Posts from April 2012

Feature Friday: Laptop Stickers

I logged into Turntable a week or so ago and everyone on stage had laptop stickers.

Laptop stickers

I immediately started rummaging around the UI trying to figure out how to get some on my laptop. I figured it out pretty quickly and now when I get up on stage to play music, I'm showcasing some of the well known USV portfolio companies.

This is the start of a virtual economy inside of Turntable. They've got avatars and laptop stickers and all of that is free and accomplishment based. I'm excited to see what they do next with these virtual goods.


MBA Mondays Live: Employee Equity - Archive and Feedback

The first MBA Mondays Live class was last monday night.

I had an incredible time and I can't wait to do it again. There isn't much better in life than standing up in front a bunch of eager learners teaching something you know well.

The archive and photos from the event is permantly hosted on this link.

Here's the video of the entire class.

I'd like to get feedback on the class so I can improve it. So I've created a google form with a few questions on it. If you attended or watched the class and have five minutes to give me feedback please click here and fill out the form. I appreciate it.

I have watched the first fifteen minutes of the class and I've got some work to do on my delivery, speed (I was rushing), and crispness. And there are two math mistakes on the whiteboard. That really bugs me. The final dilution number for the founders in the dilution table should be 58.5% not 64.5%. And the number of shares to issue the CFO should be 75k shares not 46k shares. This first class feels a lot like the beta that it was.

My plan is to teach this same material live again, probably a couple more times. If I don't sell out, that will tell me that everyone who didn't get into the first class watched the livestream or the archive and that I should move on to a new topic. But I'm not sure that is the case so I will test that out. I don't plan to livestream this class again since we already have a video version it.

As I develop additional classes, I will livestream and archive the final class on the topic when I've got the material and pacing nailed down. That was a big takeaway from this experience.

All in all, this went extremely well. The basic setup of an in person class with a livestream and an archive is a format that works. I plan to use it to teach as much of the MBA Mondays material as I can in the coming years. That's exciting to me.

#MBA Mondays

The Twitter "Patent Hack"

Yesterday Twitter announced that they plan to amend the assignments agreements that they sign with their employees. They call this proposed amendment the Innovator's Patent Agreement. I've been aware of this effort inside of Twitter for a while and I like to call this move the "Twitter Patent Hack" because I think what they have done is very clever and is likely to have a material change in the way patents are used to foster and/or hinder innovation, as the case may be.

Specifically Twitter has said that they will only used these assigned patent rights defensively to protect themselves against hostile actions. And further that any company that acquires these patent rights from Twitter will need the inventor's consent to use them in an offensive action. Twitter has also provided the inventor with certain rights to license the patent to others for defensive purposes. You can read the entire set of provisions on GitHub.

The other day I talked about Insurgents vs Incumbents. This is the framework we use at USV to think about a lot of things. And in the world of patents, the advantage goes to the Incumbents who can hoard patents and use them to their advantage. The insurgent, three engineers in a walk up in Bushwick, can't even afford the lawyer or the time to file a patent. So it is very encouraging to see an emerging incumbent, Twitter, do something like this. They are saying to the world that they do not intend to compete on the basis of patents and instead they will compete on the basis of product, feature set, user experience, etc, etc.

USV is committed to support this initiative. We are instructing the startup lawyers we work with to insert the patent hack language in our standard forms. We are reaching out to our friends in the startup world including other VCs, accelerator programs, and the startup lawyer universe to suggest that they to insert the patent hack into their standard forms. And we will recommend to our existing portfolio companies that they adopt it as well. Of course, entrepreneurs and their companies will have to be the ultimate determinator of whether they want this provision in their inventions assignments agreement. If an entrepreneur we invest in does not want this provision, we will certainly support that decision. But we will want to have a conversation about why they would want to do that.

I will end this post with a story. Many years ago now, my prior venture capital firm, Flatiron Partners, invested in a company called Thinking Media. It was an early Internet company. They developed some browser based javascript tracking technology. The company ulimately failed but was sold in a fire sale including the patents. Those patents eventually made their way to an incumbent, the big marketing research company Nielsen. Fast forward ten years or so and Nielsen sued two of my portfolio companies, comScore and TACODA, and a bunch of other companies too, on the basis of the Thinking Media patents. So IP that was partially funded by our firm was used to sue other portfolio companies. It is so galling to have this kind of thing happen and it is one of the many reasons why I have come to believe that software and business method patents are an enemy of innovation in the tech sector.

If Thinking Media had the patent hack in their documents, the story I just told would not have happened. And thanks to Twitter's leadership, I hope that all future USV portfolio companies will have the patent hack in their documents and stories like that one will be a thing of the past. I'd like to thank Twitter's leadership team, especially the legal and engineering teams, for coming up with such an elegant and simple solution to this thorny problem. The startup world is a better place today than it was yesterday as a result of their work.

