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The Amazon Backlash

A VC - February 14, 2019 - 5:40am

NY State Senator Michael Gianaris is leading the efforts to stop Amazon from opening up a large presence in the borough of Queens in NYC.

I get that this makes for good politics at some level. Standing up for the taxpayer and expressing outrage at a massive tax giveaway to the one of the wealthiest companies in the world, run by one of the wealthiest people in the world, makes for great stump speeches.

But there is one problem with all of that. The voters and taxpayers in Queens, particularly the minority voters and taxpayers, approve of Amazon’s move to Queens by very large margins.

The very people that Gianaris and others like Ocasio-Cortez represent and are “standing up for” want Amazon in Queens by large margins.

What the voters and citizens of Queens seem to understand is that this is a once in a decade type opportunity to change the face of a borough and a city.

As historian Kenneth Jackson explained in this excellent NY Times Op-Ed piece yesterday, history shows that the economic fortunes of cities change quickly with once dominant industries moving on and new ones arriving. This is a fantastic opportunity for NYC to cement its role as a leading tech sector and one that should not be missed. There is no guarantee that the NYC of tomorrow will be as vital as the NYC of today. We have to work to make it so and this effort to recruit Amazon to NYC is exactly the kind of work which will make it so.

My friend Kathy Wylde also penned an important argument in favor of Amazon in yesterday’s Daily News. Kathy explains that Queens has been planning for this sort of thing in Long Island City for over a decade and many of the issues that the rabble rousers are raising have been considered, planned for, and are already being worked on.

In my view, politicians like Gianaris and Ocasio-Cortez are being irresponsible and reckless in their opposition to Amazon while playing politics with something that is without question good for NYC, good for Queens, and good for their voters. Their voters know it and so should they.

Categories: Blog articles

The Seed Slump

A VC - February 13, 2019 - 6:10am

I have written a bit about this topic in recent years, at the end of 2017, and again when the 2018 numbers started showing up.

What has happened over the last five years in venture capital is the seed boom stalled out, the late stage market exploded, and the traditional venture capital business (Series A and Series B) largely remained the same except round sizes, valuations, and fund sizes have all gone up.

Mark Suster posted a great analysis last night of why the seed stage market has stalled out. It comes down to the fact that the traditional venture capital market has not changed much so creating more supply has not resulted in materially more demand.

This chart tells the story well:

As Mark explains, the seed market remains alive and well, but it has grown so large that it can’t continue to grow unless the traditional venture capital market grows too and that has not happened, at least not anywhere near the rate that the seed stage market has grown.

In a companion post, Mark lays out the new architecture of the startup capital markets:

In the first five years of this decade, we saw the seed portion of the market explode. In the last five years of this decade we saw the growth portion of the market explode. But over those last ten years, the middle part, the traditional venture capital market, has not changed much.

That’s an interesting observation in and of itself and something that makes me wonder if that is the next shoe to fall.

Categories: Blog articles

Feedback

A VC - February 12, 2019 - 6:50am

Thanks for all of the feedback on yesterday’s post.

There have been about 250 comments to date and a similar number of email replies.

Not surprisingly the feedback from the email replies was overwhelmingly supportive of removing the comments. It seems that most of the people who read via email don’t wade into the comments. And they email me directly with comments which often leads to a one to one private conversation.

The feedback in the comments was overwhelmingly to keep them. And there were lots of strong arguments for that.

I did get one email from a reader who told me the ability to engage in the AVC comments helped him get through a difficult time in college. That got my attention.

I also got a ton of suggestions on how to modify the comments to make them more manageable (limiting the number and length of comments, limiting the time allowed to post one, charging people to comment, etc). I like that line of thinking a lot but I am limited in terms of what I can do by the Disqus feature set.

I will ponder all of this for a bit and let it all sink it. Thanks for taking the time to tell me what you all think.

Categories: Blog articles

Rethinking AVC

A VC - February 11, 2019 - 7:35am

I read a lot of email newsletters and I love the simplicity of them.

