Convertible Notes

One of the most common questions I get as a VC from seed-stage company founders is "Should I take money from institutional VCs in a seed round?" That's a difficult question, and every start-up is going to have their own approach in answering it. I'll try to work through what to think about in this post.

Any time a company raises a venture round, investors are curious to know whether the current investors in the company are also participating. The reason is simple: the investors who probably know the company best are the ones already on the cap table. They get the investment updates from the CEO, and should be intimately familiar with the business and its future prospects. Thus, their further investment in the company sends a strong signal of how current investors see the business performing. If they are attempting to increase their ownership, it indicates they are bullish on the company. If they are trying to avoid putting more capital into the company, that is probably a sign that the company is no longer a good investment.

This is one of the most visible signals for a company raising capital. Its importance should not be understated.

When it comes time to raise a seed round, many company CEOs try to game this signal by placing only angels and micro-VCs in the syndicate – essentially, any investor that doesn't have the capital base to offer more money in a future round (or so little that it ...

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Rumors continue to swirl that Facebook is currently negotiating a buyout of Waze, the popular social mapping app. The app was founded by three co-founders, Uri Levine, Ehud Shabtai, and Amir Shinar, and is based in Israel with an office in Palo Alto. As part of a potential Facebook acqusition, the Palo Alto team would be merged into FB's Menlo Park office, while the Israel team would be used as a launching point to launch Facebook's engineering efforts in that country.

TechCrunch today ran an article that discussed whether the creation of the Facebook office would harm the nascent start-up community in Israel. The article's author, Mike Butcher describes a conversation:

Because, he says, although the Waze R&D center could be a beach-head for a full-blown Facebook R&D shop, and thus good for Facebook, “it could have catastrophic effects upon local early stage startups’ ability to compete on salaries and benefits.”

His argument is that if a big company like Facebook stays away, then the Israeli tech ecosystem is more likely to be able to “push more innovation” towards Silicon Valley, which would be in the “best interest of both the local startup industry and Facebook.”

Certainly, such a large acquisition inside such a relatively small country could well change the successful dynamics of the Israeli eco-system. If it became a mere engineering centre for Facebook, Apple and Google, the implication is that we might not see quite the same levels of startup activity as ...

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Data is becoming the central force for change in society. As we increase the sophistication of our analytical tools, there is more and more pressure on decision makers – whether in companies or in government – to utilize data and "insights" in their deliberations. Unfortunately, this opens up many of these decisions to a dangerous hack: controlling access to data can easily determine the outcome of major decisions. Just take a look at some of the recent stories where manipulating data access was key to a decision:

1. Several states have or are considering passing laws that restrict the ability to film slaughterhouses. Perpetrators would be subject to punishment that could include being placed on a terrorist list. Video tapes of slaughterhouses are one of the key pieces of evidence for animal rights groups to push policies that encourage humane treatment of animals. By banning videotaping, these legislatures are trying to control the debate on animal rights by limiting the evidence that can be introduced.

2. For years, the National Rifle Association has used its lobbying powers to prevent the collection of gun data by the government. Furthermore, the Centers for Disease Control have been banned by law from considering any research into firearm violence and its effect on human health. Again, access to data becomes key to a major policy issue, in this case gun violence. Without gun data, policymakers are forced to choose actions based solely on argumentation and rhetoric, without the deep scientific research that would lead to the best outcomes ...

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Springtime is in the air, and so is the annual cleaning of this blog. I have taken a break over the past few months to consider what I want to focus on in my work, and in my writing. That process has now been completed, and with any luck (and a little bit of tea), new posts will begin to emerge on this website.

I want to indicate a couple of changes to the editorial content and the website for those who have followed me through all of the iterations of my website over the years.

1. I have changed the name of my blog over the years from Informed Skeptic, to Danny Crichton, and now, "Hacking VC." I think this new title best describes what the focus of my writing will be in the coming year, namely thoughts and ideas that come from my work as a venture capitalist in Silicon Valley. There will also be some code examples occasionally as I learn new programming languages and libraries over the next couple of months and years. In addition because I cannot restrain myself, I will also include a random smattering of foreign affairs and politics in here. Sorry in advance.

2. I have refreshed the theme (yet again). There is now more focus on the content, with a greater width for columns as well as a simpler design. I'll never stop tinkering with the layout, but I like where this is right now.

3. I have started using Twitter more – you ...

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It has been almost two months since I last posted on this blog. That is a surprisingly long time for me, considering I have been blogging for almost 5 years now, almost without a single month being missed (the last gap was during the endgame for my undergraduate thesis).

This last month has been a month of change – new goals, new tasks, new home (having moved to SF this past month). As I execute on my goals for 2013, I realized that the amount of time that I spend on this blog is out of proportion to my own personal benefit from it. I intend to come back to this blog at some point in the future, but for now, it is going on hiatus.

As always, I am available by email. Send a note if you have something to say. Otherwise, hopefully regularly scheduled programming will return soon.

How portable are models of economic development? When people talk of the Washington Consensus or the Beijing Consensus, they are indicating a set of economic approaches toward development that include deep cultural connections. America's approach of privatization and deregulation has brought immense prosperity to the country over the past century (even if we may have moved the edge too far in the past few years). Likewise, China's approach to state-centered economic growth is merely an extension of an extremely long history of bureaucratic development.

