Remember “The Series A Crunch”? Well, I think an offshoot of this will manifest itself across what feels like almost 500 Bitcoin related companies. I, myself – I am a Bitcoin believer and Bitcoin junkie. Yet, despite that optimism, I am continuously floored by just how many Bitcoin startups are out there. I don’t know who is funding them or how they’re making money to survive the typical cycles needed to make Series A investing, which I’ve recently heard defined as “when pros invest and set the terms.” (As a disclaimer, please note I’ve invested in 7-8 early-stage Bitcoin-related startups. I am a long-term believer.)
So, based on that, I’ll try to briefly summarize my thinking: A year ago, some of the world’s best investors placed their bets on a small handful of Bitcoin startups. Many of these companies centered their offering around payment and exchange of Bitcoin. A few months ago in 2014, there was more talk of storage of Bitcoin. And most recently, in the summer of 2014, there’s more talk about companies offering more robust access to the block chain itself, or building out chain-powered apps around ideas such as derivatives and other types of smart contracts.
Reflecting over the last 20 months, I am shocked by the number of Bitcoin startups I’ve seen. It may be more than photo-sharing apps now. Most of them, of course, sadly have no traction whatsoever. Many of them are tended to by people who haven’t been toiling away with the protocol for years. They are solutions chasing a problem. Given the landscape, here’s my view on what will happen to Bitcoin startups moving forward.:
There was an arms race to acquire early Bitcoin accounts and wallets, and a small handful of companies dominate that space. It’s unlikely someone can just enter the space now (though there is a caveat) and do anything meaningful.
The successful Bitcoin teams I’ve found had at least one founder who grew up hacking around with crytocurrency and the Bitcoin protocol. There are many folks entering the Bitcoin space in a “fast friendly” way and those people are likely to lack the proper context of what the technology can really do in order to build something innovative.
Companies which get good seed funding generally consist of stellar teams, are working on consumer adoption issues (like building a mobile app), are building more merchant tools to get suppliers interested in Bitcoin, and are leveraging the Bitcoin platform to bring developers and larger companies into the mix.
The risks associated with these developments (or predictions!) are three-fold:
First, there are some great investors who do not conceive of Bitcoin as anything beyond a currency, or ones that do not believe the environment will be welcoming to these companies (for legal or regulatory concerns). This has constricted the number of larger venture capital firms that can invest in the category (for now), which means Bitcoin startups who graduate to the level of institutional investor may either find a smaller market for their equity and/or some of them may be conflicted out of participating given the eventual consolidation of talent and product ideas that will undoubtedly occur as the ecosystem matures.
Second, all of this means many of the startups which purport to be Bitcoin-related won’t meant the thresholds required to graduate to the level of real institutional venture capital. This is what I refer to as “The Bitcoin Crunch.”
Third, I think this is all healthy and natural, and starts to separate the winning solutions from the mediocre. I’m a believer in Bitcoin both as a unit of exchange as well as a platform for people to build all sorts of new applications, including ones that never use Bitcoins themselves. It will take time, though. It do something will tip all of this over at some point — it could be an entrepreneur who cracks the code on tying Bitcoin to consumers’ mobile phones, or the group of developers that partner with a company like Amazon or Google to build the next generation of distributed computing architecture on top of the protocol. I have no idea what it will be and when it will happen, but I do believe it will.
“No phone, no phone…I just want to be alone today.” –Cake, “No Phone”
Years ago, I was talking with Davy Kastens, CEO of Sparkcentral, about his product. His company builds products for large consumer-facing businesses to handle, triage, and address consumer complaints about products and service. In our chats, he mentioned a term to me — “Call Avoidance.” I didn’t think much of it at the time, but Devy build his product around the costs companies would incur as a result of fielding customer inquiries via phone.
Only recently did this term pop back into my head. You may remember the “Push For Pizza” mobile app and viral video. (If you haven’t watched the video — it’s hilarious, well worth the time.) As soon as I saw it, Davy’s line came back to me. The entire app is built around the concept Call Avoidance. On mobile, all of the apps that have cropped up where you “tap stuff to get things,” many of them replace our need for having to make a phone call and talk to another person altogether. My immediate reaction to the pizza app was: “Ha! But, I would use that.”
