Continuations

Friday, March 12, 2010

Posted at 7:50am Permalink Comments (View)

Investor Signaling (Adding to Chris Dixon)

Chris Dixon had a great post yesterday about “the importance of investor signaling in venture pricing” that every entrepreneur should read.   Leaving aside the classical economics strawman from the first paragraph (does anybody think that classical economics would apply to a small numbers situation with extreme information asymmetry?), the rest of the post is spot on.  Here are a couple more reasons why investor signaling plays such a powerful role in the venture market:

• Most companies need more than one round of financing.  Interest by other VCs in the early round suggest that they might also be interested in subsequent rounds making it easier to finance the company going forward.
  
  
• Internal partnership dynamics may make it much easier for a partner to get a deal done that other firms are interested in also compared to an idiosyncratic deal.

Chris does a great job laying out some of the implications for entrepreneurs.  Here are a few more corollaries:

• If there is a sudden interest in your firm due to some external event, you should seriously consider fundraising even if it is ahead of your planned schedule.
  
  
• Informal fundraising can help avoid the “on the market too long” problem.  It’s better to meet with some VCs and tell them the story when you don’t (yet) need additional money.
  
  
• Focus on lead investors:  firms and partners at those firms that either have led investment rounds or are clearly ready to do so.  You can tell a lot by whether someone is actively seeking an investment in your area and has clear reasons why they are interested (that don’t involve other investors).

Looking forward to more of Chris’s outstanding posts.

Tags: venture_capital fundraising

Thursday, March 11, 2010

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The Future of Browser Plugins (Hint: Let’s Call them Apps)

At Union Square Ventures we have backed a couple of companies that use browser plugins at the core of their services (Adaptive Blue, Zemanta). We have always been concerned about the potentially lower sign-up rates from requiring someone to install a plugin. The installation process on Firefox required an onerous restart (even for updates to already installed plugins!). In fact, our concern has been so significant that we have passed on a few opportunities that had plugins as central to their strategy. I believe that this could change dramatically in the near term. First, Chrome has an extension architecture that does not require a restart and allows for dynamic updates to plugins. Second, people seem to have no problem with installing apps on their phones. So what’s missing is a change in terminology - let’s call plugins browser apps - and a marketplace. The latter can help not just with discovery but also with ratings and safety. Now before anyone can even start to mention HTML5 - yes it’s great, but a plugin, I mean app, can still do more because it is user centric, not site centric. For instance, extension.fm can deliver its experience only because it sees music on all sites I go to!

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Wednesday, March 10, 2010

Posted at 7:19am Permalink Comments (View)

Every Review Should Have A Comment Thread

Looks like I managed to put the entire post into the title, so maybe I should have just tweeted it.  But here is a little bit of background.  I was talking to a friend of mine last week who has a newly released app in the app store.  She told me that while a lot of people loved it, some hated it.  She wasn’t so much offended by that but rather annoyed at her inability to respond to the negative reviews “in situ,” especially given that she felt that many of them completely missed the point of the app.

That made me think of the problems Yelp has recently encountered over their handling of negative reviews.  The removal of a review is a nuclear option and should be used only as a last resort.  I am pretty sure far fewer venue owners would be upset if they were able to simply respond to a negative review right there.

With a comment thread, everybody would get so much more value from reviews because there would be so much more signal to go on.  Did someone take the time to respond to a negative review?  Was their explanation logical?  Did anyone else step in to defend the product or service?  Did the person who originally complained go back and respond to the response?  Would be great to see some large sites do this to set the precedent.

Tags: reviews comments social_interaction yelp apple app_store

Tuesday, March 9, 2010

Posted at 7:36am Permalink Comments (View)

The Business of Code, The Code of Business

Blogged about “The Business of Code, The Code of Business” yesterday on the Google Code blog.  “The Business of Code” part talks about how the economics of being an independent software company are being transformed by the web and by cloud computing, potentially limiting the number of opportunities available.  “The Code of Business” part addresses how the structure of industries and corporations is being transformed, which provided a countervailing force that is likely to create some very exciting opportunities.

As an aside, the post title is inspired by one of my favorite quotes. Italo Calvino in The Uses of Literature described Roland Barthes as possessing “the pleasure of intelligence and the intelligence of pleasure.”

Tags: business transformation

Monday, March 8, 2010

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Oscar Fight(s) Recap: ABC vs Cablevision, Hurt Locker vs Avatar

Yesterday’s Oscars were notable for two different fights: ABC vs. Cablevision and Hurt Locker vs. Avatar.  The first of these is a perfect illustration of what I call “fighting over the digital pie.” The reason things got so vicious between ABC and Cablevision and resolved only slightly past the last minute (as far as Oscar coverage goes) is simple: dollars from TV distribution (carriage fees) are shrinking and everyone wants a bigger piece while there is still something to be had.

