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Make America sane again

Beyond Money - August 29, 2019 - 5:00am

Now is the time for the American people to stand up and use their power to challenge the political establishment, to oust the war mongers, and to join together in demanding a government that is committed to promoting the common good and peaceful relations with the governments of other countries around the world.   

Tulsi Gabbard is the only Presidential candidate I’ve seen since John and Robert Kennedy who is willing to put her life on the line to lead the people in this battle against the forces of darkness and domination. Tulsi was “being groomed to be the next great Queen of the Democratic Party establishment” but threw it all away when she “refused to sacrifice her soul” and resigned as co-chair of the Democratic National Committee. Watch this video and start informing yourself.

Categories: Blog articles

The Erasure Protocol

A VC - 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

A VC - 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

Time For A New Look

A VC - August 26, 2019 - 5:00am

Five and a half years ago, I moved AVC from Typepad to WordPress and rolled out the design that we now have. It has worked incredibly well. It is low maintenance, easy on the eyes, and minimalist, all things I have come to appreciate in a blog.

But I am in the mood to change things up. Maybe it is the arrival of fall weather in the northeast, or watching my daughter and my colleagues at USV do redesigns and some envy as a result. Or maybe it is just time.

Here are the things I would like to achieve with the redesign:

  • Even lower maintenance
  • Much better archives (and better search too?)
  • A new look and feel

I am not sure how long it will take for me to roll this out. I could get it done in a month. Or it could take me many months.

But it is on my mind and on my to do list too.

Categories: Blog articles

Hypothetical Value To Real Value

A VC - August 25, 2019 - 5:07am

I remember when my son came home one day in high school and told me he wanted to “day trade” along with some friends who were doing it. We opened a TD Ameritrade account and staked him with a small amount of money, enough to trade but not enough that if he lost it all it would be an issue. And off he went.

A few weeks later he asked me “Dad, what is a PE ratio?” So I said to him “you know that deli that you stop in every morning and get a bacon egg and cheese on the way to school?” He said “yes”. I said “let’s say tomorrow the owner says to you, I’m selling the business, do you want to buy it? We make $1mm a year in profits and have for the last thirty years.” Then I said, “how much would you pay him for it?” My son thought about it and said “Four to five million dollars.” I asked him why. He said, “Because I would get my money back in four to five years and then make a million dollars a year after that.” I said, “you offered to pay a PE of 4 to 5.” And he said, “Oh, I get it.”

I like to call that kind of valuation “real value”. You pay $4-5mm for a business and you get your money back after a few years and then cash flow after that. While nothing in life is guaranteed, real value is tangible. You can see your way to realizing it. It’s right there in front of you.

Then there is what happens in early-stage investing. We offer $1mm for 20-25% of a company and value it at the same $4-5mm. But there is no cash flow. There is no revenue. There are no customers. There is no product. Just a few people and an idea. That is hypothetical value. We think “if this becomes worth a billion dollars, we might hold onto half of our initial ownership and end up with $100 million or more”. And we plunk down the money and go.

Here is the thing. A startup becomes a company and eventually, that company gets valued on real value metrics. Someday it will have customers, and revenue, and profits. And investors will think “how many years of profits will I be willing to pay for that company?” A PE ratio will be applied and it will be valued on the business fundamentals and not what can or could be.

Venture capitalists and seed funds and angel investors make or lose money on the journey from hypothetical value to real value. And when the spread between the two narrows, the money we make is less. When the spread increases, the money we make is more.

It is easier to drink your own Kool-Aid in the world of hypothetical values. You handicap the odds of winning more aggressively. You trade ownership for capital at work. You accept the new normal.

Real value doesn’t move so fast. Because it is right in front of you. You can see it. So it is not prone to flights of fancy.

I try to keep this framework front and center in my brain as we meet with founders and work to find transactions that work for everyone. I find it to be a stabilizing force in an unstable market.

Categories: Blog articles

Can the corporate beast be tamed?

Beyond Money - August 24, 2019 - 12:33pm

One of my favorite radio programs is Freakonomics, and my very favorite grocery store is Trader Joe’s. What do these two things have to do with one another?  Well, the other day, while preparing dinner, I was scanning the Freakonomics website to find an interesting episode I might have missed hearing on NPR.

