Posts from December 2018

When Markets Overcorrect

When capital markets change direction, to the upside or to the downside, they often go too far before finding the right balance. When they overshoot to the downside, you can find some real values.

Back in the financial crisis of 2008, I was blogging about that as it related to the big tech stocks (Apple, Amazon, Google). The market hated everything and you could buy the big three tech franchises at crazy low prices as it related to their fundamentals (revenues, profits, cash flow, etc). And so I did and a lot of other people did too. And when the market came back in 2009 and beyond, those who bought at those bargain prices were rewarded.

So, it may be time to start thinking this way in crypto land. The reason I say “may” instead of “is” has to do with the fact that really bad bear markets take a while to find their footing and start moving up again. I worry that it will take crypto a while before it can make a move upward again. I wrote about that in this post a few weeks ago.

But nevertheless, I think it is time to at least start looking for fundamental value in crypto land. Ethereum is trading below $10bn. There are some traditional businesses in the crypto sector that are valued at almost that level. And if you believe in the fat protocols thesis, as I do, that gets my attention.

But there are more rigorous ways to think about fundamental value in crypto and one of the best known fundamental value thinkers in crypto is Chris Burniske, a partner in Placeholder, a crypto venture firm that USV is an investor in and I am an investor in too.

Chris posted a bunch of charts and analysis yesterday comparing Bitcoin and Ethereum to a bunch of measures of the fundamental value of their networks.

This chart from that post is the most telling in my view:

The green line is the use of gas to pay for smart contract execution on the Ethereum network. The blue line is the market cap of Ethereum. The growing gap between the green and blue lines represents, to me, the sign of market overshooting itself.

There remain some important fundamental questions about Ethereum so it is not like Apple, Google, and Amazon back in 2008. There is still existential risk in Ethereum. It could fail as a protocol and go to zero. So there are many reasons not to go all in on Ethereum right now.

But if you view Ethereum as a call option on the possibility that it will retain its role as the leading decentralized smart contract execution platform, then I think it is starting to look pretty compelling. And analysis like the work that Chris is doing is really helpful in determining things like that.

#blockchain#crypto

Leadership and Self Care

I saw this tweetstorm by Jack Dorsey on Saturday evening and thought “Good, Jack is taking care of himself.”

I guess I was the only one who reacted that way given the amount of abuse and vitriol that has been thrown at him on and off Twitter for that tweetstorm.

I understand the frustration that users feel about the things that don’t work right on Twitter, particularly the abuse and hate and the other unpleasant stuff that the Twitter platform attracts, including our horrible President and his nonsense.

I also understand that the country Jack visited and made a number of positive comments about, including suggesting that others visit there, is a place where the government and military has done all sorts of bad things, including genocide.

Certainly the comments that Jack’s tweetstorm was “tone deaf” are accurate.

But I would like to take the other side of the argument here and make a few important points.

Say what you want about Jack Dorsey, he came up with the ideas for two hugely impactful products that I use every day and many others do too. Those products are Twitter and Square.

Not only did he come up with the ideas for those products, he has breathed life into them with his work and his passion and they are two of the best products brought to market by the tech sector in the last decade.

Jack is not a conventional CEO. He does “run” two companies. But he has very strong teams who operate both companies underneath his leadership.

And since he came back to Twitter full time in the summer of 2015, Twitter has slowly but surely addressed much of what was ailing it. The stock has doubled in the last 18 months and user growth has stabilized. And, most importantly, the company is addressing many of the most troubling aspects of the service, certainly not as quickly as its critics would like, but the service is undeniably dealing with the abuse issues more seriously than it has in the past.

Square is a company that Jack has run since day one. And as Jack tweeted out the other day, the Square cash app is doing great.

And here is Square’s stock price since going public:

Even with the recent pullback, Square is up 5x since its IPO in late 2015.

So, it’s not like Jack hasn’t been doing his job. He is leading not one, but two companies, and from the outside, I would argue that he is doing a pretty solid job at that.

I am not on the inside at either Twitter or Square, so I don’t really know how things are going at these companies, but from where I sit, I would say he’s doing well.

