Overseeding Will Be Key To Strong Venture Returns

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Editor’s note: Mike Jones, formerly CEO of Myspace, is the CEO of Science, Inc., a Los Angeles-based technology studio that nurtures successful digital businesses by bringing together the best ideas, talent, resources and financing through a centralized platform. Follow him on Twitter @mjones.

The story is one we’ve heard before: plucky startup sails through seed fundraising, unfurls its wings, then runs into the brick wall of not enough venture and shatters into pieces. The numbers speak for themselves. There were 65 percent more seed-stage deals in 2013 than in 2012 while venture funding stayed relatively flat – 7.5 percent fewer dollars, 7 percent more deals.

But the forgotten winners behind this equation – the ones we’re not really talking about because we’re busy lamenting the hardships of fledging entrepreneurs – are venture capitalists. That venture as an asset class has struggled is not a surprise given its lackluster performance following the bubble years of the late nineties. But all that is about to change.

Supply-Side: Too Much Seed Money?

There are several structural factors that have increased the supply of seed funding in the short-term and contributed to the perception of a supply-demand imbalance. One is that the Silicon Valley has become a victim of its own success: every successful IPO yields newly liquid and wealthy early-stage employees/investors.

Facebook’s IPO alone was expected to create over 1,000 new millionaires by some estimates. Perhaps most importantly, these individuals/firms are more likely to invest in highly speculative assets/seed stage companies due to the “house-money effect.” They are already winners, so why not roll the dice again?

Secondly, the number of crowd-sourcing platforms and startup incubators has exploded, giving early-stage startups access to more money and increasingly inexperienced investors.

Finally, one can even take a stab at making a quantitative easing argument (when in doubt, blame the Fed!). The Federal Reserve purchases $75 billion in treasuries and mortgage-backed securities every month. As the risk-free rate is forced down, investors rotate out of treasuries and into high-yield and equity markets, causing risk premia across the board to fall.

Active/non-indexed investors are then increasingly forced to look at non-traditional asset classes for market-beating returns. Hence the increase in hedge funds, asset managers, and Middle Eastern royalty investing in pre-IPO companies like LinkedIn and Twitter. As traditional VC returns come under pressure from the influx of capital (it’s hard to compete on valuation with a Saudi prince), they too are forced to swim upstream, increasing the amount of capital deployed in early-stage/seed rounds. In a world awash with liquidity, “next best alternative” style investing eventually becomes…well, Bieber’s selfie app.

However, while important as catalysts, in the long-run none of these drivers should persist. More seed funding without a corresponding increase in Series A should theoretically lead to higher failure rates and lower returns for seed investors, and an ensuing drop in capital allocation to seed rounds.

Demand-Side: Not Enough Series A?

Of course, the flipside to this narrative is that more, better, companies are being created today compared to five years ago, and the problem lies with Series A VCs who have failed to adjust accordingly. For example, starting a business is becoming far less capital-intensive, leading to efficiency gains and increased competition among early-stage companies.

VCs can also be overly myopic and short-sighted. As noted by David Freedman, VCs might be missing out on great businesses that, while not the next Facebook, could have niche markets or longer development timelines.

In any case, if Series A investors have access to a surplus of high-quality deals and are currently only cherry-picking the very best, returns for VC funds should be increasing. Following our previous logic, this should theoretically lead to a market correction and an increase in capital allocation to Series A rounds.

Historical LP Returns Tell The Real Story

According to the Kauffman Foundation, VC LP returns have drastically underperformed the public market since the tech bubble. In fact, the average VC fund has failed to even return 100% of their invested capital back to LPs (a negative IRR!). When analyzing their own portfolio of investments in 99 VC funds from 1989-2011, the Kauffman Foundation reported a slightly higher, but still modest average net return multiple of 1.31x.

In contrast, an academic study backed by the Kauffman Foundation reported that earlier stage angel investors achieve on average a 27 percent IRR, with an average net return multiple of 2.6x. Seed/angel investing is a bit riskier than VC investing, and as a result, should achieve somewhat higher returns. However, this does not explain the unexpectedly large gap between basically similar asset classes, nor does it explain the underperformance of VCs relative to public equity markets.

This disconnect implies that historically, there has been a glut of VC funding and a dearth of earlier-stage seed/angel investors. Therefore, what we perceive as a “Series A Crunch” actually represents a long-overdue market correction. A portion of the correction is manifested by a shift in VC capital allocation, away from later-stage companies and towards earlier stage seed rounds.

