The Un-Stone Age

This post is a follow up post on our systemic dependence on the Internet, and is as a result of general encouragement of Phil Hotchkiss.

It is estimated that as we exit 2011 50% of phones will be smart phones.  So what?  Well, just as more and more of our real-world interactions are being digitized and replaced with web-enabled alternatives (listening to music, reading books, watching movies, playing games, learning, research, communications, etc.) so the devices we do this on are “converging”.  It is not just media that is being digitized but also the guts of many distinct devices.

In a few years a dedicated camera, GPS device, pedometer, watch, phone, etc. will seem twee and quaint.  The iPhone (and Android phones, and Windows 7 phones etc.) is the Swiss army knife of phones – add in the obvious combinations then add in glucose monitors, payments, and thousands of other specialized devices that are on their way.  The iPad (and other tablets as they come to market) will do the same for devices where that form factor makes more sense.

I see the physical device market coalescing around four primary form factors: phone, tablet, laptop and desktop with each of these having powerful processors, tons of storage (local and virtual) and always connected.  People will gravitate to owning, probably, three of these depending on their needs and they will sync up so that data on one is simply, like magic, on the other.

Will my grandkids wonder at all the electronics stuff we take/took for granted as everything becomes software and data?  We live in a brave new world of interdependence where we lose connectivity to what it is we use – we will soon have no idea as to how to construct the devices that we conduct our life with.   Einstein rightly said:

Current Tech Destroys Newspapers, Future Tech Supports Them

There is increased discussion about the imminent end to newspapers, such as the quote by the publisher of the New York Times, Arthur Sulzberger Jr:

Asked about his response to the suggestion that the NYT might print its last edition in 2015, Sulzberger said he saw no point in making such predictions and said all he could say was that “we will stop printing the New York Times sometime in the future, date TBD.”

One aspect that has not been covered in the discussion is the assumption that there has to be an underlying infrastructure that is ubiquitous for to make sense.  This infrastructure has to be bottom quartile accessible: i.e. dirt cheap, easily accessible and usable by even the most stupid in the population.  Think disposable $10 iPads, that run for 100 hours on a charge.  Ok, it might not have to be that extreme, but newspapers work because they reach everyone, not early adopters and mainstream, but 90%+ penetration.

Newspapers will go away, but once we have tomorrows technology – it might be iPad 6 or Android 10, so we have a sense of the path, but today’s technologies will not be the new platform – they will just help destroy the old platform.   It will take time, and, as with most platform changes, longer than most consider reasonable.  But, by then the future platform will be in place.

Feature or Product or Business or Defensible Business?

Sanjay Anandaram posted a great article in Plugged.in, and I suggest that you read the full article, though to get his full perspective.  The money quote for me is:

Today I know that a feature doesn’t make a product. A product doesn’t make a business; And most importantly, a business doesn’t make a company. A company is a means of organizing a business.

People who know me know that one of the first filters I apply when looking at a company is whether the offering is a feature, product or business.  It is the talent of management and the nature of the revenue model that converts it from something that can easily copied into something that can start to be defensible.  Being defensible is key.  Why?  Well, because let’s say that you have discovered a new market that others have not yet, and a way to extract profits from that market.  What stops others from following and dominating the market you discovered?  Financial services are full of new markets being discovered and where the margins are fat enough Goldman Sachs would move it as a fast follower, and often dominate.

So, how do you stop a fast follower?  Often you cannot.  You are left with two scenarios.  Either you have a structural advantage from being first.  eBay is a great example whereby the network dominance from being first sucked out the opportunity of others to catch up.  It was not that it was eBay that allowed them to dominate – personally I feel the site was designed by a sixth grader – but by being first with a sufficiently functional product.  In Japan they were second and lost to Yahoo Japan.  Alternatively, you simply have the best execution, which can involve a decent amount of luck at the right time.  Execution is a bit like pornography – tough to define but easy to identify.

So, if you are an entrepreneur think carefully if you have a defensible business model (when you execute) or not.  If not then the profits you could make will not be yours.   If you have a product then work out how to get it to be a business and if you have a feature, well, go back to the drawing board.

Life Mechanics

As a child I read books about Transactional Analysis and OneUpmanship, probably at the prompting of my mother.  I found these interesting in the way they described bow people play games in life and expect a reaction for every action.  Have you never been in a crowd and someone waived to you?  You probably waved back, even if you had no clue who there were.  Even so, I have generally thought that only part of society really runs with this quid-pro-quo mentality, and only for part of the time.  It is an interesting analysis but not core, mainstream or how we all live our lives.

