Posts from VC & Technology

What Happened In 2020

It is my tradition to end the year looking back and start the year looking forward. So today, I will write about 2020 in the context of tech/startups/VC/crypto.

While it is inarguably the case that 2020 was a terrible year with a global pandemic, racial strife and ugly politics in the US, and an economic downturn that is impacting exactly the people who have already been hurt the most, it was an inflection point for the tech/startup/VC/crypto sectors and a very significant one. These sectors, which had been growing in their global importance over the last twenty years, all of a sudden have emerged as the most important sectors of the global economy.

We are seeing structural declines in the importance of massive sectors like carbon based energy, commercial real estate, retail, and more. And technology based products and services are benefitting from these losses.

Some obvious examples:

1/ Zoom and other video conferencing services gain when employers allow/encourage/require their employees to stop coming to offices leased from the commercial real estate sector.

2/ Electric vehicles/batteries/software gain when fewer and fewer consumers are buying gasoline from the carbon energy sector.

3/ Technology based commerce solutions gain when less people venture into stores to buy groceries, clothes, and other consumer products.

These changes are not temporary, although the velocity of the changes may be. Technology based services have improved significantly this year, rising to the moment when consumers needed them, and they will continue to improve relative to legacy offerings. And consumers have installed the apps, left their cards on file, and adopted different routines. The genie is out of the bottle. It is not going back in.

In USV’s year end review process, we asked our team if there was anything about the work model we adopted in the pandemic they want to keep. What we heard was most people want to be in the office two to three days a week, not five. And that makes sense, particularly in a dense urban region where transportation options are crowded and time consuming. One of the big ahas of 2020 was how much time and productivity is wasted on commuting and how much more productive we have all become without it.

Financial markets, flush with stimulus money that mostly found its way to brokerage accounts instead of the families that actually needed it, understood these changes quickly and we witnessed extraordinary gains in technology stocks and crypto assets. This was largely a speculative affair, driven by people stuck at home trading stocks and crypto for their own accounts or with other people’s money.

But here is the thing about speculative frenzies – they are generally directionally correct but off in their order of magnitude. And they finance the trend that they are directionally correct about. It may be the case that Tesla’s market capitalization is too high, but that allows Tesla to raise $10bn without diluting more than a few percentage points. And that $10bn will go towards accelerating the conversion of the auto industry from carbon-based fuel to renewable energy. And that is a good thing for society.

There is no question that crypto is in yet another speculative bubble, but like I said, it is speculative bubbles that allow emerging technologies to go mainstream and finance themselves. Odd as it may seem, a lot more people want to buy Bitcoin at $28,000 than wanted to buy it at $5000. That’s just how things are. And it is important to understand that.

Startups and the investors who finance them benefit from all of this. 2020 was a great year for early-stage companies and venture capitalists. And some profound changes are afoot that will allow startups to flourish even more in the coming years. We now have virtual capital raising so that startups don’t need to travel to raise capital. This makes it easier to raise money and makes geography matter much less. And we have remote work becoming mainstream which means startups can be located anywhere and hire from anywhere. Capital and talent are the heart and soul of startups and both are now available to a founder from anywhere. It is hard to understate how transformational and important this change is.

So when we look back at 2020 in a few years, we will see that it was the year that everything changed for tech/startups/VC/crypto and set the stage for a decade of transformational change. And god knows that the world needs a lot of that right now. That will be the topic of my post tomorrow.

#VC & Technology

The Rise Of Everywhere

This is a theme I have come back to many times over the last decade but in the wake of all of the headlines about high profile founders, VCs, and companies leaving the bay area, I thought I would return to it.

There is no question that the bay area is losing some talent to other markets but I don’t think that is anywhere near the most important thing. It is also the case that Google and Apple show no signs of leaving the bay area any time soon. Silicon Valley will remain a mecca for talent and tech for as far into the future as I can see.

What is more important is the rise of everywhere. In the most recent Pitchbook 2021 predictions, they project that Silicon Valley will make up less than 20% of all VC deals in 2021. The way that happens is not less funding in Silicon Valley. The way that happens is way more funding everywhere else.

In the first decade of USV, the 2000s, we mostly invested in NYC and Silicon Valley. In the second decade of USV, the 2010s, we invested throughout North America and Western Europe. In the third decade of USV, I suspect we will extend our geographic range even further. We already have.

