Posts from 2010

I was at a board meeting yesterday and we were looking at a chart of growth. It looked something like this:

It was not straight line growth. It was stair step growth. Back in my math geek days, we called this a step function.

And this is what the user growth charts of most of our portfolio companies look like.

Nick Denton published a manifesto on blog design and blogging earlier this week. In it he showed this growth chart.

You'll note a similar stair step function in this chart.

Then Nick delivers the money quote:

We learned our lesson: aggressive news-mongering trumps satirical blogging. Gawker.com's growth since 2008 — from 300,000 people a week in the US to 1.4m — came in steps. After each story-driven spike — Tom Cruise's Scientology pitch video, Montauk Monster, Eric Dane's hot-tub non-orgy, iPad security breach, Christine O'Donnell's Halloween sleepover, etc — the audience settled back down, but at a higher level. The same pattern holds for Deadspin, which has ridden a sensational series of scoops culminating in the revelation that Brett Favre had stalked a buxom sideline reporter.

Growth comes in steps. There's a big event. Shaq joins Twitter and brings his fans with him. There's a spike. Things calm down, but they don't go down. Then a plane lands in the hudson. Another spike. Things calm down, but they don't go down.

That's how it was with Twitter and that's how it has been for most of our portfolio companies. The big events drive user growth. For Etsy it might be a seller being featured on Martha Stewart's TV show. For Tumblr, it might be Newsweek starting a tumblog. For Disqus, it might be Techcrunch joining the network. For Nick Denton, it is clearly "aggressive news-mongering."

The key learning is that, as Nick says, "the audience settled down, but at a higher level." Big events will drive audiences and some of them will stay. And you will grow in steps.

It's December 1st. November sure went by fast. And so the annual AVC Donors Choose campaign is over. And the results are in:

We raised $22,400 for classrooms where young women learn science and technology. But because of the HP Match, that will actually be $45k.

More importantly we will impact the lives of 8,543 young women (actually way more because of HP). That's a lot of young women. Maybe one of them will go on to start an important tech company. Maybe one of them will go on to teach other young women. Maybe one of them will go on to get a nobel prize. Whatever happens to these young women, I am incredibly proud of this community's generosity. Thank you.

Disqus (a portfolio company of USV) has rolled out a really sweet analytics service as part of its "add ons" that were released a few weeks ago. You get the analytics as part of every add on package, including the $19/month Plus service.

There are four main parts of the analytics service; snapshot, activity, people, and network. It's the network tab that has me the most interested. I'm always curious where the most active AVC community members hang out when they are not on AVC. Since Disqus is first and foremost a commenting system, "hanging out" means commenting for the purposes of this post.

Here's the answer:

I'd like to see more than the top six. Ideally I'd like to see the top 25 or more. But this is a good start. Happily I call each of these bloggers a friend, and one of them is my wife. If we had a dinner party with this group, it would be a blast. I'd sit Dave Winer next to Mark Suster and Howard Lindzon just to make things interesting.

This suggests a whole new set of features for Disqus. If they know the communities with the greatest overlap with this community, they can and should build network tools so that readers of this blog are aware of what is going on across the network. If there's a great post/conversation going on at Suster's blog, we should know about that here at AVC and have a quick link to get there from here.

Fortunately the team at Disqus knows that. I'm not announcing any features here. But I am pointing out that communities like AVC don't exist in a vacuum and there is a network of communities out there and Disqus is powering most if not all of them. And so there's a lot Disqus can do to make the network come to life in powerful ways. I'm looking forward to watching them do just that.

It's monday and it's time to move on from the MBA Mondays series on Employee Equity. We did nine posts on employee equity and hopefully we moved the needle a bit on understanding that complicated topic.

