Posts from VC & Technology

There has been a lot of chatter recently about ageism and the old vs young debate in tech. The New Republic has a post up today on the topic. And last week the New York Times Magazine featured a long article on the topic.

There is no doubt that tech is a young person’s game to some extent. And there is no doubt that VCs are biased towards younger founders and against older ones.

However, it’s not an absolute thing. I’ve written about this before here at AVC. At USV, we have backed founders in their teens, 20s, 30s, 40s, and 50s. I think we would back a founder in her 60s or 70s too but we have not yet had that opportunity in an investment that made sense to us. The Gotham Gal recently backed a founder in his late 60s. I am pretty sure that will be a good bet.

I saw this graphic on Tumblr today. It made me happy. Ray Kroc started McDonalds when he was my age (52).

My point is this. Yes tech is biased toward younger people. To some extent, USV may be biased in that direction. We have not done a distribution of the ages of the founders we have backed but I suspect it would weight a bit toward the younger ages. My bet is that the median age of the founders we have backed would be mid 30s.

But as this graphic shows, you are never too old to start a company. And I promise you that USV will consider any investment in our sweet spot (large software based networks) regardless of the age of the founder. Age is a two way street. Youth brings some positives. But age brings experience. And that is a pretty valuable thing.

Since starting USV in 2004 (we actually started USV in the summer of 2003, but it took Brad and I over a year to raise our first fund), we have had a two year analyst position. The idea is we bring in a young talented person early on in their career, they learn a lot about the startup world from inside a VC firm, and we get leverage from having a person who can do a lot of the support work that the partners need to do our jobs. The job gets stale after a few years and since we don’t have a career path at USV, they leave after a couple years.

It has worked out well. Our first analyst Charlie O’Donnell, has gone on to do a number of things and now runs his own seed fund, Brooklyn Bridge Ventures. Our second analyst, Andrew Parker, is now a partner at Spark Capital in Boston. Our third analyst, Eric Friedman, is now Director of Sales and Revenue Operations at our portfolio company Foursquare. Christina Cacioppo came next and she has been working on her own startup since leaving USV eighteen months ago. Here’s her online profile if you want to see what she’s been up to. Zander and Brian are still with us, but will be moving on this year as their two year stints are coming to an end. These two young men are super talented and if you are interested in hiring the very best into your company, you should reach out to them. Tweeting at them should work (I linked to their twitters above).

I like to think of this two year stint as the USV MBA. We don’t issue diplomas but we pay salaries instead of charging tuition. You learn similar things but the cases are real time, not after the fact. And I would assert with a fair amount of pride that a USV Analyst stint on your resume is worth as much as a top tier MBA, maybe more. And the alumni network, while small, is fantastic.

All of that is to provide the setup to the news that we are hiring for our next two year analyst. Zander blogged about it last week and it’s been highlighted at the top of usv.com for the past week, so many of you probably already know about this. But there is only one more week to apply as applications are due by April 1st at 11:59pm eastern time. So I thought I’d make sure everyone who reads AVC knows about this position.

The application is pretty simple. You give us some links to your online presence, you answer two questions over a video interview app called Ziggeo (which is my partner Albert’s wife Susan’s startup), and you hit submit. We take it from there. We look at the links and the videos and select a bunch of people for in person interviews. We hope to have the position filled by the end of April/early May.

If you want to apply, go read Zander’s post and the detailed instructions are at the end of the post. If you are like me and like to skip the instructions and just get on with it, the application page on usv.com is here.

This showed up in my SoundCloud stream over the weekend. I finally got around to listening to it this morning.

The iOS vs Android debate certainly does seem like old news, but what happens next is a super interesting topic. The first part of this podcast is about iOS vs Android, but the second half gets into more interesting territory.

I like that Andreessen is giving Benedict the opportunity to build an audience on multiple platforms. I am not sure if this is Benedict’s podcast or if we will see others, like Marc, Ben, Chris, and the other Andreessen partners on this podcast. But regardless, this is yet another great information source coming out of the VC business.

