Posts from February 2010


While everyone was on the holiday break at the end of last year, Twilio wrote a blog post that very few people noticed. They announced that our firm, Union Square Ventures, had become an investor in Twilio.

Twilio is not a services for the masses. Yet. 

It's a service that web developers can use to build telephony apps or build telephony into their app. This image on Twilio's home page says it all.

Twilio image

In the "Areas of Interest" post that I wrote at the start of the year, I wrote:

Developers are the new power users. If you cater to them, you can build a large user base with significant network effects.

We believe that one way to build a large network of web users is to build something that makes developers' lives easier. And Twilio does exactly that. It masks all the complexity of telephony into a finite number of API calls that web developers can use to build apps quickly and easily.

When we first met Twilio, the founder Jeff Lawson blew me away when he told me that the entire service was built on five API calls; <say>, <play>, <gather>, <record>, and <dial>. Clearly they've added a few more, like <conference> highlighted above.

Today, Twilio is announcing they've added SMS to the service, with <sms>. Now you can easily allow users to access your web app via SMS without having to set up shortcodes, dealing with aggregators, doing the configurations, etc. TechCrunch has the details.

My partner Albert led this investment for us. He's a web developer himself and has already saved himself countless hours with Twilio. Albert wrote a post about Twilio on the USV blog today. If you are a developer of web apps and are interested in adding telephony, you should check out Twilio.

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The Time Value Of Money

It's Monday, time for MBA Mondays. 

Last week, I posted about The Present Value Of Future Cash Flows and in the comments Pascal-Emmanuel Gobry wrote:

That being said, before even covering NPV, I would have first talked about the time value of money. To me, time value of money is one of the top 3 concepts that blew my mind in business school and that should be common knowledge. When you think about it, all of finance, but also much of business, is underpinned by that. Once you understand time value of money, you understand opportunity costs, you understand sunk costs, you just view the world in a whole different light.

PEG is right. We have to talk about the Time Value Of Money and it was a mistake to dive into concepts like Present Value and Discount Rates before doing that. So we'll hit the rewind button and go back to the start. Here it goes.

Money today is generally worth more than money tomorrow. As another commenter to last week's post put it "you can't buy beer tonight with next year's earnings". Money in your pocket, cash in hand, is worth more than cash that you don't actually have in hand. If you think about it that simply, everyone can agree that they'd rather have the cash in hand than the promise of the same amount at some later day.

And interest rates are used to calculate exactly how much more the money is worth today than tomorrow. Let's say that you'd take $900 today instead of $1000 exactly a year from now. That means you'd accept a 11.1% "discount rate" on that transaction. I calculated that as follows:

1) I calculated how much of a "discount" you would take in order to get the money today versus next year. That is $1000 less $900, or $100

2) I then divided the discount by the amount you'd take today. That is $100/$900, which is 11.1%.

This transaction could be modeled out the other way. Let's say you are willing to loan a friend $900 and you agree that he'll pay you an interest rate of 11.1%. You multiply $900 times 11.1%, you get $100 of total interest, and add that to the $900 and calculate that he'll pay you back $1000 a year from now.

As you can tell from the way I talked about them, interest rates and discount rates are generally the same thing. There are technical differences, but both represent a rate of increase in the time value of money.

So if the interest rate describes the time value of money, then the higher it is, the more valuable money is in your hands and the less valuable money is down the road. 

There are multiple reasons that money can be more valuable today than tomorrow. Let's talk about two of them.

1) Inflation – This is a complicated topic that we are not going to get into in detail here. But I need to at least mention it. When prices of things rise faster than they should, we call that inflation. It can be caused by a number of things, most often when the supply of money is rising faster than is sustainable. But the important thing to note is that if a house that costs $100,000 today is going to cost $120,000 next year, that represents 20% inflation and you'd want to earn 20% on your money every year to compensate you for that inflation. You'd want a 20% interest rate on your cash to be compensated for that inflation.

2) Risk – If your money is in a federally guaranteed bank deposit for a year, you might accept 2% interest on it. If it is invested in your friend's startup, you might want a double on your money in a year. Why the difference between a 2% interest rate and a 100% interest rate? Risk. You know you are getting the money in the bank back. You are pretty sure you aren't getting the money back that you invested in your friend's startup and want to get a lot back if it works out.

