Posts from VC & Technology

The day Google+ launched, I sent a friend at Google who was involved in building the service an email requesting an invite. I got the invite late that day and started playing with the service. Here's my profile. I'm not sure if this page is public or you need a Google+ login to see it. At some point Google will open the service to everyone and I expect this page will be public, but I'm not sure.

In any case, I hope Google+ succeeds. Given the blog posts saying this will kill Tumblr, Twitter, Foursquare, etc, you might wonder why I feel that way. Well first, I don't think competitors kill companies and services. I think the vast majority of "deaths" are self inflicted. Facebook didn't kill MySpace and Friendster, they killed themsleves by failing to address the shortcomings of their services and their inability to respond to changing market dynamics, in some cases brought on by competitors. Of course, that fate could be in store for any company, including our portfolio companies, but it won't be because of Google+.

My vision for social media is:

every single human being posting their thoughts and experiences in any number of ways to the Internet

Not everyone wants a Facebook experience; default private, mutual follow, best for close friends and family. Not everyone wants a Twitter experience; default public, asymmetric follow, best for broadcasting short burts of information to large networks. Not everyone wants a Tumblr experience; totally public, asymmetric follow, best for posting microchunked media.

My dad, for example, doesn't want any of those experiences. He might like Google+. It's a lot like email. He can curate groups of friends; his friends from school, his friends from the army, his friends from the community he lives in, and share information with them quickly and easily. I can see The Gotham Gal's dad loving Google+ too. It's very utilitarian and functional and powerful for certain kinds of users.

I've never thought that there would be one social service to rule them all. I've never thought that there would be one social graph for the web. I believe we'll need a multitude of social services to satsify the needs and desires of all the users of the web. Google+ fills a void between public and private, it serves what is likely to be an older demo less interested in hooking up or hipstering out and more interested in the social utility it provides. That's a good thing. We'll get more people "posting their thoughts and experiences in any number of ways to the Internet."

And there's another reason I hope Google+ succeeds. Developers need more social platforms of scale. A friend on Twitter posted a link yesterday to the post I wrote on the USV blog when we first publicly acknowledged our investment in Zynga. We first invested in Zynga in the fall of 2007 and back then I was eager to see Zynga build a business on multiple social platforms. I wrote:

Currently all of Zynga's games run inside social networks, largely Facebook, but also Bebo and several others. And that list of social nets will grow longer in the next few weeks.

Developers like Zynga benefit from having multiple large social nets to build on top of. Tech blogs have noted that Google+ has hooks for social gaming built in. That is great. My dad would love some of the Zynga games. Maybe he'll join Google+ and play them with his friends (including me) there.

My line about "don't be a xyz bitch" is all about controlling your own destiny. These social platforms are awesome to build and launch on. They give you instant distribution, instant users, instant social identity. But in a perfect world you don't want to be dependent on any single one of them. The more social platforms of scale there are, and we have a bunch now, including Twitter, Tumblr, and Foursquare, the better world it will be for developers. And our business at USV is investing in and helping developers build companies. So I'm rooting for Google+. I think it will serve users who aren't being served well (or at all) on the social web right now. And I think it will be a strong new platform for developers. And both of those are great things for the web, our business, and entrepreneurs.

Roughly three months ago, I wrote a post noting that Founder Labs was coming to NYC. Last night the first Founder Labs program in NYC wrapped up wtih the final presentations in USV's event space.

I have liked the idea of Founder Labs from the moment I heard about it. It sits between things like Pair Up and Startup Weekend and Y Combinator and TechStars. Founder Labs helps pair up three and four person teams, coaches them through ideation, all the way to a prototype. And they do this in a five week intensive class that meets on nights and weekends so you don't have to quit your job to do it.

The Gotham Gal and I were active mentors in the Founder Labs program, meeting with the teams once a week at space hosted by Google NYC, and also provided support for the NYC program along with a few other awesome people and companies.

