Our Model

This past week our portfolio company MongoDB went public. I think that occasion presents an opportunity to talk about USV’s model.

We are a small firm. We raise modest sized funds (by modern VC standards). Our first fund was $125mm, our second fund was $150mm, and we have now settled on $175mm as a good number and our past three funds have been that size.

Our typical entry point is Seed or Series A although we have an Opportunity Fund that allows us to enter later when that is appropriate. We do that once or twice a year on average.

We make between twenty and twenty five investments per fund and we expect, hope, and work hard to make sure that two or three of those investments turn into high impact companies that can each return the fund.

Although our entry point is typically Seed or Series A, we continue to invest round after round to both protect and add to our ownership. We have no requirements on ownership, but we typically end up owning between 15% and 20% of our high impact portfolio companies.

If you do the math around our goal of returning the fund with our high impact companies, you will notice that we need these companies to exit at a billion dollars or more. Exit is the important word. Getting valued at a billion or more does nothing for our model. We need these high impact companies to exit at a billion dollars or more.

Because we invest early, it generally takes seven or eight years for an investment to exit. We closed our first fund, USV 2004, in November 2004, and our first high impact exit came almost exactly seven years later when Zynga went public in late 2011.

Mongo DB represents the eighth high impact exit that USV has had. They are:

Zynga – IPO – 2011

Indeed – Sale to Recruit – 2012

Twitter – IPO – 2013

Tumblr – Sale to Yahoo -2013

Lending Club – IPO – 2014

Etsy – IPO – 2015

Twilio – IPO – 2016

MongoDB – IPO – 2017

Although MongoDB won’t be an exit until the lockup comes off and we are truly liquid, every other one of these impact investments has returned the fund it was in (or much more in the case of Twitter, Lending Club, and Twilio).

We were the lead investor in the Seed or Series A round in seven of these eight high impact companies and three of them came from seed investments. It’s easier to identify high impact companies in the late rounds, but not so easy to do that in the early rounds. That’s where our thesis based investing comes into play.

It is also important that all of our partners participate in this model. It takes seven or eight years before we can expect a new partner to contribute and Albert, who joined us in 2008, has produced the last two high impact exits with Twilio and MongoDB. John, who joined us in 2010, has already contributed one in Lending Club. I have no doubt that Andy, who joined us in 2012, and Rebecca, who joined us this week, will produce their share of high impact exits. Andy already has several in the pipeline.

So this is our model. Keep the fund sizes small. Make investments early so we can buy meaningful ownership for not a lot of money. Keep investing round after round to maintain and/or grow our ownership. And have enough high impact portfolio companies that we can get two or three of them per fund.

We have a good pipeline of high impact companies in our various portfolios so that we expect this model will keep working for the foreseeable future.

This model has more or less been the model of all three venture funds I have worked in over my thirty year period. It is time tested and it works when applied with focus and discipline and a strong investment thesis.

But with a new model, tokens, in its infancy, it begs the question of how it will impact our approach. We already have four portfolio companies that either have done or have announced intentions to do token offerings; Protocol Labs/Filecoin, Kik/Kin, Blockstack/Stack, and YouNow/Props. So we are going to figure this out in a few years. I expect the hold periods will come down as token offerings come early in a company’s life, not later. So we should know more about how this new model works in three to five years.

There are a bunch of questions that come to mind. Here are a few of them:

  1. Can a token based investment return a fund with more or less frequency than an equity based model?
  2. How long are the hold periods going to be in a token based model?
  3. Will the 10-15% high impact percentage that we see in our equity based portfolios be similar in a token based model?
  4. What are the appropriate ownership levels for a token based investment vs an equity investment?

We are going to continue to execute our equity based model in parallel with our token investments, at least for as long as that seems like the right approach. We have a good thing going with the equity based model but we understand that we have to adapt and react to changes in the market and we are doing that, fairly aggressively, with tokens.

It is an interesting time to be in the venture capital business. The decade that came after the internet bubble burst turned out to be a fantastic time to make early stage venture capital investments and we have been fortunate to participate in those good times. But the market has changed a lot with large incumbents taking up more and more white space in the internet sector as we have known it. At the same time, an exciting new sector and model, crypto/tokens, has emerged which gives us a lot of optimism about the opportunities ahead of us.

