Life Changes

One of the fun, and sometimes sad things, for me about being a VC is the life changes that people in companies we are fortunate to be a part of go through.  Babies get born.  People get married.  Kids get sick.  People get sick.  Sometimes people pass away.

I think people get hung up on the numbers in VC.  What’s your cash on cash return?  What’s your IRR?  How much money did you make?  What was the pre-money when you invested?

They forget that this whole VC thing is a people business.  When I was on the trading floor it was the exact same thing.   If you are a good VC, you form a personal relationship with the people that let you invest in them.  After all, even though you can write a Harvard Business School case about every deal, it’s the blood and guts that matters, not what’s Continue reading "Life Changes"

Perpetrating a Fraud

I noticed Elon Musk wasn’t too happy with the press he has been getting.  First the wild melt down on the analysts call and now the tweeting.  Holman Jenkins of the WSJ wrote an article yesterday about it.

There have been other frauds out of the startup world.  The idea seems so magical and the person behind it is so good at selling it along with other tailwinds propelling it we want it to be true.  Theranos, UBeam, and others have proven to be snake oil.

I was involved in a deal in Chicago where a guy took a photo of himself, gave a fake Fed wire and wired a rubber check to an entrepreneur.  People are not always what they seem.

I think Musk is a tremendous entrepreneur.  I don’t think Tesla is a fraud.  It just doesn’t make money.

In startups, really stupid ideas that are cool if Continue reading "Perpetrating a Fraud"

Do They Have “It”?

One of the best parts of Ben Horowitz book “The Hard Thing About Hard Things” is his section on hiring and firing.  In it, he talks about hiring a guy to head up sales for one of his companies. The guy didn’t have a textbook resume.

He wasn’t from a name school.  I recall he was a college grad from Southern Utah.  That sounds like a salsa commercial in the making.  He didn’t have the right background.  But there was something about him that Ben liked and connected with and he hired him.

The guy crushed it.

I think that is one of the toughest things in hiring and firing is figuring out if the person has the right stuff to do the job they are being hired to do.

When people are analyzing other people, they often use heuristics.  They look to de-risk the decision and often they are Continue reading "Do They Have “It”?"

And That’s Entrepreneurship

This was a pretty good video. I don’t know if you ever heard Frank Zappa or not. He was popular when I was in high school and college. He was an avant garde artist. Not your typical rock and roller. He was pretty smart and an intellectual. He would be what I would call a classical liberal.

Zappa’s music wasn’t played on the radio a lot. He wasn’t a Top 40 kind of guy. He died way too young of cancer. I would love to see his take at the way the music world, and the world in general has evolved today. “I knew you’d be surprised.” Zappa aficionados will know which song that line comes from.

His words ring true when I think about venture funds. You hear a lot of crap these days. Lots of important sounding stuff. Lots of buzz words. Broken promises. Some of the Continue reading "And That’s Entrepreneurship"

If You Raise ICO Money

Yesterday Fred Wilson wrote about two failure modes in startups.  He’s right.  I want to riff off the comments and talk about ICOs.

ICO money is weird.   It is non-dilutive to the equity capitalization table. When it comes in, the accounting is more like an insurance company than anything else.  In an M+A transaction, it most certainly would be counted in the valuation of the company as cash, but I am not sure the tokens that sit on a balance sheet would be worth anything.

Let’s say I am a startup and I have $100K per month in top line revenue.  I’d be at Series A or on the edge of Series A.  Instead, the company does an ICO and raises $20MM in ICO money for a token.  Assume $1 per token and there are 100 million tokens with 20 million issued.  The token can be commoditized or securitized, Continue reading "If You Raise ICO Money"

Perspective on Tech: There Will Still Be Jobs

Our first daughter was born right about the time this ad ran. Pretty amazing how things changed 16 years later.  As this article pointed out, almost everything on this piece of paper now fits in your pocket and costs you a lot less.  This is especially true if you compare 1991 dollars to 2018 dollars. $1 then is worth $1.84 today.  The cumulative inflation rate is 84%.  The calculator that now is swag that you get for free was around $30 when I was in high school.  It also didn’t have a solar battery.  You can see the effect of new technology on the price of it.  It’s advertised for 39% off at $4.88 (on the way to please just take it).

Bitcoin enthusiasts will focus on the 84% inflation rate but they will be wrong.  Bitcoin can divided.  Gold hasn’t appreciated in value since Continue reading "Perspective on Tech: There Will Still Be Jobs"

Getting It Ready to Scale

Entrepreneurs are a fun bunch.  They look at the world differently.  Or, as my friend Tom aptly describes them, “They are doers”.  I love that description.  They come across problems, then they try and solve them.  Sometimes when you are around them it can be uncomfortable because they ooze intensity.

However, solving a problem and building a business are very different things.  Just because you built a better mousetrap doesn’t mean you are going to get wealthy selling it.  This is the huge trick in entrepreneurship.  How do you find product/market fit?  How do you get your business ready to scale?

