THE BRIDGE

opinion

Unicorn production in France

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. France shows no signs of throttling back its ambition to maintain one of the world’s most vibrant startup ecosystems. At the VivaTech conference in Paris last week, French president Emmanuel Macron announced an extension of TIBI, an initiative which successfully catalyzed $30 billion of funding into French startups over a three-year period by encouraging financial institution partners to re-orient $6 billion into VC funding. When financial institutions back a venture capital fund as an anchor LP, a virtuous multiplier effect occurs, enabling the VC fund to raise more capital from other LPs. The TIBI extension will mobilize an additional $7 billion to be invested into French VC funds from such government partner institutions, with an increased focus on early-stage venture…

mark-bivens_portrait

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.


Image credit: Viva Technology

France shows no signs of throttling back its ambition to maintain one of the world’s most vibrant startup ecosystems. At the VivaTech conference in Paris last week, French president Emmanuel Macron announced an extension of TIBI, an initiative which successfully catalyzed $30 billion of funding into French startups over a three-year period by encouraging financial institution partners to re-orient $6 billion into VC funding.

When financial institutions back a venture capital fund as an anchor LP, a virtuous multiplier effect occurs, enabling the VC fund to raise more capital from other LPs. The TIBI extension will mobilize an additional $7 billion to be invested into French VC funds from such government partner institutions, with an increased focus on early-stage venture funds in particular.

Whether it be by happy coincidence or direct inspiration, Japan Post Bank just announced today an identical level of funding in Japan for “turning startups into unicorns.” So this strikes me as an opportune time to examine how France produced its 36 unicorns.

36 Unicorns and counting

Through its dedicated efforts over nearly two decades, France has emerged as the leading ecosystem for startups in Europe, and arguably by some metrics third in the world behind the U.S. and China. Several years ago, the French government set out its aspiration to produce 25 tech unicorns by the year 2025. France has already shattered this goal, having already attained 36 unicorns.

The unicorn count is a metric that governments around the world like to use as a proxy to represent the vibrancy of their domestic startup ecosystems. I believe that France represents an interesting case study in a country’s unicorn production, so let’s analyze how France produced its 36 unicorns.

Three primary factors contribute to the successful cultivation of tech unicorns:

  1. Volume of seed stage startups
  2. Time
  3. Capital

As the above funnel illustrates, producing unicorns requires starting with an abundant pool of seed stage startups. At the risk of sounding glaringly obvious, most startups do not become unicorns. In France’s case, approximately 1,000 seed stage startups are necessary to produce one unicorn. Failing to foster a sufficiently large volume of seed stage startups fundamentally tightens the reins on unicorn growth.

Secondly, it takes time. Unicorns do not grow overnight. For France, the average time for a startup to grow from seed stage to unicorn stage has been 8 years.

Finally, it takes capital. Two decades ago, France was not a country with abundant risk capital interested in the VC asset class. Nor was it a country of startups. Sources of capital were conservative in mindset, and French society espoused a culture which encouraged young people to pursue careers of stability rather than entrepreneurship. This is where the French government stepped in with a policy change which catalyzed the flow of capital into startups, and over time, transformed the mindset of French society to embrace entrepreneurship: the Angel Tax program.

Over 17 years, the French Angel Tax program produced the bulk of the 35,000 seed stage startups necessary for the unicorn funnel. Subsequently, initiatives from the BPI (the French Public Investment Bank) and more recently the aforementioned TIBI, provided the additional boost to VC funds to enable them to fill their capital coffers in order to finance the continued growth of the startups as they progress through the unicorn funnel.

The trajectory of France’s startup ecosystem represents an admirable success story. Moreover, the French government is not resting on its laurels by curtailing its ambitions. I submit that France will remain an interesting model to watch.

Web3 for the gig economy

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. I’ve been ruminating on how Web3 could potentially transform gig economy businesses — e.g. Uber, Lyft, Airbnb, Upwork, Taskrabbit, Fiverr, etc. — and whether applying token economics to these activities would even make sense. Two encounters over the past week have persuaded me that a decentralized model could address some of the failings of these established platforms. The first encounter was with the founder of one of the world’s newest Web3 ride-hailing projects. The second was with a research paper entitled, “Expanding the Locus of Resistance: Understanding the Co-constitution of Control and Resistance in the Gig Economy,” published by Hatim Rahman, Assistant Professor of Management and Organizations at the Kellogg School of Management, and Wharton management professor Lindsey Cameron. Rahman…

mark-bivens_portrait

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.


Image credit: RudeVC

I’ve been ruminating on how Web3 could potentially transform gig economy businesses — e.g. Uber, Lyft, Airbnb, Upwork, Taskrabbit, Fiverr, etc. — and whether applying token economics to these activities would even make sense.

