Posts from VC & Technology

The Globalization Of Venture Capital Investing

I’ve written a bunch about the globalization of the startup economy. You can start and build a tech company almost anywhere these days. That has been true for at least the last decade. But until very recently, raising capital for your startup was significantly easier if it was located in the major startup hubs, most notably Silicon Valley.

I believe the pandemic changed that equation dramatically and USV’s “deal log” is a great example of that. When I look at all of the opportunities we are currently considering plus all of the investments we have made this year to date, what stands out most to me is the location of the founders and teams. It seems to me that about half of our “new deal activity” right now is happening outside of the US. And very little of it is in western Europe where most of our non-US investing has been for the last decade.

This is a big change from where it was just last year and the year before. The emergence of raising money and supporting investments on Zoom has made it possible to have a much broader reach than was possible a few years ago.

What makes it easier for USV is our thesis-driven model of investing. We know exactly what we are looking for in new opportunities in wellness, education, financial services, climate, and crypto and so we can react to opportunities that fit into our thesis pretty much anywhere in the world. And we are doing exactly that.

It takes a long time, at least five years and more likely a decade, to know how changes in the startup economy and venture capital will play out. We won’t know how this move to invest globally will impact returns and founder success. I am optimistic that it will be a positive change for both but only time will tell.

#VC & Technology

Half Of All VCs Beat The Stock Market

There has been this narrative about investing in VC funds that you have to get into the top quartile (25%) or possibly the top decile (10%) in order to generate good returns. I have heard that for as long as I have been in VC and probably have written it here a few times.

Well, it turns out that is not right. Half of all venture funds outperform the stock market which is the benchmark most institutions measure VC funds against.

My friend Dan Malven wrote about this on his blog yesterday:

working paper published by the National Bureau of Economic Research (NBER) in November 2020 contradicts that notion, showing that half of all VC fund managers outperform the public markets, and are therefore worthy of institutional investment.

This study was based on a large sample of VC fund level returns from 2009 to 2017 and does not include the last few years which have been particularly strong for the VC sector.

Manager selection remains an important part of VC investing because the lower half of VC funds do not outperform the stock market. An interesting data point from this study is the VC “fund of funds” mostly outperform the stock market so a portfolio of VC funds will generally give you enough diversification that you can meet your performance objectives.

The best way to know what managers to pick is to be in the startup business in some way. All you need to do is watch how people behave to know who is good and who is not. The Gotham Gal and I have been investing in the VC funds of managers we know well and have worked with closely on boards of startups for about fifteen years now.

These are the gross return multiples of all of the funds that are “mature” meaning the returns are pretty clear now:

MultipleYear Of Initial Investment
8.662006
3.652007
5.292007
3.312010
10.382010
7.632010
4.712010
2.012010
2.292012
8.582012
3.972012

I am not going to do the work of calculating performance against the stock market for these funds, but I suspect all buy maybe two of those eleven funds have outperformed the public markets.

As you can see, investing in VC funds can be very profitable. And I suspect it is getting more profitable, not less, as the capital markets and M&A markets are providing robust liquidity options for managers.

Sadly the VC market remains largely out of reach of many “main street” investors as the SEC limits these fund investments to qualified and accredited investors. That has never made sense to me and is yet another example of the “well meaning” rules resulting in the wealthy getting wealthier and everyone else missing out.

#VC & Technology

The Bolster Board Diversity Survey

Last June, I wrote about board diversity and suggested some things we are doing and that you can do to diversity your board.

In the ten months that have passed since I wrote that I am pleased to say that we have seen a noticeable increase in board diversity in our portfolio. I have personally stepped off a few boards to make room for diverse board members and I am prepared to do more of that. A number of my partners have done the same. It is that important to me and USV.

But I can also tell you that the state of diversity in startup/growth company boards and our portfolio is still awful.

Our portfolio company Bolster connects fractional executives and board candidates to startup and growth companies. They have done some of the board searches for diverse candidates in our portfolio and they are going to do a lot more.

They have been surveying the startup and growth sector over the last few months to determine the state of diversity on boards. They published the results today. The numbers are embarrassing.

We can do better and we must do better.

Here is how:

1/ Make room on your board for independent directors at the very start and fill those seats with diverse candidates.

2/ Ask your investor directors to become observers to make room for independent diverse candidates.

