Posts from VC & Technology

Trust is rising as a central issue in tech and the Internet. We spend a lot of time at USV thinking about trust and talking about trust. It is part of our current investment thesis.

Rachel Botsman is a writer who focuses on trust and her talk at DLD last month was quite good.

Savills World Research, a global property agent, has been ranking the world’s top tech cities based on a bunch of criteria for years. In this year’s rankings, NYC tops SF to become the number one tech city in the world.

This is just one survey and I am certainly not going to assert that NYC has surpassed the bay area in terms of the best place to start a tech company.

But the bay area is absolutely struggling with some challenges. Labor and real estate costs have skyrocketed in the last decade. And from what we are seeing it is easier to convince someone to leave the bay area and move to LA or NYC than it has been in the past. The bay area is not an easy place to live and work anymore.

Truth be told, NYC has some of those same issues, but it has the benefit of five boroughs, a mass transit system that even with all of its problems moves 5.5mm riders a day, and a vibrant business community that is diverse and talented.

Another truth is that any of those thirty cities would be a fine place to start a company. Tech has gone global and so has tech talent. And investors are eager to fund innovative tech companies in many places around the globe.

USV has portfolio companies in about a dozen of those top thirty cities and, while we limit our investments to North America and Western Europe, we certainly hope to increase that number in the coming years.

But regardless of all of that, I am proud of what NYC has been able to accomplish over the last twenty-five years. In the mid 90s, I doubt NYC would have been a top ten city on this list. And now it is number one. Well done Gotham.

The Gotham Gal wanted to get a new laptop. Her late 2015 Macbook has started to fade on her.

So yesterday we made a visit to the local Apple Store and checked out the options. We looked at the Macbooks, the Macbook Airs, and we also looked at the iPad Pros. We debated the choice and she ended up deciding to go for the iPad Pro. We work with a few people who have iPad Pros and love them. And she noticed how much I am using and enjoying my Pixel Slate.

One of the most interesting things about these hybrid tablet/laptop devices is that they run operating systems that are designed for the tablet or phone. They are touch devices like our phones vs mouse devices like our laptops.

A good example of this is how I do email on my Pixel Slate. I could run Gmail in the browser on my Pixel Slate. But I have found it much more pleasing to do email in the Gmail Android App on my Pixel Slate. I swipe emails away like I do on my phone. But I also have the keyboard when I want to write a long response. It is literally the best of both worlds.

I am writing this post on my Pixel Slate (in the WordPress web app in Chrome). When I want to go back up to the start of the post and re-read/edit it, I just swipe up. No messing around with the touchpad, up button, or down button. It is so much more natural, although it took me a while to get used to it.

I am helping the Gotham Gal set up her iPad Pro this morning and we are downloading all of the mobile apps she likes to use on her iPhone. I think that is how she will want to use her new “laptop”.

So if this is the future we are heading into, where the user interfaces and applications our computing devices and our phones use start to converge, it suggests that there is a bit of an opening for new applications that are designed from the ground up to work in this way.

I have written a bit about this topic in recent years, at the end of 2017, and again when the 2018 numbers started showing up.

What has happened over the last five years in venture capital is the seed boom stalled out, the late stage market exploded, and the traditional venture capital business (Series A and Series B) largely remained the same except round sizes, valuations, and fund sizes have all gone up.

Mark Suster posted a great analysis last night of why the seed stage market has stalled out. It comes down to the fact that the traditional venture capital market has not changed much so creating more supply has not resulted in materially more demand.

This chart tells the story well:

As Mark explains, the seed market remains alive and well, but it has grown so large that it can’t continue to grow unless the traditional venture capital market grows too and that has not happened, at least not anywhere near the rate that the seed stage market has grown.

In a companion post, Mark lays out the new architecture of the startup capital markets:

In the first five years of this decade, we saw the seed portion of the market explode. In the last five years of this decade we saw the growth portion of the market explode. But over those last ten years, the middle part, the traditional venture capital market, has not changed much.

That’s an interesting observation in and of itself and something that makes me wonder if that is the next shoe to fall.

A trend we’ve seen in the financing of startups in the last five years is the “SAFE between rounds” which means raising a convertible note (or SAFE) to provide more capital and runway in between financing rounds. It often comes in the form of an offer by an investor who missed the last round and doesn’t want to miss the next round.

It is a tempting offer because there is no immediate dilution from the capital and it usually converts at the next round price or a small discount to it.

Most founders look at the offer and think “why not?”

