Posts from VC & Technology

I have been reading Whiplash, a book I recommended here last week. It starts with the story of the Lumiere brothers, who are credited with the invention of “the moving picture.”

As told in Whiplash, the Lumiere brothers started showing films to audiences in 1895 using their patented cinematograph. But by 1900, they were out of the film business and had moved on to color photography. The industry they helped to start went on to be one of the biggest new industries of the 20th century.

I often think of the formative years of the Internet, in the early/mid 90s. There are a lot of people from that era that remind me of the Lumiere brothers.

I was in a Board meeting on Friday in my office and one of the executives of the company that was having the Board meeting left to get coffee or use the rest room. When he came back, he said “why do you have one of the Josh Harris Gilligan paintings in your office? I explained that the reason Gilligan hangs in my USV office is to remind me that being first to something doesn’t mean you will profit from it. Josh Harris was the first person to show me audio streaming over the Internet. Josh was the first person to show me video streaming over the Internet. He did both of those things at his Pseudo Programs company that he started in 1993. Around the same time, 1993 ish, Josh predicted to me that auctions would be one of the first big businesses to take shape on the Internet. That was roughly two years before eBay was founded. Josh didn’t profit much from any of his visionary efforts or insights. But there is a Josh Harris painting in my office because I respect being early more than I respect making profits. I think the latter is easier than the former.

Which takes me to some things we have been thinking a lot about at USV recently. Things like Blockchain and Genomics. We think we are very early in these two important technological revolutions. We are investing actively (but not heavily) in one of them (blockchain) and trying to find the right entry point to the other one.

I think that the investing we are doing in these sectors right now is more likely to be like Psuedo Programs than YouTube or SoundCloud.

But I also think that you have to be early to learn the technology and the markets and build the networks and relationships that will allow you to see, understand, and invest in YouTube when it shows up. What you don’t want to do is lose patience or interest and move on, like the Lumiere brothers did.  Early stage VC is a marathon, not a sprint. That is true in everything, from the hold periods, to the work you do with a portfolio company, to the patience you must show towards a sector you think will be important. It is hard to sustain the enthusiasm sometimes, but if you have conviction about something, you have to stay the course.

I figured I’d follow up a post taking a shot at the AVC community with one that should engage the AVC community, including me.

And what better to talk about than what excites us these days?

It is no secret to the regular readers that it is hard for me to get excited about the current state of tech and startup land. David said as much in his comment yesterday.

With the exception of blockchain stuff, which seems very early and not yet investable except for fools and the foolhardy (me), I am struggling to find things to get excited about in tech and startup land.

So, let’s all jump into the comments and talk about what excites us about tech and startups right now. Not yesterday, not last year, not five years ago, right now. And if its your startup you are excited about, that’s cool, but please don’t turn the comments into a pitch fest. That’s my life already 🙂

I saw a blog post this weekend that looked at the IPO filings of 79 tech companies and calculated the ownerships of the founders and the VCs at IPO.

The result of that analysis is that the average founder ownership at IPO was 17% and the average VC ownership at IPO was 56%.

I’ve written a bunch on this topic and here are two posts that address this exact issue:

Founder Dilution – How Much Is “Normal”?

Employee Equity: Dilution

In both posts, I lay out how the equity gets shared with employees and investors as the company grows and scales.

Here’s the most important quote from those two posts:

In my experience, it will generally take three to four rounds of equity capital to finance the business and 20-25% of the company to recruit and retain a management team. That will typically leave the founder/founder team with 10-20% of the business when it’s all said and done. The equity split at 20% for the founders will typically be; 20-25% for the management team, 20% for the founders, and 55-60% for the investors (angel all the way to late stage VC).

I wrote that seven and half years ago, but on this topic, not much has changed over the thirty years I’ve been doing VC.

Raising round after round of venture capital is expensive. There are some entrepreneurs who figure out how to get profitable and not raise round after round (or avoid VC altogether), there are some entrepreneurs who are able to raise a very high valuations and avoid a lot of dilution, and there are many entrepreneurs who choose to sell the business before they take a lot of dilution. But for the entrepreneurs who raise four to six rounds of VC before going public, the math is the math. If you end up owning more than 20% at IPO, you are beating the averages.

