Posts from VC & Technology

As we have blogged about, we are working internally to update our web presence. We've hired a part time software engineer who is helping us build something that we hope will better leverage the network that exists inside and outside of our firm, portfolio, and relationships.

As part of that work, we have decided that our identity could use a refresh too. So we've partnered with our portfolio company Behance and are conducting an online talent audition to design our new identity.

Here's how this design competition works:

To participate, simply submit your best brand/identity design work from your portfolio for consideration by our panel of judges (Note: this is NOT a “spec contest,” just submit a past project that best exemplifies your brand/identity work). The top 5 projects will be deemed “winners,” and their owners will be invited to take on USV as a client, proposing a new identity for USV, with a $1,500 guaranteed payment for responding to the brief. If your initial proposal is selected, USV will provide an additional payment of $12,500 for the completed work.

If you are interested, please visit the Behance page and click on the big green "submit your project" button. If you know someone who might be interested, please send them the link and ask them to submit their project for consideration.

My partner Albert, who is on the Behance board, has a longer post on the USV blog explaining why we are doing this and why we partnered with Behance to run this competition.

Related articles

The Next Stage of USV.com

When Brad Burnham and I started USV back in 2003 and I had just started blogging, we spent a lot of time talking to potential investors in our first fund. One of their big questions we got from them about the kind of open firm we wanted to create was "how will you be able to make money if you share all of your proprietary insights?"

We really didn't have a good answer to them but our bet was that by sharing our ideas and insights broadly with the market, we would attract entrepreneurs to our firm who shared those insights and ideas. And we thought the startup community would engage with us around these insights and ideas and make us smarter in the process.

It was a good bet. That is exactly what happened. I think it is now best practice in VC and possibly some other investment disciplines to be broadly open with your investment ideas and insights. At least I hope it is.

But we are not as open as we can be and should be. We get together as a firm roughly once a month to do a "deep dive" on a sector that interests us. We work as team to produce a reading list and some preliminary research on that sector. And we identify a couple people who are deeply involved in that sector to come sit with us or skype with us. These sessions last roughly two hours but can often go on longer.

Christina decided last week that we should put all of this "research" out there on the Internet. And of course she is right. She has posted the first set of research on usv.com today and we will continue to do this under the "Researching ……" headline. I think this will be really useful for us and everyone who enjoys participating in a dialog about new ideas and insights in the tech startup market.

I met with a friend who was in town last week. He told me he had "hit his stride" as an investor in the past year and a half. He is a former entrepreneur who became an angel investor and then a VC. I had a similar conversation with the Gotham Gal on a long car ride yesterday afternoon. 

In listening to both of them, I heard something that I have found to be true in my own experience. It takes time to learn how to be an early stage investor. You have to make a bunch of investments and learn from them. And you have to develop a strategy, a thesis, and your own differentiated style which people can then attach to you. In effect you have to build a brand and become known for what you do and how you do it. 

None of this happens overnight. I think it took my friend about four years to hit his stride. I suspect it took the Gotham Gal about as long. Part of this is that is how long it takes to know if you've made a good investment or not. You might know in two to three years. But by four years, it is going to be pretty clear. As these outcomes start coming in, you can start to see what is working and what is not.

And "what is working and what is not" is not just about your investment selection. It is about the fit between you and a certain kind of entrepreneur and a certain kind of target market and a certain kind of business model. Some investors are better at investing in SAAS companies. Some are better at investing in e-commerce. Some are better at investing in mobile apps. Some investors are better at working with teams that need a lot of help. Some investors are better at working with teams that don't need any help and want you to get out of the way.

It is important to figure out who you are and where you fit in the startup economy before you can become a good investor. But once you do that, you can "hit your stride" and start investing with conviction.

Conviction is one of the most important things entrepreneurs want to see in an investor. The overhead of working with an investor who lacks conviction is just too much for an entrepreneur. It can become a major drain on them and their company. I'd rather have conviction and be wrong than have doubts and be right. Because the latter doesn't work in a relationship with an entrepreneur and you are likely to lose anyway.

So for those just starting out in a career as a venture capital or angel investor, I would suggest that they take their time, be patient, and build a portfolio slowly and deliberately. And pay attention to what is working for you and what is not. Over time you can build an investment thesis that works for you and that you can become known for. That is when you will hit your stride and when you can step on the gas.

The first great investment we made at USV was Indeed in the summer of 2005. Brad had been looking for a search engine for jobs and I saw this post on John Battelle's blog in late 2004. I forwarded it to Brad and he reached out to Paul and Rony. It took two tries before we could convince them to take our money. They had bootstrapped the company, launched the service, and were well on their way. They didn't need our money. But eventually we convinced them to take it, along with the New York Times Company and our friends at Allen & Company.

