One of the many things that venture capital has taught me is the value of the long buy.
What I mean by a “long buy” is buying shares in a company over a long period of time. We have investments where we have bought shares seven or eight times over a ten to twelve year period.
There are a bunch of reasons why a long buy is so attractive:
1/ You get to learn more about the opportunity before committing significant funds and each and every subsequent investment is based on a better understanding of the business, the team, the market, the product, etc.
2/ You get to build a blended purchase price which is less dependent on the circumstances of a particular moment in time.
3/ There is often a moment, sometimes several, over the course of a long buy when the company or its market is out of favor, and you can aggressively step up your purchase on more attractive terms than were possible in the first few purchases.
4/ When you own a lot of each and every security (Seed, Series A, Series B, Series C, etc, etc), you are less impacted by the specific terms of any one of the rounds.
There is a special place in the venture capital landscape where this sort of investing is possible and practiced, and that is the traditional early-stage venture capital fund.
I saw this tweet coming out of the Upfront Summit yesterday (where I will be today):
It is great that the capital markets serving founders have become hyperefficient. Being able to get a round done in a week vs a quarter is huge for founders who have better things to do than run around the country talking to VCs.
However, there is a dark side to this trend and that is the reality that shotgun marriages don’t often work out so well. You might be able to get a VC into your cap table in a week but try getting them out. That’s almost impossible.
A friend asked me over the weekend “why do VCs ask for a management rights letter when they make an investment?”
A management rights letter is a short agreement between a company and an investor to allow them certain “management rights.” These are typically the ability to attend board meetings, the ability to have access to financial reports on a regular basis, and the ability to advise and consult with the management of the company.
While it is nice to have these “rights”, the need for this letter actually has very little to do with how venture capital firms want to work with a portfolio company.
The existence of these letters has everything to do with where the venture capital firms get their funds from. If a VC firm has pension fund investors who are subject to ERISA regulations (as USV does), then they need to be a “venture capital operating company (VCOC)”. And one of the best ways to make sure you are considered a VCOC is to have management rights letters for all (or most) of your investments.
Venture funds request these rights in order to obtain an exemption from regulations under the Employee Retirement Income Security Act of 1974. Absent an exemption, if a pension plan subject to ERISA is a limited partner in a venture fund, then all of the venture fund’s assets are subject to regulations that require the venture fund assets to be held Continue reading “The Management Rights Letter”
Here are the big things that happened in tech, startups, business, and more in the decade that is ending today, in no particular order of importance.
1/ The emergence of the big four web/mobile monopolies; Apple, Google, Amazon, and Facebook. A decade ago, Google dominated search, Apple had a mega hit on their hand with the iPhone, Amazon was way ahead of everyone in e-commerce, and Facebook was emerging as the dominant social media platform. Today, these four companies own monopolies or duopolies in their core markets and are using the power of those market positions to extend their reach into tangential markets and beyond. Google continues to own a monopoly position in search
I remember when my son came home one day in high school and told me he wanted to “day trade” along with some friends who were doing it. We opened a TD Ameritrade account and staked him with a small amount of money, enough to trade but not enough that if he lost it all it would be an issue. And off he went.
A few weeks later he asked me “Dad, what is a PE ratio?” So I said to him “you know that deli that you stop in every morning and get a bacon egg and cheese on the way to school?” He said “yes”. I said “let’s say tomorrow the owner says to you, I’m selling the business, do you want to buy it? We make $1mm a year in profits and have for the last thirty years.” Then I said, “how much would
The Gotham Gal and I met when we were 19 and got married when we were 25. We lived together for most of those six years before we got married. By the time we tied the knot, we knew each other very well.
While venture capital investing and marriage are two different things, I think there are some things one can take from love and marriage into the world of startups and venture capital investing.
One of them is the value of long engagements.
I have never understood why founders want to run a lightning fast process to select business partners who they may have to “live with” for the next seven to ten years.
And yet we see this behavior all of the time. Often it is driven by other VCs who toss in “preemptive term sheets” thus turning a fundraising process into a sprint.
One of the unique things about early stage investing is the ability (and in my view, the need) to continue to invest in the companies for multiple rounds of investment.
Late stage, public market, private equity, real estate, and most other popular forms of investing typically involve a single or a time limited series of investments.
But at USV, we typically will make four to six investments in a “name” over five to seven years.
And we do this style of investing with a fixed pool of capital.
