Practice Safe Financing

Practice Safe Financing

Joe|April 26, 2016

This article first appeared on

The convertible note is a useful and common financing structure in Silicon Valley. It’s a form of debt that is really more a type of equity — one where the valuation hasn’t been determined yet.

It’s helpful because sometimes you want to align a new investor or bridge a company with extra capital, but not argue about the valuation or have to price the round yet. Many bureaucratic institutions, for example, would make you do all sorts of studies to justify any particular valuation — and you are busy building your business. You want the investor aligned (or want their cash, at least), but prefer to price the round a little down the road.

So the investor loans money to the company at some low rate of interest (usually 3–10 percent) and has all the senior protections of a debt-holder if anything should go wrong. When the next institutional round of capital is raised — usually defined by an investor coming in with at least several million dollars in a priced round — the note and interest converts into that round at some pre-determined discount to its price (usually 10–20 percent). The note holder becomes an equity holder with shares that have the same rights as those in the new round, at a slightly better price.

At a high level, there are two types of notes: capped and uncapped. You should (almost) never raise a round on an uncapped note, as it pits the incentives of the investor and the company at odds with each other.

We use convertible notes a lot at our fund, 8VC — so often that we just call them “notes” to save time. Capped notes are a great alternative to a priced seed round, and a great way to align relevant people in your community or business vertical in between your A, B, C or D rounds. They’re also sometimes a life-saver (or at least a cap-table saver) for companies who use them as a financial bridge to get their ducks in a row and give themselves a few (or more) extra months to hit an inflection point before pricing their next big round.

Of course, companies will generally pretend they are doing the alignment thing rather than admit they needed a few extra months of runway. (Don’t tell anyone, but “We are looking for some strategic partners who can give us advice before we do our next round, and are using this convertible note to align them financially,” is often Silicon Valley speak for, “We need some extra cash so we have the runway to show some better progress before we try to raise a big round.”)

A capped note means there is a maximum valuation at which the note will convert. A typical cap on a seed round note is $10 million. This is fair, as is $5, $8 or $20, incidentally, depending on the group and what they are doing. What’s ridiculous is an uncapped seed round. If the company doesn’t get strong early traction, the investment might be worth nothing, yet many of us have also heard of a company like this taking off and stories of the first priced round being raised at $100-pre. Instead of getting 10 percent or 5 percent for your first $500,000 if you’re an investor, you might now be getting less than 0.5 percent of the company.

Of course, there’s nothing unethical about this — it just means you were bad at structuring your investment. You should have insisted on a cap, or else a priced round. Usually, a good entrepreneur wouldn’t have done this to you — it’s not how almost any of the top people in our ecosystem treat others, as the true talent knows this is a repeated game and that honor and reputation is worth more than whatever percentage points they can get from chicanery.

But the thing that makes uncapped notes especially bad is that the incentive of the investor and the entrepreneur should always be aligned.

It’s wrong to put an investor in a situation where they are deciding between helping their ownership stake versus helping the entrepreneur.

When we invest in a company at 8VC, it’s our job to make that company as successful as possible — from an internal product and strategy perspective, but also in terms of who it is able to hire, what its customers think about its product and its mission, what the media says (but not until that matters) and what other investors think about it. The goal is to help the entrepreneur put their best foot forward in the way that’s the most positive and true to the company and its mission.

Entrepreneurship is in large part about building something from nothing, which means creating a cause. And causes are not created in isolation — great investors are fully aligned with their entrepreneurs and do what they can to push forward the cause along with their most relevant touch points in the community at any given time. Backing a company is a serious business.

Now go back to our $500,000 investor in that uncapped seed round. As he sees the company take off, what are his incentives? At some point, it’s not clear. Maybe he realizes these are amazingly talented entrepreneurs who are on to something, but he secretly hopes a couple of the early attempts will stumble so that they’ll have to raise money at a lower valuation than what they’d get otherwise, so he can convert in.

What does he say to the star designer who is interested and who he knows by joining might drive their valuation even higher before his note converts? And maybe he looks down and mumbles instead of playing them up to a top investor who is excited to invest at a really high valuation, in order that he gets in at a lower price. Or maybe he doesn’t, because he’s honest to his principles and he wants to be aligned with the entrepreneur even against his own interests.

With an uncapped note, you are often creating an incentive for an investor to hope you do well enough that you are going to win in the future, but maybe have some struggles and raise at a relatively low valuation next time.

In our view, a great investor should never have to face that conundrum. It’s wrong to put an investor in a situation where they are deciding between helping their ownership stake versus helping the entrepreneur. I’d like to think I’d always side with the entrepreneur in this situation — it’s who we are and it’s our mission at 8VC — but I’m also driven to win for my LPs who are betting on me: I know my partners and I feel strongly about being good players and role models in the ecosystem, but we are also fiercely competitive to do as well as possible for our IRR.

“Power corrupts” wasn’t just written about madmen who take over governments; it’s true for all of us, and it happens in small ways. Incentives and spheres of influence are powerful things, so it’s critical we keep them as aligned as possible.

There is one scenario wherein it can make sense to do an uncapped note, but even then the note should never be truly uncapped. This scenario is the insider-led bridge round, where the note is expected to be short-lived. If an investor already has equity in a company, she is aligned to make the company’s valuation go up, but she might want to bridge the company; that is, give it the money it needs to keep operating until it completes its next raise.

If the next round is imminent (within the next month or so), the cap on the note can interfere with a pricing discussion. In this case, doing something that ladders is right. For example, you could offer a note with terms of no cap if the round is done within two months, but with a cap and a discount if the round is done within four months, a bigger discount at six months and so on and so forth.

In general, the best solution is to place the cap at a valuation in which you are very confident you can hit that is likely below your next round. Contrary to popular belief, a cap is not always a signal for the price of the next round. It’s true that many rounds are raised near their caps, but I’ve had a note capped at $10 million to let helpful friends into my company that raised its next round at $45-pre, and I’ve seen many great entrepreneurs who value their community take care of allies this way.

