Posts from Fred Wilson

Competing To Win Deals

So I saw this tweet by Semil Shah yesterday:

So I clicked on the link to my Competing To Win Deals post, which I wrote in 2010, and read it. I often read things I wrote a decade or more ago and cringe at how out of date they have become. Not this one. It is as relevant today as when I wrote it almost twelve years ago. So I am reposting it below:


The venture capital business is highly competitive. There is more money out there chasing good deals than most people imagine. It is also true that there are good deals and good entrepreneurs that can’t find anyone to invest in them. That is a failure of the system. But this post is not about that. It is about how a VC can compete and win a deal that many others want.

Here are my rules:

1) Do your very best to connect with the entrepreneur. If you don’t have a great personal connection, you won’t win the deal. Don’t even bother to try to win a deal where you don’t have good personal chemistry with the founder/CEO.

2) Bring your full partnership into the deal process early and consistently. Entrepreneurs are smart and they know they are doing a deal with a firm as well as an individual. Let them see the full picture early. Make it easy on the entrepreneur to meet the full partnership. Don’t make the entrepreneur do all the work.

3) Encourage the entrepreneur to get feedback on you and your firm. Instead of references, I like to give a list of every entrepreneur I’ve ever worked with and an email address. I tell them “throw a dart at that list and talk to four or five of them randomly. you’ll hear the same thing from everyone.”

4) Don’t pressure the entrepreneur to make a decision. Don’t issue exploding term sheets. Don’t put no shops into your term sheets. Those kinds of things are signs of insecurity. I prefer to tell people that we’ll have an exclusive relationship when the deal closes and not before then. If someone wants to leave me at the altar, better it happens then than after we are married.

5) Make your offer in person and don’t do it via a term sheet. Tell the entrepreneur you want to be their business partner. Tell them how much you will invest and how much ownership you want. Leave it at that. Tell them that if they are interested, you will send them a term sheet. Leading with a term sheet focuses the discussion on the wrong things. The process should be all about personal fit and very high level deal terms. Once the decision is made to try to work together, you can get into the specifics of the deal.

6) Add value during the process. Talk about the strategy issues facing the company. Talk about the hiring challenges the company faces. Try to help with these issues even before you are an investor. Show what you can do right away.

7) Use the product or service. Ideally you should be using it well before you start chasing the deal. But use the product/service actively and smartly. The entreprener will be watching. I assure you of that.

8) Don’t feel the need to pay the highest price. Offering a crazy price to win the deal scares off most smart entrepreneurs. They will be wondering why you are so aggressive. Offering a fair price that is in the range is what you need to do. And communicate that if the entrepreneur chooses to work with you, you will be flexible on your offer. That way you put yourself in the position to win and you can work the specifics to close the deal when the opportunity presents itself.

9) Don’t team up with another firm. We’ve made this mistake a few times recently. Entrepreneurs want to choose their syndicate partners. By pairing up with another firm, you signal to the entrepreneur that you want to choose the syndicate and that is a mistake in a highly competitive deal.

10) Be prepared to lose the deal and if you do, lose gracefully. There are plenty of good deals out there. You don’t have to win them all. Lose gracefully and maintain your good relationship with the entrepreneur at all costs. They might come back to you on the next round.

Many of these rules are counter intuitive. But they work well for my partners and me. You might say they will only work for you if you are a top tier investor. That may well be true, but you have to act like a top tier investor to become one. So you might as well play the game that way from the start.

#entrepreneurship#VC & Technology

Keeping It Simple

Investing is humbling. At 60, with 35 years of venture investing experience, I still get most things wrong.

Which is why I like to keep things simple. And when I do I am rewarded.

My friend Gordon asked me last night how I got into Bitcoin. I told him the story of how I bumped into Rikki Tahta walking through the garment district in NYC in the spring of 2011 and Rikki told me he was working on a Bitcoin startup. I replied, “a what coin startup?”. And Rikki told me to read the Bitcoin White Paper. I did and I was hooked.

I didn’t even understand parts of the white paper. But what I did get was that it described a way of making permissionless money. And it was not just an idea. It was a working system that had been operating for several years. I understand how important permissionless servers and applications (web 1.0) turned out to be and so I understood how important permissionless money was going to be.

