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Musings of a VC in NYC
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Leading The People Side Of The Organization

June 14, 2018 - 2:06am

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

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

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

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

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

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

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


USV TEAM POSTS:

Bethany Marz Crystal — June 21, 2018
USV Intern Day

Categories: Blog articles

The Valuation Obsession

June 13, 2018 - 12:52am

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


USV TEAM POSTS:

Bethany Marz Crystal — June 21, 2018
USV Intern Day

Nick Grossman — June 20, 2018
Trust and fairness

Categories: Blog articles

Do Your Homework Before Sending That Email

June 12, 2018 - 10:36am

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

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

Categories: Blog articles

Stakeholder Analysis

June 11, 2018 - 3:34am

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Categories: Blog articles

Supply And Demand

June 10, 2018 - 2:08am

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

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

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

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

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

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

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

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

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

So, are more companies getting seed funded? Yes.

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

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

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

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

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

Categories: Blog articles

Video Of The Week: The Noodle Slurp

June 9, 2018 - 10:49am

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


USV TEAM POSTS:

Albert Wenger — June 17, 2018
Back (Well, Almost)

Categories: Blog articles

Funding Friday: Hack Your Notebook

June 8, 2018 - 2:47pm

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

Categories: Blog articles

Proof Of Blog

June 7, 2018 - 4:37am

We have a tradition at USV that one of our new analysts, Dani, coined Proof Of Blog.

Excited to be a part of the @usv team (it’s official now – based on Proof of Blog). I’m two weeks in, here’s some of what I’ve learned so far. https://t.co/1bajnjongr

— Dani Grant (@thedanigrant) June 4, 2018

I like that term so much. It really speaks to why we have this tradition.

When someone new joins USV, we ask them to introduce themselves to our world on the USV blog.

Here are some recent “proof of blog” posts:

Dani Grant

Naomi Shah

Zach Goldstein

Even partners at USV do this. Here is Rebecca’s post announcing her arrival at USV last fall.

And Lauren, who has been at USV for almost four years now, but is in a relatively new role, introduced a new wrinkle to this tradition blogging about her new responsibilities.

It is easy to think of a venture firm as a collection of partners; me, Brad, Albert, John, Andy, Rebecca, because we are the most visible people in our firm to the outside world.

Proof of blog is a bit about changing that perception so people know the larger team. And it is also about the broader team making sure folks know a bit about them and what interests them so entrepreneurs can leverage relationships with them too.

If you don’t follow the USV blog, but want to, you can do that on the USV Twitter handle or the USV blog RSS feed.

Categories: Blog articles

Taxation Of Carried Interest

June 6, 2018 - 6:57am

The issue of how to tax carried interest, the profit sharing interests that VCs, Private Equity firms, and Hedge Funds receive as compensation for generating returns to their investors, is in the news again.

This time it is not a debate at the Federal level, but at the state level. There are carried interest taxation bills under discussion in California, Illinois, Maryland, New Jersey, New York,Rhode Island, and possibly other states that I am not aware of.

My view on this issue is simple and I’ve stated here publicly and regulary since mid 2007.

If you are being paid a fee for managing other people’s money and have no capital at risk on the carried interest, I don’t understand how it can be considered a capital gain.

It may be good economic policy to incentivize people to manage other people’s money and maybe there should be some tax break for doing so. That is a different conversation in my view. Though I don’t buy that one either.

But capital gains tax rates should only be available to those who put their own capital at risk. Many VCs do that in their funds. The partners at USV make up a sizeable portion of our funds. We should and do get capital gains treatment on those investments.

But we also get capital gains treatment on the carried interest and I’ve never understood why. I think it’s wrong.

Finally, because I’ve written these thoughts here before, I know that some will say “well then you should be sticking to your principles and paying ordinary income rates on all of that carry you have received over the years.”

I don’t think that is right either. If the government sets the rules, and everybody else is playing by them, I don’t think it makes sense to play by different rules. I do think it makes sense to explain why you think the rules are wrong. Which is what I am doing here.

Categories: Blog articles

Deleting Your Voice Recordings

June 5, 2018 - 6:35am

A few months ago, the Gotham Gal asked me to disconnect the Amazon Alexa and Google Home devices we have in our family room.

I complied with that request.

This is what the two devices look like now:

At some point, I will remove them and either do something else with them or dispose of them.

If anyone in our house is uncomfortable with devices listening to our conversations, I don’t want to subject them to that.

I do plan to go look at our voice recording history and delete anything that seems off limits.

Here is how you do that with Google Home and Amazon Alexa.

This raises a broader question about these voice devices which is whether the value they offer outweighs the creepiness they create in the home.

For us, the answer has been a resounding no, as evidenced by that photograph.

Categories: Blog articles

Why Decentralization Matters

June 4, 2018 - 4:11am

So the news over the weekend is that Microsoft is buying GitHub. Many companies and developers are thinking “do I want my source code hosted on a service owned by Microsoft?”

Fortunately, the protocol that GitHub is built on, Git, is open source and there are other Git hosts, like GitLab.

There are also a number of proprietary Git solutions offered by companies like Atlassian and BitBucket.

Moving your source code repositories from GitHub to GitLab or somewhere else is not a simple thing, but it can be done. Kind of like moving your email from Outlook to Gmail.

Lock-in is a bitch. And everyone who has ever been locked into a shitty piece of software over the years knows, there is often no easy way out.

Software built on decentralized protocols offers a different and better way. You can move your data out if you don’t like where things are going. And that is what some developers are doing right now with GitHub.

Categories: Blog articles

Valuation Inflation

June 3, 2018 - 9:05am

In the blog post announcing changes at SV Angel last week, the SV Angel partners wrote:

The amount of money raised in seed rounds has doubled and valuations have increased significantly.

I thought I’d go back over the last three USV funds and see what I could learn about the market from our experience.

Since raising our third early-stage fund in 2012, we have led or co-led 16 seed rounds, 31 Srs A rounds, and 8 Srs B rounds, for a total of 55 new USV portfolio companies over the last six years.

I put all of that data into a google sheet this morning and this is what I learned:

The average pre-money valuation for a seed round has gone from $5-10mm in the 2012 time frame to $10-15mm in the 2017 time frame and the average amount raised in seed rounds has gone from $2.5mm in the 2012 time frame to over $4mm in the 2017 time frame.

The average pre-money valuation for a Srs A round has gone from $10-15mm in the 2012 time frame to $22-$27mm in the 2017 time frame and the average amount raised in Srs A rounds has not changed very much. It still averages around $5-7mm.

We have not been leading or co-leading many Srs B rounds in the last three years so my data on that market is not good enough to come to any conclusions there.

USV invests in North America and Europe and our largest density is in NYC and the Bay Area. This data is averaged across all of those markets and so it could be off significantly for a specific market. We find the Bay Area to be the most expensive place to invest and Europe to be the least expensive.

I think the comment made by the SV Angel partners is correct, at least directionally so. What this means for returns for angel and early-stage investors remains to be seen. Right now the angel and VC sector is producing great returns, but those are driven off of investments made in the 2005-2010 era for the most part and we have yet to see what the returns for the 2010-2015 cohort will deliver and we are a long way from knowing how the 2015-2020 era will turn out.


USV TEAM POSTS:

Dani Grant — June 11, 2018
An Overview Of The Distributed Computing Landscape

Categories: Blog articles