And, then it dawned on me…on mobile phones, so many popular apps have essentially replaced our previous reliance on telephone calls with app-initiated API calls. For instance, we now can now call a taxi, order food for delivery, schedule services, or just send a “Yo” by simply tapping our phones with mobile software which replaces API calls with telephone calls. It’s charming yet odd that rapid growth mobile phones enabled us to not to have call other people at all.
There’s a deeper lesson here for people who aspire to build consumer mobile apps. I’d say, observe the world around you and see where people are still laboring to make phone calls on a somewhat frequent basis. You’ll find issues like medical billing and insurance claims (or any kind of customer service) and phone calls made to local businesses, where consumers often spend the most money within a certain radius of their home (and perhaps why Path acquired and integrated TalkTo earlier). Today’s consumers expect powerful yet elegant applications which will make their lives easier, and not having to call anyone to discuss logistics makes life that much easier.
“Now, our operation is small, but…there’s a lot of potential for….aggressive expansion.” -The Joker, The Dark Knight [video clip]
Every once in a while, a truly world-class technology company emerges. There’s the scale of Apple, building integrated devices and changing the game each time; there’s Amazon, selling books online as a wedge to selling everything we can imagine; there’s Google, leveraging big data to build the world’s premier information company; and, most recently, Facebook, which is on a long march to bring every human on the Internet and connect them to the people, places, and things that matter to them. Each of these companies operate at massive scale, touch all four corners of the earth.
In a place like Silicon Valley, the only natural question to ask is: What’s the next startup most likely to join the pantheon above? After the past few weeks, the answer is easy: Uber.
After all the chatter around Uber’s most recent fundraising, which valued the company at over $18 billion, the company has demonstrated tremendous dexterity and range in launching a number of high-profile initiatives and moves. Specifically, consider the following timeline:
June 2014: Uber raises over $1 billion, valuing the company at over $18 billion.
August 5, 2014: Uber announces UberPool, empowering riders to share rides based on proximity and destination similarity. (Worth noting many observers feel Uber scooped Lyft’s plans to launch Lyft Line, but now it’s moot as both are up and running.)
August 19, 2014: Uber announces the appointment of David Plouffe to run the company’s public policy and strategy. You may have heard of Plouffe, who in the past simply engineered one of the most famous and successful political campaigns of all time with Barack Obama in 2008.
August 20, 2014: Uber announces a “test” for Corner Store in Washington, DC, a service within the Uber app which allows consumers to order basic sundry items, putting the company on a path to be squarely in competition with initiatives from the likes of Amazon and Google, and many startups like Postmates, Instacart, DoorDash, and others.
Consider, for a moment, the complexity of executing on all of these initiatives within a short period of time. Sure, many of these may have been in the works for months and now ready to showcase in a storm of activity, but the bottom line is Uber is not messing around: It is launching new products quickly and taking an experimental approach to continue to iterate and find product-market fit; it is not going to go into regulatory battles unarmed anymore; and they have a killer BD story to sell to hundreds of consumer mobile apps at scale. Launching with 11 API integrations was likely “taking it easy for Uber,” where 11 partnerships for most well-funded startups may be around that total after years of grinding it out.
A final thought. If hiring is a leading indicator of private company momentum, click here and take a gander at the breadth of jobs Uber is hiring for across the world. I’ll repeat that: Across the world! This is where we start talking about real physical scale. Over the summer holidays, a family member on the east coast earnestly asked me if I thought factors X, Y, or Z could hurt Uber. I thought about them, but ultimately answered with the following: “What will stop it?” Right now, I can’t think of anything.
Over the past few years, various startups have attacked the “transportation” space by offering different modes of transport — private black cars, fist bumps with mustaches, sidecars with community donations, car rentals at home, car sharing near work, personal drivers for the day, private buses to replace popular public bus lines, and more.
All of this activity drives home the point that transportation’s value to us is directly related to our own needs of sustaining income and relationships. And, it helps that public transit infrastructure lags woefully beyond what the public requires today: We don’t want to pay for new infrastructure, but we wanted to be driven to tonight’s event yesterday.
So, if entrepreneurs have figured out how to get a good deal of us from Point A to Point B without our own personal vehicles, and what happens to those folks who still drive their own cars into the parking abyss that is San Francisco? Have you seen parking rates on the nights of Giants games in SOMA creep up yearly? Is the city adding more office and residential space but fewer garage slots?
