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Musings of a VC in NYC
Updated: 1 hour 33 min ago

Funding Friday: Code Society

April 5, 2019 - 4:13am

Code Society is like Schoolhouse Rock for Computer Science. They use hip hop music and videos to teach computer science concepts to diverse communities.

They are doing a $40k project on Kickstarter (and are about half way there) to create content and applications. I backed it earlier this week and you can back it here.

Categories: Blog articles

Orthodoxy

April 4, 2019 - 5:54am

I am not a fan of Orthodoxy.

I appreciate the power of religion although I am not religious personally. I respect the followers of Allah, Jesus, Moses, Buddha, and other religious figures. I know that the beliefs of religious people give them great comfort and a purpose in life.

What I don’t appreciate is when a person of faith believes so deeply that they cannot tolerate beliefs that are different from theirs. I call this Orthodoxy and it has led to wars, horrible crimes, and many other bad things. It is the downside of what is and should be a very positive thing for humanity.

We see this same behavior developing in the crypto sector. Bitcoin and other cryptoassets have become a belief system. That is at the core of their value. Why would I give you $5000 of my dollars for one of your Bitcoin? Because I believe in Bitcoin and want to own it.

This faith in the value and power of cryptoassets is good. It is necessary for all of the other good things that can come of them.

But like religion, there is an Orthodoxy in these communities that borders on obsession and leads some people to be extremely intolerant of any other community or cryptoasset. The crypto community calls these people “maximalists”, a term I don’t like and don’t use.

I believe that we will see many cryptoassets emerge to solve different kinds of problems, just as we have seen many different religions develop to serve different groups of people. This diversity is good. It leads to a richness of thought and innovation that moves us forward.

If someone wants to believe deeply in one thing and nothing else, we should understand and appreciate it. But when that leads to hatred, nastiness, and ridicule, we should reject it. We should call it out for what it is and we should not accept it.

Categories: Blog articles

The Annual Computer Science Fair

April 3, 2019 - 4:16am

Here in NYC, we are about halfway into a 10-year effort to get computer science classes into every public school building in NYC. We are already seeing significant impact and outcomes.

Most of the students taking CS classes at school live in neighborhoods in NYC where there are no tech companies and they can’t see the pathway that they are on if they want to be. That is where the Annual Computer Science Fair comes in.

This year was the sixth annual CS Fair. We invite high school students who are taking CS classes to take the morning off from school and come to the Armory in Washington Heights and meet tech companies that they could one day work for and colleges/universities that they could attend.

I spent much of yesterday at the Fair and had the honor of taking Mayor de Blasio, who has been funding CS4All since the early days of his administration, through the event. Here are some photos from what is always a fantastic day for me.

I hope these young women made it over to the Etsy booth Where they could have learned how Etsy uses data science to personalize everyone’s shopping experiences This young man from the Bronx made a multiplayer video game in javascript and told me and the Mayor that he wants to work for a tech company out of high school. I asked him to send me an email. This teacher from Information Technology High School in Queens had two teams of students showing software projects in the student showcase. She and her students took a selfie with the Mayor.

The Annual CS Fair would not be possible without the financial support of tech companies who underwrite the expenses. I would like to thank the major sponsors for making this possible.

Categories: Blog articles

The Shed

April 2, 2019 - 6:14am

Yesterday morning, in raw, windy, 30 degree weather in NYC, I took a walk up the Highline to Hudson Yards. As I made the turn west at 29th street, I saw The Shed emerge through the tall buildings.

The Shed is a new arts institution created to commission works from artists, both emerging and established, across multiple genres. It is all about facilitating and celebrating artistic innovation.

I got involved with The Shed about four years ago around the time Alex Poots was selected as the Chief Executive and Artistic Director. Alex is an impresario of the modern age, comfortable working across many genres and with artists of all kinds, from Grammy-winning musicians to kids he sees dancing in the streets. It is Alex’ ability to stitch all of this together and make it coherent, entertaining, and inspiring that infected me with an interest in what The Shed can be.

I have consulted with The Shed on technology matters and the Gotham Gal and I have been benefactors as well.

Yesterday The Shed was dedicated and the opening performance, The Soundtrack of America, which features performances from roughly thirty emerging black musicians, will open friday night. We will be there.