#VC & Technology#Web/Tech

Steven Johnson at Elisabeth Irwin High School Next Monday

All of my kids have attended Elisabeth Irwin High School in NYC. The school was founded by Elisabeth Irwin 90 years ago. In commemoration of the 90th anniversary, they are doing a speaker series with noted thinkers, artists, authors, and activists.

When the school asked me last year for ideas of people who could speak about big ideas in and around the subject of technology, the first person I thought of was my friend Steven Johnson. One thing led to another and Steven said yes and he will be at Elisabeth Irwin HS next Monday night.

Steven has been hard at work finishing a new book called Future Perfect. I've read the early version and it is a fantastic treatise on the potential for technology and the Internet to lead us to a new political worldview. Talk about big ideas!

There are something like 60 seats available at the time of this post for next monday night's talk. The ticket price is $20. If you'd like to attend, go here and buy a ticket online. You can also call to get a ticket. Details are here. I hope to see you there.


The Board of Directors: Guest Post From Scott Kurnit

I am developing a standard format for these MBA Mondays series. I do five or six posts on a topic and then I solicit four or five guest posts to wrap it up. Today we begin the guest posts on the Board Of Directors series we've been doing for the past six weeks.

Hopefully everyone who has been following this series on Boards understands the point that you want independent directors on your Board and that the best choice for independent directors are fellow entrepreneur CEOs who have been through what you are going through.

One of the most sought after independent directors in the world of internet startups is Scott Kurnit who has started a couple internet companies and has sat on eight boards including several public boards. If you are not familiar with Scott, here is an interview he did with me in late 2010 at the Paley Center.

I asked Scott to lead us off in the guest post section because I know that he has some strong opinions about Boards and Board composition. And he shares some of them with us in the guest post below.


Fred has done his usual fabulous job outlining the critical issues with Boards. Today I’m going to address two concepts that surprise people every time, end up generating lots of head nods, then usually don’t happen. These suggestions clearly fit into the art of the board more than the science. And it’s the unwillingness to depart from traditional norms by those around the table that stop them from happening.

1. Your best friend should be on the Board, and
2. No one who works in the company other than the CEO should be on the Board.

Why would you take a valuable Board seat for your best friend? Doesn’t every seat need to be occupied by people with industry expertise, financial acumen or years of board experience? That’s logical, but what about having someone who you trust with your life? Someone you’ll truly believe when the Board is telling you that you’re not performing or that the financing you seek is wrong or that you’re spending too much or your request for stock options is too aggressive?

Ideally, your best friend has industry or financial or board expertise – but even if not, having someone who has your back… who tells you the unvarnished truth… that you believe in an instant… is in everyone’s interest. This seat is critical. Fill it.

As a repeat CEO and board member, I try to fill this role of CEO pal if a CEO doesn’t have one. I’m well aware of my fiduciary responsibilities to shareholders, but I try to think of the CEO first since if he performs, the company performs and changing out CEOs is a wrenching and often disastrous activity. A CEO should have someone he can tell anything. That makes a better company and a better outcome for shareholders.

Now, for my second point which will certainly raise the hackles of co-founders who are on the board, work their butts off and may have as much stock in the company as you do: The fact is, there’s only one CEO, one leader. And that’s why people who work for the CEO can’t also be the CEO’s boss. Yes, fundamentally, that’s what Boards are… the CEO’s boss.

Here’s the simple logic. The CEO can’t be in charge 29 days out of the month and then report to her subordinates on the 30th day. That screws up the crispness and clarity for the 29 days. A CEO should not be giving compensation or making non-objective decisions concerning subordinates, in order to make sure her own comp and Board decisions get approved on day 30. Ridiculous. You often end up with a horrible combination of dysfunctional board member and insubordinate… subordinate – all wrapped up in one person. You can’t be both a worker and a boss at the same time. Sorry, co-founders… you can observe at Board meetings… but you don’t get a vote. Period. And when the CEO tells you to leave the Board room… well, she’s the boss.

Since I have this awesome space courtesy of Fred, I could go into why Board members should have no ego, need to come to every board meeting in person, need to give performance reviews to CEOs, should only do email during Board meetings within a designated 5 minute block every hour and create an environment where everyone knows everything with total transparency. But, I won’t abuse the privilege of this space or your time.

Just get a pal on the board and keep your pals who work for you off the board. I promise, your company will be better and return higher rewards for all concerned.

Thanks Fred.

#MBA Mondays

MBA Mondays Live: Employee Equity

Tomorrow night at 6pm eastern time I am going to teach the first MBA Mondays Live class. I announced it a month ago and the class quickly sold out. Part of the deal with these classes is that we are going to livestream them and also make them available via an archive.

