Posts from July 2018

I read this post yesterday that says that 40% of VC investors went to either Stanford or Harvard.

Frankly, I am not surprised.

I’ve worked in this industry for over thirty years. It is full of Stanford and Harvard grads.

I’ve got nothing against either school. They are wonderful education institutions and full of great people.

We have Stanford and Harvard alums at USV so we are certainly a contributor to this statistic. But we don’t have 40% of our team from those two schools.

We don’t ask where you went to school on our analyst application. We ask you to answer four questions and we go from there.

I learned the VC business from a man who went to Case Western Reserve University, my co-founder of Flatiron Partners went to Queens College, and my co-founder of USV went to Wesleyan University.

We have hired analysts at USV that did not graduate from college and maybe didn’t even go, I really don’t know and don’t care.

What I have learned from all of these individuals is that curious and brilliant people come from all places, all genders, and all ethnic and racial backgrounds.

The VC business is making some progress on gender diversity. This chart is from the same post that I linked to at the start of this post.

Eighteen percent is not a number to be proud of, but 60% growth in two years is. If we continue at that rate of gender diversity growth, the VC business could be gender neutral by the middle of next decade. It would not surprise me if that happens. I feel the desire for gender diversity pulsing through our industry so powerfully right now.

But in most other ways, the VC business is still a very homogenous place. Mostly white and, it turns out, mostly educated at a handful of higher education institutions.

We can do better. We must do better. And, I hope, we will do better. Looking in the mirror and not liking what you are seeing is the first step to rehabilitation.

Kin, the cryptocurrency launched by Kik (a USV portfolio company), recently launched a developer challenge. The challenge: build a breakout cryptocurrency-based consumer experience.

Kin is a cryptocurrency focused on driving mainstream consumer transactions. Kin envisions a world where cryptocurrencies are used by people every day.

Consumers have no problem buying coffee with dollars every day. Dollars work great for that transaction.

Kin is focused on driving daily consumer utility in the digital world. Digital value for digital goods.

So, Kin launched a program designed to incentivize developers to build consumer apps with the Kin SDK.  The incentives are described here.

Developers are invited to submit ideas by August 10th. If you’re selected, and you publish an app, and you drive a significant number of active Kin wallets, you will receive the incentives.

This is a greenfield opportunity for developers. There are all sorts of consumer use cases to be discovered. So build a fun app and get rewarded for doing it.

It is my view and our view at USV that the crypto market is in what Carlota Perez calls the installation phase.

We believe that we are still putting the pieces in place for a new technology architecture to take hold.

The “big bang” for this technology cycle was the publishing of Satoshi’s whitepaper, almost ten years ago.

But we still don’t have consensus mechanisms that can scale to transaction speeds that are typical of mainstream web apps, we don’t yet have consensus mechanisms that are both energy efficient and battle-tested at scale, we don’t have an array of development tools that make building applications on this stack easy, quick, safe, and secure, we don’t have hundreds of millions of users with crypto browsers & wallets, and we don’t have all the other things that would need to be in place in order to move into the deployment phase.

But we do have the one thing that is the hallmark of a classic installation phase. We have a frenzy of innovation and financial capital that has been unleashed by the ICO boom, itself a creation of the crypto tech cycle.

Over $20bn has been raised by crypto projects via ICOs in the last 18 months.

And that is not counting the amount of capital that has gone into crypto companies via traditional means (venture capital, angel capital, etc).

This frenzy of entrepreneurship and investment has unleashed thousands of crypto projects all around the world.

And many of these teams, projects, companies are shipping things now.

Which is leading to an incredible amount of innovation coming to market in a very short period of time.

Like any early market, most of these projects and companies will fail. Some will fail to ship. Some will ship things that don’t work. Some will ship things that work but aren’t adopted. And some will ship things that are adopted but are surpassed by something better. The failure rate of these thousands of projects will be very high.

