Bridge Loans

When fundraising gets tougher for startups, the existing investors (insiders) will often provide a bridge loan to the company to extend the runway for getting another round done. There is more of this sort of thing happening in today’s fundraising market and I thought I’d share some of the things I have learned about setting up bridge loans.

First, bridge loans are a bridge to something else. Most commonly they are a bridge to a round of financing with new investors (outsiders). They can also be a bridge to the sale of the company. Occasionally, but not often, they can be a bridge to getting cash flow positive. If none of those things is going to happen in a relatively short period of time, then it is a bridge to nowhere and you really want to avoid that. A bridge to another bridge is never a good thing and should be avoided at all costs.

An alternative to a bridge is an “insider round” where the existing investors provide sufficient capital to fund the business for eighteen to twenty-four months. That is a real round of financing and it is not a bridge. While that can sometimes be the right answer for a startup, I strongly prefer bringing new investors/new capital into a company in every financing round. New investors strengthen the investor syndicate which makes the company more resilient. New investors bring new ideas, new experiences, and new sources of funding to the business. New investors in every round are a very good thing and I like to try for that whenever possible.

So let’s say your company really wants to bring new investors into the business with another round, but it is taking longer. But you and your investors are confident that the new round will happen. Then a bridge is a good idea.

Here is how I like to structure a bridge:

  • All material existing investors should participate, ideally “pro-rata”, meaning the investors participate based on their respective ownership interests. When you have an existing investor that owns a large percentage of the business and they won’t or can’t participate, you have a problem. You can get a bridge done in these circumstances but it will be painful because nobody likes to “carry” a large existing investor who can’t support the business.
  • The ideal structure is a convertible note, with nominal interest, and a discount upon conversion into the next round of financing.
  • I like the discounts to be based on the amount of time the bridge note is outstanding. This creates an incentive to get the round done quickly, which is what everyone wants in this situation. It is also easier to explain the discount to the new investors in the next round when the discount is small if the bridge has not been outstanding for long. And it is understandable if the discount is larger when the bridge has been outstanding for a longer time period.
  • I like to start with a 5% discount and cap the discount at 25%. The ideal discount is between 10% and 20% and so the time frame for the various discounts should be set with that in mind.
  • A very important consideration in structuring a bridge loan is what happens if the company is sold when the note is outstanding. If the bridge documents do not specify anything in this situation, the noteholders will only get their money back, plus interest, in a sale. That is not really appropriate given that they are providing the capital to get the company to a sale, and so I like a premium to be paid in the event of a sale. I like somewhere between 2x and 3x depending on the circumstances.

When it is time for a bridge, the lead investor, which is typically the investor with the largest capital invested and largest ownership, should “step up”, suggest terms, and work with the investor syndicate to come together and provide a bridge loan. That kind of leadership is very important when fundraising gets harder. The startups that have strong leads will do a lot better in tough times and this is a really good example of why that is.

#entrepreneurship#VC & Technology

Innovation Indicators

Tech:NYC is the industry association for NY’s tech sector. They play a number of important roles and one of them is to educate and inform about the impact of the tech sector in NY. To that end, they launched a valuable resource last month called Innovation Indicators.

Innovation Indicators is a dashboard that shows the latest data on the impact of the tech sector on the NY economy. Here is some of the data you will find there:

Innovation Indicators will be updated regularly and will be a valuable resource to entrepreneurs, academics, policymakers, journalists, and anyone else who is interested in the development and growth of the tech sector in NY.

#economics#NYC

Remote, Hybrid, or In-Person?

We have been watching our portfolio of ~130 technology companies wrestle with this decision for the last two and a half years. Brought on by the covid pandemic and the work from home moment that it created, there has been a sea change in the way that technology companies organize themselves to get work done.

Ben Horowitz observed this in a piece last week where he described A16Z’s decision to embrace a hybrid model that he called “HQ in the Cloud.”

