Posts from VC & Technology

Competing To Win Deals

So I saw this tweet by Semil Shah yesterday:

So I clicked on the link to my Competing To Win Deals post, which I wrote in 2010, and read it. I often read things I wrote a decade or more ago and cringe at how out of date they have become. Not this one. It is as relevant today as when I wrote it almost twelve years ago. So I am reposting it below:


The venture capital business is highly competitive. There is more money out there chasing good deals than most people imagine. It is also true that there are good deals and good entrepreneurs that can’t find anyone to invest in them. That is a failure of the system. But this post is not about that. It is about how a VC can compete and win a deal that many others want.

Here are my rules:

1) Do your very best to connect with the entrepreneur. If you don’t have a great personal connection, you won’t win the deal. Don’t even bother to try to win a deal where you don’t have good personal chemistry with the founder/CEO.

2) Bring your full partnership into the deal process early and consistently. Entrepreneurs are smart and they know they are doing a deal with a firm as well as an individual. Let them see the full picture early. Make it easy on the entrepreneur to meet the full partnership. Don’t make the entrepreneur do all the work.

3) Encourage the entrepreneur to get feedback on you and your firm. Instead of references, I like to give a list of every entrepreneur I’ve ever worked with and an email address. I tell them “throw a dart at that list and talk to four or five of them randomly. you’ll hear the same thing from everyone.”

4) Don’t pressure the entrepreneur to make a decision. Don’t issue exploding term sheets. Don’t put no shops into your term sheets. Those kinds of things are signs of insecurity. I prefer to tell people that we’ll have an exclusive relationship when the deal closes and not before then. If someone wants to leave me at the altar, better it happens then than after we are married.

5) Make your offer in person and don’t do it via a term sheet. Tell the entrepreneur you want to be their business partner. Tell them how much you will invest and how much ownership you want. Leave it at that. Tell them that if they are interested, you will send them a term sheet. Leading with a term sheet focuses the discussion on the wrong things. The process should be all about personal fit and very high level deal terms. Once the decision is made to try to work together, you can get into the specifics of the deal.

6) Add value during the process. Talk about the strategy issues facing the company. Talk about the hiring challenges the company faces. Try to help with these issues even before you are an investor. Show what you can do right away.

7) Use the product or service. Ideally you should be using it well before you start chasing the deal. But use the product/service actively and smartly. The entreprener will be watching. I assure you of that.

8) Don’t feel the need to pay the highest price. Offering a crazy price to win the deal scares off most smart entrepreneurs. They will be wondering why you are so aggressive. Offering a fair price that is in the range is what you need to do. And communicate that if the entrepreneur chooses to work with you, you will be flexible on your offer. That way you put yourself in the position to win and you can work the specifics to close the deal when the opportunity presents itself.

9) Don’t team up with another firm. We’ve made this mistake a few times recently. Entrepreneurs want to choose their syndicate partners. By pairing up with another firm, you signal to the entrepreneur that you want to choose the syndicate and that is a mistake in a highly competitive deal.

10) Be prepared to lose the deal and if you do, lose gracefully. There are plenty of good deals out there. You don’t have to win them all. Lose gracefully and maintain your good relationship with the entrepreneur at all costs. They might come back to you on the next round.

Many of these rules are counter intuitive. But they work well for my partners and me. You might say they will only work for you if you are a top tier investor. That may well be true, but you have to act like a top tier investor to become one. So you might as well play the game that way from the start.

#entrepreneurship#VC & Technology

Keeping It Simple

Investing is humbling. At 60, with 35 years of venture investing experience, I still get most things wrong.

Which is why I like to keep things simple. And when I do I am rewarded.

My friend Gordon asked me last night how I got into Bitcoin. I told him the story of how I bumped into Rikki Tahta walking through the garment district in NYC in the spring of 2011 and Rikki told me he was working on a Bitcoin startup. I replied, “a what coin startup?”. And Rikki told me to read the Bitcoin White Paper. I did and I was hooked.

I didn’t even understand parts of the white paper. But what I did get was that it described a way of making permissionless money. And it was not just an idea. It was a working system that had been operating for several years. I understand how important permissionless servers and applications (web 1.0) turned out to be and so I understood how important permissionless money was going to be.

That was all it took for me. I bought Bitcoin and went about finding a Bitcoin investment to make. That was Coinbase.

The same was true with blogging and tweeting a decade earlier. I met Mena Trott at a Nick Denton party in NYC in 2003 and she explained blogging to me. I was struck by the idea that anyone could be a publisher. And I became one myself a few days later (when I wrote the first post here on AVC). That led me to Twitter a few years later when I saw that most people would prefer to write a text message to the world over a long-form blog post. For those that don’t know, Twitter was initially built to use SMS to post and so the initial 140 character limit was just under the max characters you could put into a text message.