The person who made The Shed happen is my friend Dan Doctoroff. It was a proud moment for me yesterday to see Dan standing up on stage talking about this thing that he helped to make happen.

It is my hope that The Shed will have the same cultural impact on NYC that Lincoln Center, Brooklyn Academy Of Music, and similar arts institutions have had.

It is really rewarding to get involved in projects like this. Watching the idea come together, then watching it get built, and then watching it open. It reminds me that imagination and will can achieve so much.

Categories: Blog articles

The IPO Bonanza

April 1, 2019 - 4:01am

After predicting an IPO bonanza in my new year’s day post in 2015, and being largely wrong about it for four years, we are finally seeing it happen.

I am not exactly sure what it is about this year, as opposed to any of the last five years, that has drawn all of these highly valued private companies into the public markets, but here we have it.

It does take a number of years for a privately held company to prepare to be a public company. They need to get their finance and legal houses in order, they need to beef up their teams in these areas, and they need to make sure they have a repeatable business that they can manage under the spotlight of the public markets.

Already we have seen S1s from Lyft, Pinterest, and Zoom. And we are likely to get them soon from Uber, Slack, Airbnb, and a host of others, in the coming months.

I see this as largely beneficial to the startup sector for the following reasons:

1/ We will have benchmarks from highly liquid markets in terms of what these high growth tech companies are worth. Until now, most of these benchmarks have come from illiquid private market auctions, which are not exactly the best price discovery mechanisms.

2/ Many employees, angels, seed investors, VCs, and growth investors will get liquidity from these investments and recycle it back into the startup sector. More capital means more startups and more innovation.

3/ Limited Partners, the providers of capital to venture capital and growth equity funds, will get large distributions which will give them more confidence in the startup sector and they will continue or perhaps step up their commitment to invest in early stage technology.

4/ These newly public companies will be able to accelerate their acquisition programs now that they have liquid stock and cash to fund those deals. That will further flow capital back into the startup sector.

Of course there will be negatives. It will be harder than ever to afford to live in the bay area. But tech folks from the bay area are certainly welcome in NYC, LA, and any number of other startup regions around the US. Get paid on your stock and move to a more affordable and liveable region!!!

And the monster funds that have been advocating staying private forever will have to argue why these IPOs are not what every other startup should be aiming for. And I think that argument is going to be harder and harder to make with this IPO bonanza under way.

All in all, I think the IPO bonanza that is under way in 2019 is a good thing. I have been expecting it and wanting it for years and I am pleased that it is now upon us.

Categories: Blog articles

Portable TV and Music

March 31, 2019 - 11:18am

We just packed up an Airbnb that we have been living in for three months in Los Angeles and are heading back east.

This is a photo of my carry on luggage as I was packing it this morning.

That is an AppleTV and a Sonos Connect in between my “shaving kit” and my sneakers.

I brought these two devices out west and connected the AppleTV to the one TV in the Airbnb and I connected the Sonos to the receiver that powered the in ceiling speakers in the main living space in the house.

Even if the Airbnb had come with an AppleTV and a Sonos device, I would have swapped out theirs for ours for the length of our stay because these two devices have all of our services pre-confgured on them and we are logged into all of the services.

That is where the big difference is for me and the reason it is worth schlepping these devices cross country and back. The devices aren’t crazy expensive. The AppleTV is around $150 and the Sonos Connect is around $300. But setting these devices up, connecting them to all of the various services we subscribe to, and logging into each and every one can be an hour or more of work each time you do it.

All I had to do was power them up, connect to wifi, and connect to the TV and/or the receiver, and we were good to go.

It’s kind of magic to have all of your services right there on the device, organized how you like them, and ready to go.

I have friends who do the AppleTV move in hotels when they travel for business. I haven’t gone that far but I might leave the AppleTV in my carry on luggage along with my shaving kit and try that on my next business trip. Plugging in an HDMI cable into a TV is pretty straightforward in most cases.

What this means is TV and music is now highly portable. You can bring your TV and music with you when you travel and connect into the existing infrastructure in your hotel or Airbnb.

