Posts from VC & Technology

Why USV is Joining the Libra Association

A new blockchain & cryptocurrency project, Libra, was announced today. Libra has been incubated by Facebook. USV will be one of the founding members of the governing body, the Libra Association. Libra is a stable, fiat-backed cryptocurrency that will launch inside some of the world’s largest consumer-facing applications. We believe Libra has the potential to be the catalyst that brings the entire cryptocurrency and cryptoasset market into the mainstream.

When USV invested in Coinbase in early 2013, our rationale was that digital currencies and digital assets (like Bitcoin and beyond) were a breakthrough technology, similar to TCP/IP, HTTP and SMTP. But we also knew that it would take significant investment in the surrounding infrastructure to make them useful for businesses and consumers, just like it did with the Web back in the 80s and 90s. At the time of that investment, we wrote:

“There is much that must be built on top of of these digital currencies to make them work well enough to support real business at scale”

This has proven to be true. If we look back at the past 10 years since the invention of Bitcoin, we have seen a lot of infrastructure built to support an increasing variety of use cases. But there is still a long way to go.

We think about the crypto sector as the intersection of Finance 2.0 (“Money Crypto”) and Web 3.0 (“Tech Crypto”), and what we have seen is that the “Money Crypto” use cases have been the earlier to materialize, especially “slow money” use cases (those that don’t require high throughput):

For consumer use cases (including both Finance 2.0 and Web 3.0 use cases), the biggest barrier to date, beyond technical scalability, has been the rollout of crypto wallets to mainstream consumers. As of today, there is still no mainstream web browser with crypto built-in, no mainstream phone with crypto built-in, and relatively few mainstream applications with crypto built-in. As that changes, crypto assets have the potential to move from being curiosities for enthusiasts to being default internet and financial infrastructure.

Once we have crypto-compatibility built-in to applications, browsers, and phones, many new behaviors and use cases will emerge. The financial system, in general, will become more accessible (smartphone adoption is outpacing bank account adoption globally). Payments can become faster, more reliable and less expensive. Magical new user experiences will be possible due to interoperability and reduced friction, the same way that the Web’s native interoperability unlocked countless new use cases and experiences. And, perhaps most importantly, we will open the door to self-sovereign digital identities (private keys) that are the underpinnings of user-controlled privacy and control of data.

So as we think about the potential drivers for mainstream crypto adoption, a simple, fully-collateralized, cryptocurrency used inside the world’s largest applications, touching hundreds of millions or billions of consumers, is perhaps the most promising one. It is our hope that Libra will serve as a major on-ramp to cryptocurrencies and cryptoassets, to the benefit of the entire ecosystem.

USV will be joining as a founding member of the Libra Association, the governing body that will manage both the Libra technology and the Libra Reserve. As one of the initial 20 members of the Association, we will have the opportunity to participate in design and policy choices that will shape the network. It is worth noting that Facebook will be just one equal member of the Association, which was an important factor in our decision to join.

This will be a large and complex undertaking, as there are many unresolved and challenging questions, involving the technology itself (security, privacy, path to decentralization), the regulatory environment, and the nature of the ongoing governance. In some ways, the initial Association resembles a constitutional convention, where the main goal is to draft the long-term governance mechanisms themselves.

To be clear, we view this as both an ecosystem investment and a financial investment. In addition to participating in the governance process at the Libra Association, USV plans to invest in the Libra Reserve, which will provide the stability for the currency. This is an unusual type of investment for us, but we have learned that investing in the crypto sector requires us to explore a variety of new investment structures.

We appreciate that Facebook invited USV to be an initial founding member of the Libra Association and we take our role in that seriously. We will advocate for those things that USV values most: openness, transparency, decentralization, and permissionless innovation. We think that those features will help accelerate adoption within the entire crypto ecosystem — including our many existing investments in the space — and also help Libra succeed in its goals.

This has also been posted on usv.com.

Secrets Of Sand Hill Road

One of the many great things about vacations is reading books. Vacation is the one time that I can really prioritize reading books (as opposed to everything else I read).

I just finished Scott Kupor‘s Secrets Of Sand Hill Road, a book for entrepreneurs about rasing capital from venture firms.

Scott makes the point numerous times in the book that the capital raising process is asymmetric for entrepreneurs in that they do it a few times in their career and VCs do it every day.

That is true for the pitch meetings, the negotiation process, and the post financing relationship too.

What Scott does in this book is break down every part of the process and explain it in plain english so that entrepreneurs can understand what’s going on and why it matters to them.

That last part is important, this book is written for entrepreneurs, not VCs.

Scott uses real world examples, mostly investments made over the last decade by his firm A16Z, to make the lessons he is delivering more “real.”

And he uses spreadhseet examples in one chapter and shows how various events can change the cap table for everyone.

It’s very much a “how to” book, more practical than theoretical.

There have been other books written about this topic, I like Brad Feld and Jason Mendelson’s Venture Deals, which is on its third edition now.

Jeff Bussgang’s Mastering The VC Game is also great.