In our view, there is a huge misalignment with not having a cap on your notes if your investors have any real influence on your business or the technology and investing community — asking an investor to invest into an uncapped note is about the clearest way possible to tell them they are not connected to any community relevant to your success and don’t matter except for their money. And if they don’t, you should probably find better investors.

Joe Lonsdale
General Partner, 8VC

Real World Parallels to Last Night's Episode of Silicon Valley

Real World Parallels to Last Night's Episode of Silicon Valley

Joe|April 25, 2016

Photo Credit: HBO’s ‘Silicon Valley’

Although certain TV portrayals are clearly unrealistic or over the top for comedic value, this episode dealt with a lot of issues we face in our industry.

Perhaps the central theme of the episode was the lead investor gaining control of the board and forcing the founder, Richard, into a CTO position.

Control issues like this happen all the time, although it’s rare for it to happen as early in a company as “Pied-Piper” which is about to raise 5 @ 50 million — when a company is seen doing well and has a lot of momentum and excitement behind it early, the founders usually wouldn’t give up that control to an investor. This situation is more rare today, versus twenty years ago where investors typically had more power over entrepreneurs. It was a rare mistake Richard made to accept terms that created an outside board that could replace him as CEO. But at the appropriate time, funds do often try to bring in experienced leadership, and when they get control they often force it.

Some funds are seen to be on one extreme and generally to oppose replacing founders (such as Founders Fund; their name relates to how they want to stand up for founders). Founders Fund believes that truly great companies that keep growing for a long period do so in part by keeping their founders as leaders. Others, such as Sequoia, were historically known for firing the CEO if they believe it is best for the company [a couple of the people who started Founders Fund for example had been fired as CEOs by Sequoia in the past]. Of course, these are sophisticated funds that have done very well and both of them have been on both sides of these issues.

The portrayal of the founder’s ego and suffering in this situation was apt. We’ve seen far worse — intense people sometimes have their lives and identity wrapped up as CEO of the company and perhaps 10% of them are unbalanced, much worse than was portrayed here — not only intense but also psychologically troubled people seem to be attracted at a higher rate to being a founder. In the worst situations it’s not unheard of to have talk of suicide or violence around these issues, and in any situation it’s extremely difficult for a founder. The question of how a team will stand with or against the founder in these situations is also common.

The lawyer’s betrayal of the founder when Richard got emotional and threatened to sue the investor was interesting. Many lawyers are clear they serve the company and not the founder, but others would have been loyal to the founder and resigned if necessary, as they would want other founders to trust them and hire them based on their perceived loyalty in an industry that values the entrepreneur and that is mostly run by other founders. In the episode, the company lawyer surprised Richard by going against him based on his ‘duty to the company’ and was showing that he cared more about what the investor thought about him long-term and was placing his chips there… this wouldn’t always be the best strategy for a lawyer in real life, as founders wield a lot of power in SV and tend to be loyal to each other. But it’s not unrealistic.

The most unrealistic scenes were around the amusing and egotistical speech about firing of a whole group at “Hooli” by their out of control founder, who pretended he was being humble while blaming them and trying to steal some of their upside. Ego issues are definitely an issue with successful leaders and people love to mock them, but no self-respecting engineers would stay and work for a company with a leader that was that obviously out of control. That said, many successful companies in our industry do probably have a lot of inefficient programs and groups they could benefit by cutting, even if it’s not as extreme as people sitting around on the roof hanging out.

The final scene of the show was my favorite — there are a lot of really amazing, successful people around Silicon Valley who we can learn from when we open up to the fact that we don’t know everything. And in real life we mark the passing of one of the great entrepreneur coaches with the memorial service of Bill Campbell today, a kind and insightful man who shared his wisdom and inspiration with many.

When the show’s potential mentor-CEO came up the skepticism of the team making fun of his previous entrepreneurial and leadership success and cancer research efforts was right on for the cynicism of many in SV, and how they might react at first to a new senior person or “outside wisdom”. Being a great founder or early team member is a difficult dialectic — you have to be a bit overconfident and a big ego isn’t always a bad thing — to change the world requires pushing really, really hard and believing you and your team know something others don’t. But the other extreme is also important to embrace — sometimes, experienced leaders are really helpful, and founders can do best by putting their egos aside and finding ways to learn.

I didn’t like how the CEO was forced on the company — that shows an investor not adept enough to manage the company from the same side of the table as the entrepreneurs — but the nod to experience and to the team learning to grow from others who have been successful is great.

Why Blend is Awesome

Why Blend is Awesome

Joe|January 19, 2016

To celebrate its successful 2015, ~$40 million in new fundraising in the latest round, and the team’s momentum going into next year, I’m excited to share some of my thoughts on Blend.

Amazing People and Smart Enterprise

Some of the most talented people I used to work with at Palantir founded Blend, and it exemplifies much of what we have written about at Formation 8 and now 8VC ( Blend aligns with our views about how to create a top technology culture and focus on an uncrowded, yet critical, vertical. It also exemplifies the ‘Smart Enterprise’ theme, as it replaces legacy infrastructure with deep Silicon Valley technology to help an underserved industry and create tremendous value for American lenders and borrowers alike.

Multi-Trillion-Dollar Market

Mortgage loans account for tens of trillions of dollars in our economy; they comprise one of the largest areas of finance globally. As you’d expect with something so big, there are a lot of parts to the mortgage industry, and a lot of people make their living from it. Unsurprisingly, a lot of it runs on outdated systems that are decades old, and this negatively impacts consumers, businesses, and the economy as a whole.

Fixing Consumer Pain

Consumers generally feel a lot of pain around origination — that is, when they are looking for a mortgage or refinancing. They usually have to pull together all sorts of paper documents, fax in information, and fill out endless forms only to learn that they need to provide more seemingly random information. They often wait several days for responses, which then come in formats that are hard to compare and understand.

This consumer experience is so painful because so much of the space is manually run on the enterprise side, with huge teams of humans acting as sort of a subpar “Mechanical Turk” middleware. This leads to sub-optimal results for the businesses beyond just consumer experience, ranging from efficiency (loans cost $7,000+ to originate today vs. $3,000 just 10 years ago) to risk (verifying consumer data at the source).

