My colleague Nick wrote a post today about his productivity system. Nick’s system is way more elaborate than mine, but everyone has to find their own way of getting things done.
What I found most interesting about Nick’s post is what I put in the headline of this post. Our jobs at USV are a constant stream of emails, many of them hoping to get into the constant stream of meetings we take.
Nick put it this way in his post:
at the end of the day it all boils down to a single strategy: getting things into my calendar. The other main thing I try to solve for is simply not forgetting things. I live in a constant stream of emails and meetings, and it’s easy to forget something important. So a goal here is to help ensure that I don’t forget things and ultimately, that I’m focused on the most important thing most of the time.
Nick mentions my strategy of putting everything that I must do in a given day/week/month into my calendar so that it gets done. That works incredibly well for me and is really my only productivity tool.
Nick also mentions our partner Albert’s email technique which I have always wanted to implement and some day will:
Albert has a system, which seems to work for him, which is: using a set of predefined gmail filters, clear the inbox daily. Not the entire inbox, but a few filtered versions (family, USV team, his portfolio companies).
I very much like Albert’s approach. It requires writing the right stored queries (gmail filters) and then keeping them up to date (which is the part that gives me pause). But it makes a ton of sense to try to get to inbox zero on the most important parts of your life vs trying to get to inbox zero on everything.
No matter how you do it, you have to find a way not to drop balls, certainly the most important balls. And that is easy to do when you are in meetings from 7am to 5pm like I will be today.
So whether it is Nick’s approach, mine, Albert’s, or your own, having a system is key. I think it is less important what your system is than having one and sticking to it.
High growth companies need to have a strong finance function. You can’t drive a car (or a plane) without some instrumentation. Most importantly, you need to know when you are going to run out of gas (or electricity).
The mission critical things that must be done in the finance function are mostly accounting related functions; pay bills, make payroll, keep track of expenses, maintain the books and records of the company. These are “must dos” and you need a person who has an accounting background to do most of them. But these are all “looking back” functions in the way I think about the finance function.
What is even more important in a high growth situation is the ability to look forward, to project, and to make sure that the company doesn’t run out of money.
In order to look forward, you need to know where you are, and that requires a solid baseline derived from looking back. So one feeds the other. But they are different.
Looking forward requires modeling and it requires the ability to anticipate. An example of this is “we are going to get a big order from a new customer next month, let’s put that revenue into the model.” But if you don’t anticipate that it may take up to ninety (or more) days to collect that revenue, then you have messed up the modeling and that is the sort of rookie error that could lead to an unexpected cash crisis.
There are many reasons why a company needs a forward looking projection to run the business but avoiding the unexpected cash crisis is number on on that list in my view.
In my experience, the people who are strong at the looking back function are often not strong at the looking forward function. You may need different people to do these roles. In a large company, there are entirely different departments that do these functions. There is an accounting department and there is a financial planning department (often called FP&A).
If you are a small company and have limited resources, you will often attempt to get both the look back and the look forward from the same person. If you aren’t getting what you want in doing that, don’t be surprised. I would rather see a small company outsource the accounting work and staff for the planning/modeling work. Accounting is a bit of a commodity, many people can do it well. Seeing the future from around the corner is most definitely not commodity and if you have someone who can do that well, hold on to them, pay them well, and make sure they are happy and rewarded in the job.
Because looking forward is really where it is at in the finance function at the end of the day. That’s where the good stuff and the bad stuff mostly happen. And when it is done well, it is a thing of beauty.
The AVC comments has been experiencing a wave of comment spam that has largely been replies to legit comments. I appreciate the community for flagging it and our moderators for nuking it. Keeping the comments free from spam is important to me but not an easy chore.
One idea I have, which I don’t even know if is possible in Disqus, is the idea of limiting replies to longstanding community members who are registered with Disqus and have high reputation scores.
What this will do is eliminate the reply spam, but will also make it impossible for new commenters to reply. They will still be able to leave a comment.
When early stage investors make an equity (angel, seed, Srs A, Srs B) investment, they typically negotiate for something called a pro-rata right which gives them the right to maintain their ownership in the company by investing in future rounds on the same terms as new investors.
I have written about the pro-rata right a bunch here at AVC. I think it is one of the most important things that early stage investors get from their investments. Obviously the ownership an investor gets is the most important thing, but the ability to maintain it by making additional investments is also very valuable and can be the source of out-performance of an early stage portfolio (against whatever benchmark one might be using).