Indeed has always been the quiet one. Nobody really talks about them. But as I have said a number of times on this blog, they are the most complete company in our portfolio. They have it all. Two world class entrepreneurs as founders. A solid management team all up and down the company. A product that is beloved and services more than 80mm people worldwide every month. An engineering team that has kept the service up with literally no down time that I can ever remember. A business model that, like Google's, is the best on the Internet. Revenues, profits, customer satisfaction, shareholder value. They built a fortress and I am just so happy to have had a front row seat watching them build it.

The quiet one is the one that can do a big M&A transaction over the summer without anyone finding out. The quiet one is the one that puts out the news on their blog and goes back to serving customers. The quiet one is the first great investment we made at USV and one that will always have a special place in my heart. Congrats to Paul, Rony, and the team. We will miss working with you.

Yesterday we hosted a conversation between David Kappos, the Director of the US Patent and Trademark Office, and a bunch of founders/CEOs of our portfolio companies. It was a far reaching conversation that gave me optimism that our government does realize the issues with our patent system, particularly as it relates to software and business method patents.

There was one thing that we discussed that is very important and needs to be publicized broadly.

Section 18 of last year's America Invents Act provides for a "post-grant review proceeding for review of the validity of covered business method patents." Here's the provision. The USPTO has interpreted that provision and it is now fully implemented.

Here's what this means. If you are sued or threatened with a suit over a business method patent, you can submit the business method patent to the USPTO for a "post grant review." If the USPTO determines that patent is overly broad or should not have been issued, it will be thrown out in its entirety.

You can do this as part of your defense strategy and it will cost a fraction of a litigation defense. And the USPTO is required to complete the post grant review within one year of submittal, well ahead of any trial schedule.

So if you have been sued or if you are sued in the future over a business method patent, you should avail yourself of this post-grant review. It is faster, less expensive, and may well result in the elimination of bogus business method patents. And that's a good thing for everyone other than the troll who is suing you.

Related articles

Declaratory Judgment & USPTO Business Method Patent Challenges

More USPTO Final Rules

Historic Patent Reform Implemented by USPTO

What Entrepreneurs Need to Know About the America Invents Act and Patent Protection

Patent Reform: Celebrating the One Year Anniversary of the America Invents Act

Paul Graham has penned a longish and excellent essay in which he postulates that growth is the single defining characteristic of startups and the thing that all entrepreneurs must focus on. Paul is slowly but surely building a body of writing on startups that is as good as anything that has ever been written on the topic. And this essay on growth is one of the gems. This is another gem. There are quite a few of them.

I don't always agree with Paul and I see the world a bit differently than he does. But on the topic of growth, I could not agree more. Once we determine that a company fits into our investment thesis, we then turn to the team and traction to figure out if it's something we want to invest in. Traction is another way of saying growth. 

One thing that Paul did not touch on is the difference between organic and sustainable growth and temporary stimulated growth. Things like gaming Facebook's open graph can temporarily stimulate growth that is not sustainable long term. Investors can be faked out by things like that. Gaming Google's search algorithms is another way that has been done in the past. When we look at growth, we look for authentic, organic, and sustainable growth that is not overly dependent on a single source, particularly a source the startup doesn't control. That takes some experience to detect. We've messed up there as have most investors.

Sustainable and organic growth that can continue for five or ten years unabated will produce extraordinary returns. I look back at Etsy when we invested in it in the spring of 2006, about a year after they had launched. The company had just crossed $200,000 a month of gross merchandise value (GMV), up from $1000 of GMV in the month they launched in June 2005. They had grown 200x in less than a year after their launch. I am not going to reveal Etsy's current financials but it is safe to say that they have grown more than 200x again since our initial investment. And at the rate they are growing, they could grow another 10x in the next five years. Those are some big numbers and that is how investor generate spectacular returns investing startups. 

And that is how entrepreneurs and the founding team and the management team can generate significant value for themselves as well. When thinking about startups, growth is good.

There are many themes that grace this page from time to time. Two of the most common are the rise of startup communities and the role that the Internet can play in allowing society to governing itself. And there are two books out this week that are must reads on these two topics. Further and in full disclosure, they are written by two very good friends. No conflict no interest as it were.

Let's start with Startup Communities by Brad Feld. I met Brad in 1996. He had just moved to Boulder Colorado and was going to help build a startup community there by building a market leading VC firm in Boulder. Sounds audacious? Yes. But he did it. As I was working on the same idea for the past sixteen years in NYC, I was able to watch a parallel universe forming in Boulder with Brad at the center.  In Startup Communites, Brad tells us what he's learned from that experience and how the same thing can be done elswhere. If you want to create a Boulder or NYC tech scene in your community, this is your roadmap, bible, and textbook. You can get it on Kindle today and or pre-order the book for delivery next week.