You could teach an MBA or undegraduate course on capital raising for entreprenuers with these three books.

It would be a great course.

If you plan to be raising venture capital for your startup and don’t have the benefit of experience or a fantastic course on the topic, I would strongly recommend you pick up Scott’s book, or all three books, and spend some time reading them now or on your next vacation.

Seven to Ten Years

I have worked in three venture capital firms over the last thirty-three years and am intimately familiar with the performance of the fifteen (ish) venture funds raised and invested by these three firms. Much of what I have written about fund management and investment performance here at AVC over the last sixteen years comes from my observations of these funds and firms.

Starting in the mid-00s, The Gotham Gal and I started investing in other venture capital funds, always limiting these investments to firms where we knew the partners well and had sat on boards with them.

And The Gotham Gal started angel investing around the same time, often writing the first check into startups. She has made something like 140 angel investments over the last dozen years, mostly into companies founded by women.

We keep good records on these personal investments and I now have another data set to observe.

Across these three sources of data (my firms, other firms, angel investments), there are well over 1000 individual angel, seed, and early stage venture capital investments over four decades.

I have no plans to publish this data. It is not in a single database and there is a ton of confidential information in it.

But I can observe things about this data and have been doing so and will continue to do so.

One of the great truths about early stage investments is that you have to be patient with them. The losses come early and the winners take longer to realize.

It takes seven to ten years to get to real liquidity in a portfolio of early stage venture investments. You can’t short cut it. It just takes time. But come years seven, eight, nine, and ten the returns will start coming in.

I am not sure why seven to ten years and not five to seven or not ten to fifteen. It’s seven to ten. That’s how it has always been and seemingly always will be.

Unsafe Notes

I was reminded yesterday how much of a shit show raising seed capital via SAFE notes is. I can’t and won’t get into why I was reminded of that, but let’s just say nobody wants to go there.

So I thought I’d repost the important parts of a post I wrote on this topic a couple years ago.


I have never been a fan of convertible notes. USV has done quite a few convertible and SAFE notes. We are not opposed to convertible and SAFE notes and will not let the form of security the founder wants to use get between us and investing in a company that we like.

But I continue to think that convertible and SAFE notes are not in the best interests of the founder(s).

Here is why:

  1. They defer the issue of valuation and, more importantly, dilution, until a later date. I think dilution is way too important of an issue to defer, for even a second.
  2. They obfuscate the amount of dilution the founder(s) is taking. I believe a founding team should know exactly how much of the company they own at every second of the journey. Notes hide this from them, particularly the less sophisticated founders.
  3. They can build up, like a house of cards, on top of each other and then come crashing down on the founder(s) at some point when a priced round actually happens. This is the worst thing about notes and doing more than one is almost always a problem in the making.
  4. They put the founder in the difficult position of promising an amount of ownership to an angel/seed investor that they cannot actually deliver down the round when the notes convert. I cannot tell you how many angry pissed off angel investors I have had to talk off the ledge when we are leading a priced round and they see the cap table and they own a LOT less than they thought they did. And they blame the founder(s) or us for it and it is honestly not anyone’s fault other than the harebrained structure (notes) they used to finance their company.

The Series A focused VC firms that often lead the first priced rounds get to see this nightmare unfold all the time. The company has been around for a few years and has financed itself along the way with all sorts of various notes at various caps (or no cap) and finally the whole fucking mess is resolved and nobody owns anywhere near as much as they had thought. Sometimes we get blamed for leading such a dilutive round, but I don’t care so much about that, I care about the fact that we are allowing these young companies to finance themselves in a way that allows such a thing to happen.

Here are some suggestions for the entire angel/seed sector (founders, angel investors, seed investors, lawyers):

  1. Do priced equity rounds instead of notes. As I wrote seven years ago, the cost of doing a simple seed equity deal has come way down. It can easily be done for less than $5k in a few days and we do that quite often.
  2. The first convertible or SAFE note issued in a company should have a cap on the total amount of notes than can be issued. A number like $1mm or max $2mm sounds right to me.
  3. Don’t do multiple rounds of notes with multiple caps. It always ends badly for everyone, including the founder.
  4. Founders should insist that their lawyers publish, to them and the angel/seed investors, a “pro-forma” cap table at the closing of the note that shows how much of the company each of them would own if the note converted immediately at different prices. This “pro-forma” cap table should be updated each and every time another note is isssued. Most importantly, we cannot and should not continue to allow founders to issue notes to investors and not understand how much dilution they are taking on each time they do it. This is WRONG.

Honestly, I wish the whole scourge of notes would go away and we could go back to the way things were done for the first twenty years I was in the venture capital business. I think it would be a better thing for everyone. But if we can’t put the genie back in the bottle, we can at least bottle it up a bit better. Because it causes a lot of problems for everyone.

The Long Game

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.

The IPO Bonanza

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.

Respecting The Pro-Rata Right

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.

Market, Team, Product

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.

The Business Model Pivot

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:

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.