Posts from February 2018

How To Think About Selloffs

The crypto markets had a good day yesterday but have been down a lot since peaking in early January. Bitcoin peaked at almost $20,000USD in mid December and has gone down by roughly 60% since then. Ethereum peaked at almost $1400 in mid January and has gone down by roughly 40% since then.

A chart that I like to look at, the total market cap of all crypto tokens, has made a classic head and shoulders pattern and is now retracing on the downside:

The total market cap of all crypto tokens peaked at roughly $825bn and is down roughly 50% since then.

But most of you know all of this.

The more interesting question is what, if anything, to do about it.

In times like this, I like to turn to the fundamentals to figure out where things stand and how I should behave.

So how do we do a fundamental analysis of crypto prices. Is $8000 high or low for BTC? Is $800 high or low for ETH?  I see people opining on these things all of the time based on historical prices and that is not a proper way to value an asset. You need to have some fundamental theory of value and then apply it rigorously.

There are plenty of people doing that kind of work in crypto-economic circles and I saw two blog posts in the last week that I thought were quite good.

Here is a post explaining the NVT ratio (network value to transaction ratio).

And here is a post critiquing the monetary velocity approach (MV=PQ) and proposing an alternative.

What you can see from these two posts is that not everyone in crypto land is speculating without thinking. There is some serious economic thinking going on and it is going to be super important in the coming years.

However, the bigger problem in crypto land is that none of the public blockchains have really shown they can scale to the volumes of transactions that would be required for blockchain technology to go mainstream. I have likened this situation to dialup modems in the 90s eventually giving way to broadband internet (and mobile broadband internet) in the 2000s. I am confident that trust-less consensus-based systems will be able to scale to the volumes we need to go mainstream but we are not there yet. The transaction ratios and monetary volumes that drive value in the economic models I linked to above just aren’t there yet to support the almost trillion dollars of value that crypto tokens reached in early January.

But there are some very promising signs out there.

We have the Lightning Network getting implemented in the real world. Lightning is Bitcoin’s great hope for scaling transaction volumes.

We have Truebit going live on an Ethereum testnet this week:

Truebit is off-chain computation for Ethereum.

Neither I nor USV has an economic interest in either Lightning or Truebit. I mention them because they are two of the more interesting efforts out there to scale these big public blockchains. There are many more of them.

The truth is that if you look behind the scenes, you will find quite a number of strong technical teams that are working on scalability and some of the other fundamental challenges of public blockchains. The crypto sector is full of get rich quick schemes and janky token offerings, but it is also full of brilliant computer scientists and strong engineering teams working on solving these challenges. And I am quite confident that they will solve them. When and how is harder to predict.

So given all of that, how does one do a fundamental analysis of crytpo tokens and the crypto sector?

Here is a three step process that I recommend:

  1. Get the Cryptoassets book and read it. The authors do a great job of outlining how one can and should do a fundamental analysis on crypto tokens.
  2. Follow the crypto-economists who are writing regularly about this stuff and read what they have to say. I linked to two of them above in this post.
  3. Understand the technical challenges and follow the progress being made in solving them. As more progress is made, that should be reflected in the prices of the top public blockchains. If it is not, that would be a buying opportunity.

I don’t believe that the recent selloff is a massive buying opportunity, but I also don’t think that anything has really changed in the fundamental analysis of the sector in the past month. I remain long term bullish and short term cautious.

Quizlet – The World’s Largest User Generated Learning Platform

On the occasion of our portfolio company Quizlet‘s announcement of a new round of funding today, I thought I’d talk about what led us to Quizlet and why it is poised to be a game changer in education.

Quizlet is the world’s largest user generated learning platform. Founded in 2005 in founder Andrew Sutherland’s bedroom (he was 15 at the time), Quizlet has become the wikipedia of the education sector. Over the last twelve and a half years, users have posted over 200 million study sets to Quizlet. A study set is a list of things you want to learn. Think of what happens when flashcards meet the Internet and mobile devices. A study set can be French Adverbs or Heart Muscles or a Pre-Takeoff Flight Safety Checklist. You can study these things anytime and any place that you have a mobile phone on you.

That was all already in place when we invested in Quizlet in the fall of 2015. I wrote this post talking about Quizlet at the time.

What wasn’t there, and is now, is the machine learning team to make sense of all of these study sets. Take 200+ million study sets and 30+ million monthly users and you have a ton of data about what people are learning, how they are learning, and how their learning evolves over time on Quizlet. From that data will come new modes of learning on Quizlet and a lot of help figuring out what study sets are best to learn something.

The other place Quizlet plans to invest in is expanding Quizlet internationally. Over the last year, the Quizlet team has localized into 18 languages. Now, over 90% of the world’s population can use Quizlet. And because Quizlet is free to use for everyone, that means this user powered learning model can be used by students all over the world. Quizlet intends to aggressively expand its content base and user base internationally in the next few years.

Just because Quizlet is free for anyone to use doesn’t mean it is not a good business. Quizlet has two primary revenue streams right now, advertising and subscriptions, both of which are performing very well and there will be more revenue opportunities for Quizlet as they build out their content base and user base around the world. Quizlet was a profitable business when we invested in it back in 2015 and has remained at or near profitability even with the significant investment we have made in the business since then.

Quizlet is a great example of how you can build a very good business while expanding access to knowledge dramatically around the world. One does not have to come at the cost of the other if you architect your product and business model appropriately.