Two encounters over the past week have persuaded me that a decentralized model could address some of the failings of these established platforms.

The first encounter was with the founder of one of the world’s newest Web3 ride-hailing projects. The second was with a research paper entitled, “Expanding the Locus of Resistance: Understanding the Co-constitution of Control and Resistance in the Gig Economy,” published by Hatim Rahman, Assistant Professor of Management and Organizations at the Kellogg School of Management, and Wharton management professor Lindsey Cameron.

Rahman and Cameron suggest that the 5-star customer ratings system of these gig economy platforms is broken. They argue that the disproportionate importance of the customer review system subordinates gig workers to essentially a ‘digital boss’, toward whom the workers have little recourse once the rating is finalized and published. The customers, in contrast, do not bear the consequences of negative reviews as acutely as the workers do.

As a result, gig workers devise ways to resist such authority. Tactics can include: carefully vetting a customer’s behavior and prior reviews before accepting the gig, offering discounts once the job is underway in order to elicit a high rating, or even canceling the job before completion in order to avoid a negative review.

As currently structured, the Web2 ratings system abdicates power to people who do not possess a vested interest in the gig worker’s business.

Improving alignment of interests between gig worker and customer strikes me as a way that decentralization can transform these platforms.

Let’s focus on on-demand ride hailing. It’s hard to argue that this concept is not innovative, yet businesses like Uber and Lyft have never reached sustained profitability. Partly this is due to regulatory capture, i.e. when the status of drivers was deemed to be that of employees rather than independent contractors, hence requiring the platform to provide substantial benefits, the economics of the model broke down. Yet despite the regulatory impositions, drivers still struggle to make ends meet, keeping all apps active in order to maximize their driving throughput and undermining any particular loyalty to a single platform.

The thesis of these decentralized ride-hailing projects is essentially that token economics will repair the broken model. Although there still appears to be some experimentation around the specific tokenomics among these new contenders, from what I can understand both drivers and riders will earn platform-specific tokens as they use the service. Token grants could be structured to reward both frequency of usage and longevity, thus fostering loyalty from both the drivers and the riders. If the right to drive for the platform is embedded in an NFT, say, then this right could be transferable and appreciate in value just as the taxi medallions used to do.

Of course, the devil is in the details in the implementation of these models. However, decentralization brings a new dimension to the economic model of the business, which could render it viable again.

We’re at a moment where Web3 has somewhat fallen out of favor as the trendy new thing (albeit not yet in Japan where we’re still catching up). In my experience, when the spotlight on a particular innovation shifts away, this is often the best time for research and reflection on the transformative potential of it.

Japan Lead VC Radar – A glance of the most active lead VCs in 2021 (Infographic)

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. The infographic we published last month proved popular. Some of the most encouraging feedback we received came from abroad, where foreign investors in the venture asset class expressed appreciation for visibility into Japan’s most active VC Funds. Even domestically, it appears that many local startup founders in Japan find our VC sector here equally opaque, and hence applauded this new transparency. This collective feedback has inspired us to peel back one more layer of the onion: identifying Japan’s most active Lead VC funds. What defines a Lead VC? Quite simply, a Lead VC in a startup is the first venture capital fund to commit to a startup’s fundraising round. The Lead VC structures the investment round, establishes the terms and…

mark-bivens_portrait

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.


The infographic we published last month proved popular. Some of the most encouraging feedback we received came from abroad, where foreign investors in the venture asset class expressed appreciation for visibility into Japan’s most active VC Funds. Even domestically, it appears that many local startup founders in Japan find our VC sector here equally opaque, and hence applauded this new transparency.

This collective feedback has inspired us to peel back one more layer of the onion: identifying Japan’s most active Lead VC funds.

What defines a Lead VC?

Quite simply, a Lead VC in a startup is the first venture capital fund to commit to a startup’s fundraising round. The Lead VC structures the investment round, establishes the terms and valuation in a term sheet, and sets the schedule for transaction closing. In Western markets, the Lead VC often represents the largest check in the round, though not necessarily, and this is far less common in Japan.

Japan Lead VC Radar 2021

Accordingly, the Japan Lead VC Radar, 2021 edition depicted below, reflects the number of investments by led by Japan’s independent VC funds into domestic startups in 2021. In a future post I will elaborate on why we believe this is an important tool for Japan’s growing venture ecosystem. Feel free to contact us for any requested corrections.

Click to enlarge.

