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Quickly Dissecting GM’s Acquisition Of Cruise Automation

I haven’t written here in a while (for my usual pace). Lots going on. So, I need to get back into it. The world isn’t quite right when I’m not able to collect and organize my thoughts here. And, luckily, I woke up before everyone today and, from yesterday’s news about the surprise acquisition of Cruise Automation by General Motors, I now have something timely to write about. Here we go, and please do excuse me if this one is a little rusty — I need to get back into the swing.

Here are my quick take-aways from yesterday’s GM-Cruise deal:

1/ GM Making Moves: In the first week of 2016, ridesharing startup announced a $500M investment from General Motors. The implication here, of course, is that as ridesharing networks proliferate and engulf traditional car ownership and consumer behavior, just manufacturing cars may not be good enough, especially when new companies like Tesla (and allegedly Apple?) are in the space. Now with Cruise, GM adds to its “hardware” and “network” a team and technology focused on the next pillar of what will drive these networks: automation. (This itself is a longer subject that I will try to write on this spring. Too much for here right now.)

2/ A Bite At The Apple: Like many other local investors who attend Demo Day, I probably could’ve invested in Cruise. It was part of YC. Heck, even my friend Bilal sat me next to the CEO at a dinner he hosted in the summer of 2014. To the company’s credit, they didn’t over-raise venture capital and were able to drive an outlier outcome that made everyone involve happy, to put things mildly. Every now and then I’ll see a deeper tech company that’s raised a ton of capital, and then when the subject of potentially cutting burn comes up, these companies act surprised. Now we can point them to Cruise, who should be applauded for many things, including its capital efficiency.

3/ More “Chatter” About Deep Tech: Since this happens to be a subject with a bit of sensitivity and nuance, I won’t try to dissect here and, instead, point to this blog post yesterday titled “Hard Tech Is Back,” written by the President of Y Combinator. Please read the post here.

4/ The Justin.TV Mafia: This has been discussed earlier, but it is quite a band of founders that have spawned from that initial company. It is pretty cool to see a small group of the same people keep launching products which create real value, over and over again.

5/ Points On The Board: A big congrats is due to all the early, small, and institutional investors who were inspired by Cruise. Having raised my own funds, built up a network of LPs on my own, I can tell you it is really hard to earn the trust of LPs, especially when there are so many firms to choose from. Probably too many. Often, these LPs look at pitches from VCs that, years in, don’t have any real results. It’s all paper. This one was quick, and it is very real. A number of LPs pinged me yesterday. The results matter more than most can appreciate who haven’t spent time with LPs, and they’re rare events.

6/ Quiet entrepreneurship: Just a quick personal story. I had to check my email for the CEO’s name. I was seated next to him at a small dinner by Bilal back in the summer of 2014. That week, Twitch was being sold to Amazon, and the CEO had his newco, Cruise. During that evening, the CEO was very gracious, we chatted about YC, going to school in Boston, but he never once discussed himself, the looming acquisition, or his new company. With Cruise, aside from a few pieces like this by Kim-Mai (of course, she covers the real stuff), the company never really sought to play the PR game or seek attention. It was, instead, the quiet pursuit of entrepreneurship, like a whale in the open ocean, after spending hours in the deep dark blue, coming up to breach for a moment and revealing its brilliance and might.

Thanks, Cruise, for the inspiration to get back to writing.

LA Confidential

Upfront Pic

In late January, I headed down to LA to attend the Upfront Summit, which was organized by Upfront Ventures. I had a bit of time before and after the two-day event, so I filled it up with some meetings and talks. I haven’t been writing much over the last month for a variety of reasons, but have a backlog list to work through, starting with this post. Here’s a recap of the trip, which I’ll say was very enjoyable, fun, easy to get around with Uber, and gave me real confidence that the LA tech and startup ecosystem has the makings to be a very durable thing. Thanks to Cross Campus, Upfront, Earwolf, and Amplify for making this a very memorable trip and to everyone who showed up to hear me shoot the breeze on all these topics. I felt at home in LA, and I didn’t expect that nor will I forget it.

