Posts from Fred Wilson

Feedback

Thanks for all of the feedback on yesterday’s post.

There have been about 250 comments to date and a similar number of email replies.

Not surprisingly the feedback from the email replies was overwhelmingly supportive of removing the comments. It seems that most of the people who read via email don’t wade into the comments. And they email me directly with comments which often leads to a one to one private conversation.

The feedback in the comments was overwhelmingly to keep them. And there were lots of strong arguments for that.

I did get one email from a reader who told me the ability to engage in the AVC comments helped him get through a difficult time in college. That got my attention.

I also got a ton of suggestions on how to modify the comments to make them more manageable (limiting the number and length of comments, limiting the time allowed to post one, charging people to comment, etc). I like that line of thinking a lot but I am limited in terms of what I can do by the Disqus feature set.

I will ponder all of this for a bit and let it all sink it. Thanks for taking the time to tell me what you all think.

Rethinking AVC

I read a lot of email newsletters and I love the simplicity of them.

Receive, read, forward, maybe reply, delete.

If I was starting AVC all over again, I’d head over to TinyLetter, which my daughter uses, and start writing.

But I’ve got legacy issues to consider. I’ve got an archive, a three letter URL with a lot of Google Juice, an RSS feed, a community, and a number of other things that I’ve built up over the years.

Many AVC readers don’t bother with any of that and simply subscribe and read via email. For them, AVC is an email newsletter. The number of readers who engage that way has been growing a lot in recent years and it is now the majority of readers. That speaks volumes to me and suggests that is how most people want to get this content every day.

So I’ve got an email newsletter with a lot more overhead. The community requires moderation and maintenance. We have to actively manage spam. I need to keep up with WordPress, which introduced a new UI that most people dislike (I’m mostly fine with it). I have a hosting service to deal with. And the email and RSS feeds are powered by third parties who do a great job for me but need some level of staying on top of.

That is a fair bit of technical debt that I’ve built up over the years and would go away if I was using a modern newsletter service like TinyLetter.

So I am going to experiment with simplifying AVC a bit in the coming months. One thing I am going to do for sure is cut back on the comments. I have seriously thought about shutting down comments and I have done that for a few posts.

I am either going to shut them down for a week and see how that feels. Or shut them down except for a few posts a week (like Sunday and Tuesday).

The truth is comments are used by a very small portion of the AVC readership. But the people who use the comments are very active and engaged. So removing comments won’t impact a lot of readers, but it will impact the most loyal readers.

So I want to tread lightly here. But I also want to lower the overhead of writing and managing AVC and comments are the highest overhead feature on AVC.

I’m interested to hear what people think of the overall goal and objective of simplification and how I’m thinking about it. And I’m specifically interested in feedback on cutting back on comments.

How I go about doing this is still a bit of a work in progress in my mind and I appreciate the feedback as I think this through.

The Free And Open Internet

I realize that publications need to have a business model to stay afloat. And the past month has seen a number of online publications (and offline publications) layoff a large number of employees. So it isn’t even clear that all of these hard paywalls, soft paywalls, and advertising based models are going to make the online publishing business work.

But the cost of all of this business model exploration and extraction is a continued degradation of the clean and fluid user experience that made the early free and open Internet so compelling.

A few days ago I saw a link on my phone that said “John Dingell’s Last Words For America.” I thought it was worth reading what a lifelong public servant had to say on his deathbed. So I clicked on the link and got this:

I never got to read what a lifelong public servant’s last words for America were. Sure I could have purchased a subscription to the Washington Post, but I don’t believe opinion pieces should be behind a paywall and I certainly don’t believe that something like Dingell’s last words should be behind a paywall. So I’m not going to reward the Washington Post for bad behavior with my money.

The truth is Dingell’s family should never have asked the Washington Post to publish his last words. Even the Washington Post’s owner Jeff Bezos knew to publish his words that he wanted everyone to read on an open platform like Medium.

The mainstream publications, like Washington Post, have ceded their role as the public square to places like Twitter and Medium that remain open and free.

That further limits their relevance. In search of a business model they cede the very thing that made them what they once were.

So what is my point? That paywalls are bad? No, I think subscriptions have their place in the publishing business. But the way paywalls are implemented today stinks. Some content should never ever be put behind one. And paywalls should federate, like the early ATMs did, so that joining one means joining them all.