Preventing Financial Meltdowns

In addition to solving pain on the consumer side, Blend has the opportunity to empower the industry through increased transparency. Many of us believe that the lack of coherent data formats and information processes in this industry obscured risks and prevented sober analysis, and thus was a significant contributor to the 2008 recession. This recession was highlighted in the recent blockbuster “The Big Short”.

Had a platform like Blend existed at the time, it would have been much easier for the various actors to hold each other accountable and to see every detail of what they actually owned starting with the originators and the precise loans and how they were made. Everybody would have had a far better idea of the true value of all the underlying assets and of the actual risks they were taking from precise data, versus unreliable models and guesswork. Needless to say, this would have greatly dampened the risks taken during the fervor of 2005–2008.


There are hundreds of relevant mortgage originators, but the top forty or so represent over two-thirds of the origination volume. Blend is now working with a significant number of these businesses, with several more to follow in 2016. Billions of dollars worth of mortgage loans are already flowing through the Blend platform. In short, Blend is in what we in startup land call its “hypergrowth phase,” and it looks likely to continue to grow at a rate of hundreds of percent per year. Although it is currently focused on the full origination workflow, there are many other processes (such as servicing and underwriting loans) that it could expand to down the road.

A Network Effect

There’s an extra point that I feel compelled to make here about Blend’s strategy for some of my savvier friends — the GSEs receive reports from all of the the originators, and right now they spend billions of dollars a year sorting and normalizing files and running analyses on them. Blend hopes to enable new open formats, and possibly even to use cloud-based permissioning, to save a huge amount of time and money for the space and make it a lot more coherent and less manual. This is likely to create a bit of a network effect as more companies are influenced by the new rules and formats to come onto their modern platform.

The Silicon Valley — East Coast Arbitrage

Very few of my Silicon Valley friends have thought about these esoteric mortgage problems. Perhaps because it’s such an important area of finance, a lot of the private equity investors, billionaires, and Limited Partners we know on the East Coast have exposure to the space and are really excited about Blend. Few of them know how to create the elite technology culture needed that solve these kinds of problems though, so there’s an arbitrage available here that Blend is exploiting by taking a top Silicon Valley tech approach and iterating with largely East Coast-based businesses.

Lending is Evolving

The world of lending is evolving quickly, with companies like SoFi, LendingClub, Affirm, and others creating new and vastly improved consumer experiences. Blend is going after the biggest area of lending and making sure that the 99% of consumers that aren’t using these other lending platforms get just as compelling an experience.

Incidentally, This is a Really Awesome Company to Join

Blend’s mission fits into the core theme of how value is being created in Silicon Valley today through Smart Enterprise while positively impacting consumers. The best investors I know fought fiercely over Blend’s latest round. And the Blend team includes some of the most talented people I’ve worked with, along with great leaders and mentors. Needless to say, it’s an ideal place for a talented engineer, designer, or product manager to start or become 10x better at what they do.

Blend is fixing the back-end of one of the most important areas of our economy, which will help make finance work better and could prevent another recession. All in all, Blend is an important and exciting company, and I’m glad to be involved.

Read more about Blend in this recent article on Fortune:

It's Time to Open the Pentagon's Books

It's Time to Open the Pentagon's Books

Joe|January 17, 2016

Disclosure: Joe Lonsdale is an entrepreneur and investor who co-founded and retains stakes in companies like OpenGov and Palantir that create products and solutions for government.

Congress gives the Pentagon $600 billion a year: our largest non-entitlement expense. In return, the military must spend money efficiently and report back to civilian leaders. Fulfilling these obligations builds trust and ensures every dollar in the defense budget benefits America and our sons and daughters who protect us.

Yet civilian leaders at home and abroad struggle to obtain details on military spending. It was unacceptable (but not surprising) to learn last month that the Pentagon buried evidence it could save $125 billion over five years by reforming personnel practices and reducing waste. Perhaps more shocking is the fact that the Department of Defense (DoD) cannot explain $6.5 trillion in financial adjustments from 2015–rendering the Pentagon’s financial reports almost meaningless.

Three features of the Pentagon’s organizational design hamper effective fiscal management. First, Congress slashes funding if a division spends under its budget. Hundreds of managers respond by spending inefficiently and obscuring financials. Second, DoD leaders rarely measure program ROI. Third, elected officials and Pentagon leaders throw more money at failing programs rather than learning from mistakes. This creates a dishonest procurement culture and deters both efficiency and innovation.

How do we fix this? We can begin by opening the books.

Congress ordered the Pentagon to be prepared by October 2017 to finally comply with a 1996 law mandating audits of every agency. This is a positive first step, but true financial accountability and efficiency will remain elusive without deeper organizational reforms and standards.

America has the greatest military in the world, and it’s up to our leaders to set the bar for what a 21st century military culture of innovation with transparent, collaborative leadership looks like. Innovative cultures transparently document spending, admit mistakes, and ask how they can do better.

Technologists and entrepreneurs can help. The Pentagon should use data to guide financial decision-making. Of course, some black ops need to be obscured — but too often, “TOP SECRET” or compartmentalized information is an excuse to hide incompetence. Transparent, top-down financial reporting from every part of the DoD must inform military and civilian leaders.

Today, the Pentagon’s technology is not up to the task. IT staff are scattered across the DoD, operating on inconsistent data standards and formats. Staff devote their energy to maintaining legacy systems: the Pentagon spends 80 percent of its IT budget on maintenance and only 20 on modernization. Outdated IT infrastructure stunts innovation and obscures wasteful spending.

Fixing the Pentagon’s technology deficit begins with standardizing the Pentagon’s financial data, then bringing that data into a unified platform in the cloud.

Why the cloud?

First, effective financial reporting increases visibility into back-office spending, fostering accountability and enabling oversight. For example, with a unified data platform, instead of waiting months to compile questionable reports, military and civilian leaders could access detailed financial information to enable accurate discussion any time.