Lo and behold, there at the top of the page was one titled, Should America Be Run by … Trader Joe’s? (Ep. 359 Rebroadcast). Considering my loyalty to Trader Joe’s and my keen interest in politics, I could not resist listening to the podcast. Given my longstanding patronage, I already knew quite a bit about the company from the standpoint of a customer, but was oblivious to the many other features that make Trader Joe’s so unique.

If you’ve ever shopped at one of its stores you will know that TJ’s, as it is affectionately called, is not like other grocery chains. It does things differently. But beyond that, TJ’s business practices are also different, and in many cases contrary to conventional business “wisdom.” I could enumerate these to save you time, but that would spoil your enjoyment of listening to the program and pondering the possibilities as the program reveals them. But I’ll give you a hint: What do large corporation set as their top priority? Compare and contrast…

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Categories: Blog articles

Video Of The Week: Sofar Sounds

A VC - August 24, 2019 - 8:54am

Our portfolio company Sofar Sounds facilitates intimate live music experiences all over the world.

This video gives you a glimpse of what a Sofar is like:

You can go to a Sofar in your community, or you can go to one when you are traveling in a foreign country. Both are great experiences.

You can find a Sofar to go to here.

Categories: Blog articles

Funding Friday: Positive Exposure

A VC - August 23, 2019 - 4:35am

My friend Holly showed me this Kickstarter for a project she’s been working on for a while now.

POSITIVE EXPOSURE, founded in 1998, utilizes the arts, film and narratives to present the humanity and dignity of individuals living with genetic, physical, behavioral and intellectual differences.

And they are opening an art gallery in Harlem NYC to showcase works that celebrate these individuals.

I backed the project earlier this week and I am sharing it in case you want to back it too.

Categories: Blog articles

The Virtue Of Patience

A VC - August 22, 2019 - 5:59am

Our portfolio company Duolingo is known for their super popular language learning app. According to Wikipedia over 300mm people all over the world have used Duolingo.

Back in May 2014, Duolingo launched something called the Duolingo Test Center. The idea was to compete with expensive and inconvenient foreign language tests like TOEFL.

It makes sense. If you are in the business of helping people learn a foreign language, you might as well be in the business of helping people demonstrate their mastery of a foreign language.

But there is a “chicken and egg” problem in the foriegn language testing market. If you don’t have a lot of test takers, it is hard to get your test accepted by educational institutions and corporations. But if you aren’t accepted by educational institutions and corporations, it is hard to get anyone to take your test.

Duolingo has been patient, largely because they have a primary business that is doing incredibly well. Slowly but surely they have gotten institutions to accept their test.

I saw this tweet this morning from Luis, Duolingo’s founder and CEO:

Super proud that the Duolingo English Test (@DuolingoENTest) is now fully accepted as a proof of English proficiency at 10 of the top 20 US universities according to US News.

— Luis von Ahn (@LuisvonAhn) August 21, 2019

That is the kind of adoption that Duolingo’s tests need to become a standard.

And once you become a standard, you have a fantastic business, largely because it is so hard to accomplish that.

Many companies would have given up on a project like this. The payoff is too long and the effort too high.

But Luis has a personal interest in this offering. You can read about it in the blog post when he announced the service.

That is the power of founders on a mission. They can be patient and see things through that big companies never will.

There is a virtue in patience. You don’t see it that much in business. But it is powerful in the right hands.

Categories: Blog articles

Unlimited Capital

A VC - August 21, 2019 - 6:00am

This post on the WeWork IPO ends with the following observation:

In fact, I would argue that the WeWork bull case and bear case have more in common than it seems: both are the logical conclusion of effectively unlimited capital.

I don’t think there is unlimited capital. If that were the case, every idea, every startup, every person would be able to get the capital they need/want.

And I see proof every day that is not the case.

But it is true that for some things, some companies, some ideas, there is effectively unlimited capital.

Probably the biggest change I have seen in my 30+ years in VC is the huge amounts of capital that are available to “big ideas” like WeWork, Uber, Bird, etc

And the questions to ponder are whether this is a temporary phase based on global macroeconomic conditions or the new normal and whether it is only true for companies at certain stages of their development.

Does Uber, now that it is a public company subject to the rules of rational capital markets, have the same unlimited access to capital it had while it was a private company?

Will WeWork, once it becomes a public company, have the same unlimited access to capital it has had in the last five years?

And what does the next economic downturn look like? Will capital availability dry up like it normally does?

I have heard the arguments why the business cycle has changed, why monetary policy is more effective now, and why rates will remain near zero for a long time.

