Posts from 2018

What Happened In 2018

Continuing the year end theme, it is time for my annual recap of what happened this year, to be followed by a look forward tomorrow on the first day of the new year.

Last year I was not particularly confident in my look forward. I thought Trump would be President at the end of 2018, I thought the Republicans would lose control of the House, I thought the “techlash” would escalate, and I was worried about crypto. Those all turned out to be correct. But I had less clarity about the direction of the economy and the tech sector.

What actually happened was that 2018 was a year that we lost trust in tech, government, and a lot more.

Let’s start with tech. This chart I saw in Recode’s year end wrap-up says it well:

While much of the distrust is currently aimed at Facebook, the “I don’t trust you” numbers are growing for many other big tech companies.

I have always felt that search traffic on our portfolio company’s DuckDuckGo’s search engine is a great proxy for distrust of Google and that curve looks like it is going parabolic:

2018 also brought us GDPR, the first of what I expect will be multiple regulatory efforts to control the large tech companies’ use of our personal information for their gain and our loss.

But more important are our personal decisions about the technology we use and what we use less or stop using altogether.

In 2018, we saw social media usage in the US flatten out and possibly even start to decline a bit. Here is another chart from that Recode year-end wrap-up:

And the usage of screen time management apps, like Screentime on iOS, is surging. We know we are addicted to tech, we don’t want to be, and we are working on getting sober.

All of this lost trust is challenging for big tech, and the tech sector in general, but is also a huge opportunity for new companies and new technologies that can offer different products and business models that we can trust more, or don’t need to trust.

This loss of trust in 2018 was not limited to the tech sector. In the US, and also in many places around the world, we are losing trust in our institutions and our elected officials.

In the midst of the most charged political moment of 2018, the Kavanaugh hearings, I was talking to my mom who is 88 years old and has seen a lot and she said to me “I don’t know who to trust.” Neither do I. And I suspect most of us don’t either.

In the US, we have a President who is not trustworthy and may well be a criminal. We will get to that tomorrow when we look forward. And we have a Congress that no more than 20% of us trust and haven’t for over a decade.

We also see the decline of democracy and the rise of autocracy around the world.

These are worrisome trends. But I am an optimist. See a problem, find a solution.

Which takes me to crypto, naturally.

On the surface, one would say that 2018 was a horrible year for crypto. This is the Bitcoin price chart from our portfolio company Coinbase:

Native (token sale) fundraising for crypto is also way down:

But the truth is that 2018 was a year that the crypto market continued to prove its resiliency. Trading volumes declined massively but the underlying blockchains did not collapse.

This is a chart from Coinmetrics.io which shows the transaction volume of the top ten crypto-tokens by market cap over the years:

What this very busy chart tells me is that there are now many public blockchains that are supporting daily transaction volumes in the ten of thousands to hundreds of thousands.

I think this chart of Bitcoin transaction volume from Blockchain.com tells the story of 2018 well:

Crypto took a big hit in the first half of 2018 with the collapse of trading volumes. But the underlying strength of native blockchain transactions picked up the slack and it won’t be long until transaction volumes make new all time highs. Token Prices? Well that is another story, and more appropriate for the look forward tomorrow.

In summary, 2018 was a tough year for our institutions, including the big tech companies that are our new institutions. We are losing trust in them. And looking for new things to trust. Which also creates an opportunity for a post trust society. More on that tomorrow.

Happy New Year everyone.

Songs That Stayed With Me In 2018

As is my tradition as the end of the year nears, here are the songs that stayed with me in 2018.

It is a mix of songs everyone knows, like the marvelous All The Stars from the Black Panther soundtrack (which will be a 30sec sample unless you are a paying subscriber to SoundCloud) to little known gems like the starter track and the ending track. It features the biggest musical stars of the moment like Childish Gambino, Cardi B, Kendrick Lamar, Arctic Monkeys, and lesser known artists that I love like Doja Cat, Little Simz, Sampa The Great, and Grapetooth.

It has a healthy dose of SoundCloud rap, in the middle of the playlist, because I probably listened to more of that this year than anything else. But I’ve included a number of genres, from hip hop, to electronic, to R&B, to alternative/indie, and a few tracks that defy categorization.

With that, here are the songs that stayed with me in 2018:

Missing The Forest Through The Trees

At the tail end of the post that I wrote on how USV (me in particular) missed the first round for Airbnb, I wrote:

We made the classic mistake that all investors make. We focused too much on what they were doing at the time and not enough on what they could do, would do, and did do.

But we sometimes get it right when others get it wrong. When Henry Ward, founder and CEO of Carta (then known as eShares) wrote about their Series A round, he said:

I used to try explaining that $20 stock certificates were an entry point into something bigger. It never worked.

Same issue. Most investors looked at the business of selling $20 electronically issued stock certificates and missed that it was simply the entry point to moving the entire private securities market to the cloud.

Investors have figured that out now and Carta is one of the fastest growing SAAS companies out there.

But missing the forest through the trees is a common mistake that early stage investors make. I make it. We make it. Everyone makes it.

My partner Brad Burnham has the best framework for thinking about this issue that I know of. He calls it “finding the narrow point of the wedge.” The analogy is trying to hammer a piece of metal into a block of wood. If the metal is large and flat, you can’t do it. But if it is narrow and thin, you can. And, of course, once you get the narrow point of the wedge into the block of wood, you can hammer it all the way in.

So, that’s what we all have to think about. Is there a large market out there that can be fundamentally changed with technology (like moving the private securities market to the cloud, or turning empty real estate into places to stay when you travel)? And what is the simplest and easiest way to get into it (like selling $20 electronic stock certs or putting air mattresses on living room floors)?