So, with all of that backdrop, I want to make a point about the toll leadership takes on someone and the need for self care, particularly in high stress jobs like running public companies.

Leadership is a burden. You are the one everyone looks to for inspiration and direction. The things that land on your desk are the things that nobody else wanted to or could deal with. Leadership is lonely, stressful, and takes a toll on people.

Just take a look at the faces of every President on the day they took the job and the day they left the job. You will see the burden and toll of leadership right there.

And so, it is very important for leaders to take care of themselves. That can take many forms, but here are some things that I recommend to the leaders I work with (in no particular order):

  • Vacations
  • Sabbaticals
  • Eating Healthy
  • Drinking Less
  • Exercise
  • Meditation
  • Coaching
  • Working On Your Marriage
  • Spending Quality Time With Your Family

And yet, for some reason, we criticize our leaders for doing these things. Like taking a vacation, or doing a workout, or going on a meditation retreat is some abandonment of their duties.

I think it is exactly the opposite. It is their duty to take care of themselves. Because if they don’t take care of themselves, they can’t take care of their companies and all the stakeholders who rely on them.

I am glad Jack went on a meditation retreat. I am glad he is taking care of himself. I understand why that tweetstorm was tone deaf, but let’s not get carried away here. Leaders are humans too. Let’s be decent humans to them.

Disclosure: My wife and I own shares in Twitter and I was on Twitter’s board a decade ago.

#management

Thinking Ahead To 2019

In the last week, we have learned that Uber, Lyft, and Slack plan 2019 IPOs. I am sure that a few more highly valued private companies are also planning to go public in 2019.

It is something that I have been expecting and predicting for a few years now. Eventually these companies that have raised a ton of capital in the private markets will choose to go public and generate liquidity for the shareholders who plowed all of that capital into them.

And yet storm clouds are on the horizon for the capital markets in 2019. Rates have risen significantly in the last eighteen months, pulling capital out of the equity markets and into the fixed income markets. There are some leading indicators that suggest a business slowdown is on the horizon, which would be the first one in the US in a decade. And, of course, the situation in DC is getting dicey and that will weigh on markets as well.

Good companies can go public in bad markets so I am not saying that the long delayed IPO plans of juggernauts like Uber will be squashed by a bear market in 2019. 

But what I am saying is that 2019 is shaping up to be a very interesting year for the capital markets that power the startup economy.

There is a big difference between the private markets and the public markets. They do not move in lockstep. For years now, the late stage private markets have been trading at valuations that are well in excess of their public market comps. That is true for a number of reasons. First, private market investors have longer time horizons and are looking for a three to five year return, not an immediate one. Second, private market investors get a liquidation preference which in theory protects them from losses. Finally, deals in the private markets clear in an auction like environment where the highest bidder wins the deal. All of these factors mean that a hot company can raise capital in the private markets at valuations well in excess of where they can raise capital (and trade) in the public markets.

But the public and private markets are connected to each other. If the Nasdaq falls significantly, and it is down roughly 15% from its highs in the late summer/early fall, then it will eventually weigh on the private markets.

And, if Uber, Lyft, and Slack do go public in 2019, where they price and where they trade will impact startup valuations, both late stage, and ultimately early stage too.

These markets, public, late stage private, and early stage private, feed off each other and the participants in one look to the others for supply of deals and liquidity. So while they may appear to be disconnected, and often are, they do ultimately sync up.

And so I’m wondering if 2019 is the year they start to sync up again, after quite some time being out of sync. And if that comes to pass, what it means for our portfolio companies and their financing and liquidity options.

Fortunately for most of our portfolio companies, and most companies in the startup sector, we have had a number of years of very flush capital markets and many companies have strong balance sheets and a lot of staying power. The same is true of most venture capital firms as the past few years have been a great time to raise capital.

So if things slow down in 2019 and I am not predicting they will, but I think they might, the startup sector is in good shape to weather it. But at some level, the startup capital markets are a game of musical chairs and you don’t want to be the one who can’t find the chair when the music stops. 

