Posts from VC & Technology

What Will Happen In The 2020s

It’s 2020. Time to look forward to the decade that is upon us.

One of my favorite quotes, attributed to Bill Gates, is that people overestimate what will happen in a year and underestimate what will happen in a decade.

This is an important decade for mankind. It is a decade in which we will need to find answers to questions that hang over us like last night’s celebrations.

I am an optimist and believe in society’s ability to find the will to face our challenges and the intelligence to find solutions to them.

So, I am starting out 2020 in an optimistic mood and here are some predictions for the decade that we are now in.

1/ The looming climate crisis will be to this century what the two world wars were to the previous one. It will require countries and institutions to re-allocate capital from other endeavors to fight against a warming planet. This is the decade we will begin to see this re-allocation of capital. We will see carbon taxed like the vice that it is in most countries around the world this decade, including in the US. We will see real estate values collapse in some of the most affected regions and we will see real estate values increase in regions that benefit from the warming climate. We will see massive capital investments made in protecting critical regions and infrastructure. We will see nuclear power make a resurgence around the world, particularly smaller reactors that are easier to build and safer to operate. We will see installed solar power worldwide go from ~650GW currently to over 20,000GW by the end of this decade. All of these things and many more will cause the capital markets to focus on and fund the climate issue to the detriment of many other sectors.

2/ Automation will continue to take costs out of operating many of the services and systems that we rely on to live and be productive. The fight for who should have access to this massive consumer surplus will define the politics of the 2020s. We will see capitalism come under increasing scrutiny and experiments to reallocate wealth and income more equitably will produce a new generation of world leaders who ride this wave to popularity.

3/ China will emerge as the world’s dominant global superpower leveraging its technical prowess and ability to adapt quickly to changing priorities (see #1). Conversely the US becomes increasingly internally focused and isolationist in its world view.

4/ Countries will create and promote digital/crypto versions of their fiat currencies, led by China who moves first and benefits the most from this move. The US will be hamstrung by regulatory restraints and will be slow to move, allowing other countries and regions to lead the crypto sector. Asian crypto exchanges, unchecked by cumbersome regulatory restraints in Europe and the US and leveraging decentralized finance technologies, will become the dominant capital markets for all types of financial instruments.

5/ A decentralized internet will emerge, led initially by decentralized infrastructure services like storage, bandwidth, compute, etc. The emergence of decentralized consumer applications will be slow to take hold and a killer decentralized consumer app will not emerge until the latter part of the decade.

6/ Plant based diets will dominate the world by the end of the decade. Eating meat will become a delicacy, much like eating caviar is today. Much of the world’s food production will move from farms to laboratories.

7/ The exploration and commercialization of space will be dominated by private companies as governments increasingly step back from these investments. The early years of this decade will produce a wave of hype and investment in the space business but returns will be slow to come and we will be in a trough of disillusionment on the space business as the decade comes to an end.

8/ Mass surveillance by governments and corporations will become normal and expected this decade and people will increasingly turn to new products and services to protect themselves from surveillance. The biggest consumer technology successes of this decade will be in the area of privacy.

9/ We will finally move on from the Baby Boomers dominating the conversation in the US and around the world and Millennials and Gen-Z will be running many institutions by the end of the decade. Age and experience will be less valued by shareholders, voters, and other stakeholders and vision and courage will be valued more.

10/ Continued advancements in genetics will produce massive wins this decade as cancer and other terminal illnesses become well understood and treatable. Fertility and reproduction will be profoundly changed. Genetics will also create new diseases and moral/ethical issues that will confound and confuse society. Balancing the gains and losses that come from genetics will be our greatest challenge in this decade.

That’s ten predictions, enough for now and enough for me. I hope I made you think as much as I made myself think writing this. That’s the goal. It is impossible to be right about all of this. But it is important to be thinking about it.

I know that comments here at AVC are broken at the moment and so I look forward to the conversation on email and Twitter and elsewhere.