We will see how our model needs to evolve over time to make sure we can continue to deliver the results we want to deliver to the entrepreneurs and companies we back and the to the investors whose capital we manage.

#VC & Technology

Comments (Archived):

  1. Richard

    By most measures these exits have not proven to be good investments post exit for main st investors/acquires ( this in a time of if one the the great bull markets). What are the discussions if any within USV about this?

    1. fredwilson

      half of them are trading above their IPO price and half are below.the one that is most upsetting to me is LC. i don’t think they should have forced the founder/CEO out and we have backed him in his new company.

      1. Yair Spolter

        Does post-exit performance concern a VC?

        1. fredwilson

          Yes. Because I still own all of those stocks personally via distributions from our funds

  2. Tom Labus

    If this post was written with jet lag, you may want to schedule more long flights. Great post!!!

  3. fs2117

    It’ll be interesting to see if ICOs make your jobs more difficult. Seems to me that the lack of liquidity and constraints early-stage equity places on investors is somewhat of a blessing in disguise. Liquidity = optionality, optionality = more choices to make, more choices to make = more opportunities to exit (too) early.

    1. creative group

      fs2117:If USV model is surrounded by seed then the token aspect would only return most of the investment from the option of early exit. (Not?) The companies don’t have the financial wherewithal to create the infrastructure and platform to attract people to the tokens. There needs to be some type of buzz, white paper and press (In this day and age not even difficult to generate this equation).Would be interesting to see if a non-credentialed group (No college, no connections to any industry, no expertise in field, etc can raise any significant return from token raising)The blogs view would be interesting on this inquiry.

  4. Johann

    How do you think about target ownership in those massive seed/series a rounds (like in Upgrade) vs. ticket size / concentration risk?

    1. fredwilson

      upgrade was a special situation. we backed Renauld in Lending Club and backed him again in Upgrade. it was not the kind of early stage investment we would normally make

  5. Michael Elling

    Are the two really comparable? For now it looks like ICOs/tokens are a winning way. But that doesn’t account for the additional macro/micro risk that doesn’t exist with traditional equity/fiat currency model. History shows that virtual currencies work for a while; and then don’t. But I don’t want to get into big debate over crypto vs fiat, rather simply posit some risk/beta adjustment when comparing the two.

  6. Rob Underwood

    Curious if and when USV might do its own tokens/ICOs to augment the traditional LP raise route for its funds.

    1. fredwilson

      we have not discussed it. we like our funding model a lot.

  7. Semil Shah

    There are few things that hit me in the face with this post:1/ $175M size of VC fund would be considered very small in Bay Area, but now there are over 10 funds well over $1B+ per vehicle, plus now Softbank and more SWFs coming here.2/ Many assume tokens will be bad for VCs, but you articulate how a VC could leverage them. Maybe this could be another post one day.

    1. fredwilson

      small is good. at least in my book. i would not know what to do with $100bn. i can’t imagine that a fund that big will be able to produce good returns. it feels like an exercise in ego gratification to me.

      1. Semil Shah

        Well, $100b funds are not too common, perhaps a vehicle for SWFs to diversify. But there are 10-20 VC funds over $1B per vehicle, so it will be interesting to see how many will generate a return. My guess is they will have to do things that are not classic “VC,” which I guess is OK but also very different.

        1. fredwilson

          I’m of the view that you should do one thing and do it well. If the billion plus funds have to try new and different things (secondaries, PIPEs, control purchases, leveraged recaps, etc) that adds degrees of difficulty and unlike diving you don’t get extra points for that from the capital markets

          1. Semil Shah

            yes. perhaps this is the first step of capital “aggregating” where fund of funds may get weaker, and then we will have more “hybrid” funds that do both fund investing, secondaries, and directs…. very hard to do & manage well, no doubt.

