Posts from VC & Technology

I’m doing an interview today with Sarah Lacy of TechCrunch. It is the first episode of a new show on TechcrunchTV called Ask A VC. Sarah blogged about it early this week.

The interview is taking place at 2pm eastern today. I don’t know if it will be broadcast live or delayed. But it will appear on TechcrunchTV sometime today. Once it airs, I will embed it here in this post.

If you have questions you want Sarah to ask me, you can email them to her at askavc(at)techcrunch(dot)com.

Here is the interview:

My partner Albert is a hacker. We didn’t invest very much in development platforms before Albert joined us (Twitter being somewhat of an exception) because we couldn’t eat our own dogfood. Albert changed all of that for us. He can not only evaluate development platforms but he can use them and provide feedback to the team.

Over labor day weekend, Albert hacked together a web app he calls Preditter. As he explains in this blog post, he built Preditter on top of three of our portfolio company platforms, Twitter, MongoDB, and Twilio.

If you want to make a prediction about a football game this weekend, just tweet the prediction to your followers and add @preditter to the end of the tweet. I just did that. Here is the tweet:

Let’s do Albert a favor and test Preditter out. And let us know what you think.

My favorite investor is the contrarian. I know a lot of momentum investors that do well and I respect their approach to investing. But it is not an approach I can wrap my head around.

My favorite quote on contrarian investing is from Baron Rothschild who supposedly said:

the time to buy is when there is blood in the streets, even if the blood is your own

That is the kind of thinking that drove me to put a bunch of money into the market directly buying stocks in the fall of 2008, which I blogged about frequently here.

It was very hard to raise a venture fund focused entirely on early stage web investments in 2003 and 2004. Nobody thought that was a good idea. And that fund we raised will be the best venture fund I've ever been involved in. So I've had enough experience personally with contrarian thinking and excellent investments to know that it makes sense, at least to me.

I've been thinking a lot about what a contrarian would do in web investing right now. The easy answer is sit on the sidelines. But we are not paid to sit on the sidelines. We are expected to invest capital. In addition, I feel strongly about not trying to time markets. We like to put about the same amount of capital out year after year without too much variation.

We will only invest in things we know well so that takes non-web sectors off the table. Add to that our particular investment thesis around investing in large networks of engaged users and avoiding gatekeepers and you have a quandry.

I'm thinking a lot about this question these days so I thought I'd put it out there and see what you all think. Opinions of all sorts are welcome here, including the occasional kookery.

I've never been much of a fan of incubators. Some have made the model work. My favorite of the bunch is Betaworks, based here in NYC. Betaworks is more than an incubator, but they have shown that they can make the incubation model work with projects like bit.ly and chartbeat.

But one aspect of incubation that I like very much is the idea that multiple projects are sharing the same workspace. The term for this kind of work setup is coworking. There are various approaches to coworking.

There is the shared space model. Foursquare, Curbed, and Hard Candy Shell have shared a single office for the past year and a half and they get a lot of benefits from working together even though they are three companies all working on very different things. Our portfolio company Outside.in has employees from our portfolio companies Disqus and Zemanta working out of their office. We see that kind of setup all over the startup world. I encourage all of our young companies to think about that kind of setup.

The main benefits of this kind of setup are comraderie (small startups can be lonely), knowledge sharing, high energy, culture, and cost sharing. I have heard so many stories of software developers walking to the other side of the office to talk to software developers working for another company to talk about a thorny tech issue. That same thing can happen in finance, legal, bus dev, marketing, product management, really all parts of the business. You can get some of the benefits of scale without being at scale.

I have been contacted by a large number of people working in city, state, and federal government recently asking me how they can help small tech companies. They often ask about real estate. I tell them that small office spaces are plentiful and not terribly expensive, but that what we need more of is coworking spaces. And we have been getting them at a nice clip here in NYC.

The "grandaddy" of NYC coworking spaces is New Work City. They just raised almost $20k on Kickstarter to open "the awseomest coworking space NYC has ever seen."

A few weeks ago I was down at the NYU Poly coworking space on Varick St right near the Holland Tunnel. They have about thirty companies in one large open floor in a very nice buiding owned by Trinity Church. NYC Seed keeps their manhattan office there as well.

Dogpatch Labs has coworking spaces in SF, Boston, and NYC. The NYC Dogpatch is on 12th between University and Broadway. There are a lot of great companies going into and coming out of Dogpatch these days.

A new coworking space has opened in Williamsburg recently called The Brooklyn Makery.  The image at the top of this post is of their space. I am really excited about this project and a few of us from our office are going out there in a few weeks to visit all the teams.

There is an all woman entrepreneur coworking space on 23rd St between Fifth and Sixth called InGoodCompany. There is an all green/environmental startup coworking space on lower broadway called Green Spaces.

I could go on and on, but I'll just link to this wiki of coworking spaces in NYC. If yours is not on there, please add it.

If you are launching a startup or have one that is just one or two people, you should really try to get into a coworking space. It can be more cost effective, but that is not the best reason to do it. You'll get knowledge sharing, energy, and a lof of camraderie. And you can't put a price on those things when you are doing a startup.