#entrepreneurship#VC & Technology

Funding Friday: Signal Problems

One of the most vexing issues facing NYC right now is our transportation mess and at the heart of it is the subway system.

My favorite chronicler of the subway mess is Aaron Gordon and his Signal Problems blog/newsletter.

If you want an example of the quality and clarity of Aaron’s analysis and writing, I would point you all to his post on Amazon HQ2 and the transportation issues it presents.

So what does all of this have to do with Funding Friday? Well, I am glad you asked. 

Aaron is offering regular readers the opportunity to subscribe for $50/year and help support his efforts to shine a bright light on the MTA and all of its issues. 

I think we need more journalism like the kind that Aaron is providing and so I signed up for the $50 today. 

If you are a NYC resident and ride the subways regularly and want to stay on top of what’s going on, I strongly suggest subscribing to Signal Problems and while you are at it, you might consider helping to fund this effort with an annual (or monthly subscription). You can do that here.

#Uncategorized

Google Photos Feature Request

I think Google Photos is awesome. It is one of my favorite Google products. The photo search is amazing. And the sync from my Pixel phone to Photos works beautifully.

But there is one thing that bugs me about Google Photos that I would love to see the Photos team address.

When I post a video to YouTube, and then want to share it, one of the options I have is to embed the video with an embed code.

I would love to have the same option in Google Photos. If this feature exists, I can’t for the life of me find it. If it doesn’t, I would love to see them add it.

I can assure you that if this feature existed, I would be sharing a lot more photos here at AVC.

Update: A reader shared with me this third party solution to the embed issue.

#Weblogs

Quizlet Premium Content

Our portfolio company Quizlet is one of the top mobile apps out there with over 50 million people a month using it to learn something.

Quizlet has existed for over a decade as a wikipedia style learning community with its users creating and sharing study sets on pretty much everything and anything. There are over 300 million of these study sets on Quizlet and that number grows larger every day as more people join Quizlet and create and share their study sets.

This week Quizlet announced that premium content creators are now joining the Quizlet community to share, and sell, study sets that they have created. Premium content creators include publishers like Kaplan and Pearson, digital learning platforms like Babbel and Kenhub, and individual experts like Rob Swatski and Miriam Gutierrez.  

If you want to become a Quizlet Verified Creator and publish your premium learning content as a Quizlet Study Set, you can go here and do that.

None of this changes the basic Quizlet experience that 50 million people experience every month.  As Quizlet wrote in the blog post announcing Premium Content:

You can continue to create study sets and study user generated content to practice and master what you’re learning for free — just like you always have. Quizlet Premium Content doesn’t replace the parts of Quizlet you know and love; it’s adding to it, giving you new ways to use the games and activities on Quizlet to study content you don’t have to create yourself (or rely on other users to create!).

I am excited to see Quizlet add premium content to its massive library of learning material. It allows learners to find new content that may meet their learning needs better than the content they or others have created. It allows teachers and other professional learning content creators to get compensated for their premium content on Quizlet. And, of course, it creates a third revenue stream, in addition to advertising and subscriptions, to diversify Quizlet’s business model.

Quizlet is an amazing learning community. Now professionals can join it and add value while getting compensated for that. I am confident that this new premium content will make Quizlet even better.

#hacking education#Uncategorized

La Hora del Código

It is Computer Science Education Week. This is a worldwide movement to get schools everywhere doing an hour of code. It started in 2009 and nine years later it is one of the largest learning events in the world.

I celebrated CS Ed Week yesterday morning by visiting PS24 with NYC Schools Chancellor Richard Carranza and Brooklyn Borough President Eric Adams.

PS 24 is a dual language (English and Spanish) PreK-5 elementary school in Sunset Park Brooklyn.  The school is led by Jacqueline Nikovic and the student population is 88% Hispanic and 45% are English Language Learners.

We started in a kindergarten that was a dual language integrated co-teaching classroom. That means these students are being supported in their effort to acquire a second language (English).

The students were using cards with Spanish words on them like Empieza (start), Brinca (jump), and others to create an instruction set. They then followed the instructions. Here’s a photo of one of these instruction sets (those are my shoes on the lower left).