      2. JLM

        .The appropriate term is not “small.” The appropriate term is “right size.”Right size for all the reasons you have articulated.An analogy is flying. I can fly a single engine, high performance (retractable landing gear), instrument equipped plane (Bonanza, the MB of single engine planes) in instrument conditions.I am perfectly comfortable doing just that. I have 3,000+ hours in the last 15 years.I could learn to fly a twin engine or a jet, but I would have to go to school and, essentially, begin at the lowest experience level yet again.I stay in my lane and get better at what I am already competent at. [Truth is I will give up flying myself shortly.]Right size.JLMwww.themusingsofthebigredca…

      3. Girish Mehta

        Would a mega-fund’s (e.g. the $93 billion Vision fund) ability to write big checks affect the strategy of small funds to participate in the follow-on rounds (re: to maintain/increase stake) ?

          1. Girish Mehta

            Thought about that, but didn’t realize that you had it in ALL your early stage investments.So, if I understand correctly, you would walk away from an early stage investment if you did not have pro-rata rights ?

          2. fredwilson

            It’s a deal breaker. Probably the only term I would say that about. You can’t set the table and let others eat the food

          3. Girish Mehta

            Sounds about right.

        1. Adam Sher

          A mega fund may impact USV’s (or another small fund) ability to afford a follow on if the valuation or check sizes gets out of control.Now, a mega fund is severely restricted by check size in the investments it can make, which would likely eliminate its ability to participate in deals that a fund like USV would sponsor. The exception to this may be if a USV Series A deal is large enough to IPO but raises a Series D instead. Even if that is true, say this target company is worth $3b, and wants to raise a $500m Series D, even then that check size is probably too small for a nearly $100b fund (assumes that the $100b fund is 1 close-end vehicle and not the sum of Funds I-x)

