Let Your Winners Run

I met with a group of very experienced and sophisticated investors yesterday who make up the investment committee of a large charitable foundation that is an investor in USV. I gave them a two minute brief on our macro investment thesis (large networks of engaged users that can disrupt big markets) and then took them on a tour of some of these large networks (Lending Club, Kickstarter, Etsy, Twitter, and Codecademy).  Then I took questions.

This group doesn't spend a ton of time on AVC, Techmeme, Hacker News, or the tech industry in general. And yet the questions they asked me were as good as I ever get. I guess four decades of investing teaches you a lot.

One of the best questions I got was "when do you decide to sell?". Such a great question and such a hard one to answer. I've got scars from this one.

I explained that first and foremost, we generally don't make that call. The entrepreneur and her management team generally makes that call and the board is asked to ratify it.

But when and if we get to weigh in on the timing of the exit, my view is that you look to exit your weakest investments as soon as you can and you let your winners run as long as you can.

USV 2004 is instructive. Between 2004 and 2008, we made investments in 21 companies. So the youngest portfolio company in that portfolio is four years old now. Most are five to six years old. And a few, like Meetup and Return Path, are ten years old or more. We've exited six of the 21 investments, you can see them here, under past investments at the bottom.

We still have fifteen investments active in that portfolio including Zynga and Twitter and we own large blocks of stock in both of those companies. We own stakes in thirteen other portfolio companies most of which we believe are super strong companies that are building large and sustainable businesses. We will likely exit a few weaker investments in that portfolio over this year and next. But there are at least ten companies in the USV 2004 portfolio that we would be happy to own for the rest of this decade.

This does create a bit of an issue in that we raise ten year venture capital funds. So we are supposed to wind things up in the 2004 fund in another two years. But I am fairly sure that my partners and I and our limited partners will be happy to let this fund play itself out over a longer period of time.

I've made the mistake of exiting investments too quickly. Back in the middle of 2007, my previous firm Flatiron exited our investment in Mercado Libre at the IPO selling our entire position for about a 10x gain. In the almost five years that MELI has been public, it has gone up 5x. So had we held our position for another five years, we'd have made 50x instead of 10x. That stings. Lesson learned.

When you have portfolio companies that are category creators, category leaders, who are well managed, and growing 50% per year or more and delivering 20-30% pre-tax margins (or more), and who have no existential threats to their market leadership, you might want to hang on to them for a bit. They may be just getting going on the valuation creation thing.

Kickstumbler

One of my favorite people in the tech business is Anthony Volodkin, founder and operator of the Hype Machine. Anthony's a media hacker in the greatest sense of the word. He builds apps that allow us to discover and enjoy new things.

And his latest project, really just an experiment, is called Kickstumbler. I found out about it this morning. Think stumbleupon meets kickstarter. Give it a try.

But the coolest thing of all is this linear video version of Kickstumbler. I'm going to point my big screen TV in the family room at video kickstumbler tonight and just sit back and enjoy all the awesomeness.

Thanks for building this Anthony.

The Engineer's Brain

I've been reading The Corrections this long weekend. This book came out over ten years ago, but I'd never read it so I pulled it out of our bookshelf and cracked it open after we got off the mountain on Saturday. I hope to finish it on the plane ride home today.

The father figure in the book is Alfred. He's a railroad engineer who also dabbles in metalurgy experiments in his basement. He's a familiar character to me. My dad is an engineer and I have an engineer's brain as well. Apparently so does my friend Brad Feld.

The Gotham Gal tires of this mindset at times. She will say in exasperation "you can't solve every problem Fred." But that's how my mind works. Find problem, solve it, move one to the next one.

My engineer tendencies are reinforced by the work I do. Most entrepreneurs we back are also engineers. They find a problem and they set out to solve it. That journey is often a startup and we are along for the ride. Solving problems creates value in our business. Value creation is success. So the feedback loop is reinforcing and problem solving is the name of my game.

But the Gotham Gal is right. I can't solve every problem as much as I want to. The person or organization that has the problem has to want to solve it too. And when the will is not there, as clear as the solution is, its best to leave it alone.

