The SF Scooter Wars & Proposal for Urban Safe Harbor Zones

In case you haven’t heard, civil war broke out in San Francisco last month, and it’s over dockless scooters. Battery-powered single-rider scooters which can be signed out using a mobile app and then left wherever the rider disembarks. The economics only work when you’ve got a density of riders so multiple companies descended on San Francisco, each hoping to beat the other in a landgrab. My understanding is that most (all?) of them launched without any particular outreach to SF city government, preferring to take an “ask for forgiveness” approach given that (a) they’re not illegal, (b) regulatory impact falls between multiple agencies and (c) venture-backed startups live and die on growth.

[*since publishing, one person reached out to say at least two of the scooter companies reached out to one of the city departments pre-launch and got implicit ok. I don’t have details to confirm one way or the other.]

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So what happened? Like pigeons these scooters flocked, creating at best a visual detritus, and, at worst, blocking doors, sidewalks, disability accessibility and so on. The scooter companies insisted this was the riders’ fault – their apps clearly say to park the vehicles out of the way and to not ride on sidewalks. And shortly social media, tech blog and local politicians were all making noise about our city’s latest transportation option.

I fell into the camp of “ugh,” at least with regards to the clumsy launch that shoved all of the usage externalities on to non-riders. When they blocked my way I *gently* pushed them aside with a kick, and I hungered for a creative street art stickering project to turn Lime into SLime and Bird into Turd.

At the same time, it’s clear these scooters – or something like them – will be part of our future urban landscape. They make sense, are fun to ride and will be a puzzle piece in solving sprawl. So the companies are likely to go through some back and forth with the city before everyone arrives at some sort of productive conclusion.

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But what could entrepreneurs and regulators take away from this spat? Should every urban startup go through an approval process just to operate (separate from business licensing, etc)? That sounds horrible and overreaching. And would also favor deep pocketed companies who post-launch would gladly support new regulations as a way of keeping potential additional entrants at bay. On the other hand, the “simply ask forgiveness” playbook sure feels very 2014 and out of step with where we want our tech values to settle post-bro.

What if city officials created a type of “Urban Startup Safe Harbor” where new products could be trialed for a limited period of time over a particular density. Startups would agree to proactively “file notice” of a test and share resulting data with the city. All tests are approved on an opt-out basis. That is, if the public official overseeing the Safe Harbor initiative has concerns, they can block the test but a judge will review the materials and rule within a few business days. The test can stay private for up to 28 days or so, after which the basic information will be made public by the city.

I’ve lived in SF for 20 years and am now raising a family within its boundaries. There are a host of growth challenges facing this town and technology companies need to be part of the solution. Not just by creating jobs but by coming to the table and building frameworks and transparency that take all citizens into account.

The Empty Chair at the Table During Meetings: Who Should Be In The Room That Isn’t

When you sit at a management meeting are you representing yourself or someone who isn’t in the room? I was recently chatting with a startup CTO, who recently joined his company’s Board, about the responsibilities of being a Director. That it’s not a role about advocating for your own interests but instead trying to make the best decisions on behalf of the company. There’s a great passage about this from a podcast with USV’s Fred Wilson and Reboot’s Jerry Colonna:

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I also recently came across another variation of this “who isn’t in the room” metaphor in a conversation Greylock’s Reid Hoffman had with Starbucks’ Howard Schultz.

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I really like these ideas as guardrails to make sure that as individuals and as groups, you’re not making decisions that run in opposition – strategically or ethically – to the constituencies which aren’t – or can’t be – represented in management conversations.

For VCs, Your Thesis Is Your Portfolio Page, Everything Else is Just Hopes and Dreams

“We invest in rebellious outliers.” “We invest in the Future of Work.” “We invest in frontier technologies.” “We invest in diverse founders.” “We invest with social good in mind.”