However, there is also simply more seed capital available due to lower startup capital requirements, lower transaction costs, and innovative financing platforms. These structural developments should deliver more and better companies to Series A investors, helping boost returns in what has historically been an under-performing asset class.

Analyzing it from this perspective, the Series A Crunch becomes not so much an imbalance of supply/demand as it is a long-awaited rebalance. If the past is any indication, the process of correction will be slow, but will produce years of outsized returns for recently struggling venture capital funds.


Yes, but… what exactly does “being on LinkedIn” mean?

LinkedIn is, without doubt, an exceptional company: with more than 10 years of steady progress behind it, no major acquisitions or scandals have made it more than a leader in its category—the professional social networks—in fact it is really the only runner. Regional competitors, new developments, similar ideas, and assorted vampires have all fallen by the wayside, unable to keep up with a company with clear ideas and the ability to convince investors to continue supporting it.

Every year, when I begin a course about social media, the same thing happens: a lot of participants, many of them of a certain age, tell me that they avoid the social networks, with the exception of LinkedIn. Why? Because it is “serious”. But what exactly are the benefits of being part of LinkedIn? To what extent do we need to factor in LinkedIn to our personal agenda?

As LinkedIn has grown over the years, with more than 260 million users worldwide nowadays, the meaning of “being on LinkedIn” has changed significantly. In the early days, it was enough to simply have an account and to be found when somebody searched for you. Then it became necessary to have some kind of profile, with a photo and a few details about your career path.

Today, “being on LinkedIn means that your page has to have a very detailed CV, with a paragraph about each of the posts you have held, what you did in each post, how many people you managed, your budget, your goals, and preferably, one or two comments from people who worked with you, whether colleagues, superiors, or customers. Today, what somebody looking for you on LinkedIn expects to find is much more than simply a means to contact you, but to see in detail what you have done, all outlined in a site that puts you at your best.

LinkedIn is a site where you are not only reachable by millions of professionals, but one that is also a fantastically efficient index. Your LinkedIn file will be the first page in your ego-search. The mix of public and private that you manage there must be carefully thought out. If you are actively searching for work, or are looking for clients, you must make your profile as accessible as possible, because your information will be feeding processes that depend on reducing uncertainty. If you prefer to be discreet, then reduce its public presence, and refine your definition of contacts.

Don’t be a bore. It might have been acceptable once to send messages to all your LinkedIn contacts, but this is no longer the case unless you have something really important to say (and if that something is that you have changed jobs, don’t bother, LinkedIn will do it for you).

Spam. Spamming people is unacceptable, and often leads simply to large numbers of contacts that you follow going to Network > Contacts, looking for the message, and then clicking on More > Eliminate connection. If you are a salesperson, work on the basis that many of the sins committed by others in your profession will prompt many of your would-be contacts to reject your advances. You will have to find quality contacts, people who know that you are not going to send them garbage.

Contact awareness: use time wisely. The moment to send somebody a contact request is when you have just met him or her, or if they have just given you their business card, not when it suits you. A network comes into play when it needs to, not when it suits you because you are looking for work. Contact requests should sound natural: “We have just met, and instead of just exchanging cards that will be lost somewhere on your desk, let’s talk via LinkedIn.” If you go about contacting people on the basis of, “we met years ago and you probably don’t remember me”, isn’t going to work. If I am your teacher, then request contact while I am still teaching you, not two years later. And for the love of God, if I have given you a miserable B or B-, then show some commonsense and don’t ask me for a reference.

Update, update, update. Nobody wants to see a photo of you at your bar mitzvah. If you have now gone grey, then put a photo of yourself as you are. And you have to have a photo: a profile without a photo is like a garden without flowers or a rose with no scent. Aside from an up-to-date photo, your LinkedIn page must be an ongoing project. That means every project, every matter that might have any kind of impact. Remember: like a CV, but on steroids, with as much detail as you want. The one-page CV rule doesn’t apply to LinkedIn.

Don’t be obvious. Keeping your LinkedIn page up to date doesn’t mean that you are looking for work. It means that you understand how to use the network. The days when HR heads looked for what you put on your page to see if you are in the market for a job are long gone. Today, the point is to be seen, whether you are looking for work or not. Don’t wait until you are looking to make a move to update your page. A continuous process of evolution is the way forward.

