Posts from January 2017

Our portfolio company Kickstarter had another fantastic year in 2016.

They put this web presentation together to show what happened.

Things like turning smog into jewelry and turning subways ads into photos of cats are the kinds of things that always seem to happen on Kickstarter.

And I am always amazed and inspired by the creativity that people have inside of them and Kickstarter helps to pull out of them.

For years philanthropic organizations have bought fundraising software from the likes of Blackbaud and a host of other software companies, large and small, in the hope that these tools would help them raise money. The term I like for these fundraising software packages is “pay and pray.” There is no correlation between the amount of money a non-profit pays and the amount of money they raise with these tools.

I think we witnessed the end of pay and pray yesterday with the announcement that our portfolio company CrowdRise is joining forces with GoFundMe to create a single crowdfunding platform that will serve the needs of person to person fundraising, event based fundraising, fundraising for philanthropic organizations, and corporate social responsibility.

Over the past five years, CrowdRise built a suite of crowdfunding tools for philanthropic organizations, events like marathons and other races, and corporations that want to participate in social causes. Those web-based tools are used by tens of thousands of organizations to raise funds organically over the Internet. Now those tools sit on top of the world’s largest platform for charitable giving. In the six years that it has been around, GoFundMe has been used by over 2mm people to raise money from over 25mm donors. Over $3bn has been raised on GoFundMe since 2010.

I think the new GoFundMe has become the social charitable platform of choice, much like LinkedIn is the social platform for business relationships, Facebook is the social platform for staying in touch with friends and family, and Twitter is the social platform of choice for staying on top of what is happening. We will all have profiles on GoFundMe which speak to our charitable giving history and we will all have stored payment credentials on GoFundMe that facilitate one-click social action. In time, everyone who wants to raise funds from the billions of people who are on the Internet will use GoFundMe to do that. And everyone means you and me, it means charities large and small, it means corporations who want to light up social action in their employees, and it means events that want to offer charitable fundraising. One platform can do all of this and it will do all of this.

The other thing that is important to understand about a crowdfunding platform, like GoFundMe or Crowdrise, is that there are no upfront or fixed fees or minimums required to use the platform. Most crowdfunding platforms take 5% of the amount raised plus a credit card fee. So there is a direct correlation between the amount you spend for these tools and the amount you raise with them. And many charitable organizations that use these tools pass these fees onto the donor which means they keep 100% of what they raise on these platforms.

This is a revolution in the way money is raised for good causes. There is now a large scale network that exists to support charitable giving. And the tools now exist for any person or organization to participate in this network. And these tools cost relatively little, or nothing, to use. No more pay and pray.

Globalization is certainly a double edged sword for many people, but the truth is that over the past half century, the world has globalized enormously. We are now to the point that many employers around the world are looking outside their local or national talent pools for key hires.

Our portfolio company Jobbatical specializes in helping companies around the world hire from the global talent pool.

And it also helps people (maybe you are one of them) that want to think about working in a different country for a while.

Here are a few sample listings from Jobbatical’s explore page showing the diversity of job options that are available:

We think that the globalization of hiring is going to expand enormously over the next couple decades and we think Jobbatical has a fantastic opportunity in front of it. Hiring from the global talent pool has some unique challenges but that friction is what creates this opportunity.

If you are looking to hire someone from the global talent pool, list your job opportunity with Jobbatical.

And if you are looking to go work somewhere else for a while, explore the available jobs here.

I saw the news today that Nielsen reported that Streaming Now Officially the Number One Way We Listen to Music in America and I thought to myself “didn’t that happen a decade ago?” The report goes on to say that “on-demand audio streams surpassed 251 billion in 2016–a 76 percent increase that accounts for 38 percent of the entire music consumption market.” I guess that 38% is a global number and that streaming is over 50% in the US. At least that’s how I interpret the article.

Back in 2007 and 2008, I wrote that streaming was preferable to file based media. I expected the market to flip quickly.

A decade later, the market is in the process of flipping.

I started listening to streaming audio when Listen.com launched its subscription music service (which became Rhapsody and then Napster) in the late 90s. I moved on from file based music almost twenty years ago.

Which is a reminder that something may be inevitable, but that doesn’t mean it will happen quickly.

Reserves is the term VCs use to describe funds they “reserve” for follow-on financings of their portfolio companies.