In the B2C world, the path is pretty well beaten.  Get a bunch of users using a freemium model.  It might be an ad play.  It might be a lead gen play.  You have to tap into a big enough user base that you can generate the money on Continue reading "Getting It Ready to Scale"

What’s It Mean to Fire Fast

Yesterday I was at the Foley and Lardner Tech event in Chicago.  The first panel had some successful entrepreneurs on it talking a bit about their journeys.  One of the questions was on getting rid of people that were not propelling your company forward.

I want to make sure that everyone understands we are talking about employees here, not founders or co-founders.  That’s a different issue entirely.

One entrepreneur said, “Imagine yourself sitting behind your desk and having a person come into your office and tell you they were leaving the company.”

If you are happy they are leaving, it’s probably the right decision.

We have trouble firing people for a lot of reasons.  One is our own admission of failure.  It was probably the entrepreneur that hired the person in the first place.  It’s sometimes hard to admit that it’s not going well because you feel like you Continue reading "What’s It Mean to Fire Fast"

The Drag Along Right

Enough has been written about drag along rights that I don’t want to write specifically about them.  Here is what it looks like in a term sheet:

Drag-Along Agreement: The [holders of the Common Stock] or [Founders] and Series A Preferred shall enter into a drag-along agreement whereby if a majority of the holders of Series A Preferred agree to a sale or liquidation of the Company, the holders of the remaining Series A Preferred and Common Stock shall consent to and raise no objections to such sale.”

Brad Feld does a fantastic job describing what they are here (2005)

I have done enough deals to recognize when a lawyer doesn’t really understand venture.  Because of the explosion in various startup communities across the US and world wide, along with the explosion of crypto, I think it’s worthwhile to revisit the term and really understand Continue reading "The Drag Along Right"

What’s The Upside And Downside?

Coinbase is opening up a Chicago office.  Smart move by them.  Chicago is the best place in the entire world to find human capital talent for Fin Tech.  It’s not happenstance that Max Levchin grew up here, went to the University of Illinois and created PayPal.

If you are operating a B2B Fin Tech company and trying to do it outside of Chicago, you are operating with one hand tied behind your back.

Two nearby universities churn out all kinds of fin tech talent.  Chicago Booth is respected across the world for it’s graduates who get MBAs concentrated in finance.  There is also the legendary economics department at the University of Chicago.  The University of Illinois Gies College of Business has more CFOs of the Fortune 500 companies than any other school.

The largest exchange in the world is in Chicago, CME.  The largest options market in the world is Continue reading "What’s The Upside And Downside?"

Why You Can Be Bullish Crypto, Even If The Price Goes Down

One of the things you hear about crypto is that it is a fraud.  There is no doubt that some crypto will be a fraud.  They created an idea and some rudimentary tech and took the money and ran.  There is no doubt there will be future frauds in crypto.

Where there is money to be had, there is always fraud.  There is a Bernie Madoff just around the corner somewhere.  Remember, he was “respectable”.

A lot of people think that speculators entering the market is a sign of a more tangible fraud.  That’s not the case either.  Traders making wild predictions on price don’t help though.  The answer is “nobody knows”.

Nope, the true promise of cryptocurrency lies in something even deeper.  It’s ingrained into the human soul. Humans are hard wired to seek out gains from trade.  Division of labor is a part of that.  Allocation of resources Continue reading "Why You Can Be Bullish Crypto, Even If The Price Goes Down"

Sometimes It Doesn’t Work Out

One of the things that people hear about when it comes to startups companies is the rate of failure.  The failure rate is 50% or more depending on how you measure it.  If you are an investor with eyes wide open, you know that this is part of the game going in.  The path to exit is not linear and the path to failure is often not linear either.

The venture business is a home run game.  Other VCs have posted about how they swing for the fences.  Some have posted about how it’s the middling part of their portfolio that takes a lot of their time but if they can get it from 2x to 3x it sure makes a big difference in return.

Companies weave their way through this process. Abrupt failure is rare.  Usually it’s death by a thousand cuts and companies just seep blood until they Continue reading "Sometimes It Doesn’t Work Out"

Ycharts +TD Ameritrade

The news came out last week but it is worth highlighting. Ycharts integrates with TDAmeritrade now on their Veo One platform.  Ycharts is a B2B Fin Tech company I invested in back in 2009.  Their target market is RIA’s, wealth managers, hedge funds and other firms like that in the investor universe.

Ycharts is like a Swiss army knife for investors.

I have used it successfully to pick strike prices for options trades.  It is the best research terminal on the web.  It’s not for moment to moment trading. It’s an example of the quiet things going on behind the wall that you might not notice because it’s not on your phone.  But, they add a lot of value.

 

The Bond Gods

When we were changing CME there were factions of people that said, “open outcry will not die”.  I remember doing some research about things that happened behind the wall.  Open outcry and the pit was the front, the main course.  I was interested in what was happening in the back of the restaurant.

