above us only sky

a thought journey on technology, vc and startups

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Bitcoin, Tech for Good and Scientific Approach for VC

*** Bitcoin Inventor: What a few months for B(b)itcions - first we thought we’ve found who Satoshi Nakamoto really is (well, obviously, it *should* be a guy named Satoshi Nakamoto who lives in California, right?), then it turned out it might just not be that simple. Regardless who invented Bitcoin, the bitcoin community is ready to move on and it has been so since 2009.

*** Meetup Event: I help organize Founders&VC events for the tech community from time to time. This month, the topic was Bitcoin and Beyond. Not only it was a great discussion, the event generated some proceeds to help those in need at HandUp SF Fund. It’s not a lot of $ but I certainly hope it’s a good start. It’s encouraging to see people benefited from community meetup events in the valley - either through making good connections or learning something new from the panel - I know that’s the reason I’d devote time and energy in putting like-minded people in the same room. Beyond that, it made me smile when people voluntarily contribute to a good cause while they are pursuing their own dreams. And that’s what pushes our society forward. Tech could be for good - at least one event at a time.

*** Bitcoin Development : It’s no secret that I’m a big fan of Bitcoin and decentralized protocol in general. I’ve got a chance to learn about Bitcoin roughly a year and half ago (what a late-adopter I am!). It has been very interesting to see how rapidly the space has evolved. Thanks to Andreas Antonopoulos, who I met early last year before he joined Blockchain.info, I remembered we were chatting about Bitcoin as a storage value and the possible future of multiple alt-currencies. Yet indeed, Bitcoin at the time was trading at $70 something and people were making fun of Bitcoin as if it’s a fad that’s going to go away soon. The main debate at the time was around - if Bitcoin was a *real* currency or was it something that computers nerds came up to scam us all! Shortly in a few months, as the price surge up to $1000+, Bitcoin suddenly attracted tons of speculators, globally, who’d like to make a quick buck. Now the price has been holding up at around $600 - and it might well be going either way. I am not here to speculate the price. There are tons of articles/”analysis” out there you can read up and make your own judgement. My take? I am a long-term bitcoin hopeful.

*** It’s Science: Last week, I had the opportunity of hearing HomeBrew’s Satya's talk on Scientific approach on growth. It was really good - and I couldn't agree more. When we look at the startups that we partner with, regardless it's at pre or post product/market fit stage, I'd like to think operating a startup is like a giant science experiment. You might not get it right the first time, but you aim to learn, pivot and act based on a lean resource and at a fast pace of speed. Interestingly, when you apply the same principles to VC operations - it should be similar (i.e. what's the underlying hypothesis for each action that we take and how would that benefit the end goal/metrics). I expect the logic from the End Goal to Actions goes like this:

Generate great returns for LPs and the society → Amplify added values to portfolio companies → Partner with great entrepreneurs who can execute on high-risk ideas → Attract those entrepreneurs → Increase dealflow in terms of both quantity and quality → VC brand at scale → a) network; b) blog/vlog; c) events; d) twitter; e) media → reputation → do small things right — one thing at a time → genuine interaction with each and single entrepreneurs

Of course, in reality, VC operation process is more complicated than this but with this framework in mind, you can see why VC blogs (so much!) and why it’s interesting to see that how funds could dare to innovate rapidly for best experiments to serve their entrepreneurs.

*** I say: Venture capital is a craftsmanship too - how much you care about the entrepreneurs you serve and the value-adding experience you deliver?

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Bitcoin and Beyond

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*** Bitcoin’s First App: The genius of whoever invented Bitcoin is that s/he made Bitcoin’s first application as a storage of value (i.e. $$$) - and it’s hard to ignore when something is so close to money (well, it is money - how about that). Genius!

*** Bitcoin and Beyond (1/3): As you now can tell, Bitcoin is never about being a currency nor a storage of value, it just *happened* to be so as one of its first applications. A lot of times I was asked what investors are looking for in terms of Bitcoin startup investments - the short answer is: that’s a billion dollar questions (duh). I couldn’t speak for other investors but for me, the idea of building a “decentralized everything” appeal to me. It’s a grand picture that we, as human-beings, were never being exposed to before. Naval wrote this article called the Bitcoin Model for Crowdfunding, which kind of touches the idea of this new decentralized economy. The idea is big and powerful that could very well transform how we look at things.

*** Bitcoin and Beyond (2/3):
With the leverage of math-backed alt-currencies, organizations (either for-profit or NGO) now have the *option* - first time ever - to initiate an IPO by issuing an crypto-currency of its own. What does it mean? One case in action is Ethereum’s upcoming fundraiser of Ether - they are aiming to raise dozens of million dollar by issuing their own currency Ether - and given the moementum it has in the Bitcoin community, they are very likely to achieve so. The phenomenon is something bigger than the concept of “crowdfunding” - which sort of represent a one-time event. Imagine in the future, a NGO like Charity:Water could issue WaterCoin to raise $$ from day 1 - the value of WaterCoin depends on how many people are standing behind the cause. And if you do, you don’t give donations like you used to, instead, you would start accepting WaterCoin as a intermediary to exchange for your service/product. Now here comes the question - if you are a barber, how many WaterCoin would you need to charge per service? I don’t have an accurate answer yet - I expect initially, you would want something like Bitcoin or US dollar as a benchmark to measure the approx value of WaterCoin at the point of sale. However, once WaterCoin economy becomes self-sustainable with enough liquidity, this pricing question would solve by itself, over time. Similar to what Bitcoin is going through right now.