The same is true with NFTs. When I saw Rare Pepes, I was struck with the idea of making unique, rare, and scarce digital goods. And when I saw what Dapper Labs made with Crypto Kitties, I didn’t think too much about making that investment. It helped that the team had contributed to the ERC 721 spec and coined the name NFT.

The point of these stories is that aha moments come around every so often and you just need to let them grab you and take you to a foundational investment. You don’t need to do much due diligence on these. I did none on Twitter, Coinbase, or Dapper. What I did do is use the products, get in the game, feel the power, and get conviction.

You can read the investment memos for those investments on USV.com.

We publish our investment memos for the world to see. When you read them you will notice that they are basically an articulation of a big idea, what could happen, and in these cases, what did happen. That’s all. No technical diligence (had we done any on Twitter, we would have passed on it), no financial models, no talking to industry experts. Just an aha moment and an idea of what could happen.

That’s keeping it simple. It doesn’t always work. We get more wrong than we get right. But when we get it right, amazing things can happen.

#VC & Technology

The Benefits Of Venture Capital In Web3

There is a lot of criticism of venture capital in web3. Bitcoin did not have or need venture capital. Ethereum did not have or need venture capital. So why would any web3 project need venture capital? It is a good question. In the age of community-funded projects, why would a web3 project want to take funding from venture capitalists?

Well buried deep in a 66 page blog post on the Flow blockchain by Packy McCormick lies the answer.

In a section called Kitty Down, Packy describes the challenges that the Dapper Labs team went through between late 2017, when CryptoKitties launched, and the summer of 2020, when Top Shot launched.

What Packy lays out is a series of notes that the venture capitalists (including yours truly) provided to Dapper during the last crypto winter that kept the project alive. As Packy says:

In Dapper’s case, VCs kept the company alive during the bear market and the company sold tokens to the public at the same price it sold them to VCs, even though VCs invested first. 

That latter bit is quite important. After Top Shot launched and it was clear that Dapper and Flow were gonna make it, Dapper offered Flow tokens to the community at the same price that the venture capitalists got in the conversion of the notes.

There are many alternatives to venture capital these days, particularly in web3, but there are few, if any, alternatives that stick with you, when times are tough, when a global pandemic hits and you have weeks of cash left, when everything seems lost and you are at rock bottom.

But venture capitalists do, particularly good, experienced, and confident venture capitalists.

And that is what Dapper had by its side. And that is why Dapper was able to launch the Flow blockchain, NBA Top Shot, the Dapper Wallet, and a bunch more hit products too.

That’s why you might want to take venture capital for your web3 project.

#VC & Technology#Web3

A Return To Fundamentals

I wrote a fair bit last year about the disconnect between how companies were being valued and the fundamentals of those businesses. It seemed to me that many companies, from the founders, to the leadership teams, and the rank and file employees got more focused on raising capital and valuations than the basics of a business (people, product, customers, revenues, profits, etc).

That is starting to shift. I can feel it. With the public markets bringing high flyers back to reality, you can now buy the best companies out there at multiples of earnings and profits that make some sense in a historical context. And we are seeing reports that many mutual funds and hedge funds are leaving the private markets because the values in the public markets are so compelling. All of this is healthy.

Vitalik Buterin, the founder of the Ethereum project, said this at ETH Denver this past week.

The winters are the time when a lot of those applications fall away and you can see which projects are actually long-term sustainable, like both in their models and in their teams and their people

Vitalik was talking about a “crypto winter” but the basic point is more broadly applicable.

Business models need to be sustainable. Teams need to stick together and ship things. The fundamentals need to be in place for a business to succeed. All the money in the world at eye-popping valuations won’t do that for you.

I have no idea if we are in for another crypto winter. I have no idea if the stock market will continue to go down. I have no idea if the slump in the public markets will seep into the private markets. All of those questions are above my pay grade.

What I do know is that the businesses that focus on the fundamentals will succeed in any market, up or down. And I do feel that there is more of that going on in 2022 than we saw in 2020 and 2021 and that’s a very good thing.

#entrepreneurship#management#VC & Technology

A Blistering Pace

I wrote about pacing a few years ago. I am a fan of a steady pace, not too fast, not too slow. Sometimes the opportunity set forces you to go faster. As I wrote then:

I don’t think a VC firm should manage to a pacing number. It should manage to the opportunity set that it sees.

