Posts from November 2022

When markets are in turmoil, like they have been for most of this year, I like to have a buy-and-hold mindset when it comes to making new investments. It is hard to know when you’ve reached the bottom and can start buying again, but if you think about a ten or twenty-year hold, then it becomes a bit easier.

The Gotham Gal and I buy and build a fair bit of real estate on the side and we generally use a “cap rate” of between 5 and 10 when we acquire and develop real estate. That means we want to generate an annual yield on our total investment (acquisition cost plus construction cost) of between 5% and 10%. If you think of those numbers as price/earnings ratios, then we are paying a PE of between 10 and 20 times earnings.

It is true that PEs and cap rates and most other “investment ratios” are impacted by current interest rates. When rates go up, like they have been for the last year, the value of capital assets goes down. That’s what we have been seeing this year, among other things.

But if you think about holding an asset over a very long time, like a building, then you will likely hold it through a number of different interest rate environments. And so what I like to think about is what a reasonable return is for a very long-term hold. And in real estate, that is between 5% and 10% per year in my view.

Riskier assets, like venture capital investments, would require a much higher return than 5 to 10% a year. At USV, we generally underwrite to at least 10x our investment if the company is successful and drop down to maybe 5x on more mature companies where we have a much better line of sight to an exit. A 10x return over ten years is roughly a 26% annual return compounded. A 5x return over ten years is around 17.5% compounded. So riskier assets command higher expected returns.

But if you are looking at a tech stock that is mature, like Google or Apple or Amazon, or even something a bit less mature like Etsy (where I am Chairman and own a lot of stock), or Shopify, or Airbnb, I believe it is appropriate to think about that investment more like real estate than venture capital.

Let’s look at Google. It is down about 30% in the last year to a market cap of about 1.25 Trillion. It generates about $70bn of net income a year (that’s what it generated in the last year). It generates about $80bn of cash flow from operations. So if you think of Google like a building, it is trading at a cap rate of 6.4% and a PE of about 18x. Google’s business is not quite as resilient as a building, which is a hard business to mess up, but it also could potentially grow its earnings significantly over the next decade or two, which is a bit harder to do with buildings.

Would you rather buy Google at a cap rate of 6.4% or an apartment building in your neighborhood for a 6.4 cap rate. I think it’s a tossup. At least it is to me.

Now let’s look at Airbnb. Airbnb’s stock is down 46% in the last year. It is valued at $62bn. In the quarter that ended in September 2022, it generated $2.9bn of revenue and $1.2bn of EBITDA and Net Income. I am not sure why Net Income and EBITDA are the same. Maybe Airbnb is not paying taxes yet. It could be using up loss carryforwards or something like that. But a fully taxed Airbnb would be generating Net Income of more like $1bn or maybe even a bit less per quarter. On an annual basis, Airbnb is likely to be generating about $5bn of EBITDA and maybe $4bn of net income. Airbnb’s cash flow from operations over the last four quarters is approaching $3.5bn. So if you think of Airbnb like a building, it is trading at a cap rate of 5.6% and a PE of 15.5x.

These ratios and numbers are all “back of the envelope.” What I mean by that is there is a much more rigorous analysis that could be done here. I am just trying to use some real companies as examples of what I am writing about today.

My point is that if you think Airbnb and Google will be around for the next twenty years and their businesses will be stable and/or growing, then the prices at which they trade in the market resemble what a real estate owner might pay for them if they were buildings.

And if you, like a real estate owner, want to own these assets for a long period of time and generate an annual return of between 5% and 10% on them, compounded over ten to twenty years, then today’s prices look pretty reasonable to me.

A 6.4% annual return compounded over ten years is about a double on your investment. A 6.4% investment compounded over twenty years is about 3.5x your money. So if you are saving for a retirement or college expenses or something else, you have a long-term opportunity and so thinking long-term can be very helpful.

To be perfectly clear, I am not recommending Airbnb or Google stock here. I like both companies very much and think they are dominant in their sectors (travel and search) and likely will continue that dominance for the foreseeable future. But all businesses are at risk of poor management, new competitors, changing market structures and technologies, and many other things. Return comes with risks. Buildings can be risky too. Neighborhoods can change. Tax and other laws can change.