*** Bitcoin and Beyond (3/3): So, what about bitcoin protocol with a lower case b. Both Marc Andreessen and Naval Ravikant have great pieces on innovations that could take place on decentralized protocol - recently, John Villasenor also wrote his take on Slate How the Bitcoin Protocol Could Help Improve Copyright. All are very good work and worth your time to read. Essentially, it represent different applications that could be built on top of - what I called - “decentralized human trust system.” The idea that you can have trust in place (backed by mathematics) without having to trust one central entity, is huge yet very futuristic. But why, despite how much we talked about it, has it not happened yet? One of the reasons I suspect is that we are still in the early days - a lot of infrastructure that need to be build has not been built yet. I guess that’s one of the promises of Ethereum project - making decentralized innovation easier for developers. But will there be more platforms beyond Ethereum? I guess so, and I hope so …

*** Centralized v.s. Decentralized: Think about how much wealth has been created since the invention of World Wide Web (only 25 years ago!) - giants like Google ($403B market cap), Facebook ($174B market cap), Twitter ($28B market cap) are all still centralized entities. And think about this notion of “data factory" (coined by Sequoia) and the post Fred Wilson has written recently, a great amount of wealth has been aggregated into these few centralized companies. The current model has been - consumers use the product for free, in exchange for generating tons of valuable, personal data into these “data factories” where it’s able to turn data into $$$ at scale. Yet, the profits of such were only shared within the centralized entities between a rather close circle of founders, engineers and investors. While this is the model we got used to, this won’t be the only model in the future. While I am not smart enough to tell you what it means to have a decentralized Google, decentralized Facebook or twitter yet - I think this is where technology is leading us to something very interesting.
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Updates: some other interesting reads are by
Albert Wenger’s http://continuations.com/post/79187457919/decentralizing-identity
Chris Dixon’s http://www.cdixon.org/2014/03/15/stored-hashcash/

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Venture Rambling - Roller Coaster, Persistence and Ed Tech

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I’ve found that I don’t have much time to sit down and write a whole essay. But I’m good at random ramblings. I thought I might share these randomness with you - some observations, thoughts, questions - all in short, bullet, ramblings format.

I will keep it short.

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*** Roller Coaster: Everybody talks about how startup journey is like roller coaster, but few realizes how emotional demanding it could be —unless, of course, you are experiencing it right now. It started from the pivots of your ideas and then to raising capital, and then to making sales… each time, just when you think it’s a “done deal” — some sh*t would always happen. And then…you cry. Well, maybe you didn’t cry — but you are surprised, shocked and… to an extent, exhausted. What do you do? Perhaps the best thing to do is to react nothing and move forward.

*** A while ago, I was helping a startup to put the syndicate together. The founders had experienced just that — the roller coaster. Just when I thought they were probably about to give up given all these ups and downs, they smiled and moved things forward like nothing happened — at least from what I could see. And that’s awesome.

*** Persistence: There are many examples in my life that I observed persistence and resilience paid off. And that always made me happy: I met this startup XYZ roughly 6 months ago — I like the team but not so much on the idea. Since I like the founders, I would like to help anyway. So I picked up the phone and called one of the exec in our portfolio companies and see if she can kindly connect these young founders to one of the incubators she is involved with. She said yes, made the intro. And… the team didn’t get in. You know what they did? They didn’t take no for an answer, worked crazy hours, pivoted quickly — and 3 months later, I got an email titled “WE GOT IN!” Stories like this always make me smile.

*** Ed Tech: I was at a Ed tech Demo day this week — the energy was great and there is this whole “change the world” spirit in it, which I love. I was born in China and received my high school eduction there too. It was brutal — at least for me. I know some people really enjoyed the “7a-10p” style of hard-core study. But not me. I always thought learning should be more than that — and it shouldn’t be forced or expected. It should be fun. A lot of Ed tech entrepreneurs I’ve seen have been hanging their thoughts on the idea of how to bring existing tools to iPad. And that’s great — but not enough. Eduction is ultimately transferring knowledge and skills from one end to the other. Innovation on the bridging tool is a part of it but not the goal. I’d like to see how we can use technology to enhance the human interaction in teaching and to solve a real problem. How exactly? I don’t know — but I would love to meet such founder and gladly have that person outsmart me.

*** I really like Fred Wilson’s recent post The Mutual Company. That, and the concept of “data factory” by Sequoia. I think there are a lot of thoughts around this and worth greater discussions. I will find some time to write a blog post just on this topic.