Here is why you might not want to do this.

The SAFE or convertible note can “crowd out” new investors in the next round and make it very hard to find a lead investor or any high quality investors.

Let’s do some math to show how this happens.

Let’s say you did a seed round of $1mm where you sold 15% of the company and you did a Series A of $3mm where you sold 20% of the company. Your last round valuation was $15mm post-money and you’ve now sold ~35% of the company to investors. These investors will typically have “pro-rata rights” to participate in the next round. Which means 35% of the next round will go to your existing investors.

Let’s say you hope to double your valuation on your next round and raise a Series B at $30mm pre-money or more in a year to 18 months.

Then someone comes along and offers you a $2mm convertible note or SAFE which converts into the next round. You think “free money, that sounds great.”

But if you take the note, then you have a fair bit of the next round already committed for.

Let’s say the next round is $5mm. The existing investors take 35% of $5mm (or $1.75mm), the note takes $2mm, and you are left with $1.25mm to offer a new investor. It is very hard to find a lead investor who will price the round for only $1.25mm of a $5mm round. And if that round is at $30mm pre-money, $35mm post-money, you are only offering that new investor 3.6% of the company which is not a lot.

Let’s say the next round is $7.5mm, a reasonable amount to raise at $30mm pre-money (20% dilution). The existing investors take $2.625mm, the note takes $2mm, and so you have $2.875mm to offer a new investor to lead and price the round. That is a fairly small number as well and would only purchase 7.7% of the company.

You’d have to raise a $10mm Series B before you’d be able to offer a sizable allocation to a new lead if you have 35% of the round committed to pro-rata rights and a $2mm note converting into it. And even then the new investor can only purchase ~11% of the company and the round will be 25% dilutive at $30mm pre-money.

As you can see, taking a SAFE or convertible note between rounds can make it hard to create enough of an allocation in the next round to attract a high quality lead who will price the round.

So, if taking a SAFE or convertible note between rounds is not a great idea, what should a founder do?

I like to see if the investor who wants to do the SAFE or convert is interested in catalyzing a “Series A1” where you take their money and the pro-rata (or slightly more) from the insiders and price it at a significant markup to the Series A. If they are willing to do that, it often is better for everyone to do that.

That tends to be less dilutive, creates even more runway to get to an attractive B round and it avoids the issue of crowding out money in the next round.

My partner Albert gave this talk at DLD 2019 a couple weeks ago.

As a follow up to yesterday’s post, I asked Zach to calculate the percentage of teams with at least one female founder in our last two core funds.

Yesterday, I wrote “I don’t have the exact data on me and it would take more time than I have right now to calculate it, but my guess is that over the last four years, about thirty to fifty percent of the teams we have funded have had at least one woman founder on them”.

Well I am pleased and proud to let you all know that my guess was correct.

Here is the data:

Percentage of investments with at least one female founder:

USV 2014 Fund: 33%

USV 2016 Fund: 43%

Certainly we have more work to do, the female founder ratio is not 50/50 yet, and we have work to do on other areas like people of color, etc.

But I am quite pleased that USV is female founder friendly.

Starting and investing in startup companies is a long lead time business. It takes on average seven to ten years for the seed and early stage investments we make to turn into something.

So looking at data across the entire VC landscape can be confusing. Important trends can be lost in the noise.

Look at these two charts from the All Raise and Pitchbook analysis of the funding of female founders:

The first one tells a troubling story. Female founders are getting a tiny amount of the supply of venture capital and the percentages are not changing much.

The second one tells a promising story. The percentage of teams getting funded that are all male founded is declining and the percentage of teams that have women founders on them, or are all women founders, is rising.

The first chart is dominated by late stage companies (think companies that are 5-10 years old) and the second chart is dominated by earlier stage companies.

Let’s look at this data in five or ten years.

I think we will see a different story.

I don’t have the exact data on me and it would take more time than I have right now to calculate it, but my guess is that over the last four years, about thirty to fifty percent of the teams we have funded have had at least one woman founder on them.

The times are changing in venture, thanks to the hard work by a number of women founders, women angels (like The Gotham Gal), venture capitalists, and some men too, and it is having a big impact. We just can’t see it in the aggregate funding numbers yet.

We will.

Rebecca Kaden, who joined USV in late 2017, was on Bloomberg last May. Somehow, I had never seen this. So I am running it today. If you don’t know Rebecca, you should meet her. She’s leading our efforts in a bunch of areas that she talks about in this interview.