I'd like to switch topics now and talk about acquisition finance. The other day Chris Dixon said this in a comment here at AVC:

the two biggest tech companies alone (apple and google) are approaching $100B in cash that they will likely use for acquisition to support their incredibly profitable businesses

The point Chris was making with that comment is there is a lot of buying power out there in the big tech companies that can be spent to buy tech startups. And he is right about that. Google has $34bn in cash. Apple has $50bn in cash and short term investments. Microsoft has $44bn in cash and short term investments. eBay and Amazon each have more than $5bn. The numbers add up to a lot of buying power out there.

But just because they have the cash doesn't mean they will use it. There are a number of factors that acquirers consider before pulling the trigger on an acquisition. They look at whether the acquisition will improve or hurt earnings going forward. They look at how they will have to book the acquisition on their balance sheet. They look at how dilutive the acquisition will be to shareholders (even if it is a cash acquisition, they may need to issue employee equity for retention). And most of all, they attempt to determine how the acquisition will be recieved by their shareholders and what impact it will have on their stock price.

I am calling this entire topic acquisition finance. I am not an expert on this topic but I've got a working knowledge of it and I am going to share that working knowledge with all of you over the coming weeks.

I've spent much of this long weekend curled up on the couch reading Too Big To Fail, Andrew Ross Sorkin's history of the financial crisis of 2008. I've wanted to read this book since it came out last year but it took me a while to get to it. I'm enjoying it very much.

As I read about bank after bank waking up and smelling the coffee too late, I am reminded of the risks of chasing returns. In the case of the financial crisis of 2008, the banks were chasing returns in the mortgage markets and the related markets for CDOs and other exotic derivatives. The scary part of the whole thing is they were chasing returns in a market they did not fully understand. Here's a quote from Alan Greenspan that I got from the book:

I've got some fairly heavy background in mathematics. But some of the complexities of some of the instruments that were going into CDOs bewilders me. I didn't understand what they were doing or how they got the types of returns out of the mezzanines and the various tranches of the CDO that they did. And I figured if I didn't understand it and I had access to a couple hundred PhDs, how the rest of the world is going to understand it sort of bewilders me.

Andrew follows that quote with this observation:

He was not alone. Even the CEOs of the firms that sold these products had no better comprehension of it all.

But the CEOs knew they were making billions in these markets and they pushed their firms to go farther and faster in search of more billions. That is called chasing returns. And it is the most dangerous form – chasing returns you don't understand.

I have a friend who has worked on wall street for forty years and runs a large fund of funds. He told me his biggest red flag when he reviews the performance of the funds he is invested in is when the returns are "too good." When he sees that he gets on a plane and goes to visit the fund manager to understand where the returns are coming from. If he can't understand it, he withdraws from the fund, no matter how good the returns are.

I'll take this conversation back to a market that I do understand – venture capital. The venture capital business is showing good returns for the first time in a decade. The sectors that are performing best are web services and early stage/seed investing. These are sectors we have been investing in for over fifteen years. We've seen these sectors boom and bust before and we'll probably see it again. We are committed to these sectors and have no plans to leave them.

However, these sectors of the venture capital market are filling up with investors chasing returns. And some of them do not understand what they are investing in. I got a call a few weeks ago from an individual investor who wanted to invest in one of our portfolio companies. He asked about the company and from his questions it was pretty clear he did not understand the business very well. He went ahead and made an offer to invest. That scared me.

I've been visited recently by a number of foreign investment vehicles, many of whom are investing billions of dollars of sovereign wealth. They all want to get into our funds and our deals. When I talk to them about why, they can't really articulate a cogent argument about the economic potential of the social web. But they see the returns and want some of them too. That scares me.

The venture capital markets work well most of the time. Venture capital is not financial engineering. It does not involve slicing up securities into parts and selling them off in baskets (until recently). It is about making an investment to turn nothing into something. When that something becomes a real business, with real customers, revenues, and profits, the venture capital investor is rewarded with a return, often times a very good return. I do not think venture capital will ever turn into the kind of mess that the mortgage markets became three years ago.

But I do think we are seeing signs of excess in the markets we invest in and I do think we are seeing investors chasing returns in deals they don't fully understand. That is a red flag. And I am choosing to observe it, pay attention to it, and share it with all of you.