These questions are, of course, rhetorical, and the only answer I have for you is: Get ready for what I like to call #Parkageddon! That’s right. This Fall 2014, in San Francisco, you will see a level of car congestion that will beat last year’s levels. More and more startups (and investors) are now permanently in the city. The Giants are doing well, and the A’s even better. People who have been forced out of San Francisco as residents yet hold jobs in the city are likely to commute in by either car or rail.
#Parkageddon. Just watch, you will see people traveling into the city spend 33% of their commute time cruising to the city perimeter, 33% of the total trip time getting through the bottlenecks to permeate the perimeter, and then 33% of their commute time securing parking. And, those people will frustrated or even angry. They will tweet their rage. They will experience #Parkageddon.
[When I started writing this, I thought I’d list out some of the startups I’ve heard of like Caarbon, Vatler, Curbstand, Flightcar, SpotHero, ValetAnywhere, Zirx, Luxe, MonkeyParking, and others. But, then I was curious -- “How Many Are There?” Well, according to AngelList, there are 83 parking startups. Eighty Three. So, no...I won’t detail them here. As a disclosure, I am a consultant to Bullpen Capital which recently invested in SpotHero.]
It’s a natural reaction to snicker, but when I sit back and think about it, parking is a real, nationwide, mass consumer problem, or at least an annoyance. And, we have already seen scores of businesses launched that tap into labor markets and match demand (here, to park my car) with supply (here, to pay people to valet). All sorts of risks abound with this space, and we can also expect to see some unsavory stories hit the press. Some of the solutions are based around networks of individuals workers (mobile-empowered valets) while some try to give you access to parking garage inventory; some startups tried to let people trade public parking spots (which was met with City Hall fury), while others try to provide crowdsourced intelligence about where someone should park, like Waze but for parking.
Just as we’ve seen with transportation, and with food delivery, and with home cleaning, there’s no good reason to not think parking can be on that list. Will we let drivers take our cars? We already do at hotels, or at restaurants. We let people sleep in our extra rooms or squat in our subletted apartments. The common risks associated with handing over your car keys to a stranger can be managed with networks like Facebook, GPS tracking and motion sensing from a valet’s phone, background checks powered by companies like Checkr, and so forth. It sounds kind of crazy and even twisted, but parking eats up a lot of peoples’ time, and those who have money are willing to spend it for more time. Put that in the meter.
Every summer, I spend some time and resources to revamp my blog. Since my first post on Uber almost 25 months ago (it’s worth re-reading that one), I have posted a lot here, both analysis, videos, and stories behind the small investments I make. This summer, I’ve added a few things to Haywire, with the hopes that people who visit here and read the posts (and comments) will enjoy a little more. You’ll see it’s not fancy or slick. In fact, some of the new functionality makes the site feel a bit slower, but hopefully that’s Ok. Here’s what’s new or (hopefully) improved:
MailChimp as my email service provider. I had kind of neglected email as a channel for a long time, and that was my fault. Hopefully the emails for those who elect to subscribe will look nicer, and now I get better analytics. I’m excited to learn more about MailChimp. If any of you have thoughts or want to share some wisdom, my ears are open.
New “tiles” for Haystack investments.Check these out. They work on mobile, too. We had tried to make them cards (of course) that flip over for more information, but that was too much work, so you get these unidimensional cards instead. You’re welcome. (I am also woefully behind on writing up the stories behind my investments, but I’ve got a bunch of drafts saved up and am committed to working through them. Stay tuned.
A redo for the right rail. We included a “Popular Posts” on the right rail based on traffic, improved the search, and tightening some other stuff.
A place to post, discuss, and chat. I get a lot of cold emails. I want to answer them, and I’ve been trying to find a better way. So, I’m going to try this — by following this link, you’ll see a “Discussions” page on Haywire, where anyone can post a question (or link). I will be notified email, I’ll review, and I can publish it — and offer a public answer that lives on the blog. Or other people can answer. Who knows. Let’s see how it works. And, I’d truly appreciate any feedback you have on this.
