The Hard Raise | Hacker News Reader

The Hard Raise

avc.com

141 pointsikeboy27 comments

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.

>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.

> 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".

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.

That's kind of what Socrates did. Not everybody thinks it's acceptable (just look at how well it turned out for him), but it's important to challenge all beliefs.

>it's important to challenge all beliefs.

I wholeheartedly agree. This is something that's been on my mind a lot lately, and so our conversation couldn't have come at a better time.

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.

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.

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.

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. :)

>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.

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.

> 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?

As a member of the generation which is often termed "digital native", I notice that other people my age are, in general, worse with computers than people in their parent's generation (again, generalizing). I would bet on UX becoming more important as people shift away from even bothering to read error messages.

The cool thing is that most of America's young people are already long inflation through our vast student loan portfolios

The important thing to keep in mind here is that the contrarianism of a bet is very obviously not a sufficient condition to make it a success. It's just that being contrarian AND right will usually be a more valueable bet than being right AND doing what everyone else does.

Thus a successful contrarian would invest in things that everyone else considers insane, but where she herself has a good theory on why they are actually not insane.

>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...

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.

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.

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?

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.

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.

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/

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).

Is it possible to get at least some wins, either on the technical side (subproblems that you can successfully solve or libraries that have already solved them) or on the market side (early customers you can sign up)? Are there enough of them that you can regularly feel like you're making progress, or is it one hopeful blip and then years of slog?

Having hard technical problems or few customers is not a killer: problems can be solved, and new customers like your existing ones can be signed up. Having impossible technical problems or no customers is; at this point, your options include "hope, prayer, and random chance", and it's time to do something else.

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.

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.

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.

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