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I’ve been Chairman of two public companies in my career and the leaders of those two companies sat down and talked yesterday.

I enjoyed watching that very much and hope you do too.

In this nine-minute video, Jim Cramer talks to Josh Silverman, CEO of Etsy, about what makes Etsy “special” and how being special allows them to compete and win against Amazon.

Etsy CEO on Amazon Handmade: It doesn’t really threaten our business from CNBC.

Disclosure: I am the Chairman of Etsy, have been on Etsy’s board for 12 years, and my wife and I own a lot of Etsy stock.

Is Buying Crypto Assets “Investing”

There are few investors I have more respect for than Warren Buffett and Charlie Munger. So much of what I believe as an investor has come from watching them conduct themselves over the last thirty-five years (that’s as long as I have been paying attention to investing as a discipline). I believe in fundamental value, I believe in buying when others are selling, I believe in holding positions you find attractive over very long periods of time, and I believe in a lot more that they have espoused and done.

So when I read the two of them disparaging the purchase of crypto assets, it bothers me. Obviously I don’t agree with them, but I am trying to see what they are seeing and disliking.

This interview that Buffett did with Yahoo! Finance is instructive.

Buffet says:

“If you buy something like a farm, an apartment house, or an interest in a business… You can do that on a private basis… And it’s a perfectly satisfactory investment. You look at the investment itself to deliver the return to you. Now, if you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more.”

When you buy cryptocurrency, Buffett continues, “You aren’t investing when you do that. You’re speculating. There’s nothing wrong with it. If you wanna gamble somebody else will come along and pay more money tomorrow, that’s one kind of game. That is not investing.”

It is clear from those words that Buffett sees crypto assets like a baseball trading card or some other form of collectible. And if that were true of Bitcoin, Ethereum, EOS, Zcash, or many other popular crypto assets, I would agree with him.

But what these crypto tokens are is entirely something else. They are the fuel that powers a new form of technology infrastructure that is being built on top of the foundational internet protocols. Ethereum and EOS are smart contract platforms that allow developers to create decentralized applications (Dapps in the vernacular of crypto). Bitcoin and Zcash are stores of value that allow users to participate in this decentralized application space without the need for fiat currencies.

This is the key phrase of Buffet’s that I feel is incorrect “if you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything.”

Crypto-assets produce decentralized infrastructure. Bitcoin has produced a transaction processing infrastructure that looks a lot like Amazon Web Services (something I am sure Buffett would agree is extremely valuable). Ethereum has produced a similar transaction processing infrastructure which is also able to run smart contracts. I believe smart contracts are the most important innovation we have yet seen in crypto.

What Buffett and Munger may also be saying is that they don’t know how to value this “fuel” that powers the creation of this decentralized infrastructure. If they are saying that, then I agree with them. I don’t know how to value this fuel either. We cannot use discounted cash flow because this decentralized infrastructure may not produce a lot of cash flow. It is designed to create hypercompetitive networks that are self-commoditizing.

It is much more likely that these crypto assets will trade and be valued like currencies that underpin economies. There has been a lot of research and writing on that. I have recommended Chris Burniske’s Cryptoassets book here before and I will do so again. Chris outlines much of this thinking in that book.

I doubt Warren and Charlie will read this post. But if they do, the one thing I would hope they take from it is that instead of disparaging crypto assets with words like rat poison and dementia, they take a little bit of time to understand that what we are seeing here is the creation of a new internet, built upon protocols that allow for decentralized networks to form and tokens that allow people and companies to be compensated for that formation. And that cryptoassets are the fuel that power and compensate for that formation. And that purchasing these cryptoassets is very much a form of investing. And that this investing is the first time that anyone in the world, independent of wealth and domicile, can participate in venture capital style investing in the next big wave of technology.

Google Finance

Google Finance and Yahoo Finance are two web services I have used daily since the early days of the Internet.

I have used Yahoo Finance since it first launched in January 1997.

But after Google Finance launched in 2006, I started using Google Finance more and eventually, it became my default finance site on the web.

Sometime in the last month or two, I can’t remember exactly when, Google revamped Google Finance.

The UI is cleaner and the service is much simpler.

But a lot of the power user features I had come to rely on in my daily work are either gone or buried so deeply that I can’t find them.