  8. sigmaalgebra

    That’s a really clear description. For venture capital (VC), the “model” looks really good. Maybe it should be and is usual for someone with a good model to be able to describe that model well; or, to do something well, need to know well what are doing!All that said, VC is about doing projects. Well, there’s a lot on projects; that is, projects go back at least to the pyramids! Yup, in particular, the pyramids were big projects, with many well coordinated parts, many of which in themselves were big projects. And projects continued in stone, metals, war, domesticated animals, trade, open ocean sailing, ….@JLM said “Our generation didn’t invent sex.” Neither did it invent doing projects. Certainly VC didn’t invent doing projects.From what I’ve read about VC, it’s background and accumulated thinking about doing projects was, for the world of projects, quite narrow, nearly totally uninformed on doing projects and an original invention, heavily just from happenstance, and heavily influenced by the views, standards, and discipline of the analysts at the firms of the limited partners and where those views, etc. where heavily from what went before in finance, private equity, M&A, and especially commercial banking. The background in doing projects was next to trivial, about like trying to learn to be a chef by signing charges to a credit card at high end restaurants!VC has, rightly, concentrated on the main two opportunities for high return on investment (ROI) (A) information technology and (B) bio-medical technology.A lot is known on how to do projects in (A), e.g., from the NSF, and (B), from the NIH.It appears to me that in expertise in doing projects, bio-medical VC is far ahead of information technology VC.In more detail, from about 1940 to the present, the all-time, unique, grand master of doing information technology (IT) projects is the US DoD. Nearly all of that expertise rests solidly on the STEM field departments of the top 20 or so US research universities. And, yes, a huge fraction of the funding comes through the NSF and, from the point of view of Congress that approves the funding, mostly just for US national security. Here Congress is exceptionally, especially for Congress, broad minded, far sighted, and wise: NSF funds space telescopes to look at the 3 K background radiation, gamma ray bursts, data on the evolution of the universe since the big bang, gravitational waves, black holes, dark matter, dark energy, push the boundaries of the standard model of particle physics, quantum entanglement and Einstein-Podolski-Rosen “spooky action at a distance”, quantum computing, discrete optimization and the question of P versus NP, algebraic geometry, number theory, stochastic processes, …. Broad minded. We would expect that more expertise in doing projects was in those STEM field departments in the top 20 US research universities, and we would be correct, in strong terms, on solid ground. And we would expect to see good expertise in doing projects at the major, high end vendors to the US DoD — e.g., Lockheed, Boeing, Raytheon, United Technologies, GE — and again would be correct. And there is more project expertise at many labs funded by the DoD and Department of Energy (DoE) — Naval Research Labs, JHU/APL, Wright Patterson, Naval Ship R&D Center, Los Alamos, Argonne, Oak Ridge, on and on.E.g., the Navy’s missile firing submarines needed good navigation. They had tried stars, radio beacons, inertial navigation, but needed something much better. Well, at the JHU/APL some physics guys did some back of the envelope calculations and proposed a solution — it was the first GPS. It worked great, right away. Later the USAF did GPS which is really version 2.0 of what the Navy did.In such projects, there’s a lot of importance, money, smarts, hard work, and project expertise involved. E.g., for the money, bluntly, a major fraction of the annual budgets of the top 20 US research universities comes from NSF, etc. research grants intended mostly for US national security.For this whole effort, the queen of it all is pure/applied math, done in math departments, sure, but also in various departments of engineering and more. E.g., it has long been accepted that the best work in any of the STEM fields mathematizes the field. E.g., in physics the best work is theoretical and/or mathematical physics. High end electronic engineering is high end pure/applied math. Since information, from Shannon and much more, is basically about math, one would expect that the most important pillars of information technology were pure/applied math and would be fully correct. The movie about John Nash started with “Mathematics won WWII” and was basically correct.Alas, IT VC is far from the project expertise of the STEM fields of the last 70+ years I just described above. In particular, the MBA analysts at the limited partners may know about accounting, private equity, M&A, and commercial banking, but I have to believe that rarely do they know much about how the best STEM field projects were done for the past 70 years.If the limited partner analysts had been making the major US STEM field project funding decisions over the past 70 years, then clearly next to nothing from the proximity fuse, …, to GPS to the latest secret projects we hope will keep us ahead of Russia and China, stop North Korea and Iran, defeat ISIS and Al Qaeda, etc. would have happened, and US national security would be in deep trouble.Sure, the US DoD spends a lot of money, and the limited partners and VCs can’t fund really high risk projects. Right. Except, after the final proposals just on paper, which comparatively didn’t cost much to produce, the DoD success rate, “batting average”, has been very high, much higher than for IT VC. E.g., GPS, the Navy’s GPS, the Navy’s sea floor Sosus arrays, phased array radar, TCP/IP, coding theory and its applications, Keyhole (Hubble was basically Keyhole for astronomy instead of national security), the SR-71, the F-22, the B-2, laser guided munitions, infrared on the battlefield, and much more were projects done with magnificent outcomes and essentially on time and on budget.Bluntly, the US DoD, NSF, STEM field departments in the top 20 US research universities, many DoD/DoE labs, the high end DoD vendors all know very well how to do IT projects with magnificent results and essentially on time and on budget, and the IT VCs don’t. I blame the analysts at the limited partners.

  9. Alex Iskold

    First of all, It is pretty incredible, Fred, that you have a billion dollar company (or two!) every single year since 2011.I am trying to wrap my head around tokens, and curious about what you wrote. When you mean a token model, do you mean USV buying up tokens in the companies directly, or USV being on a cap table and then the company does a token sale?In the second scenario, have you seen a model that gives equity holders any exposure to tokens, or are the tokens orthogonal to equity?

    1. William Mougayar

      Typically, during a token distribution event, a % of tokens is reserved for existing equity holders. So, for example if that number is 10% of tokens, then it is distributed proportionally according to their equity stake ratios.

      1. Alex Iskold

        Thank you! I had a few conversations about this being one possible direction but haven’t heard about this being typical. Are you saying, for example, if investors own 20% of cap table, they would get pro rata, free tokens, in the amount of say 10% tokens for pre-sale or ICO?

        1. William Mougayar

          There are variations as the exact conversion rate can be negotiated / agreed upon during the token sale planning. But, in general, that’s the direction I’m seeing. (note these tokens will most likely have a long tail on lock-ups)

          1. Alex Iskold

            What if any are the tax consequences of this? Can the tokens just be given at the time of issuance OR investor capital is split between equity and future tokens and then is used when tokens are issued? Or are you saying its a straight give at the time of issuance?

          2. William Mougayar

            Ah, you’re right there are tax issues to consider, and each case will be different, for e.g. a company may have forward losses they can apply, etc.Best to talk to a tax/accounting expert for that. The issuance of tokens can be done in any of the ways you have described. It is something that is agreed upon and should be planned with all its implications.

