I wrote about Ether’s big day yesterday. In this podcast, Laura Shin and Coinbase’s Adam White, who runs the institutional business there, talk about the Ether news and Coinbase’s institutional business. It’s a quick 20min listen.

Yesterday, a top official from the SEC said what many of us in crypto land had been wanting to hear from the SEC for the last year:

According to Bloomberg:

“Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions,” William Hinman, who heads the Securities and Exchange Commission’s division of corporation finance, said in remarks prepared for a Yahoo Finance conference in San Francisco. “And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.”

For me, this is not about Ether, but about the fact that a token can be used to raise capital (the “fundraising that accompanied the creation of Ether”) and at some point no longer resemble a security in the eyes of the SEC.

I particularly like this language that Hinman used in his remarks:

But this also points the way to when a digital asset transaction may no longer represent a security offering. If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.

And this part:

Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required.

That last point is super important because as my colleague Nick tweeted out last night, we don’t want Bitcoin and Ether to have the advantage of being the only tokens that are not deemed to be securities. We want a hyper-competitive market where the best protocols win on the merits, not because some regulator likes them better.

This is a concern, and a reason why the SEC must now define a path for the development of new tokens, which may start out sponsor-controlled but become decentralized over time https://t.co/JKvMHUciCA

— Nick Grossman (@nickgrossman) June 14, 2018

But all in all, it was a good speech and a good day for crypto. It is clear that the SEC is trying to define some clear lines in the sand under which the decentralized world we all want to see happen can happen. And they are also trying to make sure that bad actors can’t skirt securities laws by simply claiming they are doing a token offering.

In yesterday’s post, which seemed to touch a nerve, something I certainly seek to do from time to time, I mentioned the “talent organizations” of our portfolio companies. These are the people who help a founder/CEO build and lead the people who make up the company. It’s an undervalued and under-discussed function.

I have heard multiple founder/CEOs tell me that the biggest sigh of relief they had in building their companies was when they finally hired a really strong leader to sit at their side and help them with the people side of the business. It is not even accurate to say “people side of the business”. People are the business!

I recently listed to two Reboot podcasts in which my friend and former partner Jerry Colonna talked with two people leaders, Nathalie McGrath at Coinbase, and Patty McCord, former people leader at Netflix.

It is worth spending the almost two hours it will take to listen to these two podcasts.

What you will hear from Nathalie is the challenge of marrying a high stress, high performing culture and the concept of work-life balance. It is a near-impossible challenge, but simply trying to make it so is a where you must start. You can’t fake it. It has to be something you want to do and need to do.

What you will hear from Patty is a disdain for the platitudes and processes that you get from most organizations. She and her partner in this work, Reed Hastings, wanted to do it their way and in the process created a culture that is the envy of many tech companies.

And, I hope, you will come away from the two hours of listening, with an appreciation for the job of leading the people team. The people who do this work well are rare and valuable and if you don’t have one by your side, you should go find one.

There is an obsession with the values that are being placed on companies when they finance. There has always been one but it is worse than ever.

Every day, without fail, I read a headline that so and so company has raised, will raise, or is trying to raise capital at some eye popping valuation.

It would be easy to blame this on the media, which certainly has to shoulder some of the blame for believing that these are important stories to write day after day, week after week, month after month, year after year.

But the media writes what people want to read and talk about.

The problem is us, the tech sector, and the mindset that valuation is the scorecard by which we measure ourselves.

Of course, valuation matters. When GitHub exits to Microsoft for billions of dollars, that matters. It matters to Microsoft’s shareholders who paid that bill. It matters to Github founders and employees who got a pay day. It matters to the investors in GitHub who got a fantastic return on their investment. And it matters to Github users who got a signal about how important the software they are using is to the big tech companies.

You cannot cover that story without taking about the price that Microsoft paid. It is an important part of the narrative.

But interim valuations being put on startups is different. Sure the price that they can finance themselves is interesting. But not more interesting than the products and services they are bringing to market, how they are building their teams and cultures, and the underlying technologies they are using to do that.

And yet we get less and less of those stories and more and more box scores.

It leads to a culture of bragging and topping one another and an obsessive focus on valuation. I’ve heard founders say “if I don’t raise at a billion or more, we will be seen as a failure.” How ridiculous is that? And yet you can see how they can get to that place.

CEOs and their talent organizations frequently tell me that it is easier to recruit people to companies that have raised at eye popping values. This is particularly peverse because the higher the valuation, the less money the employee will make on their equity. But, it seems, the talent market is looking to the investment community to signal to them what companies are worth working for.

It should work the other way around. I like to invest in companies that smart people are joining. Capital should follow talent, not talent following capital.

I know that many will read this and roll their eyes. “Fred doesn’t like the hyper inflated valuation environment so he’s trying to pour cold water on it.” That’s true about me not liking it but we benefit from it as much as anyone.

What I don’t like about this environment is the focus on form over substance and reducing everything to a number. This could be the new normal. This may be life in startup land from now on. Maybe I just need to learn to deal with it.

But I hope not. I hope that people will come to understand that it is what underneath the covers that matters and the headline number is just that. A great way to get you to click on the link and see some ads.

