Posts from February 2015

I was reading William’s post on the potential crash in the Bitcoin sector this morning and I thought of Carlota Perez. Longtime readers of this blog will know that I am a huge fan of Carlota’s work, her research around technology revolutions and financial capital, and her book about all of that.

In 2011, I got to interview her on stage at the Web 2.0 expo, which was one of the highlights of my career.

For those that are not familiar with Carlota’s work, she studied all of the major technological revolutions since the industrial revolution and how they were impacted by and how they impacted the capital markets. What she found was that there are two phases of every technological revolution, the installation phase when the technology comes into the market and the infrastructure is built (rails for the railroads, assembly lines for the cars, server and network infrastructure for the internet) and the deployment phase when the technology is broadly adopted by society (the development of the western part of the US in the railroad era, the creation of suburbs, shopping malls, and fast food in the auto era, and the adoption of iPhones, Facebook, and ridesharing in the internet/mobile era).

And the “turning point” between the two phases is almost always marked by a financial crash and recovery. See the chart below from Carlota’s book:

I’m not going to guess if we’ve seen the “collapse phase” of the Bitcoin technological revolution, or if we are in it, or if it is coming. But if Bitcoin and Blockchain is going to be a meaningful technological revolution, and I think it will be, then we are going to move from the installation phase to the deployment phase at some point and there will be a major financial break point that happens along the way.

What is less clear to me is whether this “collapse” will be seen in the price of Bitcoin, the health of the overall Bitcoin and Blockchain sector and the companies in it, or possibly the broader capital markets (VC, public equity, etc). It seems to me that the first is very likely, the second is also likely, and the third is less likely.

In any case, as my friend Tom Evslin like to say “nothing great has ever been accomplished without irrational exuberance”. And the Carlota Perez corollary to that is “nothing important happens without crashes”.

And the lesson I’ve learned in my career is to invest into the post crash cycle. When you do that, and do it intelligently, you are rewarded greatly.

I had this chat yesterday on Ethan about electronic music related companies in our portfolio:

Which suggests to me that many people in the EDM space don’t know about Splice (a USV portfolio company).

So here’s a short (less than 2min) video that showcases two of the most important features of Splice (cloud backup and version management). Splice does a lot more than that, but those two features alone make it a must have for anyone creating electronic music.

So this is a different kind of feature friday. It is about a feature I want but don’t have.

Digital money is coming and it is coming pretty fast now. In the developing world we see mpesa taking off in many countries. In some places, like Kenya, it has become the dominant way people conduct their financial lives.

In the US, among the young adult crowd, Venmo is hugely popular. My kids use it for much of their financial lives. The Gotham Gal and I rent a property we own to some young adults and they all pay us rent on Venmo. We, in turn, pay the super we use in the building on Venmo.

And then there is bitcoin. I’m running around with the Coinbase bitcoin wallet on my phone and sending money (dollars or bitcoins) around using the bitcoin protocol.

The problem is these digital money services are a “black hole” when it comes to accounting for all the transactions. I know that I put $500 into my Venmo account last month and I know its all gone. But where did it all go. How much came in and why? And how much went out and why?

I want Mint.com for digital money services, starting with the Venmo and Coinbase mobile apps. That would be super helpful for me and, I suspect, for everyone using these digital money services.

I bet it exists or that it is being built. I just haven’t see it yet. And I want it. Badly.

In the WSJ post about the FCC’s decision (announced yesterday) to adopt Title II as the mechanism to insure that last mile access providers don’t mess with the open Internet, they explain how the White House came around on this issue:

The prod from Mr. Obama came after an unusual, secretive effort inside the White House, led by two aides who built a case for the principle known as “net neutrality” through dozens of meetings with online activists, Web startups and traditional telecommunications companies.

Acting like a parallel version of the FCC itself, R. David Edelman and Tom Power listened as Etsy Inc., Kickstarter Inc., Yahoo Inc. ’s Tumblr and other companies insisted that utility-like rules were needed to help small companies and entrepreneurs compete online, people involved in the process say.

In an office on the fourth floor of the Old Executive Office Building, some companies claimed they would have never gotten off the ground if they had been forced to pay broadband providers. “We want to compete on product and service, not on our ability to negotiate preferable treatment with an Internet service provider,” said David Pashman, general counsel for Meetup Inc.

Note that startups like Meetup, Etsy, Kickstarter, and Tumblr are mentioned. These companies took the time to go to DC and explain how an open Internet allowed them to get into business and stay in business. And DC listened.