So we have gotten very analytical about modeling out our reserves for our follow on investments.
What we do is maintain a spreadsheet of every investment in a given fund and the likey amount and timing of future follow on investments as well as the probability of us having the opportunity to make those investments.
I have been vocal here that I do not like the term Unicorn to describe highly valued venture-backed startups. Unicorns are mythical creatures that don’t really exist and highly valued venture-backed startups do exist. They might be rare, but they are not fictional.
A better word would be Whales. And it turns out that the Whaling industry in the United States in the 18th and 19th centuries looked remarkably similar to today’s venture capital business.
Some of my friends and colleagues have been texting and tweeting about a book called VC: An American History by Tom Nicholas. So I got it on my Kindle and the first chapter is all about the Whaling industry and its similarities to the VC business.
Here are some photos I took of the first chapter on my phone.
This is a chart that plots the distribution of returns by whaling voyage vs venture capital
Being a Knicks fan teaches you a lot about disappointment. At one point this spring, we thought we were going to get a couple top free agents and the first pick in the draft. We ended up with a lot less.
Fortunately, I have learned a lot about disappointment in three decades of backing early-stage startups. Our business is one where a third of things we do don’t work out at all and another third deliver a lot less than we had hoped when we pulled the trigger. Only a third of our investments deliver on what we expected when we made them.
Fortunately about ten percent of the investments we make so vastly outperform our expectations, that they make up for everything else we do.
So we live with a lot of disappointment. And one of the questions I struggle with is how much of that disappointment do we
USV portfolio company goTenna‘s founder and CEO Daniela Perdomo and USV analyst Dani Grant did some number crunching on VC funding and published the info last week.
After 4 rounds of VC, I ran my own data analysis to see if my experience is unique. Women founders in female-focused sectors raise equitable VC, but women in non-female sectors raise 54% less than their fair share. In deep-tech, women raise up to 75% less! https://t.co/4Fvfor3DXD
A new blockchain & cryptocurrency project, Libra, was announced today. Libra has been incubated by Facebook. USV will be one of the founding members of the governing body, the Libra Association. Libra is a stable, fiat-backed cryptocurrency that will launch inside some of the world’s largest consumer-facing applications. We believe Libra has the potential to be the catalyst that brings the entire cryptocurrency and cryptoasset market into the mainstream.
When USV invested in Coinbase in early 2013, our rationale was that digital currencies and digital assets (like Bitcoin and beyond) were a breakthrough technology, similar to TCP/IP, HTTP and SMTP. But we also knew that it would take significant investment in the surrounding infrastructure to make them useful for businesses and consumers, just like it did with the Web back in the 80s and 90s. At the time of that investment, we wrote:
I have worked in three venture capital firms over the last thirty-three years and am intimately familiar with the performance of the fifteen (ish) venture funds raised and invested by these three firms. Much of what I have written about fund management and investment performance here at AVC over the last sixteen years comes from my observations of these funds and firms.
Starting in the mid-00s, The Gotham Gal and I started investing in other venture capital funds, always limiting these investments to firms where we knew the partners well and had sat on boards with them.
And The Gotham Gal started angel investing around the same time, often writing the first check into startups. She has made something like 140 angel investments over the last dozen years, mostly into companies founded by women.
We keep good records on these personal investments and I now have another data set to
I have never been a fan of convertible notes. USV has done quite a few convertible and SAFE notes. We are not opposed to convertible and SAFE notes and will not let the form of security the founder wants to use get between us and investing in a company that we like.
But I continue to think that convertible and SAFE notes are not in the best interests of the founder(s).
Here is why:
They defer the issue of valuation and, more importantly, dilution, until a later date. I think dilution is
My former venture capital firm, Flatiron Partners, that has not been actively investing since 2000, made its final investment in Return Path in mid-2000. I joined the board shortly after that and have been working with the founder and CEO Matt Blumberg ever since.
In many ways, this company and this entrepreneur define my career more than any other. Matt and I stuck with this
I am not exactly sure what it is about this year, as opposed to any of the last five years, that has drawn all of these highly valued private companies into the public markets, but here we have it.
It does take a number of years for a privately held company to prepare to be a public company. They need to get their finance and legal houses in order, they need to beef up their teams in these areas, and they need to make sure they have a repeatable business that they can manage under the spotlight of the public markets.
Already we have seen S1s from Lyft, Pinterest, and Zoom. And we are likely to get them soon from