Posts from VC & Technology

John Buttrick has been a partner at USV for almost a decade. He mostly focuses on financial services but also does a few other things for us.

In this chat with John Siracusa, John talks about how he ended up at USV, our investing thesis, and a number of financial services investments he has made and manages for us.

Entrepreneurship and startup investing is a long game. It requires patience, resilience, capital, commitment, and much more.

But even so, the average life of a venture capital investment is seven to ten years. It is rare for it to go longer than that. But it can happen.

Yesterday marked the end of an almost twenty-year relationship between me and what was once a startup and is now a fairly large company called Return Path. We announced yesterday that Return Path is being acquired by Validity.

My former venture capital firm, Flatiron Partners, that has not been actively investing since 2000, made its final investment in Return Path in mid-2000. I joined the board shortly after that and have been working with the founder and CEO Matt Blumberg ever since.

In many ways, this company and this entrepreneur define my career more than any other. Matt and I stuck with this company and each other for almost twenty years and in the process built an incredibly trusting, supportive, and, ultimately, profitable relationship.

We had partners in this long game. Brad Feld and Greg Sands joined the board a year or two after I did and they are among my closest friends in the venture business now. And we have had incredible independent directors like Scott Petry, Jeff Epstein, and Scott Weiss. The management team has turned over something like a half dozen times in twenty years but a few leaders have stuck it out including Jack Sinclair, George Bilbrey, and Ken Takahashi. All of these people are responsible for an incredible journey that I have gone on for the last twenty years with this company.

Matt and I have been through a lot together. We had a least four or five near death experiences when we should have lost the company but did not. We had a deal to sell the company fall through the night before the closing. We sold lines of businesses, we bought lines of businesses, we did several large reductions in force, we did several big expansions. We hired and parted ways with many executives.

Through all of that, we celebrated with each other, yelled at each other, cried with each other, annoyed each other, frustrated each other, and supported each other. Matt has made me a much better investor. He has taught me so much about supporting entrepreneurs, building and leading a great board, and hanging in there against long odds for a very long time.

When you see me do something, say something, explain something, here or elsewhere, my approach and philosophy comes from my experiences and nowhere did I get more experience than my time working with Matt and Return Path. So if you are getting any benefit from me, you are getting that benefit from Matt too.

I hope to work again with Matt and his team on another company or two or three. Hopefully they won’t all take twenty years.

After predicting an IPO bonanza in my new year’s day post in 2015, and being largely wrong about it for four years, we are finally seeing it happen.

I am not exactly sure what it is about this year, as opposed to any of the last five years, that has drawn all of these highly valued private companies into the public markets, but here we have it.

It does take a number of years for a privately held company to prepare to be a public company. They need to get their finance and legal houses in order, they need to beef up their teams in these areas, and they need to make sure they have a repeatable business that they can manage under the spotlight of the public markets.

Already we have seen S1s from Lyft, Pinterest, and Zoom. And we are likely to get them soon from Uber, Slack, Airbnb, and a host of others, in the coming months.

I see this as largely beneficial to the startup sector for the following reasons:

1/ We will have benchmarks from highly liquid markets in terms of what these high growth tech companies are worth. Until now, most of these benchmarks have come from illiquid private market auctions, which are not exactly the best price discovery mechanisms.

2/ Many employees, angels, seed investors, VCs, and growth investors will get liquidity from these investments and recycle it back into the startup sector. More capital means more startups and more innovation.

3/ Limited Partners, the providers of capital to venture capital and growth equity funds, will get large distributions which will give them more confidence in the startup sector and they will continue or perhaps step up their commitment to invest in early stage technology.

4/ These newly public companies will be able to accelerate their acquisition programs now that they have liquid stock and cash to fund those deals. That will further flow capital back into the startup sector.

Of course there will be negatives. It will be harder than ever to afford to live in the bay area. But tech folks from the bay area are certainly welcome in NYC, LA, and any number of other startup regions around the US. Get paid on your stock and move to a more affordable and liveable region!!!

And the monster funds that have been advocating staying private forever will have to argue why these IPOs are not what every other startup should be aiming for. And I think that argument is going to be harder and harder to make with this IPO bonanza under way.

All in all, I think the IPO bonanza that is under way in 2019 is a good thing. I have been expecting it and wanting it for years and I am pleased that it is now upon us.