3/ Prioritize this.

4/ Use Bolster or other service providers to surface great diverse board candidates.

There are so many qualified diverse candidates out there for you to bring onto your board. I have participated in many of the board searches in our portfolio in the last year and I am blown away by the diverse talent that is out there waiting to help you grow your company. You just need to make room for them and ask them to join your board.

Just do it.

#entrepreneurship#management#VC & Technology

Entrepreneurship In Latin America

It is a little known part of my career, but for a brief period from 1997 to 2001, I was part of a small group of investors who helped to create a startup ecosystem in Latin America.

It all started with a company called StarMedia which created a Yahoo-like “portal” for Latin America. My partner Jerry Colonna and I met StarMedia in early 1997 and we brought it to our partners at Chase Capital Partners because we wanted to lead a Series A investment in it. In that Chase Capital Partners meeting was a woman named Susan Segal who ran Chase’s Latin American private equity investing. She pulled me over after the meeting and asked me if there were other startup companies like StarMedia in Latin America. I told her that there must be but I wouldn’t know how to find them. She said, “I can help with that.”

So began a five year investment partnership between Flatiron Partners (our VC firm) and Susan’s Latin American private equity business. Susan and her team worked their Latin American connections and they brought the deals to us and we vetted them for team, technology, market need, etc. We did something like a dozen investments together including MercadoLibre (one of the greatest Internet companies ever in any region), and Patagon.com (where I met the founders Wences Casares and Micky Malka).

But it was StarMedia where I learned the most. I made and lost more money personally (at that time in my career) on Starmedia. I have a StarMedia stock certificate in my office that I look right at that was made out to one of our family entities. It was once worth tens of millions of dollars and is now worthless and has been for decades. It takes messing up on that massive of a scale to learn some things.

StarMedia is also where I met my good friend Jerry who would have been 70 today. Jerry grew up in Mexico and moved in and out of Latin America and Silicon Valley with ease. He understood both places and helped to bring them together. I miss Jerry so much. He was a mentor, advisor, and coach to many of the earliest Latin American Internet entrpreneurs.

I was reminded of all of that history yesterday as our firm listened to a pitch by a Latin American team that is building a very exciting company. It reminded me that we seeded something twenty-five years ago that has gone on to become a vibrant startup ecosystem. Jerry, Susan, and I made a great team and we did something really important together.

#entrepreneurship#VC & Technology

Recycling

Most venture capital funds have a “recycling” provision that allows them to sell some percentage of their investments and reinvest those funds back into new investments instead of distributing that capital to their limited partners. There is no standard recycling percentage in the market, but I think 20-25% is fairly common.

We do this at USV very aggressively. It allows us to put the entire fund to work and recoup the management fee load. A $100mm venture capital fund will pay something like $20mm in management fees over a ten-year life. So it would only actually invest $80mm into startups. But if that fund recycled $20mm back into new investments, it could put the entire $100mm to work even after paying the $20mm in management fees.

Sometimes it is also possible to use recycling to invest more than the fund actually raised. We have done that in a number of funds. Our first fund was a $125mm fund, but we only called something like $110mm from our investors and I think we ultimately put to work something like $140mm.

These might feel like small moves, but they can be very big moves when you are trying to make 3x or more on a fund. Three times $110mm is $330mm. Three times $140mm is $420mm.

Of course you have to be smart about what you recycle and what do you not recycle. Most venture capital funds have investments where you get your money back or a bit more. It could be an early exit where the founders got a great offer they could not refuse. Or it could be an investment that only sort of worked. Those are great opportunities to recycle capital. You get your money back or a bit more, and then you put it back to work.

It can also make sense to take a little money off the table on a rocket ship type investment and recycle that. But doing too much of that sort of thing can reduce the returns in a fund instead of amplifying them. I have made that mistake and do not plan to do it again.

Portfolio and fund management in a venture capital firm is not something that is often discussed. The biggest driver of performance is finding the right opportunities and getting into them at the right time. So that is where most people in venture capital focus their time and energy and rightly so.

But I believe that proper portfolio management; getting the right diversification in a portfolio, managing liquidity opportunities, and aggressive recycling can make a big difference in fund and firm performance and we dedicate real time and energy to these issues at USV. I think it has made a difference for us over the years.