So let's deconstruct interest rates a bit to parse these different reasons out of them.

Let's say the current rate of interest on a one year treasury bill (a note sold by the US Gov't that is federally guaranteed) is paying a rate of interest of 3%. That is an important rate to pay attention to. Because it is a one year interest rate on a risk free instrument (assuming that the US Gov't is solvent and always will be). We will assume for now that is true. So the "risk free rate" is 3%. That is the rate that the "market" says we should be accepting for a one year instrument with no risk.

Now let's take inflation into account. If the Consumer Price Index (the CPI) says that costs are rising 2.5% year over year, then we can say that the one year inflation rate is 2.5%. It can get a lot more complicated than this, but many real estate leases use the CPI so we can use it too. If you subtract the inflation rate from the risk free rate, you get something called the "real interest rate". In our example, that would be 0.5% (3% minus 2.5%). And we call the 3% rate, the "nominal rate".

Now let's take risk into account. Let's say you can find a corporate bond in the bond market that is coming due next year and will pay $1000 and it is trading for $900 right now. We know from the example that we started with that it is "paying" a discount rate of 11.1% for the next year. If we subtract the 3% risk free rate of interest from the 11.1%, we can determine that market is demanding a "risk premium" of 8.1% over the risk free rate for this bond. That means that not everyone thinks that this company is going to be able to pay back the bond in full, but most people do.

Ok, so hopefully you'll see that interest rates and discount rates have components to them. In its simplest form, and interest rate is composed of the risk free rate plus an inflation premium plus a risk premium. In our examples, the risk free "real" interest rate is 0.5%, the inflation premium is 2.5%, and the risk premium on the corporate bond is 8.1%. Add all of those together, and you get the 11.1% rate that is the discount rate the corporate bond trades at in the markets.

Which leads me to my final point. Markets set rates. Banks don't and governments don't. Banks and governments certainly impact rates and governments can do a lot to impact rates and they do all the time. But at the end of the day it is you and me and it is the traders, both speculators and hedgers, who determine how much of a discount we'll accept to get our money now and how much interest we'll want to wait another year. It is the sum total of all of these transactions that create the market and the market sets rates and they change every second and always will (at least in a capitalist system).

That was tough to do in a blog post. It's a very simple concept but very powerful and as Pascal-Emmanuel said, it is fundamental to all of finance. I hope I explained it well. It's important to understand this one.

Flash, HTML5, and Mobile Apps

About a year ago, I wrote a post about Apple's "blind spot" for Flash. I took more heat for that post than anything else I've written here other than political posts. It opened my eyes to the fact that Flash vs HTML5 is one of the most politically heated topics in the tech business. The third rail, as it were.

The choice of what technology web developers use to produce rich browser based applications is a big deal with a lot of important ramifications for companies, investors, and most importantly users. Jeremy Allaire, creator of ColdFusion and Brightcove, addresses this issue today on TechCrunch.

It's an excellent post full of great facts and insights, including this one:

What few people realize is that while H.264 appears to be an open and free standard, in actuality it is not. It is a standard provided by the MPEG-LA consortsia, and is governed by commercial and IP restrictions, which will in 2014 impose a royalty and license requirement on all users of the technology. How can the open Web adopt a format that has such restrictions? It can’t.

Jeremy predicts that "Google will make an end-run on this by launching an open format with an open source license for the technology, which according to industry experts delivers almost all of the same technical benefits as H.264."

If you are a web developer, entrepreneur, or investor, I suggest you go read Jeremy's post in full. It's very good.

If you don't plan to read it, I'll summarize. Jeremy makes two big points. The first is that HTML5 vs Flash is not a winner take all battle (at least for many years). He predicts that for web apps, we'll see more and more developers move to HTLM5. But for video, gaming, and other "immersive" applications, we'll see developers sticking with Flash for a long time.

His second point is that the desktop web and the mobile web are going to play out very differently. He says:

in the context of hand-held computing, where Apple is politically motivated to block the Flash runtime, it is apparent video publishers will be driven to build and operate solutions that leverage HTML5 Video on mobile and iPad browsing environments.

When it comes to HTML5 vs Flash, there are technical arguments, economic arguments, and political arguments. And, unfortunately, the political ones carry a lot of weight.