But inside this cohort of companies and projects will be the next Google, Amazon, Facebook, Twitter, Dropbox, Uber, and Airbnb.

And so the job of a crypto investor is to sort through all of them and decide which ones have the best chance of emerging as a winner.

We have been doing that for seven years now, since we first started poking around this sector in 2011.

And it has never been harder.

It is like drinking from a firehose right now.

There are so many high-quality projects, high-quality teams, and blue-chip financings happening in the crypto market right now.

It makes my head spin just trying to stay on top of it all.

And we have a great team of investors at USV working on this, and we have a network of crypto funds we have invested in that we collaborate with, and we have a bunch of like-minded VC firms that we work with in this sector.

That produces a lot of information flow and helps us better understand what is going on.

And what is going on is a frenzy of innovation that will lead to many important things.

But keeping up with it all is exhausting.

I spoke to a group of women entrepreneurs a few weeks ago, and one asked me “why do you need to raise VC?”

And the answer is “you don’t.”

The vast majority of entrepreneurs out there don’t raise VC. Many don’t raise any money to start their businesses.

As I was answering that question, I thought about a talk I gave at the 99U Conference back in 2012 called “Ten Ways To Be Your Own Boss.”

I’m sure I have posted this here before, probably back in 2012, but I thought I’d post it again.

It makes the point that you don’t need VC to be an entrepreneur pretty nicely.

I am a big fan of small creative projects on Kickstarter. And I also love supporting creators from other parts of the world.

As an example, I backed this project out of Mexico today. The designer is creating a tortillero, a tortilla warmer, that looks like a flying saucer.

And, naturally, I also love warm tortillas.

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An entrepreneur asked me a great question last week:

When is it OK to say I don’t know in a pitch meeting?

I told her the following things:

1/ This varies from investor to investor. Some investors are looking for founders to have all the answers.

2/ I am not one of those investors but I do want the founders to have some of the answers.

3/ If I asked her how large and valuable her publicly traded competitor is, and she said “I don’t know but I will find out and get back to you on that”, I would be fine with that answer.

4/ If I asked her what the tech stack is that her engineering team is using to build the product, I would be dissapointed if she didn’t know that answer.

In general, I believe it is critical that the founder be knowledgeable about all the details and aspects of the internal operations. They should have those answers on the tip of their tongue. That includes things like monthly burn, cash balance, headcount, etc.

And if you don’t know the answer to the question, you should be honest about it and say that you will get it and get back to the investor. And do that quickly.

Sometimes investors ask ridiculous questions and then you have to bite your tongue and be polite.

I will end with a great story. It was 1991 and we had seed funded a brilliant software engineer who was building a product for the wall street sector. I took him to see a very prestigious VC as we were looking to fill out the seed round. The company was maybe six months old and was not yet in market with the product.

The entrepreneur started in on the market, the opportunity, and the product. Maybe three or four minutes in, the VC interrupts the founder and asks, “what will your revenues and profits be next year and the year after?”

The founder was pissed. He had not even gotten to the product they were building and he was annoyed by the interruption and the question.

So he answers in his broken English “I don’t have a fucking clue.”

Our meeting ended several minutes later and we were shown the door.

We did not secure an investment from that VC but the company was successful and went public five or six years later.

So you obviously don’t need to have all of the answers in a pitch meeting to be successful. But you do need to be polite and respectful if you want to secure the funding. And there are some things you absolutely need to know the answers to.

We were hanging out with friends last night and one of them asked me how many investments I have made this year. I replied “one so far.” He said, “you are not very active.” and I replied “I do one to two deals a year and always have.” Which surprised him.

I have been investing in early stage companies since the late 80s and over those thirty plus years, I have personally led investments in about sixty companies. An average of less than two investments per year.

Our firm usually makes eight to ten new investments per year, which is one to two new investments per partner per year.