Second, the Pentagon could budget more efficiently. A data platform would enable data science-driven analytics that uncovers waste and detects fraud. For example, years of budget and transaction data would enable software that flags anomalies, informs trade-offs, and sharpens oversight.

Finally, a financial data platform would boost over a million staff members’ productivity by eliminating routine work, such as maintaining legacy IT systems and compiling data.

Experience shows us these benefits are not out of reach. For example, over a thousand local governments, from San Diego to Washington, D.C., use a company we launched in 2012 called OpenGov to build efficient budgets, track spending, and engage citizens. The Pentagon could get similar benefits from new cloud-based technologies.

We cannot delay a solution. From 2016 to 2046, discretionary spending’s share of the federal budget, which includes defense, will fall from 44 to 26 percent. But the morphing threats emerging in today’s multilateral world won’t disappear. We must spend military dollars more efficiently to address these challenges.

Those who serve in our armed forces do so from a profound sense of duty to secure liberty for their fellow Americans. They enlist to serve their fellow citizens who express their will through elected representatives, not an unaccountable defense establishment.

As President Eisenhower warned us, “Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

The political right has traditionally talked tough on government waste and accountability, but given the defense establishment a free pass. But President-elect Trump won without help from special interests that refuse to scrutinize defense spending. We have a unique chance for reform. Let’s not waste this opportunity to affirm our dedication to our soldiers and to the liberty they defend.

Let’s open the books.

Joe Lonsdale
General Partner, 8VC

8VC - Our Values

8VC - Our Values

Joe|December 23, 2015

8VC is a venture firm dedicated to playing our part to help fix the world.

We believe the technologists and entrepreneurs of our generation are in a position to have a more widespread, positive impact on the world than any group in any previous generation — and that we have an ethical duty to recognize and act on our power. We believe in the power of technology and business to enable greater prosperity. We believe in progress, and in markets, and in creating opportunity for all.

We believe in contributing to our ecosystem here in Silicon Valley in a positive sum way and encouraging others to do the same. We believe in standing strongly for the benefits of human freedom, innovation, open platforms, and transparency — and in holding people and institutions accountable to our society’s values. We believe in the power of thoughtful and ethical investing to do good in the world.

The partners at 8VC are lucky to have had a lot of success building great companies and working with our friends and institutions around the world to solve important global problems. And the more we have learned about how to confront big industries and overcome challenges, the more we’ve realized just how much there is to do.

The industries that help run our society — healthcare, education, government, finance, and energy, to name a few — are operating in very unfortunate, often ridiculous ways compared to what’s possible. This can be frustrating, but it’s also an exciting reality, because there is so much we can do over the next decade to raise global prosperity by fixing these industries and making them vastly more efficient.

The amount of waste and inefficiency throughout the healthcare system is overwhelming, not to mention that every year in the US alone tens of thousands of patients die from errors because of broken processes and technology that doesn’t fit doctor’s workflows and isn’t smart. We learn more every year, but unnecessarily negative health outcomes are common because the system didn’t encourage people to take available tests and preventative action that would have detected their cancer or heart disease or anticipated other conditions years earlier and helped treat them better, sooner. Healthcare systems are still often closed and captured by crony company-govt complexes, and our society isn’t doing enough to learn how to cure disease — but there is a lot of positive progress and innovation and reason for confidence.

Many of us have realized our education system isn’t cut out for what our modern economy demands, but great entrepreneurs are creating extraordinary solutions to personalize the educational experience and to measure and deliver what actually works — and our generation is beginning to demand that we open up the education system and allow innovation. Great teachers are able to reach many more students, the cost of textbooks and materials is plummeting, and new best practices are starting to spread faster as the space is slowly dragged into the future by determined innovators against a wide variety of special interests and complex politics.

The government is perhaps the most behind other industries in applying new technology to do its job better, but even here we are seeing the beginnings of progress with stubborn, visionary entrepreneurs and rare government leaders eager to cause trouble and make a difference. Similarly, the financial world has been dominated by closed systems and giant institutions who operate without the benefits of what open platforms can deliver — the resulting lack of transparency is beneficial only for certain old boys’ clubs or fraudsters — or those entrenched services groups that profit from the expensive and often manual processes whose costs tax the rest of society and act as a sort of gunk in the machine of this global industry. Energy, meanwhile, has many areas that are embarrassingly bad, even if we avoid the clean energy discussion — grids throughout the US waste huge amounts of power and are often insecure, for one — there is still so much low hanging fruit.

The IT platforms that will enable innovation to spread throughout global industries are still in their infancy; what we refer to as smart enterprise. It is our duty as investors in the technology ecosystem to help inspire, nurture, and scale these businesses. We are already starting to see what consumer platforms like the smartphone iOS and Android ecosystems can do for the world. We are in the early innings of the latest industrial revolution — and only technology businesses will be able to create the IT platforms that will help new innovations spread — representing best practices and new ideas that save lives, prepare our youth for the modern economy, save energy, and otherwise enable greater prosperity.

The Jewish idea of “Tikkun Olam”, to repair the world, has many meanings and has often come to connote social action or social justice. One need not be Jewish to be inspired by the core idea — that we all have a duty to do what we can in our work to make the world a better place, one with more peace and harmony and less suffering and evil.

At 8VC, we’re lucky to be in a position to help so many entrepreneurs, and to be able to choose and pick what missions to back within a dual financial and ethical framework to achieve the best results for our LPs and our community. We’re inspired to strive towards the idea of being positive sum actors, helping everyone around us to succeed in missions aligned with our community’s values.

And we’re grateful for the support of so many extraordinary leaders, investors, and advisors who share our values and are working with us at this exciting time in history to fix the world together. The world can be a very scary and discouraging place in the news these days, but the secular trends are on our side — it’s becoming less violent, more connected, and more prosperous — and if we lead together we have a really bright 21st century ahead of us.