Seth Levine has a long and thoughtful post on convertible debt vs equity. If you are an entrepreneur or active in the angel/seed sector, you should read it. He wrote it in response to Paul Graham's tweet that said:

Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.

I am sure that Paul was talking about angel/seed rounds and was not suggesting that convertible debt has "won" as the preferred financing structure in the venture capital business. But since our firm does participate in select angel/seed rounds, this was interesting to me.

I have been doing venture capital for 25 years now and have also done many angel investments personally along with my wife. We have never done a convertible debt round. That run may soon come to an end if Paul is right. Maybe I will have to join the convertible debt parade.

But I don't like convertible debt for a host of reasons.

It used to be that convertible debt was a lot easier and cheaper to do legally. But with non-negotiated "light series A docs" from most top venture law firms out there, you can do a Series A Preferred for less than $5000. And these light Series A documents focus on economics not control and governance, just like converts do. So to me that is not a valid argument for doing convertible debt anymore.

It still is true that negotiating valuation can be very tricky in an angel round and it may be better to defer that negotiation until the next round. That is what convertible debt does. But I am a sophisticated investor. I do this for a living. I can negotiate a fair price with an entrepreneur in five minutes and have done that for a seed/angel round many times. So I don't think that argument applies to an investment I am making either.

Fans of convertible debt argue that debt with a valuation cap is no different than a priced equity round. That is true if the valuation cap is the same as the valuation that the investors would pay if it was equity. But if that is the case, then the entrepreneur is getting screwed. He or she is agreeing to either take the valuation that would have been offered, or something lower if the next round is lower. That is not a good deal for the entrepreneur.

In truth. there are many convertible debt deals getting done right now with very high valuation caps and some with no valuation caps. In that instance, we are simply seeing the impact of limited supply vs excess demand come into play in the angle/seed market and we need to call this what it is – a price increase.

And that is what I think Paul is actually seeing. He has done such a good job with Y Combinator and his leadership and vision has inspired a wave of seed and angel investment in web services that is unprecedented. That wave is creating price expansion. It is a seller's market and will be for some time to come. And then things will settle down. And when they do, I think we will see the angel/seed market return to a more normal place. A place where priced equity deals between entrepreneurs and sophisticated investors is the norm.

Of course, I could be wrong about all of this. It could be wishful thinking so that I don't have to eat my words and do a convert. That may well happen. Maybe very soon. Maybe my next deal. But I won't be happy about it.

Related articles by Zemanta

• Is Convertible Debt Preferable to Equity? (bothsidesofthetable.com)
• Equity vs. Convertible Debt: VCs Debate Shifting Investment Trends (readwriteweb.com)
• Why Convertible Debt Is A Sucker's Play (burnhamsbeat.com)
• Has convertible debt won? And if it has, is that a good thing? (sethlevine.com)
• Do VCs Really Prefer Convertable Notes Over Straight Equity? (businessinsider.com)

When you want to look up information on publicly traded companies, it helps to know the ticker symbol. Microsft's ticker is MSFT, Google's ticker is GOOG, Apple's ticker is AAPL. Every publicly traded company has a ticker.

But private companies don't have tickers. And as more and more private companies are attaining status and drawing the attention of mainstream media and the investment community, it is time for that to change.

Yesterday Stocktwits and Second Market proposed a set of tickers for popular privately held companies. The proposed list of tickers is here.

I'd like to see services like Tracked.com (a portfolio company of ours: $TRACK), Google Finance, Yahoo Finance, Crunchbase, Wikinvest, and their competitors adopt these tickers. If everyone supported the TWIT symbol for Twitter, the FBOOK symbol for Facebook, and the SKYPE symbol for Skype it would make it a lot easier to aggregate financial and other information on these companies.

I have been an investor and on the board of a company called Alacra for over ten years. We made the investment in the Flatiron partnership. One of Alacra's most successful services is called Concordance. They manage symbology for large enterprises with large datasets. It is a critical service for large banks, brokers, accountants, consultants, law firms, and other knowledge driven industries.

Unique identifiers are so helpful when you are trying to make sense of large amounts of data. It is particularly helpful in the case of company specific information and it is also expected in the investment community.

So I hope this effort by Stocktwits and Second Market gains traction with the other web services that aggregate information on private and public companies. I'll do my part by tweeting with these tickers (using the $ticker standard set by Stocktwits) when I talk about private companies on Twitter. I hope others will do the same.

And Stocktwits and Second Market can make my life easier by making sure that companies like Alacra and Wikinvest that don't have private company symbols get them asap. I wonder if they should open up this database in some way so that companies can issue themselves tickers. It seems like trying to manage this as a closed system won't scale very well and some kind of open system will work better. I'm curious what others think.

Lots of talk these days about new forms of angel/seed capital. But less talk about the most vexing issue facing the venture ecosystem over the past decade – that being the shrinking amount of liquidity on the way out.