Japan VC Radar – A glance of the most active VCs in 2021 (Infographic)

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. We’ve mentioned this before: the venture ecosystem in Japan is on the rise! Now we have some supporting evidence. The Japan VC Radar indicates the most active VC funds in Japan last year. Based on data sourced from Startup DB or the funds directly, the Japan VC Radar depicts the number of new domestic investments in 2021 by Japan’s independent VC funds (note: please feel to contact us for any corrections).

mark-bivens_portrait

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.


We’ve mentioned this before: the venture ecosystem in Japan is on the rise! Now we have some supporting evidence. The Japan VC Radar indicates the most active VC funds in Japan last year.

Based on data sourced from Startup DB or the funds directly, the Japan VC Radar depicts the number of new domestic investments in 2021 by Japan’s independent VC funds (note: please feel to contact us for any corrections).

(Click to enlarge)

2022 predictions from insightful investors

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. Years ago I started publishing an annual list of technology predictions from global venture capitalists. By design, I deliberately prioritize VCs beyond the usual Silicon Valley household names, whose voices were not necessarily heard on the world stage. For this season’s set of predictions, I am again pleased to be able to give the floor to an all-female cast of investors, who in my opinion are poised to make a disproportionately positive impact on the venture ecosystem this year. May 2022 bring us further enlightenment. Happy new year ! –mark Yumiko Murakami — MPower Partners, Japan ESG investments, which showed record growth in 2021, will continue to gain momentum in 2022. At the same time, criticism of greenwashing will increase,…

mark-bivens_portraitThis guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.


Years ago I started publishing an annual list of technology predictions from global venture capitalists. By design, I deliberately prioritize VCs beyond the usual Silicon Valley household names, whose voices were not necessarily heard on the world stage.

For this season’s set of predictions, I am again pleased to be able to give the floor to an all-female cast of investors, who in my opinion are poised to make a disproportionately positive impact on the venture ecosystem this year.

May 2022 bring us further enlightenment. Happy new year !

–mark

Yumiko Murakami — MPower Partners, Japan

ESG investments, which showed record growth in 2021, will continue to gain momentum in 2022. At the same time, criticism of greenwashing will increase, and the quality of ESG investments will be questioned in 2022.

ESG has so far been focused on listed companies. This year, ESG will begin to be introduced to the private market in earnest.

Tonna Obaze — Harlem Capital, NYC, USA

I believe the world will continue its Web3 evolution with blockchain technology, cryptocurrency, & NFTs. However this year, the focus will not be awareness but more mass adoption. I’m excited to see new players emerge who make Web3 accessible for everyone — those who communicate concepts in plain language to help the “non expert” understand and those who build infrastructure to make onboarding seamless. Once upon a time, only few had access to computers and even fewer had them within their homes — Apple sought out to change that and make computers accessible to everyone. Time will tell who will step up and do the same for Web3.

Emiko Takeda — Monex Climate Impact, Japan

I personally expect a lot of interesting innovation in sustainable food. For instance, I see projects which transform empty sea urchins, traditionally a scourge of algae vital to sea life and a headache for fishermen, into highly-prized sea urchins for sushi based on an all-natural alimentation program. Another example is a project producing delicious plant-based cheese alternatives from sticky rice by employing koji malt often used in Japan for fermentation of miso and sake.

Abi Mohamed—Tech Nation, UK

2021 was a remarkable year for European startups, with a record $100B of capital invested, 100 new unicorns (Atomico Report 2021), but there was still a lack of investment in underrepresented founders, the biggest disparity was towards founders who self identifies as Black. We still saw incredible funding deals to UK Black founders, i.e. Marshmallow and AudioMob. My prediction for 2022 is that we will see more UK Black founders being funded by micro/solo funds, ex-founder turned angel investors or international institutional funds.

Mai Iida — D4V, Japan

2021 saw the rise in new content driven by individuals and communities (think NFTs, EdTech cohort programs, Japan’s “Oshikatsu” or fan activities in pop culture, etc). The diversification of opportunities has put creators in a strong position to pick and choose what is best for them. People are also revisiting their way of work and life, such as the “Great Resignation” in the US, choosing a career that suits their lifestyle best. In 2022 I look forward to seeing these two trends merging – we may see more people choosing novel ways of work, treating their hobbies just as seriously as their so-called “actual” jobs. This is an interesting and hot area for startups to contribute their innovative ideas.

Venture Capital: why AUM is the wrong metric

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. There’s an old dig that venture capitalists like to make about private equity professionals: private equity folks boast about the size of their ego in AUM, whereas VCs know that what really matters is their IRR. Now let’s define these three-letter words. First, I’m using the word ego as a euphemism here to be gender agnostic (albeit in reality it’s usually only men who tend to make this brag). AUM means assets under management (i.e. the total amount of money in the funds managed by the general partner team). IRR means internal rate of return (i.e. the cash returns distributed to a fund’s investors, annualized). Asset managers care about AUM because it directly translates into guaranteed revenue. Closed-end investment funds…

mark-bivens_portrait

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.

