Blog articles

Why Amazon Should Come To NYC

A VC - September 19, 2017 - 4:39am

USA Today reported that NYC is working on a proposal to encourage Amazon to locate its second headquarters “HQ2” in NYC.

I can’t imagine a better place for HQ2 than NYC.

Here are ten reasons why Amazon should stop thinking about any other place and just pick NYC:

  1. NYC is headquarters to many global companies. It has the transportation systems, building stock, and talent base that companies need and desire for their headquarters.
  2. It has 8.5mm people, enough to satisfy Amazon’s insatiable appetite for talent.
  3. It is home to the entrepreneurs, creators, innovators, and big ideas that Amazon is looking to surround itself with.
  4. It is home to the second largest tech sector in the US.
  5. NYC is committed to teaching computer science to all of the 1.1mm students in its school system by 2025 and is already 1/3 of the way there.
  6. NYC/NYS has embarked on massive infrastructure investment to upgrade its transportation hubs like LGA and Penn Station.
  7. There are something like fifteen direct flights from NYC to Seattle every weekday.
  8. NYC has the largest Amazon customer base of any city in the US (I am guessing on this one. But it has to be true).
  9. NYC will welcome Amazon with open arms unlike some of the other cities that Amazon is considering.
  10. NYC has the most diverse workforce in the US.

So if any AVC readers know how to get this post to the team at Amazon that is making this decision, please send it to them. I am certain NYC is the place for them. They will love it here.

Categories: Blog articles

Worry

A VC - September 18, 2017 - 6:42am

I remember when I was in my early 20s and just starting out in the venture capital business, I came across an old wall street saying that “a market climbs a wall of worry.” I didn’t understand it and that made me want to. I read a bit about the saying and came to understand that bull markets require an uneasy feeling.

Worrying is a fundamental characteristic of most investors I know. Greed and fear are the two opposing elements of market forces.

I read a board deck this weekend from a portfolio company that is absolutely crushing it and forwarded it to our team at USV with a short memo outlining all of the risks I am worried about. Not a single enthusiastic comment was in that email.

Why is that? Because although we invest on “what could go right”, we manage our investments on “what might go wrong.”

I believe one of our greatest assets to our portfolio companies is to be an early warning sign of trouble. If we can help the founders/leaders and their teams be aware of risks on the horizon, they can manage against those risks. And if there is one thing investors, particularly ones who have been around a while know about, it is how things can and do go wrong.

Of course, how you worry is critical. You can’t weigh down the leadership teams with your worries. You can’t fill up the board meetings with angst.

You have to be supportive, optimistic, encouraging, and positive in your interactions with founder/leaders and their teams. But you must also flag areas where there could be trouble. Getting that balance right has been a work in progress for me for my entire career.

So being a worrier is an important characteristic in an investor. But you have to mostly keep those worries to yourself and your partners/team (this is a place where partners are invaluable). And you have to decide when a worry is significant enough to share it with your portfolio companies and then you need to find the right moment and narrative to communicate it. When you do it right, the teams appreciate it immensely.

Categories: Blog articles

Some Thoughts On Burn Rates

A VC - September 17, 2017 - 5:11am

The startup and venture capital businesses are based on a general idea that you can and should invest heavily into your business in order to increase value creation, amplify it, and accelerate it.

These investments mostly take the form of operating losses, driven by headcount, where the monthly expenses are larger, often much larger, than revenues.

These losses are known in the industry vernacular as “burn rates” – how much cash you burn on a monthly basis.

But how much burn is reasonable?

I have been thinking a lot about this in recent years.

Instinctively I feel that many of our portfolio companies, and the startup sector as a whole, operate on burn rates that are too high and are unsustainable.

But it is hard to talk to a founder, a management team, or a Board about burn rates objectively.

There are no hard and fast rules on burn rate so you end up getting into an emotional discussion “it feels right vs it feels wrong.”

That’s no way to have a conversation as important as this one.

So I’ve been looking for some rule of thumbs.

One that I like and have blogged about is the Rule of 40.

The rule of 40 makes an explicit relationship between revenue growth rates and annual operating losses. Below 40 is bad. Above 40 is good.

