Musings of a VC in NYC

Coworking Spaces

I've never been much of a fan of incubators. Some have made the model work. My favorite of the bunch is Betaworks, based here in NYC. Betaworks is more than an incubator, but they have shown that they can make the incubation model work with projects like bit.ly and chartbeat.

But one aspect of incubation that I like very much is the idea that multiple projects are sharing the same workspace. The term for this kind of work setup is coworking. There are various approaches to coworking.

There is the shared space model. Foursquare, Curbed, and Hard Candy Shell have shared a single office for the past year and a half and they get a lot of benefits from working together even though they are three companies all working on very different things. Our portfolio company Outside.in has employees from our portfolio companies Disqus and Zemanta working out of their office. We see that kind of setup all over the startup world. I encourage all of our young companies to think about that kind of setup.

The main benefits of this kind of setup are comraderie (small startups can be lonely), knowledge sharing, high energy, culture, and cost sharing. I have heard so many stories of software developers walking to the other side of the office to talk to software developers working for another company to talk about a thorny tech issue. That same thing can happen in finance, legal, bus dev, marketing, product management, really all parts of the business. You can get some of the benefits of scale without being at scale.

I have been contacted by a large number of people working in city, state, and federal government recently asking me how they can help small tech companies. They often ask about real estate. I tell them that small office spaces are plentiful and not terribly expensive, but that what we need more of is coworking spaces. And we have been getting them at a nice clip here in NYC.

The "grandaddy" of NYC coworking spaces is New Work City. They just raised almost $20k on Kickstarter to open "the awseomest coworking space NYC has ever seen."

A few weeks ago I was down at the NYU Poly coworking space on Varick St right near the Holland Tunnel. They have about thirty companies in one large open floor in a very nice buiding owned by Trinity Church. NYC Seed keeps their manhattan office there as well.

Dogpatch Labs has coworking spaces in SF, Boston, and NYC. The NYC Dogpatch is on 12th between University and Broadway. There are a lot of great companies going into and coming out of Dogpatch these days.

A new coworking space has opened in Williamsburg recently called The Brooklyn Makery.  The image at the top of this post is of their space. I am really excited about this project and a few of us from our office are going out there in a few weeks to visit all the teams.

There is an all woman entrepreneur coworking space on 23rd St between Fifth and Sixth called InGoodCompany. There is an all green/environmental startup coworking space on lower broadway called Green Spaces.

I could go on and on, but I'll just link to this wiki of coworking spaces in NYC. If yours is not on there, please add it.

If you are launching a startup or have one that is just one or two people, you should really try to get into a coworking space. It can be more cost effective, but that is not the best reason to do it. You'll get knowledge sharing, energy, and a lof of camraderie. And you can't put a price on those things when you are doing a startup.

Stocktwits Interview

I did a Skype interview with Howard Lindzon last week. They put it up last night on Stocktwits.tv.

I was tired, particularly at the start, and it shows. The whole thing is just under 20 mins. We talked about "the web is dead" and some other things.

Some Thoughts On Convertible Debt

Seth Levine has a long and thoughtful post on convertible debt vs equity. If you are an entrepreneur or active in the angel/seed sector, you should read it. He wrote it in response to Paul Graham's tweet that said:

Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.

I am sure that Paul was talking about angel/seed rounds and was not suggesting that convertible debt has "won" as the preferred financing structure in the venture capital business. But since our firm does participate in select angel/seed rounds, this was interesting to me.

I have been doing venture capital for 25 years now and have also done many angel investments personally along with my wife. We have never done a convertible debt round. That run may soon come to an end if Paul is right. Maybe I will have to join the convertible debt parade.

But I don't like convertible debt for a host of reasons.

It used to be that convertible debt was a lot easier and cheaper to do legally. But with non-negotiated "light series A docs" from most top venture law firms out there, you can do a Series A Preferred for less than $5000. And these light Series A documents focus on economics not control and governance, just like converts do. So to me that is not a valid argument for doing convertible debt anymore.

It still is true that negotiating valuation can be very tricky in an angel round and it may be better to defer that negotiation until the next round. That is what convertible debt does. But I am a sophisticated investor. I do this for a living. I can negotiate a fair price with an entrepreneur in five minutes and have done that for a seed/angel round many times. So I don't think that argument applies to an investment I am making either.

Fans of convertible debt argue that debt with a valuation cap is no different than a priced equity round. That is true if the valuation cap is the same as the valuation that the investors would pay if it was equity. But if that is the case, then the entrepreneur is getting screwed. He or she is agreeing to either take the valuation that would have been offered, or something lower if the next round is lower. That is not a good deal for the entrepreneur.

In truth. there are many convertible debt deals getting done right now with very high valuation caps and some with no valuation caps. In that instance, we are simply seeing the impact of limited supply vs excess demand come into play in the angle/seed market and we need to call this what it is - a price increase.

And that is what I think Paul is actually seeing. He has done such a good job with Y Combinator and his leadership and vision has inspired a wave of seed and angel investment in web services that is unprecedented. That wave is creating price expansion. It is a seller's market and will be for some time to come. And then things will settle down. And when they do, I think we will see the angel/seed market return to a more normal place. A place where priced equity deals between entrepreneurs and sophisticated investors is the norm.

Of course, I could be wrong about all of this. It could be wishful thinking so that I don't have to eat my words and do a convert. That may well happen. Maybe very soon. Maybe my next deal. But I won't be happy about it.