Image credit: Pixnio

There’s an old dig that venture capitalists like to make about private equity professionals: private equity folks boast about the size of their ego in AUM, whereas VCs know that what really matters is their IRR.

Now let’s define these three-letter words. First, I’m using the word ego as a euphemism here to be gender agnostic (albeit in reality it’s usually only men who tend to make this brag). AUM means assets under management (i.e. the total amount of money in the funds managed by the general partner team). IRR means internal rate of return (i.e. the cash returns distributed to a fund’s investors, annualized).

Asset managers care about AUM because it directly translates into guaranteed revenue. Closed-end investment funds typically follow a “2 and 20 model,” meaning annual management fees of 2% and a share of 20% of the capital gains generated by the fund (aka carried interest). The annual management fees are a direct function of AUM, i.e. 2% of total AUM each year. They are contractually established for the life of the fund, usually 10 years. The carried interest is a direct function of fund performance, i.e. 20% of the capital gains generated by the fund.

Accordingly, a large AUM directly translates into a significant guaranteed revenue stream for the entire life of the fund. A fund manager with $1 billion in AUM is probably receiving around $20 million per year in recurring revenue. A micro VC fund of say $10 million is receiving only $200k per year in recurring revenue via its management fees. 

Risk of misalignment

Since management fees are meant to cover the operations of the fund, excessively high management fees can translate into high salaries for the managing partners, luxurious offices, and lavish parties. Even if the fund’s financial performance is lackluster, a guaranteed annual revenue stream in the double-digit millions for several years makes for a fairly comfortable lifestyle. Do you see where a potential misalignment can emerge?

In contrast, a small VC fund can afford no such excesses. The managers of a small VC fund cannot become wealthy on management fees alone. They must perform. Only by generating significant capital gains on the funds they manage will they be able to generate wealth for themselves via the carried interest mechanism. IRR represents each fund’s financial performance.

For LP investors in private equity or VC funds who care about financial return, IRR is the metric that reflects their financial return, not AUM. So I submit that when a fund manager brags about their AUM, the appropriate rebuttal would be to ask their IRR.

Full disclosure: I too used to be guilty of the AUM flex. As a former GP in a fund that managed nearly $1 billion in AUM, I would often open my introduction at conferences by citing this figure. But over time, I learned that IRR represents my true KPI as a fund manager. IRR is the indicator of how well or how poorly I perform my job. It is not a mathematical anomaly that my best-performing funds have been those with smaller fund sizes, hence lower AUM.

In many ways actually, a propensity to chatter more about AUM than IRR is an indication of the stage of an ecosystem. When the venture market in a given region is still nascent, track records are limited, so the nearest metric people can look for is assets under management. However, once a fund manager has progressed beyond their first vintage, the more the relevant question to ask is, “So what is your IRR?”

Blogging as a recruiting tool

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. During a return visit to France last month, I caught up with a successful French entrepreneur (whom I wish I would have backed on his first venture, but that’s another story). Anyway, he opened the conversation with flattery, claiming that I had inspired him. So of course I’m growing suspicious at this point, either expecting a punch line or reconsidering my assessment of his sound judgment. But he wasn’t joking. Rather, he stated that a blog post I wrote several years ago inspired him to adopt a habit which has now given his company a competitive advantage in recruiting talent. Specifically, he was referring to something that I had written way back in 2013: The importance of blogging for entrepreneurs….

mark-bivens_portrait

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.

Image credit: Pxfuel

During a return visit to France last month, I caught up with a successful French entrepreneur (whom I wish I would have backed on his first venture, but that’s another story). Anyway, he opened the conversation with flattery, claiming that I had inspired him. So of course I’m growing suspicious at this point, either expecting a punch line or reconsidering my assessment of his sound judgment. But he wasn’t joking. Rather, he stated that a blog post I wrote several years ago inspired him to adopt a habit which has now given his company a competitive advantage in recruiting talent.

Specifically, he was referring to something that I had written way back in 2013: The importance of blogging for entrepreneurs.

As I posited back then, regular blogging is about far more than shameless self-promotion; it’s about communication of thoughts, transparency in opinions, and beta-testing ideas with the sounding board of your readers. Regular blogging exercises the muscles of intuition and creativity. It facilitates achieving clarity in your mind’s eye, and it establishes you as a thought leader in your domain.

The fifth benefit I had cited in particular has proven especially relevant to this French entrepreneur I caught up with. Consistent blogging over the years is paying dividends to him now as his most effective recruiting tool.

