This Time It’s different

[Source www.500px.com]

We are entering a new era.   A time when great wealth is being created, and old fortunes destroyed (but not let us dwell there). A time of convergence and disruption that has not been seen in anyone’s lifetime.

In the late 90′s it was all about expectation and a belief that disruption of existing businesses was imminent; well, a decade or so later it now is. This is why the current (and upcoming) crop of Internet leaders are, well, generating revenues and profits. This is not about eyeballs anymore.

There are three main drivers, and their convergence is unlocking new money making opportunities at an increasing pace:

(1) existing established companies in many fields are being materially impacted by new secular disrupting technology;

(2) the establishments of new cheap, accessible distribution platforms; and

(3) the willingness of large (and small) enterprises to experiment with new way of doing things and work with unestablished companies.

Examples of new secular disrupting technology: SaaS services, cheap cloud storage and processing, powerful mobile platforms (phone and tablet), new touch and motion interfaces, ubiquitous API’s, social platforms (i.e. people giving up privacy for fun or ease of access/use), and location based services.

Examples of new cheap, accessible distribution platforms include iOS iTunes, Android, Facebook, Google Apps, and YouTube.

And, finally successful execution by high profile companies, low cost of experimentation, an ample supply of smart unemployed people and a societal recognition that tech is cool, as evidenced by The Social Network.

I cannot think of a time when so much disruption was happening from so many different technologies impacting so many different parts of the economy.  Thus I am not in the “It’s a bubble” camp, but in the the “It’s a bull market” camp.  Is this driven in part by cheap money, by a lack of investment returns elsewhere and by a sense of glamor, but those are the ingredients of a good bull market.  If I had to guess, I would say it is ’96 or ’97 again and we have a few more years before a blow-off top that will be called The Second Internet Bubble, or something like that.  Right now it is rational to invest in start-ups, though at some point it might make sense to step back.  As a professional investor I have to understand when to participate and when to pull back and now is the time to invest and help companies, not hold back.  Real wealth is being generated, real jobs created and real change is happening.

Innovation is very much alive in America and gives one great hope for the future of the country.

How The Bubble WILL Come About

[Source www.500px.com]

I co-joined these two blog entries as no discussion of what is happening does not involve someone raising the concern that we are in a bubble right now.  I think, and have argued above, that that is not the case…but, it most likely will be.  I can see such a thing happening three or four years from now, when everyone is sucked into the private markets and quite comfortable with their highly illiquid (but seemingly liquid) investments in companies they do not understand and yet they seem to be making money.

Bubble require liquidity and liquidity in private investments is restricted by many constraints, though the following are worth highlighting:

(1) regulation that only allows accredited investors to invest;

(2) regulation that restricts number of shareholders to 500, or burdensome reporting requirements kick in;

(3) lack of information related to how the company is performing; and

(4) institutional investing by mutual funds, brokers, etc. only make size in units of $10mm and so cannot happen until the market caps are sufficiently large (probably $500mm minimum).

I suspect that over the next few years (1) and (2) will be loosened, and (3) will stay the same, but investors will not care.  (4) is the real indicator of where the bubble will be.  It will be when mutual funds start to buy into private companies pre-IPO in a hot space, it will be when the public can participate pre-IPO through funds set up by the Bulge Bracket firms, it will be when secondary share trading grows to the point that “everyone” starts doing.  These will create a false sense of liquidity at the $500mm market cap level and above, and that will give everyone some comfort until it goes away.  Professional angels and VC’s will probably be more than willing to sell into this frenzy and take advantage of the liquidity provided.  Fortunes will be made and fortunes lost, but the bubble will have to be later stage.  Can this bleed down to the early stage?  Perhaps, but far less so.  The numbers are just too small.

Time will tell, but my thoughts are now date-stamped by this post.
[Note to self, check back in 3 years.]

I was watching Mark Suster and Tom McInerney on This Week in Venture Capital mainly for fun, though Tom is a good friend.  If you have not watched it you should as it is highly engaging.  Well into the discussion Tom and Mark delve into privacy and Tom mentions that many teens have moved to having more than one Facebook account.  This was the same week that Hashable re-tooled their privacy settings, moving from a very open public followship model to an ‘Inner Circle’ model.  All of this got me to thinking further about privacy in the online world.

For many years people would designate themselves on the web using a pseudonym such as sexybear103@aol.com.  It was not until Facebook, LinkedIn and the like coerced users to register using their real name that the social network revolution really started to matter.  Since then people have be educated to be online using their real name.  This has been important for many reasons: (1) it allows social networks to function; (2) it builds trust and improves overall behavior – visit a comment stream that forces real names vs. one that does not and you will see a huge difference in civility and relevance/quality of discourse; (3) it allows algorithmic psyco-analytical companies to flourish, such as Klout, that are a benefit to consumer in many ways; (4) it enables information to find people via crowd-soiurced trusted networks (Okay I simply should have said Twitter!) rather than have to search for it, which is bad news for Google.

