Posts from June 2018

I saw this chart on Semil‘s  blog this morning:

What is shows is that as the amount of money raised (and deployed) in seed funds has grown over the last ten years, the ability of the companies that received those seed investments to raise a follow-on Series A round has declined (massively).

That trend is what you would expect, of course. Supply outstrips demand at some point.

But from where I sit, I am having trouble with the magnitude of these numbers.

First of all, I don’t think the “conversion” from Seed to Series A was ever in the 80% range. I think it is generally around 50% and moves around that number a fair bit. But I can’t imagine a time when 80% of seed funded companies go on to raise a Series A.

I also don’t think it is now sub 30%. Maybe sub 40%. Maybe not. But I’m having a hard time believing that less than 3 in 10 seed-funded companies go on to raise a Series A.

What I think has happened is that there is now a significant “grey area” that has developed in the middle of Seed and Series A. We have “post seed”, or “seed two” rounds. We have “early As”.

So the data isn’t clean and it is harder to track from type of round to type of round.

I also think a lot of the seeds that were being done back in 2006 were non-institutional and harder to track. As the seed fund market has exploded in the last ten years, more of the seed rounds are including at least one institution and are now getting tracked in a way they were not in 2010.

So, are more companies getting seed funded? Yes.

Is a lower percentage of them going on to get Series A rounds? Yes.

Has that percentage gone from north of 80% to south of 30% in ten years? No way.

But, to the question of “is it harder to raise a Series A?”, I think the answer is “it depends.”

There is more Series A money out there too, but it has not grown as quickly as seed money.

It is certainly harder to raise a Series A than a Seed. But that has been true for some time.

The world lost a man of taste, adventure, and humanity yesterday. Anthony Bourdain was an inspiration to everyone in our family. He amplified our love of travel, food, adventure, and other cultures. We will miss him greatly.

I backed this project by AVC community member David Cole earlier this week.

We have a tradition at USV that one of our new analysts, Dani, coined Proof Of Blog.

Excited to be a part of the @usv team (it’s official now – based on Proof of Blog). I’m two weeks in, here’s some of what I’ve learned so far. https://t.co/1bajnjongr

— Dani Grant (@thedanigrant) June 4, 2018

I like that term so much. It really speaks to why we have this tradition.

When someone new joins USV, we ask them to introduce themselves to our world on the USV blog.

Here are some recent “proof of blog” posts:

Dani Grant

Naomi Shah

Zach Goldstein

Even partners at USV do this. Here is Rebecca’s post announcing her arrival at USV last fall.

And Lauren, who has been at USV for almost four years now, but is in a relatively new role, introduced a new wrinkle to this tradition blogging about her new responsibilities.

It is easy to think of a venture firm as a collection of partners; me, Brad, Albert, John, Andy, Rebecca, because we are the most visible people in our firm to the outside world.

Proof of blog is a bit about changing that perception so people know the larger team. And it is also about the broader team making sure folks know a bit about them and what interests them so entrepreneurs can leverage relationships with them too.

If you don’t follow the USV blog, but want to, you can do that on the USV Twitter handle or the USV blog RSS feed.

The issue of how to tax carried interest, the profit sharing interests that VCs, Private Equity firms, and Hedge Funds receive as compensation for generating returns to their investors, is in the news again.

This time it is not a debate at the Federal level, but at the state level. There are carried interest taxation bills under discussion in California, Illinois, Maryland, New Jersey, New York,Rhode Island, and possibly other states that I am not aware of.

My view on this issue is simple and I’ve stated here publicly and regulary since mid 2007.

If you are being paid a fee for managing other people’s money and have no capital at risk on the carried interest, I don’t understand how it can be considered a capital gain.

It may be good economic policy to incentivize people to manage other people’s money and maybe there should be some tax break for doing so. That is a different conversation in my view. Though I don’t buy that one either.

But capital gains tax rates should only be available to those who put their own capital at risk. Many VCs do that in their funds. The partners at USV make up a sizeable portion of our funds. We should and do get capital gains treatment on those investments.

But we also get capital gains treatment on the carried interest and I’ve never understood why. I think it’s wrong.

Finally, because I’ve written these thoughts here before, I know that some will say “well then you should be sticking to your principles and paying ordinary income rates on all of that carry you have received over the years.”

I don’t think that is right either. If the government sets the rules, and everybody else is playing by them, I don’t think it makes sense to play by different rules. I do think it makes sense to explain why you think the rules are wrong. Which is what I am doing here.

A few months ago, the Gotham Gal asked me to disconnect the Amazon Alexa and Google Home devices we have in our family room.

I complied with that request.

This is what the two devices look like now:

At some point, I will remove them and either do something else with them or dispose of them.

If anyone in our house is uncomfortable with devices listening to our conversations, I don’t want to subject them to that.

I do plan to go look at our voice recording history and delete anything that seems off limits.

Here is how you do that with Google Home and Amazon Alexa.

This raises a broader question about these voice devices which is whether the value they offer outweighs the creepiness they create in the home.

For us, the answer has been a resounding no, as evidenced by that photograph.

So the news over the weekend is that Microsoft is buying GitHub. Many companies and developers are thinking “do I want my source code hosted on a service owned by Microsoft?”

Fortunately, the protocol that GitHub is built on, Git, is open source and there are other Git hosts, like GitLab.

There are also a number of proprietary Git solutions offered by companies like Atlassian and BitBucket.

Moving your source code repositories from GitHub to GitLab or somewhere else is not a simple thing, but it can be done. Kind of like moving your email from Outlook to Gmail.

Lock-in is a bitch. And everyone who has ever been locked into a shitty piece of software over the years knows, there is often no easy way out.

Software built on decentralized protocols offers a different and better way. You can move your data out if you don’t like where things are going. And that is what some developers are doing right now with GitHub.

In the blog post announcing changes at SV Angel last week, the SV Angel partners wrote:

The amount of money raised in seed rounds has doubled and valuations have increased significantly.

I thought I’d go back over the last three USV funds and see what I could learn about the market from our experience.

Since raising our third early-stage fund in 2012, we have led or co-led 16 seed rounds, 31 Srs A rounds, and 8 Srs B rounds, for a total of 55 new USV portfolio companies over the last six years.

I put all of that data into a google sheet this morning and this is what I learned:

The average pre-money valuation for a seed round has gone from $5-10mm in the 2012 time frame to $10-15mm in the 2017 time frame and the average amount raised in seed rounds has gone from $2.5mm in the 2012 time frame to over $4mm in the 2017 time frame.

The average pre-money valuation for a Srs A round has gone from $10-15mm in the 2012 time frame to $22-$27mm in the 2017 time frame and the average amount raised in Srs A rounds has not changed very much. It still averages around $5-7mm.

We have not been leading or co-leading many Srs B rounds in the last three years so my data on that market is not good enough to come to any conclusions there.

USV invests in North America and Europe and our largest density is in NYC and the Bay Area. This data is averaged across all of those markets and so it could be off significantly for a specific market. We find the Bay Area to be the most expensive place to invest and Europe to be the least expensive.

I think the comment made by the SV Angel partners is correct, at least directionally so. What this means for returns for angel and early-stage investors remains to be seen. Right now the angel and VC sector is producing great returns, but those are driven off of investments made in the 2005-2010 era for the most part and we have yet to see what the returns for the 2010-2015 cohort will deliver and we are a long way from knowing how the 2015-2020 era will turn out.

A few weeks ago, our portfolio company Coinbase announced that they had acquired a company called Paradex, which operates a 0x relay (in other words a decentralized exchange). If you want to know more about what all of that means, here is a video from Token Summit where it is explained in less than five minutes.