Crypto and the Infrastructure Bill

I mentioned the infrastructure bill here last week. I continue to be impressed by the way Senators and the White House are working across the aisle to get a very big piece of legislation across the finish line. It is not done, but it sure looks like it will get done.

As I mentioned in the post last week, there is language in the initial draft of the bill requiring crypto “brokers” to report gains and losses to the IRS. The Treasury expects this provision to produce upwards of $30bn in new tax revenues over the next ten years.

I personally have no issue with crypto gains and losses being treated the same as stock gains and losses and we have been doing that at USV for quite a while now. But I do have concerns that the way “brokers” are defined in the context of crypto is very different than how it is defined in the traditional financial sector. The language in the initial draft is overly broad, infringing on privacy, and technically unworkable. Crypto industry participants like miners, wallets, smart contracts, and other kinds of hardware and software cannot carry the same obligations as “brokers” like Coinbase and Square Cash.

But here is the good news. The crypto sector has come together to get the language changed in a way that I have never seen before. Everyone in crypto is working together, staying on message, working all of the avenues, and creating the appropriate amount of pressure on the process. And while we do not yet have the language we need, we are getting there and I am hopeful that we will land in a good place.

It is also the case that when a government decides that a sector is an important producer of revenues, that is a sign that it has arrived. Many out there think these new regulations are bad for crypto but I think they are a bullish sign. Crypto is here to stay and is a mainstream industry now.

For these reasons, I think this is a watershed moment for crypto in the US. The industry has come together like never before and is acting in concert, professionally and productively. It is on message and effective. And the government is getting in business with the crypto sector to finance it’s own needs. That sounds like a win to me.

#blockchain#crypto#policy#Politics#Uncategorized

Leaving Well

I have watched countless companies and leadership teams manage transitions over the years and I have come to believe that companies and leaders should do everything they can to promote “leaving well.”

What I mean by “leaving well” is a smooth transition of a leader out of a role/company. This typically means that a departing leader gives a company a heads up that they are planning to transition out, that news is shared broadly internally, allowing for a transparent process to find a new leader. A similar process is used to transition a leader out when a new one is needed.

For this to work, companies need to do their part to facilitate this process. This means reacting well to the news that an executive would like to move on. It can also include a financial incentive to stick around during a transition. A culture that embraces leaving well puts everyone in a better place during transitions.

There are certainly times when leaving well is not possible. If an executive is terminated for reasons that require an immediate departure, there is no way to execute a smooth transition.

It is also the case that an executive could get an offer that requires an immediate start date that they feel that they have to accept. This is exactly the kind of thing a tradition and culture of leaving well is designed to prevent. Generally speaking, it is preferable to run a process to find your next role versus accepting an offer that comes in unsolicited. If a company has a culture of leaving well, executives will feel that they have the option of running a process versus accepting an offer that comes at them.

It is best to set this culture up at the very beginning. Precedent is powerful. If people see that others have been treated well on the way out, they will be more comfortable being open and honest. If people see the opposite, then they will be more mercenary in their actions.

Cultures that allow for open honest transitions are better places to work and easier companies to manage. Nobody likes a fire drill. Sometimes you have no choice, but if your company has them all of the time, it is a tough place to be.

#life lessons#management

The Lost Art Of Compromise

I am heartened to see both sides of the political aisle in the US came together yesterday to agree to move forward on a $1 Trillion Infrastructure Bill.

There are parts of the bill that I don’t like (asking blockchain smart contracts to send 1099s to the IRS seems nuts to me) and parts that were taken out that I think are critical (like building a nationwide EV charging network).

But perfect is the enemy of the good. We have not had a functioning legislative branch at the federal level in the US in a long time. I am hopeful that a bipartisan victory on infrastructure will pave the way towards other bipartisan efforts and the right and left will start talking to each other, respecting each other, and governing again.

I have spent my adult career making deals with people. I have learned that you can never get exactly what you want when you make deals. You must compromise so that both sides can feel that they won. And when you do that, there are many times when both sides do win. If you choose to sit on the sidelines, you almost always lose.

I am happy to see that our elected officials in Washington have decided to get back into the game again.

#Current Affairs#policy#Politics

Cash on Cash vs IRR

The two most used measures of a venture fund’s performance are the “cash on cash” return and the “internal rate of return” (IRR). One measures how much an investor got back divided by how much they put in (cash/cash). The other measures what the effective rate of return is on the investor’s money.

You might think these measures go hand in hand, but that is not the case.

I was reminded of that last week when I was reviewing USV’s second-quarter reports that we will send to our investors soon. Three of our most mature funds showcase how these numbers can behave differently.

Our 2008 vintage early-stage fund has generated about 5x cash on cash but only generated a 22.5% IRR.

Our first Opportunity Fund, raised two years later in 2010, has generated only 3.9x cash on cash but generated a 58.6% IRR.

And our second Opportunity Fund, raised in 2014, has generated 7.3x cash on cash but only 46.7% IRR.

Our Opportunity Funds invest in the later stage rounds of our top-performing portfolio companies plus a few later-stage investments in companies that are new to USV. The average holding period of these investments is materially shorter than our early-stage funds and so they typically produce higher IRRs for a given cash on cash performance. That explains why our 2010 Opportunity Fund has a lower cash on cash return but a much higher IRR than our 2008 early-stage fund.

But even for the same strategy, you can get materially different numbers. Our 2014 Opportunity Fund has a higher cash on cash return but a lower IRR than our 2010 Opportunity Fund. That is because our 2010 Opportunity Fund had a few very fast material exits and our 2014 Opportunity Fund had a more typical holding period for its material exits.

Venture capital funds do not take down the entire capital commitment upfront. They take it down over time, often over four or five years. And the money comes back over time as well. So the timing of the cash in and cash out has a very big impact on IRR, but zero impact on cash on cash.