This is a student showing the Chancellor and Borough President her instruction set.

By the time they get to fifth grade at this school, the students are doing Scratch programming in the computer lab.

In this photo below, the Chancellor was pair programming with a young man and a young woman (who unfortunately is blocked in this photo). Let’s just say the kids were doing the teaching and the Chancellor was doing the learning.

PS 24 adopted NYC’s CS4All program this year so it is the first year that teachers in the school are getting professional development in computer science education. Everybody I met at the school, the Principal, the teachers, and the students, seem incredibly excited about getting computer science in their school.

I was particularly impressed how PS 24 has made CS accessible to english language learners. The whole idea of CS4All is that we need to make these skills accessible to all learners, regardless of gender, race, age, neighborhood, language, etc.

Though the teachers and students made it look easy yesterday, none of this is easy. The NYC Department of Education, and the private sector supporters of CS4All, are doing something very hard, introducing an entirely new subject into a curriculum that has largely been stale for the last fifty years. 

Sometimes I struggle with how hard this work is. But when I go out to the schools, which I have done twice in the last month, I get totally energized. Seeing the excitement on the student’s faces makes it all worth it.

#hacking education

Litigation

Litigation is something I try to avoid. It is way better to work out differences by sitting down and negotiating a reasonable deal for both parties.

But litigation is a fact of life in business. You cannot avoid it all of the time. Companies and people will sue you even when you have done nothing wrong. So you need to have a framework for thinking about litigation.

Here are some of the things I have learned over the years:

1/ Litigation is expensive and can go on for a very long time. There is no sense of urgency in litigation. You can easily spend more money litigating than settling. If you can settle for less than the likely litigation expense, even if you have done nothing wrong, it is usually better to hold your nose and do that.

There are some people who argue that regularly settling for less than litigation costs will give you a reputation as someone who does that and it will make you a target for lawsuits, often baseless ones. I understand that argument, but I still think settling for less than likely litigation costs is generally the right approach. 

2/ You can lose in litigation even when you have done nothing wrong. I have a friend who is a litigator and he advised me a long time ago that “assume you have a 50/50 chance of losing, no matter how strong your case is, and then you will tend to make the right business decisions.” His point is that you should not fall back on the comfort of a “strong case.” Life is not fair. You can lose when you should win. Plan for that.

3/ Litigation expense is leverage in litigation. Early on at USV, we ended up in some minor litigation. We spent a lot of money on discovery and the other side figured out how to spend very little. We got very far over our skis on the case and we ended up settling on very favorable terms for the other side. We let the other side use expense to their favor. I promised myself I would never do that again. But I see companies we work with do that all the time. It is very easy to want to “lawyer up and fight” and often that is not the best strategy. It can be better to do the rope-a-dope and let the other side spend all of their money and get over their skis.

4/ There are times when you have to fight even if you can settle. If settling a case would materially harm your business, to the point that you would have a hard time operating it, then you must fight. These are existential cases. They are very rare, but they do come along once or twice in a career. When one like this comes along, “lawyer up and fight” is the right strategy and you should amass the best legal team money can buy and you must do everything you can to win. Figuring out when something is existential is the key. Often things feel existential when they are not. That is where the mistakes are often made.

5/ There are lawyers who are great business advisors. I like the term consigliere for them. And there are lawyers who are great litigators. Make sure you have both of them working for you in a litigation. If you can get a consigliere in your company as your General Counsel, you will be way better off in litigation. If you can’t afford that, have one on your board or in your life. The consigliere will help you manage the business side of the litigation and the litigator will manage the legal side of the litigation. It is hard for a business person to manage a litigation without a lawyer at your side.

Those are few of the things I have learned over the years. But my first rule of thumb is to avoid litigation if you can. It really sucks.