Founder Labs creator Shaherose Charania is a force of nature. She handpicks the participants in the program and helps to form the teams. I told the assembled group last night that the teams that are formed at Founder Labs are terrific. They are diverse, well balanced, and highly compatible. Each one has engineers, designers, and product talent on them. I have never seen a program create teams as well as Founder Labs does it.

If you want to do a startup but are having a hard time finding a team to do one with, you should really consider Founder Labs. The next program is in SF from Aug 11 to Sept 22. But I am certain Shaherose and her team will be back in NYC before the end of the year.

The first NYC program was so strong and there were are least two teams, maybe three that will come out of it with real traction. The winner last night was Smarketplaces, a project to put ebay/etsy style marketplaces on blogs like Disqus has done with comments. It has great promise. Authy was also quite strong with a user side solution for simple and easy two factor authentication. There were two interesting projects around alternative medicine services and helping people with food allergies navigate the world of food. We also saw new ideas in social music and daily deals.

Regardless of whether all of these teams turn into startups and businesses (I think several will), all the participants will come away with an appreciation for how to get a startup off the ground, what makes a great team, and how to quickly find out if your idea is a good one. And because of that, Founder Labs is a winning formula.

That's how Skype's option plan is described in this piece by Felix Salmon. I've seen option plans that have repurchase rights in them. They used to be more common twenty five years ago when I entered the venture capital business. The theory was that employees would have to stay until the exit if they wanted to keep their equity (be in it to win it). But in practice, once employees realized that was the deal, they were actually incented to leave because they didn't trust that the equity they were vesting would ever produce a payday for them. So they went elsewhere and created value for an employer with a better deal.

Today, the "market" deal in employee option plans is that employees have to exercise their options within some period after leaving (typically 90 days). This is a better deal for the employee than a repurchase right but can still create hardship for employees as it may cost real money to exercise and there are often tax issues with exercising options. This requirement to exercise upon departure is a big reason why the secondary market in employee common stock has taken off. Employees who leave companies need to sell some of their vested stock to come up with the cash to exercise and pay taxes associated with exercise.

This is a tricky area. Companies feel that employees who stay and work to create ongoing value should have a better deal on their vested options than employees who leave and go to work elsewhere. I understand that point of view. But it is also true that your employees need to feel that the options they are vesting are going to be worth something and that they will be able to keep them when they leave.

Companies also want to control their stock and keep it off of secondary markets where they can end up wtih shareholders who they don't know. The requirement to exercise within a short period of departure is in conflict with the desire to control the cap table.

I believe this whole area of "what happens with the options when the employee leaves" needs to be rethought in light of where we find ourselves right now in startupland. I'm not sure I have any particularly good ideas but I know that the way we do it right now is problematic for everyone.

As a follow up to yesterday's post on this topic, here's another chart from Mark Suster:

So using the math I laid out yesterday (roughly 1,000 startups funded each year by VCs), this means that on average between 1% and 3% of venture funded startups get to an IPO.

To recap, 1-3% get to an IPO and 5-10% get to an M&A exit over $100mm. So 85-95% of all venture backed startups will either fail or exit below $100mm.

I am certain the VC industry is not using this probability of outcome in setting valuations right now.

I was reading Mark Suster's latest blog post (actually its a presentation embedded into a blog post) and I came across this slide.

I don't know what the source of this data is and I don't know if this is just M&A exits or if it includes IPOs as well. It really doesn't matter for the basic point that Mark is making with this slide.

Based on the NVCA statistics on the venture capital industry, there are on average 1,000 early stage financings every year. I suppose a few of those 1,000 financings are for the same company, but I doubt that many are. So we can use 1,000 as an approximation of the number of companies that get funded in a given year.

And somewhere around 50 and 100 of them exit for more than $100mm every year. So 5-10% of the companies financed by VCs end up exiting for more than $100mm.

At at time when the average Series A round is now north of $20mm (based on very anecdotal evidence and not at all scientific), this poses challenges for the VC industry.