If these devices get small enough or cheap enough (or both), or if our smartphones can replicate all of the functionality of these devices, then the hospitality industry can focus on the “dumb” infrastructure and the guests can bring the smart devices.

Categories: Blog articles

Video Of The Week: Vitalik Buterin – The Unchained Podcast Interview

March 30, 2019 - 7:45am

As I mentioned last week, at the start of this interview Laura Shin plays a bit of my “rant” about Ethereum losing it’s lead.

Vitalik, as is his nature, calmly reacts to it and rebuts it.

The entire interview is interesting and hopeful for Ethereum holders like me.

Categories: Blog articles

Funding Friday: Renewable Plastic Tiles

March 29, 2019 - 7:14am

I backed this project out of Kigali Rwanda this morning.

They are making tiles for your home (bathroom, kitchen, etc) out of renewable plastic. Check it out:

Categories: Blog articles

More S1 Fun

March 28, 2019 - 7:03am

We are now seeing a wave of longtime private companies coming public and with that we are getting data on usage, financial performance, and a host of other issues that is very useful market data.

I spent some time looking at Pinterest’s S1 today. They filed it a week or two ago.

I found this chart of user growth quite interesting:

That shows monthly active users in the US and International over the last few years on a quarterly basis.

Pinterest is rapidly growing its user base outside of the US but usage in the US has stalled out.

This chart, also from the S1, shows revenue growth in the US and Internationally:

So what you can see is that Pinterest has been growing its US revenues rapidly but not its US user base. And on the other hand, Pinterest has been growing its International user base but its International revenue is still nascent.

So the question is whether Pinterest will be able to monetize its rapidly expanding international user base.

That is the kind of insight you can get from reading these S1s. I find them fascinating and try to read them when they come out.

I don’t plan to buy Lyft or Pinterest when they come public. That’s not really my thing. And I don’t have an opinion on whether they are attractive investments or not. But I do think we can learn a lot about these businesses from reading S1s and that can help us with the investments we do have.

Categories: Blog articles

Fewer Cars More Mass Transit

March 27, 2019 - 8:41am

Well it looks like NYC is finally going to get congestion pricing, a technique used successfully in a number of cities around the world to reduce the number of cars on the road and increase the investment in mass transit.

The concept is simple. Tax cars coming into the center of a city and use those tax revenues to invest in other ways of moving people in and out of the city.

I have been a supporter of this idea going back to the Bloomberg era in NYC when it looked like we were going to get congestion pricing and then it fell apart due to political opposition.

I wrote about congestion pricing late last year when a report came out from the Governor’s committee on metro area transportation which recommended congestion pricing and increased investment in the MTA.

I think this is the right policy. We need to create financial disincentives to drive in NYC (with the proper exemptions like people with disabilities) and we need to invest more in mass transit.

This will be good for the tech sector in NYC, where employees largely use mass transit to get around. Julie Samuels, Exec Director of Tech:NYC, explains why in more detail in this op-ed.

I do have concerns about giving billions of new tax revenues to the MTA which has not been great at using the billions we have already given them to deliver better mass transit. I mention those concerns in my post late last year.

But we should not let perfect be the enemy of the good. NYC needs congestion pricing and we need it now. It will reduce traffic in lower and midtown manhattan and it will provide the resources we need to modernize and improve our mass transit options.

If we could couple congestion pricing with structural reforms of the MTA, then we would be really cooking with gas.

Categories: Blog articles

Equity Via Inclusion

March 26, 2019 - 7:01am

We’ve been trying a big ambitious experiment in NYC over the last five years. We are training over 5,000 teachers to teach computer science classes in elementary school, middle school, and high school. We call it CS4All.

It sounds simple, but it is anything but simple. And it is expensive. We are funding it via public private partnership. I am leading the private part via a $40mm capital campaign. Talk to me about that if you are interested.

But here’s the thing. If you want to see engineering teams that are 50/50 male/female, and representative of our racial makeup (black, hispanic, etc, etc), if you want true equity and diversity in our workforces, then you simply have to do one thing:

Give the education/training/skills to EVERYONE.

And we are seeing the outcomes now that we are approaching our fifth year of this effort.

The NY Post (The NYC Mayor’s biggest critic) wrote this article about the performance and representation of young women in the AP Computer Science exams last spring.