#climate crisis#crypto#economics#employment#entrepreneurship#Food and Drink#hacking energy#hacking finance#policy#Politics#Science#VC & Technology

What Happened In The 2010s

My friend Steve Kane suggested I take a longer view in my pair of year end posts this year:

And so I will.

Here are the big things that happened in tech, startups, business, and more in the decade that is ending today, in no particular order of importance.

1/ The emergence of the big four web/mobile monopolies; Apple, Google, Amazon, and Facebook. A decade ago, Google dominated search, Apple had a mega hit on their hand with the iPhone, Amazon was way ahead of everyone in e-commerce, and Facebook was emerging as the dominant social media platform. Today, these four companies own monopolies or duopolies in their core markets and are using the power of those market positions to extend their reach into tangential markets and beyond. Google continues to own a monopoly position in search in many parts of the world, has a duopoly position in mobile operating systems, and controls a number of other market leading assets (email, video, etc). Apple owns the other duopoly position in mobile operating systems. Amazon has amassed a dominant position in e-commerce in many parts of the world and has used that position to extend its reach into private label products, logistics, and cloud infrastructure. Facebook built and acquired its way into owning four of the most strategic social media properties in the world; Facebook, Instagram, Messenger, and WhatsApp. Most importantly, outside of China, these four companies own more data about what we do online and also control many of the important channels to reach us in the digital world. What society does about this situation stands as the most important issue in tech at the start of the 2020s.

2/ The massive experiment in using capital as a moat to build startups into sustainable businesses has now played out and we can call it a failure for the most part. Uber popularized this strategy and got very far with it, but sitting here at the end of the 2010s, Uber has not yet proven that it can build a profitable business, is struggling as a public company, and will need something more than capital to sustain its business. WeWork was a fast follower with this strategy and failed to get to the public markets and is undergoing a massive restructuring that will determine the fate of that business. Many other experiments with this model have failed or are failing right now. When I look back at the 2010s, I see a decade during which massive capital flowed into startups and much of it was wasted chasing the “capital as a moat” model.

3/ Machine learning finally came of age in the 2010s and is now table stakes for every tech company, large and small. Accumulating a data asset around your product and service and using sophisticated machine learning models to personalize and improve your product is not a nice to have. It is a must have. This ultimately benefits the three large cloud providers (Amazon, Google, Microsoft) who are providing much of the infrastructure to the tech industry to do this work at scale, which is how you must do it if you want to be competitive.

4/ Subscriptions became the second scaled business model for web and mobile businesses, following advertising which emerged at scale in the previous decade. Startups that developed the skills to execute a subscription business model with positive unit economics delivered fantastic returns to investors and capital flowed into this sector as a result. This was a very positive development as subscriptions better align the interests of the users and the developers of mobile and web applications and avoid many of the negative aspects of the free/ad supported business model. However, as we end the decade, a subscription overload backlash is emerging as many consumers have signed up for more subscriptions than they need and in some cases can afford.

5/ Silicon Valley’s position as mecca for tech and startups started to show signs of weakening in the 2010s, largely because of its massive successes this decade. It is incredibly expensive to live and work in the bay area and the quality of life/cost of life equation is not moving in the right direction. The physical infrastructure (transit, housing, etc) has not kept up with the needs of the region and there is no sign that it will change any time soon. This does not mean “Silicon Valley is over” but it does mean that other tech sectors will find an easier time recruiting talent to their regions and away from Silicon Valley. And talent is really the only thing that matters these days.

6/ Cryptography emerged in the 2010s as a powerful technology that can solve some of the web and mobile’s most vexing issues. Cryptography and encryption have been around for a very long time, well before the computer. Modern computer cryptography came of age in the 1970s. But the emergence of the internet, web, and mobile computing largely did not integrate many of the central ideas of cryptography natively into the protocols that these platforms were built on. The emergence of Bitcoin and decentralized money this decade has shown the way and set the stage for cryptography to be built natively into web and mobile applications and deliver control back to users. Credit to Muneeb Ali for framing this issue for me in a way that makes a lot of sense.