Receive, read, forward, maybe reply, delete.

If I was starting AVC all over again, I’d head over to TinyLetter, which my daughter uses, and start writing.

But I’ve got legacy issues to consider. I’ve got an archive, a three letter URL with a lot of Google Juice, an RSS feed, a community, and a number of other things that I’ve built up over the years.

Many AVC readers don’t bother with any of that and simply subscribe and read via email. For them, AVC is an email newsletter. The number of readers who engage that way has been growing a lot in recent years and it is now the majority of readers. That speaks volumes to me and suggests that is how most people want to get this content every day.

So I’ve got an email newsletter with a lot more overhead. The community requires moderation and maintenance. We have to actively manage spam. I need to keep up with WordPress, which introduced a new UI that most people dislike (I’m mostly fine with it). I have a hosting service to deal with. And the email and RSS feeds are powered by third parties who do a great job for me but need some level of staying on top of.

That is a fair bit of technical debt that I’ve built up over the years and would go away if I was using a modern newsletter service like TinyLetter.

So I am going to experiment with simplifying AVC a bit in the coming months. One thing I am going to do for sure is cut back on the comments. I have seriously thought about shutting down comments and I have done that for a few posts.

I am either going to shut them down for a week and see how that feels. Or shut them down except for a few posts a week (like Sunday and Tuesday).

The truth is comments are used by a very small portion of the AVC readership. But the people who use the comments are very active and engaged. So removing comments won’t impact a lot of readers, but it will impact the most loyal readers.

So I want to tread lightly here. But I also want to lower the overhead of writing and managing AVC and comments are the highest overhead feature on AVC.

I’m interested to hear what people think of the overall goal and objective of simplification and how I’m thinking about it. And I’m specifically interested in feedback on cutting back on comments.

How I go about doing this is still a bit of a work in progress in my mind and I appreciate the feedback as I think this through.

Categories: Blog articles

The Free And Open Internet

A VC - February 10, 2019 - 8:17am

I realize that publications need to have a business model to stay afloat. And the past month has seen a number of online publications (and offline publications) layoff a large number of employees. So it isn’t even clear that all of these hard paywalls, soft paywalls, and advertising based models are going to make the online publishing business work.

But the cost of all of this business model exploration and extraction is a continued degradation of the clean and fluid user experience that made the early free and open Internet so compelling.

A few days ago I saw a link on my phone that said “John Dingell’s Last Words For America.” I thought it was worth reading what a lifelong public servant had to say on his deathbed. So I clicked on the link and got this:

I never got to read what a lifelong public servant’s last words for America were. Sure I could have purchased a subscription to the Washington Post, but I don’t believe opinion pieces should be behind a paywall and I certainly don’t believe that something like Dingell’s last words should be behind a paywall. So I’m not going to reward the Washington Post for bad behavior with my money.

The truth is Dingell’s family should never have asked the Washington Post to publish his last words. Even the Washington Post’s owner Jeff Bezos knew to publish his words that he wanted everyone to read on an open platform like Medium.

The mainstream publications, like Washington Post, have ceded their role as the public square to places like Twitter and Medium that remain open and free.

That further limits their relevance. In search of a business model they cede the very thing that made them what they once were.

So what is my point? That paywalls are bad? No, I think subscriptions have their place in the publishing business. But the way paywalls are implemented today stinks. Some content should never ever be put behind one. And paywalls should federate, like the early ATMs did, so that joining one means joining them all.

That won’t get us all the way back to the free and open Internet that sucked us all in twenty plus years ago, but it will get us a lot closer to it.

Categories: Blog articles

Video Of The Week: My Talk At Yext Onward 2018

A VC - February 9, 2019 - 2:11pm

Last fall, the folks at Yext offered to let me have some stage time at their Onward Conference to talk about the K12 CS Education work that I’ve been doing for the last ten years.

I didn’t realize that the talk was online until I saw it today.

So here it is. It’s just under ten minutes.

