Old Style vs. New Style VC

Wrote a comment over on David Lerner's blog on his "Are Super-Angels Extinct" post. He said

What I am saying is that some of these superangel funds may structurally resemble traditional VC funds, but they are something altogether different- and more akin to an angel group.

My comment was that structure matters.  If you set up the Red Cross just like a bank, with the same incentives, they would have caused the Panic of 2007.

Maybe it's just two different world-views.  I've thought about this and written about it for a long time.  My take is that if you want to create a better venture capital system, you need to change the system, not just the people.  Calling yourself a super-angel and saying you are different does not change the investing world.  Changing the processes and structures of the investing world will change the investing world.  There are firms (and super-angels) doing this.

In the spirit of changing the game, some "old-style" and "new-style" comparisons:

Old-Style	New Style
Money managers	Company builders
Organized like a law firm	Organized like a start-up
Generalists	'T-shaped'
Managing $1bn	Managing $25mm
Living on management fees	Living on expected future carry
Scaling by hiring more partners	Scaling by being more efficient
"Loose lips sink ships"	"You should read my blog"
Going to NVCA meetings	Going to the R Meetup
Joining Angel Investor groups	Writing $25k checks
Starting an owned seed fund/ incubator/ hackathon	Supporting a grass roots effort
Sports jackets	Kicks
Networkers	Community builders
Lawyers	Series Seed
Participating preferred	Straight preferred
51%	15%
LPs measure success by: IRR	LPs measure success by: IRR

Coinvestor Graph Code

I've had a bunch of people asking for the data behind the coinvestor network map and a few asking for the code.  It's actually pretty easy to generate the basic graph from the Crunchbase API.  The hard part was cleaning the Crunchbase data, augmenting it with some other data sources and then making sense of the resulting graph.

But even so, the skeleton code is below. It will get you started. Then take a look at the raw output of Crunchbase's API. Play a bit with NetworkX and note that you can tag any node or any edge with whatever data you want. Then go create your own! If you find anything interesting, let me know.


# Crunchbase to NetworkX network builder
#
# Builds a network from the Crunchbase database and outputs it in graphml format.
#
# Required modules:
#    simplejson (http://undefined.org/python/#simplejson)
#    networkx (http://networkx.lanl.gov/)

import urllib2, simplejson as json, networkx as nx

def getCBinfo(namespace, permalink):
    api_url = "http://api.crunchbase.com/v/1/%s/%s.js" % (namespace, permalink)
    return json.loads(urllib2.urlopen(api_url).read())

def add_clique(G,investors):
    # Take a set of investors and add them to the graph, along with edges
    # between them all. Where an edge already exists, increment its weight.
    l_inv = len(investors)
    if l_inv > 1:
        # add nodes
        for inv, typ in investors:
            G.add_node(inv, inv_type = typ)
        # add edges
        for i in range(0,l_inv-1):
            for j in range(i+1,l_inv):
                if G.edge[investors[i][0]].has_key(investors[j][0]):
                    G.edge[investors[i][0]][investors[j][0]]['weight'] += 1
                else:
                    G.add_edge(investors[i][0],investors[j][0],weight=1)
    return G


# Main.
# Get the list of companies Crunchbase has data on
company_names = json.loads(urllib2.urlopen("http://api.crunchbase.com/v/1/companies.js").read())

# initialize Graph
G = nx.Graph()

# Iterate through companies, getting CB data on each
for company in company_names:
    try:
        co_info = getCBinfo('company', company['permalink'])
    except:
        continue

    # For each company make a set of all investors
    investors = set()
    if co_info.has_key('funding_rounds') and co_info['funding_rounds']:
        for iround in co_info['funding_rounds']:           
            for investment in iround['investments']:
                for i_type in ['financial_org','person','company']:
                    if investment[i_type]:
                        investors.add((investment[i_type]['permalink'],i_type))

    # Add investors and edges between them to the graph
    G = add_clique(G,list(investors))

# Write the network to a graphml file /projects/cb_graph.graphml
# NetworkX supports many other formats as well, check the docs.
nx.write_graphml(G,"/projects/cb_graph.graphml")