PS – I realized after re-reading this post that I left out something very important. Arbitration is an excellent replacement for litigation. Think of it as “litigation light.” It is very important to have arbitration clauses in your everyday contracts (employment, construction, sale of software, provision of service, etc). Arbitration clauses require arbitration in lieu of full blown litigation in the event that there is a dispute over the contract. Arbitration is like litigation in that you can lose even though you did nothing wrong, but it will cost you a lot less time and money to reach a resolution and if you lose, the damages are often a lot more reasonable.

#life lessons#MBA Mondays

Centralization vs Decentralization

Decentralization is one of, if not the most, discussed features of the crypto tech stack. In a decentralized system, no single body controls the system. We have most certainly not reached the era fully decentralized systems, but that is what most of the world-class technologists working in the crypto sector are focused on getting us to and I believe we will get there in the not too distant future.

If you are a student of tech history, you will not be surprised that decentralization is also the right technology arriving at the right time to solve some of the most challenging policy problems facing the tech sector right now.

Before I elaborate on that, I want to show you a slide from my colleague Nick‘s deck on crypto that he uses to talk to policymakers and elected officials. I believe he borrowed it from our friends at Placeholder and they are credited at the bottom of this slide.

Here is my quick explanation of that slide.

IBM had a near monopoly on computing by virtue of their domination of the mainframe, mini-computer, and, it seemed, the PC computing platforms.

But the open PC hardware standard allowed Microsoft to develop an operating system that could run on any computer built to the PC hardware spec and they eventually unseated IBM, only to become a near monopoly themselves.

But just as we were wringing our hands about what to do about Microsoft’s monopoly, an open source operating system (Linux), the internet protocols, and the free distribution of the world wide web undid that monopoly and we got Google, Facebook, Amazon, and other big tech platforms.

And now we are wringing our hands about these near monopolies and their market power and the ability of bad actors to manipulate them. And around the same time, the technology to architect and scale a completely decentralized system emerges.

The other thing that is true of these moments of hand wringing is that just as the technology is emerging to unseat the near monopolies, regulators and elected officials try to put the genie back in the bottle using traditional regulatory techniques that often end up more deeply entrenching these near monopolies.

To give you an example of how this might happen, I am going to suggest you all go read my partner Albert’s post from yesterday on Twitter and how one might approach addressing some of the vexing problems that platform is dealing with right now.

Albert points out that:

On the minus side the calls to treat Twitter as a traditional publisher are growing.

That is how elected officials and regulators often think. They look backwards to find a model of regulation that has worked in the past and try to apply it to a new thing. But as Albert explains:

The idea that there could or should be a single central institution, let alone a commercial company, which as a benevolent dictator resolves all of these issues to everyone’s satisfaction is a complete non-starter.

Instead he proposes a few ideas that are steeped in decentralization:

my preferred go to answer is to shift more power to the network participants by requiring Twitter (and other scaled services) to have an API. That would allow endusers to programmatically create the best version of Twitter and would also make it easier to simultaneously use Twitter and new decentralized alternatives.

And

Twitter should significantly expand the features that let individuals and groups manage the visibility for tweets for themselves. There are already useful features such as muting a conversation or blocking an individual. These could be expanded in ways that allow for delegation. For instance, users should be able to say that they want to subscribe to mute and block lists from other individuals, groups or organizations they trust. One example of this might be that I could choose to automatically block anyone who is blocked by more than x% of the people I follow (where I can choose x). Ideally these features could be implemented at the tweet/conversation level and not just the account level.

So you can see that by decentralizing the power to the edges of the network INSTEAD of further concentrating it by requiring the network owner to further centralize power is the right answer, both from a technology perspective and a regulatory/policy perspective.

Sadly, I think we are in a race with ourselves in this centralization vs decentralization debate. We need the decentralized tech stack to evolve more quickly and show the world how decentralized technology works in a mainstream way at scale before policy makers and regulators force the tech sector to go the wrong way.

And, most disturbingly, the regulators and elected officials are taking actions, well intended of course, to slow the decentralized sector down, not speed it up.

Which is why we at USV have been spending a lot of time with public servants of all kinds, educating them, imploring them, and desperately trying to get them to understand where we are, why it is an important moment, and why we need to this new technology to succeed.

#blockchain#crypto#policy