There will be challenges ahead, even as our companies succeed. Not every new industry platform immediately creates more jobs than it disrupts, but if we didn’t allow that type of disruption, we’d all still be farming by hand full-time and living in the backwards world of several thousand years ago. And not every profit incentive of a monopoly platform is a good idea for our society — we need to apply judgement to what’s fair and hold each other accountable. Similar to the late 19th century, we might have some serious near-term structural unemployment to deal with as the world changes more quickly than people expect — not to mention the populist politicians and often misguided proposals likely to accompany this change. It’s a promising but complicated time ahead, and our community has responsibility to help figure out how to create opportunity, safety, and honest hope for all parts of our society as we take the lead in this coming transformation.

Allocating capital is one of the highest forms of business when done well, when incentives are aligned to positive sum dynamics and the investors work with a community to create value. Finance can also be one of the lowest forms of work when done poorly, when a group becomes more of a rent-seeker or trickster and loses its sense of acting as a steward of capital for an ecosystem, or other guiding values and goals. This is not an idle challenge, but one that constantly confronts us as investors, who must serve both our LPs and our role in our community. It will behoove all of us to continually be thoughtful about our business as a fund and the businesses we’re creating, and to help each other act as role models, staying true to mission and values.

In addition, we must remember that not every issue in the world can be fixed with greater prosperity or with for-profit businesses, without a philanthropic component. We are excited to be building philanthropy into our founding mission and putting in place matching grants for our employees’ and advisors’ carry. We have been amazed to see what the minds in our space can achieve when exposed to the needs in these non-profit communities, whether in combating human trafficking, coordinating large-scale disaster relief, or removing forced-labor from supply chains, to name some of what our organizations have accomplished — and know there is still so much more to do.

We each have far greater power to change human lives for the better than we realize. Thank you for being part of our technology ecosystem and for joining us in our shared mission. The world is broken. Let’s fix it!

Q & A

Q: Aren’t you just trying to make a lot of money and then claiming you are doing good? Is this serious? You even invest in financial companies… this seems like a bunch of self-serving nonsense.

A: It is likely that some people will think this; ultimately it may come down to your intuition and politics and personal views, and it will be hard to change many people’s minds. We don’t see anything wrong with making money, and that in many cases we believe it is aligned with doing great work.

When our team looks at the world and what we believe enables progress — what enables the biggest positive impact and improvement of the global human condition for the future — making these critical global industries work in smarter and more efficient ways is at the top of our list.

Education and healthcare are obvious to everyone, and they are critical, but perhaps it sounds abstract to make finance work better. Some people not familiar with this industry might not realize that there are for instance a couple million people employed doing various forms of data entry and that processes that should involve algorithms are often poorly designed and use people as middleware instead, or to reconcile the bugs. They might also not be aware that information doesn’t always flow cleanly between tens of thousands of financial organizations, so you end up with a lack of transparency that enables huge amounts of fraud — or that stops innovations that would leverage data to streamline finance instead of letting ‘rent’ be captured by entrenched interests. What this means in practice in our view is that parts of the financial industry absorb tens or even hundreds of billions dollars a year unnecessarily.

Imagine what we could accomplish for our society if those people’s time and that wealth unnecessarily “taxed” by the financial system at many levels was better directed to causes and goals each of us cared about? In art, in education, in health, in improving inner cities or curing diseases, or whatever else that wealth and human effort could be doing instead is huge. We only get there if we fix the systems.

The same is true of most big industries today. The ways that we could be running most of the global businesses has changed thanks to the mobile ecosystem and advances in big data and machine learning and the Internet, but these processes have not yet been applied, because doing so is very hard and institutions have a lot of inertia against change. It takes truly great entrepreneurs with a lot of help from an awesome community to overcome these challenges. We’ve written about this a lot in other places — applying these new processes is going to be really important for the world, and every year counts. The investors and mentors in our community are excited to be helping ambitious entrepreneurs to achieve these sorts of missions, and we believe they are both profitable and critical for the world.

From my point of view, I already have more wealth than I would spend on myself or my family. I don’t think anybody needs to wait to do what they feel is important, but as you become more successful, it becomes even easier to fully prioritize your values and beliefs — to me, I would argue one is not really wealthy if she can’t spend her day doing something she feels is important. Fixing these industries is very important for humanity.

Q: You talk about philanthropy here. How are you building it into the fund? And where do those examples come from?

A: The examples towards the end of the essay come from a lot of Palantir’s philanthropy work, some of which was done with the Clinton Global Initiative (at; as well as an anti-child exploitation group we help with called Thorn run by Ashton Kutcher and a great team (at, and a few other missions including groups like Bayes Impact ( and others.

Not every philanthropy we believe in needs to employ technology like the ones above, but we engage in those because that’s where we feel our unique skillset allows us to have the biggest impact.

Philanthropy is built into the fund in a couple ways — each of our advisors gets a good amount of upside, but when they earn the upside from carry they can choose to donate it to philanthropy and I will match them 1:1. Our employees also have this option with part of their upside, and we’re planning to start a series of events around this later to discuss and debate how we’re using our philanthropic dollars and what missions we think are most important. We’re also advised by the ONE HOPE WINE Foundation, a group I work with that combines business success and philanthropy — and we’re still exploring what else we can do with our companies to weave philanthropy further into our community. We’d love your input.

Q: You talk a lot about values but don’t give many examples. How can a VC investor be bad, and what does it mean to strive to operate with “good values for the ecosystem”?

A: This is controversial as many people see it differently, but we have a handful of principles.

* First of all in VC we should only be getting involved where we truly believe we or our community might add value — we are an entrepreneurial group and are here to help, we’re not here to be low-end bankers who just find places for money. Our money is part of our help but if it’s nearly all of our help, this isn’t where we should be investing — firms like this end up in a negative sum game simply competing for access and deals and giving nothing back in return.

