Posts from August 2011

The Gotham Gal asked me this morning "how does it feel to be 50?" I said "it feels good. another accomplishment."

It's only a few waking hours into my 50s but so far it feels great. I've never been more content with my place in the world, never felt better, and never had so much I want to do.

A friend gave me a book about turning 50, I've been trying to read it, but it's filled with all these "getting old" jokes and they aren't making me laugh. They don't resonate with me.

What does resonate with me is friends and family. The past week has been fantastic in that regard. This weekend my mom, dad, and brothers and their families are spending the weekend with us. Good times with friends and family at the end of the summer has always marked my birthday and this year has been particularly great in that way.

I'm going to start celebrating turning 50 by going out and getting the makings of breakfast with my brother. But before I do that, let me take one more moment to encourage everyone out there to consider a contribution to the Fifty For Fifty campaign we are doing via Donors Choose. We are getting really close, we passed $43,000 yesterday. Please consider contributing if you haven't done so yet.

AVC community regular RichardF suggested a while back that I do Feature Fridays. I'm not sure I can do it consistently week after week, but I'm doing it this week because we have a new feature to disqus.

Disqus has launched "ranks" here at AVC. It is not available across the entire Disqus Blog Network yet. They are giving it a spin here at AVC to get some feedback.

If you look at many of the comments, you'll see a little black "badge" next to the commenters' names. That badge means they are a community regular and that Disqus has been able to give them a community rank. I am fairly certain (but not positive) that these ranks are community specific, meaning they only apply to your activity here at AVC.

There has already been some discussion of the algorithm used to calculate these ranks. Fernando saw the ranks in yesterday's comment thread and did some number crunching. Disqus CEO Daniel Ha replied with some information on what data is used in the ranks algorithm:

We're using a few different signals for ranks right now, including visiting frequency, post, replies, likes, reciprocation of those things, being the first to comment in a thread… etc. 

We're playing with the balancing to see what feels right, but I figured the AVC community wouldn't mind playing around with some unpolished features! We're listening to any feedback you guys may have.

So the Disqus team is watching and listening to what we think. Disqus away!

Yesterday I read a great post by Gabriel Weinberg, the founder of DuckDuckGo, on how he got DuckDuckGo into Time's top websites of 2011. I just loved the way he talked about what he did and shared the strategy with everyone else. So I decided I'd make DuckDuckGo my default search engine for the next month or two and see if I miss Google.

But since I use Chrome and just type whatever I'm looking for right into the address bar, I needed to change the default search engine. Happily DuckDuckGo told me how to do it. You learn something new every day and I learned this yesterday:

1 – When in Chrome, put the cursor over the address bar, doesn't matter what address is in it, and right click. You'll see a few choices, select "edit search engines"

2 – Then scroll down under "other search engines" and find the one you want to switch to and hover over it. There will be a button that says "make default". Click that.

3 – you are done. start searching in Chrome with a new search engine.

I think it might be nice to go back to a search engine that doesn't do anything other than search. DuckDuckGo seems to be exactly that. So I'm giving it a shot at my search business.

Jerry Colonna, who should need no introduction to this community, did an interview with TechBerlin in anticipation of his workshop there next month. The first part of the interview is a bit of background on Jerry, but the part of this interview that really grabbed my attention is the middle part (about five minutes in) where he starts to talk about what a coach is, how coaching works, and why it works. If you’ve often wondered if you could/should work with a coach, watch this interview.

SKYPE A FOUNDER #6: Jerry Colonna, Professional Coach from TechBerlin on Vimeo.

If there was ever any confusion about why I blog, maybe this story will be illuminating.

Six weeks ago, I wrote a blog post called Teaching. It was about a dream I had about teaching in front of a live classroom and it went on to talk about the value of in person teaching and learning.

Later that day an entrepreneur in NYC we know pretty well forwarded that post to my partner Albert with the news that he was about to sign a term sheet with another VC firm and that he was drawn to our firm's vision of teaching as outlined in the blog post.

That led to a frantic weekend of phone calls, a monday meeting, and a decision to invest alongside the other VC firm.

That entrepreneur is Michael Karnjanaprakorn, the company is Skillshare, the other VC firm is our good friends at Spark Capital, and today Skillshare is announcing that our two firms have teamed up to finance this vision:

transform every community into a campus, every address into a classroom, and every neighbor into a teacher and student

That's a compelling vision and Michael and his partner Malcolm have built an equally compelling product through which anyone with a class to teach can offer it to willing students. 

If you go back to my Teaching post, you'll recall that I ended it musing about where to take MBA Mondays next:

I've been thinking about the ideal model that combines all of the above. A freely available curriculum on the web that grows and evolves over time. A physical space where people can come and take classes that are recorded and broadcast live and also available for viewing after the fact. Some version of that seems ideal. Should it happen in connection with an existing education institution (an engineering school or a business school), or should it be its own educational institution? Not sure.