The idea of a VC podcast is not new. Bijan and Nabeel at Spark have been doing this for a couple years. You can listen to a bunch of their podcasts here.

Everywhere I go, everywhere I speak, I get asked this question. Are we in a bubble?

I’ve been getting asked that question for at least four years now. It’s hard to sustain a bubble for four years. But we are also not in a normal valuation environment for high growth tech companies and we have not been in one for a while.

Here’s how I have been answering the question.

I learned in business school that the multiple of earnings one should pay for a business is roughly the inverse of interest rates. The reason for that is if you buy a business that makes $10mm a year and pay $100mm for it, then you are effectively getting a yield on your investment of 10% (annual earnings/purchase price). This math is terribly simplistic but fine for the purposes of this post. If interest rates are 5% instead of 10%, then you would pay $200mm for the business ($10mm/$200mm = 5%). So the math here is interest rates = annual earnings/purchase price. Again this is very simplistic because it does not deal with the important questions of what interest rate you use, how you deal with earnings that are growing or declining, and a host of other issues. But at the end of the day, this math [annual earnings/purchase price = yield] is fundamental and everything about asset values, capital markets, and valuations stems from it.

Since the financial crisis of 2008, policy makers in the developed world have kept interest rates at or near zero. They have flooded the market with cheap money in an attempt to heal the wounds (losses) of the financial crisis and incent business owners to invest and grow their businesses. That has not worked particularly well but it has worked a bit. Though their words have changed in recent years, their actions have not changed very much. We still are in a policy framework where money is cheap and interest rates are near zero.

If you go back and apply the formula [yield = earnings/purchase price] and use zero for yield/interest rate, then one would pay an infinite amount for an earning stream. Of course that doesn’t make sense and it has not happened. But valuations are at extreme levels because you cannot get a decent return on your money doing anything else.

At some point this will change. The yield on the 30 year treasury yield has been sub 5% since the financial crisis. If (when?) it gets back to the 6-8% range where it was for most of the 1990s, we will be in a different place. Here’s a 40 year history of the 30-year treasury yield. You can see that we have been in a very low rate environment for a while now.

The other thing we have noticed is that this low rate environment has caused asset value/earnings ratios to be non-linear. What you normally see is the value/earnings ratio grows linearly with earnings growth rates. If earnings are growing 20% per year you get a value/earnings ratio of X. If earnings are growing 40% per year, you get a value/earnings ratio of 2x. But what we are seeing is you get something that looks more exponential than linear when you start modeling this out at higher earnings growth rates. When earnings growth rates get to 50-100% per year and look like they can continue to grow at that rate for a number of years, you get value/earnings ratios that are eye popping. It seems that investors are so starved for returns that they are willing to pay that much more for earnings that can grow quickly.

It is the combination of these two factors, which are really just one factor (cheap money/low rates), that is the root cause of the valuation environment we are in. And the answer to when/if it will end comes down to when/if the global economy starts growing more rapidly and sucking up the excess liquidity and policy makers start tightening up the easy money regime.

I have no idea when and if that will happen. But until it does, I believe we will continue to see eye popping EBITDA multiples for high growth tech companies. And those tech companies with eye popping EBITDA multiples will use their highly valued stock to purchase other high growth tech business and strategic assets at eye popping valuations.

It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.

Two years ago Congress passed the JOBS Act, promising to help small businesses and startups more easily raise capital by loosening various Securities and Exchange Commission (SEC) regulations. Two years later, it’s as hard as ever to raise equity capital and if you aren’t rich (accredited or qualified investor status), you can’t legally participate in the world of startup investing. The reason for this is that the SEC implemented the JOBS Act the way they wanted to, and in the process hamstrung its use.