One of the economic theories that have been put forward to address this is varieties of capitalism - an approach that seeks to consider countries in terms of holistic systems of production - one in which individuals interact in a system of institutions that all work together in synergy. Thus, the United States has strong patent rights, strong rule of law, entrepreneurship, libertarianism, deregulation, etc. - the change of one of which would be incompatible with the others.

The theory has many problems (namely, reverse causality), but it highlights a true danger in economic development: economies grow organically, and it is nearly impossible to graft on a new industry or approach and expect it to be successful. One only has to look at the demise of Silicon Valley clones around the world to see how difficult copying a set of economic institutions can be.

Daniel Altman (who I seem to beat up a little too much), wrote another article for Foreign Policy in which he discusses the ...

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Syria is the worst kind of crisis - simultaneously heart-wrenching yet mostly ignored by the international community. One cannot help but see the photos of the destruction (for a great selection, see this gruesome slideshow from the Atlantic) and want to do whatever it takes to try to direct the crisis to its end. The on-going destruction reflects our own psychology and helplessness, a failure of the modern international system to protect human rights in the face of pure evil.

Yet, the complexity of such situations - the ambiguity of a society that seems so distant, so impossible - is perhaps the most interesting story. The lack of action by Western powers from America to France does not reflect a missing capacity for power projection, but rather a lack of willpower on the part of politicians who abdicate their role of moral leadership.

This issue gets at the heart of The Syrian Rebellion by Fouad Ajami. Ajami complains, almost bitterly, about an Obama administration that simply refuses to put the effort behind the Syrian opposition like it did in Libya just a few months earlier.

There was no shortage of alibis for American passivity: America did not know the protagonists and couldn’t trust the Free Syrian Army, there was no United Nations Security Council resolution authorizing foreign intervention, and more. On February 26, Secretary of State Hillary Clinton, in an interview with CBS in Rabat, the Moroccan capital, all but took away any hope that there would be rescue for the Syrians ...

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Foreign Policy has an article that basically offers the opposite view of Korea's economic growth that I presented yesterday. Daniel Altman argues that Korea's best days are behind it already, and that the country is tracking the arc of Japan's rise quite well:

Korea's rate of economic growth has been falling since the early 1990s, and its overall trend tracks Japan's with a delay of about 20 years. In terms of urbanization, the lag may be closer to 15 years, but the resemblance is clear. Also, the age profile of Korea's population 15 years from now will likely be very close to Japan's today.

Altman is generally correct - there are a lot of close correlations with the Japanese and Chinese cases. However, it is interesting that an article that focuses so clearly on economic growth rates would seem to miss mentioning the Asian Financial Crisis and the Tokyo real estate bubble.

These crises were very important for moving the East Asian nations away from unsustainable policies. Much as the dot-com bubble eventually led to today's vibrant and strong internet entrepreneur culture in Silicon Valley (they are actually businesses this time!) Tokyo and Seoul faced many problems internally with their models of development, and their respective crises both set off reforms.

Unfortunately, Japan has never fully followed through with its reforms, for a host of reasons. Most importantly, the inability of its political leadership to fundamentally alter the balance of power between the ...

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In an article in Foreign Affairs, Ruchir Sharma blows apart the notion of the BRIC nations (Brazil, Russia, India and China) as the leading economic forces in the coming century. He emphasizes the demographic issues facing China, the rising concentration of wealth in Russia, as well as the slowing growth rates across all four countries to argue that the BRIC acronym should really be retired.

He moves beyond analyzing just the BRIC nations though, instead briefly noting the facts of development over the past 50 years. Sadly, despite some notable exceptions, Sharma notes that few countries have made any progress in their rise (in terms of real per capita incomes) in the past half century. Economic evidence demonstrates that countries can rarely grow at high sustained rates for more than a decade, since few countries have been able to adapt to the changing politics and technology that confront their economy. Sharma aggressively targets China in this regard, arguing that its bureaucracy simply cannot handle the combination of a changing economic landscape with the dual trends of urbanization and an aging population.

It is Sharma's comments on Korea that interests me most:

In the past, Asian states tended to look to Japan as a paradigm, nations from the Baltics to the Balkans looked to the European Union, and nearly all countries to some extent looked to the United States. But the crisis of 2008 has undermined the credibility of all these role models. Tokyo's recent mistakes have made South ...

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Back in October of last year, I wrote a blog post titled "What scares me about Mitt Romney" that looked into the business and educational background of the then future Republican nominee. My main concern with Romney came from his emphasis on data and analytics - his formative years were spent at Harvard Business School and Bain Capital, where he perfected the data-driven approach to private equity investment. While such skills are at the heart of business, the political world has generally been immune to such quantitative approaches.

So it is not without heavy layers of irony that Romney campaign staffers started blaming the team's approach to data as one of the leading causes of Romney's failed bid. BusinessInsider has one of the many accounts of Project Orca, a data and engineering centric approach to Get Out The Vote operations on election day. Rather than revolutionizing the campaign's activities, the program helped to suppress Republican turn-out efforts by preventing volunteers from accessing voter lists, and making it difficult to track who had voted and who had not.

Contrast the Romney campaign's maladies with the big data operation at the heart of the Obama campaign, as described by Time Magazine:

Get-out-the-vote lists were never reconciled with fundraising lists. It was like the FBI and the CIA before 9/11: the two camps never shared data. “We analyzed very early that the problem in Democratic politics was you had databases all over the place,” said one of the officials ...

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