In the last two years, the VC business has been operating at a blistering pace, the fastest I’ve witnessed in my 35 years in the business (including the 99/00 era). Whether that is because of the opportunity set or the changing dynamics of fundraising (in-person to zoom, endless capital) we will only know in time.

But it is exhausting. Every day I heard some form of this from an entrepreneur, “we got a pre-emptive term sheet and will be making a decision in the next 24 hours.”

Making sound investment decisions in a week is doable. We have done it. We have done it long before the last two years. We have done it a lot more in the last two years. It helps to have a thesis, to know what you are looking for.

But even so, the VC business has turned into a sprint. And you can’t sprint forever.

My friend Howard tweeted out this blog post yesterday and suggested that every VC read it. So I did.

The author, Abraham Thomas, wrote this:

Across every aspect of venture, timelines keep compressing.

Abraham suggests in that post that this hyperactive market has become riskier even though the numbers don’t show it.

I learned a long time ago not to try to time markets. I don’t know if the VC business is near a top or near a bottom. It doesn’t matter to me. I believe you have to just keep investing, slowly and steadily, in the best opportunities that come your way and the rest will take care of itself.

But we all need to pace ourselves. This is not the public markets. Venture investments take many years to unfold. It is a buy and hold business. It is a invest and help business. It is seeding not harvesting. If you start a marathon with a sprint, you are gonna be puking by mile ten. And that’s my concern right now.

#VC & Technology

The Selloff

The stock and crypto markets have started off the year in selloff mode, with the Nasdaq down almost 5% this week and the big crypto assets down almost 10% this week. But this selloff has been going on for a lot longer than one week. It has been going on since early November when the Nasdaq peaked at $16k and BTC hit $67k. Since then it’s been downhill and the biggest carnage has been in the highflying “cloud” stocks. The Gotham Gal and I own a few stocks that have been cut in half in the last two months. Yes, they lost half of their value in the last two months.

Of course, these highflying stocks have only given up some of their gains over the last two years. In the case of a few of our public stock holdings, they went up 10x in the last two years and are now “only” up 5x. Easy come, easy go.

Even at these new “discount” prices, none of these stocks look cheap to me. Most are still trading well in excess of 10x revenues which has always been my baseline for a subscription-based software business. I don’t know where they will bottom out, but it certainly could be lower. Or the sector could have already bottomed out in this first week of 2022 blowout sale. One never knows where the bottom is until you are well on your way back up.

The capital markets have been awash in money for the entire pandemic and it has resulted in some crazy prices being paid for public stocks and for growth rounds in high-performing privately held companies. The optimist in me sees this selloff as a return to normalcy, in the capital markets and in the world we live in. It’s hard to see a return to normalcy when offices remain closed, events are being postponed or moving to virtual. But markets tend to see things first and I do wonder if the capital markets are coming back to earth in anticipation of things getting better this year.

It also makes me wonder if the “pay any price” mentality in venture may ease up a bit this year. When the IPO markets or the M&A markets can’t/won’t be able to pay more for a business than the private markets are paying, that’s unsustainable. It can last a few quarters, maybe even a year. It can’t last forever. We will see.

#crypto#stocks#VC & Technology

What Is Going To Happen In 2022

So last year I made a bunch of predictions that with one exception were kind of obvious. I don’t want to do that again, so I am going to list five things that I think will happen this year that most people would not likely agree with.

1/ As the pandemic evolves into an endemic in the first half of 2022, companies will reopen their offices and their employees will largely opt to go back to working together in offices.

I qualified this with “largely” because I don’t think we will go back to everyone in the office again. Companies have become much more comfortable hiring remote employees who don’t live near a company office. Employees have made it clear that they want/need the flexibility to work from home a day or two a week. Some companies have moved to an entirely remote work environment. But I think the dominant form of working will return to “in office, with others” by the end of this year.

2/ Carbon offsets, effectively a voluntary form of self carbon taxation, will take off in 2022 and by the end of the year, we will have a global market in excess of $10bn (up ~10x in 2022).

I think the big unlock will be bridging between the existing carbon offset market and the crypto markets where decentralized finance tools can bring massive innovation and demand to this market very quickly.

3/ K12 systems around the US (and around the world) faced with teacher shortages and desperate to erase several years of learning shortfalls, will increasingly adopt online learning services in the school building in lieu of and in addition to in-class learning.

This may be obvious. I don’t really know. But there are many forms of learning that work in addition and in compliment to teacher-led classes and school leaders will need to be open to using them aggressively to turn around several years of learning losses.

4/ Twitter opens up its APIs and allows anyone to operate Twitter clients that compete with its own.