The market for hiring talent, especially software developers, is insanely competitive right now across Europe, he told me. Startups are finding themselves outbid for developers by deep-pocketed incumbent companies, or increasingly, by other startups who have recently closed on massive fundraising rounds.

By having established his voice over the years through blogging, this guy inadvertently compiled a loyal following of readers who subscribe to the narrative of his ambition. Now, when he posts a job opening, he benefits from a ready-made audience. Better yet, candidates from this audience often prove to fit well culturally, because they’ve already been indoctrinated into his company’s vision over the years.

Blogging is playing a long game. The fruits of it do not appear immediately, causing many people to abandon it prematurely. Yet this entrepreneur is now reaping the rewards of his long-term investment. Given today’s war for talent, by accelerating the recruiting process and attracting individuals who are already on board with his project, the returns are astronomical.

Granted, the world has changed in the 8 years since I originally wrote that piece on the powers of blogging. There are other ways to evangelize and build a following as an entrepreneur. Podcasting, for example.

Creating something that does not rely on the approval of others can offer limitless upside. Naval Ravikant refers to this concept as permissionless leverage.

I like this articulation and will adopt it too.

Why I tend to prefer equity rounds over notes

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. All but two of my last 10 investments have taken the form of straight equity. Furthermore, all of the deals in which Shizen Capital was lead investor over the past two years have also been for equity rounds. In this post I will lay out the reasons that I prefer equity rounds to convertible notes or SAFE notes in early stage venture investments. For simplicity here, I will use the generic term note to encompass any type of non-equity instrument that is convertible into a startup’s equity in the future based on certain conditions. This includes therefore classic convertible notes as well as SAFE and JKISS notes. [Note: there are some key distinctions in the implementation; notably, SAFE and JKISS…

mark-bivens_portrait

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.

Modified from a Pixabay image

All but two of my last 10 investments have taken the form of straight equity. Furthermore, all of the deals in which Shizen Capital was lead investor over the past two years have also been for equity rounds. In this post I will lay out the reasons that I prefer equity rounds to convertible notes or SAFE notes in early stage venture investments.

For simplicity here, I will use the generic term note to encompass any type of non-equity instrument that is convertible into a startup’s equity in the future based on certain conditions. This includes therefore classic convertible notes as well as SAFE and JKISS notes. [Note: there are some key distinctions in the implementation; notably, SAFE and JKISS notes generally behave more like warrants than debt, in that they typically do not carry an interest rate nor a maturity date).

My preference for investing with equity rather than a note center on two of the guiding principles we hold dear at Shizen Capital when partnering with founders: alignment and transparency.

First, let’s revisit why notes can seem more alluring than a priced equity round

  1. they are less costly and more expedient to implement from a legal perspective
  2. they sidestep a difficult negotiation over valuation
  3. they can surmount a conflict of interest for investors during an internal round
  4. they grant investors additional optionality and seniority in the financing of the company

Now let’s discuss these characteristics one by one:

True, a note agreement is simply a contract between two parties: the investor (as note-holder) and the startup. At a future point, the note converts into equity or is reimbursed, based on conditions defined in the agreement.

Since no equity is being issued at the time of a note financing, corporate formalities and legal filings are unnecessary. There is no need to update the articles of association, draft a shareholders agreement, or make any formal filings. The investor could even dispense with hiring a lawyer entirely for such a transaction, thus saving fees (the founders could do so as well, though I personally recommend founders seek at least some minimum level of legal counsel). However, once the future hoped-for equity round materializes, all of these aforementioned legal formalities will become necessary.

SAFE notes can be fast but only if the investor moves fast

In theory, transactions with notes (again, including SAFE’s and JKISS’s here) are faster to implement then equity rounds. In theory. If handled deftly, a straightforward equity investment should take a few weeks to implement. A note, in contrast, can be implemented within a few days (especially a SAFE or JKISS, which are based on a standard template). However, I find it cringe-worthy all too often to hear founders lament to me about how their fundraising efforts via a note are dragging out for weeks or months. I admittedly have not performed a scientific analysis on this, but anecdotally my observations are that weeks or months of note discussions are not uncommon in many regions outside of Silicon Valley.

Postponing uncomfortable conversations

Sidestepping a difficult negotiation on valuation can also be an appealing feature of financing via a note, which does not place a price on the equity of the company at the time of the transaction. If a founder and investor cannot agree on valuation at the time of the fundraising, a note postpones this uncomfortable conversation on price.

