
The Hard Raise - ikeboy
http://avc.com/2016/10/the-hard-raise/
======
ChuckMcM
This is a great lesson to learn. I've had people disbelieve me when I've told
them some of my most memorable and important conversations have started off
with someone telling me I was wrong. Being able to discuss, defend, and
articulate a point a view with someone who passionately disagrees with it
teaches you how your point of view is perceived and received by others.

It is of course a less useful experience when someone disagrees with you but
they cannot articulate why. I will try to probe disagreement to understand
their point of view at least as well as they do in order to understand why we
disagree.

A hard raise is just such a protracted disagreement in some sense.

~~~
r_smart
>my most memorable and important conversations have started off with someone
telling me I was wrong

OT: I just had a conversation like this that was one of the most enjoyable
conversations I or my partner had had in a long time. We sort of had an
unspoken agreement where she was just going to challenge everything I said and
force me to explain / defend all of my positions as we wandered all over
various political and cultural topics. It was a blast!

We were at a party, and people kept checking in, like they were worried we
were in a fight or something, which was kind of funny.

~~~
eric_h
> We were at a party, and people kept checking in, like they were worried we
> were in a fight or something, which was kind of funny.

An ex-GF and I were once declined admission to a bar in Manhattan because the
bouncer heard us having a very animated (but amicable) disagreement about one
issue or another. "Y'all can't come in here if you're drunk and fighting".

We were mildly tipsy and debating with a bit of passion (something we did all
the time and both quite enjoyed). Some people just don't understand that you
can strongly disagree with someone without being angry or "fighting".

~~~
teekert
Ohoh, I grew up intellectually "play-fighting" my brother like this. I was
always a battle of who could outwit the other. I could make my mother quite
unhappy but we were having a blast. Now I do the same with my brother in law,
we're trying not to laugh as we try to intellectually bring the other off-
balance. It's the most fun I can have but people around us keep thinking we're
in a fight or something and tell us to stop.

------
davidu
13.91x return. It doesn't appear all capital was called, but assuming it was,
on a $100m fund the return is is $1,391m.

Assuming 2/20 economics for the partners, that's $278.2m returned to the
partners.

2% MGMT fees would be 2m/year over 10 years ($20m), but that probably had
nuance (drawdown after $x years, or % of called capital) and/or had to be paid
back, so let's ignore that.

Assuming Brad and Fred each split the carry 40% 40% (and 20% for other people)
that's about $100m return to each of the two major partners.

Nice return for delivering a great LP shareholder return on a reasonable
timeframe.

------
api
Whenever I read such things I like to think about what a seriously contrarian
investment thesis would look like today. My guide is always what I,
personally, would consider completely insane. Here's a few:

\- Bet on large-scale _increases_ in employment in the USA and other developed
countries in the next 10-15 years.

\- Bet against Apple and the Apple model (very polished vertically integrated
silos) and its dominance in the market.

\- A big long bet on the music, film, or media industries.

I don't have the spare cash to make significant plays but if anyone else is
looking to lose money (or make tons) betting on something looney there you go.
:)

Here's one I remember thinking about years ago and considering crazy:

\- Betting on oil prices going down, or on energy _abundance_ vs. scarcity.

Years ago I was convinced that energy was going to get more expensive for the
foreseeable future for fundamentally inescapable physical reasons. Obviously
lots of other people were too because lots of people proceeded to lose their
shirts on it. Fortunately I was not in any way invested in this thesis.

~~~
danieltillett
I think we will see a general increase in the power of the media industry over
the next 10 years. Prices have bottomed and as AI gets better at predicting
individual tastes we should see an increase in perceived value by consumers
which should increase both consumption and prices.

Oil is going to go down in price as other sources of energy become cost
competitive and start to dominate the energy mix. There might be an energy
shock due to supply disruption, but oil will never reach $150 a barrel again
unless we get some massive inflation.

At this point everyone has given up on the idea that central banks printing
lots of money causes inflation. If you want to be contrarian bet on massive
inflation occurring in the next few years.

~~~
api
Yup. Your last point on inflation could dovetail with the increased employment
"crazy thesis" I suggested. A bull labor market would flood a lot of the QE
cash on the sidelines into the economy. Another factor would be the emergence
of an "organized labor 2.0" that uses the Internet to coordinate... like think
Uber meets AFL-CIO and powered by game theory and deep learning. Bull labor
markets are highly inflationary.

\- On the Apple "polished closed silo" model:

The conventional wisdom is that UX is everything. But a new generation or two
is growing up today that is "digital native" and has grown up using computers
of every kind. Might this generation of digital natives actually have _less_
need for super-polished UI/UX hand-holding and inversely a greater desire for
the increased freedom and versatility that comes with a more heterogenous open
environment?

Anyway this is all a tangent with nothing to do with the original post. :)

~~~
danieltillett
>Anyway this is all a tangent with nothing to do with the original post.