Jeremy outlines the political agendas of two of the big players in this battle:

a web-centric, HTML5-centric handheld world favors Google because it can leverage it’s existing dominance in search and web advertising. A proprietary App-centric universe favors Apple because it can become the primary gatekeeper to reaching the mobile audience and already has a pole position in integrating payments and advertising into content applications.

I know where I personally come out in this fight. I much prefer a "web-centric handheld world" to a "proprietary app centric universe". And that's why I carry a Google phone instead of an iPhone. For me, it's a political statement as much as anything else.

Someday soon, I'll be reading a blog on my Google phone and I'll come upon a video in a Flash player and I'll be able to hit play and watch it on my phone. That's apparently not going to happen in Apple's "proprietary app centric universe". 

The good news for all of us is that no one company is going to dictate how this plays out. Jeremy says in the wrapup of his post:

it is evident that the competing interests of platform vendors, consumers and app and content publishers will ensure that this remains a fragmented and competitive environment for many years to come

Regardless of whose political camp you are in, we can all agree that a competitive environment is best. Even if it means a more complicated development environment.

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Lightweight Advocacy

I was at a board meeting of a non profit this week and the talk turned to "advocacy" and whether or not the non profit should be doing any of that. I had to ask what the definition of advocacy was just to be clear what we were talking about. It's not something I've traditionally been involved in.

When I think of advocacy, I think of politics, lobbying, public relations, and a bunch of other "heavyweight" behaviors that I abhor. Wikipedia's definition of advocacy is:

Advocacy is the pursuit of influencing outcomes — including public-policy and resource allocation decisions within political, economic, and social systems and institutions — that directly affect people’s current lives. (Cohen, 2001)

Thankfully, the non profit concluded that it should largely keep doing what it is doing and let the work they do, the people they engage, and the outcomes they produce send the message. That's my kind of advocacy.

Later in the week, I read Brad Feld's blog post urging immigrant startup founders to tell their story. The "startup visa working group" which I am a member of is recruiting immigrant startup founders to tell their story online here. If you are an immigrant startup founder, I urge you to go do that. It won't take long and will be incredibly valuable "advocacy" on an important issue.

And it occurred to me that the "startup visa movement" is a case study in lightweight advocacy.

The problem is relatively simple and should be easy to fix. If you are an immigrant starting a company here in the US, you can get kicked out of the country if you don't have the right visa. I've seen it happen a couple times in the past year to founders in our portfolio.

And these are people starting new companies here in the US who are hiring people and creating new jobs, and not just any job, but high paying jobs. It makes no sense to kick these people out of the country. It's hurtful to them, their companies, and our country and economy.

So last September, Brad Feld wrote a post about this issue on his blog. It attracted a fair bit of interest in the VC and entrepreneur community, got a lot of comments, and got some people talking to each other. Brad's post was inspired by an essay Paul Graham had written last spring.

As a result of Brad's post, we formed a working group of a few VCs and a few entrepreneurs that we call the "startup visa group." We've continued to blog about this issue, but more importantly, we've started calling and talking to our elected officials and their staffs. We have a plan and we have a legislative proposal to fix this issue.

Now we are collecting the stories that we need to galvanize the elected officials to act. When that is done, the group is headed to Washington to push this forward.

There are no lobbyists involved. There is no PR firm involved. No campaign contributions have been made. No PACs or other advocacy groups have been formed.

Everyone involved has a full time job either starting and running a company or building and managing a portfolio of companies. We are doing this "nights and weekends."

And we can do that because this is "lightweight advocacy". We are using our blogs, the internet, social media, and our relationships with our elected officials to move this issue forward. We'll see if we are effective. I sure hope we will be. It will fix an important issue in the startup economy and it will be yet another example of the internet is providing tools to do things the way they should be done.

NYC BigApps Winners Announced

2010-02-04 20.07.36 I've posted about the NYC BigApps contest a few times here. And you all helped me with my chore of judging all 85 apps. Thank you for that.

Last night I walked up The Highline to IAC Headquarters to attend an event where the winners were announced. 

I also manned the "Investors Bar" where a number of fellow venture and angel investors sat and talked to the entrepreneurs in attendance. Kind of like the genius bar, but the geniuses were on the other side lining up to talk to us.

The winners were (cutting and pasting from the NY Times here):


WayFinder NYC: An application designed for smartphones powered by Google’s Android operating system allows users to find the closest subway entrance. It uses an approach known as augmented reality, overlaying subway line symbols on a live view through the phone’s camera.