I just don’t know if they are correct. I suspect we will find out in the next few years.

Categories: Blog articles

Fifty-Eight

A VC - August 20, 2019 - 4:03am

Fifty-eight years ago this morning, my mother went to the hospital at West Point New York and shortly thereafter I arrived on planet earth.

I’ve always liked having a birthday late in August, at the tail end of the summer and right before labor day.

It is the most relaxed time of year for me, with the start of the fall season right around the corner.

I plan to celebrate it at the beach with family and friends.

Categories: Blog articles

Crypto IRA

A VC - August 19, 2019 - 5:24am

I have an old IRA that I don’t pay much attention to. I thought about cashing it out but the tax load to do that was too much for me to stomach. So then I thought about investing it in crypto.

But that turns out to be pretty hard.

I think there is an opportunity out there for a crypto brokerage to offer IRAs or an IRA custodian to offer crypto, or both.

Given the tendency for many investors to buy and hold crypto, it would lend itself to a long term investment product like an IRA.

Seems like an opportunity to me.

Categories: Blog articles

The Long Engagement

A VC - August 18, 2019 - 5:03am

The Gotham Gal and I met when we were 19 and got married when we were 25. We lived together for most of those six years before we got married. By the time we tied the knot, we knew each other very well.

While venture capital investing and marriage are two different things, I think there are some things one can take from love and marriage into the world of startups and venture capital investing.

One of them is the value of long engagements.

I have never understood why founders want to run a lightning fast process to select business partners who they may have to “live with” for the next seven to ten years.

And yet we see this behavior all of the time. Often it is driven by other VCs who toss in “preemptive term sheets” thus turning a fundraising process into a sprint.

What I would prefer to see, and do see in many cases, is a founder who takes the time while they are not raising money to build a number of relationships with potential investors and then engages those investors in a process when it is time to raise capital. I like to call this process the “long engagement”.

It might sound like a lot more work than the fast and furious fundraising process that many founders are running these days.

But I don’t think it is a lot more work. Building relationships over a six to twelve month period can take the form of an occasional face to face meeting, emails back and forth, and even a few visits to the office by the investor. And none of that has to have the pressure of a pitch, an ask, and a price.

For the investor, this is a much better process. It allows them to see the founder and the business execute over time. It allows everyone to develop comfort with each other.

I would argue that it is a much better process for the founder too. It let’s them see which investors are truly interested in their business, their team, their product, and their success. It also reveals which investors are “here today, gone tomorrow.” You want the former on your cap table, not the latter.

It is easy to get caught up in the game of startups and investing in them. A fundraising process is at its heart a competition. And everyone wants to win. But you don’t get a trophy for winning this game. You get into a relationship. Often a very long one. So I think stepping back from the game theory and stepping into the relationships is the way to win long term. Which is the only form of winning that really matters.

Categories: Blog articles

Video Of The Week: A Reminder

A VC - August 17, 2019 - 6:25am

As the US government thinks about regulating big tech and constraining crypto-currencies, I think a reminder about the value of open markets and freedom to innovate is important.

Categories: Blog articles

Funding Friday: Vacuum Tube Speakers

A VC - August 16, 2019 - 5:02am

I love when old meets new. And so when I saw this project this morning, I backed it immediately.

Categories: Blog articles

Zooming

A VC - August 15, 2019 - 4:46am

For the past three or four years, I have been trying to reduce my air travel for a host of reasons (wellness, reducing carbon footprint, increasing productivity, etc) and I would say that this effort has largely been successful.

The main tool that I have used to accomplish this is videoconferencing and although I use whatever videoconferencing software that the other side wants to use, it turns out that I am mostly Zooming these days.

We use Zoom at USV for all of our team meetings and for many of the pitches we receive over video (which has increased significantly in the last few years).

And the vast majority of our portfolio companies use Zoom too.

There are many days when I will be on Zoom for three, four, five hours and I can get a lot done that way.

We had a board meeting yesterday that was one of the best meetings that the company has had and everybody was on Zoom.

I will say that video works better when everyone knows each other well (like the USV team) and the benefits of body language are less.

But without a doubt, videoconferencing has arrived and it can and should reduce your need for air travel. We can’t fully replace the in-person, face to face experience, but we are pretty close to it now. And so we should leverage that to improve our lives, our effectiveness, and our business.

