Posts from September 2012

Hitting Your Stride

I met with a friend who was in town last week. He told me he had "hit his stride" as an investor in the past year and a half. He is a former entrepreneur who became an angel investor and then a VC. I had a similar conversation with the Gotham Gal on a long car ride yesterday afternoon. 

In listening to both of them, I heard something that I have found to be true in my own experience. It takes time to learn how to be an early stage investor. You have to make a bunch of investments and learn from them. And you have to develop a strategy, a thesis, and your own differentiated style which people can then attach to you. In effect you have to build a brand and become known for what you do and how you do it. 

None of this happens overnight. I think it took my friend about four years to hit his stride. I suspect it took the Gotham Gal about as long. Part of this is that is how long it takes to know if you've made a good investment or not. You might know in two to three years. But by four years, it is going to be pretty clear. As these outcomes start coming in, you can start to see what is working and what is not.

And "what is working and what is not" is not just about your investment selection. It is about the fit between you and a certain kind of entrepreneur and a certain kind of target market and a certain kind of business model. Some investors are better at investing in SAAS companies. Some are better at investing in e-commerce. Some are better at investing in mobile apps. Some investors are better at working with teams that need a lot of help. Some investors are better at working with teams that don't need any help and want you to get out of the way.

It is important to figure out who you are and where you fit in the startup economy before you can become a good investor. But once you do that, you can "hit your stride" and start investing with conviction.

Conviction is one of the most important things entrepreneurs want to see in an investor. The overhead of working with an investor who lacks conviction is just too much for an entrepreneur. It can become a major drain on them and their company. I'd rather have conviction and be wrong than have doubts and be right. Because the latter doesn't work in a relationship with an entrepreneur and you are likely to lose anyway.

So for those just starting out in a career as a venture capital or angel investor, I would suggest that they take their time, be patient, and build a portfolio slowly and deliberately. And pay attention to what is working for you and what is not. Over time you can build an investment thesis that works for you and that you can become known for. That is when you will hit your stride and when you can step on the gas.

#VC & Technology

Video Of The Week

Saturday is always a tough day for me to blog. The weeks are long and I am often spent by friday afternoon. The weekend is a time for me to rejuvenate and restore. I often find the weekends bring out the best blog posts but saturday morning is always hard. In the past, I've punted by running a video on saturday morning. I think I am going to make that a more regular event. When I've got something to say, I will blog. When I don't, I'll run the most interesting video I've seen in the past week.

Today, I'm running a twenty minute conversation between two of my favorite people in Tech, @om and @dens. This talk is mostly about Foursquare, but they do touch on the future of maps, location services, UIs, and stuff like that. I enjoyed it and I hope you do too.


Fun Feature Friday: Voice Fan Mail

I learned about this cool Twilio SoundCloud hack and thought it would make a fun feature friday post.

The band Young Guns encourages fans to call them, leave a voicemail (powered by our portfolio company Twilio).

The voicemail gets transcribed and uploaded to our portfolio company SoundCloud, embedded to their site in custom SC player and band calls the person with the best voicemail.

I just called and called and left them a message. I hope I get the call back.


Guest Post From Shana Carp: Communities Make Business Sense

Sometime over the summer, there was a discussion of analytics in the AVC comments and Shana said something like "I would love to do a serious data analysis on AVC's analytics." So I reached out to Shana and told her that I would give her access to my Google Analytics and Disqus Analytics accounts and she could go crazy on the numbers. But I told her that she had to produce a post out of all of that work. She agreed and this guest post is the result of those efforts.


One of the things I find really hard to wrap my head around about is that for all intents and purposes it runs like any other media site.  To me, this is my bar where I hang out, but in reality, this site functions much like many other media sites such as the Atlantic, or Refinery29.  There is content, there are analytics, and there are ways of pushing out content, there are some ads and tools to push them out, there are some tools to make the community more social, but not much else.  If had a business model (which it doesn’t, the advertising money goes to charity), it would be one similar to many content sites out there: Increase Users; Increase pageviews; Sell ads.  What makes this site unusual is that there is a large community of users, primarily driven by technology built by the team at Disqus.

It also leads to some interesting questions about this site in comparison to other media sites.  Most content sites are still trying to figure out the role of comments.  Do they ignore them?  Do they not have them?  Do they feature some content? Do they write about the comments?  Do they reward commenting behavior?  Does having a community make a difference to the business model of content sites?

On this site, it does.  Not only does it make a difference, comments here are highly correlated with unique pageviews of repeat users, uniques in general (not just for repeat users), time on site by repeat users, and time on site by everyone.