That was all it took for me. I bought Bitcoin and went about finding a Bitcoin investment to make. That was Coinbase.

The same was true with blogging and tweeting a decade earlier. I met Mena Trott at a Nick Denton party in NYC in 2003 and she explained blogging to me. I was struck by the idea that anyone could be a publisher. And I became one myself a few days later (when I wrote the first post here on AVC). That led me to Twitter a few years later when I saw that most people would prefer to write a text message to the world over a long-form blog post. For those that don’t know, Twitter was initially built to use SMS to post and so the initial 140 character limit was just under the max characters you could put into a text message.

The same is true with NFTs. When I saw Rare Pepes, I was struck with the idea of making unique, rare, and scarce digital goods. And when I saw what Dapper Labs made with Crypto Kitties, I didn’t think too much about making that investment. It helped that the team had contributed to the ERC 721 spec and coined the name NFT.

The point of these stories is that aha moments come around every so often and you just need to let them grab you and take you to a foundational investment. You don’t need to do much due diligence on these. I did none on Twitter, Coinbase, or Dapper. What I did do is use the products, get in the game, feel the power, and get conviction.

You can read the investment memos for those investments on USV.com.

We publish our investment memos for the world to see. When you read them you will notice that they are basically an articulation of a big idea, what could happen, and in these cases, what did happen. That’s all. No technical diligence (had we done any on Twitter, we would have passed on it), no financial models, no talking to industry experts. Just an aha moment and an idea of what could happen.

That’s keeping it simple. It doesn’t always work. We get more wrong than we get right. But when we get it right, amazing things can happen.

#VC & Technology

The Benefits Of Venture Capital In Web3

There is a lot of criticism of venture capital in web3. Bitcoin did not have or need venture capital. Ethereum did not have or need venture capital. So why would any web3 project need venture capital? It is a good question. In the age of community-funded projects, why would a web3 project want to take funding from venture capitalists?

Well buried deep in a 66 page blog post on the Flow blockchain by Packy McCormick lies the answer.

In a section called Kitty Down, Packy describes the challenges that the Dapper Labs team went through between late 2017, when CryptoKitties launched, and the summer of 2020, when Top Shot launched.

What Packy lays out is a series of notes that the venture capitalists (including yours truly) provided to Dapper during the last crypto winter that kept the project alive. As Packy says:

In Dapper’s case, VCs kept the company alive during the bear market and the company sold tokens to the public at the same price it sold them to VCs, even though VCs invested first. 

That latter bit is quite important. After Top Shot launched and it was clear that Dapper and Flow were gonna make it, Dapper offered Flow tokens to the community at the same price that the venture capitalists got in the conversion of the notes.

There are many alternatives to venture capital these days, particularly in web3, but there are few, if any, alternatives that stick with you, when times are tough, when a global pandemic hits and you have weeks of cash left, when everything seems lost and you are at rock bottom.

But venture capitalists do, particularly good, experienced, and confident venture capitalists.

And that is what Dapper had by its side. And that is why Dapper was able to launch the Flow blockchain, NBA Top Shot, the Dapper Wallet, and a bunch more hit products too.

That’s why you might want to take venture capital for your web3 project.

#VC & Technology#Web3

The Range Anxiety Weekend

Electrified cars were greater than 10% of the US market in 2021 and EVs were about 5%. EV sales are growing at nearly 100% YOY and could reach 25% of the US market in a few years. This is good news for the effort to reduce our dependence on fossil fuels. But there are still challenges for the EV market.

Range anxiety and charge times are among the top reasons that consumers avoid EVs.

The Gotham Gal and I have owned EVs for eight years now and have struggled with a few of these issues. But we continue to buy EVs and prefer them to gas-powered cars.

This past weekend, we took a five-hour road trip with our brother and sister-in-law. We each drove our own cars, both EVs. We drove our eight-year-old original Tesla Model S. They drove a Volvo XC40. We ran into a number of challenges that led us to call this road trip our “range anxiety weekend.”

The first issue that arose is that our destination was slightly beyond the range of both of our cars. We needed about 250-260 miles to get to our destination and we both had about 240 miles of range. So we selected a stop for lunch that had EV charging stations.

Fortunately, when we arrived for lunch, both charging stations were free. They were the only charging stations that we could find in this small town. If either had been taken, we would not have been able to charge during lunch and would have had to go on a charging station hunt after lunch.