But the issue with the Rule of 40 is that it is oriented toward businesses (like SAAS) where there is a well-understood relationship between value and revenues and ones that are reasonably developed.

So I’ve been deconstructing the Rule of 40 in hopes of trying to get to a more fundamental truth about burn rates.

And what I have come up with is this:

Your company’s annual value creation (valuation at the end of the year minus valuation at the start of the year) should be a multiple of the cash your company has consumed during the year.

That seems simple and obvious and that is a good thing.

But in order to make this work you need to lock down two things;

  • how are you going to objectively measure valuation absent a financing event?
  • what is the multiple?

The latter one is easier I think. The multiple should be large. 1x is clearly not enough. I don’t think 2x is either. 3x is borderline. I like 5x. I would want a 5x return on my annual burn.

I think annual value creation should produce a 3-5x return on annual burn. That feels like a good solid range to me.

The first question is trickier. If you have revenues, then using a revenue multiple to establish value is a good way to do this. You can look at comparable company financings and acquisitions and also public company valuations to figure out what revenue multiple to use. But you should be careful to understand that revenue multiples are a function of revenue growth rates. The faster your revenue is growing the higher they are.

So let’s do an exercise here to flesh all of this out.

Let’s say you are a $10mm annual revenue company in 2017 growing to $18mm in 2018.

And let’s say that you look around at public comps and companies similar to your are trading at 6x revenues.

So you can estimate that your business is worth $60mm this year and $110mm next year.

So there will be $50mm of value creation in 2018.

If you want a 5x return on your burn, you should not burn more than $10mm in 2018.

If you are willing to accept as little as 3x, you should not burn more than $16mm in 2018.

That’s how this rule works.

I like it because it is objective and will lead to rational discussions about burn rates vs emotional ones.

It does break down in pre-revenue companies where it is harder to objectively measure value creation. You can use financing valuations as a proxy in pre-revenue companies but then you quickly get back into emotional territory as the end of year valuation will be an aspirational number and unreasonable aspirations/expectations are what lead to unsustainable burn rates in the first place.

Categories: Blog articles

Audio Of The Week: Andy Weissman on Twenty Minute VC

A VC - September 16, 2017 - 5:24am

In this podcast, my partner Andy talks a lot about USV’s investment process.

It’s a good interview.

Categories: Blog articles

Fun Friday: Crypto Crystal Ball

A VC - September 15, 2017 - 7:07am

Chris Burniske posted this Twitter poll a few days ago:

Given the tense #crypto market environment right now, are you expecting:

— Chris Burniske (@cburniske) September 14, 2017

I voted for option one. I think the crypto markets will be under pressure for at least the remainder of the year. But I am a buyer so that may be wishful thinking on my part.

Where do you think crypto is headed for the remainder of this year?

Categories: Blog articles

Kickstarter Japan

A VC - September 14, 2017 - 4:23am

Yesterday was a big day for our portfolio company Kickstarter.

They launched in Japan, a market that has been dying for Kickstarter to come to for years.

Here’s a couple photos from the launch event in Tokyo yesterday:

Fortunate and grateful to launch Kickstarter in Japan today with exceptional people in Tokyo and NYC. A true honor. Otsukaresama desu! pic.twitter.com/upFLB5XG9f

— Yancey Strickler (@ystrickler) September 13, 2017

I backed a couple Japanese projects today, and I suspect I will be backing a lot of them in the future.

MARUHI Cup & Saucer: A cup & saucer with a secret spot for a sweet surprise.

革新的な電子本「全巻一冊 北斗の拳」”Fist of the North Star” eBook

Japan represents the creativity, imagination, and innovation that Kickstarter is home to as well as any country in the world and I am so happy that they are now on Kickstarter.

Categories: Blog articles

Cornell Tech

A VC - September 13, 2017 - 4:30am

I took a ferry up the East River yesterday evening to attend a dinner celebrating the official opening of Cornell Tech which happens this morning.

Situated on Roosevelt Island, underneath the Queensboro Bridge, Cornell Tech is a graduate school of engineering and business that is focused on the technologies and industries of the 21st Century. While the campus is officially opening today, Cornell Tech has been operating as a graduate school for something like four or five years now, in the Google building in Chelsea.