I've answered my own question. Sometime this fall, MBA Mondays classes will be offered via Skillshare. I will teach them in the USV event space on Monday evenings at 6pm. Classes will be one hour. They will be streamed live and recorded for posterity. The live stream and the video will be free. The classes will have an attendance fee which will be given to charity, most likely Donors Choose.

I'm still working out the schedule, how many classes a year, whether I go back and start teaching from the first post, or whether I teach the post of the day. I'm working out how to select the students for each class (first come, first serve?, something else?). I'd love to hear your thoughts on this and also on Skillshare. Here's my partner Albert's post on the USV blog about our investment in Skillshare.

Today's post in the financing options series on MBA Mondays is about Bridge Loans. Bridge loans are so called because they are a "bridge" to something else. They are short term loans intended to fund a company to an anticipated event in the future.

Bridge loans exist in many sectors outside of the startup world. Big banks will often bridge companies to transactions they are putting together for them. Real estate transactions are often bridged to a closing. The concept of short term transaction driven loans is universal in business.

In the startup world, bridge loans are a particularly interesting case to study. I've been in and around startups for 25 years now and I have rarely seen a bridge loan made by anyone other than an existing investor or investor group. Most bridge loans in the startup world are made to money losing companies that are going to run out of funds before they can close a financing or sale transaction. These are very risky loans that will not get paid back unless a transaction happens and often the transactions that are required don't happen.

If you could assemble a data dump of all bridge loans made by VCs and angel investors to startups over the past twenty five years, I think you'd see that the aggregate performance of these bridge loans would be awful. I'm certain that the performance of bridge loans made by firms I've been associated with in that time is hugely negative. The loss rate is very high and the returns on the ones that work are not much better than a typical venture investment.

So why do VCs and angels make bridge loans when they perform so poorly? There are two reasons, and they are related but they are not the same. First, investors like to give the companies and teams they have backed a chance at success. Contrary to the popular view, VCs and angels are supportive of their portfolio companies well beyond what a hard nosed rational investor would be. I have seen startup investors make follow on investments many times that make no sense other than on a "doing the right thing" basis. Second, many investors are playing defense with these loans. They know they've made a weak or outright bad investment but they don't want to acknowledge it with a writeoff, so they keep putting in good money after bad.

So bridge loans are often bad investments made defensively. And so they are red flags to other investors. When a new investor looks at a company and sees a bridge loan in place, they will understand that all is not well. This doesn't mean you shouldn't make or receive a bridge loan. It just means you will need to explain it. And it will make closing a financing more challenging.

Bridge loans made in anticipation of a sale are a bit different. There is a really strong rationale for making a bridge loan in anticipation of a sale. The investors know that a sale is coming so a priced equity round doesn't make much sense. The company can't sell equity cheap relative to what the expected sale price will be. And if the equity is priced close to the expected sale price, then there will not be an equity return when the sale closes. So a loan makes the most sense. And bridge loans are the best kinds of loans to do in this situation. An acquirer will not be terribly surprised to see a bridge loan in place when they look at the books and thus it is not nearly the same kind of red flag as it is in an equity financing.

When making a bridge loan, it is critical that the size of the loan be sufficient to get to the transaction you are bridging to. The bridge metaphor is a good one. You want the bridge to be long enough to cross the river. Otherwise it does no good. Getting a second bridge done is always very hard. So if you think you need three months to sell the company or get a fiancing done, get six months of burn in your bridge.

The biggest concern investors will have in making a bridge is the probability of a tranaction closing. Investors will not make a "bridge to nowhere." So before you can realistically ask for a bridge, you must build a strong case for the transaction you want the investors to bridge to. Getting a banker or an advisor hired to help you secure the transaction you want is one good way to give investors comfort in making a bridge. It doesn't guarantee that you will get a deal done, but it shows everyone that you are committed to making it happen.

The terms of bridge loans are pretty standard. The loan will be secured by all the assets of the business that can be pledged. If there is existing bank debt or equipment financing, the bridge will be subordinate to those loans. And you will need the bank's cooperation getting a bridge done if there is a bank involved. Sometimes that is not easy.

The loan will carry an interest rate of between 6% and 12% depending on the current rate environment and will have warrant coverage or a discount. We covered the concepts of warrant coverage and discounts in the convertible debt post earlier in this series. Bridge loans are a specialized form of convertible debt.