One half of unique pageviews over the past 9 months have been generated by repeat users.   


I wanted to see if unique pageviews of returning users was correlated with the number of comments. I used a correlation coefficient (Spearman’s Rank Correlation Coefficient) which is a measure of correlation variables that behave monotonically, or in other words, the variables move up and down together. The correlation coefficient for unique pageviews generated by repeat visitors is 0.7973 to comments. This is a high correlation coefficient and suggests the two are linked.


To give a comparison point to explain this correlation coefficient, SEOMOZ reports for Good SEO Experiments a correlation coefficient(a linear measure of correlation) of 0.3 is considered quite good, even though 0.3 usually implies fairly low correlation.  Having a community on your site is therefore way more likely to be a factor that would generate significant traffic than SEO efforts, if we compare statistical significance.

I also looked at the rate of change for the percent of returning users versus the percent of new users. They line up quite nicely. They have a correlation coefficient of .9387.  However, the rate of change for new users as well as repeat users is quite small.  Granted, this is a niche audience, so I’m not totally surprised.  Still, it is nice to know that total user activity is very much driven by regular user activity.


However, average time on site for all users to comments is less correlative (though still significantly so), with a correlation coefficient of 0.6733.   Similarly, there is correlation coefficient of 0.6848 for average time on site for returning users versus comments.  I suspect the reason is that some people like emailing back replies, some people like to go the site to write replies, and some people like using Engagio to write replies.  Unfortunately there is no way to directly measure which people on this site are using email, Engagio, or the site itself to reply to comments.

The  correlation of all unique visitors is also highly correlative to comments.  (correlation coefficient =0.8413). 


This data leads me to believe that people are in fact coming to the site not just for the posts, but for the community surrounding the posts.  People are more curious about the chatter and the interactions that come out of the posts than the post itself.  Building out community means over time you will build out a growing site.

If you are a web publisher/media company and you are looking at this post, having a strong commenting platform (like Disqus) is going to be essential to your long-term success as a media outlet.  Communities can be bigger drivers of traffic than Search Engine Optimization.  Having a strong moderation/community management team in place is more essential than having SEO staff in the long term, since there is a higher correlation to factors that matter to growth and ad sales (pageviews, uniques, time one site) to having community.  The reason is that people are not just on your media sites to read: They are there to interact with other readers about what they have read.  Teaching your writers and your community to stick to your site to discuss articles in depth ends up causing long-term growth.

(some notes:)

1)My friend Daniel Choi, a PHD Candidate in Molecular Biology/Computational Biology at Princeton, helped me understand rho based correlations. Thank you Daniel.  

2)For the sake of discussion, Disqus and Google Analytics are two different reporting tools.  GA also samples when you are looking at daily data for 9 months for a site of this size.  Please therefore take this post with a grain of statistical salt.

3) William Mougayar was kind of enough to give me some data about Fred to see if Fred’s presence in the comments matters.  It didn’t make it into the post for a variety of reasons.  Thank you William, anyway.

4) Thank you Fred for cleaning up some of the language about correlations during the editing process

5)IRL I’m a web analyst who is job hunting for my next gig while handling some side projects.  If you like this post, feel free to get in touch)


Free Speech

Our President gave an important speech yesterday at the UN. It was a speech about speech. Free speech. This is a topic that gets me going. I have been investing in the tools of self expression and free speech for close to twenty years now. I know how powerful they are and I also know that they can be used by haters and trouble makers just as easily as they can be used for good.

Here at AVC, I have tried to cultivate a forum where all opinions are welcome. Even those that are hateful or hurtful to me. I let them stand. Where everyone can judge them and opine on them. The President said this at the UN and I wholeheartedly agree with it:

As president of our country, and commander in chief of our military, I accept that people are going to call me awful things every day,” Mr. Obama said. “And I will defend their right to do so.

And he went on to say this:

the strongest weapon against hateful speech is not repression, it is more speech — the voices of tolerance that rally against bigotry and blasphemy, and lift up the values of understanding and mutual respect.

These are important values to state, to live by, and to protect. I applaud the President for expressing his beliefs on this subject. If we can export anything to the parts of the world that are just beginning their relationship with democracy, it is these ideas and the tools that make self expression possible. We must do this.



The first great investment we made at USV was Indeed in the summer of 2005. Brad had been looking for a search engine for jobs and I saw this post on John Battelle's blog in late 2004. I forwarded it to Brad and he reached out to Paul and Rony. It took two tries before we could convince them to take our money. They had bootstrapped the company, launched the service, and were well on their way. They didn't need our money. But eventually we convinced them to take it, along with the New York Times Company and our friends at Allen & Company.