The real math is a lot more complicated because of follow on rounds and such, but in order to keep this simple, let's assume all Series A deals are done at $20mm post-money and 5% of them end up exiting for north of $100mm. And let's assume that the average valuation of the exits north of $100mm is $250mm (I think that's a good guess but it could be off). That means you don't get your money back on your entire 20 investments with the one that has a good exit. The simple math is 20×20=400 which is greater than 250.

If the average valuation of a Series A deal is $10mm, then the cost of 20 early stage deals is 20×10=200 which is less than 250. That means the winner pays for the rest of the deals. And that is the model that I know works in early stage VC. Anything else is going to be challenging for the industry.

Are we in a valuation environment that is challenging for early stage VC investors? Yes.

Bill Gurley was a "blogging VC" before anyone else with his Above The Crowd newsletter back in the 90s. That has become the Above The Crowd blog. I've always been a huge fan of Bill's and whenever I read something he has written or said, I find myself nodding my head. He sees the venture business in the same way I do. And he sees markets pretty similarly too.

Bill did an interview with Business Insider recently and he said a bunch of things that are important and which I agree with. Do yourself a favor and go read it.

I was passing by Cooper Union the other day and was struck by the words on the front facade of its iconic building on Astor Place.

This phrase "to science and art" has been stuck in my mind since. I've been thinking about what happens at the intersection of science and art, how science impacts art, and how art impacts science, how New York City has been blessed to be at the intersection of science and art for at least two centuries, and how much of what is interesting to me in the technology revolution of the moment, the Internet, is at the intersection of science and art.

Peter Cooper, the founder of Cooper Union, was an inventor, industrialist, and NYC resident in the 19th century. He designed and built the first steam powered train in the US. He was the "Tim Berners-Lee" of the railroad technological revolution in the US. Cooper went on to become a very wealthy industrialist and businessman and was behind the company that laid the first cross atlantic telegraph cable. He was all about technology, science, innovation, and business. And yet, when he created and endowed a free institution of higher education, he understood that it had to be for both science and art.

Science and art are seen as two very distinct endeavors and I suppose they are. But I see science and art as the yin yang of creative culture and innovation. To quote from Wikipedia, science and art are seemingly contrary forces that are interconnected and interdependent in the natural world, and they give rise to each other in turn.

I was talking to a longtime reader of this blog, Chris Dorr, last night. Chris has been working in the film industry for a long time and blogs at the Tribeca Film Festival Blog. We were talking about changes in the film business and Chris blurted out that "filmakers and software developers need to start sleeping together and it is starting to happen." Filmmaking is art, particularly great filmmaking. But the art of filmmaking has always been based on a number of fundamental scientific inventions. And Chris' point is that the art of filmmaking will continue to be impacted by scientific inventions that are happening in real time.

And science is equally inspired by art. Just check out the music playing at the all nighter coding sessions that go on at New Work City or the number of listeners in the coding room on turntable.fm and you'll see that coding computers benefits from musical stimulation.

When I look at our portfolio, I see companies like Tumblr, Etsy, Canvas, Shapeways, SoundCloud, Boxee, Kickstarter, and GetGlue that exist somewhere in the overlap between technology and art. Most of these companies are based in NYC and the ones that aren't have a strong footing here.

I was at a meeting yesterday with an economic development group in NYC. We were talking about 3D Printing, an important new technology that was "science" a decade ago. The economic development types were explaining to me why 3D Printing technology is so important to NYC. They explained that our artist and design communities need 3D Printing technology because it allows these artists to turn their ideas into objects rapidly and at lower cost. It is a game changer for artists, designers, and architects. Our portfolio company Shapeways and other innovators like MakerBot are doing just that right here in NYC.

Peter Cooper understood the importance of science and art back in the mid 19th century when he created Cooper Union. He put the two words on the facade of his building. And they remain the twin towers of innovation in NYC and all over the world two centuries later.

I posted this on the USV blog yesterday but thought I should share it with the AVC community as well.

