Uncrunched

My former TechCrunch colleague Nik Cubrilovic has been on a roll lately.

He noticed, for example, how Apple is telling users to drive off a bridge.

His most recent tweet –

And sure enough, the project was cancelled due to lack of funding.

Cubrilovic tells me he bookmarked the original post on BoingBoing by author Glenn Fleishman and has checked in on it occasionally.

“I bookmarked it thinking if this fails, it is going to be hilarious,” he says.

And so it is.

Apologies to Fleishman and BoingBoing for pointing out the irony in this (and I remind myself of the Man In The Arena and that hey, at least he tried). But I think I’d even have to make fun of myself if this happened to me.

The CrunchFund 1 Party at the Creamery last night was a ton of fund fun. Attendees included our portfolio companies, most of Silicon Valley’s early stage VCs and plenty of others. We’ll be hosting these regularly.

We’re also happy about two other things.

First, we were able to make a really nice donation to Collective Roots from attendee donations.

And second, everyone got to drink a lot of awesome Churchkey beer (one of our investments).

And better yet, Ivor Bradley, the owner of the Creamery (and the next door Iron Cactus) has decided to keep Churchkey on the menu at both locations permanently.

So drink good beer while pitching your startup. The world is a slightly happier place this morning.

Picture via MG Siegler right as the party started. All those cans are empty now.

Great news today about our portfolio company Klout: TechCrunch reports that the company is getting a strategic investment from Microsoft and Klout will have a two-way data relationship with the Bing search engine.

This means you’ll see Klout scores in Bing results, and Klout will use Bing data in determining Klout scores. For example, when people search for you in Bing, your Klout score will go up.

The reason Klout was able to get a deal like this done is because they have a lot (a whole lot) of data on people. This data, along with the fact that they remain a neutral party working with all the giants, allows them to create a sort of Page Rank that tells others how influental you are in given areas.

See my post from August with more thoughts on why we invested.

When you forget all the weird perks people get for having a high Klout score and the sometime hilarious errors that the young service sometimes makes in assigning Klout, you can start to see the real power of the service. Big, big data. And useful.

The easiest way to see this yourself? Download the Klout for Twitter Chrome extension and see people’s Klout score as you interact with them.

Congrats to Klout and Microsoft. This is a good partnership.

See the Klout blog for more.

Buy Tickets Here

It was late 2005 that we had our first TechCrunch get together in Atherton.

The events got progressively bigger and eventually they evolved into a once a year event at August Capital. But I remember those first few parties the most fondly.

Let’s do some more. At the center of the San Francisco startup ecosystem.

Our first CrunchFund event will be held this Thursday, September 27, at The Creamery in San Francisco, from 6:30 to 9:30 PM.

We’re taking over the Creamery as well as the Iron Cactus next door, and both patios, which will safely hold around 300 people at one time. The beer taps will be open, as well as soft drinks and a taco bar and other food.

Get your ticket here. This is just the first batch, we’ll try to open up more later. You will not be able to get into the event without a ticket.

We’re charging $10 for each ticket, which experience has told me will minimize no shows. The entire ticket price, minus Eventbrite fees, will be donated to Collective Roots, an East Palo Alto sustainable food nonprofit organization.

All food and drink at the event is complimentary. So prepare to drink some beer and eat some tacos.

Update:We’ll also be serving Churchkey beer. Thanks for sponsoring!

If you’re a man about town like I am, and that town happens to be San Francisco, you’ve got better than even odds of walking by someone who’s already brandishing an iPhone 5 loaner from Apple.

Today I had my first hands-on with the phone during a meeting at Darwin Cafe in SF. MG “This Is The Greatest Apple Thingy Ever” Siegler had it in his hot little hands and was willing to hand it over, in a supervised, hovering manner, for a good 90 seconds or so.

Physically the phone blows away the iPhone 4. It’s lighter, thinner and longer and it fits more naturally in the hand than the 4 does for me.

It’s also significantly lighter than the iPhone 4. It just feels cool in your hand. A feeling very much like the first time I held the original iPhone; but I haven’t felt that feeling of “happy/peace/power” since then.

Unless you count the feel of my light sabre chainsaw in my leather sheathed hands as I prepare to take on the Zombie Apocalypse. You can see it in my Facebook profile picture. It’s perfectness is marred only slightly by the fact that it does not, of course, exist.

But back to this iPhone. If the lightsabre chainsaw actually existed I wouldn’t hesitate to call it an iPhone 5 killer. I could then follow up with a literal demonstration if you like.