I hear, read, see examples every day of investors espousing differentiated theses with regards to why they exist. Why a founder should take their dollars. And why a LP should give them theirs. Sometimes there’s substance behind these statements; others are rickety content marketing or breathless trend hopping. Fortunately there’s a source of eventual truth! Your portfolio page. Your portfolio page is your thesis. It’s where you’ve committed dollars, not just Medium posts. It’s who has actually taken your checks, not the deals you wish you were in.

One challenge for seed investors especially is that your portfolio page is a lagging indicator of your interests. Startups often don’t announce their initial funding for quarters or years, which leads to the “oh I didn’t know you guys invested in that area” challenge for early funds like ours.

So we network, we write blog posts, we research, we tweet. And hope to continue adding amazing companies to our portfolio page. Because the portfolio page is real.

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Photo by abigail low on Unsplash

YouTube Lets People Decide Their Own Truths – And That Was Once a Good Thing

The most intense week of my life occurred in the spring of 2009. A small group of tech folks were in Baghdad – and not just the Green Zone. We traveled across the city to meet with government, military, NGOs, professors and students. It was the kids who made the most impact upon me, specifically a 17 year old girl. I still remember what she told me about YouTube, where I was running product at the time.

She was very thankful for YouTube. First, because it made her feel connected to other teenagers across the world. She saw that even though her circumstances were quite crazy, that at a human level she was no different than a boy in Tokyo, or a girl in San Paolo. Friends, parents, school, crushes. YouTube turned her into a global citizen.

Second, she told me that YouTube was valuable because it allowed her to develop her own sense of the truth. She’d grown up in a repressive regime that historically limited her access to information. But YouTube provided her with first-person perspectives, citizen journalism that captured what was really taking place in her country. And news clips from around the world to add context to the explosions she heard nightly.

Nine years later we look at platforms like YouTube and wonder whether the “truths” they’re telling are really lies. Conspiracy theories, divisive content, deceptively edited video which is a minority of the content on the site, but exacerbated by algorithms, engagement and our own temperaments. All significant problems to be sure and these companies will be judged ultimately by their ability to adapt to these new understandings. But I hope we can still create global citizens and I hope we can still empower people to develop their own sense of truth. My Iraqi friend would be 25 now. I wonder if she’s still in Baghdad or did she move far away. I wish I could talk to her again. I hope she’s ok.

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Photo by Jay Wennington on Unsplash

 

Giving Visionary Women Their Due

Even though I finished reading Emily Chang’s Brotopia last month, it’s lingered. One passage in particular — Jennifer Hyman, CEO of Rent the Runway, talking about how we call many men in tech “visionary” but fail to apply this characteristic as often (or at all) to women.

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Reflecting on Jennifer’s assertion, I thought of our experience with theSkimm, one of the most dynamic audience companies out there today and a startup we were fortunate to first back in 2013. While reading Brotopia, we were also helping theSkimm finish up their new financing, with Google Ventures and Spanx founder Sara Blakely joining the cap table. Over the past five years, I’ve witnessed theSkimm be underestimated by the venture capital industry, by pundits and press. During that time I’ve heard many male media founders lauded as “visionary” – Jonah Peretti, Shane Smith, Bill Simmons. They certainly deserve it. I’ve rarely heard Carly Zakin and Danielle Weisberg described the same way. They deserve it too.

“Visionary” is defined as “thinking about or planning the future with imagination or wisdom.” What, in my mind, makes them visionary when it comes to theSkimm?

  1. Email as Format – at a time when they were being told to just try and grow on the back of Facebook and other social platform, they took a medium decried as moribund and reignited it.
  2. Smart Summarization as Wedge – helping make it easier to live smarter. Taking real news – not women’s news – and delivering it in a branded tone.
  3. Leveraging 1% Fans – the Skimmbassadors as a group, now 30,000 strong, which helps drive the passion and provides a realtime focus group.
  4. Paid App – One of Apple’s Top Five Highest Grossing News Apps since the day it launched. A $2.99/mth product delivering a seven-figure revenue stream… and growing.
  5. Calendar Integration – The app integrates into your calendar and posts things coming up you need to know about – ranging from entertainment and lifestyle events, to activism and political deadlines.