Now I am going out on a limb. But why not? That would be so amazing if it happened.

5/ As I predicted back in the spring of 2017 [8:30 into this video], only five years too soon, Ethereum’s market cap will surpass Bitcoin’s in 2022. I hope I get at least as much abuse for this prediction as I did for that one.

Ethereum’s merge in 2022, combined with the understanding that productive assets must be worth more than non-productive assets, make this a fairly obvious prediction. But I got it wrong last time, so I surely can get it wrong again.

I hope that 2022 brings us more positive surprises and less negative surprises than the last two years.

Happy 2022 everyone!

#climate crisis#crypto#hacking education#VC & Technology

What Happened In 2021

As is my custom here at AVC, I like to end the year looking back and start the year looking forward.

This post will be the look back and I started by revisiting my look forward into 2021 that I wrote on New Year’s Day 2021.

In my typical optimist fashion, I was dead wrong about how quickly the pandemic would fizzle out. I predicted that vaccines plus immunity from those who had been infected would end the pandemic by mid-year 2021. That was obviously totally wrong and I am sitting here isolating with my own Covid case (seven days in now). I can’t imagine a more appropriate “punishment” for getting that one wrong.

I got the rest mostly right and when I look back at 2021, what I see is a world that is changing before our very eyes; becoming more digital (leading to metaverse fever in tech), less tethered to a job and place to work (and live because of work), warmer, more prone to natural disasters, and tribalizing along different dimensions than what has divided us in the past.

In truth 2021 was a deeply troubling year and no wonder that mental health issues abound among all of us, but particularly our young. Nothing seems right anymore. We must face that and then fix it.

Of course, 2021 was a great year for the financial markets, both stocks and blockchain assets. Even with a big year-end selloff, which I believe was mostly tax-driven (we will see soon if I am right about that), investors who owned tech stocks and blockchain assets saw huge gains in 2021. USV was no different. We had a banner year.

But that also means that it is on us who have benefitted the most to work harder and invest to address some of these troubling issues. We are doing that with our first climate fund, which we have been investing aggressively and we hope to have a second one to invest before the end of 2022. We are seeking to both invest in technologies/companies that can mitigate the climate crisis and that can help us adapt to the changes that are permanent and we must accept that many will be.

I want to return to the pandemic before I wrap this year-end post. Sitting here with a mild case but isolating so I don’t pass it on brings home for me that our society has really struggled to find the right balance between what is right for the individual and what is right for society during this pandemic. We can’t agree on anything. Vaccines, masks, lockdowns, schools, offices, etc. Those who have a high tolerance for risk believe that we have gone way overboard in trying to manage this pandemic when we never could. Those who believe in government, public health, etc, believe that those with a high tolerance for risk are putting all of us at risk. And I think the truth lies somewhere in between. This pandemic is a metaphor for the broader inability of society to find a way to move forward together.

Beyond climate or covid, it is this plague of dissension, doubt, fear, disrust, hate, and worse that is our biggest challenge and one that is very much raging across our world right now. That’s what 2021 brought home for me.

#climate crisis#Current Affairs#VC & Technology#Web3

Consumer Trends 2022

My friends at The New Consumer and Coefficient Capital have published their annual consumer survey. There are many interesting slides in it, none more than this one.

I guess that explains this chart:

But back to the consumer survey, there are lots of interesting slides in it and you can get it here by creating a free account to The New Consumer. I strongly recommend doing that and enjoying your coffee this morning mulling over the report.

#VC & Technology

Partnerships

Like many did, we spent much of this weekend watching Peter Jackson’s wonderful documentary of the Beatles making Let It Be, titled Get Back.

I enjoyed so much of the film, particularly the music, but the big thing I took away is the power of real partnerships. While this was the Beatles last recording session, what you see in the film are four partners working together creatively and wonderfully. I wasn’t really expecting that and I found it so enjoyable to watch.

I have worked in partnerships for most of my adult life, since I was in my mid 20s. I have spent 35 years in three partnerships, all of them “equal partnerships”, the kind where everyone brings their own ideas, they are worked on together, and there is mutual respect and admiration.

Partnerships are not easy. Everyone has to dial back their ego a bit and let others have their say on things. But what you get when you do that is an environment where everyone gets better than they would be on their own. And you can see that in the Beatles work. All of the four Beatles went on to have solo careers, but none of them produced a sustained level of work that the four of them were able to make together.

Watching Paul, John, George, and Ringo work together for a month to make an incredible record was a reminder that when we sacrifice a little bit of our self and commit to a team dynamic, wonderful things can and do result.

#life lessons#VC & Technology