          3. Adam Sher

            It’s all about basis. If you receive x-coin + other consideration in exchange for USD then you may have a basis issue and that transaction could be a taxable event.There’s a lot detail I am not including and you can DM me if you want to talk about it in detail.

    2. fredwilson


      1. Alex Iskold

        In the second scenario, have you seen tokens just being given to equity holders, and if so, are their tax consequences? Or is it treated as part of the equity investment consideration?

        1. fredwilson

          Hasn’t happened yet. One more thing to figure out

      2. scottythebody

        I’m guessing you’re going to see of Coinbase can add this functionality for you 😉 so your firm can hold tokens. Or do you just install a special wallet in your office?This is a great post.

    3. sigmaalgebra

      The concept of independence applies nearly universally. Orthogonality applies essentially only in an inner product space. In contexts where both independence and orthogonality apply, independence implies orthogonality. So, usually we think first of independence, not orthogonality.The quantum mechanical physicists make a serious error: They keep saying uncorrelated where they really mean independence. Intuitively independence is easier to justify and mathematically is much stronger. But the physicists make a lot of mistakes with their math!

  10. William Mougayar

    The segway into ICO liquidity is the new new here. It is already happening. You figured it out, once it fell in your lap, but most other VCs have not.The 4 questions you asked nailed what’s next.

  11. Chimpwithcans

    Awesome post – One question popped into my head – Will the large players (Google FB, Apple, Amazon etc) take up the white space in ICO’s as they have been doing in other areas of innovation? I don’t see why not – perhaps @@wmoug:disqus can chime in with his thoughts on this?

    1. William Mougayar

      Not sure. Maybe too early to tell. If I was a big company, I would wait and see. Lots of unknowns still.

  12. jason wright

    to use a sea shipping term, is your fund limited as a time charter party or a voyage charter party?

  13. marko calvo-cruz

    This post’s tone is an interesting contrast to TechCrunch’s pessimistic “After the End of The Startup Era” article, what to make of this?https://techcrunch.com/2017

    1. JLM

      .Dog bites man. Man bites dog.Averages are built of the best of the worst, the worst of the best, but there is always someone who is better than the others.JLMwww.themusingsofthebigredca…

    2. sigmaalgebra

      I happened to see that article, and my reaction was that the opportunities are not nearly exhausted.Yes, the opportunities for social, mobile, local, sharing apps are slowing down with new such work likely done or bought by Facebook, etc.But, look at what we’ve got: The computers will do well at nearly anything we tell them to do. Well, if all we can think to tell the computers to do is routine stuff, e.g., social, mobile, local, sharing apps, then the article was basically correct. But if we will think a little, we should be able to think of many more things that are valuable we could tell the computers to do that they could do well. To me, the crucial core of the best of those things will be some likely somewhat original applied math, that is, to tell the computers what the heck to do with the available data to get the valuable things done.By analogy, with the steam engines we had power via external combustion. With Henry Ford, we got power via internal combustion. So, that was the end, right?Oops! We got a lot of development in internal combustion through the amazing engines of the WWII B-29 to a current high end Corvette and some amazing work in Japan in stratified combustion, over 100 years after the start of internal combustion.But, wait, that’s not all! In the 1940s we got gas turbines, and we have made great progress with them now, e.g., for the F-22 and the high bypass RR engines Trump has on his 757.But, wait, there’s more, e.g., super sonic ram jets. Net, 100+ years later, we’re not done with combustion or their applications, e.g., to the F-22, the B-2, and the several current projects for super sonic commercial airplanes, cheap ways into orbit, etc.Well, combustion is one heck of a crude foundation pillar for progress compared with current computing and the Internet. Yet, combustion gave us trains, ships, cars, trucks, and airplanes and in about 150 years redesigned the more developed world.Current computing and the Internet are a new genie; we just need to (A) pick something valuable to do and (B) rub the belly of the genie appropriately.Yes, next to no one in information technology in Silicon Valley — entrepreneurs, VCs, computer science profs — knows how to make use of the applied math.There’s a reason for that: The math ain’t easy! It’s widely regarded as the most difficult ugrad major — rightly so. For the math I have in mind, need a good ugrad pure math major, a good Masters from carefully selected pure/applied math, some appropriate, successful Ph.D. research, and some experience in computing (comparatively trivial stuff) and business. That combination is more rare than hen’s teeth. And THAT and understanding THAT are the bottlenecks that led to the TC article.It’s standard for anything new: Lots of people thought that what the Wright Brothers were doing was dumb. Same for Goddard. WWII? “Mathematics won WWII”, but only a tiny fraction of the US population knew that or just how and why.So, astounding: What really won the war nearly no one knew. Amazing. Even years later, nearly no one knew.So, you expect people to see now what math will do with computing over the next 10 years? Heck, nearly no one will understand it even 30 years after it happens. Right, this lack of understanding is a bottleneck. But, sure, the “flip side” is an opportunity!The human brain is the most powerful force on the planet; technology has been the most powerful application; math is by far the highest quality work of the human brain, was the key to the technology and now is the key to the exploitation of the technology, e.g., 40 nm, 28 nm, 14 nm, …, 3 nm. I don’t expect anyone to agree with me. But, if a lot of people had the same idea, then it would be a very valuable idea!

