A VC

The New USV.com Launches In Beta

Taking a cue from the advice we give to companies all the time, we've just launched the new USV.com in beta form last night. It still has a few kinks to get out, but it is mostly there.

When Brad and I first thought about our firm's website back in 2004, we quickly decided it should be a blog and that is what it has always been and it is what it will always be.

Our investment thesis is not a static thing, it is a living and evolving thesis, and the only way we know how to express it is in a series of blog posts in reverse chronological order. As we've added to the firm, our website has grown to include new voices like our partner Albert and also Andrew and Eric. It was time to refresh the look and feel and organization, but we've not changed the goal of the website.

There are three things I'd like to highlight. The first is our "focus" page. On this page we've simply collected all of the blog posts that we've written over the years on usv.com that are about our investment strategy. If you read all of the posts on the focus page, you'll understand what we invest in and why. And as our focus evolves, you'll see new posts explaining how we are evolving and why.

The second thing is the portfolio company page. Each portfolio company has an entire page on usv.com and that page is dynamic. Here is the Boxee page on usv.com. It has a short explanation of the company's business and then links to recent posts from the company's blog, along with photos, videos, and tweets from the company. This page is powered by a slick tool from Magnify. We appreciate their help in making these pages come to life. I think they are terrific.

And I'd also like to highlight the team member page. It is also powered by Magnify and includes a similar set of content as the portfolio company page. Here is my page on usv.com.

The new look is the work of a talented web designer named Phoebe Espiritu. In addition to her considerable talents, she is terrific to work with. The project was managed by Eric Friedman and I'd like to thank him for all of his effort on it.

I'm very pleased with how this came out. Our business and portfolio is changing rapidly and we've now got a website that changes in real time with it. That's the way it should be.

Comments (View) | Posted November 9, 2009 in Venture Capital and Technology

The AVC Reader Census: A Day Later

Almost 750 people took the AVC Reader Census/Survey in the past 24 hours. That's a decent sample size. So if you want to know what the readership of this blog looks like, go here.

I'm sorry to say that it is overwhelmingly male, 92% of the respondents are men. I'm also disappointed that 75% of the respondents live in North America. Other than those statistics which I am hell bent to change, I am pretty pleased with the composition of this audience. We are bloggers, twitterers, early adopters, travelers, and people who want to make their mark.

If you haven't gotten around to taking the survey, you can do so right in this post.

Comments (View) | Posted November 8, 2009 in Venture Capital and Technology , Web/Tech , Weblogs

The AVC Reader Census

We (Nathan and me) added a new widget to this blog yesterday. It's on the right sidebar above the Flickr photo widget. The purpose of this widget is to answer a few questions about the people who read this blog.

If you wish, you can take the survey right here on this post.

This census/survey is powered by Hunch which is an interesting decision/recommendations service based in NYC. I mentioned the service last week in my post about selecting a hotel to stay in.

We've already got some data coming in about what this readership looks like. Here is a screenshot of the first few data points. Click on that link to see them all.

 
The sample size is still too small to make any conclusions. I'll post again in a week or two when we have some real data.

Should be interesting and relevant to Kid Mercury's thoughts on blog stars and blog communities.

Comments (View) | Posted November 7, 2009 in Web/Tech , Weblogs

Valuation and Option Pool

One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, "it's just another way to lower the price".

I'll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I'll explain.

But first, let me lay out a few things for those who aren't well versed in these matters. The pre-money valuation is the value of the company before the money comes in. Let's say we call it $4mm. And let's say the financing is $1mm. Then the post-money valuation is $5mm and the $1mm round is 20% dilutive ($1mm/$5mm).

But to the entrepreneur it might be a lot more dilutive due to the inclusion of the option pool in the pre-money valuation. Let's say that the VC's term sheet says that a 15% "fully diluted post money" option pool needs to be in the pre-money valuation. What that means is that the investor wants 15% of the company, after the financing is closed, to be in an option pool that has not been granted to anyone.

In the case of the $5mm post money valuation, that means there needs to be $750,000 worth of options in the pre-money valuation. If the pre-money valuation is $4mm, then that means the true pre-money valuation to the entreprenuer is $3.25mm. And therein lies Mark's critique that the option pool is just another way to lower the price.

I am sure I lost a few of you on all of that math. If you want to drill down on it, please leave a comment and we'll help you figure this out. It is very important you understand all of this if you are or want to be an entrepreneur who raises venture capital.

The bottom line is the deal I described leaves the entrepreneur and his/her shareholders with 65% of the company after the financing, the VC investor will own 20%, and there will be an option pool representing 15% of the company that has not been issued yet. The $1mm financing was not 20% dilutive, it was 35% dilutive.

So it is not surprising that entrepreneurs hate this provision and fight about it every time. And like most terms, VCs have been abusing it for years by asking for excessive option pools making the provision hated more than it needs to be.

The first point I'll make is that VCs should be upfront about this provision and the fact that it is simply about price. In the example above, I'd be happy to pay $3.25mm pre-money with no option pool. Or I'll pay $4mm pre-money with one. They are the same thing to me. What an entrepreneur needs to do is find out what the market price for their company is with and without an option pool in the number. Once they do that, the negotiation over this point is a lot less contentious.

The second point I'll make is that the option pool request needs to be reasonable and based on some kind of budget. I generally ask the entrepreneur to put enough options into the "pre-money pool" to fund the hiring and retention needs of the company until the next financing. My thinking on this is that I don't want to get diluted between financings. So I like to see a headcount based hiring plan with expected options against each hire combined with a retention plan for all current employees who will need additional option grants.

In most of the early stage financings I've done in the past few years this work on the option pool has shown a need for around 10% in unissued options. I've seen it as big as 15% but that is rare. I've also seen it as low as 5%, but that is even more rare. But the point is this; don't guess or negotiate this number. Do the work, figure it out, and put it in the pre-money and then negotiate price.

I'll wrap with a true story about this provision. When Mark and I were negotiating the first round of financing for Zynga, we got into a real tussle about this provision. He did not want an option pool in the pre-money valuation. I did. Once we agreed that it was just a fight about price, the conversation got easier. I got him to give me an estimate of the pool he would need. We added it to the valuation we had agreed to. He got an increase in price, I got an option pool. And I got one of the best investments I've ever made.

Comments (View) | Posted November 6, 2009 in Venture Capital and Technology

Great Meetup Last Night

About a hundred readers of this blog gathered last night in the cafeteria of Washington Irving High School just off of Union Square in Manhattan to meet each other and celebrate the generosity of this community in the recent Donors Choose Bloggers Challenge.

It was a great moment for me. I got to meet many readers who I know by name but not in person. Putting a face to a name is a wonderful thing. I also got to meet Sarah Bunting, whose blog, Tomato Nation, raised $315,000 for Donors Choose in October. Talk about "blog stars". I've got a lot to learn from Sarah.

And I got to meet a bunch of teachers. One woman teaches middle schoolers in the Bronx with special needs. A couple others teach music in a middle school in southern brooklyn. A third teaches pre-K in the East Village. I met several others as well. 

I am telling you that these people (all women) are doing god's work. And it made my day to meet them and know that we all did something to help them.

It may have been the first meetup I've done with all of you, but it won't be the last. Thanks to everyone who showed up. I know we were competing with the Yankees but I got home in time to see them put the Phils away and I suspect most everyone else did too.

Comments (View) | Posted November 5, 2009 in Venture Capital and Technology , Weblogs