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Learning The Hard Way

A VC - September 5, 2019 - 5:38am

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

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

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

— Fred Wilson (@fredwilson) September 4, 2019

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

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

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

Categories: Blog articles

Some Thoughts On Crypto

A VC - September 4, 2019 - 5:06am

The crypto sector is in an interesting phase right now.

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

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

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

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

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

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

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

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

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

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

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

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

Categories: Blog articles

Back At It

A VC - September 3, 2019 - 3:20am

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

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

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

That includes me.

Categories: Blog articles

Labor Shortages

A VC - September 2, 2019 - 3:42am

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

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

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

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

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

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

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

Categories: Blog articles

Scaling In Lower Cost Locations

A VC - September 1, 2019 - 3:50am

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

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

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

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

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

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

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

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

Categories: Blog articles

Audio Of The Week: Sarah Beatty and Montgomery Builds

A VC - August 31, 2019 - 3:40am

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

Categories: Blog articles

Funding Friday: Subway Art

A VC - August 30, 2019 - 2:55am

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

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

Categories: Blog articles

AVC Stats

A VC - August 29, 2019 - 5:29am

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

Here are some charts and tables:

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

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

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

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

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

Categories: Blog articles

Make America sane again

Beyond Money - August 29, 2019 - 4:00am

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 - 4:08am

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 - 5:52am

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 - 4:00am

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 - 4:07am

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 - 11:33am

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 - 7:54am

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 - 3:35am

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 - 4:59am

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 - 5:00am

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 - 3:03am

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 - 4:24am

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
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