7/ Technology inserted itself right in the middle of society this decade. Our President wakes up and fires off dozens of tweets, possibly while still in bed. We are all hostage to our phones and the services that we rely on. Our elections are conducted using machine learning technology to segment and micro-target important voting groups. And bad actors can and do use the same technologies to interfere in our elections and our public discourse. There is no putting the genie back in the bottle in this regard, but the fact that the tech sector has such a powerful role means that it will be highly regulated by society. And there is no putting the genie back in the bottle in that regard either.

8/ The rich got richer this decade. Axios wrote in a recent email that:

“The rich in already rich countries plus an increasing number of superrich in the developing world … captured an astounding 27% of global growth.”

But the very poor also had a great decade as Axios also reported:

The rate of extreme poverty around the world was cut in half over the past decade (15.7% in 2010 to 7.7% now), and all but eradicated in China.

The losers in the 2010s were lower middle class and middle class people in the developed world whose incomes stagnated or fell.

Technology played a role in all of this. Many of the superrich obtained their wealth through technology business interests. Some of the eradication of extreme poverty is the result of technology as well. And the stagnation of earning power in the lower and middle class is absolutely the result of technology automation, a trend that will only accelerate in coming years.

9/ This a post publish addition. A huge miss in my original post is the emergence of China as a tech superpower and a global superpower. There are many areas (digital money for example) where China is light years ahead of the western world in technology and that will likely accelerate in the coming years. Being a tech superpower is a necessary condition to being a global superpower and China is already that and getting more powerful by the day.

I will end there. These are the big mega-trends I think about when I think about the 2010s. There is no doubt that I left out many important ones. You can and will add them in the comments (wordpress for now), emails to me, and on Twitter and beyond. And that is what I hope you will do.

#crypto#entrepreneurship#machine learning#policy#Politics#VC & Technology#Web/Tech

Gateways

Most big technology changes don’t come out of nowhere. There are predecessor technologies that predate and portend what is to come. I like to call these predecessor technologies “gateways.”

In the case of the web, there were two important gateways. The first was CD ROMs. There was a moment in NYC in the early 90s when we all thought CD ROMs were going to be the future of media. That is when the NY New Media Association was formed and there was a ton of excitement in the air about new digital.media services that would be delivered to our computers via CD ROMs.

Around the same time we saw the rise of online services like AOL, CompuServe, and Prodigy. These services allowed users to connect via dialup modem and do things like chat and email.

The CD ROM wave taught users to browse and explore rich media on their computers.

The online services wave taught users to dialup and chat and email.

So by the time the web browser showed up in the mid 90s, users were primed for the combination of the two – dialing up to chat, email, and browse rich media. It was a killer combination of the two and so much more.

As we think about crypto, we look for these gateways. One is certainly the financial speculation and trading of crypto assets. That has brought millions to the crypto sector and is the primary reason that people own or have owned crypto assets.

Another might be stablecoins that operate on closed or semi-closed networks. These stablecoins may not support the broadest set of applications envisioned by projects like Ethereum and others, but they may get hundreds of millions of people around the world owning and transacting with crypto assets.

It is tempting to get caught up in the big vision of what is possible with a powerful technology.like crypto and dismiss the gateways. But that would be a mistake as they are often necessary to set the stage for what is to come.

#VC & Technology

Butter

I once asked a famous celebrity chef how he made his pasta taste so good.

He answered “Butter. Lots of it.”

When we land in Paris, jet lagged and cranky, we head right to our favorite street cafe and order strong coffee, baguettes and butter. And our systems are restored.

Butter is one of my life’s treasures. I love it.

Butter is also something we look for in the products and services we invest in at USV.

My partner Nick coined the term Butter, at least inside of USV, and he wrote about Butter on his blog recently, explaining what it is and why we look for it.