Just 379 girls took the exam in 2016, compared with 2,155 last year, according to the department. That means that 42 percent of all city kids who took the AP exam were girls — compared with just 28 percent nationwide.


And the female students aren’t just sitting for the tests in far higher numbers — they’re conquering them at an accelerated rate as well.
In 2016, only 177 New York City girls passed an AP computer-science exam, officials said. In 2018, 1,266 earned the distinction.

https://nypost.com/2019/03/24/girls-are-acing-the-ap-computer-science-test-in-record-numbers-doe/

I am a huge fan of efforts directed at teaching young women to code, things like Girls Who Code. They are amazing resources for young women and they are part of why these numbers are moving in the right direction.

But I have always believed, and these numbers give me even more conviction, that the best way to get equity for everyone is to include everyone. Pretty simple really.

Categories: Blog articles

Life In A Constant Stream Of Emails And Meetings

March 25, 2019 - 7:01am

My colleague Nick wrote a post today about his productivity system. Nick’s system is way more elaborate than mine, but everyone has to find their own way of getting things done.

What I found most interesting about Nick’s post is what I put in the headline of this post. Our jobs at USV are a constant stream of emails, many of them hoping to get into the constant stream of meetings we take.

Nick put it this way in his post:

at the end of the day it all boils down to a single strategy: getting things into my calendar.  The other main thing I try to solve for is simply not forgetting things.  I live in a constant stream of emails and meetings, and it’s easy to forget something important.  So a goal here is to help ensure that I don’t forget things and ultimately, that I’m focused on the most important thing most of the time.

Nick mentions my strategy of putting everything that I must do in a given day/week/month into my calendar so that it gets done. That works incredibly well for me and is really my only productivity tool.

Nick also mentions our partner Albert’s email technique which I have always wanted to implement and some day will:

 Albert has a system, which seems to work for him, which is: using a set of predefined gmail filters, clear the inbox daily.  Not the entire inbox, but a few filtered versions (family, USV team, his portfolio companies).

I very much like Albert’s approach. It requires writing the right stored queries (gmail filters) and then keeping them up to date (which is the part that gives me pause). But it makes a ton of sense to try to get to inbox zero on the most important parts of your life vs trying to get to inbox zero on everything.

No matter how you do it, you have to find a way not to drop balls, certainly the most important balls. And that is easy to do when you are in meetings from 7am to 5pm like I will be today.

So whether it is Nick’s approach, mine, Albert’s, or your own, having a system is key. I think it is less important what your system is than having one and sticking to it.

Categories: Blog articles

The Finance Function: Looking Back And Looking Forward

March 24, 2019 - 7:43am

High growth companies need to have a strong finance function. You can’t drive a car (or a plane) without some instrumentation. Most importantly, you need to know when you are going to run out of gas (or electricity).

The mission critical things that must be done in the finance function are mostly accounting related functions; pay bills, make payroll, keep track of expenses, maintain the books and records of the company. These are “must dos” and you need a person who has an accounting background to do most of them. But these are all “looking back” functions in the way I think about the finance function.

What is even more important in a high growth situation is the ability to look forward, to project, and to make sure that the company doesn’t run out of money.

In order to look forward, you need to know where you are, and that requires a solid baseline derived from looking back. So one feeds the other. But they are different.

Looking forward requires modeling and it requires the ability to anticipate. An example of this is “we are going to get a big order from a new customer next month, let’s put that revenue into the model.” But if you don’t anticipate that it may take up to ninety (or more) days to collect that revenue, then you have messed up the modeling and that is the sort of rookie error that could lead to an unexpected cash crisis.

There are many reasons why a company needs a forward looking projection to run the business but avoiding the unexpected cash crisis is number on on that list in my view.

In my experience, the people who are strong at the looking back function are often not strong at the looking forward function. You may need different people to do these roles. In a large company, there are entirely different departments that do these functions. There is an accounting department and there is a financial planning department (often called FP&A).

If you are a small company and have limited resources, you will often attempt to get both the look back and the look forward from the same person. If you aren’t getting what you want in doing that, don’t be surprised. I would rather see a small company outsource the accounting work and staff for the planning/modeling work. Accounting is a bit of a commodity, many people can do it well. Seeing the future from around the corner is most definitely not commodity and if you have someone who can do that well, hold on to them, pay them well, and make sure they are happy and rewarded in the job.