That’s hopeful and important in a world where it seems the big guys have all the weapons. David can beat Goliath. It is not just a fable.

Last week, USV hosted one of our regular portfolio summits. We do this on almost a weekly basis now for some subset of our portfolio (engineering leaders, human resources leaders, marketing leaders, etc, etc). It is all part of our USV Network offering for our portfolio companies.

The summit last week was for the data analysts in our portfolio. These summits have produced some of the most interesting insights for us over the years. And last week was no different. There was a recurring discussion of the ethics of machine learning and recommendation engines.

So we decided to make that the topic of the week on usv.com. The discussion is here. Check it out.

I saw this headline on the New York Times today:

F.C.C. Is Expected to Propose Regulating Internet Service as a Utility

Now you can argue whether regulating the last mile Internet is a good idea and we have done that ad naseum here at AVC over the years.

But if you accept that some regulations are necessary, you are then faced with the question of whether you should classify last mile Internet as a “utility” or an “information service” as is currently the case.

The decision by then FCC Commissioner Michael Powell to classify internet access (the last mile) as an information service a decade ago is really what’s at stake in this net neutrality debate.

An “information service” is something like AOL or maybe even Wikipedia. It is a service that provides information to a user. The wire (or fiber) that Comcast, Verizon, or some other telco runs from their network to your home or office is most definitely not an information service and should not be regulated as such.

To me it looks like a utility. Just like my electricity service, my water service, and my gas service. The honest to god truth of this matter is that last mile internet service is a utility and has been since broadband arrived a decade or more ago.

Again, we can argue about whether it should be regulated (as electricity, water, and gas are), but we really cannot argue with a straight face that broadband internet access is an information service. It never was and it never will be.

The Gotham Gal and I made a decision recently where we had a bunch of sunk costs. It reminded me of this post and I am going to reblog it today.

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Sunk Costs are time and money (and other resources) you have already spent on a project, investment, or some other effort. They have been sunk into the effort and most likely you cannot get them back.

The important thing about sunk costs is when it comes time to make a decision about the project or investment, you should NOT factor in the sunk costs in that decision. You should treat them as gone already and make the decision based on what is in front of you in terms of costs and opportunities.

Let’s make this a bit more tangible. Let’s say you have been funding a new product effort at your company. To date, you’ve spent six months of effort, the full-time costs of three software developers, one product manager, and much of your time and your senior team’s time. Let’s say all-in, you’ve spent $300,000 on this new product. Those costs are sunk. You’ve spent them and there is no easy way to get that cash back in your bank account.

Now let’s say this product effort is troubled. You aren’t happy with the product in its current incarnation. You don’t think it will work as currently constructed and envisioned. You think you can fix it, but that will take another six months with the same team and same effort of the senior team. In making the decision about going forward or killing this effort, you should not consider the $300,000 you have already sunk into the project. You should only consider the additional $300,000 you are thinking about spending going forward. The reason is that first $300,000 has been spent whether or not you kill the project. It is immaterial to the going forward decision.

This is a hard thing to do. It is human nature to want to recover the sunk costs. We face this all the time in our business. When we have invested $500,000 or $5mm into a company, it is really easy to get into the mindset that we need to stick with the investment so we can get our money back. If we stop funding, then we write off the investment almost all of the time. If we keep putting money in, there is a chance the investment will work out and we’ll get our money back or even a return on it.

Even though I was taught about sunk costs in business school twenty-five years ago, I have had to learn this lesson the hard way. Most of the time that we make a follow-on investment defensively, to protect the capital we have already invested, that follow-on investment is marginal or outright bad. I have seen this again and again. And so we try really hard to look at every investment based on the return on the new money and not include the capital we have already invested in the decision.

This ties back to the discussion about seed investing and treating seed investments as “options.” Every investor, if they are rational, will look at the follow-on round on its own merits and not based on the capital they already have invested. But the venture capital business is a relatively small world and reputation matters as well. Those investors who make one follow-on for every ten seeds they make will get a reputation and may not see many high quality seed opportunities going forward. Our firm has followed every single seed investment we have made with another round. In most cases, those investments have been good ones. But we have made a few marginal or outright bad follow-ons. We do that for reputation value as much as anything else. We measure that value and understand that is what we are doing and we keep those reputation driven follow-ons small on purpose.

When it is time to commit additional capital to an ongoing project or investment, you need to isolate the incremental investment and assess the return on that capital investment. You should not include the costs you have already sunk into the project in your math. When you do that, you make bad investment decisions.