Posts from August 2009

I am for universal health care. To me that means that everyone in this country can obtain medical care when they need it.

That said, I dislike our current form of healthcare delivery in this country and always have. I'd like to see either single payer if we must have it or even better, a consumer centric health care system.

Yesterday I saw my friend Kurt Andersen send out this twitter message:

I clicked thru, saw a long six page article and then figured out (with the help of twitter) how to send it to my Kindle. I read the whole thing last night and this morning.

The author, David Goldhill, makes a very compelling case for a new kind of healthcare in this country that he calls "consumer centric".

You really should read the entire piece, but this paragraph near the end sums it up for me.

Health insurance has never made any sense to me as a way to pay for regular health care expenditures. We pay for our own every day dental bills (because our firm does not provide dental insurance) and my wife and I can handle that as part of our annual expenses. Why shouldn't we pay for our every day medical bills the same way?

David Goldhill makes the point that we are using insurance for the wrong things in this country. We are using it as a way to finance healthcare broadly when it should only be used to fund catastrophic situations that cannot be paid for any other way (which is what insurance is designed for).

The benefit of a consumer centric health care system is we all would start paying attention to what all of this costs and negotiating ourselves for better prices and/or shopping around. That never happens except in the cases where the procedures aren't covered. And Goldhill makes a compelling argument that uncovered procedures have shown the benefit of a competitive market at work:

Goldhill's proposal is radical and to my untrained eye, it sounds right:

The details of how to do all of this, including the important questions of what to do with the people who truly cannot afford to pay for their healthcare, are on the last page of the article, in the section called "A Way Forward".

As I said, I have an untrained eye on this subject and am no expert. Maybe this approach is flawed. And of course, as a wealthy person who can afford to pay for his family's healthcare even without insurance, I am somewhat immune to all of this.

But I believe in markets and competition. And I believe that our current approach of using big fat bureaucratic insurance companies to finance and manage healthcare is badly flawed. I'd prefer the government run the healthcare system to the way we are doing it now. But an even better approach would be to let us run it ourselves.

Robert Scoble wrote a post at 4am on the road in Indianapolis last night proclaiming that Twitter is "probably worth $5bn to $10bn." This is not the first time that someone has used a blog post to speculate on what a private company is worth. Facebook is probably the poster child for this activity.

Earlier this year TechCrunch posted that Facebook had received a term sheet valuing it at $2bn. Not much more than a month later, Facebook announced that it had taken an investment from Digital Sky that valued the company at $10bn.

Is all this speculation good or bad? I'm honestly not sure. But I think we will see more of it, not less. This morning Howard Lindzon noted on his blog that Stocktwits has established tickers for Facebook and Twitter. So now you can tweet about what you think about $fbook and $twit, the stocks not the companies.

At the same time as all this speculation is raging in the blogs (and even traditional media), we have secondary markets cropping up like SecondMarket, Sharespost, and a bunch more. I've even read research reports on Sharespost about private companies that attempt to project revenues and earnings and do valuations.

On one hand, I think the transparency into the world of private investments is good. Entrepreneurs benefit from having their companies discussed and valued in "the market".

But I think all the focus on what a company is worth can be bad. These companies are private for a reason. Most of them aren't mature enough to be public companies. They often don't have full management teams and some don't even have revenues. The focus inside these companies needs to be on building the company, the product, and the business. And endless discussions about what their company is worth can be terribly distracting.

I saw this in action back in the late 90s when a bunch of our portfolio companies went public before they were ready. The employees spent too much time focused on the stock price and too little time focused on the business. Many employees starting counting their net worth in stock that was not liquid and eventually was worth pennies on the dollar of what they thought it was worth.

At the end of the day, this speculation about what companies are worth is useful if everyone keeps it in context. It's a lot like fantasy baseball. Your team might be doing great, but at the end of the day, you really don't own a major league baseball team. It's just a game.

But in the case of startups and company building, it isn't always a game. When your company grows up, becomes a real business, and goes public, you can reap the benefits of all the work you've done. Just don't count the chickens before they roost.

The NY Times Magazine has a short piece this weekend called The Facebook Exodus. In it the author, Virginia Heffernan, cites a number of anecdotes about people quitting Facebook. I am sure there are people quitting Facebook.