At USV, we value the pro-rata right and exercise it very frequently. We often will make five, six, or seven investments in a company between when we make our initial investment and when we make our final investment. We even have a follow-on fund called the Opportunity Fund, that allows us to take our pro-rata in companies that continue to raise privately and delay going public. Our Opportunity Fund will also make some investments in companies that aren’t currently in our portfolio. But a large part of our Opportunity Fund thesis is about maintaining ownership via our pro-rata rights.
In the last ten or so years, companies, lawyers, boards, management teams, founders, and in particular late stage investors have been disrespecting the pro-rata right by asking early stage VCs to cut back or waive their pro-rata rights in later stage financings. This can happen as early as Series B (and happens to angel and seed investors in Series A rounds), but it is even more common in the later stage rounds like Series C and beyond.
I think this is bad behavior as it disrepects the early and critical capital that angels, seed investors, and early stage VCs put into the business to allow it to get to where it is. If the company agrees to a pro-rata right in an early round, it really ought to commit to live up to that bargain. But increasingly nobody does that and it is a black mark on the sector in my view. We make commitments knowing that we don’t plan on living up to them. It is very unfortunate.
The reason this happens is that allocations get tight in later stage rounds, particularly where the company is doing well and everyone wants to get into the round. The new investors, including the investor that is leading the round, will almost always have a minimum amount of ownership they want to get to in the round and the math tends to work out that the only way to get there is to cut back the early investor’s pro-rata rights.
Sometimes the way the gap is filled is by creating secondary for founders, early employees, and early investors. That can work and is sometimes good for everyone involved. That “trick” has been the saving grace on this issue over the last few years.
But I believe we are at a crossroads on this issue and I am wondering if early stage investors need to put more teeth into our pro-rata rights to insure they are honored. What if a company that was unable to offer a full pro-rata right to an early stage investor in a later round was forced to go back and change the price of an earlier round to make it up to the early stage investor? Or what if an early stage investor got warrants at the new round price to make up for an inability to honor the pro-rata right?
These are just two suggestions I came up with in a few seconds of thinking about it. But I would really like to force early stage companies, their lawyers, and their boards to think clearly and carefully about the pro-rata right when granting it. The current practice seems like “we can give this because we always get away with not honoring it down the road” and frankly that sucks.
The most common caller on my Android phone is Scam Likely. I am sure that most of you are in a similar situation.
Last week we were driving and two calls came into The Gotham Gal’s phone which was bluetoothed into our car and she declined both. I asked her why she did that. She said they were likely robo calls. I told her that they looked to be legit numbers to me. Later on she found out that both calls were from people she knew, but for some reason those names were not showing up on the car dash and so she declined the calls.
That led to a discussion of why spam filtering for email has gotten so good and robocall filtering for phone calls is still not great. I brought up the great work the email industry has done over the last twenty years with email signing protocols like DKIM and SPF, and the email industry’s adoption of DMARC protocol which operationalizes DKIM and SPF. We decided that the telephony industry needs similar solutions.
Well, it turns out that the telephony industry is working on them.
Jeff Lawson, founder and CEO of Twilio, a company that was a USV portfolio company and which The Gotham Gal and I are still large shareholders in, is writing a series of blog posts about how the telephony industry can fix the robo call problem.
Some very smart people have been working on new ways of cryptographically signing calls – a digital signature – proving ownership of a phone number before the call is initiated. One example of this is a new protocol called STIR/SHAKEN, which the communications ecosystem is working on now. Before any authentication method can be impactful at scale, it needs to be adopted by a broad swath of the ecosystem. Twilio is fully committed to efforts to authenticate calls so the identity of callers can be proven, and it looks like STIR/SHAKEN is a good candidate to do just that.
In Jeff’s next post, he will address the role that identity (of the caller and the recipient) and reputation will play in solving the robo call epidemic. I look forward to reading it.
I expect we will see IPOs from big names like Uber/Lyft/Slack, although I also expect those deals will get priced well below the lofty expectations they have in mind right now. Some of that will be because of weak equity markets in the US, but it is also true that most of the IPOs in 2018 also priced below the lofty “going in” expectations of founders, managers, boards, and their bankers. The public markets have been much more sanguine about value than the late stage private markets for a long time now.
When I see an IPO price range, I like to go look at the S1 that the issuer has filed with the SEC prior to the road show. Here is Lyft’s S1.