It turns out that running a technology company remotely works pretty darned well. It’s not perfect, but mitigating the cultural issues associated with remote work turns out to be easier than mitigating the employee satisfaction issues associated with forcing everyone into the office 5 days/week. 

https://a16z.com/2022/07/21/a16z-is-moving-to-the-cloud/

Most people are happier having a lot of flexibility around where they work. We have seen that people who are raising families have benefitted from the flexibility of working closer to where their families are and the ability to be somewhere quickly. But that is only one example of why flexibility around where you work is so powerful. Many job functions require, or at least benefit from, the ability to concentrate without interruption or distraction. A quiet home office is vastly better than a busy open workspace for that kind of work.

And then there is the commute. I am writing this on a commuter train heading into NYC. For a time in my life, I took a train like this into the city every morning at 6am and got back on it to go home at 6pm. It was almost an hour each way, so I spent almost two hours a day, five days a week, commuting. This can be a productive time, particularly if you are commuting on mass transit like I am right now, but many people don’t have convenient mass transit options in their lives and must drive to and from work, often in traffic. Eliminating the need to commute to the office might be the single best reason that people are happier having a lot of flexibility around where they work.

The numbers are telling. As of this spring, only 38% of NYC office workers were in their office on a given day based on this survey by the Partnership For NYC (a leading business group in NYC). The numbers are similar in the Bay Area and Los Angeles. Some cities around the US have much higher numbers but I have not seen any city higher than 70% on this score.

The Partnership concluded that remote work is here to stay:

Remote work is here to stay, with 78% of employers indicating a hybrid office model will be their predominant post-pandemic policy, up from just 6% pre-pandemic.

https://pfnyc.org/research/return-to-office-survey-results-may-2022/

But I want to return to Ben’s quote and talk about the cultural issues. I don’t believe we (the tech sector broadly) have done a good job of “mitigating the cultural issues with remote work.” I think a lot of the challenging morale and retention situations in our portfolio and across the tech sector suggest the opposite is true.

Here is the quandry we face:

People are happier with flexibility around where they work.

Companies, teams, and organizations are happier when people are working together.

Aren’t companies just collections of people? Yes. But groups of happier people are less happy together when they don’t get the face time that makes group dynamics easier.

We all know that people are nicer to each other in person. Email and slack and zoom don’t bring out the best in people. Having a meal together does.

So what should we do about this quandry?

I don’t think the answer is restricting flexibility around where people work. That feels like table stakes now for knowledge workers. I think the answer is figuring out how to get people back together more frequently in ways they want to convene in person.

There are many ways to do this and we have seen some good ones.

At USV, we have two days a week where we meet together and as a group with founders (Mondays and Thursdays) and those days tend to be much more popular to be in the office. We don’t require people to come to the office on those days, but we do see that most people opt into coming in those days. We also make sure to order a great lunch on Mondays and Thursdays. We could and probably should add an after-work happy hour and/or sports teams/leagues to make those days even more attractive to the team. The basic idea is to make coming to the office an attractive option a few days a week.

One USV portfolio CEO suggested a great idea in a CEO zoom we organized on this topic a year or so ago. He said that he wanted his teams to come together for a week at the start of a project and again for a week at the end of a project. He wanted them to be together to kick it off and again to ship it. I think that’s a great idea and have been encouraging the teams that I work with to do that.

Our portfolio companies used to do exec team offsites a few times a year. A few of them are now doing them monthly. That makes sense to me. I can’t imagine an effective exec team that isn’t in person together at least once a month. And yet so many of the exec teams I have exposure to are not spending nearly enough time together right now and have not for the last few years. This same thought can be extrapolated to any team in any company.

Those are just some examples of things that can be done and should be done to get people working together again in an age of remote work that is not going to end. I am sure there are many other great techniques and if you lead a company and/or an HR team, you should be collecting and using as many of them as you can right now.

At USV, we feel pretty strongly that getting people back to working together in person is important to the success of our portfolio companies and the broader tech sector. So we recently opened our new office in NYC that is designed to host individuals and teams from our portfolio and the broader tech ecosystem that need somewhere nice to work together. Think WeWork meets SohoHouse meets VC firm. We are still working out the kinks this summer and plan to open it up more broadly in the fall. Stay tuned for more on that here and elsewhere.