I saw this tweet today from our friend Arianna and I had a good chuckle:

Love when people cold email me with a pitch and ask to set up a call with management. Hi, that’s me! 🙋🏻‍♀️

— Arianna Simpson (@AriannaSimpson) June 12, 2018

But the underlying issue is not that funny. Someone took the time to send her a pitch email but did not take the time to figure out who she was.

I’m always looking for an excuse to delete a cold email instead of replying to it.

When someone sends me an email seeking to get consideration from Flatiron Partners, a firm that hasn’t been actively investing in eighteen years, I delete it. And I get those emails multiple times a month.

When someone sends me an email seeking an investment in something USV does not invest in; restaurants, movies, oil drilling, etc, I delete it. And I get those emails multiple times a day.

When someone sends me an email saying that they would like to come visit me in our office in San Francisco, I delete it. And I get those emails multiple times a week.

On the other hand, when I get a cold email from someone who has clearly taken the time to do their homework on me and USV, I try to answer it right away. I am not perfect in replying to every email I should reply to, but I do try and I do a decent job at it.

Some people figure that emails and pitches are a numbers game. In some sense they are right. But you can massively increase the hit rate if you do some prep work. And, in this day and age, it is not that hard.

I am a fan of looking at something from all sides and understanding how each side thinks about it.

Consider a neighborhood school. There are students, parents, teachers, administrators, non-teaching staff, taxpayers, the community, homeowners (whose home value is impacted by the quality of the school), and possibly other stakeholders.

In theory every one of those stakeholders has a vested interest in the success of the school but in reality there is often conflict between them.

The teachers would certainly welcome a pay raise, for example. But the taxpayers may not. Or maybe they would because it would keep the quality high and thus the values of their homes.

What if the school wanted to start later and end later? The parents might oppose it because it would make it harder for them to get to work on time in the morning. But the teachers, administrators, and non teaching staff might welcome it because they would find it easier to get to work on time in the mornings.

All complex systems have many stakeholders and while they all want the system to succeed, because they have a stake in it, they rarely view success in the same terms.

Stakeholder analysis is extremely helpful in running a company and governing it (the work of the Board).

And the stakeholders of a company are not just the stockholders. Even when a Board and management is tasked with acting in the best interests of the stockholders, it is wise and prudent to act in the best interests of all of the stakeholders.

Doing so, however, is often impossible because of these conflicts between stakeholders.

Done properly, a stakeholder analysis attempts to determine what each and every stakeholder desires and the impact to them of an important decision. It is like a scorecard. It is often helpful to look at short term, medium term, and long term impacts.

I find that it is often the case that conflicts are the most extreme in the short term and that if you can frame a decision and the impact of it over a very long time horizon, it can be easier to get alignment.

But regardless of whether you can get alignment, a CEO must act and act decisively. And a Board must make sure that the CEO is acting wisely and in the best interests of the stockholders and stakeholders.

So doing a stakeholder analysis, understanding where the issues are and will be, and making a fully informed decision is the best course of action. And you will want a communication plan to mitigate the fallout of the decision as much as possible.

You never want to surprise or be surprised by your stakeholders. They may not like you, agree with you, or even support you. But they must be understood, respected, and considered in your decision making process.

I saw this chart on Semil‘s  blog this morning:

What is shows is that as the amount of money raised (and deployed) in seed funds has grown over the last ten years, the ability of the companies that received those seed investments to raise a follow-on Series A round has declined (massively).

That trend is what you would expect, of course. Supply outstrips demand at some point.

But from where I sit, I am having trouble with the magnitude of these numbers.

First of all, I don’t think the “conversion” from Seed to Series A was ever in the 80% range. I think it is generally around 50% and moves around that number a fair bit. But I can’t imagine a time when 80% of seed funded companies go on to raise a Series A.

I also don’t think it is now sub 30%. Maybe sub 40%. Maybe not. But I’m having a hard time believing that less than 3 in 10 seed-funded companies go on to raise a Series A.

What I think has happened is that there is now a significant “grey area” that has developed in the middle of Seed and Series A. We have “post seed”, or “seed two” rounds. We have “early As”.

So the data isn’t clean and it is harder to track from type of round to type of round.

I also think a lot of the seeds that were being done back in 2006 were non-institutional and harder to track. As the seed fund market has exploded in the last ten years, more of the seed rounds are including at least one institution and are now getting tracked in a way they were not in 2010.

So, are more companies getting seed funded? Yes.

Is a lower percentage of them going on to get Series A rounds? Yes.

Has that percentage gone from north of 80% to south of 30% in ten years? No way.

But, to the question of “is it harder to raise a Series A?”, I think the answer is “it depends.”

There is more Series A money out there too, but it has not grown as quickly as seed money.

It is certainly harder to raise a Series A than a Seed. But that has been true for some time.

The world lost a man of taste, adventure, and humanity yesterday. Anthony Bourdain was an inspiration to everyone in our family. He amplified our love of travel, food, adventure, and other cultures. We will miss him greatly.

I backed this project by AVC community member David Cole earlier this week.