I also find it hard to search for a price quote now, which is kind of the most basic feature one would want in a service like this.

Anyway, I have switched a lot of my usage back to Yahoo Finance as a result.

But I am hoping that Google realizes that they messed some stuff up in the revamp and are working on fixing it.

Because I do prefer Google Finance. At least I did.

Taking Money “Off The Table”

One of the hardest things in managing a venture capital portfolio is managing your big winners. A big winner can dwarf the rest of the entire portfolio and you end up sitting on enormous paper profits that you can’t get liquid on. I realize that this seems like a great problem to have, and it is, but it is still a challenging situation.

We faced it in Twitter in 2010/2011/2012, in the years before Twitter went public (which happened in the fall of 2013). We had bought 15% of Twitter for $3.75mm in the first VC round in 2007 and though we had been diluted down a bit in subsequent rounds, we had a very large position that was worth in the neighborhood of $1bn by 2011. Our entire fund was $125mm and so we were sitting on a position that was worth 8x the entire fund. It was a wonderful situation in many ways but I was nervous that macro events or a setback at Twitter could go against us and the position would go down in value, possibly significantly.

The way we managed this issue is we sold a portion of our position in two secondary transactions and in connection with those sales, I stepped off the board, making room for an independent director who would be helpful as the Company scaled and got ready to go public. We sold about 30% of our position in those two secondary transactions for about $250mm and returned 2x the entire fund to our investors.

That allowed us to “chill out” and hold the balance until the IPO, which had a customary 180 day post IPO lockup. After the lockup came off, we distributed the balance of the position, returning another ~$700mm to our investors.

Though we sold stock in the secondary transactions at lower values than the eventual IPO, I have never regretted doing that and believe that it was the right thing for us to do for many reasons.

We have done similar things in many other situations including Zynga, Lending Club, MongoDB, and a number of other investments. We typically seek to liquidate somewhere between 10% and 30% of our position in these pre-IPO liquidity transactions. Doing so allows us to hold onto the balance while de-risking the entire investment.

I was reminded of this topic when I saw the news that Benchmark, First Round, and Menlo sold between 15% and 50% of their positions in Uber to SOFTBANK. I think they all acted rationally and responsibly in doing that. It does not mean that SOFTBANK is making a mistake purchasing the shares. There are many reasons to believe that SOFTBANK made a good deal. But if you look at First Round, for example, they have a position worth $2bn or more at the $50bn valuation of the SOFTBANK tender. I don’t know the exact details, but I believe First Round’s fund that holds Uber is less than $100mm. So they returned something like 8x the entire fund and still hold the majority of their position. That was “well played” in my book. Same with Benchmark. Same with Menlo.

Taking money off the table is smart portfolio management. It is very different from selling your entire position, which could be brilliant but is equally likely to be a mistake. Selling a portion of your position, returning a multiple or two (or eight) of the fund, and holding on to the balance works out for you no matter which way the position goes in the future. If the position blows up, you got a lot out and booked a huge gain. If the position goes up significantly, you make even more money on the part of the investment you retained. If it goes sideway, you got a little bit out early. It is a win/win/win pretty much every way you look at it.

Which takes me to crypto (naturally). If you are sitting on 20x, 50x, 100x your money on a crypto investment, it would not be a mistake to sell 10%, 20% or even 30% of your position. Selling 25% of your position on an investment that is up 50x is booking a 12.5x on the entire investment, while allowing you to keep 75% of it going. I know that many crypto holders think that selling anything is a mistake. And it might be. Or it might not be. You just don’t know.

IPOs Are Back In Favor

I read this piece on Reuters claiming that the huge megafunds in venture and growth equity are “stalling IPOs.”

And while it makes sense at some level, the truth is the exact opposite.

Based on everything I am seeing, hearing, and reading, 2018 and 2019 will be bumper years for tech IPOs, assuming the markets behave.

Uber’s new CEO Dara Khosrowshahi has promised an IPO in 18-36 months. That says 2019 to me.

Hot companies like Stitch Fix are filing to go public this year.

We have a pipeline of strong mature (and increasingly profitable) companies in our portfolio that will head to the public markets in 2018 and 2019.

