Code is a mobile app built onchain that allows anyone to send anyone else money anywhere in the world and it is entirely self custodial. Code uses the Kin token that came out of the Kik mobile messaging app. The Code team are the same folks that built Kik and Kin. I've been working with them for almost a decade and a half and it has been a wild and fun ride.
You need the Code app to do anything with Code but once you have it, it is slick. You can download Code here or by scanning this QR code:
One of my favorite features of Code is the tip card. Here is mine:
Anyone who has the Code app can scan that card and tip. Everyone who has Code has a tip card. Your tip card can go in your social profile on TikTok, Twitch, etc. You can send it via a messaging app. Or, like I just did, you can put in in a blog post.
Micropayments has always been one of the most exciting onchain use cases for me. And as we are seeing all over web3 now, tipping is leading the charge for micropayments. I think that's awesome.
A friend of mine stopped by the USV office the other morning and asked me about startup mortality rates. Her business sells to startups and big companies in roughly equal measure and she told me they were seeing a rising rate of startups closing up (and thus churning as customers). While churn is never good, you really can't beat yourself up too much about your customers going out of business. She wanted to know what we are seeing.
Our portfolio has been relatively free of startup mortality in the last couple of years but it is something we expect for, plan for, and underwrite for.
I have always said this, on my blog and in person, about what we have seen at USV and what I have seen in other early stage venture funds I've worked on and invested in:
1/3 are good investments
1/3 turn into something but you wish you hadn't made the investment
1/3 are zeros
Another friend of mine asked me a similar question via email this week and pointed me to something out of Nate Silver's book, On the Edge. Nate breaks down risk in data driven ways and uses as examples poker, venture capital, crypto, etc. The book quotes some figures from Marc Andreessen wherein he outlines that a16z's funds perform as follows (note: he also broadly says these are 'top decile' fund performance numbers, too):
A lot of folks who are new to the venture capital business and are building their own firms and funds will email or message me about reserves and recycling. I am happy to engage with them on these very "inside VC" topics because I believe they matter a lot when managing venture capital fund and firm.
For those of you who are not VCs, you may find this irrelevant. Or you may find it interesting. For those who are in venture capital, I think you should understand these topics so I hope you find this valuable.
Early stage venture investing is like poker. You make a small initial investment, which is like the ante in poker, and you get a seat at the table. Then you watch the founder and team execute until they need more money. That is like the first set of cards you get. Then you get the chance to invest more money. That is like putting more chips on the table. This repeats a few more times and eventually the company succeeds or fails. That's like the river and the reveal.
In order to play the hand correctly, you need to have reserves. You can't invest all of your money in the ante. You need to have more chips so you can keep seeing more cards. A lot of investors, particularly newbies, don't understand this and run out of money too early in a deal and don't get to keep investing in their best companies. That's like not being able to play your best hands in poker. That's a disaster since you only get a few of those.
So at USV, we make sure we always have sufficient reserves for each and every portfolio company. We do this by building a sophisticated model of each fund and the fund's portfolio of investments and the expected capital needs of each and every business over a long period of time along with probabilities associated with each and every round and we run simulations to predict what the fund will need to reserve to support each company and we raise a new fund when our simulations tell us we need to do so.
Code is a mobile app built onchain that allows anyone to send anyone else money anywhere in the world and it is entirely self custodial. Code uses the Kin token that came out of the Kik mobile messaging app. The Code team are the same folks that built Kik and Kin. I've been working with them for almost a decade and a half and it has been a wild and fun ride.
You need the Code app to do anything with Code but once you have it, it is slick. You can download Code here or by scanning this QR code:
One of my favorite features of Code is the tip card. Here is mine:
Anyone who has the Code app can scan that card and tip. Everyone who has Code has a tip card. Your tip card can go in your social profile on TikTok, Twitch, etc. You can send it via a messaging app. Or, like I just did, you can put in in a blog post.
Micropayments has always been one of the most exciting onchain use cases for me. And as we are seeing all over web3 now, tipping is leading the charge for micropayments. I think that's awesome.
A friend of mine stopped by the USV office the other morning and asked me about startup mortality rates. Her business sells to startups and big companies in roughly equal measure and she told me they were seeing a rising rate of startups closing up (and thus churning as customers). While churn is never good, you really can't beat yourself up too much about your customers going out of business. She wanted to know what we are seeing.
Our portfolio has been relatively free of startup mortality in the last couple of years but it is something we expect for, plan for, and underwrite for.
I have always said this, on my blog and in person, about what we have seen at USV and what I have seen in other early stage venture funds I've worked on and invested in:
1/3 are good investments
1/3 turn into something but you wish you hadn't made the investment
1/3 are zeros
Another friend of mine asked me a similar question via email this week and pointed me to something out of Nate Silver's book, On the Edge. Nate breaks down risk in data driven ways and uses as examples poker, venture capital, crypto, etc. The book quotes some figures from Marc Andreessen wherein he outlines that a16z's funds perform as follows (note: he also broadly says these are 'top decile' fund performance numbers, too):
A lot of folks who are new to the venture capital business and are building their own firms and funds will email or message me about reserves and recycling. I am happy to engage with them on these very "inside VC" topics because I believe they matter a lot when managing venture capital fund and firm.