Taxihack: Like Yelp for cabs, this Web tool allows people to post comments on individual taxis and their drivers via e-mail or Twitter.

Big Apple Ed: This Web-based guide offers detailed profiles, reviews and information about the city’s network of public schools.

NYC Way that offers a range of information for city residents and visitors, took home the “Popular Choice” award, determined by an online vote.


I use Wayfinder on my Google phone. It is a very cool app that combines mapping and augmented reality to get you to the nearest subway. I also really like Taxihack. You can email or twitter about your cab driver right from the cab.

Two other "apps" that I liked very much which got honorable mentions but no awards were Actuatr and Push Pin Web. These are both developer tools which make the often messy data from government agencies much easier to develop apps with. Better tools will lead to better apps.

I got to meet the teams behind ParkShark, PrimoSpot, Taxihack, NYC Way, UpNext, NYCPRO, HistoryBus, NYCSamosa, SpokesNYC, and a few more that I can't recall. It was a bit crazy at the Investor Bar last night.

I also came home with my android phone stocked full of mobile apps like PrimoSpot and Always Prompt, both of which I bought last night and am looking forward to using to help me with the daily grind.

Finally, I'd like to say that it was a thrill to see the mayor up there on stage with NYC entrepreneurs. He's the most successful tech entrepreneur in NYC but we don't see him very much in the tech scene. We need more role models, as I talked about here, and he's the best we've got in NYC. I hope he spends more time with us this term.

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Likes In The Comments

I don't exactly know why, but I've noticed a significant increase in the amount of "liking" going on in the comments recently. And I've responded to it by starting to "like" comments myself instead of or in addition to replying.

This is great for me. I often reply to a comment that I like without adding anything to the discussion just to signal that I liked it. I'll just like in that scenario going forward. I will continue to reply a lot and engage a lot so don't think that will change. And the double like/reply (which I'd like a button for) is also a nice move which I find myself doing a fair bit.

I'd like to encourage everyone who wades into the comments to start doing this as well. Many of you call yourself "lurkers" who don't like to comment. But if you like to read the comments, then please get a disqus profile and start liking. Every bit of engagement, every bit of social signaling makes this community better and stronger. 

I like liking. I hope you do too.

Rewards and Monetization

I really like what Dennis Crowley, founder and CEO of Foursquare, said about "rewarding checkins" in this post on Business Insider:

Foursquare's [success] depends on providing "the most incentive for a user to check-in."

There are many ways to do that, including the game play dynamics that Foursquare does so well. But for me, the most interesting way to reward a checkin is to provide some real value at the moment of checkin. For example, when I show up a my local cafe in the morning and checkin, I'd love to occasionally get a message on my checkin screen that says "you've checked in for the tenth time and earned a free espresso drink."

I have no doubt that is coming and I am confident that Foursquare will be leading the charge in getting there.

The reason that is the most interesting reward to me is that it directly leads to the monetization of the service. These rewards are basically another form of coupons or offers and merchants have always responded well to the opportunity to pay a third party for the opportunity to coupon their customers and potential customers.

Which leads me to an announcement our portfolio company Adaptive Blue made about their Glue service yesterday. Glue is a social network in which users engage with and opine on things they uncover on the web every day. It exists both in your browser (via a browser extension) and at

Glue assigns the "guru" label to the person in the service who has engaged the most with a specific item. For example, I am the guru of 35 different items on Glue.

The announcement was that they are now rewarding "gurus" with rewards. As you engage with items in Glue, you'll occasionally be offered rewards like this one.

 This notion of rewarding users with free offers can be expanded to many services on the web. And it provides everyone in the system with value. The service gets more engaged users. The user gets free stuff. The merchant gets to engage with the right person at the right time with the right offer.

I think we'll see more of these rewards showing up in our favorite web services. It's a different, and in many cases, a better form of monetization.

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Quirky and The Cone Of Silence

My family is tired of hearing me talk about "The Cone Of Silence". This is an electronics product I'd love to have. I am not sure if it can be built with the current state of noise canceling technology, but here is how it would work.

The Cone Of Silence is a small electronics product that you can bring to a restaurant in your pocket, place on the table, and create a "noise cancelled zone" around the table you and your friends are sitting at.