When early stage investors make an equity (angel, seed, Srs A, Srs B) investment, they typically negotiate for something called a pro-rata right which gives them the right to maintain their ownership in the company by investing in future rounds on the same terms as new investors.

I have written about the pro-rata right a bunch here at AVC. I think it is one of the most important things that early stage investors get from their investments. Obviously the ownership an investor gets is the most important thing, but the ability to maintain it by making additional investments is also very valuable and can be the source of out-performance of an early stage portfolio (against whatever benchmark one might be using).

At USV, we value the pro-rata right and exercise it very frequently. We often will make five, six, or seven investments in a company between when we make our initial investment and when we make our final investment. We even have a follow-on fund called the Opportunity Fund, that allows us to take our pro-rata in companies that continue to raise privately and delay going public. Our Opportunity Fund will also make some investments in companies that aren’t currently in our portfolio. But a large part of our Opportunity Fund thesis is about maintaining ownership via our pro-rata rights.

In the last ten or so years, companies, lawyers, boards, management teams, founders, and in particular late stage investors have been disrespecting the pro-rata right by asking early stage VCs to cut back or waive their pro-rata rights in later stage financings. This can happen as early as Series B (and happens to angel and seed investors in Series A rounds), but it is even more common in the later stage rounds like Series C and beyond.

I think this is bad behavior as it disrepects the early and critical capital that angels, seed investors, and early stage VCs put into the business to allow it to get to where it is. If the company agrees to a pro-rata right in an early round, it really ought to commit to live up to that bargain. But increasingly nobody does that and it is a black mark on the sector in my view. We make commitments knowing that we don’t plan on living up to them. It is very unfortunate.

The reason this happens is that allocations get tight in later stage rounds, particularly where the company is doing well and everyone wants to get into the round. The new investors, including the investor that is leading the round, will almost always have a minimum amount of ownership they want to get to in the round and the math tends to work out that the only way to get there is to cut back the early investor’s pro-rata rights.

Sometimes the way the gap is filled is by creating secondary for founders, early employees, and early investors. That can work and is sometimes good for everyone involved. That “trick” has been the saving grace on this issue over the last few years.

But I believe we are at a crossroads on this issue and I am wondering if early stage investors need to put more teeth into our pro-rata rights to insure they are honored. What if a company that was unable to offer a full pro-rata right to an early stage investor in a later round was forced to go back and change the price of an earlier round to make it up to the early stage investor? Or what if an early stage investor got warrants at the new round price to make up for an inability to honor the pro-rata right?

These are just two suggestions I came up with in a few seconds of thinking about it. But I would really like to force early stage companies, their lawyers, and their boards to think clearly and carefully about the pro-rata right when granting it. The current practice seems like “we can give this because we always get away with not honoring it down the road” and frankly that sucks.

I get asked frequently whether it is better to back the team or the product (the “jockey or the horse”).

It is not that simple in my view.

When I think about the big wins we have had over the years, they almost all exhibited a combination of a large market, a great product, and a talented founding team.

Some investors feel that the team doesn’t matter. They believe that you can replace the team if everything else works out. But I don’t think everything else works out if you don’t have a talented founding team.

Some investors feel that product doesn’t matter. They believe that you can pivot into something else if you have a talented founding team. While that is certainly the case, pivots are expensive in terms of capital, time, and focus. I would not choose to go through one given the choice.

And large market is critical. You can build a nice business in a small market, but you can’t build a big business in a small market.

My point is you really need all three, market, product, and team, to get the big wins that the venture capital model requires.

And in terms of finding the best opportunities, I would start with large markets, go searching for teams working in them, and writing checks only when you find talented teams working in large markets who have built excellent products.

I saw Zuck’s post on pivoting to private interactions from public posts yesterday and I had a flashback to Bill Gates’s Internet Tidal Wave memo to his company almost twenty-five years ago.

I have always seen a lot of Gates in Zuck. They both have this incredible ability to see someone else’s product and realize that they need to build their own version of it.

But copying someone else’s product is a lot easier than copying someone else’s business model, particularly when you already have a fucking great one that makes you and your shareholders billions of dollars a year.

It will be interesting to watch Zuck do what Gates was ultimately unable to do – completely reboot the company’s business model to position itself to win the next wave in tech.

