Posts from VC & Technology

As many of you know, Special Purpose Acquisition Companies (SPACs) are all the rage on wall street right now. SPACs are publicly traded “shell companies” that raise capital in an IPO process and then use that capital to merge with a privately held business.

SPACs have been around for at least thirty years and I have always thought of them as a “liquidity path of last resort” for our portfolio companies. The thinking was that if you could not go public in a traditional IPO, and if you could not find a traditional M&A buyer, then you would consider a SPAC.

But my thinking on SPACs has changed in this latest SPAC frenzy. I now see them as part of the continued “assault” on the traditional IPO process and largely a good thing.

For most of my career as a VC, the IPO has been the holy grail. Our very best portfolio companies would be offered an opportunity to go public by the top investment banks on wall street. And I have been involved in several dozen IPOs in my career.

The terms of an IPO are fairly locked down and are largely a great business for the top wall street banks and their buy side clients. I don’t take as much offense to this situation as others in the VC business have. I have viewed it as a mutually beneficial relationship between the top banks, VC firms, and the founders and CEOs who lead our portfolio companies.

However, in the last few years, competition has emerged for IPOs. On the left has come direct listings. And on the right, we have SPACs. Now founders and CEOs and Boards have a plethora of options for moving from a privately held business to a publicly held business.

Competition and choice is good. That is deeply held belief of mine across all aspects of life and business. And so the deluge of SPAC money coming to market right now is a good thing for the founders and CEOs who lead our portfolio companies. It offers them a wider array of options for going public than they had before. I am certain that will be a good thing for the tech sector and the VC sector.

All of that said, I do think SPACs have positives and negatives relative to IPOs and Direct Listings. What is right for your company will depend on the circumstances you find yourself in, including whether or not you need to raise primary capital, whether or not you need a lot of secondary liquidity, whether or not your “story” will be exciting to public market investors right out of the gate, how quickly you need to transact, and a host of other factors.

It is also the case that a number of VC firms and growth investors are raising their own SPACs. That too reflects the changing dynamics of the investment business and how fund managers like USV access capital and deploy it. I have always been a traditionalist when it comes to raising capital and deploying it. I like the small VC firm model, a close and long standing relationship with our investors (called LPs), and the rhythm of raising funds and sending the money back again and again. But I appreciate that others don’t see things that way and they may be on to something important with the VC SPAC model. We will see. I like that people are experimenting with the model. It will be revealing to all of us in time.

I woke up to a dream this morning where I was playing a game that was very similar to Turntable.fm, a failed effort to create a social music experience that had a moment back in 2011 and that I had invested in via USV. In the dream, someone had created a new version of the game that was basically identical to the original version. It was as fun to play it as it was to play Turntable back in the day. Then I found out that the creators of this new game had received venture capital funding and were going to turn it into a business. I met the founders and was happy for them. Then I woke up.

Investments that don’t work haunt me. It isn’t the losing money part. I have learned to live with that. It comes with the territory in VC. It’s the losing part that haunts me. The what could have been part. The “if only we had done it differently” part.

Good ideas will eventually be executed successfully. And investments that don’t work are often failures of execution. So it makes sense that someone could come along and make your idea work after you failed with it. It happens regularly in the startup world. And it can be painful to watch.

I’ve gone through a few periods of burnout in my career and it was usually brought on by a string of painful failures. I’ve watched others navigate that similarly. If you are heavily invested in something that doesn’t work, it hurts. And the more the investment is of yourself, your time, your enthusiasm, the worse it is.

I’ve gotten out of these periods of burnout by turning my attention to something else. Crypto was helpful for me back in 2013 and 2014 when I was going through one of those periods. It was something new that I could throw myself at, that was different, and that was working.

It’s that old adage about getting back on the horse that tossed you. I am not a horse rider, but I get the adage and agree with it. The best salve for failure is success. And you have to keep going to get there.

Many founders want to do SAFE note financings for their early rounds to save time and money.

My response to that is “let’s do a priced round, we can use a standard financing form we both like, we won’t use a lawyer on our side, and we can close in a week.”

The key to being able to do that is the availability of standard financing forms. Many venture law firms and also the NVCA have published standard forms on the web.

Here are Cooley’s forms.

Here are Orrick’s forms.

Here are the Series Seed forms created by Fenwick.

Here are the NVCA forms.

Here is Gunderson’s document library.

I am not suggesting the founder go without a lawyer. I am suggesting that the founder and their lawyer pick a “standard form” to use to do the equity round, send it to us for our review, and if we are comfortable with it (they are all pretty much the same), then we will agree to sign it without negotiation and close within a week.

Typically the only thing we all have to agree on is what the cap table will look like before and after the financing so that the correct numbers are put into the documents. Everything else is pretty standard anyway.

There is this narrative that equity rounds are expensive and take a long time and that SAFE notes are quick and inexpensive. That is not right. We can do priced rounds as quickly and inexpensively as SAFE notes. And we do that regularly.

