Posts from VC & Technology

Splitting The Deal

Syndicating an early stage investment is a time honored practice in the venture capital business. It was extremely common in the VC business in the early 80s when I started.

I assume syndicating was a common practice in the early days of the institutional VC business because fund sizes were small, risk was high, and splitting the deal among multiple firms was a good way to manage those things.

Over the years syndication has become less common among large venture capital firms as fund sizes have grown and portfolio diversification can happen in a single fund to manage the early stage risk.

In the angel market (and to a lesser extent seed market), syndication is alive and well and remains very common.

But in the institutional VC market, it is pretty common to see one firm lead and take all of the Series A, another firm to lead and take all of the non-pro-rata amounts of the Series B, and the same in the Series C and Series D. Syndicates are still built but they are built round by round versus in the round itself.

I was thinking about this today and it occurred to me that the three best VC investments I have made in the last ten years, which are also the three best VC investments I have made in my career, were all syndicated in the first VC round, which was a Series A in all three cases.

In each one, I negotiated for a $4-5mm round that bought between 20-25% of the business, and I then offered between 33% and 50% of the amount I had negotiated for to another firm.

In each case, USV could have taken the entire round. We had sufficient capital to do that. But in each case, I wanted some company in the investment and, honestly, I wanted to lay off some risk too.

In each of these three situations, the $1.5-2mm that we “laid off” to others was or is worth hundreds of millions or more and yet I don’t regret the decision in the least.

These syndicate investors each stepped up at critical times and did things for the companies that I could not do and they earned every penny of the returns they got.

So, I am a firm believer in splitting the deal, even when the economics (another word for ownership) suggest that there is no room for others.

My personal track record tells me that splitting the deal works. It helps you step up to something that has a lot of risk but also a lot of upside and it brings other people who can add value into the situation early on.

At a time when we are seeing venture funds get bigger and bigger, I am convinced that the hallmarks of old school early stage investing; small fund sizes, small rounds, and syndicates remain best practices and we continue to do that at USV.

USV Is Hiring Two Analysts

It’s that time again. USV is hiring two analysts, each for a two year rotation.

The hiring process is similar to what we have done in the past, but the role is a bit different. We are adopting more of an apprenticeship model:

For this analyst cycle, we are changing things up a bit by transforming the program into more of an apprenticeship. What does that mean? You will work mostly with two partners at the firm, one of whom will be primarily responsible for your training. We are looking for two people. The first analyst will be working primarily with Andy, the second primarily with Albert.

The USV analyst role has been a nice launchpad for the folks who have done it:

Past analysts have gone on to join other venture firms and even start their own (AndrewCharlieJoel), work at USV portfolio companies (JonathanEric), help launch new products (ChristinaBrian) and start their own companies (ZanderJennifer).

If you are interested in spending a couple years at USV, here is our process:

Our process starts with having candidates answer two questions by recording videos, as well as submitting two short written pieces. These will be due by end of day Thursday, February 15.

From the initial submissions we select a smaller group for telephone interviews and then a set of finalists for in-person meetings. We expect the process to be finished by the end of March and candidates should be available to start work in April or May.

Here are the questions:

Video 1: Why are you interested in the analyst role? [30 seconds]

Video 2: What is an example of an initiative you took outside of school or work? [60 seconds]

Written 1: An email asking for a meeting with the founder of a startup you admire.

Written 2: An argument for why one of the following is either overvalued or undervalued [Twitter, Snap, Bitcoin, Ethereum] [750 words max]

If this seems right up your alley, you can start your application here.

USV Manager Bootcamp

Our USV Portfolio Network Team built a new offering last year called the USV Manager Bootcamp.

The idea is to offer management training classes to our portfolio companies that are too small to be able to offer those classes themselves.

Last week was the sixth bootcamp and the self reported results are pretty impressive:

As I tweeted out last week, this is something other VC firms can do as well. It’s a perfect example of something that works for a portfolio of companies.

If you want to learn more about how this works, our Portfolio Network Team wrote a blog post about it last week.

A Low-Volume, High-Conviction, High-Support Investor

My friend Mark Mullen and his partner Jim Andelman are announcing a new VC firm in Southern California today. They call themselves Bonfire Ventures.

I love how they describe themselves as “a low-volume, high-conviction, high-support investor.” That is who you want at your side when you are starting a business. There are a number of those types of firms out there, USV is one, Bonfire is another, and there are plenty more. But there are also plenty of the other variety; high volume, low conviction, can’t get them on the phone when you need them investors. So finding a high conviction investor to lead your seed or Srs A round is ideal and we have one more VC firm like that now.

Bonfire is based in Southern California, one of the hottest venture capital regions right now, and is focused on “B2B” companies, a sector that Mark and Jim have focused on for the last decade.

I’d like to congratulate Mark and Jim on getting Bonfire off the ground and welcome them to the high conviction club. It’s a good group of VCs and we can always use a few more.

Audio Of The Week: A16Z’s Alex Rampell

I found this wide ranging interview quite interesting.

Alex has been an entrepreneur and is now an investor.

He is operating at the intersection of traditional fintech and crypto, which is a place USV also often occupies.

Board Feedback

Something I am a huge fan of is Board Feedback. I’ve written about this a lot here at AVC and I am writing about it again today. Because it is important and not done regularly in my experience.

A founder/CEO and their team spend a lot of time preparing for a meeting, and then they give the meeting their all, and often the Board leaves and nothing is really said about it.

That sucks. For everyone, but most of all for the CEO.

Here is what I try to do and mostly do. I sometimes mess this up but not often.