I've been trying to decide what to do on the subject of online piracy. I think there are good solutions to the problem that involve technical approaches that leverage the work the technology industry has done with domain name registration and spam/virus/malware filtering. I laid them out in a discussion I participated in last week at the Paley Center. But the entertainment industry must want to solve the core problems, not just the symptoms. And it is not clear to me that the entertainment industry wants to solve the problem. So maybe I should move on.

The same is true of the companies we work with. They often have problems that can be solved, and have been solved in many other companies. But if they do not have the will to solve them, then all of our effort to address the issue is wasted. Our desire to solve the problem will simply come across as interference, meddling, or worse.

So as I move from youthful enthusiasm to elderly wisdom, one of my development goals is to supress the desire to solve every problem and focus on the ones where I can make a difference. I'm not there yet, but I'm working on it and making progress.

The Management Team - Guest Post By Jerry Colonna

This is the final post of the MBA Mondays series on The Management Team. It is my favorite MBA Mondays series so far. The guest posts in particular have been fantastic.

Back when I started this series, I outlined it and decided that I would ask Jerry Colonna to wrap it up for us. Jerry, when he was my co-founder at Flatiron, taught me the people side of the venture capital business. And now as CEO coach to a number of USV portfolio CEOs (and many others), he is teaching the people side of the startup business to some of the best entrepreneurs we work with. He is a people person through and through and management is all about people.

So with that forward, here is Jerry's guest post. It is fantastic and he even threw in a section for Grimlock :)

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The Crucible of Leadership

 

Work is difficulty and drama, a high-stakes game in which our identity, our self-esteem, and our ability to provide are mixed inside us in volatile, sometimes explosive ways…Work is where we can make ourselves; work is where we can break ourselves. David Whyte, Crossing The Unknown Sea: Work as a Pilgrimage of Identity.

Fred started this series inspired by Bijan who urged folks to “invest in your team, help them become better managers.” The topic, said Fred with his flair for understatement, “is very important.” Over the weeks, different people looked at the process of building the capacity to actually lead—putting the team in place, scaling people, everyone argued may be the hardest part of building the company.

To me, the hardest part of scaling people is learning to lead your self.

The Crucible

They often come to me, their coach, because they don’t have any place else to put the feelings. They’ll sit on my couch, or pace while they talk on the phone, pausing as we grapple with issue after issue after issue. The common denominator is always people. When I first take on a client I warn that I don’t have a magic wand. Nevertheless their wish for some elixir to mend their relationships is heart-breakingly visceral.

When they start, they often think the hardest part is figuring out what to do but they’re inevitably knocked on their ass by the task of leading.  And when they make mistakes--when they fail to lead--their identity, self-esteem, and ability to provide—as David Whyte notes--sometimes explode.

We all too often break ourselves in the work of becoming a CEO, a manager, a leader.

The only answer, the only balm against the inevitable existential pain of becoming the leader we were born to be is to see the lessons implicit in the practice of becoming.

“In the course of studying how geeks and geezers became leaders,” writes Warren Bennis in the introduction to his classic, On Becoming a Leader, “…I discovered that their leadership always emerged after some rite of passage, often a stressful one. We call the experience that produces leaders a crucible...the crucible is an essential element of the process of becoming a leader...Some magic takes place in the crucible of leadership…The individual brings certain attributes into the crucible and emerges with new, improved leadership skills. Whatever is thrown at them, leaders emerge from their crucibles stronger and unbroken.”

The magic, the alchemy, occurs when what we do mixes with who we are and is cooked by the heat of what we believe.

Take as an example a client I worked with intensely over the last few weeks. She and a co-founder have been killing each other (okay, I have a flair for the overstatement…still, they have both been getting sick with a host of ailments—migraines and stomach problems). The arguments had gotten so bad that neither could stand to be in the same room with the other. Even I was exasperated. During one late night call, I asked my client to forget, for a moment, whether her co-founder was right or wrong. “I don’t care who’s right,” I said with my voice rising. “The only thing we have to focus on is what are you supposed to be learning from this.”

There was a long silence. I thought, “Okay. You’ve really pushed her too far. You and your woo-woo ‘lessons in the pain’ crap.” But then: alchemy. She opened up. “This is really shameful to admit,” she began, “but I know I’m a pain in the ass because I have to be right, all the time. I know it’s wrong but I can’t stop myself.”