Ask what needs to be asked: when you need information or a contact, or whatever, then ask for it. There’s no need to hassle people, but know that a request made via LinkedIn tends to receive more attention than a conventional email. That is unless you spend your time sending people who barely know you requests along the lines of, “please assess my professional profile.” Knowing what to ask for and who to ask it from is a highly prized skill among professionals.

Be detailed. If somebody in your network changes job or says something that makes you stop and think, let them know. Nobody minds receiving a comment about something they have posted. Don’t be the neighbor who never talks to anybody in the building.

Share. Sharing news about your profile — again, in moderation — can lead you to being seen as a content curator, somebody who can help others keep up to date about what is going on in your industry. But don’t avalanche those who follow you with several entries a day. If you share things, then explain why you are doing so in a couple of lines, and what you think is important about it. Tell people about what you are doing… I’m not going to explain here how important it is, if you have a blog or a personal page related to what you do, to, well, link it, to LinkedIn… everybody knows that LinkedIn is one of the main traffic referrals for this page. But if nobody bothers to answer, then ask yourself what you might be doing wrong. If you get a good response, then think about joining a group focused on your area of interest.

Groups. These are becoming a bigger and bigger part of LinkedIn, and for a good reason. If you are looking to be taken seriously in your sector, join groups that share information about that industry. Find out who set the group up, these will be people going places, and well known. Share and take part, but once again, avoid being either the party bore, or the life and soul of the party. If you are looking for work, you need to be part of groups that have some influence in your sector.

Contacts. LinkedIn isn’t about how many people you are in touch with, it’s about well-constructed networks, based on mutual interest. You must have a lot in common with your contacts, whether they are clients, suppliers, or fellow professionals. Responding to each contact request only makes sense if you are a headhunter, a teacher, or somebody with a really asymmetric profile.

Branding. LinkedIn is the perfect place to include anything that can help to establish your own personal brand: an article by you that has been published; a video of a talk you gave; a project you were praised for; high marks in an exam (in which case ask for a reference from your teacher…). There is no room for modesty on LinkedIn, but don’t go over the top either.

Pulse. LinkedIn’s strategy is clearly to move from being a site where people are going to see your professional profile to being a destination site, a place where you will find news filtered to meet your interests. If you do things right, LinkedIn’s news should give you an idea of what is really going on in your industry. The company’s purchase of Pulse (for $90 million) is one of its most important acquisitions. Use it to your advantage. And that most certainly means that LinkedIn is becoming the site where you should start thinking seriously about posting something every day.

Premium. Paying for a premium presence make sense… when it makes sense. If you are actively looking for work, the chance to send personalized mails to people who are not part of your network could pay off very quickly, but again, don’t go overboard. If you are building something that requires visibility and reach, whether it is a company objective or your own personal project, paying for the premium service can make a lot of sense.

Being part of LinkedIn today is much more than simply filling in a few lines saying, “Hi, this is me” and leaving it at that for years on end. It is also more than, “Hi, I’m looking for a job”. Ask yourself why you are part of this network, what information is on it about you or in your ego-searches. Are you really getting the most out of the network?

And while we’re at it, I should say that LinkedIn has not paid me to write this (they haven’t even given me a free premium service!) The truth is that I am simply tired of repeating all this to students, former students, and anybody I come across at conferences, and decided to write it all down, once and for all :-)

(En español, aquí)

Further Reading

Yes, but… what exactly does “being on LinkedIn” mean?

 — “The moment to send somebody a contact request is when you have just met him or her, or if they have just given you their business card, …

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The Obama Administration’s Frustrating NSA Week

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While Congress and the nation at large have done little except talk and embark on preliminary legal skirmishes regarding the United States’ mass surveillance practices, the forces in favor of reform and change had a decent week. The Obama administration did not.

The president’s speech one week ago on proposed changes to NSA practices was met with skepticism. A sample headline detailing the response: “Jon Stewart skewers Obama’s vague, rambling NSA speech.” The Post was sedate but firm: “Obama goal for quick revamp of NSA program may be unworkable, some U.S. officials fear.”

If the president had hoped that his reform proposals — including mild curtailment of the phone metadata program, some sort of protection for the privacy of foreign citizens and the like — would placate those opposed to the NSA, he was certainly disappointed.

Praise could be found for the president, but in the form of a backhanded compliment. Republican Rep. Peter King was content with the speech, because it didn’t seem to propose meaningful change:

“I didn’t think any changes were called for, any so-called reforms, but the fact is the ones that the President made today are really minimal. […] So long as the NSA can move quickly to protect us against plots, that’s all that is necessary: That the data is there, and the NSA is able to move quickly.”