If there is one megachange in VC from the pandemic (there may be many), I think it is the comfort with making investments over video without the founder or the VC traveling to meet each other. Related to that is the rising comfort of VCs and founders working closely with each other over video and not traveling to work with each other in person.

I am not saying that founders will stop traveling to raise money, although I think that may stick post-pandemic. And I am not saying that VCs will stop traveling to attend board meetings. But I am saying that we will see less of both and the result of that will be a massive increase in the geographic range of where investors can and will invest.

If you add to that the rising comfort of companies employing people remotely and the rising number of people in tech living somewhere other than the big tech hubs, we will see a massive increase in the number of founders starting companies in places other than Silicon Valley, NYC, and a few other locations. This is not just happening in the US, this is happening everywhere.

So let’s stop worrying about Silicon Valley, it will be fine, and start celebrating the rise of tech entrepreneurship everywhere. That is a profound thing for the world and something to be incredibly happy about.

#entrepreneurship#VC & Technology

Rapid Innovation

When people ask me why I prefer to invest in software-based innovation vs other important areas like biotech, hardware, energy, etc, I always point to the speed at which software can be built, released, and iterated on.

This is a personal comfort thing for me. I am not saying that these other areas are not important. They are. Society needs innovation in areas outside of software. And there are fantastic returns to be had to those who are prepared to take on those risks.

But there is something very frustrating about innovation that cannot be released to the market quickly.

I was reminded of that yesterday when I read David Wallace-Wells’ piece in NY Magazine about the Moderna Covid Vaccine. David writes:

By the time the first American death was announced a month later, the vaccine had already been manufactured and shipped to the National Institutes of Health for the beginning of its Phase I clinical trial. This is — as the country and the world are rightly celebrating — the fastest timeline of development in the history of vaccines. It also means that for the entire span of the pandemic in this country, which has already killed more than 250,000 Americans, we had the tools we needed to prevent it .

You can’t make a vaccine and ship it to the world as soon as you’ve made it. There are many good reasons for that. But if that were not the case, as David points out, we might have been able to avoid the entire pandemic. We had the technology to end the pandemic before it landed in most of the world.

And it makes me wonder if there are lessons from the world of software, where we “move fast and break things”, that can be adopted by other areas of innovation. Can we re-imagine how we test medical innovations so that they can come to market and save lives much more quickly? Can we re-architect how the energy markets work so that they can be re-shaped as quickly as software markets are? Can we stitch atoms together more like we stitch bits together so that physical things (buildings, devices, etc) can adapt more quickly?

I don’t know the answers to those questions. I am just wondering outloud. But I know this, innovating in software is so much easier than innovating elsewhere and it would be better if that were not the case.

#VC & Technology

Thoughts On Charles Duhigg's New Yorker Piece

I saw this tweet in my feed yesterday and read the New Yorker piece when I woke up this morning:

Here’s what I think. There is more truth to that article than anyone in the venture capital industry wants to admit.

The idea that capital alone can create a strong company is a flawed idea that the VC industry pursued with a lot of passion for most of the last decade. The flameout of WeWork and the tarnished stories around other “fundraising as a strategy” startups will hopefully put an end to that approach of building companies, but I won’t hold my breath until that happens.

It is true that we VCs enable the bad behaviors outlined in that piece and we must look a little more carefully at ourselves in the mirror in the morning and, as the Gotham Gal likes to tell me, “get over ourselves.” I won’t hold my breath until that happens either.

All of that said, the vast majority of VC-backed companies are not WeWork. The vast majority of VC-backed companies are innovative, led by good people, and are creating value the old fashioned way, by supplying their customers with high quality products and services. We should not let a few bad apples spoil the whole bunch.

Cautionary tales like WeWork and the others outlined by Charles Duhigg are healthy. But they are not the entire story, thankfully.

#VC & Technology

Knowing What You Are Looking For

There are many ways to invest successfully. Public stocks, bonds, private equity, real estate, venture capital, etc. And within each category, there are so many different investment opportunities.

In public stocks, there are something like 5,000 listed stocks in the US. In venture capital, there were something like 30,000 companies that raised venture capital in 2019.

How do you make sense out of all of that opportunity?