So if these two measures behave differently, what is the more important number? For me, it is cash on cash. I care less about how quickly the money goes in and comes out of a fund and more about the total return of the fund. Our early-stage funds can often take 15-20 years to be fully liquidated but they can also produce much higher total returns.

I have found that patience is often rewarded in early-stage investing. If you want to make 5-10x on your money, you need to be prepared for long holding periods. That reduces the IRR but generates high cash on cash returns.

#VC & Technology

100% Solar Match

Rocky Mountain Power emailed me last week and offered us a “100% Solar Match” which means that we can “match” all of our energy consumption in our home in Utah with power from their 20 megawatt solar plant in Holden Utah.

This doesn’t mean our home will be now be operating with energy from that plant but it does mean that we have opted for 100% solar. If every Rocky Mountain Power customer opted for this match, they would have to build more solar plants and decommission carbon based energy facilities.

There is the question of how Rocky Mountain Power could operate an all solar grid (they can’t as far as I know) and whether most customers care enough to specify what kind of power they want to purchase.

But I found the experience simple and easy. One phone call and I was cut over. And now I feel better about the energy we consume in Utah.

It does feel like a bit of a gimmick but it’s a positive one in my book.

#climate crisis

Stablecoins vs CBDCs

I have written about stablecoins in the past. I think they are a very important part of the crypto asset landscape. Two of the top ten crypto assets by market cap are stablecoins, Tether ($62bn) and USDC ($27bn). You don’t buy these assets to generate gains because they are price stabilized. You hold them like cash, to be able to move in and out of trades, purchase things, etc.

Countries around the world are looking at stablecoins and thinking “we should issue these assets via our central banks.” That is called a “central bank digital currency” or CBDC for short. China is the farthest along on a CBDC but many other countries around the world are thinking about CBDCs or building them.

Yesterday, SEC Commissioner Hester Pierce suggested that stablecoins are preferable to CBDCs.

Hester focused on the privacy concerns around CBDCs, and I agree with her that I would rather hold USDC than a Fed issued digital dollar.

But there is another more important reason to want stablecoins to win over CBDCs – competition.

When you have competition, you get innovation, new features, composability, and a host of other important benefits. When you have a monopoly, like the US Government or any government, pushing out the alternatives and forcing us to use their digital dollar, you lose all the value of competition. And that would be a terrible thing.

I am all for central banks issuing digital currencies. But they should compete for our usage with market-based stablecoins. Then we get the best of both worlds. I hope policymakers in the US and around the world understand the importance of competition and allow stablecoins to co-exist with CBDCs.

#crypto#policy

News Items

This morning I was sitting outside of my coffee shop, sipping on a cortado and reading the news on my phone while the NY Times, which I buy for The Gotham Gal every morning, sat folded up next to me. I gave up on mainstream news media two decades ago and have been relying on the Internet for news for a long time now. By “Internet”, I mean blogs, Twitter, and increasingly, email newsletters.

What I was reading this morning on the bench sipping coffee was News Items, an email newsletter by John Ellis. News Items is a subscriber-only newsletter, as opposed to the free stuff you can get on Axios. But you get what you pay for with John. His newsletter is smarter, edgier, and out in front of most anything else out there. The topics that interest John the most are technology (lots of biotech), geopolitics, and finance.

The way John describes it is:

Three baskets: (1) World in Disarray, (2) Financialization of Everything and (3) Advances in Science and Technology. Bonus basket: Electoral politics in the US and around the world. Six days a week, not Sundays.

I paid $3 for the New York Times at my coffee shop this morning. I pay $99 a year for News Items. And I get things every day from News Items that I never get from the New York Times. And I don’t have to read the nonsense that the New York Times churns out non-stop these days.

If you want more news and less nonsense, you might want to give News Items a try. You can do that here.

You can also listen to John five days a week on our portfolio company Recount’s podcast network. He and his co-host Rebecca Darst cover the same news stories that John puts in his newsletter. Here are the most recent episodes:

#Current Affairs

The Bad Marriage Problem

Over the last 18 months, the early-stage financing market has seen dramatic changes characterized by these three things:

  • A shift from in-person fundraising to virtual fundraising
  • A reduction in financing process timelines from months to weeks
  • A continued increase in the amount of capital available for early stage companies

I believe that for the most part, these changes will be permanent.

And I believe that for the most part, these changes are good for early-stage company formation and innovation.

However, there will be some negative side effects from these changes and one that I worry about is the “bad marriage problem.” Unlike public markets, private market investments are held for many years, often a decade or more. If an investor and an entrepreneur find each other difficult to work with, there is no easy solution. There is no divorce court for startups. And so the result is likely to be entrepreneurs and investors getting stuck in bad marriages.

There are a few opportunities to address this issue. There is a vibrant secondary market for private investments and while it is mostly limited today to well-known later-stage companies, it could develop into a broader market as the capital seeking to get invested in early-stage innovation continues to grow unabated. It is unlikely that founders will be able to force investors out of their cap tables via the secondary markets, but a voluntary separation via the secondary market seems more likely to me.

I also think startup boards need to evolve. There should be many more independent directors and many fewer investor directors on startup boards. Investors should be more open to observer seats and founders should have more say in which investors sit on their boards. I am not arguing that founders should control their boards, but I am arguing that investors should not control the boards. I think independent control is the most sustainable solution.

We know that bad marriages are hurtful to everyone, not just the spouses. Companies that have dysfunctional founder/investor relationships suffer from them. And the shotgun marriage environment we are operating in right now (and for the foreseeable future) will likely create more of them. So we should be thinking about solutions to end these bad marriages and let everyone move on to better ones.

#entrepreneurship#VC & Technology