Posts from June 2010

I've recently come back to yoga after a five year hiatus. I didn't realize how much my body missed it. I stopped doing yoga because I couldn't handle the mental aspect of the practice. I struggle with being present mentally for 90 minutes. In fact, I find it impossible. Even as I've come back to the practice, I look at the clock constantly, waiting for the class to end. I am working on this struggle because yoga makes me feel so much better and I am hoping I can come to terms with the mental aspect of the practice if I work at it.

I tell you this because being present is a struggle in everything I do and yet it is the most important thing you can do. Today is the 23rd anniversary of the day the Gotham Gal and I were married. And it is father's day. A pretty special day in our family. 

I got up early and took a long bike ride this morning and reflected on 23 years of marriage and almost 20 years of fatherhood. I thought about a time fifteen years ago when our kids were young and I was starting Flatiron Partners, the first venture firm I helped to start. I was working super hard and still had not made any money in the venture capital business after a decade in it. We had moved out of the city and were living in the suburbs. I was catching the early train and struggling to get home before the kids went to bed. The Gotham Gal had stopped working, was missing the city and feeling alone and overwhelmed.

Around that time, I attended an offsite of a larger private equity firm and there was a organizational psychologist who gave a talk on work life balance. He said something I'll never forget. He said that you have about ten to twelve years to connect with your kids and then they turn into teenagers, tune you out, then turn into adults and build their own lives. I thought about my kids who were five, three, and a baby and realized that time was short and I needed to be present in their lives in every way that I could. And I committed right there and then to do that. And I've done a pretty decent job of it. Not perfect by any means. But much better than my yoga practice.

Marriage is harder than parenthood. The Gotham Gal and I have been together for almost thirty years. I've heard every single one of her stories a dozen times. And she has heard mine too. Familiarity and comfort with each other is a double edged sword. We can finish each other's sentences but that also means the sentences sometimes aren't even uttered.

Being present in a relationship, whether it is with your kids, your spouse, or anyone important in your life is hard work, particularly for overstimulated type A personalities like me and many of the people who read this blog. 

Everyone is still sleeping in my house, but after I hit the publish button, I will be off the grid today and being present with my family on this special day.

I spent the day yesterday with VCs from other firms. I heard two stories about IPOs that are worth sharing.

One VC told me a story about a failed IPO for one of their portfolio companies a few years ago. He told me the legal and accounting bill they got after the IPO was pulled was $3.5mm. Yup, $3.5mm for an offering that was not successful.

The second story has a happier ending. It was about an IPO of a company that happened recently. The company was able to get public. It has revenues of almost $100mm a year and is profitable. The company raised about $75mm in the offering. And it is now trading at a market cap of around $300mm. That is a lower valuation than the company would be able to get in a late stage private financing in my opinion.

Taken together, these stories tell a sad tale about the IPO market. First, it is way too expensive to go public. And if you don't get your offering done, which is not an unusual occurrence, you are left with a huge bill to pay (and no cash to pay it with). And if you get your offering done, your company will likely be valued lower than it would be valued in a late stage private financing.

I used to think that the IPO was the ultimate exit for a venture backed company. Then in the late 90s, I was involved about a dozen IPOs, sat on some public boards, got sued by ambulance chasers, and saw the vast majority of our IPOs underperform and get abandoned by wall street. Since that experience, I've become very wary of the IPO exit.

I believe that the IPO exit is appropriate for only the very best companies, maybe one or two companies per fund, which would be the top 5 or 10 percent of our portfolio. For every other company, I think liquidity offerings followed by an eventual sale transaction is the best outcome. The cost is just too high and the benefits are just too low for most companies these days.

The folks at Behance and Cool Hunting asked me to talk at their 99% Conference a couple months ago. The 99% conference is aimed at creative professionals and is focused on Edison’s “99% perspiration.” 

And in the spirit of how to get your ideas to happen, they asked me to talk about entrepreneurship and the myriad ways you can “be your own boss.” There are way more than 10 ways you can do that, but I only had twenty minutes so I focused on 10 of them. The point being that “You don’t have to be Twitter or Foursquare to be your own boss and do what you’re passionate about.”

Here’s the talk

A couple days ago my son "graduated" from 8th grade and in the moving up ceremony his teacher read this section of a poem called The Low Road by Marge Piercy. As she was reading the poem, it made me think of this community and what it means to me. So this is for all of you.

