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Musings of a VC in NYC
Updated: 2 hours 8 min ago

The Hit Rate

11 hours 34 min ago

This simple and short blog post by the folks at Correlation Ventures contains the key to venture capital returns – the hit rate.

In the Correlation post, they define “hit rate” as:

the percent of invested dollars generating a 10X or greater return

But “hit rate” could be something else. It could be the number of investments in your portfolio that return the fund. It could be the number of seed investments you make that turn into billion-dollar valued businesses. It could be the number of your seed and Series A investments that go public.

My point is that it doesn’t really matter than much how you define hit rate.

What is important is this chart from the Correlation post:

I guess they have a keen eye for correlation at Correlation Ventures. They certainly found it here.

Venture capital returns are highly correlated to a fund’s hit rate.

Or said differently, a fund’s hit rate determines their returns.

I think that is a pretty well-known fact these days with all of the obsession with billion-dollar valued companies, or “whales” as I like to call them.

We know that venture investments result in a power-law distribution of outcomes.

And so one or two companies will determine the returns in a given fund.

Sometimes that is not the case. In our 2004 fund it was five companies, but that is why that fund was so good.

The other interesting thing about that chart is why the hit rates and returns in the venture capital industry have not returned to pre-2000 levels.

I think that is all about the amount of capital in the business now. More capital means more businesses get funded. So even if you have more winners, you don’t see the hit rates move up. The numerator and the denominator have both grown in the hit rate calculations.

Before 2000, the venture capital business was a bit of a cottage industry.

In the last 15 years, VC has become an institutional asset class with the permanence and stature that brings seemingly endless amounts of capital to it.

And so the returns have stabilized in or around the 2-2.5x over ten years number, which produces high teens/low 20s IRRs, which is enough to sustain the sector.

The only thing that I think would take us back to mean multiples of 4x or better would be some sort of massive reduction in the amount of capital coming into the venture capital business. And I don’t see that happening any time soon.

But one thing about the VC business has not changed in all of the years in that chart, which is roughly how long I have been a partner in a venture firm, and that is that your big winners will determine your returns.

Same as it always was.

Categories: Blog articles

Audio Of The Week: Full Body MRI Scans And Machine Learning

September 14, 2019 - 4:09pm

My friend Gordon suggested that I listen to this podcast about MRI scans as an early cancer detection tool.

I found it super interesting and maybe you will too.

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Funding Friday: Make Pizza On Your Camping Trip

September 13, 2019 - 8:41am

One of the things I like about Kickstarter is seeing repeat creators coming back with new innovations. I backed a project like that this morning.

I also love pizza and making it in wood fired pizza ovens.

So this project checks a few boxes for me.

Categories: Blog articles

Fractionalizing Home Equity

September 12, 2019 - 6:35am

USV recently invested in a company called Patch Homes and they are announcing that financing today along with some other important information on their business.

You can read about the financing here and USV’s investment blog post here (we do one of these for every new investment).

What I’d like to talk about is the bigger idea behind Patch and some other startups out there which is the ability to break up your home equity into pieces and sell some of it while holding onto most of it. I call this fractionalizing home equity.

In the existing home finance world, the only thing you can do with your home equity is borrow against it. And many homeowners do this. It is a big market and helps a lot of homeowners out. But once you borrow against your home equity you have larger monthly mortgage payments to make and many can’t afford to do that. And you need a certain credit score to be able to access the home equity loan market.

What Patch offers instead is to take a piece of your home equity (currently limited to $250k maximum) and sell the upside on it to a investment fund. Note that I said upside. This is effectively a call option on the equity not a full transfer of that equity. That makes things a lot simpler in many of the scenarios that could arise.

There are some great use cases for a partial sale of home equity. One example I like a lot is a family whose children are heading to college and soon will be out of the home. They plan to sell the home when all the kids are gone but don’t want to do that until then. They could sell some of their home equity, help pay for college, and then sell the house after all of the kids have graduated. There are plenty of examples like that where you are in a situation in life where you plan to sell but not just yet and you don’t want to add to your debt load and/or your monthly payments.

And that is why having more home finance options is great. It expands access to capital and that is a core part of the current USV thesis. And we are excited to be working with Patch to help them do that.

Categories: Blog articles

September 11th

September 11, 2019 - 6:39am

We were having breakfast in lower Manhattan that morning before a board meeting. It was the CEO, another board member and me. We were sitting outside in a sidewalk cafe in lower Soho and the plane flew right over us, at a height that was clearly not normal, and banked and slammed right into the first tower.