We are officially in the dog days of summer when vacations and the heat and humidity cause things to slow down.

It used to be true that companies would put financing efforts on hold in late July and August and return to “the market” after labor day.

In recent years, that summer slowdown has not happened as much and we have advised our portfolio companies to keep raising during the summer doldrums.

This year will be interesting as many founders and investors have been working remotely for five months now. Will that change anything this summer?

It is possible that everyone needs a break and things will slow down this month. But I kind of doubt it. This has been a crazy and unpredictable year but the one thing that has been true throughout the year is that the capital markets are working overtime and I suspect that will be true during the dog days of summer too.

Podcasts have emerged as a major new category in media/entertainment/news/education etc. We have seen huge deals for big podcast hosts like Bill Simmons and Joe Rogan, both of whom did transactions with Spotify for nine-figure amounts. But as Spotify (and surely others to follow) lock-up top podcast content to strengthen their subscription offerings, we stand to lose something awesome about podcasts which is the ability to listen to them for free on any platform we choose.

But the counter weight to this trend is the growing size of the “live reads” ad market. This is when a podcast host reads out an advertisement on the show. This has been a staple of talk radio for many years. I remember Howard Stern doing live reads for LoJack back when Howard was on CBS Radio. Live reads are powerful and a form of influencer marketing. If you love Howard and he waxes eloquently about LoJack, you love LoJack. Or so it seems.

The live reads ad market for podcasts was in excess of $700mm in 2019 and seems headed to a multi billion dollar ad market in the coming years. So there is certainly a lot of money out there for podcast hosts who want to stay free and independent, or are emerging and building an audience.

And that is where Gumball comes in. Gumball is a marketplace where advertisers post live read ads and podcasters pick them up and read them on their shows. Ad-buying opportunities within podcasts have historically been manual and limited, not unlike the process of purchasing web ads pre-2000. As podcasts continue to gain market share, Gumball’s self-serve ad marketplace has the opportunity to be as transformative to the podcast industry as Google Adwords was for web ads. 

Gumball is a subsidiary of the Headgum podcast network. Headgum is a network of owned and operated comedy podcasts as well as third party podcasts that join the Headgum network for distribution and monetization (via Gumball).

USV has been looking for an opportunity to invest in podcasting that fits with our thesis and we found it with Headgum and Gumball. We like the way that Headgum’s owned and operated content, its Headgum network content, and its monetization platform Gumball all fit together and enhance each other. We made an investment in Headgum recently and blogged about it on the USV blog this morning.

I wrote a blog post last week in which I said:

The second quarter of 2020 is now behind us and we will see the data on it soon. I suspect what we will see is a very active venture capital market, quite the opposite of what was initially expected.

Well the data is out and its not quite as active as I had thought.

Venture deal activity slowed in the second quarter, with $34.3 billion invested across 2,197 deals, a 23% decline in deal count compared to the second quarter of 2019 but only down slightly from 2,298 venture capital deals in the first quarter of this year.

Notable among the figures was a slump in seed deals to 315 in the quarter, way down from an average of 650 deals per quarter over the last year. Angel rounds were roughly steady by comparison in the quarter. The dropping investment in seed rounds is attributed to investors re-evaluating their portfolios and shoring up balance sheets for the quarters to come.

Standing out in the data is a trend for investors to double down on portfolio companies, with follow-on financing activity heavily outweighing first-time financing in the quarter. Likewise, there has not been a drop in late-stage activity as deal count tracked at a higher pace than 2019.

In the quarter there were 57 late-stage megadeals, those of more than $100 million. That brought total megadeals to more than 100 this year, on track to surpass the 175 megadeals closed in 2019. The report notes that some of those deals can be attributed to startups experiencing newfound growth amid the pandemic, while others were forced to raise additional funds to weather the economic turmoil.

https://siliconangle.com/2020/07/14/venture-capital-drops-due-covid-19-second-quarter-started-recover/

So Q2 was down from Q2 2019 but almost flat with Q1 2020. The most interesting thing is that Q2 had a very slow start and a very strong finish.

Different segments of the venture capital market fared differently to others with the biggest overall slump occurring in April amid lockdowns across the U.S. The report notes that through April and into early May, many venture capital firms exercised caution, triaging and focusing primarily on stabilizing their own portfolio companies. But investment started to pick up again by mid-May.

https://siliconangle.com/2020/07/14/venture-capital-drops-due-covid-19-second-quarter-started-recover/

That squares with what I have seen, although USV was quite busy throughout the entire quarter.

The strong finish to Q2 bodes well for the remainder of the year and I think for the most part the venture capital sector is very much open for business in the midst of this pandemic.

Growing up, I thought the price asked was the price. The only decision was whether or not you wanted to pay it.

As I moved into adulthood, started hanging out with the Gotham Gal and a bunch of friends, and entered the world of business, I learned that the price was what you agreed to pay for something, not what was asked.