The distinction between convertible notes and SAFE notes becomes relevant here. While a convertible note often eliminates any reference to valuation, a SAFE note by its very construction usually contains a valuation cap. This valuation cap does not represent the valuation of the company at the time, but it does require some negotiated consensus between the parties, and it also lays the groundwork for future signaling to the market.

Transparency

Furthermore, this is where the principle of transparency comes in. Postponing the uncomfortable valuation conversation is simply kicking the can down the road. Eventually this conversation has to take place, and the stakes will likely be much higher in the future than today. Moreover, numerous other unexpected consequences can arise from this approach. Because I’ve seen this play out across a vast number of companies over the years, often to the detriment of founders, I feel that in the spirit of transparency I have an obligation to alert founders to what I’ve witnessed. [Note: I’ve raised the alarm in detail on this issue here. And here is the Japanese version of the same piece]

Internal rounds

For most professional VC funds, internal rounds can raise compliance issues if not done properly. For avoidance of doubt, by internal round I mean a future financing round of a startup where no significant external parties invest in the company. A VC fund refinancing one of its existing portfolio companies without an external market participant would be required to justify the subsequent valuation if the new round is priced in equity, reflecting an inherent conflict of interest. Employing a convertible note (often structured as a convertible bridge loan in these instances) can surmount this issue

Risk of misalignment

Lastly, financing via a note naturally grants the investor an additional degree of optionality and potentially even seniority in the fundraising.

Let’s start with the notion of seniority (more flagrant in convertible notes than in SAFE or JKISS notes). From an investor’s perspective, sitting senior to all the shareholders in a company offers the best of both worlds: if things go well, convert and reap the upside; if things don’t go well, redeem for your money back plus interest, even if it throws the company into financial distress. Accordingly, the terms of a convertible note document matter. Founders need to review the fine print before entering into one.

The notion of optionality is a bit more nuanced. As a VC, I welcome optionality; in fact I actively seek it out for sound portfolio management. However, I want the founders into whom I invest to fully understand the implications of it in the case of notes. Let’s illustrate with a simple example: the VC invests 50 million yen in a seed round via a SAFE note that contains a 20% discount and a 400 million yen valuation cap. When it’s time for the Series A, the respective interests of the investor and founder diverge due to a slight misalignment. The founder’s proximate incentive is to boost the valuation of the series A higher, and preferably high enough to neutralize the discount, i.e. above 500M¥. In contrast, the investor’s incentive favors a lower valuation, because the lower the valuation of the Series A, the greater the number of shares into which the investor’s note will convert. Had the seed round been raised as a priced equity round rather than via a note, both founder and investor would be aligned in the dilution they would face from the future Series A.

I am not ideologically opposed to investing notes. Here at Shizen Capital we approach every prospective investment as a long-term relationship. Accordingly, we believe that the better we can align incentives and act with transparency with the founders we back, the healthier and more fruitful our collective partnership will be.

Why the next tech revolution will be about impact

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This is a guest post by Trista Bridges. Its Japanese translation is available on Bridge’s Japanese edition. Trista is a strategy and sustainable business expert, who’s passionate about changing business for good. Strongly believing that sustainable business = smart business, she co-founded Read the Air to shift mindsets, business strategies, and ways of working towards business models that put sustainability at the core. She’s worked across various sectors including in digital media, healthcare, consumer products, and financial services. Trista is co-author of the recently released “Leading Sustainably: The path to sustainable business and how the SDGs changed everything“ By now, you are undoubtedly aware of how sustainability has emerged as the zeitgeist of the moment – ESG investments have grown leaps and bounds in Japan and elsewhere, while the SDGs have been embraced by governments, businesses and individuals alike. Although there is no shortage of “greenwashing” at the moment, it’s undeniable that there’s a fundamental change afoot in respect to our vision of society. There’s widespread awareness that our world has some pretty audacious problems to address – from social equality to climate change and everything in between. The urgency of addressing these issues has increased, but the verdict is…

Trista Bridges
©Dan Taylor/Heisenberg Media

This is a guest post by Trista Bridges. Its Japanese translation is available on Bridge’s Japanese edition.

Trista is a strategy and sustainable business expert, who’s passionate about changing business for good. Strongly believing that sustainable business = smart business, she co-founded Read the Air to shift mindsets, business strategies, and ways of working towards business models that put sustainability at the core.

She’s worked across various sectors including in digital media, healthcare, consumer products, and financial services. Trista is co-author of the recently released “Leading Sustainably: The path to sustainable business and how the SDGs changed everything


By now, you are undoubtedly aware of how sustainability has emerged as the zeitgeist of the moment – ESG investments have grown leaps and bounds in Japan and elsewhere, while the SDGs have been embraced by governments, businesses and individuals alike. Although there is no shortage of “greenwashing” at the moment, it’s undeniable that there’s a fundamental change afoot in respect to our vision of society. There’s widespread awareness that our world has some pretty audacious problems to address – from social equality to climate change and everything in between. The urgency of addressing these issues has increased, but the verdict is still out on how to best fix these problems and whose responsibility it is to do so.