It was not until I saw Inception with my wife that  I thought about these ideas again.  Inception for me was an indication of how far game mechanics have now infused society, and game mechanics are simply the modern-day representation of these ideas I was exposed to in my formative years.  What was it about Inception?  Well, my wife is not a gamer, and yet the movie was not “strange” to her.  It was just another romantic, thriller.  The plot, however, revolves around not just a gaming structure, but with rules espoused throughout the film.  This was not jarring as more and more of our experiences, online and offline are becoming rule-based with prizes, points, quid-por-quo built in.  We used to say that gaming would change computer interfaces and impact reflexes, and though that might still happen is it is the logic of gaming that is changing us first.  Some of the fundamentals of games are working their way into society at large.

Given that I am a VC does this perspective change how I look at companies?  In some way it does.  Game mechanics can affect adoption and are built into the business models of hashable, Identified.com, Klout, Livefyre, OfferIQ, ORCAone, and Phone.com.  I suspect that more will be built in in these and other companies over time.  To link buzz words from not to a decade a god: Game mechanics can increase the stickiness and viral adoption of your site as we are and have been trained, or re-programmed, to think this way.  Like Pavlov’s dog playing Wii.

Raising Money? Easy? Investing? Easy? – Why Not?

A few days ago Dave McClure posed this:

This was the consummation of a heated debate on Twitter regarding a blog posting by Niki Scevak entitled Angel Index Funding Bullshit.  Niki argues that Ron Conway and Dave McClure by investing in a large number of startups leads to them being more passively involved than if they focused on a smaller number of companies.  He goes on to argue that “handsome returns” will not be forthcoming due to high fees, the increasing number of startups, that if you invest in the market then you get market level of returns (i.e. median returns), and that if involvement leads to higher returns you ultimately will not get them as you are spread too thin.

This is an interesting discussion as it ties in closely with an increasing amount of capital being deployed in the early stage VC space, be it by funds like ff Asset Management and  even some larger traditional VC funds.  Entrepreneurs that have oversubscribed rounds are then forced to allocate, and when the allocate they then should carefully examine what is the motivation for the investor to invest in their company, as well as what is the quality of the money?  Many startups will not face this dilemma, but as the capital drought of early 2009 has been replaced by the glut of late 2010 more and more startups are having this “problem”.  This is despite the withdrawal of funds by angels themselves.  In 2007 $26bn or so was invested by angels.  In 2009 this fell to, perhaps $12bn.  This has recovered in 2010, but not to the 2007 levels.  VC’s, on the other hand, because of the long-term nature of their funds still have plenty of capital to deploy.

All funds are managed for return (or should be!), and return is a function of the size of investment and time devoted to the investment for any actively managed VC portfolio.  I personally think that if the fund is investing well less than 1% of the total fund’s size in an investment then there is a risk of misalignment of interests between the investor and the entrepreneur.  Remember, the investor is buying an option to participate if the company is successful, and walk away if not.  That is generally fine, but it can pose a risk for the startup if it is a large traditional well known VC where people will care if they do not re-up.  If the investor’s fund will end up with well north of 50 investments in the fund at maturity, then there is the question of whether the startup will get sufficient attention from the fund’s principal(s) for the money to be treated as “smart” money and not “dumb” money.  Finally, if the fund is spread too thin, then the fund will not have the capital for follow on investments, and new relationships will need to be developed at the next round – not a real problem, but something to understand.

Bottom lime, if you have an oversubscribed round then understand the motivation of each investor and their fund:  If there is alignment, great; if not, then think carefully if you expect your investor to invest not only money but also time.

If you are not oversubscribed then consider this article (which like most “news” overstates the situation):

One person we know who has a startup trying to raise money was floored at how easy it was to get a small slug of cash. It was basically a short phone call with a potential investor who said, “I’ve heard good things about you from people I trust. When you’re ready for me to invest, just call me back.”

The Internet of People

Since the mass adoption of services such as LinkedIn and Facebook people have increasingly come online using their real names.  There has been a shift from representing yourself as angrybear101@aol.com to using your actual identity.  This phenomenon is culturally more important.  I like to refer to it as the Internet of People, compared to the the original Internet of Data or The Internet of Things.  It is significant: it involves people that have rights, emotions, intentions, and other attributes that toasters, phones, and databases do not.  It will lead to a changed understanding of information rights, privacy, and what is creepy and what is acceptable.

At its core I see four fundamental pillars: Identity, Trust, Reputation and Influence.   Yes, social networking is part of this, but this perspective gives a different, and I would say more informative, way to look at the space.  Here are a few thoughts:

• These four pillars will become increasingly important to two different constituencies: advertisers that want to reach consumers, and individuals themselves;
• Game dynamics can be applied to “manipulate” or “guide” people into certain behaviors that can then be measured in real-time – shopping and flash-deals come to mind;
• Regulation will have to play catch up – this is not longer cookie tracking it is stalking;
• People will be rewarded for the data  they surrender: a better table at a restaurant, front row seats, free goods, if they can influence others to follow their lead.

Companies will grow up over the next few years to address these needs.  Watch this space as it is going to be very, very interesting.