When you are making early-stage investments, which require a lot of your personal involvement over a seven to ten year period, you can only take on so many projects.

If you assume the average hold period for an early stage investment is seven years and if you make one to two investments per year, you will have between seven and fourteen portfolio companies to manage at any one time.

The low end of that range is quite manageable. The high end of that range is not. I have been there.

I believe that early stage venture capital done right is a service business in which the entrepreneur and the company they started is our customer.

We need to be able to service that portfolio company properly and that requires bandwidth at the partner level plus a team around the partners that can provide additional support.

And so that means managing the investment pace tightly and saying no to most opportunities that come in and being really committed and convinced about the projects that we say yes to.

And so that is what we do at USV and what I have done my entire career.

Doing this well is hard. Because if you only make eight to ten new investments per year and expect to produce at least one billion plus exit each year, something we have been able to do every year for almost ten years now, you have to have a pretty high hit rate on super early stage investments.

Our approach to making this work is an evolving thesis that tells us what to invest in and what not to invest in, rigor and collaboration in our decision making, and real substantial value-add post-investment.

This is not spray and pray, this is not following the herd, this is not momentum investing.

This is thesis-driven, active early stage investing, which has always produced the best returns over time and I believe always will.

It seems like yesterday when a bunch of folks in the NYC tech sector decided that it was time to form an organization to represent the tech sector in NYC.

But in fact, it was a little more than two years ago.

There was some upfront work we had to do and in the summer of 2016, we announced Tech:NYC.

Two years later the organization is 630 member companies strong, including over 500 small early-stage companies.

Yesterday, Tech:NYC issued their second annual report, which is just one long web page.

I really like this way of doing annual reports. It’s easy to consume and accessible to anyone with a computer or mobile phone.

If you are involved with or care about the tech sector in NYC, take a minute to read the annual report (it won’t take much more) and see about all the great things that are going on in NYC’s fastest growing economic sector.

And if you aren’t a member yet, you can join our email list at the end of the report and start hearing from us, which hopefully will lead you to join.

I’ve been chairing a $40 million capital campaign for NYC’s CS4All effort to bring computer science education to every school and every student in the nation’s largest school district.

We are just into year four of the ten-year CS4All effort and we are also into year four of the capital campaign.

The good news is I can see the light at the end of the tunnel. Depending on whether you count “soft circles” or not, I think we have about $10 million left to raise.

We started out with a bang, announcing $11.5mm in contributions, including those of my wife and me, at the start of the effort.

Year one went well, with another roughly eight million raised.

Year two was a struggle and year three started out similarly. We made some changes to our team and strategy and message and the second half of year three was much better and we are entering year four with great momentum.

I have learned a lot about running a capital campaign or any sort of large and long fundraising effort and I thought I would share some of the big lessons:

1/ You have to be patient. It is a marathon, not a sprint. No matter how much you want it to go quickly, it won’t.

2/ Cultivation is the name of the game. You have to work the top prospects slowly and carefully and patiently. Most eventually come through but you need to invest a lot of time and effort without any certainty of closure. I found this particularly hard as I always want to be investing my time where it is going to pay off.

3/ You need people around you who are experienced fundraisers. There is an art AND a science to qualifying, presenting, and following up that the best people in the fundraising business understand and bring to their work. Without that, you are going to flounder.

4/ Communicating and engaging your donors is critical. I thought a donor would write one check and be done. It turns out many donors like to start small and grow their committment over time as they see progress and get comfortable with the effort.

It turns out that raising a big sum of money is like a lot of other things in business and life. Slow and steady is a virtue, great people make all of the difference, your best prospects are the people you have already closed, and frequent communication fixes a lot of problems.

I think all of these lessons I have learned in the last three years are applicable to raising capital for your business. Fundraising is a process not a campaign and it needs to be part of a CEO’s daily cadence and calendar.

You are never not raising money when you are running a company or any sort of business endeavor that requires capital, which is basically everything.