For those of you who are not VCs, you may find this irrelevant. Or you may find it interesting. For those who are in venture capital, I think you should understand these topics so I hope you find this valuable.
Early stage venture investing is like poker. You make a small initial investment, which is like the ante in poker, and you get a seat at the table. Then you watch the founder and team execute until they need more money. That is like the first set of cards you get. Then you get the chance to invest more money. That is like putting more chips on the table. This repeats a few more times and eventually the company succeeds or fails. That's like the river and the reveal.
In order to play the hand correctly, you need to have reserves. You can't invest all of your money in the ante. You need to have more chips so you can keep seeing more cards. A lot of investors, particularly newbies, don't understand this and run out of money too early in a deal and don't get to keep investing in their best companies. That's like not being able to play your best hands in poker. That's a disaster since you only get a few of those.
So at USV, we make sure we always have sufficient reserves for each and every portfolio company. We do this by building a sophisticated model of each fund and the fund's portfolio of investments and the expected capital needs of each and every business over a long period of time along with probabilities associated with each and every round and we run simulations to predict what the fund will need to reserve to support each company and we raise a new fund when our simulations tell us we need to do so.
25% of investments make zero return (i.e. 100% write offs)
25% produce a return greater than zero but less than 1x (i.e. are losses)
25% produce a return between 1x-3x
15% produce a return between 3x-10x
10% produce a return of 10x or greater
If you bucket the first two as "zeros" or near zeros, the third one as "something you wish you hadn't invested in" and the last two as good investments, you get to roughly the same 1/3, 1/3, 1/3 that I like to use.
Of course, these are numbers over a very long period of time. Startup mortality rates rise and fall based on the vibrancy of the overall fundraising market and at times will be higher and at times will be lower.
But if you look at the data over a very long periods of time, you see that a small percentage of investments produce all of the returns. And that has always been the case for the fortyish years I have been in early stage venture capital.
Maybe that will change but it hasn't yet.
In this way, we always have enough reserves for each portfolio company so we don't get tapped out.
We also recycle capital at USV. This means that for any given fund, we will keep the returns we get on early smaller exits and put them back into the fund. This increases our reserves capacity but it also means that we invest more money in our portfolios than we raised, including the management fee load. If a $200mm fund can actually invest $250mm and gets a 3x on that $250mm, it generates a 3.75x on the $200mm that was invested by limited partners. That has a hugely positive impact on returns.
Reserves and recycling are two techniques that can significantly enhance the returns on a venture capital fund. We use both of these techniques at USV. They are built into our culture, our DNA, and our processes.
You cannot produce a top decile fund with just reserves and recycling. You need to be working with great founders and teams who are building breakout companies. Just like a poker player needs to get dealt some great hands. But how you play those hands when you are dealt them is also critically important. I have seen early stage VCs make way too little on their best companies because they ran out of money and could not keep on participating or they had to sell too soon or some other reason that was effectively poor portfolio and fund management.
Reserves, recycling, and returns go hand in hand. So build them into your firm's culture and processes. They make a difference over the long run.
25% of investments make zero return (i.e. 100% write offs)
25% produce a return greater than zero but less than 1x (i.e. are losses)
25% produce a return between 1x-3x
15% produce a return between 3x-10x
10% produce a return of 10x or greater
If you bucket the first two as "zeros" or near zeros, the third one as "something you wish you hadn't invested in" and the last two as good investments, you get to roughly the same 1/3, 1/3, 1/3 that I like to use.
Of course, these are numbers over a very long period of time. Startup mortality rates rise and fall based on the vibrancy of the overall fundraising market and at times will be higher and at times will be lower.
But if you look at the data over a very long periods of time, you see that a small percentage of investments produce all of the returns. And that has always been the case for the fortyish years I have been in early stage venture capital.
Maybe that will change but it hasn't yet.
In this way, we always have enough reserves for each portfolio company so we don't get tapped out.
We also recycle capital at USV. This means that for any given fund, we will keep the returns we get on early smaller exits and put them back into the fund. This increases our reserves capacity but it also means that we invest more money in our portfolios than we raised, including the management fee load. If a $200mm fund can actually invest $250mm and gets a 3x on that $250mm, it generates a 3.75x on the $200mm that was invested by limited partners. That has a hugely positive impact on returns.
Reserves and recycling are two techniques that can significantly enhance the returns on a venture capital fund. We use both of these techniques at USV. They are built into our culture, our DNA, and our processes.
You cannot produce a top decile fund with just reserves and recycling. You need to be working with great founders and teams who are building breakout companies. Just like a poker player needs to get dealt some great hands. But how you play those hands when you are dealt them is also critically important. I have seen early stage VCs make way too little on their best companies because they ran out of money and could not keep on participating or they had to sell too soon or some other reason that was effectively poor portfolio and fund management.
Reserves, recycling, and returns go hand in hand. So build them into your firm's culture and processes. They make a difference over the long run.