Cross Campus
On Wednesday morning, I talked to a small group of seed-funded CEOs working out of Cross Campus in Santa Monica. It was a more private chat, and everyone had products going along and trying to figure out how to get to Series A. The conversation flowed as if I was in the Valley, not somewhere else, and we discussed strategies of how to leverage the Valley’s VC ecosystem from a 1-hour flight away. It’s nice to see these coworking and incubator spaces popping up in the LA area, and I believe Cross Campus is

Earwolf
Years ago, I met Adam Sachs (then with StepOut, which was acquired by IAC) because his company had garnered great interest in India, and I was working on projects in India. We remained friends, and after a while, after Adam moved his family to LA, we reconnected. At the time, I was with Swell and getting into the world of podcasts — so was Adam. He graciously invited me to part of his series on podcasts with Earwolf. In this discussion below (see SoundCloud embed), we spend nearly 50 minutes talking about lessons from Swell, mobile product design, the podcast market, and advice for entrepreneurs in the podcast space. We also talk a bit about investing.

The Upfront Summit
The Upfront Summit was the catalyst for the trip. What a fantastic event. Let me just say that upfront, pun intended. The first day was mainly focused around LPs on stage. Let’s just say the room was so quiet, you could hear a pin drop. It’s been very educational for me to learn more about what LPs do, how they think. That evening, there was a great party, and then Steve, Kanyi, and few others hung out late night. The next day was a more open conference at the Paramount Pictures studio in Melrose. Stunning location. The Upfront team did an amazing job of not tooting their own horn, but rather bringing a range of investors, press, companies, and LPs from the LA region to showcase the region in whole. That takes a lot of thought to sit back, invite other big players, and take the orchestra conductor role. There were great sessions, my personal favorite being a chat with Tim Ferris. The best session overall, however, covered how the LA region embraced VR as a new category. You can listen to the panel here, below. When I heard these guys speak about all the nuance around VR, it was absolutely clear why Zuck bought Oculus and why the deal was a good deal for him.

Amplify
After Paramount, I had a late flight out of LAX, but had some time, so I rolled in an UberX down the hills over to Venice. See the picture below from my Uber, what an epic sunset. Paul Bricault, who is with both Greycroft and Amplify, was kind enough to organize a pretty big event for me at the Gem offices in downtown Venice. We talked about a lot of things such as mobile apps, on-demand economy, Apple’s future ambitions, difference between seed and Series A, and how LA startups could compete for talent with the Bay area. Here’s the full chat below.

LA Sunset

“The Uber Effect” – Preface And Table Of Contents

A few months ago, I announced that I’ll be writing a book on Uber. I didn’t realize that, shortly thereafter, the company would generate drama within insider circles and the mainstream media, but I guess it proves that Uber is a big, powerful, and interesting company — interesting enough to write a book on. Over the past few weeks, I gave myself a goal to write a rough draft of the book’s Preface and outline for the Table of Contents by the end of the Thanksgiving holiday. I’ve had lots of planned and unexpected travel, but managed to get them done earlier this morning.

Below, you’ll see two documents — first is the four-page preface to the book. The writing isn’t fancy or pitch perfect, but I want to see if this line of thinking encourages some conversation or push back. Second, below, is a Hackpad where I’m keeping my draft of the Table Of Contents. In this day and age, I figured I’ll write a better book if I was able to crowdsource the outline, and to address any big blind spots I have. I’ll keep the Table Of Contents up there as I go along and would thank you for any feedback you have. (Please excuse the alignment – for some reason, Hackpad wants to embed aligned-right and won’t budge!)