The CEO knew right away it was a terrorist act and we quickly settled up and headed over to the company’s offices. We told everyone to go home that could go home, and then waited to see how many people would arrive at work. Once we had sent everyone home who could go home, we got everyone who could not go home and started walking uptown to our house in Chelsea. We invited everyone in to our home and went out and got sandwiches and made a buffet lunch.

Nobody did anything but watch TV and call their loved ones, if they could get a call out on the overloaded cell networks.

By evening everyone had made plans for the night or figured out how to get home.

It was a horrible day, one that I certainly will never forget, and one that changed everything in many ways.

But when I look back at it, the ability to take everyone in, feed them, and provide some community and comfort, made that day a lot easier for me and my family. I am grateful for that.

Categories: Blog articles

Bring Back The SE

September 10, 2019 - 8:26am

Today Apple is going to announce three new iPhones.

One of them should be a small form factor like the old SE.

Apple discontinued the iPhone SE at the tail end of 2018 and has stated that the next iOS update will not run on the old SE hardware.

I have a number of friends and family members who have the old SE, love the small form factor, and do not want a larger phone in their pockets, purses, and hands.

As a result, these people have been holding onto phones that have gotten a bit old and badly in need of an upgrade.

But more importantly in my view, if Apple wants to tightly control the hardware that iOS can run on (which obviously they do), then they should put a wide enough variety of hardware into the market to support their user base.

It is unlikely that any of my friends and family members are going to move to Android, where there is a wide variety of hardware form factors to choose from. The iOS lockin is very powerful.

So Apple doesn’t need to do this so much for business reasons. But I do think they should do this for other reasons.

Categories: Blog articles

Why Positive Cashflow Matters

September 9, 2019 - 6:54am

Venture backed companies have a strange relationship to positive cashflow. Because they have financial backers who can and do finance losses, they tend to operate in the red for a long time.

In the early days it makes sense to burn cash. If you do not have revenues, you can’t generate cash. And if you can’t grow your revenues without investing out ahead of income, then you also need to be able to operate in the red.

But I have often felt that this muscle memory of investing for growth at the expense of profits can become, and does become, a habit that is hard to break.

If you have positive cashflow, you can control the timing and terms of your capital raises.

If you have positive cashflow, you can buy back your stock if any comes into the market at prices that you and your Board feels is below fair value.

If you have positive cashflow, you can borrow against it to purchase other companies or finance capital requirements.

If you have positive cash flow you can offer cash incentive compensation in lieu of ever more expensive equity compensation.

I could go on, but I suspect you get the point. Positive cash flow puts you on control versus the capital markets.

And that is a very valauble position to be in and one that a number of high flying tech companies probably wish they were in right now.

Categories: Blog articles

Foreshadowing Facetime

September 8, 2019 - 1:35pm

The Gotham Gal and I went to the Brooklyn Museum today to see the Pierre Cardin retrospective.

Near the end of the exhibit was a small clip from a Jetsons episode where Jane is shopping for dresses in a boutique.

She finds a dress that she likes and decides to call her friend on the TV in the store and find out what she thinks of the dress.

This is a fairly common activity these days. You see people facetiming with friends and family before they purchase something in a store.

But in the early 60s, when these Jetsons episodes were bring written, this was very far from reality.

But they imagined it and wrote it into the show.

That’s pretty cool.

Categories: Blog articles

Audio Of The Week: What Can We Learn From The History Of The Internet For The Future Of Crypto?

September 7, 2019 - 7:33am

In this podcast, a16z general partner Katie Haun interviews a16z co-founder Marc Andreessen. It’s a great conversation.

Categories: Blog articles

Funding Friday: Malware Blankets

September 6, 2019 - 4:08am

This is a cool project that combines textiles and malware. I backed it this morning.

Projects like this always makes me wonder what someone will think of next.

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Learning The Hard Way

September 5, 2019 - 6:38am

I got schooled on Crypto Twitter yesterday. It turns out many believe I was wrong about most everything in my post yesterday and they let me have it. Crypto Twitter is a really special place.

One of the comments was that I learned the hard way that crypto networks are not companies:

We all learn the hard way. What matters is to learn.

— Fred Wilson (@fredwilson) September 4, 2019

Pretty much everything I have learned in the venture capital and tech business I have learned the hard way. Easy lessons aren’t very powerful. Hard ones are.

I have gotten more things wrong than you can possibly imagine.