The livestream will be available here. You can click the green follow button on that page to be notified when the livestream is about to start. The archive video of the class will be available here.

This will be the first time we've ever livestreamed an event in the USV event space, something we intend to do more of. I want to downplay everyone's expectations on how good this livestream will be. We need to upgrade our internet connection. It turns out our Time Warner Cable "wideband" service is actually "narrowband". We measured it last week and we are only getting 3MB upstream. So we will not be livestreaming this class in HD and it may be tough to see what I am writing on the whiteboard.

We are in the process of getting a much better internet connection into the USV event space and we hope to be able to livestream in HD in the near future. But for tomorrow's class, I am warning everyone that the stream may be flaky and the quality may be poor.

The outline for tomorrow night's class is here. The class will have three parts; issuing employee equity, structuring employee equity, and how much equity to give out. There are links for suggested reading (archived MBA Mondays posts) for each section. If you are attending the class, I strongly suggest you review the outline and check out the required reading. If you plan on watching the livestream, you might want to check out the outline and suggested reading as well.

I am super excited to do this class. I'm a big fan of teching in front of a live classroom, and I am also a fan of allowing a much broader audience to take the class live or via the archive using the power of internet video. This should be fun. 

#MBA Mondays

Insurgents vs Incumbents

The startup world is about insurgents. A person or a few people with an idea. And they drop everything and go for it. They are going up against the incumbents and that doesn't just mean the big companies that occupy the market position they want. That means all the people, institutions, and organizations that are in cahoots with the big companies.

This is the framework through which we see the world. And this is the framework through which we would like others to see the world.

It is not the least bit surprising to me that Facebook supports CISPA. Facebook was once an insurgent. But now they are an incumbent. And we can expect them to be supportive of the ultimate incumbent, our government, particularly when it comes to sharing data on all of us with them.

I saw this this on HYV's Tumblr this morning:

Waiting to see if all the VC’s will call for a boycott of Facebook over CISPA like they did content creators on SOPA/PIPA. Or just act like it’s different suddenly.

If there were a boycott of Facebook over this CISPA thing, I'd gladly participate in it. I just don't know if people care enough about this issue to get appropriately annoyed about it. The impact of PIPA/SOPA on the Internet user was easier to understand. Cybersecurity and privacy and data ownership and sharing is much more complicated to understand.

Make no mistake, the incumbents have each others' back. But the Internet users have the insurgents' back. So when the Internet users care enough, the insurgents will win. That's what happened with PIPA/SOPA. It will be interesting to see if it will happen again with CISPA.


Fun Friday: Where Do You Get Your News?

We are treading quite close to real work on this fun friday topic, but it will be good fun anyway.

I haven't read a newspaper in at least a decade. We still get one delivered to our home and the Gotham Gal reads it religiously. She also is a crossword addict so that may play a part in her loyalty to paper, ink stains, and the morning read.

But I do read news pretty much non stop throughout the day. Most of my news comes from Twitter. After that, I like vertical news aggregators. Real Clear Politics for political stuff. Hacker News for tech stuff. ESPN for sports. Techmeme for tech business. Linkfest for business/stock news.

I don't use any sort of RSS reader or tool to read news. I just read it all day on the web, on my phone, and on my iPad. I have bookmarked these sites and I just visit them and read, click, read, follow, read, and I go wherever the web takes me.

How about you?


Finding Your Voice

Everyone has something to say, something to contribute, everyone can make a difference. And I believe the Internet is making it easier for all of us to find that voice, use it, and make that difference.

I am supporting evidence item number one in this case. I was 42 years old when I started blogging. I'd always had a lot to say. Just ask my mom about that. But I never really found the place and the way to get it all out. AVC became that thing and now I've got a platform to make a difference. I hope I'm using it well.

I have watched so many people find their voice on the Internet over the years and it warms my heart when they nail it. It happens all the time in the blog comments here at AVC. I'm not going to name names but you all know the stories and who they are.

It's also happened to the Gotham Gal. When she started blogging she was in the process of moving from being a full time mom back to the working world. And she wasn't sure how to make that transition. It was a struggle. Through her blog she has become a champion of the idea that you can be a mom and an impactful person in the world at the same time. She has also become a champion of women and women entrepreneurs. She has found her voice and her job. This blurb from her blog yesterday was proof postitive for me:

Be strong, be fierce and be tough.  Like raising money from someone who starts to hit on them or say how cute they are.  Come back with a sharp comeback or tell them to go fuck themselves and leave the room.  You wouldn't want their money anyway.

That's how she has always been in person. She gave me a piece of her mind the first time I met her. And she's been doing that to me it ever since. I love her for it. And I am absolutely certain that the women (and men) she works with love her for her "fierce" attitude too.