Finally, while I’ve been approached by some agents and the idea of writing a physical book is appealing — it adds some legitimacy, right? — I am not sure I want to write it that way. Maybe I’ll change my mind. For now, I just want to outline and write, and slowly chip away at the subject matter. I think I’ll have some time, as I don’t predict Uber will go public in 2015, but maybe it will! Who knows? In any case, I do want to make sure the book is released before the IPO, and given publishing cycles, I’m not sure the timing would work out. Also, I want the content to spread quickly online, via PDF, so people can read and share on their Kindles, over email, maybe even audiobook, etc. I’m open to any ideas and just want to make sure the best content gets out there. Thanks in advance for reading and for any questions, comments, or criticisms you may have.

Preface – Draft

Table Of Contents – Draft

Rare Earth Metal

The sports world, television, and the Internet will be even more abuzz today as Derek Jeter steps off the field at the new Yankee Stadium one last time. There will be plenty of articles, segments, and tweets lauding Jeter’s style, jeering at his sometimes subpar on field performance, or waxing nostalgic about his immortal moves like “The Dive” and “The Flip” and “Mr November.” Instead, therefore, I’ll explore another, more subtle angle: Derek Jeter as the master class example in celebrity image construction and management.

If asked to describe Jeter with single words, I’d say the following: consistent; understated; loyal; durable; reserved; private; thoughtful; discreet; political; under control; cool under pressure; prepared; and a leader by example.

Playing in the klieg lights of New York City amplified Jeter’s athletic talents, perhaps beyond what should have been. This is a common knock dished out by Jeter haters, but playing in a high-pressure environment adds a degree of difficulty most people cannot truly understand. He then fell into a dynasty, a legendary head coach, world titles, and money. He was made by the time he was 25.

Relatively speaking, based on how Jeter measures success, it was all downhill after that fateful Game 7 loss to Arizona in 2001. His team made it to the playoffs and a few World Series (winning once in 2009), but despite all his efforts, the magic of 1996-2001 was never to be replicated, despite his day in and day out attempts to do so.

Anyone who truly understands baseball and followed this timeline already knows how frustrating the ownership tussles and the media pressure could have made Jeter feel. I’ve never seen him lose his cool, his optimism, his competitiveness, or his focus. Sure, one can argue he’s well paid and a city playboy, but he already had fame and wealth by 2001 — he was driven by something deeper: baseball immortality. The end of his career was marked by personal records and achievements, but over a 13-year period, he only got to truly celebrate with his team once.

During this time, as well, Jeter became a celebrity, a star endorsement, and some might say corporate spokesperson. It’s easy to snicker at, and surely baseball misses gritty, pure player characters like Pete Rose and Ricky Henderson. Jeter became so polished, he represented his team worldwide (a multibillion dollar corporation), endorsed the most premium consumer products (Nike, Gatorade, etc), and somehow managed to mostly stay out of the world of Page Six tabloids.

And that’s mostly what I’ll remember about Jeter. The purely selfless plays, the extreme situational awareness, the high pressure performance, and his ability to be an authentic public face in a time when it’s hard to find in people just one quality, let alone the many that Jeter embodies. On top of this, his self-discipline to keep his private life private and off the press is remarkable. Imagine how many people stalked him, or tried to dig dirt, or tried to plant stories. He never let it get there. He understood that he represented an organization that is bigger than him, and that an investment in layers of security and discretion would both pay off and ask as insurance in a career that saw the creation of social media and the explosion of mobile devices.

It’s the end of an era, but I am not worried because I know I will see Jeter again soon. He’s too ambitious to just a live a normal life. He has tasted success but it is not yet time to smell the roses. Tonight will be his last game as a player, but he stopped being a great player a few years ago. No matter, he earned the right to go out on his terms, and in the process, became something more interesting, a person who could own a baseball franchise, who could become part of the Yankee brass, who could run for elected office, who could finally get married and have kids. Whatever way it goes, one thing is for certain — like everything he has done before, it will undoubtedly be done with one of today’s rarest earth metals: class.

The Bitcoin Crunch

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.:

  1. 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.
  2. 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.
  3. 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 meet 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. I do believe 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.