It is the result of an RFP process that Mike Bloomberg’s administration put out seeking a new school of engineering in NYC.

Last night the former mayor spoke about all of that and reminded us, as he always does, why NYC is the greatest place in the world.

With the opening of Cornell Tech, the city continues to feel the impact of Mike’s twelve years of leadership.

He put NYC on solid footing and helped to point it in the right direction. We are all grateful for that.

Speaking of leadership, Cornell Tech is led by Dean Dan Huttenlocher. Dan is a fantastic technologist, educator, and community member.

If Cornell Tech is a gift that the Bloomberg administration gave NYC, Dan is a gift that Cornell gave NYC.

Dan’s leadership in the NYC tech community has already been felt and as he said last night, “the best is yet to come.”

The synergies between engineering schools and technology communities are well understood and well documented.

NYC has some great engineering schools, like NYU’s Tandon where I am on the Board, Columbia’s School Of Engineering, and at the various CUNY schools. The addition of a world class institution like Cornell Tech will only make things better. It ups the competition between these schools for students, faculty, and research grants. And that makes everyone better.

Today is a big day for the NYC tech community. We welcome the Cornell Tech campus to NYC and celebrate all the good things that will come of this. And I am certain that there will be many.

Categories: Blog articles

Is Big Brother coming to the blockchain?

Beyond Money - September 12, 2017 - 5:33am

Financial advisor Jim Rickards thinks so. In a recent article titled, The Global Elites’ Secret Plan for Cryptocurrencies, he says,

“…the crypto-hysteria is distracting you from a scary truth no one is talking about. There is every indication that governments, regulators, tax authorities, and the global elite are moving in for the crypto-kill. The future of Bitcoin may be a dystopia in which Big Brother controls what’s called “the blockchain” and decides when and how you can buy or sell anything and everything. Furthermore, cryptocurrency technology could be the very mechanism used by global elites to replace the dollar based financial system.”

Rickards goes on to say “Blockchain does not exist in the ether (despite the name of one cryptocurrency) and it does not reside on Mars. Blockchain depends on critical infrastructure including servers, telecommunications networks, the banking system, and the power grid, all of which are subject to government control,” then lists a number of significant developments involving major banks, governments, and supra-governmental organizations like the IMF, all relating to their plans to legislate and control the use of blockchain technology, including its use in virtual currencies and financial transactions.

Can they really do that? Of course they can. In the mid-1800s, the U.S. government imposed a tax on banknotes issued by private banks driving them out of circulation; in 1933 the government made it illegal for private individual to own gold, requiring them to surrender their gold holdings in exchange for government sanctioned paper money at the arte of $20.67 per ounce of gold.

What will be the popular response to such measures against virtual currencies? Will people docilely comply, or will there arise massive disobedience and flaunting of the law, just as occurred in the 1930s during Prohibition, and has been ongoing more recently in the war against drugs? If there is such an uprising, I think it will be in defense, not of Bitcoin, but of some yet-to-be-created virtual currency that rewards virtuous behavior and contributions to the common good. –t.h.g.

 

 

 

 


Categories: Blog articles

AR “Browsers” On The Phone

A VC - September 12, 2017 - 4:06am

Jacqueline gave us an update yesterday on the latest with Apple’s ARKit and Google’s ARCore.

These AR “browsers” are coming soon to Apple and Google phones.

We think this is a big deal because for the first time AR developers will have standard environments to build to that are already in the hands of 1bn people.

Jacqueline wrote a bit about all of this on her Medium blog, here and here.

Throughout our conversation yesterday, I was a little unclear about how all of this would work from a UI perspective.

But then we watched this on our conference room TV and it all became a lot clearer to me.

By the way, if you like that video, you can back the developer on Kickstarter. They only have three days left on their project.

At USV, we have been slow to embrace AR and VR, as we have had a hard time seeing how all of this cool technology becomes mainstream.

With ARKit and ARCore, that path seems a lot more clear now and Jacqueline is leading our effort to talk to companies that are working in this space.

Categories: Blog articles

September 11th – A Day Of Remembrance

A VC - September 11, 2017 - 4:40am

I have written a lot about September 11th on this blog over the years.