* There are many times when an action that might benefit a firm in the short term is bad for your company and the general function of the ecosystem. For example, a firm might have a right to approve the next round. A perfectly good investor might be leading the round, and the firm with approval is allowed their pro rata — but they might be angry they couldn’t lead the round themselves and insist on holding it up. Maybe they notice that the money in the company’s bank is low, so that if they hold it up and don’t approve by going slow for a few weeks, then they have a lot of leverage to get to put more in the round. Even worse, the firm could put out a negative rumor that the new investor hears to try to get them to back off so that they can lead themselves. These are all examples of actions that we have seen firms do, but that we should not ever engage in — and we try not to work with firms who act like this.

* In another example we saw this year, a firm (let’s call them “C”) had a partner that fought to lead a round in a hot company, and sent several engineers over noting that he could help recruit. Then when the round took a little longer and we were negotiating how much each of us could put into the company, he had the engineers call up the CEO and say that they would only do the next round of interviews if they were able to give C their full desired position in the round. The CEO and us both thought this sort of strong-arm tactic was completely out of line and had no place along with recruiting in our ecosystem, and decided not only not to give C the extra amount but not to work with C at all.

* Another firm, let’s call them “Q”, has a reputation for being extremely aggressive in kicking out other investors and getting their share. One of our friends was helping a great company that is important in cancer-detection and the CEO told him he could invest into the Series A, but then Q insisted he get 0 allocation so that they could get their full amount. It’s important for our LPs that we get a large ownership stake when we lead rounds, but in this same situation, for an investor who is adding value, for the sake of the company and working with great people in our ecosystem we’d be willing to be a little flexible and take for example 18 or 19% ownership instead of 20% ownership in order to encourage others to keep helping and to be friends for next time.

* We’ve been really impressed with how a few firms such as a16z treat entrepreneurs with great respect in a variety of detailed ways, and get back promptly to entrepreneurs rather than leaving them hanging, and do our best to do the same. It’s theoretically sometimes in a firm’s interest to have more optionality and take awhile even if you probably aren’t going to do a deal, in case you learn something new or because you aren’t sure, but the right way to handle it is to decide as soon as you can, and let them know immediately, and not waste a ton of their time. Some firms will be disorganized and do huge numbers of meetings with a company and waste tons of time and then cancel last minute on firms or only turn them down after months of dilly dallying and wavering, which is a bad way to do things. In general, respecting entrepreneurs as much as possible and treating them in a high-status way is key.

* There are so many other practices that are good vs inappropriate in our ecosystem that it’s hard to keep track, but we are constantly learning and discussing what we stand for as partners. Speaking badly about others to kill a deal or to try to win in almost any case is wrong unless you’d say it to their face. And meeting with a competitor of one of your portfolio companies without telling them about the conflict in order to learn more is also wrong. We can’t always know a company is going to be competitive to something we are doing, but in meetings when I realize something is going into territory that may be competitive, I will stop them and inform them and let them decide if they want to keep going. At 8VC, we have a rule that angel deals we are in don’t always preclude us from the space, but any sizable investment we are in does preclude us from investing into a competitor, because we are working closely with all of our main investments and can’t be honestly and fully coaching opposing teams at the same time.

The high-level answer is that there is a lot to do to help companies and to make money in the right way as an investor, and it’s important to do so and to encourage others to do so by rewarding good behavior and avoiding firms that violate these norms whenever possible.

Q: I / my cousin Rupert / my aunt Olga / my client has a great startup. How should I contact you?

A: If we know you from our work together in the technology community, please send it over! If we haven’t already worked with you, ideally there is somebody in our network who believes in what you’re doing. We don’t usually respond to cold inbound notes because we have to triage, and it is a good first screen to see if somebody can figure out how to get a warm introduction. When you’re doing BD for your startup later on you’ll often need to figure out how to get at least a couple positive references to speak to a client for you before they are ready to chat, so this is an important skill.

A Few Ideas from the Trenches — Part 2

Joe|August 3, 2015

Lately I’ve had a strong sense that we’re living at a particularly important time in history, and I feel really lucky to get be able to interact with a lot of the actors firsthand.

It always struck me as pretty cool that people who changed the world often knew each other. After reading them separately, hearing that David Hume and Adam Smith were friends made sense. And after studying world champion Emanuel Lasker’s games as a young chess player, it was fun to find out he was close with Einstein. Lasker, of course, was the better player — chess, like many great skills, is helped along by genius, but without exception seems to require thousands of hours of intense study and perseverance to reach the highest levels.

It is particularly amazing that Cato, Caesar, Virgil, Ovid, Horace, and Livy were all speaking, writing and interacting at one time. These and other contemporaries were each studied for hundreds of years afterwards by every Roman schoolboy, and even into our day shape more of our culture than we realize. And when I was younger, I just assumed that their Greek predecessors Socrates, Plato and Aristotle had lived within a general period and been the most influential thinkers of a civilization — I didn’t realize that each had taught the next as their top pupil. Or that Aristotle then mentored Alexander the Great! Of course, these are just a few examples; others might include the pan-European Renaissance and the industrial revolutions and a variety of artistic and cultural movements, and no doubt many periods I am leaving out with my Western bias.

I’m not familiar with too much work on the topic, other than perhaps Charles Murray who has studied major centers of world-changing innovation and creation in “Human Accomplishment”. But it’s clear that something comes together and enables a culture and an energy at a certain place at a certain time to thrive in an amazing way.

We’re not claiming that any of my friends have reached the status of these legends, but it’s obvious to me we are living at one of these times. And if you see name dropping when I mention ideas, I hope you will forgive me — the goal is to give credit where it is due, and also to show off and document the ecosystem in which we are playing and building.

Lessons of Success

At a dinner last week with some of our CEOs, Henry Kravis of KKR continually referred to the importance of internal culture when asked about his success over nearly four decades and what he focuses on. Alex Karp at Palantir mentions this a lot, too — our view at Palantir was that as long as we can keep the internal culture strong and keep attracting the best people in the world, we can achieve anything and everything else will pretty much work itself out. But keeping internal culture strong is really, really hard. One of these two men discussed having to trim the leadership team every once in awhile over the years as part of this. And they each have a lot to do with their organizations’ culture with the strong and inspiring personal examples they set as leaders.