Decoding PG’s Latest “Startup Investing Trends” Essay

Over the weekend, YC co-founder Paul Graham penned this very important essay on his observation on investing trends. It is a very important post. I’m not one to fawn over PG’s recent posts and tweets, but if you’re at all interested in investing in and around startups, it is critical to understand this piece and read it over and over again. I’ve reproduced PG’s essay below (it should be read, not summarized) and have inserted my commentary in bold text within. If you find this interesting and/or disagree with something, please leave a comment.

——

[Full text of Paul Graham’s latest essay, “Startup Investing Trends” reproduced here ]

Y Combinator has now funded 564 startups including the current batch, which has 53. The total valuation of the 287 that have valuations (either by raising an equity round, getting acquired, or dying) is about $11.7 billion, and the 511 prior to the current batch have collectively raised about $1.7 billion. As usual those numbers are dominated by a few big winners. The top 10 startups account for 8.6 of that 11.7 billion. But there is a peloton of younger startups behind them. There are about 40 more that have a shot at being really big.

Things got a little out of hand last summer when we had 84 companies in the batch, so we tightened up our filter to decrease the batch size. Several journalists have tried to interpret that as evidence for some macro story they were telling, but the reason had nothing to do with any external trend. The reason was that we discovered we were using an n² algorithm, and we needed to buy time to fix it. Fortunately we’ve come up with several techniques for sharding YC, and the problem now seems to be fixed. With a new more scaleable model and only 53 companies, the current batch feels like a walk in the park. I’d guess we can grow another 2 or 3x before hitting the next bottleneck. [The common comment here is “YC can’t scale,” and then “when they tried to, it was bloated.” While that seems logical based on recent events, I would bet YC specifically will scale, mostly because knowledge within the organization is continuously collected and decentralized. Second, there are so many great, loyal, successful alumni of YC who could assume more leadership capabilities or physically expand the franchise — it’s not hard to imagine a YC based in NYC, and in fact, I expect that to happen eventually.]

One consequence of funding such a large number of startups is that we see trends early. And since fundraising is one of the main things we help startups with, we’re in a good position to notice trends in investing. [YC is in the BEST position, not just a good position, to notice these trends.]

I’m going to take a shot at describing where these trends are leading. Let’s start with the most basic question: will the future be better or worse than the past? Will investors, in the aggregate, make more money or less?  think more. There are multiple forces at work, some of which will decrease returns, and some of which will increase them. I can’t predict for sure which forces will prevail, but I’ll describe them and you can decide for yourself.

There are two big forces driving change in startup funding: it’s becoming cheaper to start a startup, and startups are becoming a more normal thing to do.

When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there’s a third: start your own company. That’s a big change. In principle it was possible to start your own company in 1986 too, but it didn’t seem like a real possibility. It seemed possible to start a consulting company, or a niche product company, but it didn’t seem possible to start a company that would become big.

That kind of change, from 2 paths to 3, is the sort of big social shift that only happens once every few generations. I think we’re still at the beginning of this one. It’s hard to predict how big a deal it will be. As big a deal as the Industrial Revolution? Maybe. Probably not. But it will be a big enough deal that it takes almost everyone by surprise, because those big social shifts always do.

 One thing we can say for sure is that there will be a lot more startups. The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies. This process is not just something happening now in Silicon Valley. It started decades ago, and it’s happening as far afield as the car industry. It has a long way to run. [This is important to understand because one could divide LPs and GPs into two groups — those who believe our economy is going through a cyclical change, and those who believe we are witnessing a structural change. The distinction is important, and I’ve written more about it here. PG’s argument, which I agree with, is that startups are the new normal and will continue to increase in number.]

The other big driver of change is that startups are becoming cheaper to start. And in fact the two forces are related: the decreasing cost of starting a startup is one of the reasons startups are becoming a more normal thing to do.

The fact that startups need less money means founders will increasingly have the upper hand over investors. You still need just as much of their energy and imagination, but they don’t need as much of your money. Because founders have the upper hand, they’ll retain an increasingly large share of the stock in, and control of, their companies. Which means investors will get less stock and less control. [Relatively speaking, this is absolutely true. The question is, “How much?” I’ll offer an idea below.]