That won’t get us all the way back to the free and open Internet that sucked us all in twenty plus years ago, but it will get us a lot closer to it.

Video Of The Week: My Talk At Yext Onward 2018

Last fall, the folks at Yext offered to let me have some stage time at their Onward Conference to talk about the K12 CS Education work that I’ve been doing for the last ten years.

I didn’t realize that the talk was online until I saw it today.

So here it is. It’s just under ten minutes.

Funding Friday: Wavelength

Tabletop games (or party games) is one of the top categories on Kickstarter (a USV portfolio company). There has been a real resurgence in these sorts of games in recent years and most of the innovation in this category is happening and being funded on Kickstarter.

Today’s project is Wavelength, a guessing game that looks super fun.

Optimism

I was talking with my friend Jerry today and he said “everything is possible.” I told him I don’t think I am going to be able to dunk on a regulation height rim.

But I subscribe to Jerry’s mantra of optimism.

I posted Albert’s reasons to be optimistic this past weekend and if you haven’t watched it, I highly recommend it.

As Albert states at the start of his talk, you have to be optimistic in the venture capital business.

But I think you also have to be optimistic in life.

My favorite coffee shop near my office closed recently. But a new one opened and I’m optimistic that it will become my new favorite.

The Knicks traded our franchise player last week. But I’m hopeful that we will get some good young players with the picks and sign some great free agents with the cap space.

My knee has been bothering me and my doctor tells me he needs to do arthroscopy on it. But I’m hoping more yoga and strength exercises will be sufficient.

Of course none of what I’m hoping and expecting to happen may come to pass. I may get shit coffee going forward, more losing seasons at MSG, and a scar on my knee.

But I’m not counting on any of that. Why would I?

Routines

I am often asked for advice on productivity. People want to know how I get things done.

The truth is I am not well organized, I don’t use any productivity tools.

I work hard but I don’t work all of the time. I have a decent work life balance.

My secret, if I have one, is routine.

I try to do the same things at the same times every day or every week.

Some examples:

– I like to meditate first thing after I wake up.

– I like to handle personal financial matters on Saturday mornings (something I learned from my Dad).

– I need to blog before I leave home or I have a hard time getting that done.

– I work out before breakfast.

When I stick to my routine, I seem to be able to get a lot done.

When I get out of my routine, things fall apart quickly. It is like dominoes. One falls down and knocks down all of the others.

There are challenges with relying on routine. Lots of traveling, for example, makes it hard to stay in a routine.

But I have not found any organizing principle more powerful than routines and I try to apply them to as much of my life as I can.

Early Liquidity

Ever since I got interested in crypto, I have looked at the emergence of the commercial Internet in the 90s as a roadmap for what to expect.

And while that has largely been useful as a frame of reference, I’ve struggled with the huge bubble of 2017 which felt to me like it came too early relative to the maturity of the sector.

Yesterday I read this post which has a great explanation for that:

The bubble came early because blockchain technology enabled liquidity earlier in its life cycle.

That makes a ton of sense to me and reframes the timelines in my mind.

Phew.

Some of you may have noticed that I waited until very late in the day today to post. I’m struggling a bit with adjusting to time zones, a head cold, and today was just one of those days where nothing went as planned.

I’m not planning on making early evening eastern time my regular routine.

Raising A SAFE Or Convertible Note In Between Rounds

A trend we’ve seen in the financing of startups in the last five years is the “SAFE between rounds” which means raising a convertible note (or SAFE) to provide more capital and runway in between financing rounds. It often comes in the form of an offer by an investor who missed the last round and doesn’t want to miss the next round.

It is a tempting offer because there is no immediate dilution from the capital and it usually converts at the next round price or a small discount to it.

Most founders look at the offer and think “why not?”

Here is why you might not want to do this.

The SAFE or convertible note can “crowd out” new investors in the next round and make it very hard to find a lead investor or any high quality investors.

Let’s do some math to show how this happens.

Let’s say you did a seed round of $1mm where you sold 15% of the company and you did a Series A of $3mm where you sold 20% of the company. Your last round valuation was $15mm post-money and you’ve now sold ~35% of the company to investors. These investors will typically have “pro-rata rights” to participate in the next round. Which means 35% of the next round will go to your existing investors.

Let’s say you hope to double your valuation on your next round and raise a Series B at $30mm pre-money or more in a year to 18 months.

