Goal reached. See you in Paris!

Eiffel Tower Snack Bento by Sakurako Kitsa

With the combination of dramatically reduced costs (e.g. free ticket!) and the incredible generosity of a few friends, I’ve reached my goal! Exceeded it, in fact, with plenty of time to spare.

Thank you so much to all the wonderful people who made this trip possible. I’m insanely excited to attend LeWeb. During the conference, I’ll probably have quick updates on Twitter, but as someone who values thoughtfulness over expediency, the real good stuff will probably appear on this blog afterwards.

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I’m going to Le Web!

No, I haven’t reached my target yet… but it has gotten a whole lot easier.

After starting to fundraise, I sent another email to Geraldine Le Meur, who is organizing Le Web, explaining that I was trying to raise money – but if I volunteered at the conference, could I earn an even further reduced price? She didn’t put me to work. But she did one better – she gave me one of her personal invitations, meaning that I can attend for FREE!

Of course, there are still the other major expenses of airfare and hostels, but I have never been so happy to revise down a fundraising goal:

Thank you SO much to all the people who have ALREADY contributed to making this dream come true! Now, with the help of Geraldine, I am so much closer to my goal and I am dead set on making it to Paris in December. Where there is a will, there are wonderful people who will help you along your way.

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Le Web: Chasing the dream… all the way to Paris

Update: Thanks to the generosity of Geraldine Le Meur, I have revised down my fundraising goal!

Hello friends!

My dream is to improve the world through technology, internet, entrepreneurship, and finance – and I am sitting on an incredible opportunity to chase that dream. I recently found a way to attend Le Web, the biggest tech event in Europe, but I need $1000 by Nov 11. And I’m hoping that you can help.

Why Le Web?
Le Web is Europe’s largest and most influential tech conference. The lineup is unbelievable, including rockstars like Eric Schmidt (Exec Chairman and former CEO of Google) and Sean Parker (co-founder of Napster, founding president of Facebook… you know, Justin Timberlake in The Social Network). I know that this conference would be absolutely incredible for me.

The Details
There’s a deadline because I need to buy my student ticket by Nov 11, and I can’t afford to front the money if I’m not sure that I can pay for the entire conference. The $1000 will cover the conference fee (€300), airfare to Paris (~€200), a hostel for three nights (€30-40/night), and misc. travel expenses like the annoying €12 airport shuttle.

You’ll notice that this doesn’t add up to $1000, even given the weakening dollar. During my trip, I’ll carefully track my conference-related expenses (excluding personal stuff like food), and if I’m fortunate enough to raise extra money, I will donate it to a charity yet to be determined. I’ve set a $1000 goal partially because I want to make sure I can cover everything, even if prices fluctuate – but more importantly, because I believe in setting (and achieving) high goals.

If you are able to help out a little, please leave a comment – I’m not sure that ChipIn (the free service I’m using) allows me to track who’s contributing, and I want to make sure I know who to thank. Words cannot express how grateful I would be for the opportunity to go to Le Web.

Thank you so much!

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Why Not Invest with Debt?

In establishing a VC fund at USC, my partners and I are constantly asked about how we want to invest. Inevitably, we are asked about debt. I suspect it is even more frequent for us because “socially conscious” startups are often non-profits, which cannot be financed through equity. Admittedly, I’m quite biased because I’ve always thought equity is “sexier” than “boring” debt. But I am convinced that equity logically makes much more sense.

Let’s start with a few basic definitions:

Debt: A method of investing where the investor has a contractural right to pre-determined payments (e.g. bank loan).
Equity: A method of investing where the investor is a partial owner of the company and is compensated as a percentage (e.g. stocks).

Obviously, this is an over-simplification, but from an investing perspective, these definitions capture the core differences.

Generally, people ask us about debt because it is considered “less risky.” After all, you are guaranteed payments, whereas equity is subject to market randomness. For startups, however, this simple comparison isn’t appropriate. Instead, let’s look at outcomes in terms of upside and downside potential.