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Why Do The Best Startup Ideas (Usually) Have The Hardest Time to Be Recognized and Funded?

Being on the VC side of the table, I constantly ask that question to myself - not because I have the super-power or arrogance to claim that I am always able to see the best startup ideas. I just think it’s a question worth asking.

If we look at the past - how many people thought Facebook was a joke in 2004? Come on, some website for college students to “stalk” each other? How you gonna make money out of it? And how many people would be able to say that they knew Google was going to be as big as it is today, given it was “just another search engine” back in 1998 when there were plenty other alternatives already? (there are many interesting examples here too) I guess the answer is not a lot people - certainly only a “lucky” few who had understood the vision and made the investments when others wouldn’t.

But why?

Shouldn’t VC’s market expertise, proprietary network and due intelligence help “foresee” the future and predictively pick out those winners? What happened?

As a VC investor, I get pitched a lot. Although I would like to think that I help all the founders I interact with in some way (i.e. make intro, give feedback, etc.), at the end of the day, we still need to make a decision on whether to invest or not. And it’s never been fun to say no – and trust me, I’ve been an entrepreneur myself too, and it’s never been fun to be rejected neither. But, things happen for a reason - investors are sort of positioned to say “no” hundreds or thousands of times just so that they can say “yes” a few times - simple economics.

But still, I think most VCs, when they say no, have probably asked themselves -“What if this is the next Facebook or Google that I am rejecting?” (Its not like it has never happened before). Paul Graham wrote a nice essay on “How to Raise Money.” That details 2 major psychological factors for investors - 1) “fear of missing out on startups that take off” and 2) “fear of investing in startups that fizzle.” Very true. And in most cases, fear #2 is greater than fear #1 unless proven otherwise - well, how to prove then? And in most cases, fear #2 is greater than fear #1. Think about most of your VC pitch meetings, I bet somebody has asked you something about traction, market and business model? Sounds familiar? And what were your answers?

Looping back to the big question - “why do the best startup ideas (usually) have the hardest time to get recognized and funded?” Here is your answer -

On VC side, most of them are driven by fear (never a good thing!) and are looking for “comfort factors” like traction, market and business model;

On the (best) startup side, it’s never easy to feed VC with those “comfort pills,” because either the founders are seeing what most people are not seeing or they are creating their own categories.

In the middle, which is what makes it harder, there are startups (and many many of them) that are simply bad ideas - those are also not able to provide traction, market or business model. Or, good startups can be so early at the curve that it might take decades for the game to start.

Just to make it clearer – I have drawn rough graphs below for illustration:

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Y axis is your “traction” and X axis is your “appearing market potential” (not real potential but perceived potential). Roughly speaking, point 1 is the place that people think there is a “huge” market opportunity and, for the “risk reduction” purpose, investors would prefer to invest in something “bigger than huge” (cuz that sounds better, doesn’t it).

So there you have it, the green-shaded part (point 3) is where most startups get funded by VC – usually ones appear to go after billion-dollar market, with or without revenue.

If you were an investor, you would probably like to put money as close to point 5 area as possible, right? Think about it, that’s the area where companies are tackling big problems and are seeing great traction and revenue already. So, why not?!

Well, 2 problems.

The first one is that you would miss out all the great ones – the “good ideas that seem bad” (by Paul Graham) in the point 4 area. These are the companies like Airbnb, Facebook in the early days where they were creating their own categories and have some tractions but not big enough to convince its market potential.

The second problem is about tiers of risk. And that’s what it all comes down about – risk taking. Even if you just invest in the point 5 “startup heaven” areas, you still face a tremendous amount of risk.

To break it down, here is another graph -

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There are usually 2 type of risks are generally being recognized – which, in this graph, are what I call “1st tier risk” and “2nd tier risk.” Assuming all kind of startups were born from that blue circle - as each startup grows, most of them would fail before they hit “the promised land.” Those 75% - 90% failure rate comprised the “1st tier risk.” That explaines why most seed and angel investors use the “spray and pray” approach in order to tolerate the “1st tier risk” – it really take a “spray” amount of bets to make the economics work.

Now on the other hand, you can usually avoid the tier 1 risk by dragging behind your investment stage – say focusing on Series A-Z round like most institutional VCs do – but you will be still be facing the “2nd tier risk.” The risk contains several folds – one of which is that “market disappears.”

WTF? You might ask.

Well, it might just turn out that the market you are in is either “too early” (a hype) or “not real” (a fad), or is destroyed by other external reasons such as war, etc. But, these are the risks most VCs are comfortable with and are willing to take. And that’s why you see most VCs spend a lot of time learning about the market and the team (cuz after all, you need to have a great team to execute and innovate to reach the “up-right”).

Interestingly, there is also a “tier 3 risk” that most people don’t formally recognize – that is the risk of missing out “good ideas that seems bad.” As shown in the graph above, these companies might not be able to take off fast and, have probably been struggling to gain some market and survive – therefore, most of the angels would pass because they can’t see the market while most of VCs would wait and choose not to invest until it becomes a “hot deal.”