In summary, bridge loans are common in all businesses. In the startup world they are often a sign of distress and for that reason you should try to avoid them if you can. But when you are sinking, any lifeline looks good and bridge loans are no different. Beggars can't be choosers. In a sale process, bridge loans are less problematic and are often the right solution to financing a company to a sale transaction. For startup investors, bridge loans in the aggregate are a poor performing investment and as an industry, we dislike making them. But like all of the tools at our disposal in the statup world, bridge loans are a reality of our lives, we will all experience them from time to time, and they can be a useful form of financing at a critical time in the life of a company.

Felix Salmon has a couple great posts on the New York Times' paywall. He notes that it has been successful and explains why. Felix says:

Yes, the NYT paywall is porous — but that’s a feature, not a bug. It allows anybody, anywhere, to read any NYT article they like. That makes the NYT open and inviting — and means that I continue to be very happy to link to NYT stories.

I've been a fan and a proponent of porous paywalls since studying the FT's model a few years back and was very pleased to see the NY Times go with the FT's model. 

Monetizing digital content requires a different mindset than monetizing analog content. The marginal cost of another unit of digital content is nominal. Unlike printing and delivering a paper, serving up another page view doesn't cost the New York Times much. So while the New York Times must charge its customer to recieve the paper, it doesn't necessarily need to charge a customer for every page view, particularly since they do run ads on every page served.

This doesn't mean that the New York Times can't and shouldn't ask their most active readers to pay. My partner calls this ex post facto monetization. You get paid after the fact, not before. And that's a mindset that many people used to getting paid before the fact have a hard time understanding.

Felix explains that since turning on the "paywall" at the end of March, the New York Times has signed up almost 400,000 paying customers for its online product and links to Seth Mnookin's excellent NY Mag piece on the Times.

The internal projections have been closely held, but several people have confirmed that the goal was to amass 300,000 online subscribers within a year of launch. On Thursday, the company announced that after just four months, 224,000 users were paying for access to the paper’s website. Combined with the 57,000 Kindle and Nook readers who were paying for subscriptions and the roughly 100,000 users whose digital access was sponsored by Ford’s Lincoln division, that meant the paper had monetized close to 400,000 online users. (Another 756,000 print subscribers have registered their accounts on the Times’ website.)

These 400,000 subscribers have been obtained with seemingly no loss in visitors and traffic to the NY Times' website since the paywall launched at the end of March this year:

So that's $80mm in annual revenue with no loss in traffic. That's what a porous paywall can do for you.

I'd encourage the Times to be even more agressive with it's porous paywall stratgy. The mobile situation – where I have to pay for the mobile app but can read the website in the safari browser for free makes no sense. With ex post facto monetization, you want your customers to want to pay, not force them to pay. I think they can be smarter and more creative with their mobile monetization strategy.

But all in all, I'm very pleased to see that content creators are starting to find new online models to fund their content creation costs. It costs a lot of money to send journalists around the world reporting on the important stories of the day. Printing presses and delivery trucks will be a thing of the past someday. But journalism will never be a thing of the past and we need to make sure it can be funded.

On August 1st, we launched the "Fifty For Fifty" campaign to raise $50k for classroom projects that bring families closer to the classroom.

Twelve days in, we've raised just over $27,000 from 137 donors.

That's better than half way to our goal which is fantastic.

I'd like to thank all of those 137 people for their generosity.

And in an effort to encourage more of you to participate, a few updates are in order.

First, The Gotham Gal and I will be doing a meetup in November in NYC. Anyone who gives to the campaign will be invited to attend. This will be like the meetups we've done for past Donors Choose campaigns but we'll host it in the USV event space instead of the public school cafeteria where we've done the prior ones. I will be back with a specific date for the meetup in a few days.

Second, I am going to blog the names and possibly twitter handles of everyone who gave to this campaign. I will wait until the end of the campaign to do this. If for some reason you don't want to be listed, let me know.

Bringing families closer to the classroom is such an important part of education and I'm super pleased that we've already raised $27,000 to fund those efforts. Please consider joining the campaign and getting us to our goal of $50,000.

Yesterday was a fantastic day.

I started out with a breakfast with an entrepreneur who is going to launch the web and mobile app he and his team have been building in the coming weeks. The excitement on his face was infectious.

Then I went to the kickoff board meeting for a new investment our firm made. The company is growing fast, the service has serious traction. Growing pains and big plans vied for everyone's attention.

Then I went to another board meeting for a company that has been around for between four and five years. We provided the initial capital to get it started. The business has grown to the point that all systems are working well, it's a real company with real revenues and profits right around the corner. We talked about the next big strategic moves we are going to make.

Then at 6:30, after back to back board meetings, I went to meet with the fourth of our portfolio companies in a single day. We talked about how to step on the gas wtih a business that is ramping super fast and busting at the seams.

Four portfolio companies. Each at a different stage. Each in a different business. Each with a different team. All doing great things. It's this ability to engage meaningfully with many interesting teams and busineses in a single day that makes the venture capital business the perfect job for me. I love it.