Related articles by Zemanta

• Is Convertible Debt Preferable to Equity? (bothsidesofthetable.com)
• Equity vs. Convertible Debt: VCs Debate Shifting Investment Trends (readwriteweb.com)
• Why Convertible Debt Is A Sucker's Play (burnhamsbeat.com)
• Has convertible debt won? And if it has, is that a good thing? (sethlevine.com)
• Do VCs Really Prefer Convertable Notes Over Straight Equity? (businessinsider.com)

What A CEO Does

I am posting this as a MBA Mondays post. But I did not learn this little lesson at business school. I learned it from a very experienced venture capitalist early in my post-MBA career.

I was working on a CEO search for one of our struggling portfolio comapnies. We had a bunch of them. I started in the venture capital business just as the PC hardware bubble of the early 80s was busting. Our portfolio was a mess. It was a great time to enter the business. I cleaned up messes for my first few years. I learned a lot.

Anyway back to the CEO search. One of the board members was a very experienced VC who had been in the business around 25 years by then. I asked him "what exactly does a CEO do?"

He answered without thinking:

A CEO does only three things. Sets the overall vision and strategy of the company and communicates it to all stakeholders. Recruits, hires, and retains the very best talent for the company. Makes sure there is always enough cash in the bank.

I asked, "Is that it?"

He replied that the CEO should delegate all other tasks to his or her team.

I've thought about that advice so often over the years. I evaluate CEOs on these three metrics all the time. I've learned that great CEOs can and often will do a lot more than these three things. And that is OK.

But I have also learned that if you cannot do these three things well, you will not be a great CEO.

It is almost 25 years since I got this advice. And now I am passing it on. It has served me very well over the years.

 

Women In Tech and Women Entrepreneurs Discussion

There was a piece in the WSJ on Friday about the dearth of women in tech and women entrepreneurs. We've been talking about this issue here on AVC and I was quoted in the WSJ piece:

“From successes come role models and from the role models come change,” said Union Square Ventures’ Mr. Wilson, who recently called for more diversity in the start-up world.

In the article, Rachel Sklar took a bit of a swipe at TechCrunch and Mike Arrington did not like that one bit.

He just posted a long rant on the issue on the TechCrunch blog. And guess what? He is using Disqus to host the comments to that post.

I would love to see this community join that conversation. I find the comment threads at TechCrunch to be a very different experience to what we have here at AVC. Maybe we can inflitrate and influence those discussions a bit. Maybe we can start with this issue.

I just did my part. I love commenting via Disqus. And I am so excited to see it on TechCrunch.

Taste Neighbors (continued)

A few summers ago, I penned a post called Taste Neighbors in which I described a web service that would do for food/restaurants what last.fm has done for music. From that post:

This problem has largely been solved in music. Because its relatively simple to watch what music I listen to and what music millions of others listen to, there are many services now that use musical neighbors to drive recommendations. My personal favorite of these services is last.fm and this is a list of my musical neighbors.

and

I am more optimistic about watching what they actually do. As my former partner Bliss used to say, "watch what they do, not what they say". With online finance services like Wesabe (one of our portfolio companies), you can easily build a database of every restaurant you eat at, every movie you go out and see, every book you buy from Amazon, etc.

Well Wesabe has come and gone but my interest in a taste neighbors service has not.

Last night my friend Vanessa said to a few of us, "couldn't you look at my foursquare checkins and figure out what other foursquare users like to go to the same places I like to go and then using their checkin history, recommend other places I might like to go?"

Bingo.

So is anyone doing this? Can it be done via the existing Foursquare API? I think this is a big idea and I'd like to see some people working on it.

Symbology

When you want to look up information on publicly traded companies, it helps to know the ticker symbol. Microsft's ticker is MSFT, Google's ticker is GOOG, Apple's ticker is AAPL. Every publicly traded company has a ticker.

But private companies don't have tickers. And as more and more private companies are attaining status and drawing the attention of mainstream media and the investment community, it is time for that to change.

Yesterday Stocktwits and Second Market proposed a set of tickers for popular privately held companies. The proposed list of tickers is here.

I'd like to see services like Tracked.com (a portfolio company of ours: $TRACK), Google Finance, Yahoo Finance, Crunchbase, Wikinvest, and their competitors adopt these tickers. If everyone supported the TWIT symbol for Twitter, the FBOOK symbol for Facebook, and the SKYPE symbol for Skype it would make it a lot easier to aggregate financial and other information on these companies.

I have been an investor and on the board of a company called Alacra for over ten years. We made the investment in the Flatiron partnership. One of Alacra's most successful services is called Concordance. They manage symbology for large enterprises with large datasets. It is a critical service for large banks, brokers, accountants, consultants, law firms, and other knowledge driven industries.

Unique identifiers are so helpful when you are trying to make sense of large amounts of data. It is particularly helpful in the case of company specific information and it is also expected in the investment community.

So I hope this effort by Stocktwits and Second Market gains traction with the other web services that aggregate information on private and public companies. I'll do my part by tweeting with these tickers (using the $ticker standard set by Stocktwits) when I talk about private companies on Twitter. I hope others will do the same.

And Stocktwits and Second Market can make my life easier by making sure that companies like Alacra and Wikinvest that don't have private company symbols get them asap. I wonder if they should open up this database in some way so that companies can issue themselves tickers. It seems like trying to manage this as a closed system won't scale very well and some kind of open system will work better. I'm curious what others think.