Businesses are being asked to do more

In the past, we instinctively turned to the state to fix problems such as these. But we now know that government won’t be able to tackle these challenges on its own. We have transitioned to a multi-stakeholder world, one in which various entities are being compelled to take on a greater role in addressing global challenges. And there are few stakeholders who are being expected to step up more at the moment than business. Companies of all sizes are being asked to embrace a more sustainable business model, namely one that minimizes its negative “impact” on the environment and society and maximizes its positive ones. For example, moves such as Japan’s recent 2050 net zero pledge mean than businesses of all sizes will need to take steps to reduce their carbon emissions. We’ve already seen Apple’s promise to achieve 100% carbon neutrality across its entire supply chain by 2030. Others will need to take similarly bold steps.

This growing importance of impact is a sign that we are in the early stages of recalibrating how we define business value. While financial strength will always be important, there is a growing belief that companies that don’t pay attention to their environment and societal impact, as well as their own governance, are, in fact, putting their success at risk.

Image credit: 401(K) 2012 via Flickr
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The impact revolution coming to tech

Until recently, this has largely been a publicly listed company phenomenon, with tech startup ecosystems generally being left outside of this debate. But now, it’s coming to tech with full force. While the ESG spotlight was first shown on Big Tech, startups, VCs and other ecosystem players are starting to be scrutinized on sustainability factors as never before. But what do innovators and their investors need to be most aware of? Here are some thoughts on how this trend is changing the game for the two core players of the tech ecosystem – VCs and startups:

VCs

Adoption of sustainability-oriented principles and practices has been spotty, to say the least, across venture capital. While private equity firms have made strides integrating ESG in recent years and, in some cases, even developing specific impact investment funds (see TPG’s Rise Fund), venture capital funds have been slow to come on-board. European VCs have perhaps seen the best progress to date, with funds like Idinvest/Eurazeo, Atomico, and Balderton being early movers on ESG or making sustainability commitments. More recently, the US venture capital space has seen an uptick in thematic funds around topics such as climate and diversity. Finally, stalwart funds like Sequoia have announced that they are actively investing in sustainability, especially in climate tech. Yet, it’s clear that this is only the beginning and that the VC community still has a ways to go. Nevertheless, there are three key reasons that we should see an acceleration in this area in the coming years:

  1. Risk mitigation: With an increasingly challenging regulatory environment for finance and tech alike, a growing conscious consumer movement, and shifting norms around what constitutes “good business,” it’s an increasingly risky proposition to invest in startups without considering how they’re approaching these issues. Using ESG criteria (at a minimum) to screen investment opportunities gives investors a tangible way to help de-risk their portfolios.
  2. Limited partner (LP) interests: While these entities are still looking for market leading returns from funds, sustainability is also quickly moving up their agendas. In some instances, it’s their stakeholders (shareholders, customers, contributors) who are demanding it. In others, such as family offices, individuals want to reflect their values in how they invest. In the future, it may be difficult for VCs to raise funds from reputable LPs if they don’t integrate ESG principles and practices in their fund operations and investment activities.
  3. Opportunities: Earlier tech waves addressed many first-level problems, such as connectivity, efficiency, and information discovery; the next wave will tackle much more fundamental societal and environmental challenges. Future value is going to be driven by innovations that solve these complex issues.
Image credit: nosita via Pixabay

Startups

When an entrepreneur is trying to build a company with limited resources, generally, the last thing they’re thinking about is the impact their product will have on the environment or society. Understandably, their focus tends to be more towards business fundamentals, such as product-market fit or customer acquisition. However, startups are not building their businesses in a bubble. Many of the societal and environmental dynamics mentioned in this article will impact startups’ success going forward. While there are many more support systems now to help startups scale (funding, training, etc.), the environment they are operating in is, in many ways, more complex and competitive than the one faced by their peers merely a decade ago. And this has been even further complicated by the pandemic. What can startups do to prepare and succeed in this new paradigm?

