Posts from November 2009

Conferences (continued)

I don't like to go to conferences. I explained why in this post.

But every once in a while I do attend one. Ideally it's a smallish gathering on a specific topic that I am interested in.

I'm doing that over the next couple days in Denver at Defrag.

Defrag is a conference about mining data for insight, with a focus on social data and semantic analysis. You need to look no further than our portfolio to see that is something I am quite interested in.

So I am flying out there this afternoon and will be in attendance for most of tomorrow's sessions. And I'll be doing a panel with my friends Brad Feld, Roger Ehrenberg, Howard Lindzon, and Jim Tybur on Social Leverage in the venture capital business. That should be fun.

While I am on the subject of conferences, I will also be at New Business Models For News at CUNY School of Journalism today. I am also doing two keynotes in one day next monday. I'll be opening the Social Recruiting Summit and closing the Business of APIs Conference.

All four of these events are the kind of thing I like to attend. They are small, not that well known, focused on a specific issue, and in the case of three of them, in NYC. I hope I'll see some of you at one or more of them.

#VC & Technology

Startup Ecosystems Take Time

Saul Klein, co-founder of Seedcamp and one of the top VCs in europe, has a long and thoughtful post up on the evolution of Seedcamp. In it he says:

In my mind, helping to bring some cohesion to our region's distributed network of talent, capital and is a 15-20 year project. ……

Getting to the right point takes time, and the cycles that kicked off what we now know as Silicon Valley began nearly 50 years ago.

Investing legends like Arthur Rock (Fairchild Semiconductor), Don Valentine (Cisco, Apple, EA), Don Lucas (Oracle), Dave Marquardt(Microsoft) and John Doerr (Netscape, Amazon, Google) and the entrepreneurs they backed created franchise businesses that still dominate the technology industry today. But maybe more importantly, all these businesses created the raw materials (talent, seed capital and technology) for next generation of the today's winners like Google, Facebook, and many many others.

I made the same point last week to Laura Rich of Fast Company who is doing a piece on startup ecosystems. I think it is good to think about decades when you think about the development of new startup hotbeds.

In the first decade, you are largely making it up, copying what works elsewhere, the VCs and entrepreneurs are largely doing it for the first time, and while you can have successes, they are mixed with a lot of failures. That was 1995 to 2005 in New York City and 1965 to 1975 in Silicon Valley.

In the second decade, you start to get it right. The entrepreneurs are doing it for the second or third time. The infrastructure has developed (lawyers, VCs, recruiters). And it is easier to get talented employees to do a startup. This is where we are in New York City now and is where Silicon Valley was from 1975 to 1985.

In the third decade, the ecosystem is fully formed and producing great companies. That is where Silicon Valley has been from the mid 80s on.

The only other startup ecosystem that is as fully developed as Silicon Valley is Boston. It got started even earlier than Silicon Valley with General George Doriot's ARD in the 1950s. Boston is an interesting case study because although it has all the infrastructure in place and plenty of serial entrepreneurs, role models, and success stories, it has had a harder time making the transition from tech deals to web deals. It is getting there now.

So back to new startup ecosystems developing in europe, asia, and elsewhere. It can happen and it will happen. But it takes time. And you can't fast forward because we are talking about experience which can't be manufactured. You simply have to put in the time.

#VC & Technology

The New Launches In Beta

Taking a cue from the advice we give to companies all the time, we've just launched the new in beta form last night. It still has a few kinks to get out, but it is mostly there.


When Brad and I first thought about our firm's website back in 2004, we quickly decided it should be a blog and that is what it has always been and it is what it will always be.

Our investment thesis is not a static thing, it is a living and evolving thesis, and the only way we know how to express it is in a series of blog posts in reverse chronological order. As we've added to the firm, our website has grown to include new voices like our partner Albert and also Andrew and Eric. It was time to refresh the look and feel and organization, but we've not changed the goal of the website.