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So there you have it. If you think picking good public stocks is hard, then backing a good startup might be harder. Its very similar to betting on a horse race, except that when investing in public stocks, you know which horses will show up at which track and when the race will start, whereas in the early-stage startup world, you don’t even know if you have bet on a horse (or not!), at an un-heard track-field at a time that you are not even sure when the race would start! (as precisely shown below)

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Tricky. Isn’t it.

That’s why when you ask most VC investors how and why they invested in napkin-stage, no-traction, garage-based XYZ co. (insert tech company you admire), often times, they would humbly say - ” I guess I was lucky to find Steve…”

So, luck. Is that what it takes to find and fund the best startups?

Maybe, but that’s not the whole story. It’s ultimately about which kind of investor you are. If you are a hustler, you attract hustler founders; if you are an engineer, you attract engineer founders…

In a successful startup journey, founder and investor have to match, on some level - a level that’s beyond terms like market, traction and business model. Of course, it’s a hard and rare match[a] and that’s why best startups usually have the hardest time to be recognized and funded.


[a] Also, VC usually would like to say - “the best way to get in touch with me is through a warm intro…”? On some level, it’s a match mechanism - to see if the founder belongs to this particular VC’s network/culture.

But it has a problem. Most people only make introductions when they can see and feel the startup idea and vision. So there are these multiple “blocks” or “hurdles” you have to go through if you are a some guy working on something called Twitter back in 2006.

*Thanks to Eric, Nathan, Alan and Shea for the feedback and thoughts.

*Note: I started the post because I wanted to try to answer the question why the best startup ideas (usually) have the hardest time to get funded, but I don’t have the solution for the question. If you do, please reach out and I will be happy to buy you coffee/lunch.

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How Can You Make Money From Bitcoin Or Crypto-Currency In General? - As a Consumer

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I’ve been meaning to write this article for a while, so here it goes:

Bitcoin is one of the leading crypto-currencies, along with Litecoin, Namecoin, PPCoin, etc. One of the reasons Bitcoin become popular is that Bitcoin is the first crypto-currency that is peer-to-peer and decentralized. It relies on cryptography, usually alongside a proof-of-work scheme, in order to create and manage the currency.

I will mainly discuss Bitcoin in this article and try to explore how people can make money or make investments from/on Bitcoin as a consumer or individual investor.

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A good way to look at bitcoin is to treat it like “gold/cash that you can only teleport one way”(or, “email protocol for money” if you are a techie) . Depending on your view of Bitcoin, you can see it either as “gold” (a commodity) or “cash” (real money) [Federal Judge Rules Bitcoin Is Real Money], we’ve seen people arguing both ways.

For individuals, people can make a profit from Bitcoin through price speculation - just like how you would invest and profit from gold as well as currency trading. In this case, Bitcoin is not just a commodity or a currency - it’s both.

Bitcoin acts like “gold” since it share some similar natures such as scarcity - only 21 million units of BTC will be produced and there will be no more after year 2140 (currently we have roughly 11 million BTC generated). On top of that, Bitcoin offers unique features such as low-cost money transfer, decentralized protocol, etc. just like how gold gained some of its value through its unique features. Given that our fiat currency is no longer tied with gold, gold has been treated as an alternative asset class/investment vehicle - some people see bitcoin that way as well. [Winklevoss Twin’s $10MM Bitcoin ETF] [Bitcoin Ticker Available On Bloomberg Terminal]

On the other hand, unlike gold, Bitcoin is actually usable in daily transactions (fortunately, nobody drags a bag of gold to buy stuff anymore). In other words, Bitcoin, as a currency, can and should represent some percentage of the world economy. And that’s what a lot of people are betting on. [Calculating The Long-Term Value Of A Bitcoin] Given the article’s analysis and calculation, in the next 10 years, 1 BTC (currently valued at $100) would equal to roughly $13K or nothing. Pretty much a “fly or die” situation. And that’s the risk early adopter are taking. [Germany calls Bitcoin a currency; subject to 25% cap gains tax] [The People Making Real Money On Bitcoin]

One might argue Bitcoin is a fad/ crashed because of its high fluctuating prices. However we don’t want to ignore the fact 1) that Bitcoin is a first-ever decentralized crypto technology which we’ve never been exposed before; 2) Bitcoin is a “currency” itself and its a “new-born” - give it more time and the trade price will be more stabilized, since people are adjusting and speculating (at the same time) on the ratios Bitcoin v.s. fiat currency. [What would happen if the bitcoin price reached $500?]