Because looking forward is really where it is at in the finance function at the end of the day. That’s where the good stuff and the bad stuff mostly happen. And when it is done well, it is a thing of beauty.

Categories: Blog articles

Video Of The Week In Two Parts

March 23, 2019 - 8:15am

This past week Laura Shin did an interview with Vitalik Buterin, the founder of the Ethereum project. I am going to run a video of that conversation next week.

Laura started her interview with Vitalik by playing for him and everyone else in the room a bit of this conversation Tushar Jain and I had last fall.

So I am reblogging this conversation so it is fresh in everyone’s minds when I run Laura’s Vitalik interview next week.

Categories: Blog articles

Funding Friday: Salvage Swings

March 22, 2019 - 6:47am

There is a lot to like about this project which I backed this morning and is ending tomorrow.

1/ They use cross laminated timber (CLT), which is a wood product that is getting a lot of adoption now. The Gotham Gal and I are building two CLT buildings in Brooklyn and we are big fans of CLT.

2/ They are using salvaged wood to make their CLT.

3/ This is public art, which is another thing I love.

4/ Swings are awesome. At age 57, I will still sit on a swing and go for it.

5/ This is part of FigmentNYC, a public art festival in NYC this summer.

So with all of that lead-in, here is Salvage Swings. You can back it here.

Categories: Blog articles

Reply Spam

March 21, 2019 - 9:50am

The AVC comments has been experiencing a wave of comment spam that has largely been replies to legit comments. I appreciate the community for flagging it and our moderators for nuking it. Keeping the comments free from spam is important to me but not an easy chore.

One idea I have, which I don’t even know if is possible in Disqus, is the idea of limiting replies to longstanding community members who are registered with Disqus and have high reputation scores.

What this will do is eliminate the reply spam, but will also make it impossible for new commenters to reply. They will still be able to leave a comment.

I think the pros may outweigh the cons.

Thoughts?

Categories: Blog articles

Respecting The Pro-Rata Right

March 20, 2019 - 10:28am

When early stage investors make an equity (angel, seed, Srs A, Srs B) investment, they typically negotiate for something called a pro-rata right which gives them the right to maintain their ownership in the company by investing in future rounds on the same terms as new investors.

I have written about the pro-rata right a bunch here at AVC. I think it is one of the most important things that early stage investors get from their investments. Obviously the ownership an investor gets is the most important thing, but the ability to maintain it by making additional investments is also very valuable and can be the source of out-performance of an early stage portfolio (against whatever benchmark one might be using).

At USV, we value the pro-rata right and exercise it very frequently. We often will make five, six, or seven investments in a company between when we make our initial investment and when we make our final investment. We even have a follow-on fund called the Opportunity Fund, that allows us to take our pro-rata in companies that continue to raise privately and delay going public. Our Opportunity Fund will also make some investments in companies that aren’t currently in our portfolio. But a large part of our Opportunity Fund thesis is about maintaining ownership via our pro-rata rights.

In the last ten or so years, companies, lawyers, boards, management teams, founders, and in particular late stage investors have been disrespecting the pro-rata right by asking early stage VCs to cut back or waive their pro-rata rights in later stage financings. This can happen as early as Series B (and happens to angel and seed investors in Series A rounds), but it is even more common in the later stage rounds like Series C and beyond.

I think this is bad behavior as it disrepects the early and critical capital that angels, seed investors, and early stage VCs put into the business to allow it to get to where it is. If the company agrees to a pro-rata right in an early round, it really ought to commit to live up to that bargain. But increasingly nobody does that and it is a black mark on the sector in my view. We make commitments knowing that we don’t plan on living up to them. It is very unfortunate.

The reason this happens is that allocations get tight in later stage rounds, particularly where the company is doing well and everyone wants to get into the round. The new investors, including the investor that is leading the round, will almost always have a minimum amount of ownership they want to get to in the round and the math tends to work out that the only way to get there is to cut back the early investor’s pro-rata rights.