That’s life, that’s learning, that’s winning.

Categories: Blog articles

Some Thoughts On Crypto

September 4, 2019 - 6:06am

The crypto sector is in an interesting phase right now.

The market has rallied from its lows this past winter and is up a lot in 2019:

But Bitcoin now makes up almost 70% of that aggregate market cap.

In some ways, Bitcoin is the one protocol that has found lasting product-market fit. In terms of a censorship proof digital store of wealth, there is nothing that comes close to Bitcoin. There are some protocols, like the privacy-focused ones, that offer similar and in some cases better use cases. But for the most part, Bitcoin is our digital gold.

Ethereum, as many of you know, confounds me. It has shown the way to so many important things; smart contracts, programmable trust-free computing, potentially proof of stake, and a lot more. But it remains hard to build on, scaling issues abound, and many developers are looking elsewhere.

Stablecoins, including Facebook’s plans for Libra, are a bright spot. There has been much innovation in this sector and more is coming. There is no doubt that technology can provide a stable programmable crypto asset. We are still early days in the use cases but it is not hard to imagine why one would want to own and use stable programmable digital money.

We are also seeing signs that users like using crypto-assets in mobile and web apps. Kin, built by our portfolio company Kik, has become one of the most used cryptocurrencies in the world and is built into more than fifty mobile apps. Our portfolio company Blockstack has a Dapp platform that many developers are using to create consumer Dapps. And our portfolio company YouNow’s Props token is seeing a lot of consumers transacting with it.

But there is also plenty of disappointment to be had in crypto right now.

Regulators and banks in many parts of the world are downright hostile to crypto and have pushed much of the liquidity to Asia and the innovation has followed it there. Many of the most interesting things in crypto right now have emanated from Asia.

And many of the most promising and best-funded projects are massively delayed in getting to market. Some of this is that building scalable secure and decentralized protocols is not easy. But it is also true that the decentralized development approach that many of these projects are taking is not well suited to deadlines and ship dates.

And maybe most of all, crypto has not gone mainstream. Very few people earn in crypto. Very few spend in crypto. Very few use Dapps. Very few do anything with crypto other than buy, sell, and mostly hold.

I am an optimist. I am convinced that many of these disappointments will be overcome in the next few years. But it is easy to be bearish on crypto right now. The reality is well below the hype and challenges abound

I am long crypto and USV is long crypto. And we are putting more capital into the sector and will continue to do so. But it is not without risks and setbacks. Actually it is full of them.

Categories: Blog articles

Back At It

September 3, 2019 - 4:20am

The summer is over and the fall season is upon us.

I love the fall in NYC. It hums with energy, the air cools a bit, and everyone is out and about.

It is also a good time to get things done. Everyone is back at work and focused.

That includes me.

Categories: Blog articles

Labor Shortages

September 2, 2019 - 4:42am

I read last week that there are a growing number of regions around the country where there are labor shortages. Businesses literally cannot find the workers they need to operate their businesses.

Today is Labor Day, a day to celebrate the workers who built America and the labor movement that rose up to protect workers from abusive labor practices.

And so it is worth noting that we don’t have enough labor in our country right now. Some of this results from the strong economy which is ten+ years into an expansion. Some of this results from restrictive immigration policies.

But whatever the cause, we have an abundance of capital and a shortage of labor in the economy right now.

That makes it difficult to operate a business and even more difficult to expand. Automation can solve some of these issues and I expect we will see more automation in an environment where capital is available to fund investments in automation and labor is very tight.

But the other question is how much longer should we maintain a restrictive immigration policy. I believe we should have more legal immigration in the United States. We have labor shortages and many talented people who would like to come here and live and work.

It seems like a no brainer to me that we should expand legal immigration in the US right now.

Categories: Blog articles

Scaling In Lower Cost Locations

September 1, 2019 - 4:50am

This is a topic I’ve written about a bunch over the years. I feel like it is becoming more urgent every day.

Last week I heard some shocking numbers about salary levels for certain kinds of engineers in the bay area. I checked them out with a few of our bay area portfolio companies and they were more or less corroborated.

The tight technical labor markets in the bay area, NYC, and a number of other regions in the US are making it hard to scale software businesses without burning massive amounts of cash.

At the same time, we see a growing number of our portfolio companies succeeding with scaling engineering/technical teams in secondary labor markets in the US, as well as going outside of the US to build engineering locations.

I feel that the ability to spin up and then successfully operate remote engineering locations is a skill that technology companies need to develop earlier in their development than used to be the case.