Then someone comes along and offers you a $2mm convertible note or SAFE which converts into the next round. You think “free money, that sounds great.”

But if you take the note, then you have a fair bit of the next round already committed for.

Let’s say the next round is $5mm. The existing investors take 35% of $5mm (or $1.75mm), the note takes $2mm, and you are left with $1.25mm to offer a new investor. It is very hard to find a lead investor who will price the round for only $1.25mm of a $5mm round. And if that round is at $30mm pre-money, $35mm post-money, you are only offering that new investor 3.6% of the company which is not a lot.

Let’s say the next round is $7.5mm, a reasonable amount to raise at $30mm pre-money (20% dilution). The existing investors take $2.625mm, the note takes $2mm, and so you have $2.875mm to offer a new investor to lead and price the round. That is a fairly small number as well and would only purchase 7.7% of the company.

You’d have to raise a $10mm Series B before you’d be able to offer a sizable allocation to a new lead if you have 35% of the round committed to pro-rata rights and a $2mm note converting into it. And even then the new investor can only purchase ~11% of the company and the round will be 25% dilutive at $30mm pre-money.

As you can see, taking a SAFE or convertible note between rounds can make it hard to create enough of an allocation in the next round to attract a high quality lead who will price the round.

So, if taking a SAFE or convertible note between rounds is not a great idea, what should a founder do?

I like to see if the investor who wants to do the SAFE or convert is interested in catalyzing a “Series A1” where you take their money and the pro-rata (or slightly more) from the insiders and price it at a significant markup to the Series A. If they are willing to do that, it often is better for everyone to do that.

That tends to be less dilutive, creates even more runway to get to an attractive B round and it avoids the issue of crowding out money in the next round.

Understanding Your Investors

To some extent, this blog has been about demystifying venture capital and in particular me and the firm I work at, USV.

There are many reasons why I think that is a useful exercise. When I got into the VC business in the mid 80s, it was a fairly opaque business and that did not change a lot over the next 15 years. When the Internet came along, it promised more transparency and I thought that using the Internet to help facilitate more understanding about VC was a good idea.

But also it was, and is, a self interested move. I believe that entrepreneurs are more likely to take money from a firm that they feel like they know, like, and trust. And in the hyper-competitive world of startup finance, being an open book can pay huge dividends. We have seen that to be true again and again.

So understanding your investors is important and reading VC blogs is a good way to increase your understanding of the people who may invest or have invested in your company.

One area that entrepreneurs should take some time to understand is the way that VC funds are structured. The economic terms (management fee and carry) and the durability of the capital (investment period, fund life) are particularly important as they will influence the behavior of your investors.

I have written a fair bit about these issues here at AVC as have others like Brad Feld.

One area where fund structures are different is in the crypto sector. Because crypto tokens become liquid much more quickly than startup equity, and because investors in the crypto sector will want to own publicly traded crypto tokens, the hedge fund model has been adopted by many of the investors in the crypto sector.

Joel Monegro, co-founder of Placeholder.vc and a former USV team member, wrote a good crisp comparison of the venture fund model and the hedge fund model on the Placeholder blog yesterday. USV is an investor in Placeholder.

Joel writes:

The effect of these differences is that hedge fund managers have a greater incentive to maximize short-term profits, as they can be severely affected if the fund underperforms in any given period, while VCs are incentivized to maximize long-term, realized value in order to increase their payout. And this is reflected in how each type seeks profits: in general, hedge funds will tend to trade around market fluctuations, while venture funds tend to build and hold investments to optimize for long-term value.

USV has invested in a half a dozen token funds, often as an initial LP to help the fund get going, and most of the funds we are invested in use the hedge fund model. Placeholder uses a VC model.

So we don’t have a strong point of view about which approach is best. Certainly in terms of maximizing our liquidity, the hedge fund model is best. But for entrepreneurs who want patient stable capital, it may be true that the VC fund model is preferable.

This is something to watch over the next five to ten years as this sector matures and we learn about which structure is preferable for entrepreneurs, fund managers, and fund investors.

We already see hybrid models emerging where a hedge fund structure is used but long lockups are required for investors. It will be interesting to see if the way management fees and carry payouts will evolve as well.

One thing is for sure. Entrepreneurs need to understand how the capital they are taking into their company is structured and what expectations and requirements the suppliers of that capital have negotiated with the fund managers. If you aren’t asking those questions of your investors, you should be.