But the most recent comScore numbers tell another story.

In the month of July 2009, almost 370 million people worldwide visited Facebook, up 155% from July 2008. Facebook is a global juggernaut. It is the fourth most popular website in the world after Google, Microsoft, and Yahoo!

This reminds me of all the Twitter Quitter stories I've read. People do quit Twitter. A lot of them. But here are the July comScore numbers for Twitter.

In the month of July 2009, about 52mm people worldwide visited Twitter, up 1880% over July 2008 and Twitter is the 47th most popular website in the world according to comScore.

Here's the deal, churn is part of online media, particularly social media. People come and go. Some stick around, some don't. These stories about quitters are true of course, but they miss the big picture. More and more people are using these services every day.

Of course, Facebook and Twitter and every other web service out there should pay a lot of attention to why people are quitting their services and address those issues. The best services reduce churn over time. I don't know the exact numbers, but when we first invested in Twitter, it seemed like only 10% of first time users stuck around. Now that number is much higher and is one of the reasons why the service is growing faster.

So when you read these quitter stories, take them with a grain of salt. And make sure to look at the bigger picture at the same time. It may look very different.

Disclosure: For those that don't know, our firm is an investor in Twitter and I am on the board of the Company.

I saw a tweet yesterday that said:

I wasn't sure how to take it, so I took it as a compliment, particularly given the roll that Chris is on right now on his blog.

His most recent topic is equity grant math. In that post Chris states:

Chris is right that the most important number in a grant of equity is the percent of the company that is being granted to you. Earlier this week I got an email from one of our portfolio companies with option grants to approve. It listed each person's name, their job description, and the number of shares they were being granted. It was a nice presentation but I couldn't approve the grants because it did not show what percent of the company each grant represented. I had to go look up the latest cap table, get the fully diluted number of shares outstanding, and add another column detailing what each grant was in terms of percent of the company. Then I was able to approve the grants.

But I need to differ with Chris on one thing. The total number of options or shares being granted isn't totally meaningless. If you multiply them by the share price paid by investors in the most recent financing, you'll get a sense of the "investment value" of the grant. That's the "money at work" you have in the deal by virtue of your employment.

Some will say you should multiply the number of options or shares being granted by the exercise price, but the exercise price is often much less than the last round financing price. That difference between financing price and exercise price is valuable to the option grantee and represents the difference between the value that the company was able to get a valuation firm to place on its common stock and the value that the company was able to get an investor to invest in preferred stock. It is certainly true that common stock isn't worth as much as preferred stock, but it is also true that the third party valuations that companies obtain are often conservative.

The other thing that you need to know is this percentage is likely to decline over time as the company dilutes to raise additional capital and recruit additional people. It is very hard to say what an appropriate amount of dilution you should expect. It depends a lot on what stage of the company is at when you join. If it's getting close to an IPO or exit, you may be spared any dilution. If you are one of the first ten employees, count on being diluted at least in half and possibly more. Everything else is in between the two.

Like all great blog posts, the comments to Chris' post are fantastic. Make sure to read them when you read his post (and you should read his post).

If after reading Chris' post, his comments, and this post, you are still confused about how this works, please let me know in the comments and I'll do my best to explain it.

Friday night at the IFC in the Village will be the place to be if you are in NYC and care about web stuff and great documentary film making.

The director, Ondi Timoner, and the “character”, Josh Harris, will both be there for a Q&A session after the film. It should be a fun night. I wish I could be there.

Here’s a widget that links out to everything you need to know about the film and the opening friday night.

Bill Gurley has a great post on Above The Crowd called "What Is Really Happening To The Venture Capital Industry?"

Let's start with his picture. It tells a thousand words.
  
I don't think the VC industry is going to be the biggest loser though. I think we'll be the biggest winner. Just like someone who takes off 100 pounds and gets healthy again.

Bill's assertion is that a few brilliant investors raised their allocations to alternative assets in the early 90s from low single digits (say 5%) to high double digits (sometimes as high as 25%) and supercharged their returns. Everyone saw the results and copied them. What worked in a small way with a few investors doing it failed to scale (as always) and the alternative asset classes got overfunded and returns plummeted.

Bill makes the related point that venture capital is actually a small player in this story and the buyout business is the big player. He predicts that as this overfunding of alternative assets unwinds over the next decade, we will see dollars flowing into buyouts and venture capital decline by at least 50%.