I particularly like this part of his post:

On the consumer side, Butter means end-user experiences that are frictionless and joyful.  For example, I recently went to China and was blown away by the QR Code experience — straight butter wherever you go, linking the real world to the online world.  Duolingo is Butter for Learning.  Nurx is Butter for Health.  Coinbase is Butter for Crypto.  Amazon Prime is Butter for e-Commerce.

https://www.nickgrossman.is/2019/the-butter-thesis/

Nick provides some good guidelines on how you can make your product or service buttery in his post.

We look for buttery products and services to invest in because customers look for buttery products and services to use. It is really that simple.

So when you design and build your product or service, make it buttery. That will lead to all sorts of good things.

#entrepreneurship#VC & Technology

USV Two Year Analyst Program

At USV, we have had a two-year analyst program since the very early days. The alumni of our analyst program are an impressive group of people. Some have their own venture capital firms, some are founders of companies that are doing great, some are working in large companies.

We are starting the process of hiring a new group of analysts and, as always, we kicked off the process with a blog post on USV.com.

If you are interested or know someone who might be, check out this post.

#VC & Technology

Pacing

Pacing in a VC fund context is how much capital the firm is investing in a given period and tracking that over time.

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

But I think pacing is a great thing to track in the rearview mirror.

I like to look at investment pace by quarter and year. And by dollars and deals. And by new names and follow-ons.

If you keep track of that, chart it, and review it, you will be mindful of whether the firm is getting too far out over its skis or heels.

And that is a super useful thing to be aware of.

#VC & Technology

Being There

We get feedback from the leaders of our portfolio companies on an annual basis. It helps me get better at what I do and I love it.

One area that I am constantly challenged to improve on is accessibility.

The common refrain is “I know you are busy and I hate to bother you.”

To which I reply “It is your job to bother me and my job to be responsive when you do.”

But even so, getting portfolio company leaders to feel that they can reach out, even on small things, is a challenge.

An approach that I have taken and many other VCs also take is to schedule weekly or bi-weekly catch ups with the portfolio leaders.

That works but sometimes what is needed can’t wait for that or is a “in the moment thing” like “today sucked.”

And sometimes helping someone deal with “today sucked” gets you to a level of comfort with a leader that allows you to help on many other things too.

My point is simple. Being there for portfolio leaders is job number one for venture capitalists. If we can’t do that, what can we do?

So working on that is a big part of my personal development and I work on it every day.

#VC & Technology

Reckoning Reflections

The post I wrote yesterday generated a lot of discussion. I followed it on Twitter and engaged with much of it there.

One of the best things about writing is all of the feedback you get. It helps to sharpen your arguments and also makes you rethink them too.

Here are some of the takeaways:

  • Some readers interpreted the post as arguing for only investing in high gross margin businesses. I don’t believe that is the right takeaway. The better takeaway is that high margin businesses are often less dependent on capital markets because they can internally generate cash more easily. That is not the case with low margin businesses. So how you value and how you finance low margin businesses becomes very important. They can’t be valued too highly or you risk a financing crisis.
  • Bill Gurley tweeted his blog post from 2011 that “all revenue is not created equal.” That is a great way of saying what I was trying to say.
  • Apple and Amazon were put forth as great lower margin businesses. Amazon is a roughly 25% gross margin business and trades at a little over 3x revenues. Apple is a roughly 40% gross margin business and trades closer to 4x revenues. I think that emphasizes the point that revenue multiples ought to reflect gross margins.
  • Many people argued that operating margins and growth rates should be the two numbers that matter most in valuing a business. I totally agree. But it is hard to have 40% operating margins if you have 40% gross margins. The truth is that operating margins will be highly dependent on gross margins. But there will be edge cases where that is less true.
  • I got a lot of people saying “isn’t this totally obvious?”. To which I say “it should be but clearly it is not.”

The most important takeaway for me is that the public markets are showing us in tech/startup/VC land that the economic fundamentals of a business, even those that are driving massive disruption in their markets, really does matter and that we need to pay attention to them when we finance these companies.

