Apple watch underwhelms. Another Hype over Fact example

July 20, 2015

One downside of a swirling, Twitter-fed, Facebook-liked echo chamber is the increased frequency of Hype overwhelming Fact.

Hype is when people collectively believe something yet the underlying Facts belay that belief. A few examples:

  • Justin Bieber is the greatest performer of our era
  • Lance Armstrong is an American hero
  • Uber is worth $40 billion
  • The Apple Watch changes everything.  It’s the next big thing.

Turns out, none of those appear to be true.  Bieber’s 15 minutes is over, Lance is actually complaining that athletes in this year’s tour might be doping, and we’ll see if Uber grows into it’s valuation.  Then, there is the Apple Watch.

Apple has yet to announce sales numbers for their Apple Watch, and rumors of higher returns and falling sales have led the Hyped to simply lower expectations.  There’s a great in depth blog on it here, if you’re curious.

I receive a daily feed of venture-backed companies whose financings are announced that day.  It is breathtaking the amount of money that is going into business whose potential for exit are modest.  Or, I guess I should say, the investment thesis is predicated on virtually everything going right.  Everything never goes exactly right.

Edward Chancellor, in his excellent book “Devil Take the Hindmost” describes the psychology of market bubbles, from the Dutch Tulip bubble to the internet crash.  Hype has ever been with us, including the 1830’s railroad bubble, when the cumulative valuation of all railroad startups exceeded the size of US GDP.

So, let’s not give in to the mass hysteria, folks.  For me, there is one clear takeaway from Chancellor’s book:

If you hear “this changes everything”, it’s time to head for the exits.

Reddit’s easy fix

July 17, 2015

Are you following the hand wringing over Reddit? If not, the problem is that a few people say terrible things there. And then Reddit tries to figure out how to stop it without infringing on the sense of ownership that users have for the content they help create. But deciding where the lines are and what crosses the lines is hard. After all, Google links to ALL SORTS of terrible things (seriously, click on that link at your peril), but since they don’t host all that terribleness, it’s all OK.

The controversial CEO Ellen Pao has left, and people are clamouring for “real leadership”.  This is not a “leadership” problem any more than global warming is a “sunshine” problem.

Rob Labatt and I have been discussing Reddit’s dilemma, mainly because we’ve lived through it.  Rob was CEO of a company called ezBoard, where I invested.  ezBoard grew to be a giant host of discussions of all kinds, circa 2000-2008.  We had the exact same problem as Reddit, and struggled over it in the exact same way (minus blaming the CEO — Rob was great).  The challenge is less about leadership and more about the nature of online communities.  They are, let me not say “unruly”, let me say “heterogenous”.

And, beyond attempts to play moral policeman, it’s also hard to get advertising dollars for a website that has folks saying things with which Safeway or Ford Motor Company would rather not have their names associated.

GOOD NEWS:  There is an easy fix.  The easy fix will temporarily reduce some of Reddit’s traffic but shine a fantastic light on the shady neighborhoods, and it’s this—

Make Reddit users use their real names.

It’s far easier for bad behavior to hide behind anonymity, that’s why mobs can be so destructive.  That’s why the Ku Klux Klan wear hoods.

Facebook, the most successful social network in the world, requires the use of real names.  I have a friend who is working to legally change her name, but until she does, Facebook won’t let her use the name by which everyone knows her.  So it can certainly be done.

Then, the people who need to hide behind anonymity will go to some other site that allows for that sort of thing, and we can campaign to root them out from there as well.  Keep Reddit to its original theme of Democracy Re-envisioned.  Well functioning democracies require ID for voter registration, so Reddit should take a hint.

And it removes much of the problem without Reddit trying to play policeman.  There will still be occasions where Reddit will have to remove content, but I guarantee those occasions will be drastically reduced.  Real names is the single biggest change to allow Reddit to move on from this series of bad PR and destructive moves.

Too many convertible debt rounds

July 17, 2015

This for my venture capital readers: Convertible debt is being used for too many financings.

For non-VC readers, an aside.  Convertible debt is like a loan to a start-up company while they prepare for a traditional “investment round” which is when the investor purchases equity shares in the company.  The convertible debt “converts” into equity when that traditional round comes along.