There are three things I'd like to highlight. The first is our "focus" page. On this page we've simply collected all of the blog posts that we've written over the years on that are about our investment strategy. If you read all of the posts on the focus page, you'll understand what we invest in and why. And as our focus evolves, you'll see new posts explaining how we are evolving and why.

The second thing is the portfolio company page. Each portfolio company has an entire page on and that page is dynamic. Here is the Boxee page on It has a short explanation of the company's business and then links to recent posts from the company's blog, along with photos, videos, and tweets from the company. This page is powered by a slick tool from Magnify. We appreciate their help in making these pages come to life. I think they are terrific.

And I'd also like to highlight the team member page. It is also powered by Magnify and includes a similar set of content as the portfolio company page. Here is my page on

The new look is the work of a talented web designer named Phoebe Espiritu. In addition to her considerable talents, she is terrific to work with. The project was managed by Eric Friedman and I'd like to thank him for all of his effort on it.

I'm very pleased with how this came out. Our business and portfolio is changing rapidly and we've now got a website that changes in real time with it. That's the way it should be.

Reblog this post [with Zemanta]
#VC & Technology

The AVC Reader Census: A Day Later

Almost 750 people took the AVC Reader Census/Survey in the past 24 hours. That’s a decent sample size. So if you want to know what the readership of this blog looks like, go here.

I’m sorry to say that it is overwhelmingly male, 92% of the respondents are men. I’m also disappointed that 75% of the respondents live in North America. Other than those statistics which I am hell bent to change, I am pretty pleased with the composition of this audience. We are bloggers, twitterers, early adopters, travelers, and people who want to make their mark.

If you haven’t gotten around to taking the survey, you can do so right in this post.

Powered by

#VC & Technology#Web/Tech#Weblogs

The AVC Reader Census

We (Nathan and me) added a new widget to this blog yesterday. It’s on the right sidebar above the Flickr photo widget. The purpose of this widget is to answer a few questions about the people who read this blog.

If you wish, you can take the survey right here on this post.

Powered by

This census/survey is powered by Hunch which is an interesting decision/recommendations service based in NYC. I mentioned the service last week in my post about selecting a hotel to stay in.

We’ve already got some data coming in about what this readership looks like. Here is a screenshot of the first few data points. Click on that link to see them all.

Reader survey screenshot
The sample size is still too small to make any conclusions. I’ll post again in a week or two when we have some real data.

Should be interesting and relevant to Kid Mercury’s thoughts on blog stars and blog communities.


Valuation and Option Pool

One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, "it's just another way to lower the price".

I'll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I'll explain.

But first, let me lay out a few things for those who aren't well versed in these matters. The pre-money valuation is the value of the company before the money comes in. Let's say we call it $4mm. And let's say the financing is $1mm. Then the post-money valuation is $5mm and the $1mm round is 20% dilutive ($1mm/$5mm).

But to the entrepreneur it might be a lot more dilutive due to the inclusion of the option pool in the pre-money valuation. Let's say that the VC's term sheet says that a 15% "fully diluted post money" option pool needs to be in the pre-money valuation. What that means is that the investor wants 15% of the company, after the financing is closed, to be in an option pool that has not been granted to anyone.

In the case of the $5mm post money valuation, that means there needs to be $750,000 worth of options in the pre-money valuation. If the pre-money valuation is $4mm, then that means the true pre-money valuation to the entreprenuer is $3.25mm. And therein lies Mark's critique that the option pool is just another way to lower the price.

I am sure I lost a few of you on all of that math. If you want to drill down on it, please leave a comment and we'll help you figure this out. It is very important you understand all of this if you are or want to be an entrepreneur who raises venture capital.

The bottom line is the deal I described leaves the entrepreneur and his/her shareholders with 65% of the company after the financing, the VC investor will own 20%, and there will be an option pool representing 15% of the company that has not been issued yet. The $1mm financing was not 20% dilutive, it was 35% dilutive.