What I am saying, however, is that many of the top tech companies have seen their stocks tumble between 30% and 80% in the last year. Shopify is down 75% in the last year. Twilio is down 83%. Cloudflare is down 75%. These are companies I am quite familiar with, know the CEOs, and admire. Again, I am not recommending these stocks. I am just saying that prices have come down a lot in the last year and fundamental analysis, at least on some, suggests they are in the range where a long-term buy and hold could make a lot of sense.

Does that mean the stock market has bottomed? Absolutely not. It may have. It may not have. But if you are investing for a very long time horizon, you may not want to think about trying to time the bottom, which is very hard to do anyway, and just think if investments you make now and hold for a long time make sense. And on that measure, I feel that the answer is starting to be yes.

If markets continue to tumble into next year, then we will have opportunities to buy great companies at even lower PE ratios and higher cap rates. And there is some chance that will be the case.

So another thing I like to think about is taking a long-term approach to making investments. If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month. The markets may move up on you making the later investments more expensive. But they could also move down on your making the later investments more attractive.

Since we don’t know which way markets will move, it is best not to try to time them and just average into a position over a reasonably long time period.

Markets are not rational in the short run. They become overheated at times and those are excellent times to sell some of your investments and move to cash for a while. They also become overly beaten up at times and those are excellent times to deploy that cash back into the markets. Knowing when you are in which situation is critical and fundamental analysis using cap rates and PE ratios and expected returns can be very helpful in determining that.

We spent this past weekend in Mexico City at Bright Moment’s NFT Art CDMX. Bright Moments is the premier NFT art “gallery” in the world. I use that term in parentheses because Bright Moments is much more than a gallery but that word is well understood. USV is a member of the Bright Moments DAO.

Over the course of the weekend, eleven leading NFT artists minted new generative artworks one by one in minting rooms where the collector and the artist saw the work revealed together.

Because there were eleven artists minting their work and also the 1000 mexican cryptocitizens (called Mexas) being minted all at the same time, there was a “live feed” of all of this minting activity in the center of the space.

Hanging out in the main space and witnessing all of the fantastic art coming to life for the first time in real time and in real life was an amazing experience. We did it for two nights this weekend.

I’ve written before about Bright Moments and the in-person experience of experiencing the creation (minting) of generative art. Too much of the NFT experience for my taste happens online and in isolation.

Art is best when it is experienced by a group of people and displayed in a large format where everyone can appreciate it and discuss it together. When you experience generative NFT art that way, it is an aha moment.

Finally, I want to thank the entire Bright Moments team for putting together an incredible event where the artists were front and center along with their amazing work. I came away from it even more excited about where NFT art is going and what it will become.

This post was co-written by Katie Haun and Fred Wilson

The events surrounding FTX have shaken the confidence of many. How did one of the largest crypto exchanges collapse so quickly? Why do meltdowns like this seem to keep happening?

At times like this, it helps to have a long-term view of web3 as a sector, not just a forward-looking long-term view, but also some perspective on where we have come from.

As longtime investors in web3 and board members (also individual shareholders) of Coinbase, one of the oldest and best-known companies in the space, we thought we might share some thoughts.

Web3 is a software-driven innovation that has a built-in financial system. This has been both a strength and a weakness. On the one hand, tokens enable developers and users to contribute to open-source protocols and participate in the economic upside of doing so, leading to strong developer communities. That’s been a positive relative to how software has been developed, monetized, and governed in the past. On the other hand, tokens lend themselves to boom/bust cycles and a sense by many that web3 is simply a speculative endeavor with no real substance behind it. 

This perception is only reinforced by the companies and individuals who started web3 companies and projects with the exclusive intent of making a lot of money very quickly through leveraged trading and speculation, pumping and dumping, and, sometimes, outright fraud.

Most of the well-known meltdowns in web3, going all the way back to Mt Gox and including recent failures like 3AC, Celsius, and Alameda/FTX, have happened to centralized companies operating trading, lending, and speculating businesses. Many of the failures have been offshore and all of them were largely unregulated. These companies and their activities have given web3 a bad name. We have also seen high-profile decentralized projects, like Terra, fail due to flawed design but those failures happen out in the open in a transparent way that is much healthier than the way centralized companies fail.

