Blog

All posts are my own opinons and do not repersent any organization I am affiliated with.

Warm Day in Boulder

Today was a very warm day in Boulder. It was 50 degrees for most of the day and we still have about 5 inches of snow on the ground. I made full use of the warm weather and hiked all day.

I started off in the morning with Green Mountain Loop

View from the top

And then went on a run (mostly walking tho :p) from Flagstaff to the top of Sanitas Valley Trail.

Made it back to the car just in time for sunset.

In total I went 10 miles and 4,000 ft up.

Ingenue by Atoms for Peace (cover)

Piano cover of Ingenue by Atoms for Peace

You know like the back of your hand
Who let me in?
You got me into this mess
You get me out
You know like the back of your hand
Your bell jar
Your collection
Ingenue
You got me into this mess
Fools rushing in, yeah
And they know it

The seeds of the dandelion you blow away
In good time, I hope I pray
If I'm not there now, physically
I'm always before you, come what may

And you know it
Who let 'em in?
Yeah, well you know it's
Fools rushing in,
Yeah well they know it's
Gone with a touch of your
Gone with a touch of your hand

Move through the moment
Though it betrays
Transformations
Jackals and flames
If I knew now what I knew then
Just give me more time I hope and pray
I mistake all you say
The seeds of the dandelion you blow away

Life Is as Fun as You Make It

So make it fun.

Here is something fun:
neave.tv

Choice Fatigue

Choice fatigue is a phrase I've been using lately to describe the situation when a decision has to be made between many good options. In this case, it is difficult to make a decision. Not because a good choice is hard to find, but rather because the worry of not making the absolute best choice holds back any decision. When the difference in the quality of the options is marginal, the time lost trying to make the best decision can outweigh the marginal improvement gained by the best option.

Choice fatigue can also play a role in product design. For example, Amazon helps their customers avoid choice fatigue by naming only 1 item in each category the best selling item. So when users search for a product like "reading lamp" they aren't given 100s of results with only a marginal difference in quality and no easy way to distinguish between them. Instead, they are given assistance picking "the best" option by labeling it as the #1 best-selling product in that category. This prevents users from becoming too fatigued by the options and therefore unable to decide.

Upside Protection

Unlike many other types of investors venture capitalists are not as worried about downside protection. There is inherent downside protection in equity investing, namely you can only lose as much as you invest. Yet the equity can grow infinitely in value. Also unlike most equity investors, VCs expect to make the vast majority of their returns with only a small handful of investments. With the rest of the investments either being losses or a "push". Because of the fixed limit on the downside and a focus on the few investments with great upside potential. Therefore, it is more important as a VC to focus on upside protection. That is to capture as much return as possible on investments in companies whose valuations are growing very quickly. This can be done through a variety of mechanisms. I want to talk a bit about two of such mechanisms here.

Follow-on investing. Many VCs retain large portions of their funds to make subsequent investments in companies that are doing really well.[1] This helps to alleviate dilution in further financing rounds and exposes the firm to more of the positive upside potential. This is why small funds with a limited ability to follow on, can be disadvantaged. This can also be a huge disadvantage for angel investors who do not have reserves of capital to invest in their winners. Tucker Max has a good post that cites the limited ability to follow-on in winners as a reason for small angel investors to never start investing at all.

Convertible note with a valuation cap VS a note with just a discount. This is more subtle, but an important mechanism for investors who use convertible notes. For example, let's say you are the first investor in a very early stage company. The company is just a founder with an idea. You and the founder decide to use a convertible note for simplicity as well as to not have to come up with an exact valuation for the very early stage company. You give the note a 20% discount as it converts in the next round. This sounds reasonable, as you are taking more risk so your reward is a 20% discount.

Consider if the company is doing really well and they do an equity round with a valuation of $20 million dollars. Your investment converts at a 20% discount, $16 million dollars. A valuation much higher surely then you would have agreed to when the company was just an idea. However, if you had negotiated a $3 million valuation cap. Your investment would convert at the $3 million cap and you would effectively own 5x more of the company than just based on the discount note. That is upside protection. In the first case, you would effectively be punished for taking a chance investing earlier in the company because of how well it was performing so quickly.

This is important because at a $3m cap and a $20 million valuation this investment might be the one that returns your whole fund. It would not have done so simply with a 20% discount and certainly wouldn't cover the other losses and "pushes" in the fund.

Notes:

[1] Some companies also encourage this behavior with a pay to play clause.