But it is lots of fun to talk about - since when do we have to let the topic
constrain the conversation :)

On the topic of inflation there is so much money sloshing around that it is
really hard to know what will happen. It really is unprecedented so we can’t
rely on the past to be a good predictor of what will happen in the future.

~~~
api
I'll say this on inflation: housing, tuition, health care, and several other
things are insanely expensive relative to wages and the rest of the economy.
You can't have a market with no buyers. Two possible outcomes: (1) these
deflate until they are reasonable, and (2) the _rest_ of the economy inflates
until these are reasonable.

Given the amount of money sloshing around and the stickiness of esp. real
estate prices, (2) may be more likely. My kids may know a country where
everyone makes six figures and a starter house is... well... still $750k.

Of course central banks and governments are not as dumb as people think. This
is likely the _intended_ outcome.

------
jasode
_> But that fund, USV 2004, has been one of the very best venture capital
funds ever put together. The numbers are public because many (most) of our
investors are public pension funds who have freedom of information act (FOIA)
obligations to report the performance of the funds they invest in. At that
time (early 2000s), the big VCs in the bay area were kicking out FOIA
obligated limited partners out of their funds. That was a huge win for us and
we got a bunch of those FOIA obligated LPs into our fund._

To contrast, Sequoia Capital is a famous example of a VC that doesn't allow
LPs with FOIA obligations.

Wow, I looked at Fred's linked pdf from the Oregon Public Employees Retirement
Fund and saw some amazing IRRs:

\+ Union Square Ventures 2004 fund +67.0%

\+ Union Square Ventures 2008 fund +22.2%

\+ Union Square Ventures Opportunity Fund (2010) +63.8%

\+ Union Square Ventures 2012 fund +27.2%

The Oregon table doesn't have the funds' total sizes. Fred volunteered that
info in a different comment:

[https://www.cbinsights.com/blog/union-square-ventures-
teardo...](https://www.cbinsights.com/blog/union-square-ventures-
teardown/#comment-1521929070)

~~~
ejcx
Can someone explain these numbers? I looked at the spreadsheet:

It looks like they put 25m in to the USV 2004 fund, and it became 294m. The
financial terms are not familiar to me at all.

~~~
arikr
In short, IRR is yearly rate of return. i.e. If 25mm becomes 50mm in 12
months, then the IRR (yearly rate of return) is 100%.

Try searching up something like 'venture capital IRR explanation' and you
should get more details.

~~~
sp332
So if $24 million becomes $26 million in one month, they say it's 100% IRR?
Even though it's only up 8.3% and it's just as likely to go back down?

~~~
nostrademons
The footnote on the document says "Investments held less than three years
generally have TVPIs and IRRs that are not meaningful, and are therefore
labeled NM", and most of the post-2012 funds are labeled as such.

IRR as a concept is used for any sort of investment, eg. if you buy an
advertisement that will let you sell $X/month in additional product, you can
calculate an IRR from that. It's used to compare different ways to invest your
capital. You absolutely can use it over short durations (this is how the
payday loan & credit card businesses operate - they compare the returns from
loan fees vs. the cost of bad loans), but typically you want to use it on
realized gains & losses, i.e. ones that have been converted to hard cash. On
unrealized gains, you can run the calculation, but understand that uncertainty
in payoff will be magnified by the time scale on which it operates.

------
david927
That's really inspiring. Sometimes, in the middle of a hard raise, you
question it all. In the middle of the dark night, sometimes the worst part is
not the darkness but the feeling that it may never end.

Fred deserves where he's gotten, not just because he's a great guy and a smart
VC, but for having the fortitude and persistence to take it to the end. It
makes me recommit, rededicate myself to my own hard raise, which may not end
as well, but I can ensure won't end from giving up.

------
AndrewKemendo
What's the difference between early...

 _One of the reasons hard raises can turn into great performers is that they
often mean you are doing something others aren’t doing, you are early to an
opportunity and others don’t see it. That certainly was the case with USV
2004. That’s the contrarian bet in action._

and way too early...[1]

 _Beware of "way too early". It hurts and it keeps hurting._

[1] [http://avc.com/2009/04/only-ten-years-too-
early/](http://avc.com/2009/04/only-ten-years-too-early/)

~~~
JimboOmega
Well, there's two different kinds of timing.

One of them, which the OP was about, is about investing. “Be Fearful When
Others Are Greedy and Greedy When Others Are Fearful" as Warren Buffet said.
It's the contrarian timing - it's investing when nobody else wants to (because
everyone thinks that the tech bubble burst and tech is dangerous and/or tech
has been captured by a few big players in the 2004 case).

Then there's the timing of a specific product, which requires hardware,
software, etc, to be just so. My favorite example there is video streaming
(which YouTube came to dominate). Google Video was what, 6 months later? And
there were how many before that were sunk because of the tangle of codecs and
other things required to view video over the internet before there was enough
flash penetration? (Or consider Apple Newton vs. Apple iPhone).

------
jakozaur
This articles how information transparency (FOIA) can boost overall market,
even if individual players may not find that compelling (e.g. Sequoia
Capital).

Similar past examples:

1\. Employment at will. Individual company may be in disadvantage, but it is
one of the main advantage of Silicon Valley ecosystem.

2\. California Labor Code 2870. Tl;dr: Any IP created in your spare time on
your own equipment in area unrelated to employer is always yours. A lot of
companies may prefer simple assume all IP is their while you work there, but
it can't hurt startup creation.

Future hypothetical examples:

1\. Information transparency of VC market. It gotten better, but still a lot
of things are private. It creates informational asymmetry that favor incumbent
power players than newcomers.

2\. Limited access to investment opportunities. Very, very few people can
invest to VC. Likely way less than 0.01% of global population can do it. Even
if you are wealthy individual there is no way to give $10k for 10 years to any
top-tier USA VC.

What if there would be equivalent of stock exchange for VC/startups. Likely it
would have very limited liquidity and very different rules, but it may bring
economy growth on next level.

------
random28345
Seems almost tautological that if there's not a ton of frothy money chasing a
limited pool of assets, it will both be hard to raise money, and you'll get
better returns because of less investment competition.

~~~
ryporter
It's not tautological, because there is normally a good reason for the raise
being hard. Obviously, there are exceptions, such as in this case. However,
I'd be surprised if the returns are particular strong if you look at _all_ VC
funds that had a hard raise. In many of the cases that ended badly, one would
look back and say, "Well, of course that was a hard raise. The thesis was
flawed." But that's exactly what people were thinking who turned away USV,
before they had the benefit of hindsight.