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We are big fans of communities at Union Square Ventures. The partners in our firm have been investing in Internet communities for almost 15 years and we are constantly reminded of the power of the community. Whenever we are presented with the opportunity to invest in an emerging new Internet community, we take it very seriously.

We were presented with exactly that opportunity a few months ago by Chris Poole, also known on the Internet as "moot." When Chris was 15 years old he launched one of the most powerful Internet communities, 4chan, from his bedroom. For eight years, Chris has been operating, moderating, building, observing, and learning from 4chan. Last year, Chris recruited a small group of engineers and designers and started building a new Internet community called Canvas.

Canvas is a real-time canvas on the Internet. It is a community where everyone can come to create imagery together. It is inspired by the best of 4chan but is aimed at much more. At the heart of Canvas is the concept of remixing. Every image on Canvas has a remix button which allows users to quickly modify the image and repost it. The result are threads that are anchored by the initial image. Here are a few of my favorite examples:

Ze Frank Scribbler

Charlie Sheen – I Probably Took More

All The Things?

Redrawn Icons

4chan is famously anonymous. It is raucous, unruly, and tremendously creative. The architecture of Canvas is subtly different, and although anonymous posting is allowed, you must first register a login to participate.

There aren't any filters on Canvas. You see what is happening there in real-time. Sometimes the result is inspiring. Sometimes the result is provocative. I liken it to real world creative communities like the Lower East Side of NYC when I arrived here in the early 80s. The most interesting creativity comes from places that aren't always manicured and sterile.

Canvas is very much a work in progress. The service is still in invite-only beta and requires you connect with Facebook to register. Chris and the Canvas team are committed to building the most exciting and interesting community for real-time creativity on the Internet, and we are thrilled to be along for the ride. You can get on the ride as well because Canvas is hiring. Their jobs page is here.

On Monday I wrote about contests as a way to raise money. They are also a way to raise the profile of you and/or your startup. This post is about a developer contest that is in the latter camp.

This blog community has adopted DonorsChoose as our charity. Every fall we do a month long fundraiser for them. These events have been very successful and we've even done meetups between our community and DonorsChoose.

The connection between DonorsChoose and the tech startup/entrepreneurial community has always been strong. In fact, DonorsChoose is a startup. The founder Charles bootstrapped the service, then raised a "venture round" which was designed to take the non-profit to "profitabilty." That plan has worked perfectly and the reason I am on the DonorsChoose board is that it reminds me of the startups we work with more than a non-profit.

That connection gets even stronger with the DonorsChoose Hacking Education Contest. DonorsChoose has opened up most of the data on their platfrom via APIs. And it is encouraging developers to use those APIs to build apps that improve education in America. Here are some suggested apps they'd like to see people build:

Analyses

• Identify a trend in the resources requested at DonorsChoose.org that could change a city or state education budget. For example, "Elementary school teachers in Chicago are submitting 40% more projects requesting microscopes."
• Show a pattern in DonorsChoose.org classroom projects that could impact how and what we teach children. I.e., "These are the 10 novels most requested by high school teachers in low-income communities."
• Rank what people care about most when supporting classrooms in need. A catchy project title? High poverty rate? Field trips rather than technology?

Apps

• Reinvent the classroom project discovery experience to provide more serendipity, personalization, or casual exploration. (Etsy has more than five different ways to browse through their inventory.)
• Create the first ever hyper-local giving app for mobile phones. I.e., an app which shows you classroom project requests from schools that are close to your current location. Or create a mobile app which uses a pivot other than geography to present classroom projects!
• Invent a way for people to engage with classroom project requests before they're ready to open their wallets. About 2% of visitors to DonorsChoose.org make a donation. What can the other 98% of visitors do for fun?

There are seven categories of prizes (based mostly on technology used) and one "Big Winner."  The Big Winner gets to attend a taping of The Colbert Report with three friends and meet Stephen Colbert and accept a trophy from him. That's what I call getting attention.

The deadline for app submission is June 30th. So if this is interesting to you, you need to get on it right away. Here are the details.