Setting Up A New Phone

I finally got around to buying the Pixel 2, a phone that several of my USV colleagues have said is the best phone they have owned.

It’s too early in my relationship with this phone to comment on whether I like it or not, but I did have the easiest new phone setup experience of my smartphone tenure last night.

First and foremost, Google has made moving from one Android phone to another way better. You simply connect the two phones with a USB-C cable and about ten to fifteen minutes later, you have everything on your new phone. Then the apps start downloading and about 30mins later (depending on how many apps you have), everything you had on your old phone is on your new phone.

The second factor in the “easiest new phone setup experience” is Dashlane on Android. I realize Dashlane doesn’t have the same access to the operating system on iOS, but on Android, it is really great.

Once I had everything on my phone, I logged into Dashlane and turned on “auto login” for apps and websites on my phone.

After doing that, the process of logging into all of the apps on my phone was a breeze. It still required me opening every app on my phone, but I must have easily saved 30 minutes using Dashlane to automate much of that process.

I suspect other password managers can do the same, but I use Dashlane and it was a godsend last night.

Finally, a word about two factor authorization apps and codes. The regeneration of 2FA codes on a new phone is yet another annoying and painful process you have to do every time you get a new phone. I am not aware of an easy way to automate that and I suspect it would be a security challenge to make it easy. So that is today’s project.

I like to get a new phone for a lot of reasons. I like to get the latest and greatest technologies on my phone, I like the longer battery life that a new phone has, and I like change. Thankfully the process of setting up a new phone has gotten a lot easier in recent years.

Splitting The Deal

Syndicating an early stage investment is a time honored practice in the venture capital business. It was extremely common in the VC business in the early 80s when I started.

I assume syndicating was a common practice in the early days of the institutional VC business because fund sizes were small, risk was high, and splitting the deal among multiple firms was a good way to manage those things.

Over the years syndication has become less common among large venture capital firms as fund sizes have grown and portfolio diversification can happen in a single fund to manage the early stage risk.

In the angel market (and to a lesser extent seed market), syndication is alive and well and remains very common.

But in the institutional VC market, it is pretty common to see one firm lead and take all of the Series A, another firm to lead and take all of the non-pro-rata amounts of the Series B, and the same in the Series C and Series D. Syndicates are still built but they are built round by round versus in the round itself.

I was thinking about this today and it occurred to me that the three best VC investments I have made in the last ten years, which are also the three best VC investments I have made in my career, were all syndicated in the first VC round, which was a Series A in all three cases.

In each one, I negotiated for a $4-5mm round that bought between 20-25% of the business, and I then offered between 33% and 50% of the amount I had negotiated for to another firm.

In each case, USV could have taken the entire round. We had sufficient capital to do that. But in each case, I wanted some company in the investment and, honestly, I wanted to lay off some risk too.

In each of these three situations, the $1.5-2mm that we “laid off” to others was or is worth hundreds of millions or more and yet I don’t regret the decision in the least.

These syndicate investors each stepped up at critical times and did things for the companies that I could not do and they earned every penny of the returns they got.

So, I am a firm believer in splitting the deal, even when the economics (another word for ownership) suggest that there is no room for others.

My personal track record tells me that splitting the deal works. It helps you step up to something that has a lot of risk but also a lot of upside and it brings other people who can add value into the situation early on.

At a time when we are seeing venture funds get bigger and bigger, I am convinced that the hallmarks of old school early stage investing; small fund sizes, small rounds, and syndicates remain best practices and we continue to do that at USV.

Video Of The Week: The Upfront Summit Crypto Video

The annual Upfront Summit took place in LA this past week. I attended day two and enjoyed it very much.

Prior to the summit, the Upfront team interviewed a bunch of investors in the crypto sector and put together this video.

I think it captures the current investor sentiment very well.

USV Is Hiring Two Analysts

It’s that time again. USV is hiring two analysts, each for a two year rotation.

The hiring process is similar to what we have done in the past, but the role is a bit different. We are adopting more of an apprenticeship model:

For this analyst cycle, we are changing things up a bit by transforming the program into more of an apprenticeship. What does that mean? You will work mostly with two partners at the firm, one of whom will be primarily responsible for your training. We are looking for two people. The first analyst will be working primarily with Andy, the second primarily with Albert.

The USV analyst role has been a nice launchpad for the folks who have done it:

Past analysts have gone on to join other venture firms and even start their own (AndrewCharlieJoel), work at USV portfolio companies (JonathanEric), help launch new products (ChristinaBrian) and start their own companies (ZanderJennifer).

If you are interested in spending a couple years at USV, here is our process:

Our process starts with having candidates answer two questions by recording videos, as well as submitting two short written pieces. These will be due by end of day Thursday, February 15.

From the initial submissions we select a smaller group for telephone interviews and then a set of finalists for in-person meetings. We expect the process to be finished by the end of March and candidates should be available to start work in April or May.

Here are the questions:

Video 1: Why are you interested in the analyst role? [30 seconds]

Video 2: What is an example of an initiative you took outside of school or work? [60 seconds]

Written 1: An email asking for a meeting with the founder of a startup you admire.

Written 2: An argument for why one of the following is either overvalued or undervalued [Twitter, Snap, Bitcoin, Ethereum] [750 words max]

If this seems right up your alley, you can start your application here.