This phone is lighter, longer, thinner and feels of even higher construction quality than the already impressive iPhone 4S.

Next I’d like to review some of the software updates that come at the same time as the phone is being released. But alas, Siegler swiped it back from me before I was able to touch too many of his precious virtual buttons. It sure did look sparkly, though.

I’ll be getting one shortly.

An addendum to my notes from yesterday.

One of the big talking points for people is the notion that the Republicans want to “sharply cut social services for the poor to pay for huge tax cuts for the rich.”

example

This talking point really works, because everyone knows the Republicans want to rework entitlements and they don’t like raising taxes on the rich. People get really pissed thinking about it. Rich people want a new ferrari or something, so some dirt poor family has to go without shoes.

But anyone who says this is either completely misinformed or (worse) dishonest. Most of my friends here in San Francisco are one of these.

And this is the kind of dishonesty that is really going to make the final reckoning a
whole lot more painful.

Because it doesn’t matter how much you tax the rich. At some point this country is going to have to deal with the unfunded entitlement obligations that are going to crush us. That are already crushing us.

At some point we’re going to have to find some $47 Trillion dollars to pay for exploding Medicare and Medicaid obligations.

That’s not going to happen. The government will either create massive inflation to deal with this, or entitlements will be rewritten and gutted.

Either way everyone is going to get crushed.

If you don’t understand this but you continue to throw out ridiculous statements like Romney believes in “sharply cutting social services for the poor to pay for huge tax cuts for the rich” you’re part of the problem.

As I’ve said before, go for it! Destroy the rich. Take it all. But when you’re done, someone’s going to have to deal with the financial mess we’re in. Because destroying the rich will do absolutely nothing to fix this problem.

The problem is so big that we’re not going to deal with it no matter who wins this election because U.S. citizens don’t yet understand how hard things are going to get down the road. My guess is in another 5 years or so the shit will really hit the fan and everything will change.

But in the meantime, if you’re going to throw out righteous opinions, at least take the time to understand exactly what the problem is.

I’ve been spouting off a bit lately on politics and I keep making the same arguments to people, one at a time, on Twitter and Facebook. I’m aggregating some of them here so I can point to it later.

First, I’ve recently said I won’t vote for a Republican again unless the candidate explicitly approves of gay rights and is pro choice.

That doesn’t mean I support all (or most, or even many) of the core beliefs of Democrats. I’m with them on the social rights stuff, and I’ve made it clear that those issues matter enough to me that I’ll hold my nose and vote for a Democrat, or not vote at all.

But this tax stuff is just ridiculous.

1. The Tax Base.

Wealthy Americans pay almost all the taxes in the U.S. Only about half of Americans pay federal income tax at all.

A lot more pay payroll and state and local taxes, but it’s a specious argument to say that it’s the same thing.

If you don’t know what specious means, look it up. Don’t just glance over it because it’s the core issue.

The federal budget is financed with debt and with the income tax. Payroll taxes are used to pay social security and unemployment.

When only a fraction of the population pays taxes democracy will break down. See “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”

This isn’t revolutionary France, where the poor were incensed over being taxed. The argument now has assumed that only the wealthy pay the big taxes. The discussion is just that they should pay more.

2. The Rich Don’t Pay Enough.

This is a complicated argument that ends up boiling down to sound bites. Warren Buffett made it all worse by confusing all kinds of stuff.

I wrote about it here.

The super rich don’t pay much in taxes. But the sort of rich really get crushed. Mostly because the super rich and the poor/middle class team up to screw them bad.

People with relatively large incomes (think $500k or $1m/year) pay lots of taxes – 35% of their 2012 income, for example.

Everyone’s running around now saying that the rich don’t really pay that rate, though. Again, Warren Buffet really added fuel to this fire when he said he paid a lower rate than his secretary.

But that’s because he’s super rich. The super rich are super cool with higher taxes, because they don’t rely on income each year. They already have tons of money, so even a higher capital gains rate isn’t much of a bother. Just don’t say “wealth tax” to them, they’ll freak out fast if you do.

And there’s a huge gaping hole in the tax code that allows private equity types to take their income as capital gains, which usually means a 15% rate. This is the carried interest exception and it stinks.

That single exception allows people like Mitt Romney and Warren Buffet to pay a very low tax rate on massive amounts of income.

Buffet could have come out explicitly against just that, but instead he more generally said we need to tax the rich more.

When in fact the high income earners are already taxed way too high relative to everyone else.

That’s why people like me don’t bother with normal income any longer. The government takes too much of it, it’s not even worth earning.

