Posts from May 2018

CryptoTwitter

Last week, I was asked this question on Twitter:

But if you want to read CryptoTwitter, what is the best way to do that?

I have curated a bunch of people to follow in my timeline over the last seven years so CryptoTwitter is part of my personal Twitter.

But for those where that is not the case, what is the best way to get CryptoTwitter?

Twitter Lists are a great way to do that.

I believe Twitter Lists are still organized in reverse chronological order and are not filtered in any way. So that is a good thing in and of itself.

I like this Twitter List, called Crypto Thought Leaders, made by richardx.

If there are other CryptoTwitter lists that people in the AVC community like to use, please recommend them in the comments.

#blockchain#crypto

The Finance To Value Framework

There are two major failure modes in startups.

The first common failure mode is the thing you make doesn’t get adopted. That’s called not finding product market fit in startup lingo.

The second common failure mode is “getting too far out over your skis” and it happens to companies that do find product market fit but mess things up by building an inappropriate cost structure (and capital base) and it all comes crashing down on them when they either can’t continue to raise money at ever increasing valuations and/or when they can’t grow into their cost structure quickly enough.

The first failure mode comes with the territory. The world of startups is all about experimentation. Most experiments fail. If this happens to you, it sucks, but that is what you signed up for.

The second failure mode is entirely avoidable and way more common than you might think.

The capital markets are efficient over the very long run but highly inefficient in the moment. So just because investors are willing to throw gobs of money at you and your company, it doesn’t mean that it is smart to take it. And, as I have written numerous times here before, having lots of capital does not derisk your business plan. In many cases, it amplifies the risk of your business plan.

So how do you stay in balance and avoid getting too far out over your skis?

I like this framework that I call “Finance To Value” which means you finance your business to regular valuation targets that are driven by fundamental value analysis.

The first thing you need to know is how your business will be valued by a buyer or the public markets when it is a scaled business. I like to use EBITDA and Revenue multiples for this work. And the best place to get them is from bankers who work in your sector and/or investors who are active in your sector. The key point is these multiples are what you are going to be valued at upon exit or IPO, not currently.

Revenue multiples work better for this than EBITDA because very few companies have positive EBITDA during their growth phases.

Here are some examples. Please don’t use these multiples without verifying them with someone who knows your industry and your business. These are simply examples:

E-commerce business – 1 to 2 times revenues

SAAS business – 6 to 8 times revenues

Marketplace business – 4 to 6 times revenues (which can be less than 1x GMV depending on your take rate)

Once you know this number for your business (and don’t be aspirational or agressive in determining it as that will just lead to problems), you can apply the Finance To Value framework.

There are two Finance To Value rules:

Don’t raise more money in a given financing round than you can create in incremental value during that capital window.

Don’t let the post-money value of your round get higher than you can grow into during the capital window.

So let’s apply it to a fictional company.

Let’s say you have a SAAS software company that is doing $10mm of annual recurring revenue and you want to raise money to fund the business for the next 18 months. Let’s say that your business is growing at 40% per year and that your annual recurring revenue will be $18mm in 18 months. And let’s say that the post money value of the your last round was $60mm.

So using a revenue multiple of 6x revenues says that you should not raise more than 8×6 or $48mm. But that means you won’t create any incremental value. If you want to create incremental value then you should raise some fraction of that, maybe half of that.

Also, you should not let your post-money value get beyond $108mm (6×18). So if you raised the entire $48mm, it would be a flat round with your last one.

This is a bit of art vs science, but what those two calculations tell me is that the right raise for this company would be something like $20mm at $70mm pre/$90mm post, leaving some cushion to miss plan and still be able to raise an up round.

The challenge for founders and CEOs operating in startup land is that investors are often willing to throw more money at an opportunity at a higher price than you should accept. Who wouldn’t want more capital and less dilution?

But that is how you get out of balance. Don’t be tempted by the money and the valuation. Stay in balance and always make sure you can get the next round done on fundamentals.