What we found was that most of the brokerage in US Treasuries and other big credit markets was all done by “voice brokers” on a squawk box.   It was a telephone market.  Even in the Eurex Bund options.  That was interesting because the Eurex was this monolith that had wrested the German debt market from the LIFFE and was supposedly going to electrify everything and put us all out of business.

Yet, their option market wasn’t really an electric market at all even though it appeared to be.

In the Financial Times-no link because the paywall Continue reading "The Bond Gods"

Does Your Company Have Fizz?

At the Chicago Booth Management Conference I listened to a panel on data and marketing. One of the people on the panel was a person named Ted Wright.  He graduated from Chicago Booth in 2000.  He is a marketer and runs a company called Fizz out of Atlanta.  They are the global leader in word of mouth marketing with every client in all major categories.  They have consistently delivered triple digit ROI to clients over a number of years.

Marketing is something that has always fascinated me even though I have been in finance virtually my entire career.  I did my undergrad in Marketing at Gies College of Business.  Ted wrote a book about word of mouth marketing.  If you are building a consumer brand it is a must read.

I picked up the book because I wanted to learn some word of mouth marketing concepts and see if Continue reading "Does Your Company Have Fizz?"

Should The SEC and CFTC Regulate Cryptocurrency?

Over the past couple of weeks, I have talked to a person that works at the SEC and a person that works at the CFTC on crypto.  It’s been interesting to listen to them.

One of the things I find refreshing is that both agencies are working together towards a solution to outlining regulatory guidelines for crypto.  They seem to be treading carefully so there are no turf wars between the agencies.  They also seem to be going slowly to be respectful of the fact that crypto is more than a product, a stock, or an instrument but they recognize that it is also a technology.

I think we can point to lots of instances where the federal bureaucracy became the boogeyman when it comes to regulation. Regulations set up bad incentives and markets failed.  Conversely, regulations could be so onerous that they broke the economics of the business and Continue reading "Should The SEC and CFTC Regulate Cryptocurrency?"

State of Seed Stage Investing

Two days ago, I talked about investing.  Yesterday I linked to a great tweetstorm about private investing.  Today I’d like to pick up on seed stage.  I thought this Medium article was interesting.  The author, Natalie Dillon, did a great job, and I put her quotes in italics.  There is a lot to unpack here and the data she presents should be a good guideline for entrepreneurs as they think about how to raise funds, and how much to raise.

“Dollars into seed deals remains high, deal count sees sharp decline.$1.6B was deployed into 727 seed companies in Q1. “

Me being Captain Obvious sees bigger seed rounds but less of them.  The interesting thing is what Thomas Tungaz wrote about optimal seed round sizes.  33% of companies raise a Series A.  It’s also not that important if you raise from angels Continue reading "State of Seed Stage Investing"

Will Private Investing Be Disrupted?

Yesterday I linked to a tweetstorm about private investing. Here it is.

I love the thought in this a lot. I can take both a position of agreeing with some of his points and even if I agree with him I can make the counter argument. That’s what is fun.

Basically, the assumptions are that incumbents often don’t see innovation coming. They double down on existing strategies because they work and then use the older strategy to fight off innovation. Ryan’s point is the incentives for fund managers are wrong-that their only incentive is to raise larger and larger funds so they can skim larger and larger management fees.

In some cases, he’s correct. In others he is wrong. If managers have a ton of their personal capital in the fund, that logic doesn’t wash. I know funds where managers are 30% of the capital. It also Continue reading "Will Private Investing Be Disrupted?"

The State of Private Investing

There are winds of change in the private investing world.  Yesterday I was in a meeting and we were talking about it.  I mentioned that I truly believe people should be in charge of their own capital with no limits put on them by government.  If a blue collar worker wants to toss some money in a risky startup, they ought to be able to.  Suppose Facebook would have crowdsourced its initial seed round.  $1000 bucks would have been life changing to a large segment of the population.

I also dislike companies staying private longer.  It doesn’t let people who only have access to the public market grow wealth.  Pension funds don’t have access.  It’s not that it is not fair, it’s just not right or American.

Ironically, I saw a beautiful tweetstorm discussing private investing and a Medium article that talked Continue reading "The State of Private Investing"

Learn At Lunch: Cryptocurrency

On June 1, I will be co-hosting a learn a lunch with a bunch of colleagues at the University Club in Chicago.  We are starting a new group in the club.  The group is going to be dedicated toward educating people on issues in financial services and technology.  It’s not a stock pickers club.  Lunches like this are not expensive. Typically it is just $20-$30 bucks.

Chicago has a wealth of talent when it comes to finance.  Just in my little group of co-hosts, we have one of the top SEC attorneys in the country, a hedge fund manager, an accountant that has 40 years of experience and a top fin tech attorney when it comes to payments and exchanges.

A number of years ago, James Koutoulas and I did an impromptu lunch on exchange clearing and the MF Global situation.  It was well attended and it was liked.

Our Continue reading "Learn At Lunch: Cryptocurrency"