I make almost all my money on carried interest via CrunchFund. And I’m telling you right now that it’s undertaxed. It should be taxed at normal income tax rates.

And I’m ok with it if the carried interest exemption goes away (as are lots of VCs who understand how odd it is).

Why? Because it’s more fair. And also because I have stored wealth, which the government can’t touch without implementing a wealth tax or through inflation. A wealth tax won’t happen any time soon. Inflation already is.

3. Inflation.

The biggest threat to my wealth is, simply, inflation. Inflation eats economies, kills wealth, and rewards debtors.

The biggest debtor is the U.S. government. Which is why they secretly don’t mind a little inflation.

The only way to pay the vast amount of debt we have is through inflation. It doesn’t matter if you close the carried interest exemption, or if you tax the high income types into the middle class. That might seem fair but it doesn’t solve the tens of trillions of dollars in unfunded liabilities we have as a country.

The only way to fix it, other than inflation, is to lower spending. And that means crushing entitlements. Even defense spending isn’t enough to make a real dent in things.

No matter what happens to the rich in this country, one thing is clear – entitlement programs as we know them are going to end. Either because we won’t be a functioning country any more, or because government will finally be forced to change them.

Update: Kill The Rich! It Feels Good!

Oh, this brings back memories. It seems like yesterday that we announced we (TechCrunch and Jason Calacanis) were going to compete with DEMO, the twice yearly conference that’s been around forever.

They were the only show in town back then and they charged a ridiculous fee for startups to be on stage. Our business model was simple – don’t charge startups a penny to launch. Instead, be thankful for all that great free content and build a business around it.

My favorite moment of the early years was when we just put our new conference on at exactly the same time as DEMO. I said something like “DEMO needs to die.” Their response can be roughly paraphrased as “oh shit.”

VentureBeat soon took over the DEMO conference, and everyone for the most part gets along these days. But DEMO has always taken itself out of the game by insisting that all (or most) launching startups have to pay a fee. With much bigger audiences and the no fee philosophy Disrupt always wins with more attendees, revenue and profit.

The conference last week, a year after I was fired, was their most successful one yet.

I didn’t know that my former co-editor Erick Schonfeld was taking over DEMO until I read the news today.

My first reaction was “perfect.” Erick is very good on stage and in front of a camera and has tons of experience running big events that have crushed DEMO in the past. His joining makes DEMO relevant for me again and I’ll definitely attend the next one, assuming I’m invited.

VentureBeat’s Matt Marshall puts on a brave face with the change, and I believe him when he says the conference is too much work and interfering with other VentureBeat business.

But my understanding was that DEMO owner IDG was paying VentureBeat a handsome fee to run the event and that it provided much needed cash flow for the blog network. If that’s accurate VentureBeat is going to need to find a way to fill that revenue hole. I wouldn’t be surprised if they raised more venture capital to do it.

I also wonder if another former colleague of mine, Sarah Lacy, was considered for the job. She would have been excellent, too, although she would have had the same time conflicts as VentureBeat did since she’s running Pando Daily.

Congratulations to Erick. This is a great place for him to land.

Image credit

I had a problem this week. I rolled into town for TechCrunch Disrupt with my two dogs Laguna and Buddy, two largish (mostly) Labradors.

The problem was, who the heck was going to watch these two troublemakers while I was on stage and otherwise doing tech stuff at the conference?

Enter Exec, a startup CrunchFund and others invested in earlier this year.

If you need something done, Exec will find someone to do it.

If you attended Disrupt you may have seen Megan Kearns and Tristan Zier from Exec being walked around the event by Laguna and Buddy.

They even used Exec to have dog bones delivered to the event.

They’ll be there again tomorrow for the last day, too. Go up and say hi, they’re dog lovers and really nice. I believe they’re handing out coupons to try out Exec, too. Or if not, they should be. It’s a great service.

I have a few thoughts on this Y Combinator/Google Ventures mess.

Background:

The original post is at Business Insider and includes a leaked email from Y Combinator founder Paul Graham. The email:

If you’re talking to Google Ventures you may be part of a pattern. The pattern is: you’ve already raised some money at a cap of $x. Then GV says they’re interested and wants to invest at a cap of $x/2.

If this happens to you in isolation, you worry “Oh dear, maybe my cap is too high.” But in fact for some bizarre reason this is just their standard m.o.

What do you do in response? Just focus on other investors instead. Maybe you’ll find enough from other sources that you can blow off GV. Or maybe you won’t, and you’ll need that offer to fall back upon. Either way it’s better to wait.