I started AVC a couple years post 9/11, while I was and NY was still very much in its wake.

Time has a way of making traumatic things fade away and that has happened to some degree.

But a smell, a scene, or a person can take me right back there to that awful day.

So today, like all September 11s, will be a day of remembrance for me.

Categories: Blog articles

The Equifax Data Breach

A VC - September 10, 2017 - 7:32am

The news broke late last week that hackers have taken almost 150mm records from Equifax. These records include name, address, social security number, birthdate, and in some cases driver license information.

This is an identity thief’s treasure trove.

So what should we do about it?

I read Ron Lieber’s suggestions in the New York Times yesterday and did all of that for our family this morning.

That includes putting a freeze on our records at the big four credit agencies:

– Equifax

Experian

– TransUnion

Innovis

And putting a fraud alert on file for the next 90 days at the big three:

– Equifax

– Experian

TransUnion

That took the better part of an hour as you need to do each of these things for each social security number you want to “protect.”

I also went ahead and pulled credit reports for our social security numbers to see if any new credit had been taken out in our names. Hackers may have had this information for quite a while.

None of this feels particularly protective to be honest. We’ve made it harder for someone to take out loans in our names, but I don’t think we’ve made it impossible.

Lenders and others are going to have to get more diligent about detecting and protecting themselves (and us) from identity theft in the wake of this and many other data breaches.

Name, address, social security number, and birthdate should not be considered sufficient information to prove identity and access credit or confidential information any more. This has likely been true for some time, but this breach certainly is the nail in the coffin for that approach (and possibly the credit bureau business model).

It’s time for new approaches to security, identity, and the protection of our financial information. Thankfully, there are a lot of them out there, mostly in startup land.

Categories: Blog articles

Video Of The Week: William and Ted

A VC - September 9, 2017 - 9:36am

Our portfolio company Kik is doing a token offering for its Kin crypto token this coming week.

AVC regular William Mougayar interviewed Kik founder/CEO Ted Livingston a few weeks ago and their talk is the video of the week this week.

Categories: Blog articles

Fun Friday: The Johnnie Walker Ad

A VC - September 8, 2017 - 3:29am

I love the LA band called Chicano Batman.

They did an ad for Johnnie Walker back in January that is very timely right now.

Check it out.

Categories: Blog articles

A Nightmare

A VC - September 7, 2017 - 4:32am

I don’t know why we call them Dreamers. Because they get to pursue the American Dream? Don’t we all?

These kids, or adults as many are now, were brought to America by their parents and have lived here for most of it.

That we would even think that they should not be here is abhorrent to me.

We can talk about their parents, who came to the US illegally, but we should not be talking about their kids.

These people did nothing wrong, broke no laws.

As my partner Albert, an immigrant, wrote on his blog yesterday:

The blame for this situation though rests with Congress and past Presidents who have failed to make any meaningful progress on immigration reform. Right now, it is worth remembering now that the DREAM act has been around for 16 years. There have been multiple attempts to pass it with at varying times support in the House and Senate, but never the two at the same time, including a bipartisan filibuster that included 8 Democrats. The opposition by Democrats often arose because they wanted comprehensive immigration reform or nothing.

We have our elected officials to blame for not addressing this issue and fixing it a long time ago.

I for one expect them to fix it, to put the other immigration issues aside, which they never seem to be able to do, and address this one.

This is about our morality, our decency, our humanity.

Fix it.

Categories: Blog articles

Oreo

A VC - September 6, 2017 - 5:29am

I received an over the air upgrade to the Oreo version of Android (Android 8) yesterday.

It makes my phone feel even more like an iPhone. Notifications work more like iOS.

Google has polished the UI quite a bit and it is a joy to use.

I have been saying for several years that Android and iOS are copying the best things from each other and they feel more and more similar than ever.

I don’t really think it matters what mobile OS you use these days. They are both really great.