Indeed has always been the quiet one. Nobody really talks about them. But as I have said a number of times on this blog, they are the most complete company in our portfolio. They have it all. Two world class entrepreneurs as founders. A solid management team all up and down the company. A product that is beloved and services more than 80mm people worldwide every month. An engineering team that has kept the service up with literally no down time that I can ever remember. A business model that, like Google's, is the best on the Internet. Revenues, profits, customer satisfaction, shareholder value. They built a fortress and I am just so happy to have had a front row seat watching them build it.

The quiet one is the one that can do a big M&A transaction over the summer without anyone finding out. The quiet one is the one that puts out the news on their blog and goes back to serving customers. The quiet one is the first great investment we made at USV and one that will always have a special place in my heart. Congrats to Paul, Rony, and the team. We will miss working with you.

#VC & Technology#Web/Tech

Section 18 of the America Invents Act

Yesterday we hosted a conversation between David Kappos, the Director of the US Patent and Trademark Office, and a bunch of founders/CEOs of our portfolio companies. It was a far reaching conversation that gave me optimism that our government does realize the issues with our patent system, particularly as it relates to software and business method patents.

There was one thing that we discussed that is very important and needs to be publicized broadly.

Section 18 of last year's America Invents Act provides for a "post-grant review proceeding for review of the validity of covered business method patents." Here's the provision. The USPTO has interpreted that provision and it is now fully implemented.

Here's what this means. If you are sued or threatened with a suit over a business method patent, you can submit the business method patent to the USPTO for a "post grant review." If the USPTO determines that patent is overly broad or should not have been issued, it will be thrown out in its entirety.

You can do this as part of your defense strategy and it will cost a fraction of a litigation defense. And the USPTO is required to complete the post grant review within one year of submittal, well ahead of any trial schedule.

So if you have been sued or if you are sued in the future over a business method patent, you should avail yourself of this post-grant review. It is faster, less expensive, and may well result in the elimination of bogus business method patents. And that's a good thing for everyone other than the troll who is suing you.

#VC & Technology

MBA Mondays From The Archive: Analyzing Financial Statements

My favorite course in business school was Financial Statement Analysis. It was like taking a course in investigative journalism or learning how to be a police detective. The professor explained that if you look hard enough, you can learn most anything you want about a business from the numbers. I've learned that numbers themselves are not the most important thing in a business but they sure are symptoms of what is going on inside the company. And therefore, they are worth studying if you care a lot about a company.


This topic could be and is a full semester course at some business schools. It is a deep and rich topic that I can’t cover in one single blog post. But it is also a relatively narrow skill set at its most developed levels. If you are going to be a public equity analyst, you need to understand this stuff cold and this post will not get you there.

But if you are an entrepreneur being handed financial statements from your bookkeeper or accountant or controller, then you need to be able to understand them and I’d like this post to help you do that. I’d also like this post help those of you who want to be more confident buying, holding, and selling public stocks. So that’s the perspective I will bring to this topic.

In the past three weeks, we talked about the three main financial statements, the Income Statement, the Balance Sheet, and the Cash Flow Statement. This post is going to attempt to help you figure out how to analyze them, at least at a cursory level.

In general, I like to start with cash. It’s the first line item on the Balance Sheet (it could be the first several lines if you want to combine it with short term investments). Note how much cash you have or how much cash the company you are analyzing has. Remember that number. If someone asks you how much cash you have in your business, or a business you are analyzing, and you can’t answer that to the last accounting period (at least), then you failed. There is no middle ground. Cash is that important.

Then look at how much cash the business had in a prior period. Last month is a good place to start but don’t end there. Look at how much cash went up or down in the past month. Then look much farther back, at least a quarter, and ideally six months and/or a year. Calculate how much cash went up or down over the period and then divide by the number of months in the period. That’s the average cash flow (or cash burn) per month. Remember that number.

But that number can be misleading, particularly if you did any debt or equity financings during that period (or if you paid off any debt facilities during that period). Back out the debt and equity financings and do the same calculations of average cash flow per month. Hopefully the monthly number, the quarterly average, the six-month average, and the annual average are in the same ballpark. If they are not, something is changing in the business, either for the good or the bad and you need to dig deeper to find out what. We’ll get to that.

If cash flow is positive for all periods, then you are done with cash. If it is negative, do one more thing. Divide your cash balance by the average monthly burn rate and figure out how many months of cash you have left. If you are burning cash, you need to know this number by heart as well. It is the length of your runway. For all you entrepreneurs out there, the three cash related numbers you need to be on top of are current cash balance, cash burn rate, and months of runway.