Some of this ground was completely new to the industry. Some was shared by similar thinkers such as Mike Allen and The Week. But the package is unique. And that’s why 7+ million active readers start their day with theSkimm. A number that’s almost all US-based, professional and aspiring professional. A number that’s the equivalent of a Top Five news network.

Digiday recently did a podcast with Carly and Danielle and it’s a lively snapshot of how they think about the present and the future of theSkimm (transcript). Listening to it I thought one thing – visionary.

Congrats to the team on their fundraise and here’s to being underestimated!

Human Resources Policy at Startups

One thing we try to do at Homebrew is help startups who *aren’t* part of the portfolio and one way we do that is by providing whatever we can publicly, not just to the companies we’ve backed. Our Head of Talent Beth Scheer is the catalyst for a lot of this and she just published great Human Resources Policy materials which have been vetted by legal (in the US) and other subject experts. Take a look,

Is The Quest For “Software Margins” To Blame For Twitter’s Trolls, Facebook’s Russians and YouTube’s Fake News?

Nothing gets an investor’s heart racing like the phrase “software margins.” It’s shorthand for the concept than businesses which are primarily bits (not atoms) have some very attractive characteristics: fixed development costs, economies of scale in deployment & servicing, and “winner take most” markets with pricing power. The resulting impact is very profitable, fast-growing success stories with high gross and net margins. Dismissing a company as “nice but doesn’t have software margins’ is the “yeah, nice personality I guess” of venture investing.

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Photo by Bill Jelen on Unsplash

So if you believe that in order to access growth capital and consistently trade at a high multiple as a public stock a company needs to maintain the margin-profile of a best-of-class software company, what might be the tradeoffs?

Well, maybe you focus engineering efforts disproportionately on growth and revenue-generating projects. And perhaps you see Sales & Marketing as necessary but every other non-product function – Policy, Customer Support, HR – as margin sucking cost centers.

Could Facebook, Twitter and YouTube spend more money on faster responses to abuse reports, more accurate content review tools, better ethics training for engineers, more manual investigations of identity theft and fraud? Sure. Would these lead to better products despite being fundamentally non-scalable? We can debate whether the answer is between “partially” and “substantially” but the impact would certainly positive.

Will we find that there were types of technology businesses which we thought had “software margins” but were understaffing customer support, content moderation, and policy enforcement because managing a global social network is just fundamentally different than selling expense software into the Fortune 500? These are questions not proposals, but when I look at some of the struggles my favorite consumer tech companies are facing, I do wonder if the requirements to fit a certain margin profile are one of the structural constraints to solving their issues faster.

Venture Funds as Products. What We Changed for Homebrew III.

“What did you change about Homebrew III to better fit ‘seed phases’ versus seed rounds?” a fellow VC asked me after my previous post. That’s a great question! One consistent LP complaint I hear about new’ish fund managers is that they forget a bunch of fund construction and portfolio modeling decisions are connected. The amount you raise, the average check size, your follow-on strategy, the fund staffing and so on — these aren’t single points but instead need to all be driven from one’s mission and strategy. For Homebrew, we’ve optimized for a product offering that will appeal to our target customers (founders) and maximize spending our time being hands-on supporting startups. So if you look at each of our funds as a version of a product release, what’s new or different about Version, errr Fund, 3.0?

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Actually not much. We’re still working with a very small group of institutional LPs, making a target of 6-8 investments each year during the seed phase, and keeping the partnership tight. But there was one non-traditional request we had and which our LPs agreed to support. We lengthened the initial investment period as well as the fund itself. In simpler language, Satya and I anticipate making more total investments in this fund (~32) than we did in the previous two (20 and likely ~25 respective), while not fundraising again until ~2022 (versus a more typical cycle of raising every three years or so that many < $200m funds employ). To execute this strategy we decided that ~$90m was the right size for Fund III. Here’s our thinking behind these figures:

  • Seed phases require patience and we don’t want companies to try and raise their Series A before they’re ready

When a VC is fundraising one of the stats they like to present to LPs is the quality and size of follow-on in the portfolio. For a seed investor like us that would mean “How many companies have raised a Series A (or later) and how good [brand name] are the investors leading those rounds?” This can sometimes consciously or unconsciously cause a VC to feel pressure to get their investments into their next round and marked-up in order to show momentum. In the first two Homebrew funds we’ve not always seen a correlation between speed of subsequent fundraising and long-term durability of company. Especially with founders who are in markets where they start earning revenue very early in a startup’s lifecycle, they sometimes choose to “fund” their business using this revenue and then go out when ready for a Series A. Creating a longer fund cycle for ourselves is consistent with the spirit with which we want to engage the founders we back and reduces the potential for mismatch between our incentives and theirs.

  • Larger, longer fund gives us a better shot to hit our recycling goals

Ok, as if this entire discussion wasn’t inside baseball enough, if you don’t know what recycling is, first read Brad Feld’s post. Since recycling depends on cash flow a larger fund with a longer deployment increases the odds that we’ll get capital back from early exits that we can redeploy. We’ve generally got a recycling target of ~110% and minimally want to get to 100% invested.

  • Time diversity is our friend

Simply put, we believe four years is better than three for achieving time diversity at the seed stage. Optimizing for spanning cycles of ups and downs, new ideas and models, etc. Being able to make enough investments to survive expected mortality rates and focus on durable outcomes.

  • Time spent helping Homebrew investments is better than time spent fundraising for Homebrew

While we’ve been VERY fortunate to always have relatively straight-forward fundraising processes there’s no denying it does take some time that, if we’re being short-term greedy, we’d rather be spending with our portfolio and new founders.

Of course, while that’s what we’re optimizing for there are some secondary consequences of this strategy which ultimately impact Homebrew.

  • More fees in the near term but harder to get to our target returns multiple given increased fund size

We’re long term greedy – for us the economic rewards of success come after our founders and LPs get paid, but that’s a feature not a bug. So the fact that a larger fund gives us more capital to spend on Homebrew operations upfront (which might include an increase to our salaries) is fine but it’s also essentially a loan we’re paying ourselves since we pay this money back to our LPs prior to sharing in the upside of the fund. And to get to a target return of 4-5x net, it means we need to return 5 * $90 million (ie $450m) to our investors. And if you assume ~10% ownership for Homebrew, well, you can do the math on exit value requirements.

  • Need to remain disciplined with regards to check size and follow on decisions

If you raise it, you spend it. That’s what we tell to founders who take on a big round with the idea they’ll stay judicious in how they use the capital. Satya and I are pretty thoughtful about this stuff and since we make decisions by consensus, this one doesn’t worry me but we’ve noted it as something to keep an eye on.

  • Fund IV will be raised off data, not momentum

Fundraising for VCs is always a bit of “remember how good we’ve been” plus “look how good we seem to be doing now” plus “here’s why we’ll well-positioned for the future.” There’s a certain cynical aspect of me which believes the fat middle of “just ok” VCs are in some perpetual game of fundraising when the above three attributes are just enough to get a fund done – ie timing the fundraise. By pushing Homebrew IV out a bit, I think we’re amplifying the idea we’ll be raising off results, not just momentum. Of course we think this’ll be to our advantage but… 🙂

  • Our J Curve and early IRR may look worse than other funds

Another inside baseball issue (read about J Curves) but since our LPs are pros who care about cash on cash returns, understand our strategy and generally are seeing lengthening time to liquidity in venture, we aren’t too worried about this.

So, that’s basically what we’ve changed about Homebrew III compared to earlier funds in order to support our belief of Seed Phases. We document this stuff publicly because it helps collect feedback on our thinking and in the spirit of collaborating with other new fund managers.