Got it?  Wait, there’s more!  The convertible debt has a “cap” on what price it will convert to in a financing, and there is sometimes a discount of 15% to 25% as a small financial benefit to the debt holder.  In an “investment round” the equity purchased by investors is “preferred” rather than “common” stock which includes a whole slew of financial advantages (paid first in a sale, can participate in the next financing round), control advantages (board seats and voting rights), and exit freedom (influence on the type and price of exit or financing).

There should be an entire series of posts on those things, so stay tuned for when I get around to that.

OK, I understand the allure of convertible debt for entrepreneurs, they get to do a rolling close (raise money as they go rather than wait for the entire target amount), set their own price (via the cap and discount), and have low legal fees. But as convertible debt rounds increase to be the size of Series A rounds from three years ago, it’s gone too far.

Here is what you, dear investor, are investing in with your millions:

1) No board seat
2) No control provisions
3) No pro-rata in the next round of financing.
4) The 15% discount is not representative of the risk or progress made, particularly when the cash will last the company a year.  To wit:  who believes the company is only worth 15% more after a year?  If you believed that, you should not have made the investment.
5) no start to the timer for tax rollovers for small business investments after 5 years (effectively, a 30% impact on your exit value)

And you, entrepreneur, are missing out on a few things as well:

1) a down round after taking debt is like “full ratchet” anti-dilution, meaning 100% of the down pricing is suffered by entrepreneurs, not investors.  While you believe your success is always up and to the right, that belief might be because you haven’t lived through the last two venture industry downturns.  We have one about every 8 years, which means it’s time for the next one.
2) possibility of friends and family in convertible debt getting screwed by the preferred investors, since the debt has no control over financing.  Then they don’t trust you, and you don’t get to start another company if this one goes bad (which odds are, it will)

These thoughts have been building for a time, but came to a head after reading Brad Feld’s complaints about an investment made by VCs after Brad’s seed investment.  You can glance at that here.

While it might not be the best practice for VCs to step on their fellow VCs toes, Brad’s complaint is, really, that he’s using a tool that doesn’t protect him, and that’s the reason that Series financings have been developed over the last 50 years.  The standard terms in preferred stock investments have been honed over those 50 years, and incorporate all the protections created after bad actors did bad things over 5 decades.

What surprises me, though, is that abuses don’t happen more.  Give enough people $2 million at a time with no constraints, and some portion of them will buy new cars or  throw a party featuring the Dixie Chicks.

The favor economy vs. the show-off economy

June 15, 2015

I received an email from a work acquaintance today. It’s in a stack of about 500 emails, some from people I interact with regularly, some from strangers. This acquaintance was in the middle of the friend vs stranger spectrum, but when performing triage on all those emails, he was among the most important.

The reason? He once did me a favor.

Specifically, he came and spoke in my venture capital class. So now, he moves to the top of the queue when he emails me.

It occurs to me that I do this all the time. The nature of the venture capital business is one of being nice to, and hopefully helpful to, a whole range of people. I try to do favors whenever I can. In the back of my mind, I hope that one day this will work out for me. Someone will send me a great deal, a great connection, an investor in my fund. But I don’t keep track. There is no tally of gives and gets. This isn’t accounting for money. These are favors. And not the mafioso “now you owe me” favors. Just nice things.

In addition to venture capital, it seems that business, politics, entertainment, athletics, basically all fields of human endeavor are fields where relationships can be the difference between success and failure.

As our culture moves more and more towards “look at me” and “I’m great” public projections of our fragile egos, it seems that relationships, and getting ahead, would benefit more from a favor economy than a show-off economy.

Now, if only I could find an app for that.

VCs as TV Stars

December 11, 2014

Dave McClure of 500 Startups, a seed fund in Silicon Valley, has just announced that he’s going to be the star of an Anthony Bourdain style reality show (it is in fact produced by the same company).

This raises an interesting question for venture fund strategy: Does star power improve financial returns?

This is an important question because Limited Partners in venture firms entrust their capital to the firm’s partners (in this case about $50m or so) with hopes of multiplying that capital. The focus is the money, and by extension, the companies the money flows to. If the focus becomes the personalities managing the money, will that lead to distraction? Is the eye still on the financial ball?