Applications are open for New York’s seventh annual FinTech Innovation Lab, a 12-week program that I have blogged about a bunch here on AVC. This proram is for early and growth stage companies that have developed cutting edge technology products targeted at financial services customers. The program has a particular interest in: Augmented/ Virtual Reality; Data Analytics using Artificial Intelligence/Machine Learning; Digital Customer Engagement Tools; Enterprise Dev Ops; RegTech; Security, and other Disruptive Financial Services Models.  For a complete list of focus areas, click here.

The FinTech Innovation Lab is run by the Partnership Fund for New York City and Accenture. Accepted companies will get the chance to refine and beta test their financial technology products in New York City in partnership with the world’s leading financial services firms and receive mentorship from the Lab’s Entrepreneurs Network.

Through a competitive process, the chief technology officers of the participating firms will determine which proposals are accepted for further development and deployment. The participating firms are:  AIG, Alliance Bernstein, Ally Financial, Amalgamated Bank, American Express, AQR, Bank of America, Barclays Capital, BBVA, BlackRock,  Capital One, CIT Group, Citi, Credit Suisse, DE Shaw, Deutsche Bank, Fidelity, Goldman Sachs, Guardian Life Insurance, JPMorgan Chase & Co., KeyBank, MasterCard, Morgan Stanley, New York Life Insurance, Pitney Bowes, Rabobank, Scotiabank, Synchrony, UBS and Wells Fargo.  Several venture firms also support the Lab, including Bain Capital Ventures, Canaan Partners, Contour Venture Partners, Nyca Partners, Rho Ventures, RRE Ventures, and Warburg Pincus.

For more information sign up for their information session on Monday, November 7, 2016 from 5:30 – 6:30 PM – Register

Application deadline is December 1, 2016– APPLY

Last week Coin Center published a primer on app coins. It is very good.

I particularly like this part:

Open platforms have proved difficult to create because it has been historically difficult to monetize them even if they become successful—by nature they are public goods. Now, however, the developers of a cloud storage service can incorporate a scarce access-token, an appcoin, into the design, distribute that token to users, retain some amount of the token for themselves, and if the platform proves popular, the token (alongside the holdings of the developers) will grow in value and remunerate the developers for providing a public good. This new model challenges the concept of equity as traditionally understood, and carries entirely different risks and rewards.

The idea that we now have a monetization model for creating and maintaining a public good (ie Twitter) is something that makes me incredibly happy and poses all sorts of interesting questions about the future of venture capital.

This is almost a year old, but most of it is still very relevant.

I think selling is the hardest part of investing. Buying is, of course, critical to generating strong investment performance. Figuring out what to buy and when to buy it is what most people think of when they think of investing. But your returns will have as much to do with selling as buying. And buying is a fairly rational decision. Selling tends to be emotional. And that is why selling is the hardest part of investing.

In venture capital, thankfully, VCs don’t drive a lot of the sell decisions. I wrote about that back in 2009. Most sell decisions that really matter in a venture portfolio will be made by the founders and management of the portfolio company, including the timing of the public offering if that is where a company is headed.

But even so, I have struggled with the sell decisions, both personally and professionally, over the course of my career. I have held on way too long and watched a publicly traded stock literally go all the way to zero without selling it (ouch). And I have made the even worse decision of selling too soon and watching a stock go up three, four, five times from where I sold it.

So where I have landed on selling is to make it formulaic.

If we (USV) have to make a sell decision, we like to have a policy and stick to  it. We like to distribute our public positions as soon as we can, for example. That’s a policy and we stick to it. If you look at the SEC forms we have filed as a firm over the years, you can see that is what we do. It is a formula. It doesn’t mean that it is the right decision in each instance, but it does mean that, if we stick to it, we will do the same thing every time and the law of averages will work things out. We also let the people we work with know that is our policy so they are not surprised by it. What is worse is to make each decision emotionally and get them all or most of them wrong.

Personally, I like to dollar cost average out of a stock (sell a position over time instead of all at once) and I also like to hold onto some of the position for the very long term (schmuck insurance). I have a formula for the disposition of public stocks I get via distribution from USV and the other VC funds we are invested in. We execute the formula time and time again. It takes the emotion out of the decision and it works better for us.

The thing I have learned about selling is that it is almost impossible to optimize the sell point. You need a crystal ball and you need to know something that others don’t know. That is either impossible or criminal. So I don’t try to optimize it. I try to make it formulaic and systematic. It works better for me and I think it may work better for you too.