And with that we had something to work with. I pressed her: Given this tendency, what do you really believe? What values do you hold? What kind of company do you want to build? And what kind of adult do you want to be?

Over the next few weeks, on guard for her need to be right, we carefully went to work changing her approach to the co-founder. For her, the crucible moment came in facing her shame, acknowledging who she really has been and as a result she got to choose how she wanted to manage and who she wanted to be.

We forge our truest identity by facing our fears, our prejudices, our passions, and the source of our aggression.

The Buddhists teach that for the steadfast warrior to emerge, we’ve got to break open our hearts to what is.

Eat Me If You Wish

“One day,” begins a story re-told by Aura Glaser in the latest issue of Tricycle Magazine, “[the Buddhist saint] Milarepa left his cave to gather firewood, and when he returned he found that his cave had been taken over by demons. There were demons everywhere! His first thought upon seeing them was, ‘I have got to get rid of them!’ He lunges toward them, chasing after them, trying forcefully to get them out of his cave. But the demons are completely unfazed. In fact, the more he chases them, the more comfortable and settled-in they seem to be. Realizing that his efforts to run them out have failed miserably, Milarepa opts for a new approach and decides to teach them the dharma.

“If chasing them out won’t work, then maybe hearing the teachings will change their minds and get them to go. So he takes his seat and begins... After a while he looks around and realizes all the demons are still there…At this point Milarepa lets out a deep breath of surrender, knowing now that these demons will not be manipulated into leaving and that maybe he has something to learn from them. He looks deeply into the eyes of each demon and bows, saying, ‘It looks like we’re going to be here together. I open myself to whatever you have to teach me.’

“In that moment all the demons but one disappear. One huge and especially fierce demon, with flaring nostrils and dripping fangs, is still there. So Milarepa lets go even further. Stepping over to the largest demon, he offers himself completely, holding nothing back. ‘Eat me if you wish.’ He places his head in the demon’s mouth, and at that moment the largest demon bows low and dissolves into space.”

Surrendering to the demons that torment your organization does not mean abdicating your responsibilities to manage. You are still responsible for dealing with the reality of what is. In some cases, the demon is the wrong vision for the company. In others, it might be that you’ve hired the wrong people. In still others, it might be your own failings—like an inability to admit that you’re wrong.

But in all cases, allowing your self to be eaten by the demon that remains—acknowledging the ways you contribute to the problem without descending into pointless self-flagellation--adds to the heat beneath the crucible. Without heat, there is no alchemy.

On Becoming Your Self

When I was a young Padawan, I remember lamenting to my therapist about my own fears as a manager. After a series of infuriating questions, she got me to admit that I was trapped by my own beliefs about success. I finally admitted I would never be satisfied until I was as successful as Bill Gates.

Being myself was never good enough and, as a result, being comfortable in my own leadership was impossible.

“If you bring forth what is in you, what you bring forth will save you. If you do not bring forth what is in you, what you do not bring forth will destroy you.”  Jesus, Gospel of Thomas

It was only later, after allowing myself to bring forth what is in me, that I emerged not only as a leader but a Jedi master.

Joel Spolsky, in his guest post for this series, tackled what I hear all too often in my workshops. He takes the Steve Jobs Question head on.

He writes:

“And yes, you’re right, Steve Jobs…was a dictatorial, autocratic asshole who ruled by fiat and fear.” But, importantly, he points out “you are not Steve Jobs.” Just like I am not Bill Gates.

Indeed, I think what Jesus taught was a simple truth: the only choice that doesn’t destroy you is to be the leader you were born to be. The alchemy of becoming your self is the ultimate act of leadership.

Listen close enough and you’ll hear echoes of this from every conceivable source.

Phil Sugar, tells us who he is and what he believes in the simple statement that, “My biggest legacy is the network of people I’ve hired and what they’ve gone on to do.”

Matt Blumberg, having gone through his own crucible challenged conventional wisdom (and the advice of Fred), choosing instead to invest in his team. “We consistently work at improving our management skills,” he notes adding that, “We learn from the successes and failures of others whenever possible.”

JLM writes:

“Develop a philosophy of management. Write it down. Try it out on some folks whose wisdom you admire. Put it to work…” and, my favorite, “Live it.”