As one might suspect, the world of technology is likely to solve this problem on its own. As Naval writes in this excellent post, the innovations behind the Bitcoin protocol and architecture are spilling out into the world of open source and crowdfunding. We have seen a number of exciting projects lately that are loosely organized collections of software developers building new approaches to distributed e-commerce, identity, legal contracts, and a host of other interesting and vexing problems using this method to fund their “startup” (cut and pasted from Naval’s post):

• Write software to power a completely distributed network in which any node can participate anonymously.
• Allocate scarce resources in the network using a scarce token – an Appcoin. Users need this Appcoin to use the network. Owners of scarce resources get paid in Appcoins.
• Pre-mine or early-mine Appcoins and keep some non-threatening amount. These are shares of your company, equity that will appreciate in value if the network is adopted.
• Give network operators the ability to collect new Appcoins in proportion to their contribution. Route a small fraction of each transaction output to the developer foundation (Mastercoin does this). Theserevenues are used to pay for operations, and bounties for ongoing development.
• As network usage increases, so does equity value and revenue.
• Anyone can buy Appcoins, anywhere, anytime, anonymously. Ship your code, ring the IPO bell.

We’ve been asking ourselves at USV if we should be purchasing coins in some of these “genesis block sales” instead of our normal appetite for Series Seed and Series A shares. I think the answer is ultimately yes, but we are most certainly entering into unknown territory in the process.

My partner Albert has been predicting that there will be no distinction between the public and private markets in a decade. He may have been off by eight or nine years in that prediction. It feels like its coming soon and coming fast. And that is exciting to me. Anything that creates more innovation and more entrepreneurs is a good thing for VC, for society, and for me.

VC is a service business like law firms and ad agencies. Our customers are the entrepreneurs we back. Our shareholders are our limited partners. When we do a good job of helping our customers create value, our shareholders benefit.

But, like law firms and ad agencies, it is hard to provide truly objective and unbiased advice when you have a conflict of interest. In the law and advertising business, clients will demand that their service providers don’t work for their competitors. The same is mostly true of entrepreneurs and VCs. There is no language in the stock purchase agreements we sign with our portfolio companies preventing us from investing in a competitor. But there is an understanding about conflict avoidance and breaching that understanding can have negative reputational consequences.

The problem that arises is that conflct is not the same to everyone. As I said to an entrepreneur yesterday, “conflict is in the eye of the beholder.” This entrepreneur had pitched me on his business via email and I told him it sounded a lot like one of our portfolio companies. He was shocked as he didn’t (and doesn’t) see it. A few months later, he went to see the Gotham Gal about making an angel investment in his company. She pointed out the exact same conflict to him. Again he was surprised. So he emailed me yesterday about the situation and I pointed out that not everyone sees conflict in the same light. But I went on to point out that the perception of conflict is conflict.

When someone feels that something you invest in is encroaching on his or her territory, you have created a perception of conflict with that entrepreneur. Even if he or she is dead wrong about that, it doesn’t really matter because they are now in conflict with you in their own mind and they won’t listen to you the same way again. And that is the most powerful leverage point a VC has when making an investment. If you cannot get an entrepreneur to listen to you objectively and rationally, then you have lost your greatest hope of postively impacting that investment. And that is a tool that VCs should not throw away lightly.

So the meta point I am making in this post is that it isn’t the facts that matter when discussing conflict. It is the perception that matters. If anyone in a relationship with you percieves that you are in a conflicted situation, you are in a conflicted situation whether you agree with them or not. Your only choice is to try to convince them otherwise before you obligate yourself to the conflict situation. Once you’ve obligated yourself, it is too late.

A friend in the VC business told me yesterday that he thinks this is the biggest issue top VCs face. Because they get to see the most interesting investment opportunities, but the opportunity cost of saying yes to an investment is that they take themselves out of the running for everything else in that category going forward. I agree that conflict issues are large and need to be front and center in everyone’s minds when making an investment decision. But I also think that large markets are large and there are ways to slice them up in ways that do avoid conflict. And if you can get an entrepreneur comfortable, you can make multiple investments in a large space. We made five or six social media investments. We’ve made a similar number of crowdfunding investments. I would like to make a large number of bitcoin related investments. If you think carefully upfront about how these markets will likely segment themselves over time, and if you can make that case upfront (not after the fact) to an entrepreneur, I think you can navigate this tricky issue.