If you look at how much money has been raised by venture firms, including the seed and super seed categories, versus how much money has been returned in the past ten years, the ratio is not good. At some point the investors who fund the venture capital asset class will not be able to keep funding it.

The asset class needs to focus on liquidity. M&A continues to be the one bright spot and although I have not seen the data, I suspect M&A activity around venture backed companies in the past ten years has not shrunk and may have actually increased (if you take out the bubble years of 98-2000).

But IPOs of venture backed companies have almost been nonexistent over the past ten years. And that had been an important source of liquidity in the venture capital ecosystem. There is some hope that the IPOs of Skype and Demand Media will spark a renewed interest in tech IPOs. I am very excited about Skype. But friends on wall street tell me that the Skype IPO has issues, like a very weak stock market, the huge overhang of the eBay position, and a continued skepticism around tech IPOs. We will see. I am hoping my friends on wall street are wrong.

I have written about the emerging third way which is secondary sales of founder, angel, and VC stakes to late stage VC firms, growth equity firms, private equity firms, and even hedge funds. This has been a bright spot of late and the trend continues to be positive.

Yesterday our portfolio company Etsy announced that it had concluded a largely secondary transaction with Index Ventures. The interesting thing about this transaction is that it was not founder liquidity driven. The founders did not sell in the transaction. It was not VC liquidity driven. Some of the existing VC firms actually bought in the transaction. It was angel liquidity driven.

Etsy did two angel rounds early in its existence. Our firm participated in the second round. But both rounds were largely composed of individuals, including a bar owner and a restaurant owner who provided the first outside capital. In the video below, founder/CEO Rob Kalin tells the story of installing a new handmade wood bar for the bar owner and in return securing his first outside capital for Etsy. The entire video is very good. If you have a few minutes, check it out.

But the main point of this post is we are seeing that angels can get liquidity via these secondary transactions. They don't need to wait for the sale of the company or possibly the IPO. That is a very good thing, for the angel/seed sector, and for the overall venture capital market.

I hope these secondary purchases work out well for the funds that are making them. Because if they do, we will see even more of them. And that may be a way out of the liqudity issues plaguing the venture capital business these days.

Related articles by Zemanta

• Index Ventures Buys Into Etsy, Triples Valuation To Nearly $300 Million (techcrunch.com)
• Index Ventures buys into Etsy, now worth almost $300 million (eu.techcrunch.com)
• Etsy Raise Another $20 Million For $300 Million Valuation (paidcontent.org)

I came across this interview I did at Wharton a few years ago. They asked me how blogging has impacted the way we do the venture capital business. I don’t think many people have seen this since the total views on YouTube are only 34 right now. I think it’s a pretty good explanation of how this blog is a critical part of how I work. It is only 3 minutes long.

I’ve written about this topic before. I think many people with the ambition and the opportunity can become excellent CEOs. But it takes a lot of work and a commitment to self improvement. It is a very hard job. It is lonely. And it requires discipline and decisiveness. Most of these traits can be learned.

But who do you learn them from? Certainly not me. I have never been a CEO and never will be. I can help entrepreneurs with many things. But there are some aspects of running a company that I can’t help with.

So I encourage most of the CEOs I work with to get mentors or coaches (or both). I have seen this work so well for so many people. You might ask “what can a coach or a mentor really help me with?”

I’ll point to a blog post by Ben Horowitz on “office politics.” I tweeted this out yesterday so some of you may have read it already. If you are a CEO or plan to be one someday, you should read it.

Here’s an example of Ben’s advice on what to do when one exec comes to you complaining about the performance of another exec:

If they are telling you something that you already know, then the big news is that you have let the situation go too far. Whatever your reasons for attempting to rehabilitate the wayward executive, you have taken too long and now your organization has turned on the executive in question. You must resolve the situation quickly. Almost always, this means firing the executive. While I’ve seen executives improve their performance and skill sets, I’ve never seen one lose the support of the organization then regain it.

On the other hand, if the complaint is new news, then you must immediately stop the conversation and make clear to the complaining executive that you in no way agree with their assessment. You do not want to cripple the other executive before you re-evaluate their performance. You do not want the complaint to become a self-fulfilling prophecy. Once you’ve shut down the conversation, you must quickly re-assess the employee in question. If you find that they are doing an excellent job, then you must figure out the complaining executive’s motivations and resolve them. Do not let an accusation of this magnitude fester. If you find that the employee is doing a poor job, there will be time to go back and get the complaining employee’s input, but you should be on a track to remove the poor performer at that point.

Imagine having someone you can pick up the phone and call when this happens to you? How nice would that be?

You can get that several ways. You can take an investment from a VC like Ben or Mark Suster or Jeff Glass or many others who have serious operating experience. Or you can bring an experienced and successful CEO (or two) onto your baord. Or you can get a CEO Coach. 

I would not recommend you overdo it. Getting advice from too many places isn’t very good. Pick a mentor/coach and run with it. If you are struggling with the demands of being the boss, the first thing to realize is you are not alone. It is a super hard job. The second thing is to get some help. From someone who has done it before and knows what to do. Trust me, you will be much happier once you do that.