August in the Valley always turns out to be an introspective month for me. Things slow down, people leave town, and my wife’s work is also a bit slower before kids come back to campus. This year is no different, as I’m in another transition. I have some fun and also much-needed personal items to tend to this month, and I will also take the time to reflect, recharge, and rediscover what makes me most passionate about work. Three years ago this week, I got my real start in the startup world in the Bay Area. People often just assume it all came together neatly — they see that I wrote for TechCrunch or tweet a lot and assume it was just always like that, or that I know what I’m talking about. Not true. If anything, I’m learning it all as I go along, trying to play catch up with everyone around me.
Three years ago this week, my friend Joel made an off-hand remark that I should just join his company — with the caveat that he couldn’t pay me. Jeez, Joel, thanks for the offer, buddy! Yet, at that time, after nearly 11 months of trying to crack into startups, I thought about the offer and realized — I don’t have a better choice. I emailed Joel. I think he was surprised. He replied, paraphrased: “Well, I can’t pay you, but you’ll get plenty of equity and I’ll buy you Banh Mi sandwiches every day you’re here.” Sold! Since then, Rexly somehow was acquired by Live Nation Labs, I went to Votizen (which wasn’t a great fit) and that was acquired by Causes, and Causes was just acquired by Brigade (these are all Sean Parker companies), and then I was lucky to get my first break in VC and joined Javelin Venture Partners for six months as an executive-in-residence where I began to focus on mobile technology and the iOS platform, after which I started working as a formal consultant for a small handful of companies that were designing and launching apps, and then eventually increased my involvement with Swell, where I became an employee until recently. Along the way, I was fortunate to work as a formal consultant to a variety of venture capital firms (and still do) — like General Catalyst, Trinity Ventures, Kleiner Perkins, GGV Capital, DFJ, and Bullpen Capital, among others — and to have the support of everyone I worked with to explore my interests in mobile and investing simultaneously — and to friends and mentors who helped me channel my energy into the creation of a new fund.
All the while, I have met and worked with great people whom I call friends and mentors. Just like startups fight like hell to become “ramen profitable,” looking back on my three short years in the technology startup vortex that is the San Francisco Bay Area, you could say I worked for “Banh Mi equity.” Most of the equity listed above and the subsequent events have been largely ceremonial. It’s been a fun ride to be on, surrounded with the smartest people in the world. And, here I am again, in the dead heat of August, late twilights that stretch longer, at the same desk, typing away, trying to reset, and wondering what the next Banh Mi equity package will look like. I’m in a good spot, but there’s a long way to go, and excited to let life unfold and see what presents itself.
Y Combinator has come up often in discussions of late, and whenever a topic repeatedly comes up in discussions, it’s time to attempt to structure those thoughts. Let me say upfront that while I don’t agree with everything YC does or shares on their blogs (and have written publicly about that), they are, in a way, somewhat underrated in their impact. Two quick anecdotes: I was recently at a dinner where I was seated next to a founder who has been through YC twice. “Why go back again?” I asked. His answer, paraphrased: “I like the social peer pressure of being in a group, I like the pressure that three months places on a team, and I love the network.” Two, I talked to a friend in the current batch who said YC has essentially empowered the technical to master business, and that inspires him to do the same. Pretty hard to argue with the power in those statements.
All this got me to thinking, YC is not just a “startup accelerator” or whatever it is lumped in to. From my vantage point (on the outside), it is an organization which continues to grow in influence and still has so much more room to grow. This isn’t discussed often in a structured way because the chatter focuses aroudn the brand and personalities, as well as the investors who jockey for positioning next to the graduating classes. Consider the following morsels:
Growing Headcount: People muse a16z is getting bigger. Look at the team page for YC. Lots more people to manage the growing network. Many founders I’ve talked to like being matched with an alumni mentor but it can be hit or miss (in their view, not mine) who they’re assigned to as a partner.
Extending Brand Geographically: “Startup School” as a recruitment tool has extended to New York and Europe. Why not other places, right? It’s just a matter of time. I’ve argued before that we could see YC not just in SF proper, but perhaps in NYC, Berlin, and even China as their brand grows and as they continue to perfect the model of finding talent and building products quickly.
Moving Up-Market: It feels like more and more companies are entering YC already with a product that has some traction and/or revenue. Yes, there are people who still get in without an idea, but plenty of companies are quite further along, which is, in part, a reflection of our times, where everyone has a company (or wants to found one), and what ends up separating the visionaries from the doers is evidence of real adoption, even if small.
