Category Archives: Silicon Valley

Good read from Fred on convertibles

Not cars but notes :: http://avc.com/2017/03/convertible-and-safe-notes/

His reasons about why not to do are so good.

2. They obfuscate the amount of dilution the founder(s) is taking. I think many investors actually like this. I do not. I believe a founding team should know exactly how much of the company they own at every second of the journey. Notes hide this from them, particularly the less sophisticated founders.

This one is good. Many times I find even that the founders don’t know what they are talking about and have not figured out their own dilution. They also may not have carved out something for the ESOP and are not taking that into consideration as well.

3. They can build up, like a house of cards, on top of each other and then come crashing down on the founder(s) at some point when a priced round actually happens. This is the worst thing about notes and doing more than one is almost always a problem in the making.

This is the one we see too many times. Rolling notes or extended notes that take a serious Excel expert to figure out how each round is actually priced and who owns what. You have to be careful about this so that you know what each round is doing and how to calculate the dilution.

4. They put the founder in the difficult position of promising an amount of ownership to an angel/seed investor that they cannot actually deliver down the round when the notes convert. I cannot tell you how many angry pissed off angel investors I have had to talk off the ledge when we are leading a priced round and they see the cap table and they own a LOT less than they thought they did. And they blame the founder(s) or us for it and it is honestly not anyone’s fault other than the harebrained structure (notes) they used to finance their company.

Yup. Also, see this. They over promised angels with too high a valuation cap and once you see a few rounds of this by the time you actually calculate it all one will find the dilution and ownership.

The list of stuff he says to do is gold. Freaking gold:

Here are some suggestions for the entire angel/seed sector (founders, angel investors, seed investors, lawyers):

  1. Do priced equity rounds instead of notes. As I wrote seven years ago, the cost of doing a simple seed equity deal has come way down. It can easily be done for less than $5k in a few days and we do that quite often.

  2. The first convertible or SAFE note issued in a company should have a cap on the total amount of notes than can be issued. A number like $1mm or max $2mm sounds right to me.

  3. Don’t do multiple rounds of notes with multiple caps. It always ends badly for everyone, including the founder.

  4. Founders should insist that their lawyers publish, to them and the angel/seed investors, a “pro-forma” cap table at the closing of the note that shows how much of the company each of them would own if the note converted immediately at different prices. This “pro-forma” cap table should be updated each and every time another note is isssued. Most importantly, we cannot and should not continue to allow founders to issue notes to investors and not understand how much dilution they are taking on each time they do it. This is WRONG.

Again. One can do notes. They serve a purpose but I think most founders don’t know what they are doing with them and assume that it is better than equity but in fact dealing with a proper equity round might make more sense. Normally the reason to do a note is speed and you expect that pricing the round later makes more sense than pricing it now. Regardless one shouldn’t do many rounds as notes, leave notes open for too long and delay the hard work of pricing and converting.

Obviously, I am new at this but Fred isn’t!

Greed vs Value Creation

It’s a struggle sometimes for sure but lately it just feels like most of what is going on in the valley is straight up greed.

I am not a huge Arrington fan but I think he makes a point. Is this a cyclical thing? Is there too much capital around? Is the Trump era to blame?

I tend to think it is more related to the pressure cooker of expectations around always having to have that big exit and making everyone rich versus building cool shit. I know there is a fine line. And I am not saying that I don’t want to make money but there is a difference in my opinion.

Uber as of late just feels like greed. Let’s treat employees like shit, let’s skirt the law and let’s steal stuff to win it all because they are changing the world? It’s too much. You can’t demolish everything in your path and still keep telling your customers that we should trust you ferrying our wive’s and children around. Enough already. I honestly hope Google takes them to the cleaners.

Snap. Who knows on this one but the way they are doing things feels to me like just wanting to cash out versus build something for the long haul. Again, I could be all wrong and this is the technique they are using to get enough money to defend their turf and build something amazing. Only time will tell. I could be all wrong. With Facebook I bought on the dip and held. That’s worked out okay so far. Not sure I would with Snap.

