Posts from September 2017

Mexico City

Mexico City is an amazing place. The Gotham Gal and I were there around this time last year.

The people, the culture, the energy are all great in Mexico City. It feels like a place on the move where good things are happening.

So I was upset to hear about the devastating earthquake last night.

We have had so many natural disasters in the last month and I understand that we may all be fatigued from giving to all of these needy causes.

But I took some time this morning to give and thought I’d share with all of you where I sent some funds in case you want to do the same.

  1. Salma Hayek’s Crowdrise Campaign to UNICEF’s on the ground relief efforts: I donated $1000.
  2. Bitso’s (Mexico’s largest crypto exchange) Campaign to benefit Red Cross and Brigada de Rescate Topos Tlaltelolco A.C.: I donated 2 ETH.

It feels good to send some funds to organizations on the ground that are actually helping people in a difficult time.

#crowdfunding#crypto#Uncategorized

Why Amazon Should Come To NYC

USA Today reported that NYC is working on a proposal to encourage Amazon to locate its second headquarters “HQ2” in NYC.

I can’t imagine a better place for HQ2 than NYC.

Here are ten reasons why Amazon should stop thinking about any other place and just pick NYC:

  1. NYC is headquarters to many global companies. It has the transportation systems, building stock, and talent base that companies need and desire for their headquarters.
  2. It has 8.5mm people, enough to satisfy Amazon’s insatiable appetite for talent.
  3. It is home to the entrepreneurs, creators, innovators, and big ideas that Amazon is looking to surround itself with.
  4. It is home to the second largest tech sector in the US.
  5. NYC is committed to teaching computer science to all of the 1.1mm students in its school system by 2025 and is already 1/3 of the way there.
  6. NYC/NYS has embarked on massive infrastructure investment to upgrade its transportation hubs like LGA and Penn Station.
  7. There are something like fifteen direct flights from NYC to Seattle every weekday.
  8. NYC has the largest Amazon customer base of any city in the US (I am guessing on this one. But it has to be true).
  9. NYC will welcome Amazon with open arms unlike some of the other cities that Amazon is considering.
  10. NYC has the most diverse workforce in the US.

So if any AVC readers know how to get this post to the team at Amazon that is making this decision, please send it to them. I am certain NYC is the place for them. They will love it here.

#NYC

Worry

I remember when I was in my early 20s and just starting out in the venture capital business, I came across an old wall street saying that “a market climbs a wall of worry.” I didn’t understand it and that made me want to. I read a bit about the saying and came to understand that bull markets require an uneasy feeling.

Worrying is a fundamental characteristic of most investors I know. Greed and fear are the two opposing elements of market forces.

I read a board deck this weekend from a portfolio company that is absolutely crushing it and forwarded it to our team at USV with a short memo outlining all of the risks I am worried about. Not a single enthusiastic comment was in that email.

Why is that? Because although we invest on “what could go right”, we manage our investments on “what might go wrong.”

I believe one of our greatest assets to our portfolio companies is to be an early warning sign of trouble. If we can help the founders/leaders and their teams be aware of risks on the horizon, they can manage against those risks. And if there is one thing investors, particularly ones who have been around a while know about, it is how things can and do go wrong.

Of course, how you worry is critical. You can’t weigh down the leadership teams with your worries. You can’t fill up the board meetings with angst.

You have to be supportive, optimistic, encouraging, and positive in your interactions with founder/leaders and their teams. But you must also flag areas where there could be trouble. Getting that balance right has been a work in progress for me for my entire career.

So being a worrier is an important characteristic in an investor. But you have to mostly keep those worries to yourself and your partners/team (this is a place where partners are invaluable). And you have to decide when a worry is significant enough to share it with your portfolio companies and then you need to find the right moment and narrative to communicate it. When you do it right, the teams appreciate it immensely.

#VC & Technology

Some Thoughts On Burn Rates

The startup and venture capital businesses are based on a general idea that you can and should invest heavily into your business in order to increase value creation, amplify it, and accelerate it.

These investments mostly take the form of operating losses, driven by headcount, where the monthly expenses are larger, often much larger, than revenues.

These losses are known in the industry vernacular as “burn rates” – how much cash you burn on a monthly basis.

But how much burn is reasonable?

I have been thinking a lot about this in recent years.

Instinctively I feel that many of our portfolio companies, and the startup sector as a whole, operate on burn rates that are too high and are unsustainable.

But it is hard to talk to a founder, a management team, or a Board about burn rates objectively.

There are no hard and fast rules on burn rate so you end up getting into an emotional discussion “it feels right vs it feels wrong.”

That’s no way to have a conversation as important as this one.

So I’ve been looking for some rule of thumbs.

One that I like and have blogged about is the Rule of 40.

The rule of 40 makes an explicit relationship between revenue growth rates and annual operating losses. Below 40 is bad. Above 40 is good.

But the issue with the Rule of 40 is that it is oriented toward businesses (like SAAS) where there is a well-understood relationship between value and revenues and ones that are reasonably developed.

So I’ve been deconstructing the Rule of 40 in hopes of trying to get to a more fundamental truth about burn rates.

And what I have come up with is this:

Your company’s annual value creation (valuation at the end of the year minus valuation at the start of the year) should be a multiple of the cash your company has consumed during the year.

That seems simple and obvious and that is a good thing.

But in order to make this work you need to lock down two things;

  • how are you going to objectively measure valuation absent a financing event?
  • what is the multiple?