 —————-

Alone, you can fight,
you can refuse, you can 
take what revenge you can 
but they roll over you.

But two people fighting 
back to back can cut through 
a mob, a snake-dancing file 
can break a cordon, an army 
can meet an army.

Two people can keep each other 
sane, can give support, conviction, 
love, massage, hope, sex. 
Three people are a delegation, 
a committee, a wedge. With four 
you can play bridge and start 
an organisation. With six 
you can rent a whole house, 
eat pie for dinner with no 
seconds, and hold a fund raising party. 
A dozen make a demonstration. 
A hundred fill a hall.
A thousand have solidarity and your own newsletter; 
ten thousand, power and your own paper; 
a hundred thousand, your own media;
ten million, your own country.

Yesterday our portfolio company Twilio announced the developer availability of their Open VBX platform. Techcrunch and GigaOm had good posts on it. Techcrunch called it "open source google voice for business" and Om Malik said "OpenVBX is simple and yields the one thing users want most: a voice mail box that also forwards calls to different numbers."

There is other open source PBX software out there, namely Asterisk and Freeswitch. And there are other cloud based telephony APIs as well. But what is important about Open VBX and the Twilio web service API for telephony is the pairing of the two. With Open VBX you get free software to build telephony services and a web based telephony cloud to provision the numbers, calls, text messages, and way more.

My partner Albert, who led our investment in Twilio, has more on his blog. If you are interested in Open VBX, you should read his post.

We are big fans of the open source software movement. We believe that free and open software opens up markets and new capabilities much more quickly than closed and expensive software products. In the comments to my post on another open source effort we are funding, MongoDB, there was a discussion about why a VC firm would want to invest in free and open software. In that discussion, I explained that there are a number of ways to make money with open source software. The most obvious one is the "Red Hat" model of building a services and support business on top of the open source software. Red Hat has revenues of almost $600mm per year and boasts a public market valuation of over $5bn. MySQL, which also used that approach, sold to Sun for $1bn.

But the intersection of web services and open source opens up some more interesting possibilities. Look at WordPress. The WordPress software is available open source. But they also operate a hosted version at WordPress.com that is a commercial effort. MongoDB is available as open source software that anyone can download and run on their servers for free. But I am sure that hosted versions of MongoDB will become popular as well.

And Open VBX takes that model and adds something more. Yes, there will be hosted versions of Open VBX. Dreamhost already offers a one click install of Open VBX. But Twilio's telephony APIs for phone calls, messaging, and more are paid offerings that plug into Open VBX and offer another business model for open source software.

So we believe the pairing of open source software and cloud based business models vastly increases the commercial potential of open source software and we are excited to see Twilio leading the market into this exciting new world of open software.

One of my favorite bloggers is Nick Bilton who blogs about tech for the NY Times. He covers the basics, like Twitter's purchase of Smallthought last week, but also blogs about cool stuff you might not know about like this story about an MIT Fellow who is using kites and balloons to record the impact of the spill.

So when Nick asked me a few weeks ago if I would sit down with him and do an interview, I said yes. I don't really like being profiled much. I would prefer people write about the entrepreneurs we back and the companies they build. That's where the interesting stories are.

Nick's a good reporter and he got me to talk about being broke right before hitting it big with Geocities in the late 90s, falling in love in college and following the Gotham Gal to NYC, and why my refusal to carry an iPhone is a "political statement."

The interview is up at the New York Times. Check it out and let me know what you think.

PS – I really dig that the Times decorated the post with a CC licensed photo taken by our friend Joi Ito in the back booth at Tarallucci last year.

This is a cross posting of a blog post I wrote this morning on the USV blog.

We are big believers in the power of Internet marketplaces to bring efficiencies and new opportunities to people and businesses. And the market where this has the most potential of all is the labor market.

So we are excited to announce our latest investment – Workmarket. Workmarket is exactly what it sounds like, a marketplace for employers and workers to connect to get work done.

Workmarket is the latest startup founded by serial entrepreneur Jeff Leventhal. Jeff has been working in this sector for the better part of twenty years and Workmarket is his fourth startup. We love working with serial entrepreneurs with a deep passion for a particular domain. That's Jeff and his passion is bringing transparency and efficiency to work markets.