Co-evolution and other housekeeping

A couple of weeks ago I wrote something for AdExchanger's 'Predictions for 2011' series. It needed to be brief, and I wanted to talk about what entrepreneurs will be beta testing two years from now.  I made a couple of observations that are pretty obviously true and then ventured this prediction:

Towards the end of [2011], the smartest entrepreneurs will start thinking about how to reinvent the core platforms to better support the needs of the best emerging applications. A dynamic similar to the software/hardware co-evolution of the '70s and '80s will begin, creating similar strategic opportunities.

I actually think this is a pretty tame thought, but once John published it people starting asking me what I meant and how it's actionable.

***** 

I should talk about what I'm thinking generally, though.  I've been pretty quiet since the Summer and where I used to be tightly focused on the data-driven web-based display-ad exchange ecosystem, I'm now a bit broader*.

1. In web-based display I've continued my 2010 push on the publisher side of things.  In addition to my investment in MetaMarkets--who are doing some pretty astounding things--and advising PubGears, I've got another pub side investment that should be announced anon.  I'm still looking for others doing something unique here, but to some extent I feel like these three companies are building 80% of what's undone in getting publishers back their negotiating leverage in a data-driven world.

2. The only other pieces of the web-based ROI feedback loop that I articulated in February that remain unaddressed are the piece at the marketers and the piece at the individuals.  I am still actively looking for companies in the former.  I've met a couple of really exciting ones and am working with them to get to launch-readiness, but want to meet more; this is a big area.  I'm trying to figure out what, if anything, could work at the latter.  I would have invested in Hunch, had I the opportunity back then, but I think there are other ways to address the consumer side of the people-product matching problem.

3.  Social may be one.  The social loop will share superficial characteristics with the display loop, but it's really completely different.  A softer, more subjective approach is needed. IMHO, the area with the most near-term leverage will be tools that help communicators understand the impact of how they are communicating and then help them make better decisions.  I've made an investment here that will probably also be announced anon.  I'm treading carefully in other areas of social because I've seen a lot of ideas imported from the display ad world rise and plateau: social is different and harder to scale.

4. Mobile.  In addition to my long-ago investment in Pinch Media (now Flurry) I've made an investment in a geo-data startup.  This one has not announced publicly, but it's a big idea.  Other than that, again I'm treading carefully.  Steve Jobs' reaction to Flurry earlier this year is an example of why: no matter where you invest in mobile, you're at the mercy of some pretty ruthless gatekeepers.  That said, it's exciting to think about how much value startups could add through the mobile platform.

5. Data is a big problem.  And, to be clear, it's been a big problem for a long time so it has some big and expensive solutions sold by big and slow corporations.  But the companies that are bringing data-munging solutions into the reach of smaller companies operating without teams of specialists are pretty interesting.  I've been trying to get a feel for the process, on a small scale, as my last couple of posts show.  But I've got a lot to learn before I even begin to feel competent.  (If you have something to teach me, I'll buy lunch.)  I want to find companies that can democratize data science.

6. Respect for the individual.  I think about this a lot.  I don't talk about it a lot.  It's a difficult area and using a rational thought process on something that's pre-rational in our makeup is tough.  I haven't been able to organize my thoughts, so I have no idea how I support the value-creation process.  But it's always there in the back of my mind.  I am open to suggestions.

So that's what I've been doing and thinking.  Points 2 through 5 will probably continue to be my focus through most of 2011.

*****

In terms of the AdExchanger bit, here's what I was getting at.

At IBM in 1988, in meetings to discuss moving an instruction's execution from the microcode engine to the hard-coded execution engine, I realized that our design team was at the tail-end of a long chain of product-market fit interactions. Because of the way end-users were using applications, applications had changed which parts of the operating system were critical paths, and the operating system designers had come back to us hardware folk asking that certain instructions be optimized for performance.