I generally like to go to the income statement next. And I like to lay out a few periods next to each other, ideally chronologically from oldest on the left to the newest on the right. For startups and early stage companies, a 12 month trended monthly presentation of the income statement is ideal. For more mature companies, including public companies, the current quarter and the four previous quarters are best.

Some people like to graph the key line items in the income statement (revenue, gross margin, operating costs, operating income) over time.  That’s good if you are a visual person. I find looking at the hard numbers works better for me. Note how things are moving in the business. In a perfect world, revenues and gross margins are growing faster than operating costs, and operating income (or losses) are increasing (or decreasing) faster than both of them. That is a demonstration of the operating leverage in the business.

But some early stage companies either have no revenue or are investing in the business faster than they are growing revenue. That is a sound strategy if the investments they are making are solid ones and if they have a timeline laid out during which they’ll do this. You can’t do that forever. You’ll run out of cash and go out of business.

From this analysis, you may see why the business is burning cash or burning cash more quickly or less quickly. You may see why the business is growing its cash flow rapidly. I am most comfortable when the monthly operating income (or losses) of a business are roughly equal to its cash flow (or cash burn). This does not have to be the case for the business to be healthy but it means the business has a relatively simple economic architecture, which is always comforting. From Enron to Lehman Brothers, we’ve learned that complex business architectures are hard to analyze and easy to manipulate.

One thing that bears mentioning here are “one time items” on the Income Statement. They make your life harder. If you go back to the Income Statement post and look at Google’s statement, you’ll see that in the first year of their presentation Google made a one-time contribution to the Google Foundation. That depressed earnings in that period. You need to back that one time charge out for a consistent presentation, but you also need to be somewhat suspicious of one-time charges. Companies can try to bury ongoing expenses in one-time charges and inflate their earnings. You don’t see that much in startups but you do in public companies and it’s a “red flag” if a company does it too often.

If the monthly operating income (after backing out one-time charges) doesn’t come close to the monthly cash burn rates, then something is going on with the balance sheet of the business. Many of these differences are normal for certain businesses. My friend Ron Schreiber told me about a software distribution business he and his partner Jordan Levy ran in the mid 80s. They would buy software from Microsoft, Lotus, and others in bulk and sell it in small quantities to mom and pop businesses. Microsoft and Lotus wanted to be paid upfront when the shipped the software but the mom and pop businesses were running on fumes and could not pay until they sold the software. So Ron’s business, called Software Distribution Services (of course), was always out of cash. In Ron’s words, they were a bank and a distribution company and weren’t getting paid for the banking part of their business. All during this time the revenue line and the operating income line was growing fast and furious as desktop software went from a niche business to a mainstream business. Eventually Ron and Jordan had to sell their business to Ingram, a large book distributor who had the financial resources to provide the “banking services”. They made a nice hit on that company, but not anything like what Microsoft and Lotus did even though they grew their topline just as fast as their suppliers.

Ron and Jordan’s business was “working capital intensive.” Working capital is the non cash current assets and liabilities of the business. When they grow rapidly in relation to revenues, it means you are financing other parts of the food chain in your industry and that’s a great way to run out of cash.

So if monthly income and monthly cash flow aren’t in the same ballpark, look at the changes in working capital month over month. We went over this a bit last week in preparing the cash flow statement. If working capital is the culprit soaking up the cash, you need to look at two things.

The first is if the revenues are real. A great way to inflate revenues is to “ship product” to people who aren’t going to pay you. A company that is doing that is operating fraudently so you don’t see it very often. But if someone is doing this, cash will be going down while profits are steady and accounts receivable are growing rapidly. I always look for that in a company that is supposed to be profitable but is sucking cash.

The second is the availability of working capital financing. If a business can finance its working capital needs inexpensively, then it can operate successfully with this business model. In times when debt is flowing freely, these can be good businesses to operate. When cash is tight, they are not.

The final thing to look for on the balance sheet is capex.  If a business is operating profitably, and growing profits, but its capex line is growing faster than profits, it’s got the potential for problems. Hosting companies are an example of a set of companies that might be in this situation. Again, the availability of financing is the key. Local cable operators operated profitably for years with big negative cash flows because of capex. The financial markets like the monopolies these busineses were granted and consistently provided them with financing to buy more capex. But if that party ends, it can be painful.

This post is three pages long in my editor so it’s time to stop. There is more to discuss on this topic so I’d like to know if I did this topic justice for most of you or if you’d like another post that digs a little deeper. My preference is to move on because I’m getting a bit tired of writing about accounting every Monday, but most of all I want to cover the stuff you want to learn or freshen up on. So let me know.