Downside Upside
Equity Very Exposed Very Exposed
Debt Some Exposure Not Exposed

As a debt investor, you might think you are not exposed to downside risk at all, since you have a legal guarantee of payment. However, in reality, a worst-case scenario is rough for debt investors too. If a company goes to 0 and defaults on their debt, no one gets paid anyway. Moreover, in a rough patch, a company often negotiates with its debtors to reduce payments. Things are not quite as “guaranteed” as they seem.

Notably, being early-stage changes the game a little. Since these companies are “do or die” compared to large corporations, the risk of default is much higher. Thus, the downside risk profile of debt and equity is actually quite similar. At the end of the day, if the company flops, everyone is in trouble.

If the company does well, you want to hold equity. Why? The upside of debt investors is capped; the most you can make has already been negotiated through your interest payments. For equity investors, however, the sky is the limit – you get your percentage regardless of whether the company is valued at $100 or $100mm.

Interest Payments as a Disadvantage of Debt
There is one final reason equity is superior to debt for our fund. At the most basic level, debt imposes interest payments on a company that probably has no revenue, let alone cash flows. For a high-growth company, that money would be best spent reinvesting in the company. Why would you pull cash out of a company that you just invested in?

At a deeper level, equity more easily matches a startup’s needs. Typically, debt requires regular interest payments regardless of how the company is doing, whereas equity allows the company to retain capital until some future exit. The trajectory of an early-stage company is not predictable, and through equity, entrepreneurs and investors can continually make decisions that offer capital for the startup and returns for the investor when appropriate.

I hope this provides a compelling rationale for using equity-only investments for the fund. Equity offers maximum upside potential with comparable downside potential, while also better aligning with the entrepreneur’s interests.

Of course, all of this is me theorizing, so I would love feedback – especially cases of debt or equity investments that went south.

EDIT: In venture capital, liquidation preferences definitely change the nature of this upside/downside analysis. Going into detail about liquidation preferences might be a little too technical for this blog, but for anyone really interested in VC, it’s definitely worth learning about. Here’s a video with some information about liquidation preferences… can’t remember where exactly, but the whole video is a good primer on VC.

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Becoming a 30-Second Genius

Next spring, I’m expecting to join the Marshall Case Team (MCT), which travels the world competing in case competitions on behalf of USC Marshall.

Why? For me, it’s simple: mental models.

There are a million other reasons to join MCT or even work at a management consulting firm: prestige, networking, all-expense-paid travel, and tremendous diversity of experience. But my answer is that if you’ve decided it’s time to learn, rather than earn, there is no better place to learn a bunch of mental models that may drive your success in the future.

Warren Buffett once said that his partner Charlie Munger has “the best 30-second mind in the world.” How? As Munger said at USC (video|transcript):

You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life.

Munger has collected a broad network of mental models that allow him to quickly assess and understand a variety of situations. If you accept that, the next question becomes: how do I acquire all those mental models?

My theory is working through tons of cases. For example, simply preparing for Marshall Case Team has given me a tiny sliver of insight into the mental exercises that consultant perform every day. On any given case, you must quickly assess what is or is not important, which means that you eventually develop models to efficiently guide you through the process.

Are cases a complete education? Of course not. Munger uses models from many different schools of thought, from physics to philosophy. I want to do the same. But cases are an amazing way to train yourself on the mental models in business. Even if I never actually pursue management consulting as a career, the preparation alone will help me gear up to become a 30-second genius.

As an aside, the article that I linked earlier (Is it time for you to earn or to learn?) is about working at a startup, not as a consultant, as an opportunity to learn. Nevertheless, I think the learn/earn dichotomy is a useful tool. Mental model, if you will.

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Chris Sacca on Foundation

Bouncing from a $12mm to $-4mm net worth and back, leading Google’s stealth data center grab, and ultimately becoming a venture capitalist, Chris Sacca is one of the most fascinating people I have encountered online.

He was recently featured on Foundation, a show produced by Kevin Rose (founder of Digg) with high-quality, in-depth interviews with entrepreneurs like Jack Dorsey (Twitter, Square) and Tom Conrad (About.me).