Here are some things entrepreneurs should know about VCs and reserves:

• One very important thing that separates a strong VC firm from all other sources of capital is that the best VC firms reserve capital for follow-on financings for their portfolio companies and can be counted on to participate in subsequent financing rounds. This is not true for angel investors, seed funds, growth funds, and strategic investors.  I don’t mean to be disparaging of these other sources of capital. They all are important at various stages of development. But if you want someone you can count on in your cap table, that would be a VC firm, particularly a top tier VC firm.
• Most top VCs will choose to take their “pro-rata share” of follow-on rounds. That means they will invest enough capital to avoid being diluted by the follow-on financing round. If a VC owns 15% of your company, they most likely are going to want to take 15% of follow-on rounds. That means that you can’t raise your next round from your VC investors, but you can count on them for a material part of the round. There are exceptions to this rule, and they are called “inside rounds”, but entrepreneurs should not count on inside rounds. It is generally preferable to raise an outside round, although there are exceptions to that rule.
• VCs raise money in discrete funds. These funds are pools of capital that are capped at some number. That number could be $100mm, $500mm, or $1bn, or more. VCs generally do not like to, and are often prohibited from, “cross investing” between these discrete funds. That means if your company raised money from USV 2004, LP (the name of our first fund, a $125mm fund), it will be hard for us to invest in your company out of USV 2008, LP (the name of our second fund, a ~$150mm fund).
• For this reason, experienced VCs have learned to create large reserves in their funds for supporting their portfolio companies. That means that a firm like USV might go back to its investors for a new fund (USV 2008) after only investing a portion of a fund (USV 2004). At USV, we generally go back to our investors for a new fund after investing about half of a fund. That means that we reserve roughly half of a fund for follow-on investments.
• VCs also have a tool called “recycling” at their disposal to supplement these reserves. At USV, we have the right to take some of our realized proceeds in a given fund and reinvest them in the portfolio companies of that fund. That recycling capability is typically capped in the agreement between the VCs and their investors. At USV, that recycling cap is roughly 25-30% of our funds.

So, given all of this, here is what entrepreneurs should understand:

• VCs, particularly top VCs, can be counted on to support a portfolio company from round to round, particularly for their pro-rata share.
• But VCs don’t have unlimited resources to invest in your company. If they are investing in your company out of a $150mm fund, that is the total amount of capital they have at their disposal as far as you are concerned.
• And a typical VC fund will have 20, 30, 40 portfolio companies in it, so those funds are allocated to the entire portfolio, not your company.
• If a VC invests $3mm in your company, they likely have another $3mm reserved for your company and may have as much as $6mm (2x the initial investment) reserved for it. Don’t expect more than that.

At USV, we take reserves very seriously. We know that early stage companies require a fair amount of capital to grow into profitable sustainable businesses and we work hard to make sure that we have the staying power that our portfolio companies require from us. Specifically, we have done two things to help us manage this reserves issue:

• For each fund we raise, we build a model of the portfolio that lays out all future financing rounds as far as we can predict them. We estimate the timing, size, and probability of that financing round happening. We then run a “monte carlo simulation” of that portfolio to develop a statistical distribution of outcomes. That looks like a normal distribution and we make sure we have a 95% probability of being able to participate in all of these future funding rounds. Practically speaking, this tool allows us to determine how many portfolio companies we should put in each fund before we go back to our investors for another fund.
• We have raised two Opportunity Funds which allow us to continue to participate in funding rounds for our most successful portfolio companies that start raising very large growth rounds. We also use these Opportunity Funds to occasionally participate in later stage rounds of companies that we did not invest in at the early stage.

One of the most common mistakes I see new “emerging VC managers” make is that they don’t sufficiently reserve for follow-on investments. They don’t go back for a new fund until they have invested 70 to 80% of their first fund and then they run out of money and can’t participate in follow-on rounds. They put too many companies into a portfolio and they can’t support them all. That hurts them because they get diluted by those rounds they can’t participate in. But it also hurts their portfolio companies because the founder and/or CEO has to explain why some of their VC investors aren’t participating in the financing round.