Categories: Blog articles

Funding Friday: Wavelength

A VC - February 8, 2019 - 5:49am

Tabletop games (or party games) is one of the top categories on Kickstarter (a USV portfolio company). There has been a real resurgence in these sorts of games in recent years and most of the innovation in this category is happening and being funded on Kickstarter.

Today’s project is Wavelength, a guessing game that looks super fun.

Categories: Blog articles

Optimism

A VC - February 7, 2019 - 8:05am

I was talking with my friend Jerry today and he said “everything is possible.” I told him I don’t think I am going to be able to dunk on a regulation height rim.

But I subscribe to Jerry’s mantra of optimism.

I posted Albert’s reasons to be optimistic this past weekend and if you haven’t watched it, I highly recommend it.

As Albert states at the start of his talk, you have to be optimistic in the venture capital business.

But I think you also have to be optimistic in life.

My favorite coffee shop near my office closed recently. But a new one opened and I’m optimistic that it will become my new favorite.

The Knicks traded our franchise player last week. But I’m hopeful that we will get some good young players with the picks and sign some great free agents with the cap space.

My knee has been bothering me and my doctor tells me he needs to do arthroscopy on it. But I’m hoping more yoga and strength exercises will be sufficient.

Of course none of what I’m hoping and expecting to happen may come to pass. I may get shit coffee going forward, more losing seasons at MSG, and a scar on my knee.

But I’m not counting on any of that. Why would I?

Categories: Blog articles

Routines

A VC - February 6, 2019 - 4:18pm

I am often asked for advice on productivity. People want to know how I get things done.

The truth is I am not well organized, I don’t use any productivity tools.

I work hard but I don’t work all of the time. I have a decent work life balance.

My secret, if I have one, is routine.

I try to do the same things at the same times every day or every week.

Some examples:

– I like to meditate first thing after I wake up.

– I like to handle personal financial matters on Saturday mornings (something I learned from my Dad).

– I need to blog before I leave home or I have a hard time getting that done.

– I work out before breakfast.

When I stick to my routine, I seem to be able to get a lot done.

When I get out of my routine, things fall apart quickly. It is like dominoes. One falls down and knocks down all of the others.

There are challenges with relying on routine. Lots of traveling, for example, makes it hard to stay in a routine.

But I have not found any organizing principle more powerful than routines and I try to apply them to as much of my life as I can.

Categories: Blog articles

Early Liquidity

A VC - February 5, 2019 - 6:04pm

Ever since I got interested in crypto, I have looked at the emergence of the commercial Internet in the 90s as a roadmap for what to expect.

And while that has largely been useful as a frame of reference, I’ve struggled with the huge bubble of 2017 which felt to me like it came too early relative to the maturity of the sector.

Yesterday I read this post which has a great explanation for that:

The bubble came early because blockchain technology enabled liquidity earlier in its life cycle.

That makes a ton of sense to me and reframes the timelines in my mind.

Phew.

Some of you may have noticed that I waited until very late in the day today to post. I’m struggling a bit with adjusting to time zones, a head cold, and today was just one of those days where nothing went as planned.

I’m not planning on making early evening eastern time my regular routine.

Categories: Blog articles

Raising A SAFE Or Convertible Note In Between Rounds

A VC - February 4, 2019 - 8:08am

A trend we’ve seen in the financing of startups in the last five years is the “SAFE between rounds” which means raising a convertible note (or SAFE) to provide more capital and runway in between financing rounds. It often comes in the form of an offer by an investor who missed the last round and doesn’t want to miss the next round.

It is a tempting offer because there is no immediate dilution from the capital and it usually converts at the next round price or a small discount to it.

Most founders look at the offer and think “why not?”

Here is why you might not want to do this.

The SAFE or convertible note can “crowd out” new investors in the next round and make it very hard to find a lead investor or any high quality investors.

Let’s do some math to show how this happens.