Yesterday we kicked off "office hours" for USV. We did it with this post on the USV twitter account. We got 68 responses in a few hours for 32 slots. So we've taken down the signup form (which is why the link in the tweet doesn't work). The first 32 responses will get priority but we will try to accomodate everyone who filled out a form in the coming months.

The idea for office hours comes from our friends at First Round Capital and Foundry Group. Both Josh Kopelman and Brad Feld have written about the benefits of "first come first serve" meetings with no filters and no qualifications. We also believe in a level playing field for all entrepreneurs and have been wanting to do this for a while now.

I'd like to recognize Gary Chou, the General Manager of the USV Network, for his work in getting this going. Gary's got a "can do" attitude and he's been putting together lots of new stuff for us and our portfolio companies since his arrival this summer.

Another new effort from USV courtesy of Gary and Christina is our USV Jobs twitter account. We try to tweet out a job or two every day. We get the feed of job openings from our portfolio company Indeed and then we curate it to highlight interesting jobs in our portfolio companies.

If you are interested in working in one of our portfolio companies and/or meeting with one of us for 15 minutes, I suggest you follow the USV and USV Jobs twitter accounts. Based on yesterday's response to office hours, we need to be doing more stuff like this. And with Gary and Christina's help we will.

One hundred forty seven people have donated to the Donors Choose campaign we are running this month here at AVC. That's incredible to see. With five days left, we are on pace to raise $20,000 from about 175 people. Here is how we've done in prior years.

So this is likely to be our biggest year ever and that's before the HP Match which will double the amount we raise for classrooms where young woman learn science and math.

As many of you know, we are going to have a meetup to celebrate this campaign. It will be on December 8th at 6pm at Washington Irving High School right off Union Square in NYC. The meetup is open to anyone who gives to the AVC Donors Choose campaign.

Here's the Meetup.com page for the event on December 8th. Please go RSVP if you plan to attend. We will have the list of all the donors at the event so you need to be on that list in addition to RSVP'ing.

I hope to see you there.

It's Thanksgiving. And I woke up thinking about entrepreneurs. It was probably this awesome Steve Blank blog post that caused that. Steve says:

I believe that we will look back at this decade as the beginning of an economic revolution as important as the scientific revolution in the 16th century and the industrial revolution in the 18th century. We’re standing at the beginning of the entrepreneurialrevolution. This doesn’t mean just more technology stuff, though we’ll get that. This is a revolution that will permanently reshape business as we know it and more importantly, change the quality of life across the entire planet for all who come after us.

I have had the pleasure of working with entrepreneurs for the past 25 years and as I get older I appreciate them more and more every day. Not only do we work with great tech entrepreneurs in our USV business, but the Gotham Gal and I invest personally in entrepreneurs who are working in other sectors. We've backed real estate entrepreneurs, restaurant entrepreneurs, non profit entrepreneurs, media entrepreneurs, food entrepreneurs, local businesses, and many others. We get such great pleasure from watching people imagine something and then create it before our very eyes. 

I hope Steve is right and we are on the cusp of the entrepreneurial revolution. Our economy needs something new and entrepreneurship can provide that. So I am dedicating this thanksgiving to all the entrepreneurs in our lives and everywhere else in the world. Thank you.

I saw two HTML5 apps yesterday. One running in my Android browser. The other running in the iPad browser. They looked and worked exactly like their mobile app counterparts. It was a mind opening moment.

There still are issues. When I went to show one of the HTML5 mobile apps later, my mobile data connection wasn't there and I couldn't load it in my Android browser. But a friend told me you could cache all the elements, including the database, on the phone and deliver an offline experience in HTML5 in the browser.

I've always disliked the idea that we have to download apps on our phones when the apps we use on the web are loaded in the browser on demand. But I've accepted the mobile app paradigm as something we will be living with for the next five years.

I'm not sure it's five years anymore.