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Aside from profiting from Bitcoin, it’s worth noting that Bitcoin plays an crucial role in developing countries such as Kenya and Argentina. In Argentina where people are extremely concerned about inflation and currency restriction, Bitcoin become the popular trusted currency for daily use - it was so popular that Bitcoin was traded $156 per BTC while it was only $94 traded at US BitStamp Exchanges. In Kenya, Bitcoin has been integrated into part of M-Pesa, the mobile payment system that accounts for as much as 31% of Kenya’s GDP. [In Kenya, Bitcoin linked to popular mobile payment system

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*Disclosure: So far, I only hold single-digit amount of Bitcoin just for experiment.

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One Thing I Wish I Knew at B-school

It’s been a while since I was at School. Now looking back, it’s really not the course/materials that helped me to be a better or smarter person but it was really the platform that gave me the opportunities to experience different things and make friends with different people. I guess the most memorable experience that I had was the year when I was starting a company while taking crazy amount of credits to graduate early – amazingly, not only they didn’t conflict with each other, it helped me understand business operation and entrepreneurship at much deeper and practical level – and I got my best grades that year throughout all my academic career. Ironic?

With that said, I do think there is one thing I wish I knew when I was at B-school. That is:

Entrepreneurship ≠ Business Plan

Although obvious, I think a lot of business schools are still doing the same thing – offering courses that teach students how to write a professional startup business plan (I don’t even know what it means) with market research, execution plans and (most ridiculously) 3-year financial projection! Although it was nice in a way that It could help students to exercise their research and intellectual skills, it also kind of misleads people (at least I was one of those naïve kids) into thinking: “ oh I am gonna start a business and the first thing I need to do is to write a business plan and then talk with investors…and blah blah” you know the story – 1) write a awesome, compelling biz plan; 2) get some money from Friends, Families and Fools; and 3) BOOM, you now have a “risk-free” business.

I kid you not, I was the victim of this kind of thinking for a while until I ran into the concepts of Eric Ries’s Lean Startup and Steve Blank’s Customer Development (here is Blank’s MOOC course BTW: https://www.udacity.com/course/ep245). The moment I finished the books, it just made perfect sense to me.

People who know me know that I am a big advocate for the Lean approach – it’s not about being cheap but it’s about being efficient in finding your product/market fit using the fastest approach. Therefore, by definition, spending a month or even a week writing a business plan (or even worse, you spent time worrying about the “professionalism” of words) is probably not “the fastest approach” to find your fit.

Everybody now talks about how founders should have the conviction in whatever he/she is doing. I think what it translate is that as a founder, not only you have a different perspective (or vision if you feel trendy today), you also need to have a relatively deep yet comprehensive industrial knowledge to at least fill out a one-page Business Model Canvas without too much difficulty – now, it’s not to say that what you write in the Canvas is THE execution plan (even if you are a Senior whatever in the field…) because plan always changes when you start a startup and that’s the norm. However, it will probably give both you and your perspective investors to stay focused on the key issues and hypothesis.

“Hypothesis? Geez, that sounds like science and super Unsexy!” you might scream out loud.

And that’s exactly right, why can’t the process of starting a startup be a science? Sure, there will always be many judgment calls but those will only be starting points – leading to many hypothesis that you will need to test and analyze. Maybe all our entrepreneurs should be like this - with a little bit of “craziness" aiming to change the world:

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(Entrepreneurs! - ARRRR! )

So I think this is what we missed at B-school:

The acknowledgement of how uncertain startups could be and therefore founders should spend more time swimming in the filed, empathizing with their customers rather than writing business plans like this guy:

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Venture Capital 2.0

I count myself fortunate enough to be in the venture business - helping the best entrepreneurs to start, scale and succeed. It interests me that the dynamics between entrepreneurs and VCs are changing as it becomes cheaper & cheaper to start a company - in simple terms, as an entrepreneur, you probably don’t need venture capital that much, any more.

VCs Reaction - Service!

Now the problem turns to the VC side: we want to make sure the best entrepreneurs take our capital and go ahead change the world. Not only do we want to convince them that we are a long term partner – as a matter of fact - we also want them to come to us not simply for money!

As an entrepreneur myself, I am empathetic with the founders and we always strive to provide fairness, transparency and timeliness to every founder we have met.

Different VC firms have different approaches: one notable route that big name VC firms take is to increase its PR influence – the rational seems obvious: startups need press, so do the VC firms. And that’s not the only way - VC firms such as First Round Capital focuses on building an internal P2P sharing and learning platforms within the founders, much like how accelerators build and maintain its community culture.

Yet, questions remained

At the end of the day, most of the VC firms recognize the change of the industry and are all trying to build an “entrepreneurs-friendly” brand. However, either through a PR approach or community approach or any other ways, there are still questions remained to be answered:

  1. If we truly believe that VC firms are in the service business for entrepreneurs, well, what do our “customers” want – besides capital?
  2. Are the above approaches truly effective in helping entrepreneurs? If so, how can we be so sure and how can we measure the progress?

