Posts from life lessons

I realize that most businesses are suffering greatly in this pandemic. Many have been shut completely.

But there are some that are experiencing the opposite situation. They have a growth spurt as a result of this moment. Businesses in food delivery, e-commerce, online education, telehealth, remote work, and cloud infrastructure are examples of such situations.

I’ve seen event driven growth spurts over the years. A plane lands in the Hudson and everyone heads to Twitter to see it. A competitor is shut down and everyone shows up on your door. Crypto gets hot and everyone wants in on the action. That sort of thing.

And I’ve been talking to leaders who are experiencing this and wondering how to model out what happens when and if things return to normal.

Each situation is different but a framework I like is to take your pre-event baseline, your event driven peak, and assume you will give up half of the delta when things return to normal and that will be your new baseline.

That won’t be right of course. It’s a model. You can revise as real data comes in.

But what it suggests is that not all of your new customers will stick around. But some will. And you will have a new and higher baseline. That has been true of almost every event driven growth spurt I have seen in my career.

We call it IRL “In Real Life” in the tech sector. IRL is the opposite of the virtual reality/online worlds that we have been reading about in science fiction and slowly building over the past three decades.

I have heard a number of people assert that this pandemic, when we are staying home and working, learning, and playing online, will rapidly increase our comfort with and usage of the virtual world.

I beg to differ. I think this pandemic is showing all of us how much we crave being in real life.

After five weeks of total and complete self isolation in our home, the Gotham Gal and I started inviting another couple over for a socially distant cocktail this week. They come and go via our driveway, we sit in the back yard, separated by ten feet. I serve drinks in latex gloves. We talk. After an hour or two, they depart the same way and we wash everything up in warm soapy water and then have dinner back in our self isolation.

It has made a big difference to our frame of mind.

In person social interaction is the core of being human and I think this pandemic is reminding all of us how vitally important that is.

The tech sector will continue to build virtual worlds and online experiences. We will continue to use them, some more than others. They are valuable, efficient, convenient, and entertaining. But they can not and will not replace in real life experiences. This pandemic has shown me that in spades.

One of the silver linings to this awful pandemic is that things have slowed down a lot. Not just work. Everything really.

I find myself taking more time to do the dishes, work out, meditate, etc. There is less “racing through the day” and more time to do things right and carefully. We clean the house on Sundays and it takes the two of us almost three hours and while I can’t call it enjoyable, there is a certain satisfaction from doing it well and doing it right.

My inbox has less in it and I can spend more time talking to people; my colleagues, the leaders of the companies I work with, friends in the business, etc. I find myself being more proactive and less reactive.

It feels really good. I would happily trade this good feeling for a world in which nobody is dying and nobody has lost their job. It’s a terrible price to pay for more time.

But we are where we are and we can’t go back and change the course of history.

What I am wondering is how we keep this slower pace when the world gradually reopens. And will we? I hope so because it is showing me the cost of going so fast and the benefits of going more slowly.

I promised to post this once it is live and it went live today.

So here it is:

The Gotham Gal and I have been largely self quarantining in our home for the last two weeks and are preparing to continue doing so for a while longer.

It’s a bit depressing to be honest and I’ve been looking for ways to get the proper mental state for what could be an extended stay at home.

My friend Brad Feld wrote a blog post yesterday calling this “spring break at home.” I like that framing. It puts a positive spin on this challenging situation.

Our oldest daughter told me that a lot of great work has been done by people when they were under quarantine for the plague.

So I’ve been thinking about what I can accomplish with all of this new found time. Of course I plan to work as USV is open for business. But I also have down time which I am now going to spend at home.

We certainly could binge on all of the TV shows we’ve never watched (Friday Night Lights, Breaking Bad, The Wire, etc, etc) but somehow I doubt that’s where we are headed.

Our younger daughter suggested I learn French on Duolingo. That’s a possibility. She also suggested I finally learn to cook. That probably isn’t. Thankfully the Gotham Gal is a fantastic cook so I’m set there.

My point is this. It’s a shitty situation we are all in right now. But I’m going to try to make the best of my spring break at home and I hope that all of you can too.

Today is a tough day in the financial markets. Who knows where we will end up at the end of the day, the week, or this month. We’ve already seen the major indexes give up around 20% of their value in a few weeks with today’s down moves at the opening.

I’ve seen this movie before. I had just started working in the venture capital business in 1987 when the stock market crashed 23% on “black monday.” There was the Internet stock meltdown in 2000 when the internet sector went down something like 80% over that bear market. And then there was the financial crisis in 2008.

I don’t know if we are in for another of those moments or something else.

But I do know that good companies can be bought at very attractive prices when markets meltdown. Back in 2008, I was blogging my purchases of Apple, Amazon, and Google during that crisis.

I went back and looked at those blog posts this morning to remind myself of what it was like back then. In this post, I mentioned buying Apple at $90, Google at $320, and Amazon at $40. Those turned out to be fantastic prices when the market bottomed and then started going up again. I eventually sold those positions which of course was a mistake. But even so, it was a great trade.

I was buying these three great companies at less than 10x projected annual cash flow. And they went on to increase their cash flow enormously over the next decade.

Capital markets sometimes put out the for sale sign and if you are patient and wait for bargains to emerge, they will do that.

We are a long way from being able to buy Google and Apple at 10x projected annual cash flow and I am not suggesting we will get to those levels.

But I do know that good companies with resilient businesses and strong balance sheets will survive these occasional crises and that they can be bought with confidence at the right time.