#MBA Mondays

Student Loans and the Education Bubble

I was early for a meeting on friday afternoon and found myself sitting in a chat between a University President and members of the faculty. One of the faculty members asked the President about the "education bubble." The President gave his thoughts on the topic and then unexpectedly turned to me and asked what I thought. 

I am a product of student loans. I got an engineering degree at MIT and a MBA at Wharton and paid for both of those degrees with a mix of family support, tuition credits for working while in school, and the maximum amount student loans I could take out. I spent much of my 20s paying those loans back. I remember when I made my last payment. It was a moment of great pride. 

I have made a tremendous return on my two degrees. Those student loans were an investment in me and they paid off big time. For the right student and the right institutions, there is no better investment that society can make than to pay for a high quality college and graduate education. Not only have I paid back the loans, but the Gotham Gal and I have made and continue to make generous gifts to a host of educational institutions. We will pay back the investments made in us many times over.

When it came time for our children to go to school, we have paid for the highest quality education we could find for them. We are fortunate that we did not have to take out loans to pay for those tuition bills. But if that were not the case, I am confident we would have borrowed the money to help them attend those institutions. So we are big believers in the value of a higher education and we have invested in it for ourselves and our children.

I told the University President and the faculty members all that. But I also told them that I am deeply concerned that about the cost of a high quality education and the fact that it is getting out of reach for many. And I told them that I am not sure the return on the investment is as high as it once was for many degrees. And finally, I told them that too many students are walking out of college with a student loan burden that is crushing and that they can't and won't pay back. 

So how you reconcile these two opposing views and what can we do about it?

Technology can help. But it is a tool not a panacea. Given the choice, most of us are still going to opt to send our children to MIT instead of the University of Phoenix. MIT and the other leading higher education institutions will increasingly use technology to improve the education they deliver and do so more efficiently. This may help alleviate the ever rising costs.

But we also need to get more creative about the financing of higher education. We should measure the return on investment students are getting from the institutions they attend and the degrees they obtain and tie the amount of loans they can get to the returns they are likely to achieve. Students that attend institutions that can deliver higher returns should be able to take out larger loans.

Repayment terms need to change as well. Loan repayments should be capped at a percentage of current income. I know a woman who has been out of graduate school for more than a decade who dedicates one of her two paychecks a month to paying back her student loans. She is spending half of her take home income on her student loans. That is nuts.

Bubbles are driven by easy money that drives irrational behavior. Our student loan policies have been doing some of that. We can and should change our policies to force more rational decisions in the purchase of higher education in this country. 

But we cannot forget the power of a high quality education to put our children on the best possible path in their lives. I am an example of what such an education can do for someone. And I know that there are many others out there just like me. We need to figure out how to reform the system in ways that don't cut that path off for students like I was thirty years ago.

#hacking education


Paul Graham has penned a longish and excellent essay in which he postulates that growth is the single defining characteristic of startups and the thing that all entrepreneurs must focus on. Paul is slowly but surely building a body of writing on startups that is as good as anything that has ever been written on the topic. And this essay on growth is one of the gems. This is another gem. There are quite a few of them.

I don't always agree with Paul and I see the world a bit differently than he does. But on the topic of growth, I could not agree more. Once we determine that a company fits into our investment thesis, we then turn to the team and traction to figure out if it's something we want to invest in. Traction is another way of saying growth. 

One thing that Paul did not touch on is the difference between organic and sustainable growth and temporary stimulated growth. Things like gaming Facebook's open graph can temporarily stimulate growth that is not sustainable long term. Investors can be faked out by things like that. Gaming Google's search algorithms is another way that has been done in the past. When we look at growth, we look for authentic, organic, and sustainable growth that is not overly dependent on a single source, particularly a source the startup doesn't control. That takes some experience to detect. We've messed up there as have most investors.

Sustainable and organic growth that can continue for five or ten years unabated will produce extraordinary returns. I look back at Etsy when we invested in it in the spring of 2006, about a year after they had launched. The company had just crossed $200,000 a month of gross merchandise value (GMV), up from $1000 of GMV in the month they launched in June 2005. They had grown 200x in less than a year after their launch. I am not going to reveal Etsy's current financials but it is safe to say that they have grown more than 200x again since our initial investment. And at the rate they are growing, they could grow another 10x in the next five years. Those are some big numbers and that is how investor generate spectacular returns investing startups. 

And that is how entrepreneurs and the founding team and the management team can generate significant value for themselves as well. When thinking about startups, growth is good.

#VC & Technology