Categories: Blog articles

The decay of western civilization

Beyond Money - September 5, 2017 - 10:32am

One of my correspondents, Irish financial advisor Christopher Quigley, recently sent me a link to his article, Civilizations Die by Suicide Not by Murder. In that article, he mentions famed historian Arnold Toynbee’s monumental work, A Study of History which describes the rise and fall of 23 civilizations throughout human history. Toynbee concluded from his study that, “civilizations start to decay when they lose their moral fiber and the cultural elite turns parasitic.” That certainly rings true for our present world—the banking and corporate elite and their political minions have clearly turned parasitic, putting power and profit above all else.

Then by some strange coincidence I happened to notice a few days ago a book on display at my public library.  The book is, The Lost City of the Monkey God, by Douglas J. Preston, which tells the story of the search for a legendary city that was supposed to have existed several hundred years ago in the eastern part of Honduras in Central America. It is a true adventure story that reads like fiction. Preston was part of a team that went looking for, and by using some highly advanced technology, ultimately found, not only a city, but extensive remnants of a lost civilization, one that appears to be distinct from the Mayan and others of the region that are well known.

In one chapter, Preston speaks more generally about the civilizations that existed in that region and tells of the decline around AD 650 of the Mayan city of Copan. He says,

“This happened even as the ruling classes apparently swelled in size over succeeding generations…in what archaeologists call the ‘increasingly parasitic role of the elite.’  (We see the same process today in the gross expansion of the Saudi royal family into no fewer than fifteen thousand princes and princesses.) This proliferation may have triggered the vicious internecine warfare and killing among the elite.”

He goes on to say, “The commoners were willing to support the privileged class as long as they kept up their end of the bargain with effective rituals.”

What does that suggest for western civilization today? Who are those that comprise our privileged class, and what is the nature of the bargain between them and the “commoners?” I leave it to the reader to ponder those questions, but I would suggest that the bargain must at least include assurances of social justice, basic human rights, and access to a fair share of our natural and cultural heritage. But however one might define that bargain, political developments around the world in recent years seem to indicate that increasing numbers of people are feeling let down by their leaders.

Are we then doomed? Will western civilization continue to  decay and collapse to be followed by another dark age?

I think it is not “we” who are doomed, it is the global interest-based debt-money regime that sits at the pinnacle of the power pyramid, and the American imperial hegemony that are doomed. How long the collapse will take, how much pain and suffering will it cause, how can the present dysfunctional systems be displaced? These are all open questions. The optimist in me sees the peaceful emergence of a multi-polar political order and a sustainable and equitable global economy based on the devolution of power and new exchange and financing mechanisms that are interest-free, cooperative, and grounded in a spirit of compassion and mutual aid. –t.h.g.

Edit: This article from the BBC provides an excellent elaboration on the topic of this post: How Western Civilization Could Collapse.


Categories: Blog articles

The China ICO Ban

A VC - September 5, 2017 - 5:31am

Regulators in China imposed a blanket ban on ICOs over the long weekend.

A number of people have reached out to me via email and Twitter asking me what I think about this.

I think regulation of ICOs is inevitable and a good thing if done right (ie lightly).

The SEC’s comments on ICOs back in July were well done in my view.

There are all sorts of bad things going on in the ICO market right now, from outright scams to projects raising tens of millions of dollars on a white paper written in a day to celebrities getting in on the action.

We needed a cooling off period and if China’s actions are that cooling off period, then I welcome them.

However, a blanket ban on ICOs seems like bad policy to me.

The SEC is heading in the right direction by making a distinction between tokens with real utility vs tokens as a substitute for securities. The former is where the innovation lies. The latter is just a fast and loose way around the rules.

If you look back at the Ethereum token offering several years ago, it is hard to see how that was a bad thing. It provided needed funding to the Ethereum project and the result has been a wave of innovation on top of Ethereum, including the whole concept of ICOs.

If I am reading the Chinese regulators correctly, they are saying that an offering like the one that Ethereum did is not going to be allowed. That’s bad.

Many have speculated that this Chinese ban is temporary to give the Chinese authorities time to come up with sensible regulations. I suspect that is right.

However, I would not like to see the SEC and other regulators follow suit. I think a better move would be to work to rid the market of the scams and other bad actors and actions while allowing for real innovation to continue. That seems to be where the SEC is headed and I encourage them to keep going in that direction and not follow the Chinese.