All change has good and bad downstream effects. The broad-based adoption of remote work in the tech sector (and beyond) is allowing people to balance work and home life in ways that are extremely beneficial to them. But team morale and the broader cultural needs of companies have suffered and we need to recognize that and address it. We can’t accept that as the new norm. It is unacceptable the way it is right now. A hybrid model that provides continued flexibility while creating a lot more face time is the long-term answer and we must keep innovating until we find the right balance.

#employment#enterprise#management#VC & Technology

Valuing a Venture Capital Portfolio

Every quarter our firm goes through a process to value our entire portfolio. Those values, on a schedule of investments we publish to our investors every quarter, flow through to our financial statements and capital accounts and establish how much an interest in our partnerships are worth at that time.

We have always taken this process very seriously and approach it with a lot of rigor. Every partner is highly engaged with this process. Although we have a fantastic financial team at USV, we do not simply outsource valuing the portfolio to them because we understand that those who are closest to the portfolio companies will have the best view of what they are worth.

We have a few rules and I would like to share them:

– Be conservative. The auditors try to get us to mark our portfolio up to reflect “market prices” but we prefer to keep our portfolio marked below market prices, particularly in times of market froth. This leads to a fair bit of haggling with our auditors that is mostly a waste of everyone’s time but we feel that it is important to maintain our conservative posture.

– Get Ahead of Market Pullbacks. We like to move quickly to take our marks down when we see the market environment changing. Public stocks often lead private valuations by several quarters so we like to look to public market comparables and mark down quickly.

– Never Mark Higher Than Potential Sale Value. Every time we have a significant M&A exit in our portfolio, I like to check that the proceeds to USV exceed our current mark. I believe we have always met that test. I hope we always do.

– Take Total or Partial Write-Downs In Advance of Problems. When a company is having real issues, we like to take total or partial write downs. We sometimes reverse them if the company recovers. If you might lose money on an investment, it is always best to signal that ahead of time.

– Have Multiple Sets Of Eyes On The Marks. We debate and discuss the marks with each other. This is all about getting multiple sets of eyes on the marks. While the partner closest to the company will always have the best sense of value, debating and discussing often leads to a better answer. We do this in everything we do at USV. It’s a huge part of our culture.

Valuing a private investment or a portfolio of private investments is an inexact exercise. Because there is no liquid market for most of our positions, we don’t really know what someone would pay for them right now. So we do the best we can, take a very conservative posture, and revisit them quarterly. That has worked well for us over the years.

Q1 of this year was a down quarter for USV and we expect we will see additional markdowns in Q2. But our markdowns have not been as steep as the decline in the Nasdaq over the last six months. That is because we maintained a conservative bias throughout the last few years and resisted the efforts of some to get us to behave differently. And that feels good and right to me.

#VC & Technology

Some Thoughts On Twitter (continued)

I wrote the post at the bottom and linked here when Elon Musk announced his intention to buy Twitter in late April. I am relieved that Musk has decided he does not want to own Twitter. I never thought he would be a good shepherd of the Twitter network and maybe now we have the opportunity to find a better ownership/governance model for it.

I understand why the Twitter Board and management team feel they must force Musk to perform on the agreed-upon deal. They have shareholders to protect and an obligation to do what is best for them. If Musk really does not want to own Twitter and is not just trying to renegotiate the deal, then eventually both sides will come to some settlement that enriches Twitter and lets Musk out of the deal. That will likely be a lot more than the $1bn breakup fee. I hope that we don’t end up with Musk owning Twitter at a lower price. That would be a bad outcome for the shareholders and for the Twitter network.

I would like to see the Twitter Board and management team continue to press Musk to perform on the deal, and at the same time start working on a plan to decentralize Twitter and move it to the thing it has always wanted to be which is a core communications protocol for the Internet. A first step in that direction would to broadly re-open the API and allow third-party clients to be built on Twitter with a business model that covers the costs of operating the Twitter network. Longer-term, Twitter should move to a fully decentralized protocol, like Bitcoin or Ethereum, but that will take some time to do.


When I read the news a few weeks ago that Elon Musk had offered to buy Twitter, I wrote this:

I continue to believe that decentralization is the right long-term answer for a core communications protocol of the Internet and hope that Elon will think about doing just that once he owns it and is not concerned with the stock price and meeting quarterly revenue targets.