Does that mean investors will make less money? Not necessarily, because there will be more good startups. The total amount of desirable startup stock available to investors will probably increase, because the number of desirable startups will probably grow faster than the percentage they sell to investors shrinks.

There’s a rule of thumb in the VC business that there are about 15 companies a year that will be really successful. Although a lot of investors unconsciously treat this number as if it were some sort of cosmological constant, I’m certain it isn’t. There are probably limits on the rate at which technology can develop, but that’s not the limiting factor now. If it were, each successful startup would be founded the month it became possible, and that is not the case. Right now the limiting factor on the number of big hits is the number of sufficiently good founders starting companies, and that number can and will increase. There are still a lot of people who’d make great founders who never end up starting a company. You can see that from how randomly some of the most successful startups got started. So many of the biggest startups almost didn’t happen that there must be a lot of equally good startups that actually didn’t happen.

There might be 10x or even 50x more good founders out there. As more of them go ahead and start startups, those 15 big hits a year could easily become 50 or even 100.

What about returns, though? Are we heading for a world in which returns will be pinched by increasingly high valuations? I think the top firms will actually make more money than they have in the past. High returns don’t come from investing at low valuations. They come from investing in the companies that do really well. So if there are more of those to be had each year, the best pickers should have more hits. [I’m not sure I agree with this paragraph entirely. I do believe the top firms will generate even more returns as they grow in size and cut bigger checks at the later stages, but more modest funds can most definitely generate outsized returns by investing earlier, at lower valuations. USV is the obvious example, so look at this back-of-the-envelope estimation I made of one of their best vintages.]

This means there should be more variability in the VC business. The firms that can recognize and attract the best startups will do even better, because there will be more of them to recognize and attract. Whereas the bad firms will get the leftovers, as they do now, and yet pay a higher price for them.

Nor do I think it will be a problem that founders keep control of their companies for longer. The empirical evidence on that is already clear: investors make more money as founders’ bitches than their bosses. Though somewhat humiliating, this is actually good news for investors, because it takes less time to serve founders than to micromanage them. [I guess this style of demonizing will always continue. Ha! From my vantage point, all the great investors and up-and-coming ones never act as “bosses” nor “bitches.” They’re partners. Of course, without founders, investors couldn’t do their work, but if you ask the founders, most of them value having those good investors around the table for a variety of reasons and do not think of them as servants — they want to leverage them and their networks.]

What about angels? I think there is a lot of opportunity there. It used to suck to be an angel investor. You couldn’t get access to the best deals, unless you got lucky like Andy Bechtolsheim, and when you did invest in a startup, VCs might try to strip you of your stock when they arrived later. Now an angel can go to something like Demo Day or AngelList and have access to the same deals VCs do. And the days when VCs could wash angels out of the cap table are long gone. [I hope this is true. It would be great. My concern is that I know a bunch of very successful but quieter former-angels who have stopped. They’d disagree with PG’s assessment. Specifically, they’d say valuations for individual angels are too high, and since most companies end up in some kind of modest M&A, the path to any return for an angel is even tougher.]

I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly. Few investors understand the cost that raising money from them imposes on startups. When the company consists only of the founders, everything grinds to a halt during fundraising, which can easily take 6 weeks. The current high cost of fundraising means there is room for low-cost investors to undercut the rest. And in this context, low-cost means deciding quickly. If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they’d get access to almost all the best deals, because every good startup would approach them first. It would be up to them to pick, because every bad startup would approach them first too, but at least they’d see everything. Whereas if an investor is notorious for taking a long time to make up their mind or negotiating a lot about valuation, founders will save them for last. And in the case of the most promising startups, which tend to have an easy time raising money, last can easily become never. [This is absolutely true. I have seen it. In fact, there’s a new fund which sort of operates this way, perhaps based on this realization. It’s called Bloomberg BETA and it’s run by Roy Bahat, and my friend James Cham, and a few others. While I think deciding in 24 hours is probably too fast for a variety of reasons, it’s also not rocket science and small checks should be decided on very quickly. The problem in practice is that most smaller investors will still tell founders that they’re “in” so long as they find a lead because they don’t want to wire $100k while the founders grind out three months to collect the remaining $900k, if they can at all.]

