John Buttrick's posts and talks

Upgrade

In July 2011, we were fortunate to lead the Series D financing round in Lending Club, founded in 2006 by Renaud Laplanche. Along with Zopa (UK company) and Prosper, Lending Club was a pioneer of the now-familiar marketplace lending model, which cut interest costs for high quality borrowers by as much as 50% (not a typo) and at the same time offered investors attractive risk-adjusted returns not available elsewhere. This was a fundamental innovation in financial services that is thriving globally and will continue to gain in importance.

During the next four years, we watched Renaud and his team execute extremely well, growing from $20mm a month in originations at the time we invested to $500mm a month when Lending Club went public in December 2014. Lending Club originated over $20 billion in loans to over 2 million borrowers, saving consumers substantial amounts. Scaling a company at this rate is very difficult. Renaud and his team did as good a job as we have seen.

In retrospect, Lending Club probably went public too early. Financial services companies are held to high standards in the public markets these days, regardless of size or vintage. In May 2016 the company faced compliance issues and Renaud left the company, a difficult and unfortunate event for all involved.

Today, Renaud and his new team are announcing the launch of Upgrade, a new marketplace for consumer credit. We think of it as Lending Club 2.0 and are excited to be Series A investors in this new venture, along with our friends at VY Capital, Sands Capital, FirstMark Capital, Ribbit Capital, Silicon Valley Bank and others.

In our view, we are still in the early innings of the marketplace lending model. We believe Upgrade’s team and business plan makes it well positioned to quickly become a leading company in the industry, benefitting both borrowers and lenders. We look forward to helping Renaud steer his ship once again.

Payjoy

Sometime in the late 90s I picked up my first mobile phone, a Motorola StarTAC. The sound quality wasn’t great but it was a radical change to no longer be tethered to a wireline. Next up was the Blackberry, which combined voice with email, and quickly became the device of choice for many. Then, in 2007, the iPhone was released and the smartphone era began.

Today I use a Google Nexus 6P, and it’s hard to imagine living without a smartphone. My guess is I use at least 10 different applications every weekday. At USV, we’ve invested in many mobile-first applications across a variety of services, including Foursquare, Soundcloud, SigFig, DuoLingo, Figure 1 and Clue, but these are only a small fraction of what’s available in the app stores. Smartphones also provide an alternative connection to the internet for those who cannot afford the costs of, or don’t have access to, broadband services.

Over the past few years, the smartphone has become an essential device for work, play and daily life. It also provides an alternative connection to the internet for those who cannot afford the costs of, or don’t have access to, broadband services. Last year the Pew Research Center published an excellent study on the importance of smartphones.

The average price of an Android phone is still over $200, and is not projected to go below that anytime soon. The best unlocked smartphones can easily exceed $500 and are out of reach for many. Our newest investment, PayJoy, addresses this problem by providing underbanked consumers with an innovative financing option at lower cost than normally available to borrowers with little to no credit history.

PayJoy will finance 70-80% of the price of a smartphone over 3-12 months at a monthly cost of $50-150, depending on price and term of payment. Similar to platforms like Lending Club and Funding Circle, PayJoy uses an off-balance sheet model that connects purchasers with a financing source. If customers fail to pay, after multiple notices PayJoy’s technology locks the phone until payment has been received. To date, default rates have been quite low, as you would expect for an essential device.

For many of its customers, PayJoy is their first financing product and the first step towards developing a credit history and using internet-based financial services.

PayJoy currently operates only in the United States, but we believe there is a large global market for its services. We are excited to lead this Series A round to provide PayJoy with resources to expand outside the US, and we look forward to working with PayJoy’s three founders, Doug, Mark and Gib

USV 2016, LP

This week, we will close our first investment in USV’s 2016 fund, which has total capital commitments of $175 million, the same size as our 2014 fund. This will be USV’s fifth early-stage fund. We continue to make new investments in our second Opportunity fund, which is not fully invested and has an investment life extending into 2018. As many of you know, our Opportunity funds invest in later-stage and non-traditional opportunities. We’ll do a separate post on this topic soon.