It is completely clear that over some time all of this will move to streaming and the big winner will be the Academy itself (or anyone else actually originating live content).  This will take a while, but TV networks at best don’t add much (NBC coverage of the winter Olympics?) and cable is purely a pipe.  At home we sampled the Red Carpet coverage on a high quality stream from ABC.com which showed how irrelevant Cablevision is other than as a bandwidth provider.  Even the actual Oscars we were able to quickly find a bunch of illegal streams (of much reduced quality, but the opportunity for the Oscars to go direct is real).

The second fun fight of the night was between Hurt Locker and Avatar.  Despite my having been a rabid fan boy for Avatar, I was not surprised to see Hurt Locker clean up.  For starters, it is an excellent movie.  The criticism that it is an unrealistic depiction of war is, in my view, misguided.  Hurt Locker is a character study of extreme risk taking, not an Iraq war documentary.  What made both Hurt Locker and Avatar attractive as Oscar contenders is that they were made by directors on their own terms (and of course it provided some extra frisson to know that Kathryn Bigelow had been married to James Cameron).

But the voting was no surprise.  First, I doubt that members of the Academy have forgiven Cameron for his “King of the World” acceptance speech for Titanic.  Second, everyone can see themselves as coming up with a movie such as Hurt Locker eventually, whereas Avatar — by virtue of its budget alone — is seen as an extreme one-off (at least until the next one comes along).  Third, Oscar voting has always had an element of it is “someone’s turn” and a female director was a good fit for that.

All in all - by far the most entertaining Oscars in a long time.  And that didn’t even require watching the actual show!

Tags: hurt_locker oscars avatar abc cablevision carriage_fees

Friday, March 5, 2010

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The Internet Transformation (Talk Outline)

Today at noon I am giving a talk to the Japan Business Network in New York — an informal get together organized by my brother-in-law, Charles Danziger.   The topic is the fundamental transformation of industries that the Internet will bring about.  I am planning to use the following outline.

Some background on Union Square Ventures
- about $300 million under management across two funds
- invest exclusively in the Internet
- based in New York but national mandate (and some international investments)
- mostly lead first institutional round
- well-known investments include Twitter, Zynga, Etsy, Foursquare

Fundamental USV thesis
- The Internet will change everything
- This will go on for a long time (decades)
- Will provide significant startup and new investment opportunities along the way

First story:  Newspapers
- these were big and mighty businesses
- they existed for a long time (100+ years)
- highly profitable for a long time

Along comes: the Internet

Step 1: Unbundling of economics (online classifieds)
- job classifieds: HotJobs, Monster
- for sale: eBay
- dating: various sites
- all of the above: Craigslist
-> result: major source of profits removed

Step 2: Unbundling of content
- the rise of blogs
- specialist publications
- user generated content
-> result: splitting of audiences

Net result: newspapers everywhere are struggling

Second story: Disrupting the disruptors

Job classifieds: HotJobs, Monster
- 1:1 translation of offline model to online
- listing for a fee
- really just playing on cost advantage

Along comes: Indeed

Vertical search for jobs
- find jobs wherever they are
- can only be done on the Internet
- native revenue model: keyword advertising

Third story: The new news businesses

Blogs
- Blogs have low cost structure
- Many blogs don’t need to make money directly (side project, lead generation, etc)
- Targeting specific audiences
- Highly varying levels of analysis / original thinking / reporting

Aggregators: Techmeme
- Analyze link structure
- Analyze social media / real-time web
- Run software in the cloud — all variable cost
- Small team

Extrapolating
- Not just the news business — all businesses
- Why?

Many other businesses with huge information/content components
- Education
- Healthcare

Education example

What about manufacturing?
- 3D printing
- separation of model making and “printing”
- lot size 1
- mass customization

But goes deeper: fundamental fabric of organizations
- Modern corporation now > 100 years old
- Command and control structure
- Trade-off between motivation and cooperation/information sharing
- Transition to “small pieces, loosely joined” (like architecture of the Internet)

Doesn’t stop there: governments?

We are in for an exciting ride into the future.

Tags: internet transformation industries

Tuesday, March 2, 2010

Posted at 6:29am Permalink Comments (View)

More Thoughts on EBook Pricing

The New York Times had a piece yesterday on ebook pricing, which I have written about before.  Interestingly, the piece simply states and doesn’t question that an ebook retailer such as Apple should be entitled to a 30% fee.

What will Apple provide?  There would seem to be four separate functions: discovery, payment, delivery and DRM.   Let’s start with payment.  The fraud rate for ebooks is likely to be very low and the cost to process a payment at scale should be no more than 25 cents (and hopefully even less in the future if companies such as Square succeed even).   Delivery is essentially free, as most ebooks are a couple of MB big at best.  Discovery is something that Apple does well for music with Genius, but by far does not have a monopoly on with music blogs and services such as last.fm and Pandora.   For books the same is likely to be true.  Apple may have roll out a Genius feature for those also, but there are many other places to discover books such as Goodreads or DailyLit.  With a lot of competition for discovery it seems to me that it should not command more than 50 cents to $1 per book.