It seems to me that once you get to 100-200 people (or 50+ engineers), you should be thinking about this. The most important thing is not where you put your first remote location. The most important thing is learning how to do this successfully. Because once you can do it in one location, you most likely can do it successfully in multiple locations.

This post explains how Stripe (a USV portfolio company) started with remote engineering hubs in Seattle, Dublin, and Singapore, and then evolved into a structure that supports remote workers anywhere.

The move from a centralized engineering structure to a decentralized one is a process and takes time to get right. And so I think it is best to start building those capabilities long before they become necessary.

Categories: Blog articles

Audio Of The Week: Sarah Beatty and Montgomery Builds

August 31, 2019 - 4:40am

The Gotham Gal loves this conversation with Sarah Beatty about her Montgomery Builds project and suggested that I give it a listen. So I am doing the same with all of you.

Categories: Blog articles

Funding Friday: Subway Art

August 30, 2019 - 3:55am

When I got to NYC in the early 80s the subway cars were like moving paintings with graffiti all over the cars. Going down into the subway station was like going to an art show.

This retrospective of Henry Chalfant’s photography of that era at the Bronx Museum captures that period so well and I helped support it today.

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AVC Stats

August 29, 2019 - 6:29am

As I’ve been working on a new design and approach to this blog/newsletter, I have been diving into the analytics to understand what all of you are doing with it.

Here are some charts and tables:

1/ The web traffic (desktop and mobile) has risen and fallen over the years, driven by SEO and other factors. MAUs peaked in the 2012/2014 period in the 300k range. It has settled in more recently at 80-100k a month.

2/ The email “newsletter” subscriptions have risen a lot in recent years. For much of AVC’s history, email was not a particularly popular way to read this blog, but in the last four or five years, it has grown a lot, to about 30k active email readers.

The top 50 blog posts of all time are an interesting bunch. Most of them have been written in the last five years, but there are a few that go back to 2009 and 2010.

Clearly there is a lot of value in the archive and I want to flesh that (and search) a lot more in the redesign.

It also want to make the email subscription work better. I have heard from many who read via email that it could be improved. So I will work on that.

Categories: Blog articles

The Erasure Protocol

August 28, 2019 - 5:08am

Some crypto projects are developed from scratch. Bitcoin, Ethereum, and our portfolio company Algorand are examples of this. The developers have a vision and they go out and build it.

Other crypto projects evolve from something else. Kin and Props, both created by USV portfolio companies, are examples of that.

A particularly interesting example of the latter model is Numerai>Numeraire>Erasure. USV is an investor in Numerai which is a hedge fund that sits on top of the “The hardest data science tournament on the planet”.

Numerai initially developed the crypto token called Numeraire to allow data scientists to stake their predictions in the Numerai tournament and earn more compensation.

But as the Numerai tournament gained scale and the adoption of Numeraire grew, the Numerai team “realized that the primitives Numerai has built could have a wide range of applications beyond the tournament”.

And so they built the Erasure protocol which allows anyone to publish data and stake capital based on the accuracy of that information. This post explains some of the ideas behind the Erasure protocol.

The Erasure protocol is now live on the Ethereum Mainnet and you can build things on it. The Numerai team has already built two applications on Erasure:

Erasure Quantis a tournament used to crowdsource data on the Russell 3000 index. Participants submit daily price predictions on US stocks and are rewarded for contributing while building an immutable track record. Erasure Quant is a template that can be used by others to build their own tournaments.
ErasureBay is an open marketplace for information of any kind. It can be used to create credible signals over possession of local knowledge and attract a buyer willing to pay for it.

These crypto projects that evolve from something else are more focused and benefit from a real use case and market need. That does not make them more likely to succeed or more valuable. In the current market, almost all of the most valuable crypto projects are ones that started from scratch.

But I don’t think that will always be the case. Many of the most important technologies evolved from something else and I think that will be the case in crypto as well.

Categories: Blog articles

Returning The Fund

August 27, 2019 - 6:52am

I have always felt that every investment in a venture fund should be able to return the fund.

That doesn’t mean that they all will.

In fact, for many funds I have worked on, only one or two investments work out well enough that each of them can return the fund.

So if you have a $100mm fund, you need to look at each and every investment and ask yourself if the company delivers on everything they are seeking to do will that return $100mm to your fund.

It’s a tall order and doesn’t happen that frequently.

But if it never happens, you won’t be in the venture capital business for long.

Categories: Blog articles