VC, Service and SLA

For the first question, one simple way to look at it is: as a service business,

  • How are we interacting with our founders? - service performed
  • Have we made them feel welcomed/inspired/excited or discouraged/(even worse) intimidated? - customer satisfaction
  • Would founders we met or worked with enthusiastically refer others to us in the future, not solely for the capital but for the awesomeness we, too, have. - customer referrals

Naval, co-founder of AngelList, has recently published a post called: A Venture SLA. The idea is not complicated – since VCs are in the service business and it is reasonable that a Service Level Agreement (SLA) should reached and a lot of things should be standardized. (BTW, This is part of the mission AngelList is trying to achieve and they have done a great job in transforming seed stage investments and also having built a great showcase platform for both investors and founders.)

Naval’s idea is a great vision to have and it will be soon realized by seed & early stage venture funds first (some of those are already happening). The fundamental behind this VC trend is that entrepreneurs are gaining more negotiation power when it comes early capital, as it gets cheaper and cheaper to start a startup. And it makes sense for the seed & early stage firms to act and serve more like an accelerator with a lot of add-on service and standardized decision process.

But I am not too sure about the timing of how soon it will be completely realized – or it would be “soon” in the next 5 -10 years as the ones who don’t change will be short of good quality deal flow and therefore be wiped out eventually. But, as for growth VC fund, there are, as of now, a lot of variables – SLA might happen, but I am just not sure when and how.

A Metric-driven Lean VC?

I don’t have the answer for the second question, as I haven’t seen any metrics showing direct impact relationship between companies’ success rate and VCs’ add-on service – its kind of like taking your daily vitamin and exercising at the same time, you are getting healthier but you don’t know its either due to your daily vitamin or due to your exercise. With that said, I do think VCs’ efforts add value but we just don’t know how much and it would be nice to have a way to measure it.

Putting all things aside, early stage companies are probably in need of all kind of resources. So, something is probably better than nothing.

The Beginning

Just like any other industries, Venture Capital is evolving as well. That, and other changes that are happening are good things for the startup world – both on the entrepreneurs’ side and VC side.

As Paul Graham stated in his essay The New Funding Landscape: founders now are not only facing ever-lowest cost to start a company but are also having more funding options with the emergence of Angels, SuperAngels and Micro-VCs; on the other side, VCs will benefit from an increasing flow of higher-quality startups – with the assumption that those startups will take these VC money as well.

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Is Bitcoin a stable currency?

Answer by Jay Zhao:

By definition, currency is usually backed, defined and produced by government or some authority. So I don’t think its fair to say that Bitcoin is a currency since it might limit our view to see this new emerging disruptor.

However, I do think that the nature of Bitcoin is a lot like a commodity: imagine gold/rice/corn or whatever things that ancient civilization used to use for exchange of value, but now it could be instant, it could be remote and it is backed by the faith of whole human society through computing network.

Therefore, if we agree that Bitcoin is not your traditional currency, then we should re-look at the meaning of Bitcoin’s value stability, which is always a relative matter. I would say this, because of the limited supply of Bitcoin (21MM BTC by 2140), it’s designed to be inflationary. In other words, the longer you hold/save your BTC, the more stuff/service you will be able to purchase as the economy grows. (weahter this is a good thing or not, that would be another story). Now let’s assume that in the future, the dollar and Bitcoin co-exist and the dollar currency doesn’t inflate nor deflate, therefore, Bitcoin will trade more dollars in the long term assuming our economy grows in the long term.



Most people are curious/panic/concerned about the fact that Bitcoin was once worth lower than a dollor but now in a fairly short amount of time, you can trade Bitcoin for $100+. Its something that they’ve never seem before, especially its VIRTUAL! Well, my suggestion is, stay tuned cuz we are witnessing a birth of a new era - I can’t guaranteed the the new promising baby will survey, but I surely hope so.
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In Search of the Next Big Thing