WeWork. Is this really a revolution or is it a modern day real estate play with co-working throw in to be cool? No one knows yet but the Softbank deal feels like greed to me. Let’s see what they do.

I used to miss the valley but I am not sure I could survive there. I am not that greedy to be honest. Interesting times.

I am glad I live in Singapore.

Uber’s month from hell!

And now the investors are piling on :: https://shift.newco.co/an-open-letter-to-the-uber-board-and-investors-2dc0c48c3a7#.wro1quz15

#deleteUber

Then the latest on all the sexual harassment

Adding the recode link :: http://www.recode.net/2017/2/23/14717432/waymo-otto-uber-anthony-levandowski-lawsuit

And now :: https://medium.com/waymo/a-note-on-our-lawsuit-against-otto-and-uber-86f4f98902a1#.j81e8os6u

We found that six weeks before his resignation this former employee, Anthony Levandowski, downloaded over 14,000 highly confidential and proprietary design files for Waymo’s various hardware systems, including designs of Waymo’s LiDAR and circuit board. To gain access to Waymo’s design server, Mr. Levandowski searched for and installed specialized software onto his company-issued laptop. Once inside, he downloaded 9.7 GB of Waymo’s highly confidential files and trade secrets, including blueprints, design files and testing documentation. Then he connected an external drive to the laptop. Mr. Levandowski then wiped and reformatted the laptop in an attempt to erase forensic fingerprints.

Wow. Not even a professional hijacking. Just straight up stealing and trying to cover it up.

Guessing Alphabet has plenty of cash and an axe to grind. Seems to me it’s time for the CEO to step down and let an adult run the company before it is too late.

Updated :: Upfront State of the VC & Tech Industry 2017

This is really good. I need to dissect it more and think about Asia in regards to some of the thoughts. Funny – Singapore is in the deck a few times but maybe not for what you think.

I wrote about the conference scene we are missing a little here so it is cool to have a nice deck to digest.

A good primer to the deck is this small digest from Mark Suster :: https://www.cooleygo.com/quarterly-vc-update-mark-suster-state-venture-capital-investing/

Envious of the USA conference scene

Gonna throw a few links at you today. One of the things I have missed about not being in the states is the conference scene. I am not saying Asia doesn’t have any that are good but they just don’t yet compare to the quality and level of speakers. Maybe it is just me so if so – tell me to shut up.

I hope someday to get to Recode’s Code Media Conference :: https://events.recode.net/events/code-media/

It is on my list for 2018.

For VC conferences I think the Upfront Summit looks awesome :: http://summit.upfront.com. I am going to figure out how to get into it for 2018 as well. I assume they will post some videos soon but if you follow Mark on his podcast link – they have dropped some good audio interviews.

Love this one with Cuban :: https://overcast.fm/+BxlT794oA

He has a really good quote in there. He is asked about startup ecosystems outside of Silicon Valley and what is the difference. He goes on to state that the only difference is the exits. I tend to agree with this. You can build a startup, get funded and make money in any location but you might have a hard time exiting. Sure – not everything needs to exit but generally, almost always, a venture backed business needs an exit through acquistion or going public at some point. That’s how the capital system functions. Like it or not.

Lots to ponder.

New DLD Galloway Video Up

I won’t lie – I dig this dude. I don’t agree with all of it but most of it.

Some highlights to track:

  • Amazon to keep kicking ass and become the biggest of the 4 horseman
  • Facebook and Google to leap ahead of Apple. I agree that Apple is in a funk but I also think Facebook’s core product will be in decline.
  • He says Snap won’t go public and will decline in value. We should see the answer to that soon.
  • Says the wearable market is a mess. I agree. I keep thinking but have not bought an Apple watch.
  • Say VR is not going to be huge. I agree. I think AR will be bigger.
  • He also gets into the morale responsibility of the large platform players and how thet pretend they can shirk things like fake news as an example. Will be interesting to see if this gets any attention but I think it won’t under Trump unless he picks a target.

All in all another good video from Scott.