Impressive accolades. When the forces arrayed against change think you are doing fine, you aren’t pushing for much change.

Also this week the Privacy and Civil Liberties Oversight Board lit into the NSA’s bulk collection program, saying that it lacked firm legal footing. The White House was left to somewhat lamely argue that it “simply disagree[s] with the board’s analysis on the legality of the program.”

The group also attacked the key reason for keeping the program: Its efficacy. The group’s report contained the following, as the Washington Post quoted:

“We have not identified a single instance involving a threat to the United States in which the telephone records program made a concrete difference in the outcome of a counterterrorism investigation. Moreover, we are aware of no instance in which the program directly contributed to the discovery of a previously unknown terrorist plot or the disruption of a terrorist attack.”

This week Russia announced that it would not expel Edward Snowden, and that the choice to leave would be his to make. So, if the administration had hoped that the clock would run out, sending Snowden back into its hands by default, those hopes have been largely dashed.

A group of self-described “US researchers in cryptography and information security” released an open letter in opposition mass surveillance today. A sample:

Indiscriminate collection, storage, and processing of unprecedented amounts of personal information chill free speech and invite many types of abuse, ranging from mission creep to identity theft. These are not hypothetical problems; they have occurred many times in the past.

And finally, earlier this Friday the Republican National Committee passed a resolution condemning the NSA’s bulk data programs in Constitutional terms. The resolution called for Republicans to investigate the NSA, forming a new committee. It was strongly worded, and somewhat surprising, coming from the party of the former President who set up much of what we are now talking about shutting down.

There was more, but that is a representative sample from the week.

Nothing may still happen. We can’t say that it won’t, but as time passes it increasingly seems that at least moderate change is feasible.

In the immediate aftermath of the early Snowden leaks, even that seemed far out of reach.

Top Image Credit: Flickr


Now Is Always the Time To Be an Entrepreneur

The World we Live in Right Now

People very close to me have lost their jobs in the last year. “Laid Off” would be a much better term because they were/are good at their jobs but in today’s world companies are smartening up, getting squeezed, and essentially ironing out their employees. It’s a leaner approach than we’ve ever experienced but said companies are churning along, accumulating more cash and realizing this can all be done with less man power. It’s a fact of life that machines, overseas work, and online technology have made the “working world” an extremely far cry from the assembly line days of past when Dad came home from the plant, brought home a roast and fed a family of four with a solid wage, good benefits and a pension that would come after retirement. The middle class, a term used so often, a “class” of people that politicians have been “fighting” for so desperately, has been disintegrating for decades. The fact is that the gap between the rich and poor is higher than it has ever been and frankly I don’t see that gap closing any time soon. In fact I think it’s just going to keep widening.

And even if the gap did in fact close, you’d never catch me in a “secure” job. After the financial crisis in 2008, as far as I’m concerned, the middle class effectively died (or is dying or is practically dead). Think you can make $75,000 a year, have a nice 401K, sit in a cubicle and check your email all day anymore and keep your job? Think again. Think you’re safe because you have a Master’s in Education? Think again. Tenure doesn’t even exist anymore in the New York Board of Education. No job is safe. And it hasn’t been in a long time. Unless you are an owner or unless you have a practice that is so established (like being a doctor’s group or partner in a law firm, even then you’re not safe) that it can’t be broken, you are essentially walking on thin ice out there and it’s just a matter of time before the company you so desperately cling to for survival realizes it doesn’t need you anymore.

All the years of you putting in the work, giving your time, energy, and efforts all coming to a big fat zero out of nowhere leaving you sitting on the curb with the remains of your emptied desk. Now, is this meant to scare you? Nope. And if it does I’m sorry about that. It’s simply the truth. It’s where we are. We are in more of a “survival of the fittest” atmosphere than we’ve ever been in and performance, hard work, and results are more critical than ever. You can either rise above the rest or you will more than likely be eliminated by the competition. I love this atmosphere. Not because of how difficult the environment is but because of how honest it is. Shortcuts won’t work anymore. Anything less than giving it your all simply won’t cut it.

Today we’re in an environment where 100 people can be doing the same job but only 1 or 2 of those 100 will be successful. And I’m talking in nearly any line of work. Question is, can you rise above and be one of those people? Do you even want to be one of those people? In my eyes, if you’re going to make it, and have the life you set out to have you’ve got a choice. You can either make your bed and lye in it or you can hide under the covers hoping to God you don’t get canned. So whether you’re in a job now, want to create something new for yourself, or just flat out have no clue what to do, it’s time you entrepreneurialize yourself and get into the mindset of becoming an owner.