So it is not surprising that entrepreneurs hate this provision and fight about it every time. And like most terms, VCs have been abusing it for years by asking for excessive option pools making the provision hated more than it needs to be.

The first point I'll make is that VCs should be upfront about this provision and the fact that it is simply about price. In the example above, I'd be happy to pay $3.25mm pre-money with no option pool. Or I'll pay $4mm pre-money with one. They are the same thing to me. What an entrepreneur needs to do is find out what the market price for their company is with and without an option pool in the number. Once they do that, the negotiation over this point is a lot less contentious.

The second point I'll make is that the option pool request needs to be reasonable and based on some kind of budget. I generally ask the entrepreneur to put enough options into the "pre-money pool" to fund the hiring and retention needs of the company until the next financing. My thinking on this is that I don't want to get diluted between financings. So I like to see a headcount based hiring plan with expected options against each hire combined with a retention plan for all current employees who will need additional option grants.

In most of the early stage financings I've done in the past few years this work on the option pool has shown a need for around 10% in unissued options. I've seen it as big as 15% but that is rare. I've also seen it as low as 5%, but that is even more rare. But the point is this; don't guess or negotiate this number. Do the work, figure it out, and put it in the pre-money and then negotiate price.

I'll wrap with a true story about this provision. When Mark and I were negotiating the first round of financing for Zynga, we got into a real tussle about this provision. He did not want an option pool in the pre-money valuation. I did. Once we agreed that it was just a fight about price, the conversation got easier. I got him to give me an estimate of the pool he would need. We added it to the valuation we had agreed to. He got an increase in price, I got an option pool. And I got one of the best investments I've ever made.

Reblog this post [with Zemanta]
#VC & Technology

Great Meetup Last Night

About a hundred readers of this blog gathered last night in the cafeteria of Washington Irving High School just off of Union Square in Manhattan to meet each other and celebrate the generosity of this community in the recent Donors Choose Bloggers Challenge.

It was a great moment for me. I got to meet many readers who I know by name but not in person. Putting a face to a name is a wonderful thing. I also got to meet Sarah Bunting, whose blog, Tomato Nation, raised $315,000 for Donors Choose in October. Talk about "blog stars". I've got a lot to learn from Sarah.

And I got to meet a bunch of teachers. One woman teaches middle schoolers in the Bronx with special needs. A couple others teach music in a middle school in southern brooklyn. A third teaches pre-K in the East Village. I met several others as well. 

I am telling you that these people (all women) are doing god's work. And it made my day to meet them and know that we all did something to help them.

It may have been the first meetup I've done with all of you, but it won't be the last. Thanks to everyone who showed up. I know we were competing with the Yankees but I got home in time to see them put the Phils away and I suspect most everyone else did too.

#VC & Technology#Weblogs

Throw The Bums Out

Dump this self serving bum ..

I drove out to the middle of New Jersey yesterday morning to attend a board meeting. Everywhere I went, I saw "dump corzine" messages. It was clear the governor was in trouble.

And this morning, we wake up to the news that Corzine has indeed been dumped and Mayor Bloomberg barely got 50% of the voters in NYC to pull the lever for him

Both of these men are wealthy. Both of these men grew up on wall street in the 1970s. Both of these men moved from wall street to public service about a decade ago. Both of these men spent heavily to get re-elected. Bloomberg made it, Corzine did not.

It's worth spending a minute thinking about the message the voters sent here in one of the most liberal parts of the country. The voters aren't happy. The voters aren't comfortable with rich guys who can spend their personal fortunes getting elected. And most of all, the voters want change.

This may well be a referendum on Obama, but I see it more as a referendum on the status quo. It's a throw the bums out moment in this country. It's too bad that Nancy Pelosi, Harry Reid, Barney Frank, Chris Dodd, Mitch McConnell, and John Boehner didn't run for re-election yesterday. Maybe they would have been sent home as well.