I read in all these thoughts a steady, consistent wisdom: the wisdom of knowing yourself, your own beliefs, and living them.

Enduring the alchemical crucible requires developing the capacity to reflect, to turn the pain of the everyday life as a leader into lessons. Every wisdom tradition I’ve ever encountered—from Fred’s blog to the words of sages—ultimately demands the same thing: we must go inward.

That’s often the biggest obstacle to becoming your self. The frenzied, frenetic, do-it-now, answer-the-email-now-or-the-company-will-die-even-though-it’s-3 a.m. attitude is precisely the wrong process of becoming your self.

Joseph Campbell, writing in The Power of Myth, says,  “You must have a room, or a certain hour or so a day, where you don't know what was in the newspapers that morning…a place where you can simply experience and bring forth what you are and what you might be.”

Call that room, at that hour, the crucible of leadership.

Fun Sunday: Powder Skiing

I am in Park City with the Gotham Gal and our son and two of his friends. We woke up to fresh snow and its supposed to come down all day. So I'm taking the day off and going powder skiing off the Dreamscape lift where this video below was filmed. We'll be back tomorrow with Jerry Colonna's wrapup post on our Management Team series on MBA Mondays.

The video is about 3:30 long. Do yourself a favor and fast forward 30 seconds to the good stuff.

ClearQAM - What It Is And Why It Matters

There are millions of homes and apartments around the country that have a TV connected to a cable but have no set-top box and no video service from their local cable provider. These TV viewers either moved into a home or apartment where the previous owner had cable and the wire was still lying around. Or they are getting their broadband Internet over cable. Either way, when you connect a cable directly to most modern TVs, you can get the broadcast channels in HD without a set top box. And in doing this, you are not breaking any laws. This is perfectly legal.

The technology behind this is called ClearQAM. QAM is a modulation scheme that allows the transmission of digital TV channels on an analog RF cable. Because of a number of rules and regulations, cable televesion companies are required to provide access to the broadcast channels in the clear - thus the name ClearQAM. This whole thing is outlined pretty well in this Engadget post from a few years ago.

There are other ways to get the broadcast channels without a set-top box. You can put up an antenna and pull down them over the air for free. But for many locations, the cable is a better way to get the broadcast channels reliably.

Why am I telling all of you this? Because the cable industry is currently lobbying the FCC for a rulemaking that would allow them to encrypt QAM and shut down this whole bypass mechanism causing millions of TVs to go dark. And there aren't many voices out there opposing this rulemaking request. Our portfolio company Boxee's is one of the few that has spoken out. Their presentation to the FCC on this matter is online and is worth a quick read.

Getting rid of QAM isn't a bad idea in the long run. But encrypting the broadcast channels is not the best way to do that. Putting direct IP access to the broadcast channels on the cables is a much better approach.

It has always been the policy of our government that the broadcast channels are meant to be freely available over the air and by other means. There is no reason to change this policy now just because the cable companies want every home and apartment to have one of their set-top boxes and a paying subscription from them.

If you would like to reach out to the FCC and let them know what you think of this proposed rulemaking, you can do that here.

Fun Feature Friday: Clik This

I know its supposed to be Fun Friday, but this is going to be a Fun Feature Friday.

Yesterday our portfolio company Kik launched a new mobile app/platform called Clik.

Clik is really just one simple feature, implemented as a mobile platform that any developer will be able to leverage via a set of tools that are coming soon. And that feature is "point your smartphone at a browser that is showing a QR code and take control of the screen with your phone." Sounds strange the first time you hear it, but give it a try and you'll see what I mean. It's really powerful.

There's one more aspect of this feature which makes it even more fun. If your friends also have the Clik app on their phones (iPhone and Android to start), they can also take control of the screen and you can play games, play videos, play music, show pictures, etc with each other using your phones as controllers. It's fun to imagine the new kinds of games that can be built with this platform.

So do me a favor, download Clik onto your smartphone, fire up a web browser, point it to clickthis.com, and then take over your computer with your phone. You'll see the power of the platform right away.

If you are a developer and want to build something on top of the Clik platform, its really simple. No mobile development required. All web development and pretty easy to boot. If you are interested in learning more, email the Clik Platform team and they will be happy to explain how it works.