We had a leisurely two-hour lunch and when we got back to our cars, we had each gotten another forty miles. That was enough to get to our destination so off we went. We did get to our destination with some spare battery but both of us were below twenty miles when we arrived.

The hotel we stayed out told us they had EV charging stations, but it turns out what they had were two Tesla charging stations and we could not find an adapter to charge the Volvo XC40 on the Tesla charger. So the Gotham Gal and I charged our Tesla both nights at the hotel but our brother and sister-in-law were not able to do that.

The next morning we went on an EV charging station hunt and found an Electrify America fast-charging station which took the Volvo XC 40 from empty to full in about two hours. We left that car charging for most of the day and toured the area in our Tesla.

We charged our Tesla again overnight at our hotel and we both had full batteries for the drive back. We picked another lunch destination halfway home that had charging stations and started the trip back.

While the lunch destination on the way home did have both Tesla and non-Telsa chargers, the charging rate was so slow on them that we were not able to get enough additional mileage over lunch to make it home. So the Gotham Gal and I headed to a Telsa Supercharging Station and in about ten minutes got another fifty miles and then made our way home.

Our brother and sister-in-law had to find a fast charger in town and did but it was not easy. And it took a fair bit longer for them to get the extra fifty miles they needed to get home. But get home they did and the range anxiety weekend ended without any major issues.

But here is what we learned from this trip about the availability of charging stations on the road in California:

  • When hotels and restaurants say they have EV chargers, they mostly mean Tesla proprietary charging stations that you need an adapter to use if you are driving something other than a Tesla.
  • When you are on the road, you need fast charging stations. The slow variety, which is mostly what is out there, only work for an overnight charge. So they are OK for a hotel but not for anything else.
  • Tesla has done an incredible job with their supercharging stations. Range anxiety is a signficantly reduced issue if you drive a Tesla.
  • While Electrify America is doing a nice job of buildling out fast charging stations for non Telsa EVs, their charging stations are signficantly slower than Tesla’s superchargers and they are not nearly as prevalent.

Given that range anxiety and charge times are among the top reasons that consumers don’t purchase EVs, it would make sense for the automobile industry to come together and standardize charging outlets and invest heavily in fast (super fast) charging stations. Telsa can likely get away with its own charging network and charging outlets, but everyone else cannot. I don’t understand why this is not a bigger priority for the industry. It needs to be.

#Blogging On The Road#climate crisis

1K Project For Ukraine

My friend Alex Iskold ran the 1K project during the pandemic to help families that were struggling with lost jobs/income, etc. I blogged about it here and AVC readers were generous with their support.

Alex came to the US from Ukraine many years ago, but he has many friends and family members there. So naturally, he has relaunched the 1K project focused on the suffering that is happening in Ukraine.

I supported a family and hopefully, some of you can join me in doing that. And those of you who don’t have the resources to support a family might be able to chip something in. Every little bit helps.

#crowdfunding#Current Affairs

Funding Friday: Codrone

I love using robotics to teach kids to code. A K12 teacher told me many years ago, “when the robot doesn’t do what you told it to do, you know your code is wrong and you need to fix it.” Robotics brings code to life for kids and that’s a great thing.

So when I saw this Kickstarter project, Codrone, I backed it immediately. So did 120 other people and so this project is going to come to life. If you want to back it too, you can do so here.

#crowdfunding#hacking education

A Return To Fundamentals

I wrote a fair bit last year about the disconnect between how companies were being valued and the fundamentals of those businesses. It seemed to me that many companies, from the founders, to the leadership teams, and the rank and file employees got more focused on raising capital and valuations than the basics of a business (people, product, customers, revenues, profits, etc).

That is starting to shift. I can feel it. With the public markets bringing high flyers back to reality, you can now buy the best companies out there at multiples of earnings and profits that make some sense in a historical context. And we are seeing reports that many mutual funds and hedge funds are leaving the private markets because the values in the public markets are so compelling. All of this is healthy.

Vitalik Buterin, the founder of the Ethereum project, said this at ETH Denver this past week.

The winters are the time when a lot of those applications fall away and you can see which projects are actually long-term sustainable, like both in their models and in their teams and their people

Vitalik was talking about a “crypto winter” but the basic point is more broadly applicable.