This was part of a long-standing and ongoing co-evolution between the hardware and the software.  Innovations on the hardware side changed what software was viable.  Innovations on the software side changed what was needed of the hardware.  Read Melinda Varian's intensely interesting VM and the VM Community, where she talks about the development of IBM's time sharing operating system, and think about it as a co-evolutionary process.  IBM in 1964 opened an office in Cambridge as a liaison to the MIT software engineers developing the first time-sharing operating systems.  Because of its proximity to the users, this office was instrumental in pushing IBM to change its mindset from building machines optimized for batch processing to building machines optimized for time-sharing.

During the next few years, both sides--the operating system writers and the hardware designers--pushed the other side to optimize around what they thought was needed or what they could deliver.  The software engineers pushed for address relocation capability and other features needed for time-sharing. The hardware engineers spec-ed a new processor to meet those requirements.  The hardware engineers floated the idea of virtual machines.  The software engineers built an operating system to take advantage of them**. 

Calling this co-evolutionary may be oversimplifying.  In fact, each layer of the stack co-evolved with the adjacent layers.  Sometimes the tension between different layers evolving differently led to entirely new organisms forking off, like Multics (which then evolved into Unix and its descendants.)  This process can happen in any multi-layer ecosystem that has different actors in different layers.

The data-driven display ecosystem is like that.  The tensions between co-evolving layers is evident (AppNexus/Google anyone?)  And forks are emerging.  I expect that within three years there will be a major fork away from the owned exchanges into a crossing platform that can better support the demands of the adjacent layers: the data exchanges, analytics, the DSPs and the SSPs.  Right now none of these are especially happy with what the exchanges are offering.  Not to say that they're unhappy, but they each have a laundry list of things they would improve or change.  The best of them are creating ways to avoid the exchanges, but only because there is no good alternative.  A platform would still be most efficient.

The exchanges, on the other hand, seem to be pretty content with the way things are.  Or, at least, they feel that they should be controlling the pace and direction of the evolution.  This opens the way for entrepreneurs to build something disruptive.  If you're an entrepreneur with the chops to build something here, you should start thinking about it soon.  2012 will be too late.

-----
* No Thanksgiving jokes, please.
** One great anecdote talks about how the early CP/CMS OS could only keep one virtual machine in memory at a time.  So when a user logged on, the OS would reserve space on the paging drum for the copy of their virtual machine while somebody else's was running.  When the paging drum was full, space would be reserved on disk.  Since the paging drum was so much faster than disk, people started showing up to work earlier and earlier so they could get a slot on the drum.  Finally the OS designers made the page slot allocation mechanisms dynamic.  They just weren't morning people.

More VC Coinvestment Visualizations

I've always believed that unless you try your hand at something, you can't really appreciate the people who do it well.  That was my motivation in creating the VC Coinvestment Network Map I posted two weeks ago.  And believe me, after munging that together I did appreciate the complexity of the process and the expertise of the people who can do it well.

As a side-benefit, I got to meet and talk to several people in the data visualization/network analysis community.  Drew Conway over at Zero Intelligence Agents was the first, and he put up a visualization of the data that teased out some of the structure that I couldn't find.

Now Linkfluence has put up a visualization that does something different.  It doesn't find the 'bones' of the data, as Drew did, but it allows you to find nodes and interact with them.  Below is a screen shot of my node and its neighbors (i.e. the companies and people I have coinvested with, per Crunchbase and AngelList data as of two or three weeks ago*.)  The screenshot doesn't show my cursor hovering over KP, but that's why their name shows up.  Also, we added links back to the Crunchbase database from each node (some of the people don't have CB entries, but that's a small minority of the nodes.)

It's pretty cool to play with.  Take a look.


-----
* The caveats and filtering I did to the data noted in my previous post still apply.

Venture Coinvestment Map

It was a grand plan. I was going to learn all sorts of new things: Pentaho, R, Processing. All sorts of new things. In the end, I got caught up in getting something done and learned none of those things. Again.

Using trusty old Python with the beautiful NetworkX module and the shockingly fast--if a bit rough around the edges--graph visualization tool Gephi, I pulled Crunchbase data to create a social network map of how venture investors coinvest. You can skip straight on down if you want, playing with it is more fun than reading about it (and more fun than learning Pentaho, it turns out.)