  1. Anticipate risks and prepare accordingly: Startups today are innovating in areas that their predecessors shunned for fear of overregulation or sheer complexity. While this is commendable, it also presents them with new risks. Taking an approach early on which considers societal and environmental impact will help them avoid potential problems down the road. For example, are entrepreneurs innovating with AI considering potential problems around biases or possible nefarious use of the services they develop? What actions can they take to avoid these potential challenges? Or, are food delivery services thinking about fair labor practices or the environmental impact of mounds of plastic packaging waste? Getting ahead of these issues early on can help avoid potential problems, regulatory, reputational, or otherwise, down the road.
  2. Respond to investors’ shifting priorities: Naturally, as VCs increasingly embrace sustainability, they are going to look to startups that do the same or are willing to do so. As VCs make commitments, they need to demonstrate to their LPs and other stakeholders that their fund and portfolio companies are moving in lock step. It goes without saying that this is a big ask of many startups. To make this work, VCs will need to support startups differently and, often, more proactively than they have in the past.
  3. Lean in to sustainable innovation: Encouragingly, there are endless opportunities for startups in areas like climate tech, food tech, sustainable fashion, fintech, and healthcare. Startups that build products and services that can do things like efficiently and inexpensively capture and store carbon, significantly reduce inequalities in healthcare access, or shore up the resilience of our food systems, will be the next generation of winners. And with burgeoning success stories like Northvolt, Impossible Foods, and Japan’s own Euglena, there’s evidence that this is already coming to pass. Working today on opportunities that drive positive impact will pay dividends tomorrow.

You can’t coach ambition

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here. Red Auerbach — winning basketball coach of the Boston Celtics for 9 NBA championships in the 1950s and 60s, famously remarked that, “You can’t coach height.” He made the statement in response to a reporter‘s question on why he drafted somebody who turned out to be a fantastic player but didn’t possess much in the way of basketball skills other than being super tall. In other words, some favorable basketball attributes can be coached: passing, dribbling, shooting free throws, making plays, rebounding shots, etc. whereas other attributes can never be taught, namely a player’s height.  I think the equivalent of this expression for entrepreneurs would be, “You can’t coach ambition.” This expression came to mind again as I witness reverberations in the Silicon Valley echo chamber about the recent funding round of Clubhouse.  The brouhaha…

mark-bivens_portraitThis guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.


Image credit: PhotoFond

Red Auerbach — winning basketball coach of the Boston Celtics for 9 NBA championships in the 1950s and 60s, famously remarked that, “You can’t coach height.” He made the statement in response to a reporter‘s question on why he drafted somebody who turned out to be a fantastic player but didn’t possess much in the way of basketball skills other than being super tall. In other words, some favorable basketball attributes can be coached: passing, dribbling, shooting free throws, making plays, rebounding shots, etc. whereas other attributes can never be taught, namely a player’s height. 
I think the equivalent of this expression for entrepreneurs would be, “You can’t coach ambition.”

This expression came to mind again as I witness reverberations in the Silicon Valley echo chamber about the recent funding round of Clubhouse. 

The brouhaha relates to Clubhouse’s Series A fundraising of $10 million from Andreessen Horowitz, which was accompanied by $2 million worth of secondary cash paid directly to the Clubhouse founders.

Perhaps it’s because I spent more of my investing career in Europe then in Silicon Valley, but for me, creative deal structures like this one — even if it looks egregious to some on the surface — do not strike me as eye-popping. 

Although I would not classify most European founders as underprivileged, very few come from positions of extreme wealth. Most of the entrepreneurs I have encountered had been toiling away for years with modest wages (especially on a net basis after significant taxes and social charges), and limited capital gains from other sources such as stock market appreciation. Functioning universal healthcare coverage provides a safety net on the downside, in contrast with the U.S., making entrepreneurship accessible to a wider range of economic classes.

For these and historically cultural reasons, the go-for-broke mentality is far less prevalent among European entrepreneurs.

So I’ve been no stranger to structuring deals with a secondary component for the founders who have been plugging away for years with relatively little concrete monetary value to show for it. No, I have not offered secondaries of $2 million — closer to an order of magnitude smaller — nor have I offered them on Series A rounds, only at later stages. However, I’ve done them on multiple occasions.

In some cases, the secondaries have worked out superbly well, removing obstacles for founders to strive for aggressive growth. On other occasions, they provided little or no improvement, and have sometimes even backfired by misaligning the interests in the cap table.

It was only after numerous experiences with these that I realized the importance of controlling for another variable: the intrinsic ambition of the founder.

If a founder’s self-imposed restraint stemmed from external factors, for instance family responsibilities, alleviating such burdens with a small secondary payout has proven wildly effective. If the risk aversion originated from within, on the other hand, the hoped-for benefits of a secondary structure never seemed to materialize.

Ambition is raw. It sits independently of the support I might provide to portfolio companies, either directly or by finding people who do. Company structuring, financial management, marketing, pitching, fundraising, negotiating, recruiting, exit positioning, etc. all of these skills can be fostered and encouraged.