Categories: Blog articles

Tumblr

A VC - August 14, 2019 - 5:55am

The news hit yesterday that WordPress has purchased Tumblr from Verizon (which owns it by virtue of its acquisition of Yahoo! and AOL).

USV seeded Tumblr along with our friends at Spark in the summer of 2007 and were actively involved in the development of the company until its sale to Yahoo! in 2013.

I maintained an active Tumblog from before we invested in 2007 until October 2016, when I stopped posting there. There was no moment when I decided to stop posting there. I just did.

The narrative around the sale of Tumblr to WordPress is all about Yahoo! paying more than a billion for it and selling it for $3mm. It is absolutely true that Yahoo! never figured out how to turn Tumblr into a business and ending up losing its shirt on the investment.

But it is also true that Tumblr was bypassed by native mobile applications like Instagram and Snapchat where it was even easier to post about your life. Tumblr was both a blogging platform and a social media application and while I always loved the versatility of the platform, native mobile applications benefit from simplicity, not complexity.

There was a time around 2010 and 2011 when Tumblr was the most engaging social platform that I was on. I followed and met quite a few interesting people there and it was a lot of fun to be on it.

David Karp, the founder of Tumblr, always focused on making Tumblr a “positive” experience. That is why he refused to have comments, even though I pushed him to do it and hacked Tumblr by putting Disqus on mine. That is why he made the primary (only?) form of engagement a heart.

And it worked. Tumblr was a happy place and using it made people feel good about themselves.

While the world of social media has evolved a lot in the last six years, since Tumblr sold to Yahoo!, it has not really gotten better. One could make a very strong argument that it has gotten a lot worse. Tumblr was an example of how to do social media right and we can learn a lot from it.

Categories: Blog articles

Open Finance First, Open Data Second

A VC - August 13, 2019 - 3:15pm

My partner Nick put together a deck outlining USV’s approach to crypto investing earlier this year and we have been using it with founders and investors since then.

One slide I particularly like from that deck is this one which describes how we think the crypto market will develop over time.

We have already seen an explosion of assets issued on blockchains and a number of very large and profitable custody/brokerage/exchange businesses built. We expect we will see continued innovation in the open finance (finance 2.0) sector in the next few years while the open data (web 3.0) sector will take longer to develop.

We also think that open finance will inevitably lead to open data as users (both consumers and businesses) will start to understand and appreciate the benefits of increased user control, lower transaction (and other) costs, and other benefits of decentralization.

Categories: Blog articles

Awesome Features That I Did Not Know About: Version Management In Google Sheets

A VC - August 12, 2019 - 5:20am

One of the joys of using technology for me is discovering awesome features that I did not know about. This happens to me every so often and always brings a smile to my face. So I thought I’d blog about this when it happens to me.

This recently happened with version management in Google Sheets. When I work with a big spreadsheet, I always worry about making some change and messing the entire thing up. I have been using spreadsheets since Lotus123 and have messed up many a spreadsheet. So I like to make copies of my work regularly so I have something to roll back to.

Sometime in the last few weeks, I accidentally deleted a row and could not undo it. So I searched for “version management in Google Sheets” and got this one box answer:

This works for all Google apps but is particularly valauble for Google Sheets.

So now I can stop saving my work regularly. Google is doing that for me. Awesome.

Categories: Blog articles

Risk Tolerance

A VC - August 11, 2019 - 4:39am

Startup companies go through a number of phases as they mature from an idea, to a small team, to a growing team, to a small company, to a big company.

And along this journey, the leadership team you need changes. You need little to no leadership structure when you have a small team, you need some sort of leadership structure when your team is growing, you absolutely need a leadership team when you become a “company”, and the leadership team becomes incredibly important when you become a big company.

In the last week, I’ve had several conversations with CEOs in our portfolio who are leveling up their leadership teams and are recruiting executives from larger organizations.

I’ve counseled them to make sure that they hire executives who have a lot of risk tolerance.

High growth companies that emerge from a startup situation tend to be volatile. They have a lot of turnover in their organization, they have moments when the cash balances get low, they sometimes face existential risks.

If you have executives that you need to spend a lot of time comforting and solidifying, that’s not good. Ideally your leadership team is your steadying force and if you are steadying them, then your setup is suboptimal.

It is always tempting to bring in people who have operated at a scale well beyond where you are. And I am not saying you should not do that. You should. But just make sure they can handle the heat in the kitchen because it’s gonna get hot sometimes.

Categories: Blog articles
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