    3. Adam Sher

      The article demonstrates a lack of original thinking about how big companies come to be and what opportunities are out there.Who’s to say the current crop of big tech companies will stay the same in the next decade? Why is it a given that a company like Uber, who’s CEO was fired, who faces a multitude of regulatory hurdles on an international level, and loses a lot of cash, will survive?

  14. JLM

    .This is a very well articulated investment thesis and strategy. I doubt most VC investments have such a clear strategy. Not VC firms, their investments.There is a huge wisdom to “staying in one’s lane” which beggars the more important question — what is the right lane.One’s lane is defined by talent, time, experience, size of funds, span of control, pace, sense of luckiness (lagniappe, mojo, juju), and an innate instinct which can only be generated by the passage of time.This post articulates that well. It is interesting to see how many of the exits are IPOs, particularly at times when the conventional wisdom was that the IPO, as an exit vehicle for VC funded companies, was kaput.In the course of building a business (brand, lane), it is interesting to see how the ages of the partners are layered into the mix.This proves an important point — coming to work early, staying late, working hard, being thoughtful, valuing experience, being a student of one’s business, having a well-reasoned investment thesis, and staying in one’s lane are still the keys to success in business.USV Exhibit #1Bravo, well played, and best wishes for continued success.JLMwww.themusingsofthebigredca…

  15. cavepainting

    Great post. Keeping the fund size small also ensures that the following do not happen: a) Investing because you can, not because you should. b) broad diversification of bets weakening adherence to the core theses, and c) on-boarding partners and employees who do not match with the culture and gradual dilution of the core values over time.

  16. Frank W. Miller

    Grats! MongoDB has made a real impact in the database world.

  17. Francois Royer Mireault

    Congratulations and thanks for being that transparent with us/the community. I’ve learn a lot reading AVC.com in the past years and I hope I learn even more in the next years as you figure out this new model.

  18. Aashay Mody

    Anyone recommend resources to learn more about ICOs and how they work?

  19. Lou Pugliese

    Thanks for this Fred. It draws good clarity into a very precise strategy. It would be good to know what the general $ range in seed/series A you typically do. Also, I’ve been hoping for years that the ed tech sector will gain more of the funds attention. You are one of the more enlightened people in the space.

  20. jason wright

    “meaningful ownership for not a lot of money”. that’s my kind of asset class.

  21. David Miller

    Fred, since we’re talking about your model … If you can talk about it, has the percent of the fund contributed by the GP changed over the course of time? USV has made plenty of money for your LP’s and for yourselves, and I’m wondering whether the amount of contributed capital provided by the GP has changed meaningfully from Fund I. I would think that the Team would want to invest a much greater share of it’s personal capital given the success. Why have LP’s if you don’t need them and plan to limit the size of your funds?Just wondering out loud.

    1. fredwilson

      Yes. We are approaching 10%. Our LPs don’t like it because we have to cut them back to do it. So it’s a balance.