Most people think that VC is all about the initial portfolio construction, selecting the companies to invest in. But the truth is that is only half of it. What happens with the portfolio after you have selected it is the other half. That includes actively managing the portfolio (board work, adding value, etc) and it includes allocating capital to the portfolio in follow-on rounds, and it includes working to get exits. And it is that second part that is the harder part to learn how to do. The best VC firms do it incredibly well and they benefit enormously from it.

One of our colleagues at USV pointed us at a series of web videos called Stated Clearly.

I really like this one that explains DNA and how it works in a very simple and easy to understand way.

Our portfolio company Kickstarter has opened up the year with a challenge; launch a project in January in which you make 100 of something. It is called make/100.

Here are the details:

What is Make 100?

Make 100 is a creative initiative focused on editions of 100. Kick off 2017 by challenging yourself to bring your brightest idea to life, x100.

How can I take part?

Getting involved in Make 100 is simple: just launch a Kickstarter project this January featuring your idea as a limited-edition reward capped at 100 backers. Then, share your live project with us: [email protected].

If you’ve been wanting to do a project on Kickstarter but just haven’t had the right catalyst, maybe this is it. If you do a make/100 project, let me know in addition to Kickstarter and I’ll feature as many of them as I can on subsequent funding fridays this month.

Yesterday Medium announced that they are moving away from ads and thinking about a different kind of business model for their online publishing network.

I saw this tweet suggesting they are looking at Spotify for inspiration:

Medium is pivoting. Ads aren’t working. Sounds like they’re looking at a Spotify-like model. That can get messy.https://t.co/u75ZVaxEZQ pic.twitter.com/RgLsZYejGs

— Neil Cybart (@neilcybart) January 4, 2017

I don’t have any inside information here. USV is not an investor in Medium and I am not privy to any of the strategic thinking at Medium. So they may not be looking at Spotify for inspiration. But they are certainly looking around to figure out where to go from here.

I don’t think Spotify (music), or Netflix (video), or Amazon (books), should be the inspiration for online publishers in search of a new business model. The sad truth is most people are not going to pay a monthly subscription for online publishing content. Certainly not for blog posts by people they have never heard of.

The new online publications that have a paywall have built nice small businesses that pay the bills and maybe make some money for the founders. That’s a great way to go if you want to be small. But if you want to be a large network with millions of readers and publishers, as Medium already is (2 billion words written on Medium in the last year. 7.5 million posts during that time. 60 million monthly readers), a paywall is not going to work.

I think the blockchain based social network Steem would be a more interesting place for the Medium team to poke around at. Here’s the Steem white paper. That’s a good place to start.

To be clear, I don’t think Steem has this all figured out. I don’t own any Steem (or at least I don’t think I do). And I think they have made things a bit too complicated with their tokens and incentives. To their credit, they have taken steps to simplify things and they are headed in the right direction.

The thing about token based business models is that the token captures the value of the network as it grows and it is the only business model that exists for the network. You can buy tokens if you want to speculate on the value of the network (or invest in the online publication business, as it were). You can earn tokens by participating in the network (or by publishing content on the online publishing network, as it were). You can spend tokens to participate in the network (or by engaging in or curating the online publishing network, as it were).

Twitter could also go this route but clearly it would be harder for them to move away from an ad-based business model than it was for Medium. And believe me, it was not easy for Medium to do this.

The most likely companies that are going to figure out this token based business model are startups. They have nothing to lose and everything to gain. It would be stunning, bold, and brilliant for Medium to do this. I hope they do.

One of the challenges with the current state of cryptology is that quantum computing breaks most of the current forms of crypto, a point made in this twitter exchange a few days ago:

@CarpeDiemCyber @rhhackett extremely disruptive

— Fred Wilson (@fredwilson) January 2, 2017

So what is the state of quantum computing?

Well according to this piece in Nature, moving along quite nicely.

According to Leo Kouwenhoven of the University of Delft in the Netherlands, “2017 is the year of braiding”, meaning that “excitations of matter … encode infor­mation by tangling around each other like braids. Information stored in these qubits would be much more resistant to outside disturbance than are other technologies and would, in particular, make error correction easier.”

That’s a lot to grok and I am not entirely sure that I grok it. But as Nature points out, big tech companies like Google and Microsoft are investing heavily in quantum computing and there is a non-trivial chance that we will get to viable quantum computing in the next decade.

As I said in my tweet reply, that would be pretty disruptive.