning the SeedCamp with a really smart blogging tool that I just had to have on my blog.

USV invested in a seed round that summer that was led by the SeedCamp folks and Eden Ventures. Zemanta was USV’s first European investment. Today, we have ten out of sixty-seven active portfolio companies (~15%) based in Europe.

The seed investment in Zemanta led to a nine year journey with Bostjan and Andraz, who founded Zemanta along with Ales.

The blogging tool is amazing. It recommends links and images in real time as you type into your blogging tool. I still have it running in my WordPress web application. It looks like this right now.

Zemanta sold the blogging tool to a company called Sovrn a while ago and refocused on the native advertising market. They understood how to place related content into a content feed as well as anyone and they decided to focus the company on that. Bostjan and Andraz recruited Todd to lead the new business opportunity. Over the course of the last three years, Zemanta DSP has become the leading buying tool for native advertising.

And the largest company in the native advertising market, Outbrain, became their largest customer. So a few months ago, Outbrain asked the Zemanta founders to join their team and help build some important new technology for Outbrain. After haggling for a few minutes, the deal was sealed and Outbrain now has an office and a team in Ljubljana.

Like every investment, Zemanta taught me a few important things. I learned how to work with founders from a different part of the world, I learned that Ljubljana is a lovely little city with wonderful cafes and restaurants along a gorgeous river, I learned that you can keep a company alive for almost a decade on less than five million dollars if you have a crack team of product managers, data scientists, and software engineers in a place that most people don’t know about, and I learned that tenacity wins, always.

I am pleased that Zemanta has found a home inside a larger company with a bigger opportunity, I am pleased that Ljubljana has a startup success it can point to, and I am pleased that USV is now a shareholder in Outbrain, an investment I mistakenly passed on a decade ago. But mostly I am pleased that Bostjan and Andraz, with a lot of help from Todd, were able to go all the way, from startup to exit, never losing that which makes them special. That’s a big win in my book.