If you stick to that practice, you can significantly reduce the possibility of getting too far out over your skis.

#Uncategorized

Video Of The Week: How Play Made the Modern World

I got to spend a fair bit of time with my friend Steven Johnson this past week, in preparation for our crypto talk on Thursday night and before and after that talk.

Steven has this wonderful quality of being able to observe both history and the present and make connections between the two and also to weave those observations into narratives that make for great stories.

A persistent theme in his work is the role of play in the advancement of society. He argued in Everything Bad Is Good For You that playing video games and watching TV are actually educational and productive uses of our time. And in Wonderland, he argued that play led to many important societal advances.

This talk at RSA, delivered in the wake of Wonderland, is a great articulation of the value of having fun to moving society forward.

I enjoyed it very much and I hope you do too.

#VC & Technology

Funding Friday: Food Security for Puerto Rico

An AVC community member sent me to this GoFundMe project last weekend and I backed it.

They are raising $20k to build two hydroponic vertical tower farms in two communities in Puerto Rico.

A tower farm looks like this:

This is from the project page:

Puerto Rican families need sovereignty over their own food supply. Before Hurricane Maria, Puerto Rico was 80% reliant on imports to supply the island’s food. Now they are 100% reliant on imported food. 

People need access to fresh water and food to live. There is no time to waste in launching the agricultural revitalization that Puerto Rico so desperately needs. The local government is financially over-extended and has limited support from FEMA. Lives depend on us.

And this is the team behind this project:

Green Food Solutions was co-founded by Electra Jarvis and Mary Wetherill. We are a vertical farming company. We sell, install, and maintain hydroponic vertical farms and provide educational presentations and workshops as part of our commitment to health, the environment and food justice. We are based in NYC and grow food out of a 10,000 square foot greenhouse in the Bronx. 

If you want to make this project a reality, you can back it here.

#crowdfunding

What's Going On?

A lot, to be honest. It’s Crypto Week in NYC this week.

The last two weeks have been a blur, with so many things happening that I can’t keep up or write about all of them.

But, here are a few

1/ The Rockets ended the sweep nonsense talk going on in the bay area with a trompsing of the Ws last night in Houston. Thank God.

2/ The Celtics are showing how great a job Danny Ainge and Brad Stevens are doing running that team.

3/ Our portfolio company Blockstack launched a Dapp Store yesterday, featuring Dapps across all of the competing chains. When I saw that on Twitter, I said this:

4/ I will spend the day at William and Nick’s Token Summit and will chat on stage with the CriptoKitties folks at 3pm today.

5/ My friend Steven Johnson, who wrote the seminal mainstream piece on blockchain for the NY Times last year, and I are going to talk crypto tonight at the NY Hall Of Science. Talking with Steven is one of my favorite things to do.

6/ We have completed our Employee Equity Project and are now vetting the data with the USV portfolio companies before publishing it more widely. But I can tell you that the salary multiples that I shared in 2010 in the original Employee Equity – How Much? blog post have risen at least 3x since over the last eight years. I have added a note to that original blog post alerting readers that the multiple table in that post is not accurate anymore.

7/ The Gotham Gal pointed out on her blog yesterday that buying convertible notes in angel rounds delays the start of the clock ticking on the QSBS capital gains exclusion. A great point and one that I have not seen made in the ongoing argument to “convert those notes!”.

8/ Paul Vigna of the WSJ and co-author of a great book on crypto interviewed me and Balaji Srinivasan, CTO of Coinbase, on stage at Consensus yesterday. It was a fun talk, featuring a high five between us at one point. The video will be online at some point soon and I will blog it. But until then, here’s a fun drawing of the talk.

#blockchain#crypto#Sports#VC & Technology

The Maturation Of A Market

Yesterday’s announcement that our portfolio company Coinbase is launching a suite of institutional products for the crypto market made me step back and think about the evolution of their institutional business.

Coinbase started out as a place for individuals to buy, sell, and hold Bitcoin. They launched that in 2012.