My partner Albert wrote this yesterday:

Albert’s suggestion would return Twitter to where it was a decade and a half ago when it first launched and that would be a fantastic first step towards full decentralization.

I continue to believe that a single person owning one of the most important communications protocols of the internet is a bad idea, but maybe it can be a bridge to something better.

Certainly being a public company has not been the right ownership model to make the big fundamental changes which are badly needed.

#Web/Tech#Web3

The New AVC

AVC has been around for nineteen years and it has evolved over the years from a place I’d post multiple times a day to once a day to now once a week. There was a time when there was a vibrant comment community at AVC with many posts getting over a hundred comments and replies. That’s long gone and now it is just me posting here with some chatter occasionally on Twitter.

As anyone who has tried knows, posting every day is a mighty big commitment. I am relieved to have given that up, gradually, a few years ago.

What is left at AVC is a place where I can write when I have something to say that I want to say out loud. That last bit is important because there are many things I will say privately these days but not publicly. At this stage of my life, AVC is for conversations that are helpful, productive, and constructive. Everything else can happen elsewhere.

The entire catalog of AVC posts remains online and can be accessed in the archives. If anyone wants to see the progression, it is right there out in the open for anyone to see. The comments are there too for the posts that have them.

The AVC archives are a journey through the evolution of social media. From an experiment in the early 2000s, to a happening in the late 2000s, to mainstream in the early 2010s, to a mess in the late 2010s, to something to be incredibly careful with now.

At least that is my journey with social media. I continue to believe that technology that gives everyone a voice, that gave me a voice, is an incredible thing. But like many incredibly powerful technologies, it has to be used carefully or it can create more bad than good.

And that’s what I’m seeking to do here at AVC. Create more good than bad. Use the technology carefully and constructively. It has taken me a few years to land here but I’ve been here for a while now and I thought I’d explain it that I understand it myself.

#Weblogs

The Case For EVs

The Gotham Gal and I own five EVs and have been driving electric-powered cars since 2014. I don’t drive gas-powered cars and haven’t for a few years now. We have purchased two Chevy Bolts, two Tesla Model Ss, and one Rivian truck.

I love the instant acceleration you get from an EV, I enjoy driving mostly with just one foot due to the fact that EVs accelerate and brake using the accelerator pedal, I like that I can charge my car every night at home (using solar panels on our roofs) and don’t have to go to the gas station anymore, and I like that the maintenance costs and hassle are much lower with an EV. There is certainly an environmental benefit from driving EVs, but in my view, EVs are also better cars (and trucks).

But EVs remain expensive and “risky” for most folks and only 9% of global car sales are electric and that percentage is smaller in the US (more like 5%).

So how do we change that?

With gas prices sky-high, policymakers are looking to do something about the cost of driving. They are talking about short-term solutions like gas tax holidays that will do little to reduce the price of gas. I believe they should spend that money on longer-term solutions that will accelerate the conversion to EVs and reduce our reliance on the fossil fuel industry.

So what would those things be? Here is a list:

1/ A government-backed loan program (like student loans) that makes buying an EV less expensive to the average car and truck purchaser.

2/ An incentive program for merchants (think Starbucks or 7-Eleven, but it could be any merchant) to install and offer fast-charging stations.

3/ Subsidies to build battery manufacturing facilities (80% of EV battery manufacturing is in China).

4/ Policies to produce more cathode materials (which are roughly half of the cost of an EV battery).

Most automobile manufacturers are making EVs now. They understand EVs are the future. But there remain real impediments to consumer adoption of EVs. We need policies that work to reduce those impediments and speed the adoption of EVs and we need them now.

#climate crisis#economics#policy

Staying Positive

The last six months have been a challenging time for tech and tech startups. Macro events have weighed on the sector, valuations have come crashing down, revenue growth has slowed (or stopped), and layoffs are happening across the sector.

Many of the folks I work with are frustrated. The things that were working in their business stopped working and they can’t get it moving again. They are struggling to project the business and plan for the year and next year. They feel terrible about letting so many great people go and blame themselves for it.