Young companies are a bit like children. They require care and feeding.

The feeding part comes naturally to investors. Because that is what we do. We invest capital into young companies in hope of generating large returns on those investments.

The caring part comes harder to investors. At least it did to this investor.

But as I enter my fourth decade in venture investing, it is the caring that keeps me going.

Caring is exactly what it sounds like. Giving a shit. Actually caring about the company, the team, and the business.

The thing about caring, when done right, is that it means everything to the founders, the managers, and the team.

They feel it, more than you think possible.

And that allows you to encourage them to adjust their thinking, their plans, their team.

I have found that feeding doesn’t change behavior very much. It works well in the short run (do this and we will invest more money). But it doesn’t work very well in the long run.

Caring, on the other hand, has immense power to bring positive change.

I see this every day. And it encourages me to care even more.

In the summer of 2003, Brad Burnham and I set out to raise a $100mm early stage venture capital fund. We had both been successful VCs in other firms and we had a thesis that the second wave of the Internet was upon us and that large networks were going to get built in this phase. The term “web 2.0” had not yet been coined and Facebook had not yet been started (LinkedIn was being built around this time).

It took us a year and a half to raise that fund. We traveled all around the country (and to the UK too which was a total waste of our time and money). We spent our own capital raising that fund. We believed in ourselves and our thesis, but it was very hard to get others to understand it. Sometime in the spring of 2004, someone got it. And then a few others did. And by the summer, we had a group together and we were able to build to a first close in November of 2004. We had our final close in February 2005, eighteen months after we started. That was a hard raise.

But that fund, USV 2004, has been one of the very best venture capital funds ever put together. The numbers are public because many (most) of our investors are public pension funds who have freedom of information act (FOIA) obligations to report the performance of the funds they invest in. At that time (early 2000s), the big VCs in the bay area were kicking out FOIA obligated limited partners out of their funds. That was a huge win for us and we got a bunch of those FOIA obligated LPs into our fund. Without FOIA, I am not sure we would have gotten USV 2004 done. But we did.

There is a correlation between hard raises and strong performing investments. It is not a perfect correlation by any means. Some great investments are obvious (Facebook in 2010, Airbnb in 2014) and get done easily by the company and perform very well. And many hard raises are hard because they aren’t good investments.

But there are some investments that are very hard to get done that turn into incredibly strong performers. We have had a few of these in our portfolio over the past year as the expansion capital stage (Series C and D) of the venture capital market has contracted. We have seen companies need as much as six to nine months to get a financing done and we have seen founders and CEOs get rejected by more than fifty investors during that process.

I like to tell them the story of USV 2004. I believe Brad and I got over 100 rejections during that process. Rejection hurts but it is part of the game, particularly when you have a hard raise.

One of the reasons hard raises can turn into great performers is that they often mean you are doing something others aren’t doing, you are early to an opportunity and others don’t see it. That certainly was the case with USV 2004. That’s the contrarian bet in action.

Another reason hard raises can turn into great performers is that you learn something from all of that rejection. Brad and I learned that we weren’t explaining the opportunity clearly and crisply enough. We went and read Carlota Perez on a friend’s suggestion and she helped us frame the “second wave” argument in a much cleaner and clearer way. And once we started investing the capital, we had a framework, influenced by Carlota’s work, that we could execute against. The fundraising process, and all of that rejection, helped harden our investment thesis to great effect.

It is this second reason that I am seeing in action in our portfolio. As these expansion stage companies struggle to raise capital, they are forced into a cathartic (and at times painful) process of self reflection. What is their sales process? Is it efficient? What is their unique value proposition? Is it really unique? What kind of company are they building? Will it be large enough to justify all of this investment?

And as a result, these companies are coming out of these hard raises with better businesses, better operating models (lower burn rates!!), and bigger visions to go execute against.

And I suspect that many of these rounds that have taken six to nine months to get done are going to turn into really strong performers for the investors who have ultimately decided to get behind them. We are using these opportunities to “lean into” these investments with our funds. We are always deeply reserved for our portfolio and believe in doubling down on investments when we have conviction. And, as an investor, you should always be open to having conviction around an investment that is having a hard time getting done. Because they can, at times, be among the strongest performing investments out there.