After the meeting ends, at least one director, ideally the Chairman if there is one who is not the CEO, or the lead director, or the director who is there in person, should lead an executive session without the CEO and get feedback from all of the directors and observers and then they should sit down with the CEO and provide that feedback in an honest and open way.

The sooner you do this the better. No CEO should ever be wondering how the Board Meeting went, what people are thinking, and how they are doing.

And yet that is often the case. That is malpractice. It is wrong. It should not happen.

ADP Acquires WorkMarket

ADP announced this morning that they have acquired our portfolio company WorkMarket.

This is a bittersweet moment for me.

WorkMarket has been a big part of my personal portfolio for almost eight years.

USV and Spark seeded WorkMarket in June 2010, backing two serial entrepreneurs Jeff Leventhal and Jeff Wald.

The idea was to create a cloud based SAAS application to allow enterprises to manage their contingent workforces which were growing in size and complexity. It seemed like a timely opportunity at the time and it was. Eight years later the SAAS contingent workforce management market is in the hundreds of millions of dollars annually and WorkMarket is the creator and leader of it.

But like all startups, the WorkMarket story has a number of twists and turns. The market was a bit slower to develop than we had initially hoped and it wasn’t until the last few years that big companies started to include contingent workforce management in their SAAS budgets.

We also lost one of the two founders, Jeff Leventhal, when he stepped aside at the end of 2014 and was replaced as CEO by Stephen DeWitt who was recruited to the opportunity by Jordan Levy, who has been everything you could ask for in a co-investor.

The last few years at WorkMarket have been amazing. The senior team that Stephen and Jeff Wald built is among the best that I have had the opportunity to work with. And the contingent workforce market really exploded in 2016 and 2017.

But like all exploding markets, the expanding opportunity brought a lot of new entrants and buyers interested in getting into it. And one of those big companies, ADP, made us an offer we could not refuse, both in terms of the financial opportunity and the fit with their business. ADP has been helping enterprises, large and small, with human capital management solutions for decades and has the customer base, market knowledge, and capital to lean into this opportunity in a way that a venture backed startup never could.

So WorkMarket is now part of ADP and I am pleased with that outcome. Jeff Wald will take over leading WorkMarket for its next phase and he is well suited and deserving of that role. He has been the one constant for the eight years that I have worked on WorkMarket. Everyone else who was there at the start has come and gone. But Jeff and I saw it through from start to finish and I appreciate that very much.

I also want to acknowledge Stephen and the senior team of Grady Leno, Jim Chou, Marcy Shinder, and Tom Benton. As I said, this is an amazing team and it has been a pleasure to watch them build the product, market, and customer base. They are all superstars in my book.

This is the way of the VC business. You get inspired by an idea and a couple founders. You spend a lot of time helping them build something. You give a piece of yourself to the business. And one day, you are done. That day, for me and WorkMarket, is today and I have enjoyed the ride very much.

Timing

There is a big difference between being right about something and being right about when something will happen.

Sadly, to profit from being right you either have to get the timing right or you have to hang in there until the timing is right. The latter can be incredibly painful and most investors don’t have the stomach for it.

This is particularly true of short positions. It is not enough to know that something is going to blow up. You have to know how, why, and when.

On long positions, like venture capital investments, you do have the ability to buy time but it requires a lot of conviction and patience and the carrying costs can negatively impact the returns.

Which is why the best venture capital investments are always the right idea at the right time by the right team.

I remember watching streaming video over a 14.4 modem in 1997. Ten years later YouTube nailed that opportunity. Right place. Right time.

A lot of venture capital investors ask “what can go right” instead of “what can go wrong” and that is exactly the right mindset in VC investing. But you also have to ask “when will it happen and why?”

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.

What Is Going To Happen In 2018

This is a post that I am struggling to write. I really have no idea what is going to happen in 2018.

  • Will the crypto markets continue in their bull cycle? I have no clue. I was showing my daughter’s friend an app that helps people save and invest and he said to me “I don’t need that, I just buy some ETH every week.” I said “that’s a good plan until it isn’t.” I just don’t know when buying crypto will stop being a good idea. It was a great idea in 2017.
  • Will the economy extend its eight year expansion? I have no clue. The longest post WWII economic expansion was 10 years from 1991 to 2001. Can this one beat that one? Maybe. Will this one also burst over the collapse of another tech bubble? Maybe. But again, I have no idea when that might come.
  • Will the corporate tax cuts that are coming from Trump’s tax bill lead to increased hiring and investments, or will companies simply hoard that cash or pay it out in dividends? Likely a bit of both. But I think Wall Street has largely priced in the increased earnings so I’m not sure the tax bill will be a boon for the stock market in 2018.
  • Will the current Internet oligopoly (Amazon, Apple, Facebook, Google) continue to take share from the rest of the sector, or will one or more start to falter? I’d like to see the latter, but I suspect it will be more of the former.
  • Will the rise of massive growth funds (SOFTBANK, Sequoia, etc) lead to the best and brightest tech companies delaying IPOs even longer? The logical answer is yes, but I think the answer may be no. We see an increasing desire of founders in our portfolio to take their companies public.
  • Will the tech backlash that I wrote about yesterday continue to escalate? Yes.
  • Will we see more gender and racial diversity in tech? Yes.
  • Will Trump be President at the end of 2018. Yes.
  • Will the GOP lose control of Congress in the midterm elections. Yes.
  • Will we avoid war with North Korea? I sure hope so.

So there you have it. Ten questions. A few predictions. A lot of unknowns. That is how I am going into 2018.

Happy New Year Everyone.