It is not a positive to be an incumbent right now. And that's a good thing because the track record of our government sucks. I hope the anti incumbent mood continues to be honest. We could use a good house cleaning throughout our government.


The Double Opt-In Introduction

I'm sure everyone out there gets email intros. Someone who knows you sends you and someone you don't know an email suggesting you meet.

I send emails like that a lot. I might send a half a dozen or more every day.

I get even more emails like that. Sometimes dozens a day.

And I'd like to propose some email intro etiquette which I follow almost religiously myself:

When introducing two people who don't know each other, ask each of them to opt-in to the introduction before making it.

Last night I got talking about this with some friends who also get a lot of email intros. All of us get email intros that we don't want to follow up on. Some just ignore them. Others reply with something like "I'm really busy now and will get back to you in a month." And then never do.

I don't really like either of those two solutions and I also don't like responding to an introduction email with something like "I'm sorry but I don't really want to meet you".

So I often take meetings in these situations that I don't really want to take. And that means I'm less available to meet with people I do want to meet.

My friends said that I should simply keep track of who is giving me bad intros and let them know about it. I'm sure that I should be doing that and probably am at some level.

But I think asking for permission to make an email intro before making it is good form. I try to do it as a matter of practice. And I wish more people would.


#VC & Technology

Thematic vs Thesis Driven Investing

As the venture business has grown and matured, many firms have developed specific areas of focus. Our firm, Union Square Ventures, for example only invests in web services. I believe this is a good thing for both the investors in venture funds, called LPs, and the entrepreneurs.

But there are a number of ways that firms can execute their focus on a particular area. Two of the most popular are "thematic investing" and "thesis driven investing".

They are very different.

Thematic investing involves identifying big themes and going after them. Examples from the world of web services would be "social networking", "online video", "ad networks", "social media", "real time", "mobile". I know many VCs who go about it this way. They identify the themes and then get busy filling out their portfolio with companies that fit those themes.

Thesis driven investing involves drawing a picture of where your particular area of focus is going. I like to take a five to ten year view. And once you have mapped out that picture, it becomes your thesis. And you evaluate every investment you make in the context of that thesis.

The two venture firms I've been involved in founding are good examples of these two approaches. Flatiron Partners was largely a thematic oriented firm. We identified the web as a big theme and within it we identified content, commerce, and community. And we made big bets in those themes. It worked out pretty well but we didn't see the web changing at the end of the decade as much as we should have.

Union Square Ventures is a thesis driven firm. I owe that to my founding partner, Brad Burnham, who has the discipline to force everyone to do the work to develop our thesis and the discipline to make sure we put each and every investment through the thesis test.

Just last week, we were meeting with one of our LPs and I was talking about the mobile web in that meeting. Later that afternoon, Brad walked into my office and put our thesis on web vs mobile web on the table and we made sure we were seeing the mobile sector play out the same way. An important factor in thesis driven investing is everyone in the firm needs to buy into the thesis or it won't work.

Thematic investing is good for bigger firms. It allows each partner to pick a couple themes and go after them. Thesis driven investing is good for smaller firms. It requires a tight team that works to keep themselves on the same page executing after a singular vision.

I believe thesis driven investing produces the best returns when the thesis is directionally correct and probably also the worst returns when the thesis is wrong. I believe thematic investing works less well because it can lead to "bucket filling" where the firm just runs around filling the themes with deals without much thought to why and how they will work. It also leads to a lot of "me too" investing which is a scourge that the venture industry can't seem to figure out how to rid itself of.

But both thematic investing and thesis driven investing are better than a generalist approach because they both promote domain expertise which is critical to building a sustainable investment advantage. I think "generalist" or "opportunistic" investing is likely to underperform domain expert driven investing in all but the most turbulent markets.

It would be good to talk more about how one goes about building a five to ten year map of where an industry is headed. That's a longer conversation than I have time for this morning. But I'll leave you with the thought that this blog is a part of how I build mine.

Reblog this post [with Zemanta]
#VC & Technology