Contrast that with regulated web3 businesses like Coinbase, Kraken, and Anchorage that operate in the US and you will see that the companies that have followed the rules and behaved properly have weathered these storms. Coinbase’s early innovation was creating a secure, easy-to-use, regulated bridge from fiat currencies to crypto and a safe place to store crypto assets. Coinbase provides a number of important services that have allowed the web3 ecosystem to grow and thrive. 

The most important software innovation of the last decade, which started with the Bitcoin white paper fourteen years ago, is the emergence of open-source software and decentralized protocols that are the foundation of web3.  These protocols have survived recent market volatility. It is the promise of software that is not controlled by a company, but instead by an open-source community with built-in safeguards and increased transparency relative to today’s tech and financial systems, that gives us so much confidence in the future of web3.

These web3 protocols are in active development for mainstream adoption and some key features are still missing. For example, blockchains as they were originally architected are public by default. This is not suitable for most applications. Imagine if your email, banking, and social data were public for everyone to see on a blockchain. Also, blockchains are slow and complex networks. Improvements to performance, scalability, and privacy are happening at the infrastructure level of the web3 technology stack. Emergent technologies like zero-knowledge proofs and rollups are starting to address these issues without compromising decentralization. These breakthroughs are still in the early stages of deployment among a small subset of developers. This is the kind of important work that happens behind the scenes without any coverage. But it is these developments that are preparing web3 for the mainstream.

Eventually, as the web3 infrastructure improves, the user experience gap between self-custody and storing assets on centralized entities will shrink. More users will feel comfortable self custodying their assets in software they control and managing the keys that provide access to their assets themselves. This is how many web3 users interact with decentralized applications, like NFT marketplaces, today.

When web3 becomes a credible alternative to web2 for the masses, large centralized companies like Facebook, Apple, Amazon, and Google will have to compete for access to our data thus redefining how we use the web. Software development will be more open-source and composable. And large financial institutions like banks and brokerage firms (which includes the FTXs of the world) will no longer control our assets and lend them out without our permission.

Ironically, web3 is about giving control of data and assets back to the people and taking it away from large centralized companies. But the transition from web2 to web3 has been slow and messy and many of the early web3 companies have been copycat versions of what came before them. That is where the risk has been in the web3 ecosystem and what we need to move away from.

The lesson of these recent events for policymakers should not be that web3 is bad and must be constrained. It should be that pushing innovation offshore is bad. We need trusted and well-regulated centralized entities to survive and thrive and we also need decentralized web3 protocols to flourish and provide a path to a fully decentralized web. Both are possible and the good news is we are already on a path toward both. We need to stay that course, provide for a healthy web3 sector in the US, and stop pushing US users to risky/shady offshore entities with unclear, uneven, and unfair policy actions.

This is another hard moment for web3 and we will see negative headlines about “crypto” for some time. But it’s important to remember that these headlines are all about the speculating/trading part of web3. The much more important underlying software innovation continues unabated. And that is what we remain so excited about and will continue to fund and champion. 

This post was also shared on the Haun Ventures blog.

I’ve previously written about The $1k Project for Ukraine, which was launched by my friend, Alex Iskold, five days into the Russian aggression. 

Since its inception, the project raised more than $10M and helped 10,000 families and 35,000 children. The AVC community has generously participated.

Last week, Russia announced its withdrawal from Kherson and The $1k Project crew is racing to help the next 1,000 families specifically focusing on the liberated territories. 

This coming winter is going to be absolutely brutal in Ukraine because of the energy crisis.

The Gotham Gal and I have previously made a donation to the project and we received this thank you page from the families we supported.

This past weekend we made another donation to support these families in the newly liberated territories.

If you are able to give and support a family please do so here.

The Gotham Gal and I just spent the last two weeks in Paris. We have been going to Paris together for around forty years and have had a place there for the last decade. It is a place we can go to get away from it all for a few weeks, connect with each other, and enjoy ourselves in a city we love.

I’ve thought a lot about why Paris works so well for us to dial it down a bit and focus more on each other for a while. The time zone is a big part of it. The US doesn’t wake up and start working until early afternoon in Paris so our mornings and lunchtime are all our own. We sleep way later than we sleep anywhere else and stay up later too. The coffee shops I like don’t open until 9am or later so that’s an added incentive to stay in bed a bit longer.