Success gives you a platform for further success — suddenly everybody wants to work with you, and your opportunities and possibilities open up. But at the same time, success is also immensely challenging — it ultimately often creates pride, stubbornness, and sloppiness that beget failure, taking down people and organizations. The consistently successful people I have met are aware of this and seem to think about it a lot. Our ancient Greeks above liked to say that the gods pile more and more pride on you, the more successful you are, until ultimately as a mortal it destroys you; the warning is that none of us can fully escape this paradox (but one might argue that it’s very helpful to be aware of it, and to fight it).

My favorite historical story of success becoming a blockade to more success was with Alexander the Great and his troops. I don’t know if it’s apocryphal, but apparently by the time they got to India, each of the troops had multiple servants — hairdressers and concubines and what not — and weren’t particularly interested in fighting anymore. They had enough and were enjoying their life, Alexander’s glory be damned. He knew he could not convince them to keep going. One even wonders if this secretly had to do with the great man’s early and untimely death. The joke at dinner was that this dynamic the troops faced was also a problem in NY, and could soon be one in SV as well. It’s something more of the leaders start to think about, as for example early employees ask to sell a small part of their shares and take ~25 million off the table at Uber, and Goldman Sachs strategizes with Travis about structures to enable this without destroying the culture. We definitely see ATG’s problem recurring in real time, and it becomes a counterpoint and a challenge to the focused, hard-working, substantive culture of SV. Success is not a challenge to be taken lightly for any part of our culture, and we have a lot to learn from each other’s experience.

This is how we do it at Apple

The problem of success pops up in a lot of areas, but one that I’ve struggled with a lot lately has been “successful” companies who are extremely stubborn about what makes them successful.

This is a two-sided issue. On one hand, a company is often winning because it’s the best in the world at something, and you don’t want to risk breaking that special culture and process that makes them the very best. On the other hand, the company may have just been doing a couple things right and then a few other things in really stupid ways that were never optimal but they won anyway, and now they are still being stubborn about the parts that are stupid and they aren’t willing to fix them or learn from others. This happens a lot. As David Sacks put it at a board meeting this week, whatever they were doing when they hit product-market fit gets enshrined and becomes untouchable.

This isn’t just a problem at my most successful portfolio companies. When my friend’s company was bought only a few years ago, she was shocked to find out that some of her colleagues at Apple didn’t know what A/B testing was, and that they didn’t have an analytics framework on the software side. Steve Jobs was a genius; he figured out what the customers wanted, designed it intuitively, and iterated on it. That was how it was done! A/B testing? That’s not what we do here. Of course, when are you running a lot of software projects, there is a dialectic, and great design is key, but an analytics framework is also important — it informs your decision making and teaches you what users are doing, where they are frustrated or unhappy, and where they are / are not taking certain actions. It’s just how it is done. Eventually, she convinced them to learn this best practice from SV and changed the process in this area.

Palantir, Addepar, Google, FB, Salesforce — everybody faces this problem. Salesforce was extremely stubborn about its web interface through the cloud, to the point where it was in danger and had to scramble to adjust to the new mobile realities. And now it’s not clear that it’ll be able to shift from single to multi-tenant for new data applications. Was hiring all these huge numbers of researchers and CS PhDs core to what made Google successful? Maybe. It certainly became enshrined into an obsession after their product-market fit. Palantir still has a very strong bias towards everybody being technical and maintaining an engineer-is-king culture, and keeping out others. Technical people own customer relationships and Palantir has eschewed regular sales — it is very stubborn about a lot of the practices that have been in place during its really fast growth in the last years. Alex Karp and the team are probably right about what outsiders don’t realize — it is really easy to destroy the innovative culture with less substantive and more political business people, and that it’s a complex and delicate balance between maintaining a strong engineering culture and expanding as a business. But of course, there are a lot of lessons to be learned from best practices at other firms too, and there are lots of areas where I think Palantir could learn from outsiders. They could hire more great writers and top PR people for more intelligent engagement with the press, and they could possibly invest in business process optimizations such as support departments for more established deployments — and many other things that everybody else does. That said, as the company scales, they’re figuring it out in a way that works for them — all of these firms are right to be slow and careful about what makes them unique, and to fight to keep their core culture.

But in general, companies very often become stubborn and point to their success and assume that whatever they were doing that was weird and quirky is part of their success. Another of our fund’s most successful companies has refused to build out certain traditional parts of its executive team, and generally will schedule meetings with important people and then cancel them multiple times in a row, often last minute, because they need to focus on their core business and metrics and they are having a busy week. And they are probably right to be ruthlessly focused, and right that certain executives they tried to hire were a distraction to the core value they were creating. Which doesn’t mean that, as a huge business, they don’t need to surround themselves with awesome people who can handle the issues that come with being a larger business, even as they continue to keep their core ruthlessly focused.

The question is how to take a successful company and learn from outsiders and keep challenging yourself to improve — and to do that without giving up your own special and unique identity. The rumor is that Theranos has fallen on this extreme as well, and is ruthlessly negative about the rest of SV and assumes it can learn nothing from its peers — and now that it has had early success and is lauded by the press, that quirk has become enshrined; none of us know them well. This happens a lot. Some firms will bring in traditional business leaders and lose their soul, which is the wrong extreme. But I think the overriding lesson is that the success often makes us arrogant and insular, and we should challenge our leaders to fight this. The lesson of history is to be proud and strong in your own view, but also to engage and learn from the other great people around you.

Operational Debt

I was speaking about the above with David Sacks at a board meeting for Addepar this week — he is one of the more thoughtful operational leaders in our space (COO PayPal, CEO Yammer, now COO Zenefits). He said he’s been thinking a lot about the idea of operational debt, which he believes companies incur just as they do technical debt when they grow quickly. You can’t always engineer all the right processes, just as you can’t build all the right long-term tech infrastructure, so you have a lot of operational hacks and inefficient structures in place to try to deal with things however you can as a company grows quickly. And your job is to be constantly fixing it and paying back some of the debt when you can amidst the madness of a hypergrowth company. Examples of this include a lot of things, such as how you build and handle various aspects of the customer life cycle — from marketing to sales to time-to-value to customer success/support and customer advocacy — to how you on-board employees and maintain internal culture. If resources aren’t available or processes haven’t had time to get built out, you just deal with it however you can, often by internal leaders filling in the gaps manually and in one-off ways.