      1. David Miller

        Thanks for the insight. I’m actually surprised to hear it’s that low, even with the grumbling.

        1. fredwilson

          Typical is 2% if you can believe it

          1. Adam Sher

            2% is low but I’ve seen it (I usually see 3%-5%). At that level (and sometimes even at 5%) a GP wouldn’t actually have to write a check because he/she could fund his/her commitment out of fees that are generated by the fund.Talk about not having skin in the game.

      2. Adam Sher

        I really like 10%. You have skin in the game.

  22. ZekeV

    (1) Token offerings should not be viewed as a source of liquidity. The proceeds of an ICO* should be earmarked for protocol infrastructure investment, not lambos. I am concerned about what seems to be a consensus on part of investors that ICO is the end of the story rather than the beginning.(2) Not every protocol / token is going to be a bitcoin clone or similarly fungible smart contract specified asset. Some assets will be highly illiquid and not supported by real-time exchanges, trading more like real estate as opposed to money. Maybe this is where the biggest profits are in the future, and more suited to the mindset of the venture investor as opposed to the prop trader.* I hate the term “ICO” about as much as “unicorn” but find it convenient to use anyway…

  23. Todd Barrs

    Fred, thanks very much for your continued posts: I always find value in them. Curious about your thoughts on this article that just came out (see below). I can think of a number of counter points, but would love to see your thoughts on this proposed shift in the tech space: https://techcrunch.com/2017

  24. creative group

    CONTRIBUTORS:Can anyone who is a VC answer this following question?Is there any situation which a LP can position themselves to maintain a percentage in a seed deal no matter the following rounds? And do new rounds payback the LP initial investment?Thanks in advance

    1. Adam Sher

      I’m not a VC but private equity funds work (are) the same. The short answer is yes, via a side-letter.

      1. creative group

        Adam Sher:Yes to both inquiries? Maintaining initial ownership percentage and being paid back initial investment and keeping same stake.

        1. Adam Sher

          Yes to maintaining initial ownership percentage, which may be accomplished by a side letter or directly via the type of investment the GP structured. A difference b/t the two is that under the former, the LP will have more control over maintaining his or her pro-rata share.The uses of money in a subsequent round would be negotiated so it is possible that money from a Series B could be used to pay investors from a Seed or Series A round. I doubt this scenario is common. Again a side letter with an LP may dictate that a subsequent round may trigger some sort of liquidation for that LP only. While this is possible, it is not likely.Partial redemptions of LP money can cause problems for the GP. First, this may trigger a reinvestment provision and the GP will have to find another investment or this could put the amount of capital deployed below the threshold at which the GP can go raise another fund.Some Funds have tiered management fees, where the GP’s fees decline once the fund is fully invested (or a certain percent is invested). If the GP is suddenly below that threshold and the management fees increase, the other LPs may ask WTF is going on. While the GP did nothing wrong, they don’t look good.Here’s another wrinkle. A company like USV is managing an individual fund that falls below a major AUM threshold for the SEC. This means that side letters (I’m not insinuating that USV has any of these or that they are inherently ill intentioned) will often go unmentioned and none of this will be subject to an SEC examination or Audit. Since USV manages multiple funds, its aggregate AUM [likely] surpasses that threshold and subjects the GP to examination and/or audit. This usually brings these side-letters to light, and forces GPs to disclose material differences in deal structure to its LPs.

  25. LL

    But if you raise a HUGE fund then you can invest in the most overhyped startups and get billions from bureaucrats at SWFs! For a few years you’ll be famous and a visionary and oracle until everyone starts talking about the next visionary!

  26. Donna Brewington White

    I would have paid admission (tuition?) to read this post.

  27. Sukhdeep Grewal

    Any thoughts on how you guys are thinking about equity exits which are usually at a multiple of revenue (or the cost for a customer to receive the service), whereas the a coin is both the cost of service and an “equity” proxy – any risk of not being able to get a multiple of revenue / earnings change how the model of returning the fund?

  28. Joel Valdez

    Awesome post. Thanks for sharing this. Now that you shared those successful exits, I wonder if sharing those investments (or at least the number of investments) that were not as successful is possible. That way we can get a better perspective and point of reference.