So when you read stuff on the Internet, don’t take it as correct.

The truth is often the exact opposite.

Diversification (aka How To Survive A Crash)

I was emailing with my friend Harry this past week and we started talking about crypto and the inevitability of a massive crash. I am certain the big crash will happen. I don’t know when it will happen and I think it may be some time before it does. But better safe than sorry. So I’m going to write some thoughts about how to survive it.

I told Harry my personal story of having 90% of our net worth go up in smoke in the dot com bubble and crash.

The only reason it was not 100% was that we owned two significant pieces of real estate that were about 10% of our net worth before the crash and became our entire net worth after the crash.

We were not diversified. We had all of our money in venture capital and internet stocks and had ridden that wave all the way up. Before Flatiron Partners (the venture firm I co-founded at the start of the Internet boom), we had no net worth. So everything we had, we made in the 1996-2000 period. And we essentially lost it all when the bubble burst.

Had we not sold Yahoo! and other stocks to purchase the real estate and pay the taxes on the gains, we would have been wiped out completely.

You might think “you could have sold when things went south” and that is a good point. But when things blow up, your first instinct is that they will come back. They didn’t this time. The selling just continued. A few companies we owned a lot of went bankrupt. These were public stocks that went all the way to zero. So, while it is true that we could have and should gotten out when the bubble burst, we did not, and in some cases could not.

So selling when a market blows up is not the best way to protect yourself from a crash. Selling long before it blows up and diversifying your assets is a much better way. Like we did with real estate, but with a lot more than that.

I like a mix of cash (t-bills, money market funds, etc), blue chips stocks (Amazon, Google, etc), real estate (income producing with little to no leverage), and a risk bucket (venture capital, crypto, etc). I think 25% in each would be a good mix. We have more in the risk bucket but I am in the VC business professionally and have been for 30+ years. 25% in each is where I’d like to get to in time.

I have advocated many times on this blog that people should have some percentage of their net worth in crypto. I have suggested as much as 10% or even 20% for people who are young or who are true believers. I continue to believe that and advocate for that.

But we don’t have that much of our net worth in crypto. We probably have around 5% between direct holdings and indirect holdings through USV and other crypto funds. I think that’s a prudent number for a portfolio like ours.

I know a lot of people who are true believers in crypto and have made fortunes in it. They are “all in” on crypto and have much of their net worth (all in some cases) invested in this sector. I worry about them and this post is aimed at them and others like them. It is fine to be a true believer and being all in on crypto has made them a lot of money. But preservation of capital is about diversification and I think and hope that they will take some money off the table, pay the taxes, and invest it elsewhere.

That is the smart and prudent thing to do. I wish I had done it during the internet boom. I did not, but the next time we made a bunch of money, I did. I learned the hard way. I share my story so that others don’t have to.

Numeraire Is Live

Back in February, I posted about Numeraire.

I wrote:

the Numerai team has now gone a step further and issued a crypto-token called Numeraire to incent these data scientists to work together to build the best models instead of just competing with each other

And roughy four months later, I am happy to write that the Numeraire token is live on the Ethereum blockchain.

You can read more about this here.

Well done Numerai team.

A Man For All Markets

I have had this book, A Man For All Markets, on my kindle for the past year. I can’t recall who recommended it, possibly my friend Jeremy, but I can’t be sure.

A couple weeks ago, I had lunch with my friend Harry and he again suggested it to me. I decided to put it at the top of my to read pile (a virtual pile) and have been reading it for the past week.

It’s a terrific book, nominally the life story of Edward Thorpe, the math professor, blackjack card counter, and hedge fund manager.

The book is a reminder that math, particularly the highly agile mathematical mind, is a very powerful thing. But it is also full of amazing insights on risk and return, from gambling to investing.

I particularly liked this observation that Edward makes after testing his “ten count” system with the the backing of some less than reputable characters:

For the second time, the Ten-Count System had shown moderately heavy losses mixed with “lucky” streaks of the most dazzling brilliance.

My person experience with investing includes plenty of moderately heavy losses and the occasional “dazzling brilliance.

I am pleased to know that pairing is common in all sorts of risk taking ventures.

If you like math, cards, and/or investing, I am sure you will enjoy this book as much as I am.