It helps to work with many companies in times like this. We see this happening almost everywhere. And so we have some perspective. Yes, it is our collective fault for getting out over our skis during the good times and not seeing tougher times ahead. Yes, we could have and should have been more conservative with our growth plans and hiring. Yes, it is our fault for putting our companies in the position where they have to let go of so many people.

But it is also the case that the number one thing in times like this is staying in the game so you can play another round. You don’t want to go bust right now. So it is time to take your lumps, learn some valuable lessons from them, and move on.

It is also time to stay positive. When you are the leader of a company (or anything else), you have to lead with optimism, enthusiasm, and positive energy. There are people out there declaring tech is dead, web3 is over, and cheering on the fall from grace. It is best to ignore all of that, focus on what you are building, and find some wins for the team, and for yourself.

The great thing about working in tech is that there are always new problems to solve, new markets to create, new products to ship. The macro events don’t change that. So focus yourself and your team on building and shipping those things, get some wins, and move forward with optimism and positive energy. It will be infectious.

#VC & Technology#Web/Tech#Web3

The Partnership

I have worked in three venture capital firms in the thirty-six years I have been doing venture capital investing. They have all been small partnerships, between three and seven investing partners, where there is little to no hierarchy among the partners.

There are many models out there for building and managing investment firms. They vary from a single partner to an organization structure that looks like a Fortune 500 company. There is no best way to structure an investment firm.

But for early-stage investing, I believe that the small flat partnership is the best structure if the goal is to produce high return on capital funds. Here are some reasons why this model is superior for early-stage investing:

  • At the early stage, investors must bet on teams and ideas that have not been proven. The biggest winners almost always come from the investments that are the most controversial and “out there”. A small tight partnership where there is a lot of trust between the partners is a place where you can make a lot of these kinds of investments.
  • Being a lead investor in a company you start working with when it is very young (sub 10 employees) and remain actively involved with until exit can take a decade or more of work. Staying aligned as a partnership on the company and supportive of it is hard to do but incredibly important if you want the best outcome. That is hard, if not impossible if the investing team is large, hierarchical, bureaucratic, and largely disengaged with the company.
  • No single investor has the entire package. Not even the best investors out there. Trust me. I know this. Surrounding top investing talent with other top investors is a magical thing. Some have great deal instincts. Some have great networking skills. Some are great working with founders. Some have great financial minds. Some are great technical minds. Some see new markets before others. If you can put together a team that has all of this, they fill in each other’s gaps and everyone gets better. This describes the team we have at USV right now and it is a joy to work in a team like this.
  • It is very hard to make an investment that will produce over a billion of proceeds. You need to get and keep double digit ownership and the company needs to be worth over $10bn at exit. I’ve made less than five of these in my career, over almost forty years. So if you want to produce a high return on capital fund, you have to raise a lot less than a billion. I think a quarter billion is probably where it starts getting really hard to produce a high return on capital fund. This means you need a small partnership and a small firm.

The key to all of this is partnership. Real partnership. A real partnership is where everyone is equal, not just in terms of economics (which is critical to sustaining this model), but also in terms of influence and stature. This is actually quite rare in the venture capital business. I see it in some other firms. But I don’t see it very frequently. The firms that have this are special places. They are special places to work at. And special partners to take capital from.

#VC & Technology

The Gillibrand Lummis Bill

New York Senator Gillibrand and Wyoming Senator Lummis have teamed up to propose a bi-partisan bill that would shift much of the regulatory oversight of crypto assets from the SEC to the CFTC, acknowledging that these tokens are much more like commodities than securities.

The details of the bill will be made public today and then there will be a lot of feedback from elected officials, regulators, and industry. It is not certain that this bill will become law and if it does, it is not certain that it will look anything like the initial bill.

But even so, I am very encouraged by this development. Crypto tokens are a foundational element of web3, a technology architecture that allows for decentralized applications which lessen the control of big tech monopolies on our lives and our data, and that allows for users to own their data and a share of the networks that the applications are built on. Constraining these user tokens as securities is not only incorrect but also would inhibit much of their utility and therefore the potential for web3 to remake the technology industry as is so desperately needed.

So I applaud the work of Senators Gillibrand and Lummis and their staffs. They are making an important statement with this bill and I believe that this is a big step in the right direction.

#crypto#policy#Politics#Web3