Here are the things I like to look for in a S1:
1/ The total shares outstanding. You can go to the table of contents of the S1 and look for the section called “Description Of Capital Stock”. In Lyft’s S1, it says there are ~240mm shares of Class A common stock plus some amount of Class B common that is not yet detailed. The Bloomberg article I linked to above says the company is going to sell 30.8mm shares at $62 to $68 per share. So there will be at least 270mm shares outstanding plus the Class B shares. The Bloomberg folks seem to be using a post deal share count of 288mm share so that is close enough. You get to fully diluted post deal valuation by multiplying the share count (288mm) by the range ($62/share to $68/share).
2/ Revenues and earnings/losses. You can go to the table of contents of the S1 and look for the section called “Selected Consolidated Financial And Other Data” and you will find the audited financial data. I like to find the quarterly numbers because that will give you a good idea of current growth rates. These are the numbers for Lyft:
As you can see the quarterly revenues are growing at roughly $80mm a quarter so a back of the envelope guess on revenues for 2019 are [$750mm, $830mm, $910mm, $990mm] for a total of ~$3.5bn, up from $2.1bn in 2018 (yoy growth of 65%).
You can also see that the contribution (net of cost of goods sold) has been about 45% over the past few quarters so if that ratio holds in 2019, there would be contribution of roughly $1.6bn in 2019.
For the operating costs, you can look at the difference between contribution and EBITDA, which you can see here:
Lyft spent ~$1.85bn on opex in 2019 ($921mm of contribution plus $943mm of EBITDA losses). That number grew from $1.1bn in 2017. I would expect Lyft’s operating expenses to be at least $2.25bn to $2.5bn in 2019.
Which gets you to this possible P&L for 2019:
Revenues – $3.5bn
Gross Margin – $1.6bn
EBITDA (loss) – $600mm to $900mm
3/ Valuation Ratios:
At the mid-point of the offering range $18bn, the price to revenue multiple is roughly 5x (18/3.5) and the multiple of gross margin (what Lyft keeps after paying significant COGS) is roughly 11x (18/1.6).
4/ Time to cash flow breakeven. This is harder because you have to make some assumptions about growth rates beyond 2019 and opex growth rates. But if Lyft can grow revenues at 60% per annum for a few more years and keep opex growth rates to 25-30% per annum, then it could get profitable by sometime in 2021. This suggests that the $2bn it is raising may be sufficient to get profitable, but it will be close.
So what does this mean for other late stage high growth high flyers?
To me it says if you have company focused on a big opportunity (like transportation) that is growing at north of 60% per year it is worth in the range of 10-12x net revenues to wall street right now. Because Lyft only keeps about 45% of its revenues after very high COGS, that works out to be 5x revenues.
Many late stage private companies are getting financed at valuation ratios in excess of this so they will have to grow into their eventual public market valuations. But that has been the case for quite a while now as the late stage private markets continue to pay higher prices for high growth companies than the public markets do.
The mobile app stores, in particular, have always seemed to me to be a constraint on innovation vs a contributor to it.
Spotify has a huge user base and brings in billions of dollars of revenues every year but it has a challenging business model. Let’s say that 70cents of every dollar they bring in goes to labels and artists. That seems fair given that the artists are the ones producing the content we listen to on Spotify. But if they also have to share 30cents of every dollar with Apple, that really does not leave them much money to build and maintain their software, market to new users, pay for servers and bandwidth, and more.
You might say “well that’s what they signed up for” and you would be right except that their number one competitor is Apple. So their number one competitor does not pay the 30% app store fee, meaning that they have a competitive advantage.
We see this with our portfolio companies a fair bit too. Apple has complete control over what gets into their app stores and what does not. And the process can be arbitrary and frustrating. But that is how it works and our portfolio companies are reluctant to make any noises publicly for fear of making their situation with Apple even worse.
I am not a fan of Warren’s idea of breaking up companies like Apple.
I like my partner Albert’s ideas better which he expressed in a tweet last week:
A better set of policies to restore competition in the digital age would be (1) consumer right to API access (2) consumer right to side load apps (3) restored ability for small companies to go public / sensible regulation of crypto currencies. https://t.co/4bOFTnZ5NK
If it was the law of the land that any company could side load any application onto the iPhone or any iOS device, including third party app stores, we would have a much more competitive market with a lot more innovation, and Spotify would not have to go to the European Commission to deal with this nonsense.