And by ownership, I’m talking business, life, any endeavor. Own yourself. Own your decisions. Just own. Only then can you accomplish what you set out to do. Oh and let’s not forget a happy life people. That’s even more important. But wouldn’t it be nice to be happy in life and job? It’s 100% possible but you’re gonna have to put in the time and effort. There’s simply no other way.

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The Princeton Facebook Study is Missing Something Obvious

There is a fascinating report coming out of Princeton University about Facebook loosing 80% of its users by 2017. I gave it a read, and here is what I think they’re missing:

I look at social media like bars and clubs. See, in your teens and early 20’s its your job to get out and try every new bar, club, and thing that’s out there. By the time you turn 30-35, you’ve probably settled down into a relationship, and you and your better half have found 3-4 places that you really love. So if you look at the habits of a 22-year-old: dozens, maybe hundreds of new places every year. The habits of a 35-year-old: They’re going to their favorite spots over and over again.

This is exactly how I see Facebook, and social networks as a whole, playing out. I still haven’t really nailed down the exact age, but I’ve been looking at VaynerMedia‘s own data and at this point my intuition is that everybody 32 and older who is currently on Facebook is going to be staying there for a lot longer than most people think. It’s a much bigger push than the Princeton team realizes to get the average 45-year-old female and her entire social graph to switch over to an entirely new network. Facebook has the advantage of mapping this entire dynamic, and I think that the shift is going to be a lot slower, if it even happens at all.

So I’m sure there is plenty of data to show that the kids are shifting around. It makes a ton of sense. At that age, you’re supposed to try out the Snapchats, and the Vines, and the Whispers of the world. However I’m not so sold that the people who are set in the habits will be so quick to move.

If you’re feeling me on what I said here, it would mean a ton to me for you to share this with your LinkedIn contacts. If not, drop me a comment and tell me why!

Posted by:Gary Vaynerchuk

7 ways to make the most of your college experience

Some of these things I knew all along, and some I only picked up on after spending some time screwing up. For all you incoming freshman, here is a list of 7 things I found that helped me make the most of college.

  1. Establish a daily routine that you never break. Have a designated bed time, a waking up time, and time alotted for everything in between. Never break your schedule. Try doing this for a day, and see if you don’t feel 100x more productive.
  2. There’s always a way to do it yourself. Didn’t land that dream internship at a Silicon Valley startup? Start your own. Whatever your goals may be, chances are there are ways to out hustle your competition and learn a ton in the process by being resourceful. The beautiful thing about hustle is that anyone can do it, and it’s always impressive.
  3. Surround yourself with people who ooze passion for something. Whatever University you’re going to, there is probably some kid loves serving the poor so much he started a health clinic in Africa. Or maybe another kid started a startup that gained a ton of traction. Or maybe you know a guy who’s breath smells like a pitchbook with all the studying he’s done for Wall Street interviews. Find these people. Be friends with them.
  4. Meet at least two new interesting professionals each week who are relevant to your industry. If you can’t meet in person, Skype. If you can’t Skype, get on the phone with them. The beautiful thing about social media is that it brings you closer to alumni who are doing amazing, interesting things. Go talk to them. Ask them questions. Stay in touch with them. I’ve met some genuinely awesome people this way, and uncovered some really cool opportunities.
  5. Failing fast is a way of life. Now’s the time to do stupid, risky things (well, within legal reason). As a student, I’ve found out repeatedly, people are much more understanding if you screw up and are very willing to help you out. Get it all out of your system before you graduate.
  6. Always be working on something huge. You should always have a huge side project going no matter what. Whether it’s a tech startup, brick and mortar business, algorithmic trading, starting a non-profit, or something else you’re interested in doing “someday”, now’s the time to get cracking. Universities are your biggest advocate here for grant funding, mentorship, and whatever else you might need to build something amazing. Trust me, you’re not too inexperienced to give it a shot.
  7. Get super fit. I don’t always run, but when I do, I feel amazing for the rest of the day. You don’t have to fit into the waking-up-at-noon-and-eating-ramen-noodles stereotype. It’s better that you don’t. Do something crazy and train for a marathon or a triathlon. You’ll feel good.

I don’t always follow through with all 7, but I try. When I do, everything seems to fall into place.

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