Will the number of big hits grow linearly with the total number of new startups? Probably not, for two reasons. One is that the scariness of starting a startup in the old days was a pretty effective filter. Now that the cost of failing is becoming lower, we should expect founders to do it more. That’s not a bad thing. It’s common in technology for an innovation that decreases the cost of failure to increase the number of failures and yet leave you net ahead.

The other reason the number of big hits won’t grow proportionately to the number of startups is that there will start to be an increasing number of idea clashes. Although the finiteness of the number of good ideas is not the reason there are only 15 big hits a year, the number has to be finite, and the more startups there are, the more we’ll see multiple companies doing the same thing at the same time. It will be interesting, in a bad way, if idea clashes become a lot more common.

Mostly because of the increasing number of early failures, the startup business of the future won’t simply be the same shape, scaled up. What used to be an obelisk will become a pyramid. It will be a little wider at the top, but a lot wider at the bottom.

What does that mean for investors? One thing it means is that there will be more opportunities for investors at the earliest stage, because that’s where the volume of our imaginary solid is growing fastest. Imagine the obelisk of investors that corresponds to the obelisk of startups. As it widens out into a pyramid to match the startup pyramid, all the contents are adhering to the top, leaving a vacuum at the bottom.

That opportunity for investors mostly means an opportunity for new investors, because the degree of risk an existing investor or firm is comfortable taking is one of the hardest things for them to change. Different types of investors are adapted to different degrees of risk, but each has its specific degree of risk deeply imprinted on it, not just in the procedures they follow but in the personalities of the people who work there. [Boy, I could write a whole post just on this. Very, very true. Change in a VC firm on any dimension is hard because VC partnerships combine two of the least-efficient ingredients found on Earth: partnership structures and VCs themselves. I’m partially joking, but partnerships are, in my mind, the tragedy of the commons in corporate life. This is why the top firms mostly have either flat structures or have a top-dog in charge who makes sure the partnership doesn’t devolve into a tragedy. Therefore, changing dynamics inside a firm is really, really hard. Even for the easy, small stuff — but if you consider an input as big as risk, well, that’s nearly impossible unless the partnership changes in composition drastically.]

I think the biggest danger for VCs, and also the biggest opportunity, is at the series A stage. Or rather, what used to be the series A stage before series As turned into de facto series B rounds.

Right now, VCs often knowingly invest too much money at the series A stage. They do it because they feel they need to get a big chunk of each series A company to compensate for the opportunity cost of the board seat it consumes. Which means when there is a lot of competition for a deal, the number that moves is the valuation (and thus amount invested) rather than the percentage of the company being sold. Which means, especially in the case of more promising startups, that series A investors often make companies take more money than they want.

Some VCs lie and claim the company really needs that much. Others are more candid, and admit their financial models require them to own a certain percentage of each company. But we all know the amounts being raised in series A rounds are not determined by asking what would be best for the companies. They’re determined by VCs starting from the amount of the company they want to own, and the market setting the valuation and thus the amount invested.

Like a lot of bad things, this didn’t happen intentionally. The VC business backed into it as their initial assumptions gradually became obsolete. The traditions and financial models of the VC business were established when founders needed investors more. In those days it was natural for founders to sell VCs a big chunk of their company in the series A round. Now founders would prefer to sell less, and VCs are digging in their heels because they’re not sure if they can make money buying less than 20% of each series A company.