I've talked to a number of people about this idea in the past year. My dad is a former engineering professor. He thinks it would be hard to develop successfully. My father in law is a former engineering professor and also spent years working with the US Navy on underwater submarine detection (and evasion). He thinks it is not possible to build in the compact way I want it to work. I've gotten similar reactions to this product idea from a number of other people who know a thing or two about sound waves and physics.

But I am not giving up. Last week I was introduced to Quirky, a community of product enthusiasts where people submit product ideas and the community develops them together. Each week one product is selected to build and launch in a pre-sale to the community. If enough of the product is sold to break even on the production costs, it is built and sold and then launched commercially.

Quirky has been doing this for about six months now and they've developed 30 products together and launched about six commercially. You can see the products that have launched commercially on the front page of the Quirky website. Some of these products are also available in offline retail.

So as you might expect, I submitted The Cone Of Silence idea to Quirky last weekend and it is one of 27 candidates to be selected to be "product 0031". The idea has generated some comments and, like my dad and father in law, a few people think its not possible to build the way I want it to work. We will see if any good ideas emerge.

Even if the Quirky community doesn't figure out how to build The Cone Of Silence, I am not giving up on the idea. I'm not giving up on teleportation either.

And I think the idea behind Quirky is great. We've seen communities like Threadless, Etsy, Kickstarter, and others do amazing things. There's certainly room for a community to build people powered products. Check out Quirky (and The Cone Of Silence) and let me know what you think.

UPDATE: For your viewing pleasure, courtesy of "Maxwell" in the comments

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The Present Value Of Future Cash Flows

My friend Pravin sent me an email last week after my "How To Calculate A Return On Investment" post. He said:

I wish there was a class that I could take that would teach me how to properly research stocks/companies for investment purposes and how that could be made into a private tutoring business. It'd be for people like me, people who didn't go to school for business but still are interested in understanding all the jargon, methods of investing, etc and how to apply it to a buy and hold strategy.

Pravin then went on to say that the post I wrote was exactly the kind of thing he was looking for and that he'd like to see me do more of it. So with that preface, I'd like to announce a new series here at AVC. I'm calling it "MBA Mondays". Every monday I'll write a post that is about a topic I learned in business school. I'll keep it dead simple (many people thought my ROI post last week was too simple). And I'll try to connect it to some real world experience.

I'll start with the topic Pravin wanted some help with: how to value stocks, what they are worth today, and what they could be worth in the future. This topic will take weeks of MBA Mondays to work through but we'll start with a fundamental concept, the present value of future cash flows.

I was taught, and I believe with all my head and heart, that companies are worth the "present value" of "future cash flows". What that means is if you could know with certainty the exact amount of cash earnings that the company will produce from now until eternity, you could lay those cash flows out and then using some interest rate that reflects the time value of money, you could calculate what you'd pay today for those future cash flows.

Let's make it really simple. You want to buy the apartment next to you for investment purposes. It rents for $1000/month. It costs $200/month to maintain. So it produces $800/month of "cash flow". Let's leave aside inflation, rent increases, cost increases, etc and assume for this post that it will always produce $800/month of cash flow.

And let's say that you will accept a 10% annual return on your investment. There are a multitude of reasons why you'll accept different interest rates for different investments, but we'll just use 10% for this one.

Once you know the cash flow ($800/month) and the interest rate (also called the "discount rate"), you can calculate present value. And this example is as easy as it gets because the cash flow doesn't change and the interest rate is 10%.

The annual cash flow is $9,600 (12 x $800) and if you want to earn 10% on your money every year, you can pay $96,000 for the apartment. In order to check the math, let's calculate 10% of $96,000. That's $9,600 per year.

In practice, it is never this simple. Cash flows will vary year after year. You'll have to lay them out in a spreadsheet and do a present value analysis. We'll do that next week.

But it is the principle here that is important. Companies (and other investments) are worth the "present value" of all the cash you'll earn from them in the future. You can't just add up all that cash because a dollar tomorrow (or ten years from now) is worth less than a dollar you have in your pocket. So you need to "discount" the future cash flows by an acceptable rate of interest.

That basic concept is the bedrock of all valuation concepts in finance. It can get incredibly complex, way beyond my ability to calculate or even explain. But you have to understand this concept before you can go further. I hope you do. Next week we'll look at using spreadsheets to calculate present values.