Work Market is expanding their team and is looking for A+ development and product management talent (Java and PHP) in the Greater New York area; click here to see the company's job openings.

So that's what Jeff and his founding team will be building with Workmarket and we are really happy to be along for the ride. Also along for the ride are our friends at Spark Capital who invited us to this opportunity. We'd like to thank them, especially Mo Koyfman who will be joining me on the board.

One of the most fundamental concepts in finance is that risk and return are correlated. We touched on this a tiny bit in one of the early MBA Mondays posts. But I'd like to dig a bit deeper on this concept today.

Here's a chart I found on the Internet (where else?) that shows a bunch of portfolios of financial assets plotted on chart.

 

As you can see portfolio 4 has the lowest risk and the lowest return. Portfolio 10 has the highest risk and the highest return. While you can't draw a straight line between all of them, meaning that risk and return aren't always perfectly correlated, you can see that there is a direct relationship between risk and return.

This makes sense if you think about it. We don't expect to make much interest on bank deposits that are guaranteed by the federal government (although maybe we should). But we do expect to make a big return on an investment in a startup company.

There is a formula well known to finance students called the Capital Asset Pricing Model which describes the relationship between risk and return. This model says that:

Expected Return On An Asset = Risk Free Rate + Beta (Expect Market Return – Risk Free Rate)

I don't want to dig too deeply into this model, click on the link on the model above to go to WIkipedia for a deeper dive. But I do want to talk a bit about the formula to extract the notion of risk and return.

The formula says your expected return on an asset (bank account, bond, stock, venture deal, real estate deal) is equal to the risk free rate (treasury bills or an insured bank account) plus a coefficient (called Beta) times the "market premium." Basically the formula says the more risk you take (Beta) the more return you will get.

You may have heard this term Beta in popular speak. "That's a high beta stock" is a common refrain. It means that it is a risky asset. Beta (another Wikipedia link) is a quantitative measure of risk. It's formula is:

Covariance (asset, portfolio)/Variance (portfolio)

I've probably lost most everyone who isn't a math/stats geek by now. In an attempt to get you all back, Beta is a measure of volatility. The more an asset's returns move around in ways that are driven by the underlying market (the covariance), the higher the Beta and the risk will be.

So, when you think about returns, think about them in the context of risk. You can get to higher returns by taking on higher risk. And to some degree we should. It doesn't make sense for a young person to put all of their savings in a bank account unless they will need them soon. Because they can make a greater return by putting them into something where there is more risk. But we must also understand that risk means risk of loss, either partial or in some cases total loss.

Markets get out of whack sometimes. The tech stock market got out of whack in the late 90s. The subprime mortgage market got out of whack in the middle of the last decade. When you invest in those kinds of markets, you are taking on a lot of risk. Markets that go up will at some point come down. So if you go out on the risk/reward curve in search of higher returns, understand that you are taking on more risk. That means risk of loss.

Next week we will talk about diversification. One of my favorite risk mitigation strategies.

Interesting comment discussion between me and iamronen this morning. It started with me making the assertion that most founders start companies with the goal of building a "financially successful business."

iamronen then pointed me to a Jeff Atwood post from earlier this month where Jeff says:

Yes, Stack Overflow Internet Services Incorporated©®™ is technically a
business, even a
venture capital backed business now — but I didn't co-found it
because I wanted to make money. I co-founded it because I wanted to
build something cool that made the internet better. Yes, selfishly
for myself, of course, but also in conjunction with all of my fellow
programmers, because I know none
of us is as dumb as all of us.

For those that don't know, Jeff is a founder of our portfolio company Stack Overflow.

So then iamronen asked me if we would be happy if Stack didn't make profits but did make enough money to sustain itself (a non-profit?).

And I answered with this:

if hundreds of millions of people all around the world are learning and improving
their lives with stack powered knowledge exchanges, i will be thrilled

And I will be thrilled. But my answer doesn't really mean that we would be happy if Stack became a non-profit. We are financial investors and we do want to see our portfolio companies become valuable.

My answer to iamronen suggests something else. At USV we do focus on financial metrics, but our number one goal for our companies is to build very large networks of engaged users. We believe if they do that, they will build value for themselves and us.

So that is how we measure success first and foremost. We believe very large networks of engaged users will ultimately create significant financial value for everyone involved.