I can't believe Crunchbase didn't rate limit me* but most of the data is from their excellent database. I augmented it with info individuals have made available on AngelList. I didn't include any non-public info, even though I know of several excellent angels who didn't make the map because they've kept their activities under the radar.

I then had way too many nodes to make any visualization make any sense. So I did two things: any person mentioned as an investor who was also a venture firm employee was folded into the firm. I also made some fixes I knew of (merging my friend Roger Ehrenberg's IA Capital into IA Ventures, for instance.) I know some venture partners invest as angels outside their firms, but since this is a map of social connections, I think the step not only makes sense, but weights individuals more accurately. (Roger Ehrenberg, for instance, would not get the weight his activities deserve if his investing activity was split among three entities.)

Then, again to make it manageable, I took out any investors with fewer than five investments. Ran it through Fruchterman-Reingold. Colored venture firms red, people green and others (corporates, incubators) blue. Made node size proportional to number of investments.

The result is below, in Zoom.it. Some things that stand out:

- The network is incredibly connected. If you go into the "core", where the Sand Hill Road firms are, there are so many edges, they are indistinguishable. Generally, in this visualization, the drawn edges are more or less decorative, because there are too many to have them make sense.

- Because of the dense interconnectivity, there are not many noticeable subnetworks, from 50,000 feet. Here's a map key, such as it is, showing some areas that are distinguishable. The separation between biotech and the core is no more noticeable, to my eye, than that between web 2.0 and the core. I do find that the further I get from my own node, the less I know about the investors.

Map key:

I should note the usual caveats.  Crunchbase data is not a complete record of investment activity, in fact it tends to be severely self-selecting.  I assume both non-US and non-Internet-tech are underrepresented.  I know non-VC investment is underrepresented.  Also, my few fixes are not all-encompassing.  This was a project I had time for because of a couple of long train rides.  I do have the raw dataset (both gephi, graphml and pickled networkx graphs) for the entire network.  If you want them, let me know.

Drag and zoom.  Find your friends.



------
* Or maybe because I was hitting their API while on the Acela, they figured it couldn't possibly be programmatic. In any case, to my fellow train passengers, I apologize for hogging the bandwidth.

OPM

I think Chris Dixon is one of the smartest investors around.  I co-invested in him when he was an angel and I've co-invested with his early stage fund, Founder's Collective.  But while I generally agree with his recent post on venture investing segmentation, I need to call bull on this:

What we are witnessing now is a the VC industry segmenting as it matures. Mentorship and angel funding are performed more effectively by specialized firms.

It's kind of surprising to me that someone who did such an excellent job as an angel would imply that he really wasn't the best investor for those companies in the first place but, hey, he's entitled to his opinion.  But saying you'd be a better angel if you were a firm is like saying that you'd be a better amateur athlete if you went pro*.  You can't be an angel if you have a fund.  And though this sounds like a semantic argument, it make a real-world difference to entrepreneurs.

What bothers me is the lumping of angel motivation and technique in with the "Super-Angel"/micro-VC motivations and techniques.  The otherwise excellent David Lerner makes this mistake when he says he intends to explicate the angel investing world and then lists, as half his angels, people with funds.  This is a fundamental analytical mistake: taking the average of a bimodal distribution tells you nothing very interesting at all.

There are reasons why angels existed in the first place.  While the lower cost of getting a startup from A to B has changed the dynamics of early stage rounds, it hasn't changed most of the fundamental advantages of having individuals investing their own money: a personal--rather than institutional--connection to entrepreneurs, the ability to make quick decisions, the ability to make decisions that may not seem fiduciarily responsible but are for the greater good, primary expertise in an industry and in company building rather than in money-management, etc.  Most importantly--despite what the Supreme Court may think--firms are not people and they don't, in the long run, act like people.  Angels do.

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* While this is the reasoning behind the modern Olympics and many college football programs, it flies in the face of the actual meaning of "amateur" and destroys what makes amateur athletics so appealing. 