As has been the case since we organized our 2012 fund, the 2016 fund will have five investing partners: Brad, Fred, Albert, Andy and me. I’m leading the first investment, which we expect to announce in July. Andy is in discussions about a possible second investment. It will take us approximately three years to identify 20-23 companies for the new fund. Since the firm has more than 60 active companies today, we will likely have a slower investment pace than the last two funds, but who knows?

There is one change with the new fund. In past funds, the key man provision in our fund formation documents was focused on USV’s founders Fred and Brad. This provision gives limited partners a second look at a fund if named members of the general partner become inactive. In the 2016 fund, the provision focuses on Albert and Andy. They will take an increased leadership role and lead more investments in this fund cycle. Fred, Brad and I will be active in all investment decisions for this fund, but it seems time to acknowledge the leadership role that Albert and Andy have been playing and will play at USV going forward.

We all love what we do and the partnership we have developed, but last summer Fred, Brad and I independently concluded it was time to cut back a bit as we discussed the next fund and examined our gray hairs. VC requires long time horizons, at least ten years and often fifteen or more. We still have four companies remaining in the 2004 fund and 15 in the 2008 fund.

We have been talking to our limited partners, companies and colleagues privately about this transition for about a year, but last month at our CEO summit we learned there continue to be unfounded rumors that Fred and maybe Brad were retiring. This amused us greatly since on most days we share email threads almost every hour and the firm’s activity level on investment, network and policy matters has never been higher.  You can find Fred’s thoughts on this topic at avc.com.

Each investment fund is an adventure as we build a portfolio and help our companies succeed. As anyone reading this post knows, it's an exciting time to be in this line of work. We are grateful to everyone who supports us. USV 2016 is now open for business and we are committed to managing it until it is fully liquidated, almost certainly until 2030 or beyond.

eShares

eShares

Anyone who owns shares or options in a private company instinctively knows that cap table management remains frustratingly analog. At USV, we own equity interests in more than 50 companies. For many of our portfolio companies we own three or more securities. The collection and management of this information is a thankless task but critical to our business.

Almost every company in our portfolio manages its cap table in a spreadsheet (Google, Numbers, Excel, etc) and communicates that information via email. At the end of each quarter, we have the fun job of nudging the busy management teams of our portfolio companies to provide a current cap table so we in turn can accurately report our ownership positions to our limited partners. The whole process feels like snail mail and is prone to error. Not to mention the process of collecting and storing stock certificates in a third party vault, even though no one except our funds could really offer these outmoded pieces of paper as evidence of a legally valid ownership position.

Of course, once a company goes public this information is all neatly arranged in a brokerage account. You don’t have to ping Google’s CFO or treasurer to confirm how many shares you own or calculate your fractional ownership position or try to triangulate a valuation. Why is that not the case with private companies? Why can’t investors log onto an account that has up to the minute information on our private ownership positions, as well as information on recent changes in 409A and other valuations?

Employees who own options have their own set of problems but have no interest or training in keeping track of option agreements, vesting schedules, 409A valuations, exercise mechanics, etc. This in turn places an unwanted burden on our portfolio companies and their law firms, and is unfair to employees.

Fortunately, a number of companies are bringing technology to bear on this problem. We think the leader in this space is eShares, which was founded by Henry Ward and Manu Kumar at K9 Ventures. On Friday, Henry authored a great post on the subject of broken cap tables: https:[email protected]/broken-cap-tables-bbf84574a76a. In October, Andy Palmer, an early eShares investor, also wrote an excellent post from a user’s perspective: http://blog.koalab.com/2014/10/02/did-the-lawyer-lose-your-stock-certificate/

We are excited to announce that we recently led eShares’ Series A round, joined by our friends at Spark Capital and investors from eShares’ seed round. One of my New Year’s resolutions is to get most if not all of our portfolio companies to adopt eShares. Now that we have played with the eShares platform, we wish this had happened yesterday. More importantly, employee option holders of our portfolio companies will also be thrilled even though they don’t yet know how much they will benefit from the ease and transparency of eShares’ solution. Like many software and cloud technologies we now take for granted, we will soon wonder how we lived without it.