(Other common examples of this are that a certain percent of sold clients aren’t qualified correctly and end up needing a ton of hand-holding by support to get value out of the product; deployment people having to do data integration by hand because there was no time to build the tools or materials to teach the clients; the CEO having to call or visit huge numbers of early clients in person because the relationships haven’t been passed off to an acceptable other senior person; marketing and product teams not strategizing or working in sync and having to revise materials and plans as the other groups’ plans change; etc. — there are hundreds of processes to get right).

The danger of course is to make sure to keep learning and to see what’s working well for what it is, and what is an operational hack that needs to be fixed (despite all the success you are having). Leaders are right to be paranoid — it’s really hard to figure out what really is your super-power and what actions are critical to the identity of your company. It may be really important not to follow a legal best practice that larger firms use, because it might destroy your firm’s entrepreneurial spirit if the lawyers infect the culture. Or maybe you are just being stubborn and don’t like dealing with a few lawyers, but it’s not that bad if you set it up right. This is where that old-fashioned wisdom about knowing yourself first before you can conquer the world really comes into play.

Are you Long or Short Innovation?

One of our fund’s core theses is about the smart enterprise platforms we believe will be created and drive a lot of innovation / capture a lot of value in major global industries in the coming years.

This is tied to our view of the world proceeding mostly in S-curves. When a new paradigm emerges, like the web, it first has a period where it gains some traction, and then a period of exponential mass adoption, and then finally a period where things stay basically the same for a while until the next paradigm emerges. As you progress through time, you see innovation going up in a bunch of S-shapes. Human history has seen several paradigms that define the information processes of their age. Beginning with the development of spoken language a hundred thousand years ago, and then the invention of written language five thousand years ago, discontinuous innovations have fundamentally changed the way that information flows through organizations and through society. In more modern times, paradigms that have come to define the information workflows for business enterprises have included the printing press (1440), the telegraph (1837), the telephone (1876), the computer, and now the Internet and mobile ecosystem. The following graph is a large oversimplification and focuses on a narrow area to demonstrate the concept.

It’s dangerous to discuss this without being accused of being a luddite, as a lot is changing around us, but I believe we are at a point of time where the fundamentals are going to stay the same for a long time around the core of how the web and mobile work. I don’t agree with the second half of this article at all, but the first part is pretty good in giving airplane technology as an example to think about this. For 40 or 50 years, airplanes had gotten safer and faster and more awesome each decade, with the turbo prop and then the jet engine and what not. As an engineer in the 1950s, most assumed that we’d be going at Mach 3 within a couple decades, and TWA was already taking commercial orders for people to fly their planes to the moon (this was just assumed to be something that would happen, apparently). It turned out, however, that the laws of physics and what was generally possible and comfortable within the framework of energy expenditure meant that we hit the peak commercial speed around the late 1950s with the Boeing 707. In fact, the new 787 is actually a slower plane.

If that author and many others I know are right, the basic information technology framework of being able to access and collect and process distributed data, and how the web works, may have been this one time shift in infrastructure that could look pretty similar even many decades from now, just as airplanes are very similar to 50 years ago.

And if that is true, it means the next decade is really important in business! Because while perhaps most of the new consumer platforms that should exist given this infrastructure have mostly been built (Google, FB, Amazon, now Uber, etc.), it’s clear that the enterprise platforms needed to upgrade all the major industries — industries such as government, finance, healthcare, energy, education, or others — have not been built. Platforms in these industries will help these institutions share and use their data to its fullest potential, and will enable a fundamental shift in how the industries work and who captures margin. Not only will building them help make these huge industries work a lot better and spread innovation, but there’s also a good chance that their creators will own these platforms for a very long time. This makes them very valuable — ironically, less disruption to how the world works means the existing companies are worth more.

There is a lot of money flowing around SV, but I think focusing on this reality is important — there should probably be even more money invested into what we are doing right now if it’s true that there has been a major paradigm shift that hasn’t worked its way through the economy yet AND is a big one-time shift. If you look how small the amount of money is going into this versus how much capital there is in the world and what the shift impacts, it’s actually really tiny. Of course, only the very best technology and business teams working for years towards the best ideas in these industries will win and create a category defining company that will be around for decades, but there may be a lot of these.

I was sharing my thoughts on this with Peter Thiel at breakfast this week, and he had a clear way of capturing the dynamic. Companies are either short or long innovation. Clearly Facebook and Google are innovative places with lots of amazing people, but if you are a large shareholder of GOOG or FB today, you are short innovation in search and social networks. If there is going to be a ton of innovation in these areas, these are much riskier stocks to own. Many great companies are long innovation for a few years — they are creating something new and proving it works. Then, while they may keep innovating and the people running them may be very innovative, shareholders are really mostly short innovation, as they don’t want the platform disrupted from everything going on outside the company.

This is an important thing to think about as a tech investor, as many of the later stage tech investments may actually be short innovation — that is where the bulk of the money goes into our space. It’s a useful model as sometimes we may be long innovation in one area but short in others, and we should be honest about which bet we are making.

If we are right and are able to distribute a lot of stock to our LPs in the future as our top big-industry platform companies succeed as standalone entities, all of us will end up in a financial position where we will be hoping there isn’t a lot of innovation that once again changes the fundamental structure of the web and mobile ecosystem and what’s possible in business. (I will probably be rooting for new innovation anyway, because I can’t help myself, but financially we’d all be aligned against it). Fortunately, for now, we are all very long innovation at our fund — that is more fun, and we are very excited to prove to the world how some of these old industries should work.

And I think we are set up to do just that in a lot of areas, assuming our most successful companies are able to keep learning and growing, and aren’t destroyed by the challenges of their early success.