The reason I describe this as a danger is that series A investors are increasingly at odds with the startups they supposedly serve, and that tends to come back to bite you eventually. The reason I describe it as an opportunity is that there is now a lot of potential energy built up, as the market has moved away from VCs’s traditional business model. Which means the first VC to break ranks and start to do series A rounds for as much equity as founders want to sell (and with no “option pool” that comes only from the founders’ shares) stands to reap huge benefits. [Again, this is absolutely right. The market has moved away from VC’s traditional business model around what constitutes required ownership levels. Fred Wilson wrote about this last week, as well. The problem here, in practice, is that only firms as small and modest in size like USV can adapt to these changes. If you are managing $800M or over a billion dollars, those 20% ownership floors are critically important for the investors’ model. Smaller funds, by contrast, are on the hook to return less dollars overall, so they are in a position to do what PG says. The problem, however, is that generally-speaking, founders are still motivated by the size of the round they can pull down, as well as the valuation. This is where deals fall apart in real life: A smaller fund wants to invest in a hot Series A deal, and they want to invest around $5m at a more modest valuation, but a larger firm will literally double the cash in, and then all sorts of irrational behaviors kick in, as well as endorphins. Again, I agree with PG, but haven’t seen this yet, though I hope to. In fact, I view it as a sign of sophistication of a founder to take on more modest valuations in order to maximize their exit options down the road.]

What will happen to the VC business when that happens? Hell if I know. But I bet that particular firm will end up ahead. If one top-tier VC firm started to do series A rounds that started from the amount the company needed to raise and let the percentage acquired vary with the market, instead of the other way around, they’d instantly get almost all the best startups. And that’s where the money is.

You can’t fight market forces forever. Over the last decade we’ve seen the percentage of the company sold in series A rounds creep inexorably downward. 40% used to be common. Now VCs are fighting to hold the line at 20%. But I am daily waiting for the line to collapse. It’s going to happen. You may as well anticipate it, and look bold. [Definitely true. Smaller firms are going down to 13%, even 8-9% for smaller Series A. However, so much of this is inside-baseball. Sometimes founders do want to work with specific investors and will take more dilution in order to. Sometimes they want to reward the firm that made the first offer, even if the terms aren’t “the best.” I’ve seen this happen a few times already this year.]

Who knows, maybe VCs will make more money by doing the right thing. It wouldn’t be the first time that happened. Venture capital is a business where occasional big successes generate hundredfold returns. How much confidence can you really have in financial models for something like that anyway? The big successes only have to get a tiny bit less occasional to compensate for a 2x decrease in the stock sold in series A rounds.

If you want to find new opportunities for investing, look for things founders complain about. Founders are your customers, and the things they complain about are unsatisfied demand. I’ve given two examples of things founders complain about most—investors who take too long to make up their minds, and excessive dilution in series A rounds—so those are good places to look now. But the more general recipe is: do something founders want.

“Motiveless Substance”

I came across an incredibly thoughtful tweet today penned by wordsmith @mm:

Few blogs–and people–in Silicon Valley are of more motiveless substance than @benjy. If only he wrote more. http://benjyw.com/ 

Earlier today, on my way up to San Francisco, I read Benjy’s latest blog post which was RT’d into my stream. It is an excellent post. I’d recommend reading it. A few hours later, I came across Morgan’s tweet, which had the descriptor “motiveless substance.” I had to pause and re-read that phrase. It’s kind of an awkward comment. But, then I read it over a few times, and realized, it was perfect. Content-marketing in our world is only growing in popularity, partly because it’s cheap to produce and partly because it works, and it works really well. And, I am a small part of all this noise created we have to suffer with. And, I like to think what I write is of substance, but I’m not sure that’s always the case. And, I’d be lying if I said there wasn’t some motive buried deep inside what I do and continue to do. It is, then, with motive. But, true “motiveless substance” is rare and provides real signal. I hope to read more posts that fit this type of writing, and I hope one day I can write like Benjy.