On to Future Perfect by Steven Johnson. Back in the Spring, Steven emailed me a draft of this book. I put the PDF on my Kindle and started reading. I found myself yelling Yes, Yes, Yes as I was making my way through the chapters. I know most, if not all, of the stories in this book. I have been involved in some of them and have followed the others closely. Those stories tell me that there is a "case for progress in a networked age" and Steven makes that case as only he can, by telling the stories brilliantly and then wrapping the meaning of them together in a crisp, cohesive, and easy to understand narrative that leaves you with a framework to take out in the world. You can get Future Perfect on Kindle or in hardback right now as it was published earlier this week.

The comment thread on my Get Out The Vote post a couple days ago was downright depressing and full of anger and cynicism. So for all of you and everyone else, here is a short 3 min video from Steven talking about the ideas in his book and where they are going. If you need a shot of optimism this morning, watch it.

I am in my second decade as a board member on several companies. It doesn't happen often in the VC business, at least my VC business, because I get off the boards of companies that go public or are headed there shortly. The percentage of portfolio companies that don't shut down, sell, or go public within a decade of their initial VC investment is low. But the ones that make it into their second decade without an exit are special in many ways. They have staying power, an ability to evolve and grow, and a culture that is built to last.

The company in that group that this community is most familiar with is Return Path. Executives from Return Path, including its founder and CEO Matt Blumberg, have written guest posts here a few times. Return Path has reinvented itself three or four times in its history. And yesterday they did it again. They are now the global leader in email intelligence. They actually have been that for quite a while. But they gave themselves that label yesterday.

What is email intelligence? Well in Matt's words, it is:

[Emailers] are struggling with two core problems that complicate their decision making: They have access to so much data, they can’t possibly analyze it fast enough or thoroughly enough to benefit from it; and too often they don’t have access to the data they really need.

Meanwhile they face new challenges in addition to the ones email marketers have been battling for years. It’s still hard to get to the inbox, and even to monitor how much mail isn’t getting there. It’s still hard to protect brands and their customers from phishing and spoofing, and even to see when mail streams are under attack. And it’s still hard to see engagement measurements, even as they become more important to marketing performance.

Our solution to these problems is email intelligence. Email intelligence is the combination of data from across the email ecosystem, analytics that make it accessible and manageable, and insight that makes it actionable. 

In connection with the new reformation of their company's mission and position in the market, Return Path launched or relaunched three products yesterday. The one that is truly groundbreaking in my opinion is called Inbox Insight. Think of its as ComScore for Email. If you want to know how your mail is doing compared to your competitors across a number of key metrics like engagement, inbox placement, spam complaint rates, etc, you can learn all of that and more with Inbox Insight.

Starting, building, and running companies is hard work. I know this because I see it in the eyes and wrinkles of the people I work with every day. But building a lasting, evolving, growing, and market leading company is a terrific feat. I want to congratulate Matt and the team at Return Path, most of whom have been there as long as I have, on a big day yesterday and a great new tagline, mission, and market position. Well done.

Back in the summer of 2010, I wrote a post outlining why I don't like convertible debt investments. USV does a fair bit of seed investing and we have never done a convertible debt deal (although we have done bridge loans for our existing portfolio companies). My wife, aka Gotham Gal, does a fair bit of seed investing and she has done her share of convertible debt investments, always with a reasonable cap, but she also prefers a priced equity round.

Convertible debt is being discussed again, I suspect because valuations are coming down and that is causing some problems, but also because there are folks suggesting improvements on the structure of these deals.

My view on this is fairly simple:

1) A priced equity round can be done quickly and inexpensively. Most experienced venture lawyers have a standard form of "lightweight Seed" or "lightweight Series A" documents that can be signed without negotation on both sides. We do this all the time.

2) When you set the price, both sides know what deal they got. It's locked in and they are in business together and aligned. The entrepreneur can't get screwed later when the price drops on them. And the investors can't get screwed later when the price jumps on them. This is a big deal. I don't understand why folks don't understand it.

3) Equity is simple. You own what you own. Debt is complicated. All sorts of things can happen with it, including bad things.

Mark Suster has a long and winding but very good post on all of this on his blog. If you want a detailed discussion of this issue, go read it.

My hope is the market moves back to priced rounds for all things including seed and angel deals. It's a better, simpler, and massively less complicated way to do venture investing.