This is one of the great interviews I enjoy. Great questions asked. You can find the full article on Harvard Business Review hbr.org/2013/05/in-search-of-the-next-big-thing/ar/4
HBR:
How would you characterize the best entrepreneurs you work with?
Andreessen:
We aim for a trifecta in the people we want to back. We’re trying to find a product innovator who is entrepreneurial and wants to start a company, and who also has the bandwidth and discipline to become a CEO. When people like that actually deliver and work hard for 10 years, the results are miraculous. If they fall down on any of those three fronts, generally it’s a casualty.
HBR:
Do all those skills really have to reside in one person?
Andreessen:
It’s hard to pair a product innovator with a business partner—or to partner the founder with an outside CEO—and have them get anywhere. We work with our companies when they absolutely have to do this, but it’s very challenging.
HBR:
Can entrepreneurs be taught? Or are the skills innate?
Andreessen:
We think CEOs can be taught, so we specialize in training innovators to become CEOs. We don’t spend a lot of time trying to teach CEOs to be innovators.
HBR:
To what extent is the start-up business still hungover from the last boom and bust in tech stocks?
Andreessen:
It’s a really big deal, especially for anybody over age 35. It’s similar to what happened after the Great Depression: Not until the 1950s did people really start focusing again on the stock market. Everybody’s hypersensitive about another bubble. The minute anything starts to show even a little bit of life, they say, “Oh, my God, it’s another bubble!”
HBR:
Are you saying that the general view of the market is irrational?
Andreessen:
Yeah, it’s irrational. The rational thing is to focus on the future, not the past. But current attitudes are very much based on what happened in the past.
HBR:
What’s the view of Andreessen Horowitz?
Andreessen:
Obviously, we see opportunity. We started our firm in 2009, after probably the worst 10 years ever in venture capital. But given the history of these things, this is probably a good time to get in.
HBR:
Do you see the danger of a new bubble out there?
Andreessen:
It’s in the nature of venture capital and start-up investing that there are always stupid investments. The problem is that you never know which ones are which. I get these things as wrong as anybody else. But if you’re afraid to make any investments that might be stupid, you’ll never get any big winners—because the big outlier winners tend to look crazy at the start.
HBR:
One symptom of the hangover is that fewer start-ups are doing IPOs. What does that mean for investors like you?
Andreessen:
In a sense it’s good for me. As venture capitalists, we have a 13-year lockup on our money, so we take “long term” seriously. I tell our entrepreneurs, “If you build a big successful independent company, at some point you almost certainly will go public.”
HBR:
In the meantime, how do you prepare them for that moment?
Andreessen:
I tell them they shouldn’t even think about going public until they’ve built what I call a fortress. You build a company that’s so big and powerful and well defended that it can withstand the pressures of being public. Our entrepreneurs are therefore almost completely focused on the substance of what they’re doing—as opposed to what happened in 1999, when everyone tried to take companies public in two years on the basis of a lot of hype.
HBR:
Ah, the good old days.
Andreessen:
One of the local VCs had two mottoes in 1999. One was “Grow big or go home.” The other was “Forget details, just do deals.” The second one got them into trouble because some of their companies had very little substance. They were largely just press releases on their way to an IPO.
HBR:
So walk us through getting to an IPO today.
Andreessen:
We take companies through what we call the parade of horrors—all the stuff that happens to a public company. We take them through Sarbanes-Oxley, financial disclosure, patent laws, antitrust. We talk about what hedge funds do, and the intersection between hedge funds and fair disclosure.
HBR:
What role do hedge funds play in all of this?
Andreessen:
Hedge funds are much more powerful than they used to be. Market manipulation is never prosecuted, so they can lie about you all they want. On the short side, they target companies that aren’t fully funded. If you have liquidity exposure on your balance sheet and you have to raise money at some point in the future, they’ll try to kill you. And they can make it into a self-fulfilling prophecy, where it’s impossible for you to raise money. So we talk a lot about what it means to have a strong balance sheet, to ensure you never get into that situation.
HBR:
How much cash should a start-up have on hand?
Andreessen:
Generally, you want to have at least two years’ worth of cash on the balance sheet in case your revenue goes to zero. This is the tech industry—sometimes that actually happens.
HBR:
In this brutal environment, how important is it for start-ups to retain their founders?
Andreessen:
We always want control to rest with the founders. Anything else can be intensely dangerous, because of the ease with which people can mount proxy fights and all this other stuff. Large tech companies will often move to take over start-ups with no intention of actually buying them, just to screw up their business for 18 months.
HBR:
Man, I’m glad I’m on the East Coast.
Andreessen:
It’s like World War III out here. [Laughs.]
HBR:
If IPOs are so hard to pull off, are most of today’s start-ups looking to sell out to bigger fish?
Andreessen:
If somebody comes in here and says his goal is to sell his company, we won’t invest. There are plenty of other venture capitalists who will fund him. For us, companies that are built to be independent are the most attractive. As for companies that are built to be sold, most acquirers are pretty smart and can smell that. It’s ironic, but it’s very hard for such a company to actually find a buyer.
HBR:
Back in 1995, you took Netscape public after just 18 months. Now you’re on the board of Facebook, which had its own noteworthy IPO. Can you talk about the difference in IPO expectations?
Andreessen:
Netscape was a different era. There was no Sarbanes-Oxley, no reg FD [regulation fair disclosure]. Hedge funds were a tiny percentage of the market. Short sellers were small and unsophisticated. And there were more long investors who really understood what it was like to invest in a small company and see it develop. There was also the expectation that you took things public quickly. I can’t really talk in detail about Facebook. But in my opinion, Facebook went public when it had become a fortress. The company had built itself into a position of strength in all the areas that make it safe to be public.
HBR:
How has the lean start-up model changed the game?