The latter one is easier I think. The multiple should be large. 1x is clearly not enough. I don’t think 2x is either. 3x is borderline. I like 5x. I would want a 5x return on my annual burn.

I think annual value creation should produce a 3-5x return on annual burn. That feels like a good solid range to me.

The first question is trickier. If you have revenues, then using a revenue multiple to establish value is a good way to do this. You can look at comparable company financings and acquisitions and also public company valuations to figure out what revenue multiple to use. But you should be careful to understand that revenue multiples are a function of revenue growth rates. The faster your revenue is growing the higher they are.

So let’s do an exercise here to flesh all of this out.

Let’s say you are a $10mm annual revenue company in 2017 growing to $18mm in 2018.

And let’s say that you look around at public comps and companies similar to your are trading at 6x revenues.

So you can estimate that your business is worth $60mm this year and $110mm next year.

So there will be $50mm of value creation in 2018.

If you want a 5x return on your burn, you should not burn more than $10mm in 2018.

If you are willing to accept as little as 3x, you should not burn more than $16mm in 2018.

That’s how this rule works.

I like it because it is objective and will lead to rational discussions about burn rates vs emotional ones.

It does break down in pre-revenue companies where it is harder to objectively measure value creation. You can use financing valuations as a proxy in pre-revenue companies but then you quickly get back into emotional territory as the end of year valuation will be an aspirational number and unreasonable aspirations/expectations are what lead to unsustainable burn rates in the first place.

#entrepreneurship#VC & Technology

Fun Friday: Crypto Crystal Ball

Chris Burniske posted this Twitter poll a few days ago:

I voted for option one. I think the crypto markets will be under pressure for at least the remainder of the year. But I am a buyer so that may be wishful thinking on my part.

Where do you think crypto is headed for the remainder of this year?

#blockchain

Kickstarter Japan

Yesterday was a big day for our portfolio company Kickstarter.

They launched in Japan, a market that has been dying for Kickstarter to come to for years.

Here’s a couple photos from the launch event in Tokyo yesterday:

I backed a couple Japanese projects today, and I suspect I will be backing a lot of them in the future.

MARUHI Cup & Saucer: A cup & saucer with a secret spot for a sweet surprise.

革新的な電子本「全巻一冊 北斗の拳」”Fist of the North Star” eBook

Japan represents the creativity, imagination, and innovation that Kickstarter is home to as well as any country in the world and I am so happy that they are now on Kickstarter.

#crowdfunding

Cornell Tech

I took a ferry up the East River yesterday evening to attend a dinner celebrating the official opening of Cornell Tech which happens this morning.

Situated on Roosevelt Island, underneath the Queensboro Bridge, Cornell Tech is a graduate school of engineering and business that is focused on the technologies and industries of the 21st Century. While the campus is officially opening today, Cornell Tech has been operating as a graduate school for something like four or five years now, in the Google building in Chelsea.

It is the result of an RFP process that Mike Bloomberg’s administration put out seeking a new school of engineering in NYC.

Last night the former mayor spoke about all of that and reminded us, as he always does, why NYC is the greatest place in the world.

With the opening of Cornell Tech, the city continues to feel the impact of Mike’s twelve years of leadership.

He put NYC on solid footing and helped to point it in the right direction. We are all grateful for that.

Speaking of leadership, Cornell Tech is led by Dean Dan Huttenlocher. Dan is a fantastic technologist, educator, and community member.

If Cornell Tech is a gift that the Bloomberg administration gave NYC, Dan is a gift that Cornell gave NYC.

Dan’s leadership in the NYC tech community has already been felt and as he said last night, “the best is yet to come.”

The synergies between engineering schools and technology communities are well understood and well documented.

NYC has some great engineering schools, like NYU’s Tandon where I am on the Board, Columbia’s School Of Engineering, and at the various CUNY schools. The addition of a world class institution like Cornell Tech will only make things better. It ups the competition between these schools for students, faculty, and research grants. And that makes everyone better.

Today is a big day for the NYC tech community. We welcome the Cornell Tech campus to NYC and celebrate all the good things that will come of this. And I am certain that there will be many.

#NYC

AR "Browsers" On The Phone

Jacqueline gave us an update yesterday on the latest with Apple’s ARKit and Google’s ARCore.

These AR “browsers” are coming soon to Apple and Google phones.

We think this is a big deal because for the first time AR developers will have standard environments to build to that are already in the hands of 1bn people.

Jacqueline wrote a bit about all of this on her Medium blog, here and here.

Throughout our conversation yesterday, I was a little unclear about how all of this would work from a UI perspective.

But then we watched this on our conference room TV and it all became a lot clearer to me.

By the way, if you like that video, you can back the developer on Kickstarter. They only have three days left on their project.

At USV, we have been slow to embrace AR and VR, as we have had a hard time seeing how all of this cool technology becomes mainstream.

With ARKit and ARCore, that path seems a lot more clear now and Jacqueline is leading our effort to talk to companies that are working in this space.

#AR/VR

September 11th - A Day Of Remembrance

I have written a lot about September 11th on this blog over the years.

I started AVC a couple years post 9/11, while I was and NY was still very much in its wake.

Time has a way of making traumatic things fade away and that has happened to some degree.

But a smell, a scene, or a person can take me right back there to that awful day.

So today, like all September 11s, will be a day of remembrance for me.

#life lessons