When I started out in VC in the mid 80s, the investors usually started the price negotiation. The founder would come in and pitch, and if the investors liked what they heard, an offer would be made.

It is very different now. Founders have an asking price when they walk in the door. And often VCs treat that asking price like I treated prices as a kid. The only decision is whether or not you want to pay it.

The reason for this is that the VC market is highly liquid and there are many buyers out there. Investors understand that even if they won’t pay the asking price, someone will. And so they treat it like it’s “take it or leave it.”

But I am not a fan of that approach. I prefer to have a discussion about the asking price. If a founder says they are thinking of raising $10mm for 20% of the Company, I like to reply with something like “We were thinking of $6mm for 20%”, thereby setting up a discussion of the price.

It doesn’t always work. Many founders reply with something like “I’ve got term sheets at that price already” which basically means “take it or leave it.”

But even then, I have found there is a way to have a price negotiation if both sides are looking to do business with each other.

The key is doing it respectfully and honestly. I feel like the sooner you have the price conversation the better. The worst thing is dragging a founder along in a process with them thinking you are at their price when you are not.

Negotiation is an important part of any business transaction. It reveals something about both parties and helps them understand each other and decide if they want to work together. I would encourage everyone to seek a negotiation and engage in it enthusiastically. Doing a deal without a negotiation feels like a missed opportunity to me.

When the pandemic started, the conventional wisdom was that the capital markets would take a beating, including the venture capital market for startup capital.

The second quarter of 2020 is now behind us and we will see the data on it soon. I suspect what we will see is a very active venture capital market, quite the opposite of what was initially expected.

There are a number of reasons that I think we will see that.

First, venture capital firms raise funds and it is our job to put them to work. If we see interesting opportunities, it is our job to invest in them. We are not paid to hoard the cash.

Second, the stock market for tech companies has been on a tear in the last three months and that weighs on the minds of investors. A bullish stock market leads to a bullish venture capital market.

Third, the pandemic showed that software based businesses, e-commerce, software infrastructure, and other sectors popular in startups and venture capital are resilient and attractive right now.

Fourth, sitting at home all day, not being able to travel, not being able to socialize, creates an efficient work environment for many (but certainly not all).

And finally, there are so many great founders out there coming up with excellent business ideas. The pandemic has not slowed that down. If anything, it has sped it up.

It is possible that some sectors of the venture capital market have slowed. Some areas which have attracted big growth investments over the last few years were quite negatively impacted by the pandemic and I would imagine we will see parts of the growth market negatively impacted as a result.

But looking back on the second quarter of 2020, what I see is a hyperactive venture capital market firing on all cylinders. And that is good news for founders and innovation.

This is a topic of great importance and one that we in the tech/startup sector have not done a good job with. We wait until a company is ready to go public and then address it. While that is better than nothing, it is not good enough.

The board diversity problem is a symptom of a much broader problem around lack of diversity in founders that get funded and lack of diversity in VC firms. Most startup boards are made up of a few founders and a few VCs. No wonder you have no diversity on the board.

Here are some suggestions for addressing this situation. I am working on this in my portfolio and USV is working on this in our broader portfolio. We are not control investors so this is a process of advocacy and persistence. This post is a part of that effort.

1/ When a startup board is created, there should be two independent seats on it. Day one. I know that will mean that founders will be unable to control their boards early on but these “independent seats” can be nominated by the founders to allay those concerns. And founders should put diverse people (gender, race, life experience, etc) into these independent seats.

2/ VCs should accept observer seats instead of board seats when they invest in companies. Boards don’t need three or four VCs on them. One is often enough. Two maximum. Instead VCs should negotiate for an observer right and the ability to nominate an independent director. And they should nominate diverse people for those seats.

3/ There should be term limits on board seats. Nobody and no investor should have the right to sit on a board forever. I could argue that in some situations, the founder might be the exception to this statement. That does not mean a valued board member should step down. That valued board member can always be asked to serve another term. What term limits do is raise the question about whether a person is the ideal board member for the company for the next few years. Often the answer is no.

4/ We need more resources like The Board List, Athena Alliance, and ELC to surface great board candidates. One of the many problems with boards that aren’t diverse is that they are not well connected to diverse candidates.

5/ We must commit to addressing this issue and make it a priority. Board development in general is not a high priority for founders. They are rightly focused on their company, their products, their customers, and enormous challenges of building a business from scratch. But boards are important. They need to be a priority and a diverse board is a better board for everyone. So we need to increase our efforts here.

Ten years ago the the tech/startup/venture industries started to make gender balance a priority in management teams, boards, and the venture capital industry. While we are not where we need to be, we have made good progress. We can do the same with diversity across the board. We can use the same approaches and the same persistent approach to the issue.

I am committed to making this a priority with the founders and companies I work with and I hope that all of you will too.