We try to keep Brad’s framework in our heads at USV, but we forget it frequently. And it is often the costliest mistake we make in the VC business. Because high impact companies do not come along that often, and when they do, we have to find a way to say yes.

Guest Commenting Has Been Suspended

We have been dealing with a lot of comment spam here at AVC over the last few weeks.

Most of it is “guest commenting” where the spam is being posted by an account that is not registered to Disqus (which hosts the AVC comments).

So I am trying something new and different in the hopes that we can dramatically reduce comment spam.

We are suspending the guest commenting feature on AVC. This may be temporary or it may be permanent.

I hope and expect that regular commenters who are registered with Disqus will not be impacted.

I realize this may reduce the number of comments by people who are new to AVC. It may also reduce the total number of comments and the opportunity for new voices to come and participate. None of this is good in my view.

But I want the AVC comments to be a “clean and well lit” place and I also want the maintenance of this blog to be minimal. So that’s why I’m doing this. We will see how it goes.

The Profit Motive

I had an interesting conversation with a friend who operates a traditional business (not tech, not venture backed, not “growth”) last week. He buys a lot of software from tech companies and he observed that not one of them operates profitably. And that makes him a bit uncomfortable as he has always operated his businesses profitably. He mentioned to me that when he has taken capital from investors he has paid them back in full in less than a year each time, from the profits that the business is generating.

It got me thinking that there is something about tech, particularly venture capital-backed tech, that allows us to operate for what seems like forever without a need to generate self sustaining profits.

This can be a fantastic way to generate value when the opportunity is large enough (Google, Amazon, Facebook, Twitter, etc). But it is not a fantastic way to generate value when the opportunity is constrained, either by a smallish market size (TAM) or by a ton of competitors (little to no barriers to entry) or a number of other factors.

Value is generated when the capital required to get a business to sustainability (usually positive cash flow, but I will include exits here) is meaningfully less than what the business is worth when sustainability is reached.

As the capital requirements go up, because of sustained losses year after year after year, the business needs to become worth ever more money at sustainability.

The mistake I think we make in the startup/tech/VC sector is that we look at things like Google/Amazon/Facebook/Twitter, or more recently Uber/Airbnb/Slack, and we think that every business can execute the same playbook. The sad truth is that not every business can execute that playbook and, as a result, many startups consume way too much capital on the way to sustainability and value is lost, not created.

The never ending question that founders and management teams and boards face is whether to invest for growth (aka lose a ton of money) or work towards profitability (but constrain the growth of the business). It seems like every board I am on and every company in our portfolio is always asking this question.

Where I come out on this issue, and always have, is that the growth has to be responsible (positive unit economics on growth spend) and that the path to profitability needs to be well in sight. I would add to those two constraints that a management team ought to be able to get a business profitable in a pinch without killing the business, if necessary. Clearly these “rules” should not apply to very early stage companies. They become relevant and possible once a business has a growing customer base and revenue stream.

I think very few companies in our portfolio and any VC firm’s portfolio will pass these tests right now. Some do but not many. We have a few companies in our portfolio that are operating profitably. We have a few more that are in operating with profitability well in sight and could get there in a pinch without hurting the business too much. But the vast majority are burning money like its water and there is plenty more where it came from.

Perhaps it is true that there will always be money to fund burn. Or perhaps it isn’t. But even if there is endless capital, many founders and teams will wake up one day and realize that all of that burn they accumulated is now a hurdle they have to overcome. And many won’t overcome it.

The profit motive is what makes capitalism work. Businesses are ultimately valued as a discounted set of future cash flows. Positive cash flows. If you can’t generate profits in the future, your business will not be worth anything. So profits are key. And yet we don’t seem to value them in the tech/VC/startup world very much. Maybe we should.

Merry Christmas

To all of those who celebrate Christmas, I wish you a wonderful day filled with family and friends.

To those who don’t celebrate Christmas, I wish you a day of rest and relaxation.

Pocket

I recently wrote about my new Pixel Slate. There is a lot I like about it and plenty more that I’m getting used to. I touched on most of that in my blog post.

I am writing this post on my Slate using the Slate Keyboard (you can see it in the left of the photo below.

One thing that I am totally smitten with is reading web content on it. The screen is big and crisp and it feels great in the hands. It’s like a huge phone, which is the device that I have been doing most of my reading on.

If you look at the bottom of the screen, you will see four icons; Chrome, Calendar, Gmail, and the fourth is Pocket.

I have just started using Pocket. It used to be called Read It Later and it was developed by Nate Weiner. Pocket was bought by Mozilla in 2017.

I selected Pocket because both of my daughters use it and several colleagues at USV do too.

While I have mostly been reading web content on my phone, I come across it in many places (email, twitter, google discover, reddit, hacker news, techmeme, etc) on all of my various devices . Believe it or not, I have typically stopped what I was doing and read it when I saw the link, or I would email the link to myself and read it later in my mail client on my phone.

But now that I have this Slate where I want to try and read all of my web content on, I am drawn to a service that exists on all of my devices (phone, desktop, laptop) and can collect all of the links and let me read them in one place.

So I am going to finally try and make the switch to a “read it later” service, something many of you have been doing for years now.

I do have some questions for those of you who use Pocket already:

1/ How do you save to Pocket links you come across in Twitter?

2/ How do you save to Pocket links you come across in Google Discover?

3/ Is there a way to save to Pocket directly in Gmail vs clicking on the link and launching in the browser and saving there?

So that’s one of the things I am up to on this year end holiday break. I appreciate all of your help in quickly making me a power Pocket user.

Gone Skiing

We arrived in paradise (as this photo shows) last night and we will be here with our family and friends for the next ten days.

I plan to write daily but maybe not about tech and startups as much as I usually do.

It has been an eventful year and next one is shaping up to be a doozy. So I am looking forward to some time to relax and reflect and recover before things get crazy again.