The Gotham Gal blog had a big part in making all of that come together for her. The back to back posts this week telling women to be fierce and how to make macaroons for passover represents a fairly unique media property but that's how she rolls and it's her voice.

Finding your voice doesn't just mean blogging by the way. I'm watching a good friend get involved at a high level in a big time political campaign and I can see how energizing it is for him. I'm watching my partner Brad finding a way to engage in advocacy that he has cared deeply about for years. I'm watching dozens of entrepreneurs start companies with a goal of changing the way the world works for the better.

But blogging can help achieve all of these voice finding exercises. You have to walk the walk and talk the talk. Blogging/commenting/social media is the talk part. And I encourage everyone out there to leverage the Internet as you find your voice, make an impact, and find your way in this world.


Staying Independent

Possibly the most interesting running conversation I've been having with entrepreneurs lately is how they can keep their companies independent without having to go public and turn their cap table into a casino. There are a bunch of entrepreneurs thinking seriously about this issue and I've been thinking seriously about it too.

Of course if you bootstrap your business and never take outside investors then this is not an issue. You control the timing and the choice of exit and there are no investors to concern yourself with. But there are plenty of entrepreneurs who have built interesting businesses using outside capital – angel, seed, VC, or some other form – and they have a portion of their cap table that is seeking a return on their capital on some reasonable timetable.

The emergence of a vibrant secondary market may point to a solution. If one set of investors eventually cashes out to another set of investors who eventually cash out to another set of investors then you have a formula for staying independent while giving your investors liquidity over time.

To some extent this has already been happening in the buyout and private equity world. One financial buyer trades the asset to another financial buyer and so on and so forth. The venture capital industry could potentially adopt some of these practices while leaving the entrepreneur and their management team intact and in control.

Angels and early stage investors who have portfolios with high loss ratios might hold on to their strongest performers for five to ten times their money. Later stage investors who have much less downside risk might hold on for three to four times their investments. Companies could build enterprise value over time generating returns to their various stakeholders who might change over time.

Another possibility is leveraged recaps and possibly dividends. If you build a business with excellent cash flow, there will be cash that can be used to pay out dividends or used to service and pay down debt. Dividends are not tax efficient under US tax law. The Company will pay income taxes on its earnings and then the investors will pay taxes again on the dividends. That is why leveraged recaps are more attractive in the US. Instead of paying dividends, the Company borrows funds it can easily service and pay down over time and uses those funds to repurchase stock from its investors.

Both of these approaches (dividends and leveraged recaps) require that the Company have strong recurring cash flow that when multiplied by a cash flow multiple will provide a meaningful gain to the investors.

Let's look at a model of how this might happen. Let's say a company required $10mm of startup capital to get to breakeven. Let's say $3mm of it came in for 20% of the business and another $7mm came in for another 20% of the business. The investors would then own 36% of the business. If over time, that business could earn $20mm per year of pre-tax cash flow, then it would have roughly $12mm of after tax cash flow to pay out. The investors could be paid out $4.3mm per year in dividends (36% of $12mm). Over the course of five to ten years, those dividends could deliver a 2.2x to 4.4x return to the investors. The issue with this approach is the tax inefficiency resulting from double taxation and the long time frame it would take to earn a decent but not amazing return.

On the other hand, $20mm of cash flow could be used to borrow $100mm (5x coverage) and that $100mm could be used to repurchase the 36% from the investors. The investors would get a 10x return on their investment and the founders would get all of that equity back. It would take 7 or more years to pay off the debt including interest and that would be a large debt balance for a company to carry.

Clearly the leveraged recap is preferential to paying dividends as a way to take out investors with cash flow. Some variation of the leveraged recap will be the way to go for as long as dividends are tax disadvantaged to leverage.

None of these approaches is likely to result in returns that are as good as what could be obtained in a strategic sale at a big premium or an IPO in a strong market environment. A company with $20mm of pre-tax cash flow is likely to have close to or greater than $100mm in revenue and could possibly exit or IPO for between $300mm to $500mm in a strategic sale or IPO in a good market environment. If the investors own 36% of the Company, their proceeds in that kind of an exit would be $110mm to $180mm, higher than what could be obtained in any cash flow based exit scenario.

But none of this says to me that new approaches to liquidity for venture investors should not be on the table. If the entry price is right (rare these days) and the investor is patient and if the entrepreneur and company is willing to get creative, there are ways to get early investors liquidity at acceptable rates of return that compensate for the risk of the early investment that do not require selling the company or taking it public.

I am working on this on a few fronts. Nothing urgent or imminent. But I am confident we will see our firm utilize some of these different approaches in the coming years. I think we have to if we want to continue to serve the interests of entrepreneurs and the companies they create.

#VC & Technology