Let’s say you did a seed round of $1mm where you sold 15% of the company and you did a Series A of $3mm where you sold 20% of the company. Your last round valuation was $15mm post-money and you’ve now sold ~35% of the company to investors. These investors will typically have “pro-rata rights” to participate in the next round. Which means 35% of the next round will go to your existing investors.

Let’s say you hope to double your valuation on your next round and raise a Series B at $30mm pre-money or more in a year to 18 months.

Then someone comes along and offers you a $2mm convertible note or SAFE which converts into the next round. You think “free money, that sounds great.”

But if you take the note, then you have a fair bit of the next round already committed for.

Let’s say the next round is $5mm. The existing investors take 35% of $5mm (or $1.75mm), the note takes $2mm, and you are left with $1.25mm to offer a new investor. It is very hard to find a lead investor who will price the round for only $1.25mm of a $5mm round. And if that round is at $30mm pre-money, $35mm post-money, you are only offering that new investor 3.6% of the company which is not a lot.

Let’s say the next round is $7.5mm, a reasonable amount to raise at $30mm pre-money (20% dilution). The existing investors take $2.625mm, the note takes $2mm, and so you have $2.875mm to offer a new investor to lead and price the round. That is a fairly small number as well and would only purchase 7.7% of the company.

You’d have to raise a $10mm Series B before you’d be able to offer a sizable allocation to a new lead if you have 35% of the round committed to pro-rata rights and a $2mm note converting into it. And even then the new investor can only purchase ~11% of the company and the round will be 25% dilutive at $30mm pre-money.

As you can see, taking a SAFE or convertible note between rounds can make it hard to create enough of an allocation in the next round to attract a high quality lead who will price the round.

So, if taking a SAFE or convertible note between rounds is not a great idea, what should a founder do?

I like to see if the investor who wants to do the SAFE or convert is interested in catalyzing a “Series A1” where you take their money and the pro-rata (or slightly more) from the insiders and price it at a significant markup to the Series A. If they are willing to do that, it often is better for everyone to do that.

That tends to be less dilutive, creates even more runway to get to an attractive B round and it avoids the issue of crowding out money in the next round.

Categories: Blog articles

Understanding Your Investors

A VC - February 3, 2019 - 11:38am

To some extent, this blog has been about demystifying venture capital and in particular me and the firm I work at, USV.

There are many reasons why I think that is a useful exercise. When I got into the VC business in the mid 80s, it was a fairly opaque business and that did not change a lot over the next 15 years. When the Internet came along, it promised more transparency and I thought that using the Internet to help facilitate more understanding about VC was a good idea.

But also it was, and is, a self interested move. I believe that entrepreneurs are more likely to take money from a firm that they feel like they know, like, and trust. And in the hyper-competitive world of startup finance, being an open book can pay huge dividends. We have seen that to be true again and again.

So understanding your investors is important and reading VC blogs is a good way to increase your understanding of the people who may invest or have invested in your company.

One area that entrepreneurs should take some time to understand is the way that VC funds are structured. The economic terms (management fee and carry) and the durability of the capital (investment period, fund life) are particularly important as they will influence the behavior of your investors.

I have written a fair bit about these issues here at AVC as have others like Brad Feld.

One area where fund structures are different is in the crypto sector. Because crypto tokens become liquid much more quickly than startup equity, and because investors in the crypto sector will want to own publicly traded crypto tokens, the hedge fund model has been adopted by many of the investors in the crypto sector.

Joel Monegro, co-founder of Placeholder.vc and a former USV team member, wrote a good crisp comparison of the venture fund model and the hedge fund model on the Placeholder blog yesterday. USV is an investor in Placeholder.

Joel writes:

The effect of these differences is that hedge fund managers have a greater incentive to maximize short-term profits, as they can be severely affected if the fund underperforms in any given period, while VCs are incentivized to maximize long-term, realized value in order to increase their payout. And this is reflected in how each type seeks profits: in general, hedge funds will tend to trade around market fluctuations, while venture funds tend to build and hold investments to optimize for long-term value.