Having a Presence in SF and NYC

Software and mobile applications can be developed anywhere in the world, especially today. Even hardware, for that matter. And specifically, two locations have created a strong community of technology creators separate from Silicon Valley: New York City and San Francisco. The density of activity has become so intense, investors on the west coast are flying out more often to NYC, are taking cars up to the city, and even opening satellite offices, hiring new colleagues (even at the partner-level), arranging to syndicate deals with preferred investors in new locations, and trying to learn the nuances of each new ecosystem. I believe all of this activity is moving in the right direction and entirely rational, with one caveat: To me, there’s a subtle difference between:

  • (a) “having an office in SF and/or NYC” versus;
  • (b) “having a presence in SF and/or NYC” versus;
  • (c) “being ‘present’ in SF and/or NYC.”

I don’t want to suggest that any one of these three approaches is better than the other, but they shouldn’t be confused with each other or used interchangeably, as they are fundamentally very different and directly effect the type of relationship investors have with not only founders, but also tech bloggers, operators in startups, PR professionals, and folks who are looking to jump from their current gigs into the startup world.

A Powerful Insight from Highlight

Highlight launched in early 2012, generated unsustainable buzz prior to SXSW, and entered a “quiet period” after everyone realized mobile battery performance was too valuable to spend unwisely. As is the case with new mobile products, I road-tested Highlight and subsequently erased it from my iPhone after a month. That’s not to say I didn’t like it. For a v1 product, I thought it was brilliant. Even the ability to “pause” highlight during times was well thought out. After a month away, I reinstalled Highlight and have basically kept it “on” every since, coming up on two months now. My use of it hasn’t been earth-shattering, and the app hasn’t required me to do anything special, and I have met some interesting people on it. And, after this second time around the block, I’m starting to see the bigger idea that Highlight (or other similar apps) could tap into — Push.

Here’s my logic: Back in the day, Google gained leverage by capturing our intent through search. We would hunt and peck for information, and Google delivered it to us. Then, when people with identities (or pseudonyms) came online into various social networks, the act of curation or the power of discovery grew in importance, making sense of the “mess” of information around us and offering “delight.” Today, and in the near future, mobile-specific services that are “always on” and run in the background could provide that next big delivery mechanism, pushing relevant information to us based on the strong API support from the handset makers and mobile operating systems, as well as information based on context, such as location. Today, Highlight periodically tells you when someone who is a second or third order connection via Facebook is around you, but in the future, a service like Highlight could tell you when your friends or colleagues are around, or when you’re nearby a store you love that’s having a sale, and so forth. That is a massive shift from the hunting and pecking we still do on our mobile phones and tablets — and more importantly, it’s a shift I’m looking forward to as a user.

The Organization of the Obvious

This is the initial post on my new blog. I decided to stick with WordPress, but opted to self-host in order to integrate Disqus for comments and customize portions of it in the future. I have two goals for this blog. One, I want to create original content about technology and startups on a daily basis. The posts won’t be long or perfect. They won’t look like what I’ve written on TechCrunch, or on Quora, or on my previous blog. They’ll be entirely different, I hope. Shorter, more direct, and more opinion. My style will be to frame questions that interest me rather than try to write long tomes or explain everything about nothing. And two, that’s where you come in. That’s why I researched all commenting systems and elected to invest in Disqus. My second goal with the blog is to ignite discussion, debate, and disagreement. I will invest the time to moderate. As a reader, you may post comments using identities from Facebook, Google+, Disqus, or Twitter. Finally, I must admit — despite my hopes — that I’m a bit skeptical folks will be interested in commenting given how much content is generated out there today and how fast it flies around. I’ve even caught myself saving items to Pocket and just skimming the headlines, never getting around to reading anything. In that spirit, I’m hoping that the small group of folks who start reading and following this blog actually don’t share it, but instead participate in a discussion, and hopefully one day, a real community. In the future, I’m even hoping to organize aspects of this blog in real life. That sounds like fun to me, but it will take some time to get there. As you poke around, some of the blog is missing or incomplete. It’s a work in progress, and I hope it gets better every week. Thanks for your time, and thanks for reading. First real post will hit tomorrow.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2016 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus