Recycling

Most venture capital funds have a “recycling” provision that allows them to sell some percentage of their investments and reinvest those funds back into new investments instead of distributing that capital to their limited partners. There is no standard recycling percentage in the market, but I think 20-25% is fairly common.

We do this at USV very aggressively. It allows us to put the entire fund to work and recoup the management fee load. A $100mm venture capital fund will pay something like $20mm in management fees over a ten-year life. So it would only actually invest $80mm into startups. But if that fund recycled $20mm back into new investments, it could put the entire $100mm to work even after paying the $20mm in management fees.

Sometimes it is also possible to use recycling to invest more than the fund actually raised. We have done that in a number of funds. Our first fund was a $125mm fund, but we only called something like $110mm from our investors and I think we ultimately put to work something like $140mm.

These might feel like small moves, but they can be very big moves when you are trying to make 3x or more on a fund. Three times $110mm is $330mm. Three times $140mm is $420mm.

Of course you have to be smart about what you recycle and what do you not recycle. Most venture capital funds have investments where you get your money back or a bit more. It could be an early exit where the founders got a great offer they could not refuse. Or it could be an investment that only sort of worked. Those are great opportunities to recycle capital. You get your money back or a bit more, and then you put it back to work.

It can also make sense to take a little money off the table on a rocket ship type investment and recycle that. But doing too much of that sort of thing can reduce the returns in a fund instead of amplifying them. I have made that mistake and do not plan to do it again.

Portfolio and fund management in a venture capital firm is not something that is often discussed. The biggest driver of performance is finding the right opportunities and getting into them at the right time. So that is where most people in venture capital focus their time and energy and rightly so.

But I believe that proper portfolio management; getting the right diversification in a portfolio, managing liquidity opportunities, and aggressive recycling can make a big difference in fund and firm performance and we dedicate real time and energy to these issues at USV. I think it has made a difference for us over the years.

#VC & Technology

Volunteer At TEALS NYC

TEALS is a longstanding program supported by Microsoft where software engineers assist in computer science instruction in K12 schools. I have been blogging about and advocating TEALS for over eight years now. TEALS came to NYC in 2013 and has been helping kids learn computer science in NYC schools ever since.

For many of those years, the software engineers would have to travel to the school building to assist in classroom instruction. But that has changed and now TEALS volunteers can teach remotely. I think that is a huge unlock for everyone and I am encouraging software engineers in NYC to consider doing TEALS during the 2021/2022 school year.

You can learn more here.

If you are interested, you can apply here.

#hacking education

Dapper Labs, Flow, and NBA Top Shot

I have written about all of these things here at AVC before. But I am writing again as there is likely to be a bunch of chatter about Dapper, Flow, and NBA Top Shot as the news of a financing round comes out today.

Financings don’t really interest me but companies do. And this is a fascinating company.

Dapper Labs came out of an incubator called Axiom Zen back in 2017. The Axiom Zen team was looking at interesting things they could build using Ethereum. They contributed to the ERC 721 standard for non-fungible tokens and started building an NFT collectible game that became Cryptokitties. That got our attention and led to a financing that spun out the team and Cryptokitties into Dapper Labs. I wrote a short post on the USV blog announcing that we had invested in Cryptokitties, but in truth, we invested in much more. We are only seeing the entire vision now.

After building a few more collectible experiences on Ethereum, the Dapper Labs team concluded that the NFT experiences they wanted to create needed a different blockchain and they started building Flow. Flow is a proof of stake blockchain that was designed from the ground up for consumer experiences that require scale and performance and more.

And then they started building NBA Top Shot on Flow. That required a deal with the NBA which they made happen a few years ago. And it required Flow to launch. And it required a crypto wallet experience that was tightly integrated into the game that allowed new users to fund their wallets with credit cards in addition to crypto assets. Building all of that was quite a task but they got it all done by the middle of last year and launched NBA Top Shot into beta last summer.

Slowly but surely Dapper let more users into NBA Top Shot and iterated on the experience and by the end of the year, they had a hit on their hands. Hundreds of millions of dollars of transactions a month happen between collectors on NBA Top Shot. Pack drops sell out more or less instantly.

The success of NBA Top Shot has led many developers to Flow seeking to build additional collectible experiences and I expect that we will see many more great games and experiences on Flow in the coming months and years.

It is rare in the crypto sector to find a team that has successfully launched a blockchain, a wallet, and a number of popular applications. The Dapper team has done all of that and I am excited to watch what they do next.

#blockchain#crypto#digital collectibles#Games

Staying Positive

One of the gifts that I got was the ability to stay positive. I am grateful to my parents, my wife, and my genes (and anyone else responsible too). It is such a superpower.

I don’t just mean optimism. I mean saying nice things about people. I mean keeping a smile on your face. I mean positivity in all things. I do have my moments of negativity, but they come infrequently and go away quickly.

I saw Magic Johnson say something nice about the Lakers last night and I texted my son that I appreciate how Magic is always so positive. He always has a smile on his face. He is always saying nice things. I am sure he was a vicious competitor on the court, but he did it nicely.

I recall when David Karp was building Tumblr, he refused to have comments. He refused to have downvotes. The only user engagement was a heart and a repost. He told me he wanted to emphasize positivity and de-emphasize negativity. And Tumblr was a very positive place to be during its heyday.

For every negative thought, there is a positive counter thought. If you don’t like the Celtics, maybe you like the Knicks. If you don’t like Trump, maybe you like Biden. If you don’t like Bitcoin, maybe you like Ethereum. It is a pretty simple move, and also a very powerful move, to focus on what you like versus what you don’t like.

Doing this not only can change how others feel about you, it can change how you feel about yourself. I highly recommend it. I hope it becomes a trend. We would all be happier and nicer. Social media would be tolerable. Life would be better.

#life lessons

Digital Art Frames

I have a Samsung Frame in my home office. I think I posted a photo of it here at AVC once before. But for those who did not see that post, here it is:

I’ve had it for something like three years and I change the digital art on it from time to time.

Digital Art has been tricky to purchase and own and the business models around it are a bit challenging.

I think NFTs might change that. If artists can get paid for the “original” or a “limited edition” and then make copies free or near free, then I think the digital art market could explode.

My partner Albert posted about NFTs a week or so ago and made an important point that I think is a bit lost in all of the hype/mania about NFTs right now:

This is what NFTs do for digital content. They let someone assert “I am the Louvre” (for that piece of content).

This is not a fad. It is a fundamental and profound innovation.

https://continuations.com/post/645017712412786688/a-word-on-nfts

Go here and read the entire thing because “the Louvre” is a bit out of context in that quote. His point is that crypto/blockchains allow for someone (or a group) to own the original(s) and everyone else to own copies that are as good as the original.

And that is the kind of thing that could make owning digital frames really awesome.

#art#crypto#non fungible tokens

Resilience

A friend and I dined last night at a restaurant that opened in our neighborhood last summer, in the middle of the pandemic. For the first six months of its existence, they could not welcome diners into the space that they had spent time and money creating. They carried on, figured out how to make money serving customers outside. As the NYC economy starts to recover, they are still standing. And they are now welcoming diners into the lovely space they created for them a year ago.

Resilience is an extremely valuable trait when you are starting and running a business. In a bull market that rewards other things, it is often overlooked. But I don’t overlook it.

A reporter asked me recently about a company that I am on the board of that has become very successful. I told the reporter that for years, the founder carried on while every competitor left the market in search of a viable business. The viable business arrived eventually and the founder was rewarded for his patience.

Sticking with something, even when the chips are down, is hard. Many people (most?) can’t do it. They are impatient. They want the easy money.

While the world has been going through a painful and deadly global pandemic, the tech sector has experienced a bull market of epic proportions that has lifted all boats and made some incredibly wealthy. But that bull market will eventually end and things will get harder for founders and CEOs and investors.

And that is when resilience will be in short supply. So look for it in founders now, when it is less necessary.

#entrepreneurship#VC & Technology

Crypto and Climate Continued

I wrote about crypto and climate earlier this month and suggested that the narrative that crypto is bad for the climate is not as straightforward as many make it out to be.

Over last weekend (a beautiful one in the northeast), two of my partners wrote on this topic.

My partner Albert took a similar approach as I did in my post and outlined many reasons that crypto and climate are not at odds with each other. He went further than I did in my post and it is worth reading his, even though they are similar.

My partner Nick went out on a limb and compared Bitcoin to a battery. He used that analogy to be provocative. He took some heat for doing it, but I think it was worth it because you sometimes have to stake out a provocative position to get people’s heads to turn a bit on something.

This is the key part of Nick’s post:

Which brings us back to crypto mining. Crypto mining converts electricity into value, in the form of crypto assets (BTC, ETH, etc). Those assets, like the aluminum produced in Iceland, can then be moved, transferred and transformed. But unlike aluminum, which must be physically shipped to its final destination, crypto assets are programmable, and can move there instantly via an internet connection.

So, if we think of Bitcoin as a battery, what can we do with it?  The key properties of Bitcoin’s battery are: 1) always on and permissionless (no need to find customers, just plug and go) and 2) naturally seeking low-cost electricity: it will always buy when the price is right.

https://www.nickgrossman.xyz/2021/bitcoin-as-battery/

We have been addressing this topic (crypto and climate) for multiple reasons. First, because we believe the narrative in the mainstream media is too simplistic and we would like to see it evolve. And second because we know that there are many entrepreneurs out there that are working with crypto to help address the climate crisis and we would like to meet them.

Nick and Albert’s posts last weekend opened the floodgates on the latter point and we are now talking to a number of very interesting projects as a result.

#climate crisis#crypto

Stack Overflow For Teams Goes Freemium

I could not help but use the word Freemium in the headline to this post. For those that don’t know, the word Freemium was invented here at AVC, back in 2006. I am quite proud of that fact, even though I did not come up with the word myself.

With that business taken care of, let’s move on to the topic of the day.

Our portfolio company Stack Overflow, best know for its massive free knowledge sharing service for programmers, has been building a companion business over the last few years called Stack Overflow For Teams. Teams is the same knowledge-sharing software that programmers know and love but for private sharing inside of companies.

Since launching Teams, it has been free for the first thirty days. But it takes longer than that to build great knowledge sharing inside of companies. So last week, Stack launched a new version of Stack Overflow For Teams that is now free forever for teams of 50 or less.

If you use Stack Overflow and love how it surfaces the answers to your questions and you want to use it for your team, you can do that for free right now. Go here and click Create A Free Team.

A Freemium Stack for your team. I love it.

#Web/Tech