#VC & Technology

Resilience

A friend and I dined last night at a restaurant that opened in our neighborhood last summer, in the middle of the pandemic. For the first six months of its existence, they could not welcome diners into the space that they had spent time and money creating. They carried on, figured out how to make money serving customers outside. As the NYC economy starts to recover, they are still standing. And they are now welcoming diners into the lovely space they created for them a year ago.

Resilience is an extremely valuable trait when you are starting and running a business. In a bull market that rewards other things, it is often overlooked. But I don’t overlook it.

A reporter asked me recently about a company that I am on the board of that has become very successful. I told the reporter that for years, the founder carried on while every competitor left the market in search of a viable business. The viable business arrived eventually and the founder was rewarded for his patience.

Sticking with something, even when the chips are down, is hard. Many people (most?) can’t do it. They are impatient. They want the easy money.

While the world has been going through a painful and deadly global pandemic, the tech sector has experienced a bull market of epic proportions that has lifted all boats and made some incredibly wealthy. But that bull market will eventually end and things will get harder for founders and CEOs and investors.

And that is when resilience will be in short supply. So look for it in founders now, when it is less necessary.

#entrepreneurship#VC & Technology

Secondary Markets

Buying something from the creator or issuer is often called the “primary market.” Reselling it to someone else is often called the “secondary market.” I have spent my career in the primary market, buying equity from very young companies and holding it for many years usually until a sale or IPO. That has worked well for me over the years but recently, I have watched a vibrant secondary market develop for private company shares and I think that is a good thing as I believe more liquidity is better than less liquidity in most, maybe all cases.

I was reminded of this yesterday when I purchased tickets to a Knicks game against the Warriors next week at Madison Square Garden. As a season ticket holder, I was able to get into a pre-sale to purchase two of the two thousand seats that will be available at that game, the first Knicks game at MSG with fans in almost a year.

Those tickets come with some very serious, and appropriate requirements including obtaining a negative Covid PCR test within 72 hours of the game. After discussing the requirements with my son last night, we decided it wasn’t for us and I put the tickets on StubHub. Although I probably could have and should have marked them up, I just wanted my money back and the tickets sold in a matter of minutes and I was made whole.

I knew I could do a secondary sale when I purchased the tickets and I also knew that as a season ticket holder, I had the ability to buy when others could not, and that I had to move quickly. Knowing that I could resell them took the risk out of moving quickly and I was able to do that with confidence.

That’s an example of how secondary liquidity reduces risk and increases trust and confidence in a market.

Going back to startup equity, I believe that we will continue to see more and more secondary liquidity for startup equity. Our portfolio company Carta has recently launched a market for exactly that called CartaX and I believe it will be an important source of secondary liquidity for founders, employees, and investors in startups. As we de-risk the investments of time and money that everyone is making in these startups, I believe that will draw more talent and more capital to the startup sector.

And that is a good thing.

#entrepreneurship#VC & Technology

Six Months Later

In early June, I wrote this post explaining that I and we need to do more to reduce the inequality issues for Black people in tech, venture capital, and startups.

I think MLK day is a good time to talk about what has happened since that post.

We have identified a number of areas where we must do better:

  • Increase the number of Black founders we back
  • Increase the number of Black team members at USV
  • Increase the number of Black VCs we work with and support
  • Increase the number of Black board members in our portfolio
  • Increase the number of Black leaders in our portfolio
  • Increase the number of Black employees in our portfolio
  • Increase the number of Black engineers in our portfolio
  • Increase the number of Black investors in our funds
  • Increase the number of Black college graduates going into tech, venture capital, and startups
  • Create pathways for Black students to study STEM and find their way into careers in tech, venture capital, and startups

We have ongoing projects, workstreams, investments, and efforts in each and every one of these areas and we have made tangible progress in almost all of them.

I believe that the inequity issues are so severe and deeply rooted that it will take a concerted effort over a number of years to truly erase them.

But we are making progress and if we keep at it, across many dimensions, we can get where we need to go. Roughly 15% of Americans are Black. Until we can look around the room and see at least one Black person for every six in the meeting, we haven’t done enough. Today is a good day to remind ourselves of that and recommit to the work that needs to happen.

#employment#entrepreneurship#management#VC & Technology

The Work-Life Balance Revolution

Yesterday, I had a gap in the middle of the day. So the Gotham Gal and I took an hour-long walk with our dog Ollie. It cleared my head and when I got back to work, I was full of energy and clarity.