Sometimes the way the gap is filled is by creating secondary for founders, early employees, and early investors. That can work and is sometimes good for everyone involved. That “trick” has been the saving grace on this issue over the last few years.

But I believe we are at a crossroads on this issue and I am wondering if early stage investors need to put more teeth into our pro-rata rights to insure they are honored. What if a company that was unable to offer a full pro-rata right to an early stage investor in a later round was forced to go back and change the price of an earlier round to make it up to the early stage investor? Or what if an early stage investor got warrants at the new round price to make up for an inability to honor the pro-rata right?

These are just two suggestions I came up with in a few seconds of thinking about it. But I would really like to force early stage companies, their lawyers, and their boards to think clearly and carefully about the pro-rata right when granting it. The current practice seems like “we can give this because we always get away with not honoring it down the road” and frankly that sucks.

Categories: Blog articles

Scam Likely

March 19, 2019 - 6:55am

The most common caller on my Android phone is Scam Likely. I am sure that most of you are in a similar situation.

Last week we were driving and two calls came into The Gotham Gal’s phone which was bluetoothed into our car and she declined both. I asked her why she did that. She said they were likely robo calls. I told her that they looked to be legit numbers to me. Later on she found out that both calls were from people she knew, but for some reason those names were not showing up on the car dash and so she declined the calls.

That led to a discussion of why spam filtering for email has gotten so good and robocall filtering for phone calls is still not great. I brought up the great work the email industry has done over the last twenty years with email signing protocols like DKIM and SPF, and the email industry’s adoption of DMARC protocol which operationalizes DKIM and SPF. We decided that the telephony industry needs similar solutions.

Well, it turns out that the telephony industry is working on them.

Jeff Lawson, founder and CEO of Twilio, a company that was a USV portfolio company and which The Gotham Gal and I are still large shareholders in, is writing a series of blog posts about how the telephony industry can fix the robo call problem.

In Jeff’s first post in the series, he explains that the telephony industry is developing their own versions of DKIM and SPF and DMARC:

Some very smart people have been working on new ways of cryptographically signing calls – a digital signature – proving ownership of a phone number before the call is initiated. One example of this is a new protocol called STIR/SHAKEN, which the communications ecosystem is working on now. Before any authentication method can be impactful at scale, it needs to be adopted by a broad swath of the ecosystem. Twilio is fully committed to efforts to authenticate calls so the identity of callers can be proven, and it looks like STIR/SHAKEN is a good candidate to do just that.

In Jeff’s next post, he will address the role that identity (of the caller and the recipient) and reputation will play in solving the robo call epidemic. I look forward to reading it.

If you want to make sure to get Jeff’s posts, you can follow him on Twitter, like I do.

Categories: Blog articles

The IPO Price and the S1

March 18, 2019 - 7:55am

In my What Is Going To Happen In 2019 post, I wrote:

I expect we will see IPOs from big names like Uber/Lyft/Slack, although I also expect those deals will get priced well below the lofty expectations they have in mind right now. Some of that will be because of weak equity markets in the US, but it is also true that most of the IPOs in 2018 also priced below the lofty “going in” expectations of founders, managers, boards, and their bankers. The public markets have been much more sanguine about value than the late stage private markets for a long time now.

And now we are starting to get the data from these IPOs. Lyft is on the road raising roughly $2bn at a post-deal valuation range of $16bn to $20bn ($62 to $68 per share).

When I see an IPO price range, I like to go look at the S1 that the issuer has filed with the SEC prior to the road show. Here is Lyft’s S1.

Here are the things I like to look for in a S1:

1/ The total shares outstanding. You can go to the table of contents of the S1 and look for the section called “Description Of Capital Stock”. In Lyft’s S1, it says there are ~240mm shares of Class A common stock plus some amount of Class B common that is not yet detailed. The Bloomberg article I linked to above says the company is going to sell 30.8mm shares at $62 to $68 per share. So there will be at least 270mm shares outstanding plus the Class B shares. The Bloomberg folks seem to be using a post deal share count of 288mm share so that is close enough. You get to fully diluted post deal valuation by multiplying the share count (288mm) by the range ($62/share to $68/share).