Now at 30% on a $12.99 book, Apple is getting almost $3.90 per book, which after subtracting my estimates for payment, discovery and delivery leaves over $2.50 for DRM and Apple profit.   That does not seem either reasonable or sustainable to me in the long run.

Tags: e_book publishing drm

Monday, March 1, 2010

Posted at 6:25am Permalink Comments (View)

Undercover Boss (In Your Startup)

We took a quick look yesterday at the Closing Ceremony for the Winter Olympics, which was painful (Shatner, really?) but as we flipped to another channel, we ran across Undercover Boss on CBS.  The premise of the series is simple: a boss from a large company works “undercover” at the frontlines of the business.  The (first?) episode was one of the family owners of White Castle working shifts at several of their restaurants and at two of their supply facilities.

On the downside, like all reality TV, the show appears heavily scripted / produced.  For instance, in just three days of working, the White Castle owner encountered a bunch of great people working in the fast food restaurants, such as a 17-year old aspiring chef (who was then promptly given a scholarship).  On the upside, I have personally experienced how incredibly distant top management can be from frontline issues and this show could just give a bunch of people a nudge to experience their own companies.

Now startup founders might think that this show obviously only applies to large corporations.  After all, they know all of their employees by name and see them every day.  But there is an important analog that is available to even the smallest startup: use your own product/service as if you were just a regular enduser.  It is so easy to get caught up in the “fog of startup” that sometimes glaring product/service issues go unnoticed or at least stay unresolved (acting as an enduser is also good discipline for board members!).

As a startup gets larger founders would do well to go back and take on roles like customer service or sales for a day.  Of course they won’t be incognito, but it will still prove to be an eye opening experience.  In addition, new hires for senior positions should start out rotating through or accompanying some of those roles as well.  This will expose people with a fresh set of eyes to what is actually going on, which even in a startup can be quite different from what founders (and the board) have led themselves to believe.

Tags: tv startups management

Friday, February 26, 2010

Posted at 1:24pm Permalink Comments (View)

Cloud Computing = Democratization of Applications

The Web brought us the democratization of content. Cloud Computing will do the same for applications. That will be one of my key themes for the Cloud Computing panel this afternoon at the Wharton Business Technology conference (that’s assuming that my Acela which is already 30 minutes late will make it to Philly in time). Prior to the Web, to get a piece of content out to the world required going through some gatekeeper like a publisher for books or a label for music. Now anyone can post content and reach the world. The Web theoretically made the same true for applications through web delivered functionality, but two important constraints applied: first scaling was hard and second everyone was building stovepipes. Cloud computing will remove both of these constraints. First, we are getting close to where developers can focus almost entirely on what their application does and spend very little time on how to scale it as more and more users sign up. We are not there yet, but the progress over the last couple of years has been simply astounding. Second, whether by choice or by enduser demand, applications in the cloud are all exposing APIs. Instead of stovepipes it is now possible to create a new application by focusing only on the new pieces and easily integrating with all the existing services. Both of these will vastly reduce the effort required to deliver a an application to anyone in the world. That is the democratization of applications. No more gatekeepers for applications - and I am aware those used to include VCs …

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Thursday, February 25, 2010

Posted at 10:41am Permalink Comments (View)

Burn Rate as the Canonical Mistake (for Web Startups)

One of the all time great opening lines is from Tolstoy’s Anna Karenina:

Happy families are all alike; every unhappy family is unhappy in its own way.

I am beginning to think that the opposite is true for (web) startups.  There seem to be surprisingly many roads to success.  But the canonical road to trouble appears to be taking your burn rate up *before* you have something that is really working.

Over the past couple of weeks I have seen two startups that are in very different positions, despite superficial similarities.  They both have fully launched services in interesting areas and with some traction but that have not yet really taken off.  They are both iterating on their services.  But one has spent $5 million already whereas the other has spent less than one tenth of that.

The mood between the two companies couldn’t be more different.  One is filled with excitement about a new twist on their service that they are pursuing at a current burn rate of less than $40K per month, which represents the highest it has been.  The other is struggling to make changes they know they need but their burn is still $100K per month, despite having come down significantly from where it has been.

Only time will tell whether the low burn rate company will succeed, but they have a great many more options available for themselves.  They could get acquired and have in fact had some offers (they do have some traction after all) and even a modest acquisition would pay back investors and leave something over for the founders.  They could raise just a bit more money and keep iterating for a long time.  Or if they happen to hit it right with their latest iteration they can quickly and cleanly raise a fair bit of money.

Nothing really new here in this post — this is after all the mantra of the lean startup movement — but it can’t be said often enough!  And this recent experience brought the contrast home so starkly that I felt compelled to write about it not just for others but as a reminder to myself.

Tags: lean_startup