But the thing you have to keep in your mind first and foremost is that perception is reality. And managing that is the most important thing of all.

One of my big weaknesses as an early stage investor is my eyes glaze over at wireframes, design sketches, photoshop screens, and prose that describes a product. Until I can get my hands on it and use it, I have an incredibly difficult time imagining what the thing is.

For that reason, I prefer working on projects that are designed in code as opposed to paper, photoshop, or some other tool. That’s a lot easier on the web and much harder on mobile, which is a bummer. When something is designed in code, it comes to life for me quickly and I can react to it, give feedback on it, and think about it, and consider investing in it.

I’ve pretty much given up investing in products that aren’t ready for public use. It has not really worked out for me. I really enjoy investing in a business where the product is out in the wild, getting used, and everything else has to be figured out. I am good at that. But I am not good at investing in the figuring out the product stage. My track record proves that conclusively.

I get a ton of requests (mutiple requests a day) to meet with entrepreneurs to give them feedback on their product. I also get emails with links to wireframes and sketches where entrepreneurs want feedback. I generally decline these requests because I know that my feedback will be poor. I lack the imagination to see where the entrepreneur is going with the product.

Everyone has their strenghts and weaknesses. My weakness is the pre-product phase. I thought I’d make that clear to everyone. It will save us all a lot of time and energy.

A few weeks ago, Nick came into my office and asked if I thought we could get more engagement out of the new usv.com.  He felt that we’d succeeded on the transition from a blog to a link blog, but we had not succeeded in really stimulating discussions at the new usv.com. He had some ideas on how to address that and we batted them around. I encouraged him to follow his instincts.

He then posted this thread on usv.com and got a ton of feedback on it. And so for the past few weeks, he’s been iterating on the usv.com front page. This past Monday, Nick and Brian did some more work, came up with the “cards” thing and Nick was excited. For the past few days, I’ve been encouraging him to “ship it.” He did that last night.Check it out.

For those of you who did not click on that link, here is what it looks like:

The big changes are:

– Infinite scroll. This is something I’ve wanted since day one. I am so happy.

– All posts on the front page. No posts hidden behind the new tab anymore.

– Posts are bracketed by days. So each day you can come and see everything that was posted on the previous day to make sure you didn’t miss anything.

– Posts are inside a “card” that shows the poster, tags, comments, bumps, the link, and for the most popular posts, a blurb from the poster about the link.

– The left and right columns have been switched.

– Search is now prominently featured at the top. Yesssss.

So that’s it. I’ve been using this new UI for the past two weeks and I can’t imagine using the old one anymore. I like it way better. I hope you all do too.

I testified yesterday in a public hearing on Bitcoin as part of two days of hearings put on by the New York State Department of Financial Services. The hearings are being livestreamed here and you can click on the archives and watch yesterday’s two panels.

I got pretty animated during the discussion, which is probably not a great thing to do when testifying in a government hearing. But this kind of thing is really important to me. We were talking about the freedom to innovate in an emerging market that is going to get regulated. I don’t have a problem with regulation per se, but how and when it happens matters a lot.

As our panel was winding down, Superintendant Lawsky asked what countries were doing it right. I didn’t answer that question but instead decided to talk about one that isn’t doing it right and brought up China and noted that a fantastic investment strategy would be to have invested in every Internet servcies that China has blocked. My point being that the services China likes to block are the really important ones that have been built on the Internet.

I then noted that this discussion is really about freedom. Chris McAlary recorded my assertion in this tweet:

“It’s about freedom,ultimately,and whether you want to live in a society that embraces innovation,free speech & freedom or not”@fredwilson

— Chris McAlary (@KlausTeuber) January 28, 2014

Some will say that I was being overly dramatic or romantic with that line. But I really believe it. If you look at the countries around the world where the most innovation happens, you will see a very high, I would argue a direct, correlation between innovation and freedom. They are two sides of the same coin.