The US has always been a home to innovation and innovators. We have been able to do that while applying sensible regulations (for the most part) on innovative new technologies. If we continue to take that approach we can compete and even beat China to market in areas like blockchain where they are arguably ahead of us. Naval said it well in this tweet yesterday:

ICOs need regulation, sure, but banning ICOs altogether is a huge gift to Silicon Valley and its resident financiers.

— Naval Ravikant (@naval) September 4, 2017

Categories: Blog articles

Union 2.0

A VC - September 4, 2017 - 4:00am

I wrote this post below on labor day two years ago. From where I sit, very little progress has been made on this since then. That is a problem and also a big opportunity.

Some Thoughts On Labor On Labor Day

When one looks back over the history of the development of the modern economy from the agricultural age, to the industrial age, to the information age, the development of a strong labor movement has to be one of the signature events. Capitalism, taken to its excesses, does not allocate economic value fairly to all participants in the economic system. The workers, slaving away to build the railroad, the skyscraper, etc, provide real and substantial value to the overall system and yet, because they are commodified and interchangeable parts, they don’t always get their fair share of the economic value they help to create. So the labor movement provides the market power that each worker individually cannot provide.

The emergence of the middle class in the developed world in the 19th and 20th centuries has as much to do with the emergence of a labor movement as it has to do with anything. And a growing middle class in turn drove economic development as the obtained earning power was spent on needs like homes, cars, education, etc.

I am a fan of the idea that labor needs a mechanism to obtain market power as a counterbalance to the excesses of markets and capitalism. I think we can look back and see all the good that has come from a strong labor movement in the US over the past 150 years.

However, like all bureaucratic institutions, the “Union” mechanism appears anachronistic sitting here in the second decade of the 21st century. We are witnessing the sustained unwinding of 19th and 20th century institutions that were built at a time when transaction and communications costs were high and the overhead of bureaucracy and institutional inertia were costs that were unavoidable.

One has to think “if I were constructing a labor movement from scratch in 2015, how would I do it?”  My colleague Nick Grossman coined the term “Union 2.0” inside our firm to talk about all the organizing tools coming to market to assist workers in the “gig economy.” But I think Union 2.0 is way bigger than the gig economy. The NY Times has a piece today on workers in a carwash in Santa Fe organizing outside of the traditional union system. One can imagine leveraging technology, communications, and marketplaces to allow such a thing on a much larger scale.

I don’t know how much the traditional union system taxes workers to provide the market power they need. But if its like any other hierarchical system that we are seeing replaced by networks and markets, the take rates are in the 20-40% range and could be lowered to sub 5% with technology.

That’s a big deal. And I suspect we will see just that happen in my lifetime. I sure hope so.

Categories: Blog articles

Multi-Sig Wallets

A VC - September 3, 2017 - 6:02am

A lot of financial processes require multiple signatories, like a wire transfer for example. That adds a level of security and comfort to a process that moves a lot of funds quite quickly.

So it makes sense that blockchain technology would find a way to mimic that in software.

It is called a “mult-sig wallet” and if you use one, you need multiple “signatories” to move funds out of the wallet. I put signatories in quotations because what you actually need is multiple private keys to move funds out of the wallet.

CoinCenter wrote a nice explanation of multi-sig technology back in early 2015 that I frequently share with people who ask me about multi-sig. Give that a read if you want to learn a bit more about how this technology works and why it is so useful.

Our portfolio company Coinbase uses multi-sig technology in its vault product which is currently available for Bitcoin wallets and will eventually come to its other wallet offerings.

If you use a hardware wallet like Ledger, you can use the BitGo software to get multi-sig on it. Here’s a blog post about that.

With the big increase in crypto prices this year, many people are now holding significant amounts of crypto assets. It is worth taking security more seriously and putting your assets, or at least most of them, into a multi-sig wallet is a good step toward that.

Categories: Blog articles

Video Of The Week: The Coming Disruption Of Transportation And Energy

A VC - September 2, 2017 - 6:02am

My friend Steve suggested that I watch this video about the coming changes in energy and transportation and how profound (and rapid) they will be.

It’s long (an hour) but worth it.

Categories: Blog articles
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