Viewing posts by davidkircos
So make it fun.
Here is something fun:
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.
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.
I upgraded to the iPhone 7 a couple weeks ago after realizing that would only cost me sales tax + $1 extra per month. This was because they would reduce my bill by $20/month and finance the purchase of the new phone for $21/month. So I walked out of the store paying $21 (3% Colorado sales tax) and had a brand new $700 phone. I'm not sure why Verizon lowered my bill by $20/month, but I wasn't too eager to ask questions.
I really like the design of the iPhone 7, it is very consistent with very few asymmetries. Previous iPhones had those asymmetric antenna lines, on this one the antenna is invisible. There is, however, one major exception; the giant camera protruding out of the back. This prevents the phone from lying down flat on a flat surface, just like the iPhone 6. And just as annoying. In my opinion, it would have been much better to make the rest of the phone thicker and increase the battery size as well as keep the 3.5 headphone jack. Which brings me to the most annoying part of the iPhone 7.
The iPhone 7 headphones do not work with a Macbook. It's not possible, not even with a dongle. Owning a Mac and iPhone used to feel like being part of a metaphorical club where everything worked together really well. The new headphones are a pretty stark deviance from that seamless ecosystem. I really hope Apple figures these usability things out better in the future, it would be even more annoying to have to learn Android :p
Complaints aside, I still really like the iPhone. As of late it feels just a little bit like Apple has lost their way. Investors might be thinking that too, which could partially explain why APPL is trading at only 15 times earnings. Where almost every other major tech company is more than double that (Microsoft 30x, Google 30x, Facebook 45x, Amazon 170x, with the notable exception of Samsung at only 13x).
1/2/2017
in the mountain sun
able to take a deep breath
calm before the fray
Monday's I am going to write poems. I will vary the poem type week to week. Next week I'm taking inspiration from Isaac Asimov and writing a limerick.