USV has invested in a half a dozen token funds, often as an initial LP to help the fund get going, and most of the funds we are invested in use the hedge fund model. Placeholder uses a VC model.

So we don’t have a strong point of view about which approach is best. Certainly in terms of maximizing our liquidity, the hedge fund model is best. But for entrepreneurs who want patient stable capital, it may be true that the VC fund model is preferable.

This is something to watch over the next five to ten years as this sector matures and we learn about which structure is preferable for entrepreneurs, fund managers, and fund investors.

We already see hybrid models emerging where a hedge fund structure is used but long lockups are required for investors. It will be interesting to see if the way management fees and carry payouts will evolve as well.

One thing is for sure. Entrepreneurs need to understand how the capital they are taking into their company is structured and what expectations and requirements the suppliers of that capital have negotiated with the fund managers. If you aren’t asking those questions of your investors, you should be.

Categories: Blog articles

Video Of The Week: Reasons For Optimism

A VC - February 2, 2019 - 10:35am

My partner Albert gave this talk at DLD 2019 a couple weeks ago.

Categories: Blog articles

Funding Friday: Make 100

A VC - February 1, 2019 - 8:14am

Kickstarter has a tradition of starting January with the Make 100 campaign, which asks creators to make 100 of something and put it up on Kickstarter for funding.

I backed this Make 100 project earlier this week:

You can see all of the Make 100 projects here. Check them out. They are fun and fascinating.

Categories: Blog articles

Mark Leslie On Entrepreneurship, Leading, and Selling

A VC - January 31, 2019 - 9:30am

I have had the pleasure of sitting on a few higher education boards with Mark Leslie. He’s a very accomplished and wise person. I respect him a lot.

In this talk with Peter Levine, Mark talks about some of the most important concepts in starting, leading, and building companies. Listen to him. He’s knows what he’s talking about.

Categories: Blog articles

Funding Female Founders

A VC - January 30, 2019 - 7:55am

As a follow up to yesterday’s post, I asked Zach to calculate the percentage of teams with at least one female founder in our last two core funds.

Yesterday, I wrote “I don’t have the exact data on me and it would take more time than I have right now to calculate it, but my guess is that over the last four years, about thirty to fifty percent of the teams we have funded have had at least one woman founder on them”.

Well I am pleased and proud to let you all know that my guess was correct.

Here is the data:

Percentage of investments with at least one female founder:

USV 2014 Fund: 33%

USV 2016 Fund: 43%

Certainly we have more work to do, the female founder ratio is not 50/50 yet, and we have work to do on other areas like people of color, etc.

But I am quite pleased that USV is female founder friendly.

Categories: Blog articles

Why Central Banks?

Beyond Money - January 29, 2019 - 12:47pm

I have long argued that the interest-based, debt-money, central banking regime is both dysfunctional and destructive, and advocated for the decentralization of control over credit and the creation of exchange alternatives that use privately issued currencies and direct clearing of accounts among buyers and sellers.

There is a considerable body of literature that makes the case for free money and free banking, most of which has been ignored. These ideas have been overwhelmed by the economic and financial orthodoxy which stands in support of the political status quo which centralizes power and concentrates wealth.

For governments, central banks serve as “lenders of last resort,” enabling deficit spending through their purchase of government bonds and manipulation of interest rates, while for the banking cartel, government serves as “borrower of last resort,” sustaining their privilege of lending money into circulation and charging interest on it. Whenever this unsustainable system threatens to implode (as it did in the crisis of 2008), the government steps in to take bad (private) debts off the bankers’ hands and place them on the shoulders of the citizens (“bail-outs”). When the next bubble reaches its climax, we will likely see another round of “quantitative easing,” but when that proves to be inadequate, we will likely see some combination of inflation and outright asset confiscation known as “bail-ins” (partial seizure of bank balances).