Graham commented and clarified on this on a Hacker News thread:

Just so everyone understands, I was not saying that Google Ventures is a bad investor and should be avoided. If we thought that, the email would have been a lot shorter. I was just talking about a structural problem that happens when you’ve already raised some money on a convertible note with a valuation cap, and an investor offers to invest at a lower cap.

That sort of offer puts founders in a bind, because if you take it (a) it can anger the earlier investors, and (b) perhaps worse, it can, like a “down round” give investors the impression that your prospects are getting worse.

My overall advice about fundraising is to do breadth-first search weighted by expected value. I.e. talk to every investor who’s interested but focus on the most promising ones. This is one of many situations whose solution follows from that rule. An investor offering you money on worse terms is at least offering you money, which is better than nothing. But all other things being equal, the expected value of such an investor is lower than that of one willing to invest on the same terms as your existing investors, so you have any of the latter you should focus on them.

My thoughts:

1. My first reaction to the message is that Google has done absolutely nothing wrong. It is absolutely fine for a venture firm to offer whatever they want to a startup, and it’s absolutely fine for the startup to not accept that offer and move on. It’s easy to read Graham’s message as bullying. A sort of “don’t piss us off or we’ll blackball you” type thing.

2. However, the actual message in the email isn’t all that bad (more on that below). What’s awful is that it looks like a public takedown with the leak. Most people don’t really parse the language or read Graham’s clarification. They just see “Y Combinator Is Publicly Trashing Google Ventures.”

3. I think Graham’s choice of language in a couple of sentences is way too strong. Like suggesting Google Ventures has a “standard m.o” of lowball offers. I’ve seen no evidence of this from Google Ventures.

4. To sum up the first three points above, the only real problem with this email is that it became public and looks like bullying. You have to remember, though, that Graham is probably horrified this was made public.

5. An aside – Most stuff like this from Y Combinator doesn’t leak. The fact that this did leak is the most interesting part of all this for me. It may be because there are so many companies coming out of YC now that there isn’t the same sense of loyalty to the program. Or it may be a sign of stress because some of the startups may be finding it much more difficult to raise funding than previous classes.

6. Another aside – Most of these YC companies are being started by extremely green entrepreneurs who have never raised money from investors, or even had any real business experience. They’ve also seen an extremely loose venture capital world over the last few years and may have unrealistic expectations on just how hard it is to do all this stuff. A “setback” like a low offer may make them feel like they’re being mistreated and it’s natural that they’d complain to their support group (YC and their fellow startups) about it. Graham has a big job mentoring these entrepreneurs and he’s shown over time to be pretty balanced with his advice.

7. Graham has sent us (CrunchFund) private feedback at least twice in the past. We appreciated the feedback (he didn’t have to take the time to communicate), we responded, and everyone moves on.

8. I don’t fully agree with Graham that it is a disaster for startups to accept money at one valuation cap and then accept money at a lower cap. But he’s right that investors can get extremely pissed off about it.

The two times we’ve seen this happen (where we offered less than the previous cap and our offer was accepted) the company amended the previous agreements to give those investors the same deal we got.

9. The VentureBeat article today that suggests the reason Graham wrote this email is because Google Ventures is now a full on competitor to Y Combinator (“Google Ventures has perhaps become more of a competitor to Y Combinator than an asset”) is just pure nonsense.

The email is clearly nothing more than Graham trying to mentor and advise his startups. I know him well, and like most successful people he doesn’t worry much at all about his competitors (even if Google Ventures was a competitor, which it really isn’t).

That article also shows a fundamental misunderstanding of how these financings work on a mechanical level. For example, the statement “In debt financing, most rounds have multiple caps” is just wrong. Many startups raise multiple “financings” over time with different, usually increasing, valuation caps. But in a single financing? No, that’s quite rare.

There are other errors in the article as well but I won’t take the time to list them here. Just imagine if I wrote an article on fashion or particle physics or something that I know nothing about and my research consisted entirely of reading Wikipedia for a few minutes. There’s be a lot of words there maybe, but anyone with real knowledge of the subject would know I was full of shit.

I also think VentureBeat should fully disclose any other issues they have that might be affecting their judgement about Y Combinator, but I’ll leave it at that.

10. In the end the startups are the ones who will take a hit on all this. If a venture fund has to make a choice between walking away from a deal or making a lower offer than other investors, they’ll almost certainly walk away rather than take the risk of a public lashing like this. I’m sorry about that. I’m certain it’s the absolute last thing Graham wanted to happen.