In the case of Gates, it was the pivot from paid software to free advertising supported software (aka – the attention economy that we are now paying for).

In the case of Zuck, it will be the pivot from monetizing attention to monetizing the protocol. The good thing is he is headed in the right direction, and surrounded some of the smartest people I know in crypto. The bad news is when you have this anchor called a legacy business model, it means making the right moves and making them quickly a lot harder.

Here is an example of one of those choices Facebook will need to make and make correctly:

If @facebook’s stablecoin goes the private blockchain route it will be to #crypto what @Microsoft’s Internet Explorer was to the Internet.

— Chris Burniske (@cburniske) March 4, 2019

In any case, it is game on. Being on the verge of 60 years old means I have seen this game play out at least once before and so I have a frame of reference to observe it. That’s really great. It is an exciting time again in tech.

Howard has a great (and short!) post on how blogging publicly gives you a timeline on how you were thinking at a given time. He’s right, it is awesome to be able to go back and see what you were thinking and evaluate it in hindsight.

Like my “What Is Going To Happen In 2019” post.

Sitting here two months and a few days into 2019, I could not have been more wrong about the first couple predications I made in that post.

The stock market has been on fire and the President is still firmly in charge.

Of course all of that could change.

It is still early days in 2019.

But going back and re-reading that post is super helpful in reminding me that my assumptions may be wrong and I need to re-evaluate the assumptions to make sure I am heading in the right direction.

And blogging (aka taking a stand publicly) is a great way to do that.

I walked out of my house in LA this morning and was greeted with this sight:

I thought “ugh” and debated picking it up and putting it where it belongs.

I am all for progress and understand that there are costs and benefits with everything.

This post explains how electric scooters can and likely will result in massive reductions in carbon emissions (and that Steve Jobs was a big fan of electric scooters).

With that electricity subtracted, the net amount of mitigated carbon equals 17,130 metric tons. Let’s reduce this number by 20% for people who would have walked and for chargers picking up scooters in their cars. Now we’re looking at a total amount of 13,700 metric tons of CO2 mitigated by not driving a car.That’s the equivalent of taking 105,000 cars off the roads around the world, each day.

https://medium.com/cleantech-rising/the-environmental-impact-of-electric-scooters-8da806939a32

That is a big deal. It is really hard for me to be against electric scooters when I see people riding them to work instead of driving or being driven in cars.

But the way electric scooters have been rolled out here on the west side of LA leaves a lot to be desired. I have counted at least five suppliers of electric scooters in my neighborhood. There seems to be no limit on new entrants. And the big product market fit innovation that unlocked electric scooters, the dockless network (which I’ve been a fan of on this blog), is also the cause of much of the “ugliness” of them.

I have no doubt that the electric scooter providers will innovate on the model and the product and figure out how to alleviate many or possibly all of this ugliness over time. But until then we will be picking up scooters from our lawns and sidewalks.

It is no wonder that large swaths of society are getting tired of tech companies, startups, and disruption and are starting to say “no mas.” We in startup land have learned that the winners beg for forgiveness instead of ask for permission. And you won’t find a bigger fan of and promoter of permission-less innovation than me and my colleagues at USV.

If we wait for those in power to grant permission to innovate we won’t get anywhere. Most everyone understands that.

So we end up with ugliness. And that is a big challenge for innovators. Can we innovate a little more beautifully? I don’t know but I hope that we can try. If we don’t, we will see even more backlash than we are seeing now.

Mark Suster wrote a post this weekend laying out some rules for being a good board member before the meeting, in the meeting, and outside of the meeting. It is a very good list. I particularly like his rules for outside of the board meeting and agree with him that is the most important part of being a board member.

I try to follow these rules except “let others speak.” That is a joke but I am known for taking up a lot of airtime in meetings, not only board meetings. It is something I’ve been working on for thirty-five years and something I expect I will be working on for the rest of my life. I just get so into it and can’t help myself.

Which leads me to my rule for being a good board member.

It comes down to one word.

Care.

If you care, really care, deeply care, like the way a parent cares for a child, you will be a good board member.

Of course, you have to do a lot of work; preparation work, people time, relationship work, reading, studying, etc to be good at this job.

But all that comes easy if you just deeply care about the company, the people running it, and everybody in and around it.