Andreessen:
It’s a direct reaction to “Forget details, just do deals.” Back in 1999, entrepreneurs were guided to do a fast start-up: Get the most basic, rudimentary product on the market as soon as you possibly can, and then hype the s--- out of it. Sell the s--- out of it. Try to generate as much noise as you can and as much hype as you can and get the big IPO first-day pop. And then hope that in the fullness of time you’ll grow into all the promises you’ve made to everybody. Or, the cynics would say, you can sell out quickly. A lot of these companies had terrible products.
HBR:
And now?
Andreessen:
The new start-up methodology is basically a complete 180 on that. It says the only thing that matters is getting the product right—developing a product that people want and use and love and will pay for—before you do all the other stuff. That is a tremendously healthy move, because it centers these companies on the substance of what they’re building.
HBR:
Is there any downside to that kind of focus?
Andreessen:
It can be taken too far. A large number of founders are terrified of actually getting into a market. They use this approach as an excuse to never think about sales and marketing. In my view, they’re in complete denial about what it takes to actually build a company and build a business.
HBR:
So what do you do? A guy comes in with a great product and no interest in the rest of it...
Andreessen:
We administer a beating. [Laughs.] We basically say, Look, we understand. A 28-year-old who has built a great product and comes in here is not going to have much experience in sales and marketing. We explain that a lot of products are being sold and marketed out there. If you don’t take sales and marketing seriously, nobody is ever going to know about you. Nobody is ever going to buy the thing. You’re going to end up losing. But if you want to take it seriously, here are the things we can do to help you.
HBR:
What are you looking for when you invest in a tech start-up?
Andreessen:
I define a tech start-up as a new company whose value is the innovation it’s bringing to the world. It’s not the value of the product it’s currently building but the value of the products it’s going to build in the future. So it’s worth investing in a technology company only if it’s going to be an innovation factory for years to come.
HBR:
You’ve written that “software is eating the world,” that digital innovation is transforming virtually every industry. Where are we in that process?
Andreessen:
It’s a long-term thing. Only recently have we become a world in which everybody has a computer and we’re really there with the smartphone. Now is the time when a number of industries that historically have not been much affected by technology are all of a sudden in a position to be transformed by it.
HBR:
What are some examples?
Andreessen:
The book industry is an obvious one. First Amazon came for the book distribution business. It turned that into software—the Amazon website. Now it’s turning the book itself into software. We look at industries like real estate, agriculture, education, financial services, health care, retail. And we think now is a good time to create the kind of state-of-the-art software companies that will really transform them. Ironically, a lot of these companies are actually replays of ideas that were tried and failed in the dot-com era.
HBR:
You’ve talked about having launched some big ideas that didn’t fly because they were ahead of their time.
Andreessen:
We launched Loudcloud in 1999, and basically Amazon Web Services is what Loudcloud would have been if it had launched in 2006 instead of 1999. The technology wasn’t ready. Reid Hoffman started a social networking company in 1997 called SocialNet.com, long before Facebook or LinkedIn [which Hoffman cofounded in 2003] existed. For 20 years people laughed at the Apple Newton and said it proved that nobody had any interest in a tablet. And then along came the iPad. A lot of ideas that failed in the dot-com era were actually winners. They were just too early.
HBR:
Does access to the cloud and big data improve the odds of success for new companies, by allowing their business models to rely a bit more on science and a bit less on art?
Andreessen:
Yeah, I think so. The best of the companies we’re seeing now are unbelievably good at analytics. They have this incredible closed loop where they analyze data and feed the numbers directly back into the process virtually in real time, running a continuous improvement loop. But none of this is a shortcut to success. That still involves a lot of art. For that matter, it’s still hard to get the science right.
HBR:
What have you learned about developing the art part of the process?
Andreessen:
The best founders are artists in their domain. They operate instinctively in their industry because they are in touch with every relevant data point. They’re able to synthesize in their gut a tremendous amount of data—pulling together technology trends, their companies’ capabilities, their competitors’ activities, market psychology, every conceivable aspect of how you run a company. A large number of tech companies that failed did so when they brought in a new CEO and the company stopped innovating and sold out. It’s very hard to transplant a founder’s skill set to someone coming from the outside.
HBR:
Are VCs actually any good at finding great companies?
Andreessen:
Research shows that there is a very high correlation between the top VC firms and persistent returns. These firms are good at what they do, but we believe that only a very small part of that is because they’re smart. It also has to do with the persistence of the deal flow. It’s a buyer-driven market for capital. And the best entrepreneurs want to raise money from the top firms, because they want the positive signaling effect—which is especially important for recruiting top talent. As a consequence, most second- or third-tier firms don’t have the option of funding great companies. It doesn’t matter how good the picker is. He’ll never get to see the deal.
HBR:
You’ve made some good bets—on Twitter, Facebook, Skype, and others. Is there one bet you missed out on that you wish you hadn’t?
Andreessen:
Square [an electronic payment service] is our great white whale. We’ve passed on every single round and we’ve regretted it pretty much every time. But we’re proud of our results so far. Our first fund has returned 2x already, with a lot more companies still to mature—which has allowed us to raise the other funds very quickly.
HBR:
You’ve developed a strong philanthropic focus. Is the next generation of investors thinking about social investment?
Andreessen:
No. [Laughs.]
HBR:
So much for my hopes for the next generation.
Andreessen:
Many younger entrepreneurs have a social mission or a philanthropic agenda. They start early. Investors, not so much.