2/ Revenues and earnings/losses. You can go to the table of contents of the S1 and look for the section called “Selected Consolidated Financial And Other Data” and you will find the audited financial data. I like to find the quarterly numbers because that will give you a good idea of current growth rates. These are the numbers for Lyft:

As you can see the quarterly revenues are growing at roughly $80mm a quarter so a back of the envelope guess on revenues for 2019 are [$750mm, $830mm, $910mm, $990mm] for a total of ~$3.5bn, up from $2.1bn in 2018 (yoy growth of 65%).

You can also see that the contribution (net of cost of goods sold) has been about 45% over the past few quarters so if that ratio holds in 2019, there would be contribution of roughly $1.6bn in 2019.

For the operating costs, you can look at the difference between contribution and EBITDA, which you can see here:

Lyft spent ~$1.85bn on opex in 2019 ($921mm of contribution plus $943mm of EBITDA losses). That number grew from $1.1bn in 2017. I would expect Lyft’s operating expenses to be at least $2.25bn to $2.5bn in 2019.

Which gets you to this possible P&L for 2019:

Revenues – $3.5bn

Gross Margin – $1.6bn

EBITDA (loss) – $600mm to $900mm

3/ Valuation Ratios:

At the mid-point of the offering range $18bn, the price to revenue multiple is roughly 5x (18/3.5) and the multiple of gross margin (what Lyft keeps after paying significant COGS) is roughly 11x (18/1.6).

4/ Time to cash flow breakeven. This is harder because you have to make some assumptions about growth rates beyond 2019 and opex growth rates. But if Lyft can grow revenues at 60% per annum for a few more years and keep opex growth rates to 25-30% per annum, then it could get profitable by sometime in 2021. This suggests that the $2bn it is raising may be sufficient to get profitable, but it will be close.

So what does this mean for other late stage high growth high flyers?

To me it says if you have company focused on a big opportunity (like transportation) that is growing at north of 60% per year it is worth in the range of 10-12x net revenues to wall street right now. Because Lyft only keeps about 45% of its revenues after very high COGS, that works out to be 5x revenues.

Many late stage private companies are getting financed at valuation ratios in excess of this so they will have to grow into their eventual public market valuations. But that has been the case for quite a while now as the late stage private markets continue to pay higher prices for high growth companies than the public markets do.

Categories: Blog articles

The Spotify Apple Issue

March 17, 2019 - 1:30pm

Many people who follow tech know that Spotify has filed a complaint with the European Commission regarding the challenges that Spotify has doing business in the iOS app store.

I am very sympathetic to Spotify’s complaint. In my post last week on The Warren Breakup Plan, I wrote:

The mobile app stores, in particular, have always seemed to me to be a constraint on innovation vs a contributor to it.

Spotify has a huge user base and brings in billions of dollars of revenues every year but it has a challenging business model. Let’s say that 70cents of every dollar they bring in goes to labels and artists. That seems fair given that the artists are the ones producing the content we listen to on Spotify. But if they also have to share 30cents of every dollar with Apple, that really does not leave them much money to build and maintain their software, market to new users, pay for servers and bandwidth, and more.

You might say “well that’s what they signed up for” and you would be right except that their number one competitor is Apple. So their number one competitor does not pay the 30% app store fee, meaning that they have a competitive advantage.

But this is about more than money. If you look at the web page Spotify put up to explain how challenging it has been to do business with Apple, you will see numerous instances of Apple not approving app upgrades.

We see this with our portfolio companies a fair bit too. Apple has complete control over what gets into their app stores and what does not. And the process can be arbitrary and frustrating. But that is how it works and our portfolio companies are reluctant to make any noises publicly for fear of making their situation with Apple even worse.

I am not a fan of Warren’s idea of breaking up companies like Apple.

I like my partner Albert’s ideas better which he expressed in a tweet last week:

A better set of policies to restore competition in the digital age would be (1) consumer right to API access (2) consumer right to side load apps (3) restored ability for small companies to go public / sensible regulation of crypto currencies. https://t.co/4bOFTnZ5NK

— Albert Wenger (@albertwenger) March 12, 2019

If it was the law of the land that any company could side load any application onto the iPhone or any iOS device, including third party app stores, we would have a much more competitive market with a lot more innovation, and Spotify would not have to go to the European Commission to deal with this nonsense.

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