Here are a few key segments particularly applicable to venture capital:

Getting startup cash through law school financial aid (1:30)
From $12mm to $-4mm (4:45)
Creating a random company to get legit work (9:50)
Building a fund for the deal of a lifetime (29:00)
What to look for in a startup (45:03) – notes below

  • Is this a product I can be helpful with?
  • Focus on entrepreneur as a person
    • Has had a shitty job
    • Lived, traveled, or studied abroad
    • Play sports, have balance in life
    • College isn’t a prereq, but there’s a correlation between doing well in college and afterwards
    • Would I have these guys up at my house?
  • Money is really made by doubling down on follow-on rounds
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Feature vs. Company

Since reading Mark Suster’s post, Explaining FNAC: Feature, Not a Company, I’ve been thinking about the concept of feature vs. company as well as Skype’s acquisition of GroupMe more. Then, finally, I think it clicked.

There are two things at work here: 1) Scale, which determines what is, and 2) Competence, which determines what could be.

1) Scale
Scale is the easiest to understand. A feature is small; a company is big. As Mark mentions in his response to my comment:

I think any time you have such a big & monetizable revenue stream you’ll always view less monetized portions of your business as features until such time as they add meaningful revenue. I saw this first hand inside Salesforce.com. The company I sold to them in its own right could be a company (we did what DropBox does) but inside Salesforce it has remained a feature since their core business monetizes so well.

In other words, Mark’s company became a feature because it was so much smaller than Salesforce.com. And frankly, when all these valuation numbers are flying around, it’s easy to forget the relative sizes of companies if you have no context.

The most recent number I’ve seen for GroupMe’s acquisition price is $43mm, or maybe as high as $85mm. Even Foursquare, which was recently valued at $400mm (5-10x GroupMe), is pretty small. When I put my investment banker hat on, even $400mm is microcap, meaning it’s the kind of company that would struggle as a hardly noticeable investment in public markets (hence little serious discussion of an IPO… to my limited knowledge). In contrast, Skype was acquired by Microsoft for $8.5bn, which is 20x Foursquare. Regardless of whether Microsoft overpaid for Skype, there’s no doubt that’s a real company.

However, the key for me is the second sentence of Mark’s response: “The company I told to them in its own right could be a company.” When it comes to scale, management/investor goals are more important than absolute numbers. Check-ins at Foursquare are certainly could be a feature (e.g. Places), but Foursquare is certainly working hard to differentiate as a sustainable business model.

2) Competence
With features, incumbents have an advantage because of established competencies; a company creates its own competitive advantage by developing unique competencies.

To illustrate my point, I’ll talk a little about an idea I’ve had for a long time – or rather, a problem I’ve had for a long time.

I travel a lot. My family is in Chicago, school is in Los Angeles, and summer is always somewhere different (last 5: New York, Shanghai, Chicago, Lubbock, and Palo Alto). Plus, my friends are all in college and travel all the time too. With a peer group as mobile as mine, it can be difficult to remember who is where – which means I often miss opportunities to catch up with friends when our cities finally overlap. My need, therefore, is very simple – something that organizes what geographic regions my friends are in, and for how long. I don’t need the granularity of Foursquare. I just want the general area.

This is a feature. Why? Because incumbents have an advantage based on data – companies like Facebook, Foursquare, LinkedIn, TripIt, etc. have easy access to the locations of your friends, unlike me or any other potential founder. In fact, Facebook might be doing something like this with Nearby. If someone tried to fill this gap with a company, they would be crushed once an incumbent became a competitor.

Although, to be fair, Arrived is working very hard to prove me wrong. And the rise of data as a service may eventually erode the incumbent advantage, leveling the playing field for new companies where once existed only features.

In this context, GroupMe is not just a feature. In my view, its acquisition by Skype does not trigger any significant incumbent advantage. (In consultant-speak, the only synergies I see are typical SG&A synergies, but nothing more significant than that.)