#stocks#VC & Technology

The Great Public Market Reckoning

Dan Primack wrote in his friday newsletter:

Public market investors have become less willing to leave their comfort zones, and it’s manifesting most obviously in the IPO market.
Novel disruption has fallen out of favor, with many preferring more time-tested models like enterprise SaaS and biotech.
Peloton yesterday raised over $1.1 billion in its IPO, pricing at the top of its $26-$29 range, but its shares then got crushed (although still valued well above the last private mark). Its CEO talked to Axios yesterday about the falling stock price.
Endeavor, the live events and artist representation firm led by Ari Emanuel, last night canceled an IPO that originally was to raise over $600 million, before it was later downsized.
WeWork… well, you know the story there.
Yes, all three companies have dual-class shares. Yes, all three were highly valued by venture capital or private equity investors. Yes, all three were unprofitable for the first half of 2019.
Those characteristics are also true of Datadog and Ping Identity, both of which had successful IPOs this month and continue to trade above offering.
The trio’s real similarity was that each had a very complicated story.
Peloton is a high-end hardware and SaaS business that produces original media content, sells apparel, and runs its own delivery logistics.
Endeavor began life representing movie stars and Donald Trump, but later expanded into a massive live events business that includes the UFC and Professional Bull Riders. Plus, it’s got a streaming platform.
WeWork… again, it’s different.
All of this comes against the backdrop of Uber, which also had a very complicated story and an IPO that emboldened short-sellers.
Up next: A lot of biotech startup IPOs, but no high-growth, complicated tech unicorns.
“We’re about to get a bit of a break from those sorts of deals, which I think is good for everyone,” a top Wall Street banker told me this morning.
Private markets follow public markets, so don’t be surprised to see some valuation and/or deal size pullback for these “hard to comp” companies.
Particularly if SoftBank fails to raise Vision Fund 2.
Goodbye to egregious governance terms. Dual-class will survive, but WeWork laid a third rail for others to avoid.
U.S. IPOs have still outperformed the S&P 500 in 2019, although the gap has shrunk significantly this month.
Or, put another way: The sky isn’t falling, but it’s gotten a lot darker. And, for some, downright stormy.

While all of this is true, I think it is a lot simpler than that.

The public markets are a lot different than the private markets.

Financial transactions in the private markets are controlled by the issuers, happen when the issuers want them to happen, and are generally auctions, particularly in the late stage markets.

Public market investors can buy and sell stocks every day based on what is attractive to them and what is not. If they feel like they missed out on something, they can get into it immediately.

For this reason, valuations in the private markets, particularly the late-stage private markets, can sometimes be irrational. Public market valuations, certainly after a stock has traded for a material amount of time and lockups have come off, are much more rational.

For the last five or six years, I have been writing here that I very much want to see the wave of highly valued and highly heralded companies that were started in the last decade come public. I have wanted to see how these companies trade because it will help us in the private markets better understand how to finance and value businesses.

And now we are seeing that.

And what we are seeing, for the most part, is that margins matter. Both gross margins and operating margins.

If you look at the class of companies that have come public in the last twelve months, many of the stocks that have performed the best are software companies with software margins. One notable exception to that is Beyond Meat.

  • Zoom – 81% gross margin
  • Cloudflare (a USV portfolio company) – 77% gross margin
  • Datadog – 75% gross margin

If you look at the same list, many of the stocks that have struggled are companies that have low gross margins.

  • Uber – 46% gross margin
  • Lyft – 39% gross margin
  • Peloton – 42% gross margin

Some other notable numbers:

  • WeWork gross margins – 20%
  • Spotify (down almost 30% in the last two months) gross margins – 26%

I believe that we have seen a narrative in the late stage private markets that as software is eating the world (real estate, music, exercise, transportation), every company should be valued as a software company at 10x revenues or more.

And that narrative is now falling apart.

If the product is software and thus can produce software gross margins (75% or greater), then it should be valued as a software company.

If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software.

But we have not been doing it that way in the late-stage private markets for the last five years.

I think we may start now that the public markets are showing us how.

#stocks#VC & Technology