In 2015, Coinbase added the GDAX exchange where institutions, other exchanges, and large traders could trade Bitcoin.

By the middle of last year, it became clear that many big institutions were entering the market and needed a lot more. And so Coinbase went back to the drawing board and developed a plan for a comprehensive suite of institutional products. And that is what they announced yesterday:

  • Coinbase Custody
  • Coinbase Markets
  • Coinbase Prime
  • Coinbase Institutional Coverage Group

What started out as a simple web and mobile app for buying, selling, and holding Bitcoin has evolved into a full-fledged financial services company, serving both the consumer and institutional market.

Say what you will about crypto, it has become an important asset class and the market is maturing before our eyes.

I have had the opportunity to watch a bunch of markets go through this cycle over the course of my career and it always gives me chills to watch it happen.

#blockchain#crypto

Off Grid Crypto Transactions

One of the benefits of decentralization is that you can build “censorship-resistant” applications.

The best example of that is Bitcoin, a store and transfer of value system that governments can’t interfere with.

Censorship resistant money, as it were.

But if these transactions are going across a wire that is controlled by the government or some other censor (Apple, Google, Facebook, etc), then you haven’t really accomplished your goal.

Enter mesh networks.

Yesterday, our portfolio company GoTenna, which makes a popular and inexpensive mesh networking device, announced something pretty interesting, a mobile app called TxTenna that will allow off grid Bitcoin transactions.

From that blog post:

Today we are pleased to announce that the Samourai team took our suggestion, and went well beyond our expectations! The result is the TxTenna app.

A transaction using the TxTenna app works as follows: Using the Samourai Wallet app the user creates a standard bitcoin transaction and signs it. This is possible while offline and without wifi or mobile access.The Samourai Wallet app then passes the offline transaction to the TxTenna App and TxTenna broadcasts it to nearby mesh nodes via a paired goTenna mesh device. Other goTenna devices in the area relay the transaction until an internet connected goTenna node also running TxTenna receives it and forwards it to the Bitcoin network.

I am excited to see the TxTenna app come to market in the coming months, but more than that, I am excited by the idea of the possibility of off-grid crypto transactions. I think they are necessary in theory and possibly in reality.

#blockchain#crypto

Having A Foot In Both Camps

At our annual CEO Summit, which took place last week, we kick things off going around the room with each attendee (there are over seventy at this point) mentioning something they are struggling with right now.

When it got to my turn, I said that I am struggling to be “all in” on crypto and also “all in” on my current portfolio companies.

A few of my current portfolio companies are in the crypto space, which makes it easier. We have been investing in crypto since 2012.

But most are traditional internet-based businesses that use subscriptions, advertising, and/or commerce to monetize.

I am very happy with the progress of these portfolio companies and am very engaged with them, their teams, their strategies, and their businesses.

My portfolio has not been in this good shape in I don’t know how long and I am quite enjoying my work with these companies.

As I said to the assembled CEOs, I am not going to show up at a board meeting for these companies and suggest they scrap their existing business models and launch a token and an ICO.

So it means that I have to have a foot in both camps.

One in traditional internet businesses and business models.

And one in crypto, which is re-writing most of the rules that these traditional businesses operate under.

It can be challenging.

Most of the reading and research I am doing is in crypto.

Most of the new pitches I take are in crypto.

But most of the board meetings and one on ones and other portfolio company engagement is around traditional businesses.

I am trying to keep the two mindsets separate in my brain right now.

Maybe there is a time that they come together.

I don’t think that time is now.

#crypto#VC & Technology

Happy Mothers Day

It is a bit strange that we set aside one day a year to honor Mom and motherhood because where I sit it is something we need to honor every hour of every day.

Motherhood is one of the most beautiful things about life.

The combination of unrelenting love and equally unrelenting demands is a potent mix.

It is the thing that makes us grow up and be what we are.

So let’s celebrate motherhood and the mothers in our life today, and every day.

Happy Mothers Day.

#life lessons