Final Thoughts
Scale, though important, is ultimately relative. Competence seems more robust – and I don’t think anyone is more competent in group messaging than GroupMe. But again, scale determines what actually happens, which means that while I maintain that GroupMe could have been an independent business, just like Mark Suster’s company, it is more likely that Skype incorporate GroupMe as a feature.

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Mark Suster – A Must-Read VC

A lot of venture capitalists out there maintain blogs, but very few of them consistently produce compelling, must-read content. But I have encountered an important exception: Mark Suster, a general partner at GRP Partners in Los Angeles. His blog, Both Sides of the Table, has everything from the typical tips for entrepreneurs to thoughtful discussion about both industry-specific, technology trends and broader economic trends.

This is not the first time I’ve come across Mark’s blog. I remember that Mark came to the USC campus in August or September of 2009 – I attended his talk hosted by the Stevens Institute during the first few weeks of my freshman year, if I remember correctly. In fact, I remember sitting in front so that I could record the talk on my iPhone for a friend who couldn’t make it. (Unfortunately, I’ve deleted the recording so I can’t go back to confirm this actually happened.)

Mark also popped up while I was working on the USC fund. He is the founder and one of the key organizers of LaunchPad LA, a network offering mentorship for LA-based startups. Unfortunately, none of the Summer 2011 class fit our investment criteria, but nevertheless it looks like a great organization that we would be honored to work with. (Sidebar: sent them an email a few days ago; we’ll see what happens.)

He also hosts an incredible video podcast called This Week in Venture Capital. I’m in the process of watching every episode (50+ as of this writing) to learn about the industry.

But more than anything else, Mark has repeatedly emerged from my various mediums for consuming content, whether being featured on TechCrunch or being retweeted on Twitter. After I kept finding great articles that were coincidentally written by Mark, I had to take a more serious look. Here were a few of my favorites:

All of this has resulted in me adding Mark to my Google Reader feed – which means I expect to read every single one of his future entries. I’m looking forward to see what might be coming. More importantly, I’m taking this as an opportunity to get to know him better before hopefully meeting him when I am back in Los Angeles in the spring. (Read: If you know him, Adam Lilling, or Joshua Webb of the LaunchPad LA team, please let me know!)

Also, this has lead to me buying the Kindle version of Mark’s recommended book, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist.

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Starting a VC fund at USC

Between finishing my dream internship and spending a semester in Milan, I can only think about one thing… the budding venture capital fund at USC.

This is a project I started about five months ago. A socially conscious, early-stage investment fund run by USC undergraduates. To be honest, it has been a daunting but incredible undertaking thus far, and we’ve made a lot of progress:

  • We formed a team of 12 students, with 11 graduating May 2013 or later (so we can see this project through)
  • We assembled a group of advisors, both inside and outside of USC
  • We are putting together a packet describing exactly what we are trying to do, including:
    • our definition of “socially conscious”
    • our investment profile (for-profit, early-stage companies near USC)
    • potential legal structure
    • timeline with key milestones and launch in Fall 2012
    • our strategy for maintaining organizational longevity
    • brief student bios
    • remaining questions and “asks” for administrators/donors/etc
  • We are conducting a mock due diligence process to demonstrate our ability to find companies that fit our investment profile

On a more personal note, though, it has been a thrilling experience. There is a long, long road ahead – we’ve barely scratched the surface of the work to be done, though I expect leaps and bounds of progress when the academic year starts again – but it’s been a while since I’ve been this excited about something.

Why? Because this is my ticket to living my dream right now.

Let’s be real. Where can a 20-year-old make early-stage investment decisions? Nowhere – the people making those decisions are seasoned entrepreneurs and industry experts, or at least people with a lot of money. But through USC and the Trojan Family, I can have a taste. And that prospect is tantalizing.

This is what I have always wanted to do. Early-stage investing is the business of empowering ideas. As an eternal optimist (which makes investing difficult), I love being surrounded by people who are trying to change the world. To me, socially conscious just means aspirational. People aspiring to make things better. I might not be the visionary, but I know finance and investing – and I want to use my talents to change the world too.

With all that in mind, I guess it should come as no surprise that a few months in Milan seem unimportant in comparison.

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