Business models need to be sustainable. Teams need to stick together and ship things. The fundamentals need to be in place for a business to succeed. All the money in the world at eye-popping valuations won’t do that for you.

I have no idea if we are in for another crypto winter. I have no idea if the stock market will continue to go down. I have no idea if the slump in the public markets will seep into the private markets. All of those questions are above my pay grade.

What I do know is that the businesses that focus on the fundamentals will succeed in any market, up or down. And I do feel that there is more of that going on in 2022 than we saw in 2020 and 2021 and that’s a very good thing.

#entrepreneurship#management#VC & Technology

A Blistering Pace

I wrote about pacing a few years ago. I am a fan of a steady pace, not too fast, not too slow. Sometimes the opportunity set forces you to go faster. As I wrote then:

I don’t think a VC firm should manage to a pacing number. It should manage to the opportunity set that it sees.

In the last two years, the VC business has been operating at a blistering pace, the fastest I’ve witnessed in my 35 years in the business (including the 99/00 era). Whether that is because of the opportunity set or the changing dynamics of fundraising (in-person to zoom, endless capital) we will only know in time.

But it is exhausting. Every day I heard some form of this from an entrepreneur, “we got a pre-emptive term sheet and will be making a decision in the next 24 hours.”

Making sound investment decisions in a week is doable. We have done it. We have done it long before the last two years. We have done it a lot more in the last two years. It helps to have a thesis, to know what you are looking for.

But even so, the VC business has turned into a sprint. And you can’t sprint forever.

My friend Howard tweeted out this blog post yesterday and suggested that every VC read it. So I did.

The author, Abraham Thomas, wrote this:

Across every aspect of venture, timelines keep compressing.

Abraham suggests in that post that this hyperactive market has become riskier even though the numbers don’t show it.

I learned a long time ago not to try to time markets. I don’t know if the VC business is near a top or near a bottom. It doesn’t matter to me. I believe you have to just keep investing, slowly and steadily, in the best opportunities that come your way and the rest will take care of itself.

But we all need to pace ourselves. This is not the public markets. Venture investments take many years to unfold. It is a buy and hold business. It is a invest and help business. It is seeding not harvesting. If you start a marathon with a sprint, you are gonna be puking by mile ten. And that’s my concern right now.

#VC & Technology

NFPs

Early in my career, I was taught that any team member was replaceable and that as long as you had sufficient time to find a suitable replacement, you would be fine. I have operated on that basis since then, imparted that wisdom to the founders and teams that I work with, and have always advocated for that approach to management.

But I have learned that on any team there are always a few members who are extremely difficult to replace. While most team members are “fungible”, there are always a few “non-fungible people” and retaining these NFPs can be incredibly important to the long-term success of the business.

The first, and most important, NFP is the founder. The person who originally conceived of the opportunity, recruited the first few team members, scoped (and often built) the first product, brings immense value to the business, mostly around long-term vision, setting the culture and values, and knowing when something is “off.” Retaining the founder’s interest in and involvement with the business is critical. There are times when the founder is bringing more difficulty to the business than value and they should depart. But those situations are to be avoided if possible because of how important a founder is to the business.

NFPs are usually individual contributors, not managers. The management function is much easier to replace than a uniquely skilled individual. A common mistake that I and others have made is to promote an NFP into management when they are much happier not managing people. A classic role for an NFP is the CTO of the business. In this role, the person sets the overall technology direction of the business, makes the hardest technical decisions, builds technology themselves, but does not manage the engineering function. In many companies, the CTO has no direct reports.

You can find NFPs in any part of the company. They are not limited to technical functions. You can have an NFP in customer service, finance, legal, marketing, really anywhere. The key is to identify them and recognize them, reward them, compensate them, and retain them.

More and more companies are moving to compensation models where critical individual contributors can make as much, or more, than their manager or any manager. This has long been common in sales where commission models create such opportunities and where there are often NFPs, but I am seeing more and more companies recognize that simply compensating people on the basis of their management level is incorrect and leads to their best people moving into management, underperforming in that role, and departing.

NFPs are pretty rare. Most people are easily replaceable given sufficient time to do a proper search. But there are always a few people who are not replaceable. Identifying them and retaining them should be a key goal of the management of the business.

#management