We do find time to work when we are in Paris, but it is generally from mid/late afternoon until dinner time. So the time we work goes down considerably but not to zero and the time together goes up a lot.

Add to that our love of walking through cities and neighborhoods. We do a ton of that in NYC and will walk to and from dinner most of the time in NYC. But walking in Paris is next-level walking. The avenues are wider, the buildings are lower, the light is better, and the architecture fills the streets with beauty. We walk between 10,000 and 20,000 steps every day we are in Paris except for full rainouts, of which we had one on this trip.

And then there is the culture. The museums, the galleries, the nightlife, the restaurants, the stores. You can get all of that in NYC or London or a number of other great cities in the world, but Paris does it so well.

Our stays in Paris are basically less work, more sleep, more culture, more walking, and more fun together. It’s a formula we found many years ago and has never failed us over the years.

On this trip, there were some new things and observations that I thought I’d mention.

1/ Pedal assist bikes and bike lanes: I’ve been doing Velib bikes in Paris since they launched in 2007/2008. I wrote about them back then. But over the last few years, Paris has really upped its bike game. They have cut down lanes for cars and replaced them with bike lanes. They have allowed competitors to Velib in the market and now I have three bike apps on my phone, Velib, Dott, and Lime. The Gotham Gal and I were able to find pedal-assist e-bikes whenever we wanted them with no trouble. Our favorite was Lime which was the most available and their new Gen4 bikes are really good. On Thursday, when we wanted to go to the Paris Photo Show in the 7th, there was a strike on the Metro and so we biked forty minutes, mostly along the River Seine, to the show. It was fabulous. NYC should allow competitors to come into the market and compete with Citibike. When it comes to pedal-assist e-bikes, I think the more options the better. And the way Paris manages the parking spots for the Lime and Dott bikes works pretty well and suggests that the kiosk model that Citibike and Velib use may not be ideal.

2/ English spoken everywhere: Well maybe not everywhere. But over the last decade, since we got our first place in Paris, the number of people we encounter whose English is worse than our French has basically gone to zero. I don’t feel great about my poor french, which gets better over the course of two weeks but is not conversational in the least. But I do feel great about being able to communicate with whomever we need to while we are in Paris.

3/ More and more American ex-pats are living in Paris. Or maybe it’s that we know more American ex-pats living in Paris. Some of them came a decade ago. More came in the wake of the changing political dynamic in the US in the last five years. And the Pandemic brought even more. I did think a few times, “maybe we should join them” but we are not ready to give up the lives we have built in the US over the last forty years. But I do understand why so many US citizens are making Paris their home. It’s a very livable city. And with the dollar so strong, an American income goes a long way in Paris these days. And socialism, which is a scary word to many in the US, seems to work quite well in France. There is a safety net. There are fewer homeless on the streets and there is a sense that people in need are better taken care of in Paris. I don’t know that to be true, but that’s the feeling I get walking around the city for a few weeks.

4/ Property values and rents are more stable: Having bought a couple of apartments in Paris over the last decade, we have come to understand that the real estate markets work a bit differently in France. If an apartment is offered at a price, and you meet that price, the apartment comes off the market for a month while you decide if you absolutely want to buy it. There are no bidding wars as a result. There may be other factors at work as well, but we got the sense that the real estate markets, both purchasing and renting, are moderated in Paris in a way that is absolutely not the case in NYC. We own a lot of property in NYC and have benefitted from increases in the value of our real estate but we feel like those gains came at a great cost, which is that NYC, particularly Manhattan, has become so expensive to own and rent that many stores cannot make it anymore. It’s hard to find a shopping street in Manhattan that doesn’t have multiple vacant stores. We saw very little of that in Paris. And many restaurants we love have remained in the same spaces for over a decade. Again, we don’t know the details of how and why this is, but it is noticeably different and it seems like the model is working in Paris. The streets are alive and vibrant in a way that NYC streets are not right now.

We returned home yesterday having spent a wonderful two weeks together, reconnecting in lots of ways, and with new memories and new adventures under our belt.

I highly recommend that couples find a time and place that they can go unwind and reconnect. For us it is Paris. But it can be almost anywhere that allows you to cut back on work, spend more time with your loved one, and refresh and recharge. It has been working great for us for many years and the longer we do it, the better it gets.