I’ve been working exclusively from home since the end of November 2019 when we left NYC to go to LA. It has been a stretch of incredible productivity for me.

I am not arguing against going back to the office. As I’ve said in many posts recently, I can’t wait to go back to the office. But I am sure that many of us have had the same experience that I have had working from home during the pandemic. It has its advantages.

And in that realization exists the possibility that we are on the cusp on a revolution in how many of us can find work life balance going forward.

My friend Tom wrote this post last week suggesting that a husband and wife can now work a total of 50 hours a week between them and have two full-time jobs and raise a family. This part sums up the idea pretty well:

Why do I think 25 hours/ week is the equivalent of a 50-hour week (counting commuting)?

Given a nine-to five schedule with an hour for lunch, the 40 hour work week was only 35 to begin with.

As an ex-CEO, I think that at least ten hours of each workweek go to socialization, surfing the internet, checking with the spouse or checking up on the children, chatting on smartphones etc. (Mary thinks only five).

Meetings and travel to meetings waste a huge amount of time and money. One reason that Zooming appears not to have reduced productivity is that many of the meetings weren’t productive to begin with.

Office space and often parking are expenses to the employer but they are not income to the worker. If office space and all its attendant costs can be drastically reduced, employers can afford to pay more dollars in salary for the same productivity.

Commuting expense including perhaps even the second car, daycare, clothing and dry-cleaning bills, and paid before and after school activities whose purpose is to supervise school age kids are all expenses which go away when parents can work from home. Even if the WFH employee has less gross taxable income, he or she will have more cash at the end of each month.

https://blog.tomevslin.com/2021/01/newnormal-the-50-hour-family-work-week.html

Even if Tom is off by a bit with his math, he makes a terrific point. Companies can ask for less of a family’s time, pay them more, and get the same amount of work done using the techniques we have perfected during the pandemic.

I realize that not all jobs lend themselves to this approach. But maybe more than you think. Take doctors. We used to have to go see doctors in their offices. Now with digital health services like those offered by our portfolio companies Brave and Nurx, the doctors are seeing the patients from their homes (or wherever they are).

Teaching is another occupation that presents a lot of opportunity to rethink time and location. Many teachers have been learning how to help their students master new things from their kitchen counters over the last year.

I want to say it again. I am not suggesting that we won’t be going to offices anymore. I am not saying doctors won’t have offices anymore. I am not saying teachers won’t be in classrooms anymore.

What I am saying is that we can and should be asking how much of our work time needs to be in person, face to face, and how much can be virtual. And I am certain that we will be asking that. In our year-end reviews at USV, we heard again and again from our team that they wanted to ask those questions. They should. Commuting and business travel are not the necessities they were last century.

And, naturally, this coming work-life balance revolution presents tremendous opportunities for new products, services, and companies. We have been seeing many of them crop up over the last year and have invested in a few of them.

From bad comes good. This pandemic and all of the things that have come with it has been awful. But I believe it will unleash all sorts of new behaviors and businesses that will be for the better. If you squint, you can see them coming.

#climate crisis#economics#employment#enterprise#entrepreneurship#Family#hacking education#health care#management#VC & Technology

USV Climate Fund

As I alluded to in a post earlier this week, we have some new things going on at USV. Today my partner Albert talks about one of them on the USV blog.

Over the last few months, USV has raised a climate fund. Our thesis for this fund is:

The USV Climate Fund invests in companies and projects that provide mitigation for or adaptation to the climate crisis.

https://www.usv.com/writing/2021/01/usv-climate-fund/

We believe that the time is right to invest in companies seeking to mitigate the climate crisis by either reducing carbon emissions or drawing down carbon from the atmosphere. We also believe the time is right to invest in companies providing solutions for adapting to the climate crisis that is already underway and may not be able to be completely mitigated.

This is the third strategy we are executing at USV. Each one has a fund associated with it. We have our core early-stage fund that is investing in what we call Thesis 3.0. We now have our climate fund investing in our climate thesis articulated above. And we have our Opportunity Fund that invests in more mature companies across both theses. And we have one team of generalists that works together to invest all three of these funds.

I encourage all of you to go read Albert’s post which has a bit more information about what we plan to invest in around the climate thesis and how we intend to do it.

#climate crisis#VC & Technology