Or, craftily, will Limited Partners say “Hey, that guy is interesting and smart and not afraid to use F-bombs on TV, I want to give him millions of dollars to invest for me!” ?

Will the world’s best entrepreneurs say “I like how entertaining he was with that company he invested in. He deserves to invest in my company more than Greylock or Sequoia or NEA!”?

Dave, I count you as a friend. We need to see each other more. Could it really have been as long as the last clove cigarette encounter? Anyway, I’m interested in your thoughts on this one. OK, I’m interested in other readers thoughts as well. What do you think?

15,000 passengers try to fill lifeboats which hold 1,500

November 17, 2014

15,000 people are on an (admittedly large) ship, preparing to steam through treacherous North Atlantic seas. On this particular trip, forecasters put the odds of hitting a cataclysmic iceberg above 50%. The ship has lifeboat space for 1,500.

Do you get on the ship?

If the “ship” is “starting a seed funded company”, then I bet you do. The “icebergs”, of course, are the chance that your company runs afoul of its primary problem — lack of cash.

It turns out that, depending on your data sources, about 15,000 companies are funded by seed funders — everyone from Angelist to your Uncle Beavis. But only 1,500 companies per year are subsequently funded by Venture Capitalists.

Now that’s OK if a few hundred kilobucks is all you need for the life of your company.  But the odds of  a seed backed startup hitting an iceberg, of running out of cash, are quite a bit above 50% in actuality.  If you need more capital, and your rich Uncle Beavis is all tapped out, then you’re going to need more. And VCs are investing in just 10% of you. The “lifeboats” are full. Enjoy the swim; the water is cold.

As a startup company, don’t forget this key point: If you are a money losing entity, your “customer” is more money. The money it takes to get you to cash flow break even is the “lifeboat”. Before cash-flow breakeven, having thousands of downloads of your mobile app, garnering paying customers, or building great product technology are only relevant to the extent that they get you more capital to keep the ship afloat.

And that later money, that lifeboat, is ten times harder to get than the ticket that got you on this leaky ship.

My genomic breeding nightmare

September 30, 2014

For everyone worried about being dominated by our robot overlords or an impending zombie apocalypse, I have a different fear — eugenics style genomic breeding programs.

This from a fellow VC investing in DNA testing companies:

“Already underway in (country x).  Genetic testing is 100x less expensive than when Craig Venter did it first, and over the next 5 years it can become cheap enough that you’ll get you’re DNA tested every time blood is drawn in order to look for changes.”

So (country x) is testing Nobel Prize winners, smart kids in class, and athletes to build a model of DNA markers that create these positive attributes.  Then, they can easily clone a mother’s egg 10,000 times or so, expose them all to spermatozoa, and then test the combined DNA of those 10,000 embryos.  The parents, or (country x), can pick the one with the best genetic markers for genius or athleticism or whatever.”

Voila.  Engineered kids.

I wonder if the smart ones will also have Aspergers symptoms, or the strong ones will have academics bred out of them.  It might be scary, but if they find the DNA marker for “Teenage Irritation Syndrome” I might be a customer.  We could dial that down.


Join the 9 syllable poetry movement

May 6, 2014

I was listening to a radio story about poetry, something we all think we know a lot about. Well, my interpretation of the goal of poetry is to convey a complex story or feeling in as few syllables as possible. For you millennials, poetry is a type of constrained communication — just like Twitter.

Sure, meter and rhyme can matter as well, but it was the frugality of words that struck me. And, in a strange act for a non-poet, I came up with the following:

“Cut costs”
said my spouse,
who costs a lot.

Maybe not for you, but this conveys a complex relationship between two people in just 9 syllables.  Even shorter than haiku.  Is the poet a man or a woman (my wife insists I tell you it’s not me speaking)?  Is the person quoted fearful or just fiscally conservative?  Is the speaker’s view the truth or just a faulty perception?  The poet, receiving this news, has an opinion about the speaker.  But is “a lot” of cost = “too much” cost?  Or is it the speaker’s hypocrisy that is at issue.  For that matter, what exactly are the costs that the spouse incurs — purely monetary?  What will happen next…

SO TRY IT!  respond here with a 9 syllable poem.  Need not rhyme.  It does not need the 2-3-4 syllable structure of my lines.  We can start a movement.