For Fundraising, Seed is No Longer a Round, It’s a Phase

Want to know the biggest challenge Satya and I faced when announcing Homebrew’s third fund? How to describe the moment in time we seek to invest. “Early stage” has been coopted by billion-dollar VCs who try to shoehorn a $10m ARR SaaS company into their idea of risk capital. And the verbal gymnastics of some founders! “We did a pre-seed, followed by a seed, then a bridge and an A. Now we’re raising an A-2 to scale. But it’s definitely not a B – that’ll come in 18 months.” What?!? Makes me wish we’d just adopt version numbers, a la software releases – Round 1, Round 2, Round 2.5 and so on.

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But ahead of the industry solving this problem, we had a blog post to publish. So, what to say? We decided on “seed phase” because now more than ever, we believe seed isn’t a round, it’s a period of time where you are starting, learning and iterating to a business that has proven its core value proposition and raises a Series A to begin scaling. Why does this matter to founders (and to us)? A few reasons.

1. Asking founders to prematurely perfectly forecast the amount of capital they need to get to a Series A is an unnecessary constraint

When we invest in a startup we expect aspects of the roadmap will change, heck, if it doesn’t I’m suspect they’re not taking enough risks or aren’t running the right experiments to get the data they need. Why should I expect premature precision in budgeting and forecasting the capital requirements? Of course a CEO should be thoughtful and disciplined when it comes to their cash and early stage startups don’t usually die because of lack of funding but rather lack of ideas and output. At the nascent point where we invest I’d prefer a CEO to be absolutely correct about their focus and directionally correct about the economics it takes to get there. You should get multiple bites at the apple if things are going well.

2. Series A investors are increasingly looking for derisked companies and willing to pay more for momentum

While there still exist conviction-based VCs, many more are momentum-based. That is to say, evidence of a startup being a potential outlier is worth a lot more to them. Why? Well, the long path to liquidity means many GPs don’t have much capacity open and the cost of getting stuck with a mediocre company is high (sucks up capacity and a competitive blocker for other investments). Later stage capital markets seem to be more willing to pile into perceived “winners” so the Series A VC can draw a path to where the next few rounds will come from. A result, the more mature the vertical (SaaS, commerce as examples), the less interested a Series A VC will be in an investment that just checks the boxes – ie it’s not about simple milestones. Which also means….

3. Startups are raising more total dollars, in various configurations, to get to the point where a strong Series A can occur

Many of our most successful investments have raised 2-3 rounds of capital before going out to do a Series A, in various configurations, in order to build not just product-market fit, but a real company! They’ve gone to market for a Series A that’s happened quickly and from a point of strength because they’re a real operating vehicle, not just six months of heat. This was the case with Lumi, who closed a very competitive Series A led by Spark. While the total amount they raised during their seed phase wasn’t out of line with a single larger round, they traunched it in a way to accelerate when necessary without taking all the dilution upfront. Call it whatever you want – a pre-seed followed by a seed followed by a seed-2. I don’t care – those are 90% marketing terms.

4. Founders benefit from having a financing partner who will write more than one check into the seed phase when necessary or desired

Homebrew will write multiple checks into your seed phase when it makes mutual sense. We’ve participated in pre-seeds and then led seeds. We’ve led a seed and then doubled-down to help a company go even further before heading out to the markets for a Series A. We don’t need outside validation because we’re investors of conviction. So yes, whether you’re raising your first $500k or multiples of that or your last $1m before a Series A, we want to chat with you.

So founders, whether you work with us or not, Homebrew’s belief is that seed is a phase and increasingly having an investor of conviction who can back you through the entirety of the phase is a competitive advantage. 

[Inside baseball: our goal is to concentrate our dollars in 6-8 investments per year because that allows us to concentrate our time and sweat too. For Fund 2 so far that’s looked “typically” like ~$1m of your first $2-3m raised, but we’ve done several pre-seeds, participating in rounds < $750k and then putting more into your seed. We’re agnostic and can work with you about pros and cons of different approaches. And yes, there is such a thing as “too early” for us, but that’s based on type of company, not stage of development. Will write a separate post on that…]