I’ve always been a fan of knowing what you are looking for and ignoring everything else. We call that thesis based investing at USV, but it is actually more than that.

We can say that we are looking to back trusted brands that increase access to capital, wellness, and knowledge, and we do. But we do more than that. In each of those sectors, we go deeper and identify specific areas within them that we want to target. We call those “deep dives.” We identify areas we want to focus on and areas we don’t want to focus on.

All of this is a relentless effort to figure out what we are looking for and then go out and find it. It is not a static thing. It is a dynamic thing. A pandemic comes along and rocks our world. Time to revisit the thesis and the deep dives. When the pandemic ends, and it will, we will factor that into our thinking too.

In a world with so much opportunity, it pays to ignore the vast majority of it and focus on a tiny bit of it. That may seem counterintuitive, but I am certain that it is the right thing to do.

#stocks#VC & Technology

The Star Pupils

I was looking at the numbers on an early-stage VC fund that the Gotham Gal and I are invested in. I am not very familiar with the portfolio but this fund was formed in 2012. There are 24 names (investments) in the portfolio and 3 of them have produced 92% of the value in the fund.

This is more or less the pattern of every early-stage venture capital fund I have helped to manage and every early-stage venture capital fund I have invested in over the last thirty years. I believe it is a fundamental law of early-stage investing that a small number of investments will produce that vast majority of the returns.

But here is the thing. You may get your returns from a small number of names, but you cannot simply focus on them.

I liken it to a teacher and a class full of students.

There will always be the “star pupils” but the teacher’s job is to serve all of the students. The reward may be to watch the star pupils shine, but the job is not. The job is to serve all of the students equally, or possibly to help the students who are struggling more than the others.

That mindset has helped me navigate this challenging issue in the early stage venture capital business. The work is often in one place and the rewards in another.

#VC & Technology

Setting Off On Your Own

I read Alex Konrad’s profile of Fred Ehrsam and Matt Huang of Paradigm yesterday and was reminded of my own career.

In 1996, after almost a decade at Euclid Partners, I left to start Flatiron Partners with Jerry Colonna. I was 35. Jerry was 33. We had a lot to learn but we did know one thing. We knew that the Internet was upon us and it was going to be big.

We had absolutely no clue how big it was going to be. But that did not matter. We got to work investing in Internet companies and we did very well until the bubble and crash.

If you read Alex’s profile of Fred and Matt, you will learn that they are 32 and 31, and that they believe that crypto will be big.

The Gotham Gal and I are investors in Paradigm, so I am biased, but I believe that Fred and Matt are right and that, like Jerry and me, they have no idea how big it will be.

#crypto#VC & Technology

A Failing Grade

I wrote yesterday, about the quarterly numbers for VC investing activity:

If this was a student coming home with a report card, it would be straight As.

Well, I missed something in the data that was subsequently reported on by PitchBook, one of the authors of the report:

Venture funding for female founders has hit its lowest quarterly total in three years.

Firms invested a total of $434 million in Q3—the lowest figure since the second quarter of 2017, according to PitchBook data. The third quarter total also amounts to a 48% drop in funding from Q2, when female founders received $841 million across 132 deals.

I hope Q3 is an anomaly and not the reversal of a trend that has mostly been “up and to the right” in recent years.

We continue to see, and fund, great woman founders so I am hoping that there is not some fundamental change to the market that is hurting women founders. But it is possible that there is and I missed that in my blog yesterday. I will give myself an F for that.

I’ve seen a few replies on Twitter that suggest the same is true for underrepresented minorities. I have not seen the data to back that up but if it is true, that is also a failing grade for the VC sector.

I have been encouraged by what I have seen in the VC/startup sector regarding opening up access to women founders and founders of color. It feels like positive change is happening. But we have to see that in the numbers or it is just talk.

And apparently we did not see it in the numbers last quarter.

#VC & Technology

Venture Funding Trends Intact

The NVCA and Pitch Book are out with their Q3 report on the VC industry and what they report is that the VC industry continues to be very active throughout the pandemic. Deal counts and deal values are stable to up over last year. The massive expansion of later-stage private capital continues unabated. Valuations continue to rise. And exits have been very robust.

If this was a student coming home with a report card, it would be straight As. The startup economy is alive and well during the pandemic.

#VC & Technology