How did you spend the “bonus year”?

April 25, 2014

April 10th has come and gone.  It’s the anniversary of my narrow escape from death by car.  Read about it here.

As it turns out, during the exact moment of this anniversary, I was teaching a class at Stanford.  This is roughly what I said to class:

Exactly one year ago to the minute, I nearly died when a car hit me while bicycling.  I was lucky — my injuries were minor and the geometry was fortunate — just 6 inches to the left and I would have been far worse.

During the same week last year, in an accident very similar to mine, Joy Covey, founding CFO of, friend of many in Silicon Valley, had less fortunate geometry.  While on a lunchtime ride, she was hit, and she died.  At the end of the school day, her son waited for her on the curb as he always did.  And waited.  And waited.  Just imagine that waiting.  Mom always comes.  But not that day.  In the confusion and grief, no one told the school or went to console her son.

So I was given a bonus year, to do something more.  Today I went on a bike ride as my secular prayer, and to reflect on how I have used the year.  I find myself lacking.  I didn’t laugh enough.  I didn’t make other laugh enough.  I didn’t accomplish enough.  I have work to do on me and in the world.

What have you done in the last year?  And what are you going to do in the next?  Today could be the beginning of your bonus year.  We could celebrate it together.  It will be a year we won’t waste.  One we value, savor, build.  And next year, on April 10th, we could get together and judge our performance, and urge ourselves towards more.

You owe your parents’ debts from 30 years ago. Plus puppy photos

April 22, 2014

This blows my mind. If your parents were (maybe) overpaid by the government for things like social security or welfare, you will have to repay it, even if it was 30 years ago. This from the Washington Post (April 10):

A few weeks ago, with no notice, the U.S. government intercepted Mary Grice’s tax refunds from both the IRS and the state of Maryland. Grice had no idea that Uncle Sam had seized her money until some days later, when she got a letter saying that her refund had gone to satisfy an old debt to the government — a very old debt.

When Grice was 4, back in 1960, her father died, leaving her mother with five children to raise. Until the kids turned 18, Sadie Grice got survivor benefits from Social Security to help feed and clothe them.

Now, Social Security claims it overpaid someone in the Grice family — it’s not sure who — in 1977. After 37 years of silence, four years after Sadie Grice died, the government is coming after her daughter. Why the feds chose to take Mary’s money, rather than her surviving siblings’, is a mystery.

We all know our government is the world’s best accountant, so their record must be right.  Right?  Who’s with me?  No one?  Hello?  I guess you’re right, it turns out that even though the Social Security Administration was sending Grice’s SS checks to her current address, they were sending notices of this debt to her old address from 1977.  OK, maybe their record-keeping is pretty shoddy.  But you still owe them whatever they say.  It’s like the old child’s game — “I’m thinking of a number between $100 and $100,000…”

Debts belong to adult individuals or adult married couples.  They do not pass down through generations, or else Bernie Madoff’s great grandkids are going to be bumming.  We do not have debtor’s prisons.  Oh, wait, we are trying to bring them back.

This feels like the freedom pendulum swinging towards business and government rather than having laws which protect individuals from those with more power.  Because of this, you are going to have to start keeping your parents old tax returns for 50 years in a vain attempt to save yourself from retroactive penalty.  Because there is no recourse here.  Also from the Washington Post:

Grice was also told there was little point in seeking a waiver of her debt. Collections can only be halted if the person passes two tests, Clark said: The taxpayer must prove that he “is without fault, and [that] repayment of the overpayment would deprive the person of income needed for ordinary living expenses.”

More than 1,200 appeals have been filed on the old cases, Clark said; taxpayers have won about 10 percent of those appeals.

Now if the Social Security Administration can just combine this with the NSA snooping databases, they can start demanding money from you if you say bad things about the government.  Uh, um, right.  About that.  I’m not saying bad things.  This isn’t critique.  Really, sir.  This is just a light-hearted reflection on Labradoodles, this year’s designer dog:



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