Alumni Network As Investors: As the YC alumni base grows in size and power, those individuals will become angel investors. Of course, many already have. They are likely some of the first choices for entrepreneurs in YC, and why not? They have the most recent experience and can help guide them up to and beyond demo day. This puts competition on the early-stage players who are not in the alumni network. All’s fair in love and war! Further more, there are pre-demo days leading up to the main demo day, which means the pressure to access has increased. And, YC companies, in my view, are getting smarter each batch about the opportunities and risks associated with talking to larger institutions too early in their life cycles. This means the larger funds may have to change their approach unless they want to invest quickly.
Shifting Terms: Many assume YC charges 6-7% for each company, but as they move up-market and companies mature, and as the startup ecosystem continues to become more transparent (even for YC!), they do now negotiate on equity percentage.
Recruiting Teams To Apply: As the YC partnership extends, like with a16z’s, the partners can hear about more companies which have matured slightly and invite them to apply to YC, which is about the same thing as inviting them to pitch the partnership. In this way, they’re extending into the sales realm of traditional VC, which is super-interesting and quite smart. (A follower on Twitter commented that #YCHacks also fit into this theme, as the winning teams get an interview with YC.)
Again, YC is a force — no doubt. But, I also think its impact on individuals and companies is underrated (despite all the surface-level hype), and I think they’re planting all different kinds of seeds to extend their power and reach. As the traditional venture capital model continues to experience pressure from myriad angles (private equity, hedge funds, lowering costs of startups, cheaper financial instruments, companies started outside Silicon Valley, crowdfunding platforms like AngelList and CircleUp, and so many other factors), the impressive, expansive growth of YC should be added to the mix. YC is like a growing startup, too — it’s just under 10 years old, and not done growing and evolving. As the faces who lead it change, and as it remains nimble to change as an institution, it enjoys many advantages — just like startups do against incumbents.
Over the past few days, you may have seen a larger number of people (mostly investors) tweeting about a bizarre term: “pro-rata.” This term is a venture investing inside baseball term, but it is actually quite important for (future) founders to think about. To simplify the term, a pro-rata right is essentially a provision in a venture investment that gives an investor the option to invest more money, on a prorated basis, to maintain their ownership percentage as the valuation of a good company increases over time. This protects the earlier investors from dilution as the valuation of the company rises, and it also is a critical instrument for those earlier investors to “double-down” and put their money to work into the companies that have the best chance to return their fund.
I am writing this as someone who is learning about all this stuff as I write it — not an expert. So take the following with a grain of salt:
Larger institutions in the business of venture usually don’t invest unless they have pro-rata rights. It’s a condition of the deal, and those funds have business models which depend on at least one or two companies within a vintage which end up being the “winners” and end up carrying the fund. The larger players have been in business for a while, so they’ve had enough time to understand it; the newer entrants in the seed ecosystem mostly have not, and it seems like only now that people are understanding that, no matter at what stage, pro-rata rights are critical for investors.
Ah, but there are few assumptions around these that we must reexamine, and this is where it gets interesting given the climate:
Many angels, early-stage, and smaller check-sized investors do not get pro-rata rights. In my limited experience, I never ask for them, and if I did, I probably wouldn’t get them at all.
Now, some investors who have a big enough checkbook, a big enough fund, or a big enough brand name or expertise can lay down that having pro-rata rights is a condition of their involvement in a deal. In those cases, the founder has to chose whether or not that condition is worth it. For example, I was involved in a great seed deal where a well-known investor wanted to come (and he has very relevant experience in the space). His condition was to only participate with pro-rata, as an edict from the fund he works for. No one else got pro-rata. This is a critical point — a founder does not, in no way, have to allow these investors to have pro-rata.
Ok, well, so now that there’s an excess supply of angel and microVC capital in the system, and because many of the people writing these checks do have a business model (i.e. returning a fund based on fund economics), people are asking for their pro-rata rights and realizing just how critical they are for their fund’s performance metrics and, in some cases, survival.
Yet, what’s also interesting is that founders are now in the driver’s seat with respect to pro-rata. Consider a great seed team which raises a bit of funding, and as a condition, they do not give out pro-rata. Assuming they aren’t targeting someone specific, they could just use their leverage to set the ground rules that no pro-rata rights are given. Why not, right?