I think Bill's analysis is spot on, but we also need to add the fact that all of this happened in parallel with the Internet and Telecom revolutions. Around the same time that smart investors were scaling up their commitments to venture capital and buyouts, the venture capital business had some of its best years ever. Venture capital funds that were raised between 1994 and 1997 put up fantastic returns. So these smart investors who doubled, tripled, or quadrupled down on VC and buyouts also timed those bets brilliantly.

None of this was repeatable or sustainable at scale. The venture capital business has now produced ten years of single digit returns (at best) and people are calling it "broken".

Regular readers of this blog have heard me opine on all of this ad naseum and you know where I stand on it. We need to get the venture capital business back to raising and investing less than $20bn per year on a sustainable basis. We are there now in terms of dollars being invested in startups. The last quarterly numbers were sub $4bn. And the amount of money coming into the VC business this year will be even less than what is going out.

The diet has begun. We are getting healthy again. I can see it in the market and I believe we will see it in the returns soon enough.

Gary Wolf wrote a Wired cover story about craigslist called "Why Craigslist Is Such A Mess". It's a somewhat strange article because it is highly critical of craigslist's design, management, and lack of innovation. But you cannot read that article and not come away impressed with Craig Newmark, Jim Buckmaster, and the ethos of craigslist.

Here are some stats I pulled from the piece:

I do not believe we should criticize a company that operates like this. We should learn from it. Of all the Internet companies out there, the one that serves as the most iconic for our firm is craigslist, not Google. We dream of funding a company that can be worth a billion dollars with only 30 employees. We've never done it and I don't know if we ever will. But we are going to try again and again and again.

My partner Brad wrote a post on the USV blog recently about the freeconomics debate and he ended with this observation.

And of course, that is exactly Craig's point:

A system like Craigslist does result in a lot spam, fraud, and abuse. But it is also certainly the most efficient and cost effective way to make a market. We should all be studying this system, understanding why it works so well, and how we can replicate it on our businesses, institutions, and governments. I think we have no other choice.

So Adeo Ressi of The Funded has posted his version of the idea first round term sheet. TechCrunch blogged about it here.

I have not had a chance to go through the term sheet line by line and evaluate it against other versions I've seen. I do think it is progress that we've got a discussion going on about this issue and I hope we'll coalesce around something standard that we can all use.

But I thought I'd address the three terms that TechCrunch highlights about The Funded's term sheet:

– A 1X liquidation preference – I am all for this. I cannot imagine why anyone would want a multiple liquidation preference in a first round term sheet. There are reasons why that might make sense in a late round financing, but not in a first round.

– Elimination of participating preferred – I prefer a straight preferred but there are times when a participating preferred makes sense, even in a first round. When the valuation gets bidded up to a price that would not allow the investors to make a return on an exit in the short term, and when the entrepreneur wants to control the exit, it makes to issue a participating preferred so that the investors can still get a return on their capital in the event of an early exit (the quick flip). If a participating preferred is used, it should go away at some multiple of the price paid (I prefer 3x).

– Single trigger acceleration – I don't like this provision for a lot of reasons. Chris Dixon, who started this whole discussion off last week, describes it well in this blog post. Chris recommends a double trigger with a partial single trigger acceleration:

Chris also has some thoughts on his blog today regarding The Funded's proposed term sheet.

There are now about a half dozen templates out there for the ideal first round term sheet. There is the Y Combinator version, the Wilson Sonsini version, the Cooley version, the Gunderson version, and now the Funded's version. I am on vacation today and trying to unplug as much as possible so I am not going to hunt all these down and link to them. Maybe someone will do that in the comments.

The bottom line is this is a great conversation and we are headed to a place where we will see more standardization of terms, lower legal fees, and better terms for entrepreneurs. But there are times when you need to veer off the standard form and it's important to recognize when that is and why.

As usual, the comments to yesterday's post about suggested books for entrepreneurs (132 comments so far) are way better than the post itself.

At some point yesterday, when the suggestions were coming hot and heavy, I commented that we ought to create a wiki with all of these great suggestions on it.

Zachary Burt did just that on PB Wiki. Here it is. Please feel free to add any other books you think deserve to be on the list.