In his recent review, Leonidas Zelmanovitz, highlights the main points in Vera Smith’s book, The Rationale of Central Banking and the Free Banking Alternative, which was published in 1936. Paraphrasing Smith, Zelmanovitz concludes that [Keynsian policies are] “not necessary to solve the problems they are purported to solve; most likely, they are part of the cause of the problem. Furthermore, there is an alternative, and that alternative is free banking,.” and, ” You can have good money without central banking and central banking does not guarantee good money.” You can read the entire review on the EconLib website.

Another classic source on free banking is Henry Meulen‘s, Free Banking (London: Macmillan, 1934). Free download available here. I will provide some excerpts from that source in a future post.


Categories: Blog articles

Changes In VC and Startups Take Time

A VC - January 29, 2019 - 7:49am

Starting and investing in startup companies is a long lead time business. It takes on average seven to ten years for the seed and early stage investments we make to turn into something.

So looking at data across the entire VC landscape can be confusing. Important trends can be lost in the noise.

Look at these two charts from the All Raise and Pitchbook analysis of the funding of female founders:

The first one tells a troubling story. Female founders are getting a tiny amount of the supply of venture capital and the percentages are not changing much.

The second one tells a promising story. The percentage of teams getting funded that are all male founded is declining and the percentage of teams that have women founders on them, or are all women founders, is rising.

The first chart is dominated by late stage companies (think companies that are 5-10 years old) and the second chart is dominated by earlier stage companies.

Let’s look at this data in five or ten years.

I think we will see a different story.

I don’t have the exact data on me and it would take more time than I have right now to calculate it, but my guess is that over the last four years, about thirty to fifty percent of the teams we have funded have had at least one woman founder on them.

The times are changing in venture, thanks to the hard work by a number of women founders, women angels (like The Gotham Gal), venture capitalists, and some men too, and it is having a big impact. We just can’t see it in the aggregate funding numbers yet.

We will.

Categories: Blog articles

The Send To All Mistake

A VC - January 28, 2019 - 9:07am

I believe I’ve written about this before but I see it made so often that I feel compelled to write about it again.

Entrepreneurs, VCs, and others in the startup ecosystem often send an email introducing a company to all of the partners (or most) at our firm. And that email is addressed to all of us, not one of us.

The result is that none of us feel ownership in the introduction and though we generally figure out who should reply, it can result in the email going unanswered for a while or longer.

On the other hand, if an email is sent to one partner, with possibly a copy to others, then the recipient feels a responsibility to reply and the email is generally answered.

I send emails to busy people a lot. And what I have learned is that I need to address them directly, write the note personally so that it is obvious that I have written it myself, and then copy someone (usually their assistant, but often a colleague as well) to make sure they see it.

Email is such a challenging medium to operate in that when using it, you must be very careful to optimize the chances of a reply.

Sending an email to all is generally not a form of optimization that works.

Categories: Blog articles

Funding Films, Continued

A VC - January 27, 2019 - 12:17pm

The Gotham Gal and I have been at the Sundance Film Festival this weekend. We’ve seen a nice mix of documentaries and feature films. And in the feature film category we’ve seen mainstream crowd pleasers like Mindy Kaling’s Late Night which Amazon bought for a bundle and indie films that may struggle to find a mainstream audience.

We tend to prefer the latter and among the best of the indie variety that we’ve seen was a film called Ms Purple that we saw yesterday morning at its world premiere.

Ms Purple raised almost $75k on Kickstarter (a USV portfolio company) a few months ago which funded much of the post-production costs and licensing expenses. A total of 373 patrons invested an average of $200 each (some way more, some way less) to help this film come to life.

From my experience yesterday morning, I would say it was a fantastic investment. Ms Purple is about the challenges that immigrant families navigate in the US, and about the tensions that exist in sibling relationships, particularly when a parent is dying.

Ms Purple’s filmmaker (writer and director) Justin Chon is exactly the kind of artist that Sundance and Kickstarter exist to serve. While I hope his stories can and will go mainstream, they need to be heard even if they don’t.

And funding mechanisms outside of the studio model/system insure that they will.

Categories: Blog articles
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