And, this is where it gets interesting for founders, especially for the ones who survive and their companies mature — they may be in a position in the future to dictate whether or not pro-rata rights are even dished out to begin with. This is the cold view interpretation, as I’m sure many founders will want to investors they’re close to and like to have them, but founders also can use them as a stick to fend off bad behavior. In the future, I believe things will trend this way. The people who actually get pro-rata rights will be the ones that either have close relationships with founders, those that bring extremely deep, relevant experience to the venture, or those who have a brand and patina that send a signal to the market. If I’m right that founders will hold back on this moving forward, this then alters the model of the early-stage funds and puts more pressure on them to have one or more of the characteristics I cited earlier. Otherwise, the money is just money.
As a frame of reference, I set out in my investing activity to assume I won’t have pro-rata because I believe that it has to be earned, over time. It’s less of a pro-rata right, but more of a pro-rata privilege. This is just my point of view, informed only by a few years…I’d love to hear what you think in the comments below.
[Update: Links to all my StrictlyVC Q&A's and two columns are now below. Enjoy!]
When TechCrunch ended my weekly column after over three years of writing there, I got many nice messages from folks and friends who are reporters, bloggers, and in the media at large. That turn of events triggered some potential opportunities, but I found thereafter that I wanted to take a break from writing something for a large audience on a weekly basis while working at a startup and working on a variety of investment-related activities. One friend who did email me, Connie from StrictlyVC, smartly notified me that she’d be trying to take an unplugged family trip in August and, if I was up for it, I could help write her daily newsletter for those two weeks — a daily newsletter which is read by many founders and all investors in the startup technology ecosystem. (Almost a year ago, Connie was kind enough to profile me for her newsletter. You can click here to read that short interview, and I’d recommend subscribing to her newsletter, too.)
Well, I took her up on her offer, so for the first two full weeks of August, I will be the guest columnist for StrictlyVC! And, we cooked up a great lineup. For those 10 business days, I will write two columns each of the Fridays about what I’m seeing in the VC landscape, and for the other eight days, I’ve completed detailed Q&As with some of my friends who are in industry. Specifically, you can look forward to learning more about:
In May 2004, Paul Graham published “Hackers And Painters,” arguably one of the most important modern books focused on the intersection of technology and entrepreneurship. I was catching up on reading tonight and saw a post which referenced some passages from the book. I clicked through and was curious, “How old is the book?” Well, it’s just over 10 years old. A decade ago. I cut and pasted the Table of Contents from the book below — the title of each chapter and most of the subtitles are truly prescient, now with a decade of hindsight. I do not agree with 20% of what Graham blogs and tweets about today, but it is hard to argue he didn’t perfectly nail this thesis. Reading through each title, it’s remarkable to see the level of foresight he held, as if he saw the next decade unfolding in his mind.
A few nights ago, I was at a dinner and happened to sit next to a founder who had gone through YC twice. We talked a lot about entrepreneurship, the program, his experiences, and much more. This guest realized I had a lot of thoughts about the topic, so he asked me, “Well, what do you think motivates PG?” My answer: “I believe he wants to empower the people he believes are creators.”
Why Nerds Are Unpopular
Their minds are not on the game.
Hackers and Painters
Hackers are makers, like painters or architects or writers.
What You Can’t Say
How to think heretical thoughts and what to do with them.
Good Bad Attitude
Like Americans, hackers win by breaking rules.
The Other Road Ahead
Web-based software offers the biggest opportunity since the arrival of the microcomputer.
How to Make Wealth
The best way to get rich is to create wealth. And startups are the best way to do that.
Mind the Gap
Could “unequal income distribution” be less of a problem than we think?
A Plan for Spam
Till recently most experts thought spam filtering wouldn’t work. This proposal changed their minds.
Taste for Makers
How do you make great things?
Programming Languages Explained
What a programming language is and why they are a hot topic now.
The Hundred-Year Language
How will we program in a hundred years? Why not start now?
Beating the Averages
For web-based applications you can use whatever language you want. So can your competitors.
Revenge of the Nerds
In technology, “industry best practice” is a recipe for losing.
The Dream Language
A good programming language is one that lets hackers have their way with it.
Design and Research
Research has to be original. Design has to be good.