It's not about the founders, it's not about the money. It's about what you're building.

I spent my Summer thinking about how I could continue to be useful as an angel investor.  Then this Angelgate thing happened and I can't seem to write the post I meant to write about it.  So I'm writing this instead, hoping to get some thoughts out of my head and move on.  I don't think I'm saying anything new here and this is just a distraction from real work, and I've allocated time as such, so forgive the disjointed style.

1. "Judean People's Front?  We're the People's Front of Judea.  Judean People's front, caw...  The only people we hate more than the Romans are the fucking Judean People's Front."  Every successful revolution is the same, cold comfort though it is, the most vehement feelings are directed towards people working towards the same goals in different ways*.   We're all on the same side and we all want the same thing: more and better startups.

2. Venture investment today is far preferable to every other system of financing innovation we've ever had.  It's not perfect, or even great, but it's far better than what was.  The financing of innovation has improved, in fits and starts, for the last five hundred years.  Think about how the early explorers were funded, think about how the Wright brothers were funded, think about how the second industrial revolution was funded.  For goodness sakes, think about how internet startups were funded fifteen years ago.  The new VC model is better.  The new angel model is better.  Should we make it better still?  Of course.  Should we talk about just chucking it all?  No.

3. It's better for entrepreneurs, but that's not the driving force here.  The entrepreneurs and investors are both bit players in a bigger show.  I tend to disagree with Jon that founders come first, although the why of my disagreement may seem a bit like theological hair-splitting.  Founders don't come first, the idea does.  If a founder thought it was all about them rather than what they were building, I wouldn't invest.  That said, no one works on building something as hard or as smart as the person whose idea it was.  I back ideas, but I believe in founders.  I believe in them because they believe in their idea.  But this semantic distinction leads to a fundamental difference: I'm not doing this to make founders rich, I'm doing it to see good ideas turn into great companies.  When this happens, the founders tend to make a lot of money, but that's a second order effect.

4. Likewise, investors make money.  But startup investors aren't in it for the money: the return on investment is also a second-order effect.  That said, investors need to make money; if they don't, they don't get to invest anymore.  That's true when you invest other people's money, but it's also true for angels.  I have a significant chunk of my money invested or earmarked for startups.  If I lose it, I won't be able to invest anymore.  If I make money, I get to reinvest it.  Not a week goes by when I don't wish I could invest in more companies or invest more in a company that no one else believes in yet.  But not a day goes by when I don't think about the gambler's ruin.

5. Seed-stage VCs are not in it for the money, not in itself.  Angels even less so.  No one on the Forbes 400 list made it there by dint of venture investing.  No one.  [Edit, 9/25/10: Should have checked first... John Doerr and Michael Moritz are both on the list, both by dint of their investment in Google.]  Venture investors aren't robber barons, they don't make the cut.  Think about the economics of a First Round Capital... a fund structured that way won't make the partners much more than minimum wage unless it's one of the top-performing funds in the world.  Any world-class investor would have made a multiple of what they made if they had been a world-class entrepreneur.  VCs have a lower beta, it's in the nature of what we do, but we're all on the same risk-reward curve.  The startup world is a choose your own beta kind of world.  Don't get pissed off when someone chooses a different one.

I'm not defending anyone and I'm not downplaying what happened (whatever did happen... I wasn't there.)  But if one of the guys in that restaurant likes you enough to gives you a valuation, I guarantee you that you can find a less well-known investor who will give you a higher one.  There is no collusion that could affect your outcome.  I doubt there is anyone who believes otherwise.  So I think the anger about this is really a pent up anger about the startup finance system altogether.  I've been an entrepreneur, I've raised money for a startup, and I realize how bad that process sucks, how random and uninformed it all feels.  We have to keep working at and looking for ways to improve it.  But let's not forget that we are all on the same side and we all want the same thing: for startups to have a better chance at success.

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* Of course, in this case there's been no anti-bolshevik league-like purges, no ice picks in the back of the head, no duels at dawn in Weehawken.  Well, not yet anyway.