I also know that market meltdowns cause a lot of unwinding of risk and leverage. This is a painful process and the losses can be enormous for investors and financial institutions. That impacts all capital markets, including the private markets.

We may be in for a downturn in all markets and if you have a business that is dependent on the capital markets (ie you are losing money), then you need to be very mindful of that and make sure you are making the financial moves to preserve your cash. On the other hand, if you have a business that is not dependent on the capital markets because you are profitable and/or have a very strong balance sheet, then this environment could be an opportunity to play offense. But you really need to figure out which camp you are in and plan accordingly.

I hope that this crisis will end quickly and that things will return to normal soon. But hope is not a strategy. So we all need to be clear eyed and calmly assess our situation and develop a strategy that gives us the best chance of success.

Back in 2009, I wrote a post called The Venture Capital Math Problem.

I was reminded of it yesterday when I saw this tweet:

1/ It is so damn hard to predict the future.
This 2009 piece from @fredwilson (literally the best in the biz) predicted significant venture industry contraction when in fact the last 10yrs have seen massive expansion.https://t.co/B88t5W6yYA

— Ben Siscovick (@bsiscovick) February 26, 2020

In that post, I argued that the venture capital business could not sustain more than $20bn a year of new capital coming into it and continue to produce good returns to the investors in VC funds.

The venture capital business has been raising north of $50bn per year for much of the last decade and so far, the returns continue to look quite good.

So what did I get wrong in my attempt to solve the venture capital math problem?

I think it set the problem up correctly but I got one assumption very wrong and it was this:

And I assume that the biggest exit each year is $5bn. Yes, it is true that some venture investments turn into businesses like Apple, Google, Microsoft that are worth $100bn and more. But it is also true that most VCs are long gone from those deals before the valuations get to that level. So for the sake of solving this problem, I’d assume the largest exit each year is $5bn and then you have a power law distribution of another 999 deals.

……..

I’ll assume that the biggest deal, $5bn, represents 5% of the total value of all 1000 exits and that the total value of all exits is $100bn per year.

That was off by maybe an order of magnitude or more. Uber IPO’d at $70bn and still trades at north of $50bn. Zoom is now trading at $32bn. Out of the USV portfolio in the last decade we have Twitter at $26bn, Twilio at $16bn, and MongoDB at almost $10bn and a number of high quality public companies trading in the single digit billions.

I suspect that last paragraph that I quoted should read “the biggest deal, $50-100bn, represents 5% of the total value of all exits (likely north of 2000, possibly a lot more) and the total value of all exits is $1-2 trillion per year”

By that math, keeping all other assumptions, formulas, and math the same, the max that can be invested in VC is maybe as much as $100bn per year and we are still well below that level based on the numbers I am seeing.

So what did I learn from this mistake?

I learned that you can’t assume that the past is a predictor of the future. And I learned that it is helpful to ask yourself “what could go right?” instead of “what could go wrong?”

It is also true that the last decade has been one of incredibly low interest rates/cost of capital, and conversely very high PE and revenue multiples on growth stocks. And we have seen companies like Uber, Facebook, etc stay private much longer so the VCs have exited at much higher valuations than was once the case.

We cannot assume that will continue either and it may well be true that the $50bn-$100bn that is going into the venture capital business right now will not get the same returns that the $20bn that was going into the venture capital business in 2009 has gotten.

But regardless, I was dead wrong in that post back in 2009 and I have learned from it. As I have aged, I tend to underwrite to the upside not the downside. That has not been my nature but I have learned that it works better, particularly in the VC business.

Finally, I do not regret writing that post one bit. As I replied to Ben’s tweet when I saw it:

One of so many bad calls I've made over the years. All public. All available for critique. But I can, and do, learn from my mistakes and so can anyone else because I've made them in public.

— Fred Wilson (@fredwilson) February 27, 2020

A year and a half ago, I converted my office at USV from a classic office with a desk to a small conference room with a couch, a chair, and a display for videoconferencing. I call it my “zoom room.”

It looks like this.

You can’t see the display because it is on the wall that the couch is facing. But that is my zoom room office at USV.

I like it so much that I have recreated it elsewhere and my friend Brad Feld gave me a tip that I am now using which is to have two displays on the wall, one for the people you are meeting with and one for the presentation material. That is a big improvement to version 1.0 which I have running at USV.

My day is usually all about meetings. I meet with people in conference rooms, I meet with people in my zoom room, and I meet with people on Zoom. So I don’t need a desk and I don’t need a traditional office anymore. The move to this new office model has been very positive for me.

This is the sixth winter we have spent in Los Angeles. One of the things I have had the hardest time getting used to about life in LA is all of the driving.

But starting last year, I found myself using the LA Metro system a bunch. The catalyst was going to Lakers and Clippers games at the Staples Center. I just could not stomach sitting for up to 90 minutes in traffic to attend a basketball game. Instead I would hop on the Expo line in Santa Monica and arrive at the Staples Center 35-40mins later. On the way home, I would grab a ride with a friend or Uber or some combination of both as traffic heading west at 10pm is almost non-existent.

But then I suggested to The Gotham Gal that we Metro it downtown for dinner and Uber it home. We did that once or twice.

This winter, I have already taken the Metro half a dozen times and I am writing this post on the Metro as I’m taking it to Pasadena from Santa Monica today.

The Metro is not as convenient as the NYC Subway. There are fewer lines, six in total, and I still need to drive to get to it from our house.

But being able to read, work, text with my children, and whatever else I might want to do instead of driving, is fantastic and makes LA a bit more like NYC for me. Which is a good thing in my book.