But, but privacy gets in the way, or at least defines the usage of the service.  Twitter is clear: it is open, there is no privacy (even DM’s can be read by 3rd parties from their API’s), it does not pretend to be private and so it is like walking up to the town square, picking up a soapbox and shouting.  There is no pretense that something tweeted is private.  Facebook pretends: it wants you to think that what you say/share/do is private to you and your intimate circle of ‘friends’, but it is not; and even if you shut down most of your privacy settings you are dependent, sometimes, on what privacy settings your friend’s have.  People want to share and so they are resorting to pseudonyms on Facebook which, well, reduces some of the utility highlighted above.  Hashable has moved from defaulting all people checkin’s from being public (or private) to being shared with your Inner Circle (or private).  This, for me, massively increases the utility and going forward all the CEO’s of my portfolio companies and my employees will be in my Inner Circle – we will share with each other our meetings and what we are getting up to and I am sure there will be many occasions where this serendipitous sharing will lead to new ideas, new connections and new business.  Hashable will add real utility from getting privacy right.  Others will be shut out, but that is fine, this information was not easily shareable before.  This seems to me to be the optimum level of privacy for me to get the most out of Hashable.  I am sure it will evolve, but I like this latest iteration.

Social privacy should mimic actual privacy, and so be different for different services.  In the real world you compartmentalize what you know/think and who you share it with.  We all have a private self that we keep, basically, to ourselves.  Then there is a public self that we are willing to share with everyone – though some people have multiple public persona that they like to keep separate, e.g. fraudsters and bigamists.  Then there is everything in-between: some people have just one setting for friends and family, and others have different settings for different groups that don’t intermix e.g. their guy friends, or work colleagues.  The online world has to mimic this, and so a service either has to address just one of these privacy groups, of be uber-flexible if it wants to cover more than one.  It is clear that I think Facebook is attempting and failing to do this.

Services will continue to evolve and getting social privacy right is essential for them to increase their utility to us as people and them for engagement.

I really did not want to post about the Yuri Milner/Y Combinator/SV Angel announcement, but felt that there was something lacking in the debate.

Like Roger Ehrenberg I think this is a “ho-hum” announcement, but time will tell.  There are various surveys and analyses out there, and all the numbers are slightly different, but the order of magnitude is that there well over 100,000 angels making over 50,000 investments for a total amount of $15bn+/-, each year.  One angel’s investment in 43 startups for $6mm does not move the needle.  It makes GREAT news, however and there are already four TechCrunch articles about it.  It seems the valley is, well, narcissistic.

There is also the law of unintended consequences: does this mean that talented folks that are hands on and helpful to startups will avoid YC in the future if they feel that they cannot invest at fair prices.  Time will tell.  A rigged game does not attract talent, it attracts fools.  You also have to wonder if Yuri is buying options, then the companies must be selling them.  My time on Wall Street told me selling options can be a sucker’s game.  And then there is the questions as to whether there be a signaling issue?  Would you invest in a company that Yuri has decided to pass on in a later round?

Overall, I can understand the attractiveness of the money, but there is no such thing as a free lunch.

Now that I have your attention with a grandiose title, I am going to share with you an iPad tech support story: I am in London and had to switch out my iPad – I could not get the O2 sim card working for UK wireless connectivity, so Steve at the Genius Bar switched out my iPad, and voila, it now works. Usual Apple approach of not wasting my time if they cannot find out why something does not work – amazing service.

But I am far from home: how useful is this without my applications and data? Very! I might not have a few movies for the flight home, but Virgin has a decent selection. Meanwhile I simply downloaded my programs for free: SimpleNote, DropBox, DropKick, Pages, Keynote; I downloaded my contacts, bookmarks, calendar, notes from MobileMe; I downloaded my email accounts from Gmail, with full IMAP history. Within no time I had literally everything except a few movies. When I get home a quick sync will restore my layout and settings just as I had them before this trip.

This is the future of computing. Disposable hardware, part-cloud-part-local data and applications. Data and applications reside nowhere and everywhere at the same time. It is sweet, productive, efficient, device independent and, well, magical.

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:

]]> http://www.any.biz/2010/09/the-un-stone-age/feed/ 5 http://www.any.biz/2010/09/no-print-leads-requires-new-devices/ http://www.any.biz/2010/09/no-print-leads-requires-new-devices/#comments Fri, 10 Sep 2010 23:16:11 +0000 admin http://www.any.biz/?p=216

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.

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.

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.

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.”

]]> http://www.any.biz/2010/09/raising-money-easy-investing-easy-why-not/feed/ 0 http://www.any.biz/2010/09/the-internet-of-people/ http://www.any.biz/2010/09/the-internet-of-people/#comments Sat, 04 Sep 2010 00:57:38 +0000 admin http://www.any.biz/?p=125

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.