Venture backed companies have a strange relationship to positive cashflow. Because they have financial backers who can and do finance losses, they tend to operate in the red for a long time.
In the early days it makes sense to burn cash. If you do not have revenues, you can’t generate cash. And if you can’t grow your revenues without investing out ahead of income, then you also need to be able to operate in the red.
But I have often felt that this muscle memory of investing for growth at the expense of profits can become, and does become, a habit that is hard to break.
If you have positive cashflow, you can control the timing and terms of your capital raises.
If you have positive cashflow, you can buy back your stock if any comes into the market at prices that you and your Board feels is below fair value.
If you have positive cashflow, you can borrow against it to purchase other companies or finance capital requirements.
If you have positive cash flow you can offer cash incentive compensation in lieu of ever more expensive equity compensation.
I could go on, but I suspect you get the point. Positive cash flow puts you on control versus the capital markets.
And that is a very valauble position to be in and one that a number of high flying tech companies probably wish they were in right now.
I got schooled on Crypto Twitter yesterday. It turns out many believe I was wrong about most everything in my post yesterday and they let me have it. Crypto Twitter is a really special place.
One of the comments was that I learned the hard way that crypto networks are not companies:
We all learn the hard way. What matters is to learn.
Pretty much everything I have learned in the venture capital and tech business I have learned the hard way. Easy lessons aren’t very powerful. Hard ones are.
I have gotten more things wrong than you can possibly imagine.
The crypto sector is in an interesting phase right now.
The market has rallied from its lows this past winter and is up a lot in 2019:
But Bitcoin now makes up almost 70% of that aggregate market cap.
In some ways, Bitcoin is the one protocol that has found lasting product-market fit. In terms of a censorship proof digital store of wealth, there is nothing that comes close to Bitcoin. There are some protocols, like the privacy-focused ones, that offer similar and in some cases better use cases. But for the most part, Bitcoin is our digital gold.
Ethereum, as many of you know, confounds me. It has shown the way to so many important things; smart contracts, programmable trust-free computing, potentially proof of stake, and a lot more. But it remains hard to build on, scaling issues abound, and many developers are looking elsewhere.
Stablecoins, including Facebook’s plans for Libra, are a bright spot. There has been much innovation in this sector and more is coming. There is no doubt that technology can provide a stable programmable crypto asset. We are still early days in the use cases but it is not hard to imagine why one would want to own and use stable programmable digital money.
We are also seeing signs that users like using crypto-assets in mobile and web apps. Kin, built by our portfolio company Kik, has become one of the most used cryptocurrencies in the world and is built into more than fifty mobile apps. Our portfolio company Blockstack has a Dapp platform that many developers are using to create consumer Dapps. And our portfolio company YouNow’s Props token is seeing a lot of consumers transacting with it.
But there is also plenty of disappointment to be had in crypto right now.
Regulators and banks in many parts of the world are downright hostile to crypto and have pushed much of the liquidity to Asia and the innovation has followed it there. Many of the most interesting things in crypto right now have emanated from Asia.
And many of the most promising and best-funded projects are massively delayed in getting to market. Some of this is that building scalable secure and decentralized protocols is not easy. But it is also true that the decentralized development approach that many of these projects are taking is not well suited to deadlines and ship dates.
And maybe most of all, crypto has not gone mainstream. Very few people earn in crypto. Very few spend in crypto. Very few use Dapps. Very few do anything with crypto other than buy, sell, and mostly hold.
I am an optimist. I am convinced that many of these disappointments will be overcome in the next few years. But it is easy to be bearish on crypto right now. The reality is well below the hype and challenges abound
I am long crypto and USV is long crypto. And we are putting more capital into the sector and will continue to do so. But it is not without risks and setbacks. Actually it is full of them.
I read last week that there are a growing number of regions around the country where there are labor shortages. Businesses literally cannot find the workers they need to operate their businesses.
Today is Labor Day, a day to celebrate the workers who built America and the labor movement that rose up to protect workers from abusive labor practices.
And so it is worth noting that we don’t have enough labor in our country right now. Some of this results from the strong economy which is ten+ years into an expansion. Some of this results from restrictive immigration policies.
But whatever the cause, we have an abundance of capital and a shortage of labor in the economy right now.
That makes it difficult to operate a business and even more difficult to expand. Automation can solve some of these issues and I expect we will see more automation in an environment where capital is available to fund investments in automation and labor is very tight.
But the other question is how much longer should we maintain a restrictive immigration policy. I believe we should have more legal immigration in the United States. We have labor shortages and many talented people who would like to come here and live and work.
It seems like a no brainer to me that we should expand legal immigration in the US right now.
This is a topic I’ve written about a bunch over the years. I feel like it is becoming more urgent every day.
Last week I heard some shocking numbers about salary levels for certain kinds of engineers in the bay area. I checked them out with a few of our bay area portfolio companies and they were more or less corroborated.
The tight technical labor markets in the bay area, NYC, and a number of other regions in the US are making it hard to scale software businesses without burning massive amounts of cash.
At the same time, we see a growing number of our portfolio companies succeeding with scaling engineering/technical teams in secondary labor markets in the US, as well as going outside of the US to build engineering locations.
I feel that the ability to spin up and then successfully operate remote engineering locations is a skill that technology companies need to develop earlier in their development than used to be the case.
It seems to me that once you get to 100-200 people (or 50+ engineers), you should be thinking about this. The most important thing is not where you put your first remote location. The most important thing is learning how to do this successfully. Because once you can do it in one location, you most likely can do it successfully in multiple locations.
This post explains how Stripe (a USV portfolio company) started with remote engineering hubs in Seattle, Dublin, and Singapore, and then evolved into a structure that supports remote workers anywhere.
The move from a centralized engineering structure to a decentralized one is a process and takes time to get right. And so I think it is best to start building those capabilities long before they become necessary.
