Continuations

Thursday, July 2, 2009

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Board Effectiveness Tip #2: Board Package

The thought of putting together a board package seems to instill a lot of apprehension in founders/management of startups. That’s a shame, because — if done right — the board package will create hardly any additional work and will be an incredibly useful tool not just for making the board effective but also for managing the company. Here are some suggestions that may help: 1. Choose a format and order and stick with it. Good to start with a “what’s working and what is not”, together with or followed by KPIs. 2. Pick no more than one big topic to go into detail on. This could be the biggest problem you face, the biggest opportunity, etc. Trying to cram too much into one package virtually guarantees it won’t get enough attention. 3. Have each of your key management team members contribute a section to the board package on their area. They too should pick a format and try to stick to it. 4. The KPIs and team member sections and possibly even the “what is working and what’s not” should be part of your day-to-day management process. The only extra time for board package should be putting these into a single file. 5. There are no points for production value. These should be working documents not Powerpoint Extravaganzas. 6. Send the package out about between 48 and 24 hours before the board meeting. Much earlier and folks will forget to read it (“I have plenty of time to get to this”). Last minute and folks won’t have time to read. In either case dangerous, because most directors will have an off-the-cuff reaction anyhow in the meeting (certainly no shortage of opinion among most VCs, myself included). But the off-the-cuff and the having-slept-on-it opinions may be quite different. 7. Avoid big (negative) surprises. If board members find out about things going poorly from the board package you are not communicating enough directly. See Tip #1 for this (sorry, no link - writing on my BB). 8. Provide spreadsheets in .xls format in addition to any summary that you may have included in the deck. Often I want to draw a chart for myself or calculate some ratios that you might not have. Don’t want to have to retype to do that. 9. Don’t make the deck a data dump. Attaching backup data is great (as per #8) but the board needs to know what you believe the data means or if you don’t know at least what the key question is that it raises. 10. Include one unexpected item somewhere in the deck. This could be a chart with a surprising metric or an odd quote from a customer or competitor. That may sound like unnecessary extra work, but I would be surprised if in the course of one month of running your startup you don’t come across at least one item that makes you laugh (or cry) or at least scratch your head. Share that with the board. If despite doing all of the above you have a board member who regularly has not read the board package before the meeting, you will have to challenge him or her on it (obviously not in the board meeting). Much as you might want the responsibility for that to rest with someone else, it is not likely that another board member will take this on and you may discover something useful in the process.

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Wednesday, July 1, 2009

Posted at 7:11am Permalink Comments (View)

Mobile (App) Development: Android's Missed Opportunity?

The post on the USV blog about the challenge of creating native mobile apps (meaning ones that can on exist on the mobile platform) has created a lively discussion with by now over 60 comments.  A good chunk of that discussion was about the relative merits of just sticking with the mobile browser versus developing apps.  For instance, Fred observes:

I’m a big fan of the mobile browser too but it does seem like the prevailing delivery package today is the mobile app, not the browser.

That and a conversation yesterday at lunch got me thinking: Why doesn’t Android make the browser an equal citizen for app development?  All that would be needed are some Javascript extensions to give access to the phone capabilities, in particular location, the camera, making calls and cross-app communication (including access to built-in apps such as the address book).

I have in the past written that this would be the best (possibly only) way to beat the iPhone and had been hopeful for the Palm Pre.  But all along in those posts I missed the bigger question.  Why isn’t Google pushing the HTML5/Javascript model for Android?  After all, Google is demonstrating what can be done with Javascript in its mobile version of gmail and I even posted about how that was a good thing for the Pre.  Google is also really showing off the capabilities of HTML5 with Wave.

So does anyone know why Google would not completely embrace Javascript/HTML5 as the app delivery model for Android and pioneer any missing capabilities (such as camera access)?

Tags: google iphone android html_5 javascript

Tuesday, June 30, 2009

Posted at 7:51am Permalink Comments (View)

The Continuing Confusion About Free

Last night I read Malcolm Gladwell’s review in the New Yorker of Chris Anderson’s new book “Free: The Future of a Radical Price” followed by Chris Andersons’s response on his blog.  I have not yet read the book, so my initial reaction is based on and to Gladwell’s review: there seems to be profound and ongoing confusion about critical economic concepts including marginal and total cost, marginal and total benefit, and price.  I tried to clarify these in my posts on the Economics of Abundance and on Name-Your-Price for Digital Goods.

Since Youtube is apparently one of the examples in the book and one that Gladwell tries to pick apart, let me give this another whirl:

• The marginal cost of serving one additional stream for Youtube is (essentially) zero as at (almost) any time they have spare capacity.  That does not in any way imply that the total cost of operating Youtube is zero.  Having all that capacity in the first place (processing, storage, bandwidth) is very costly.
  
• The marginal benefit of someone watching another video of funny cat clips is almost certainly zero — I only watched it because my daughter made me.  But that doesn’t mean that many people (my daughter included) did not get genuine enjoyment out of watching this video, so that total benefit is positive.
  
• The price of watching a stream on Youtube is zero.   With marginal cost zero and marginal benefit zero, from a perspective of maximizing total social (net) benefit, free is the right price because it does not preclude any video that could possibly have benefit from being viewed.  That does not mean that free is sustainable because it obviously doesn’t help cover the total cost.

It seems to me impossible to have a constructive discussion around the social challenges of “free” without getting these basics right.   The participants’ energy will be dissipated with such unproductive distrations as questioning each others’ motives, when we should be innovating on ways to capture some of the benefit and transferring it to cover the cost.

Tags: malcolm_gladwell chris_anderson free economics

Monday, June 29, 2009

Posted at 6:20am Permalink Comments (View)

The Mobile Challenge

Today’s post is over at the Union Square Ventures site on the challenge of creating native mobile applications.  We are fascinated with the disruption that is taking place in mobile.  The big question is what “native” applications will emerge based on the unique technical capabilities of the mobile platform and the emerging behaviors around those capabilities.  Head on over there to read some of our early thinking.  There are likely to be some big opportunites for startups!

Tags: mobile disruption applications native startups

Friday, June 26, 2009

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Heyzap Introduces Payments

The team at Heyzap yesterday launched payments to enable virtual goods for Flash games.  This is really neat because it is exactly the kind of thing that is difficult to do for an individual game developer or publisher but delivers value to the whole system.  By difficult I don’t mean from a technical perspective, but from a social and network perspective.  For long-tail casual games, endusers would not necessarily trust an individual game with a payment and the incentive to buy currency that can only be used in a single game is much smaller as you are much more likely to tire of a game.  Similarly, for many publishers Flash games are an addition to their core site for which they cannot invest in additional support technology.  There are many more great things on the roadmap for Heyzap for both game developers and publishers!

Tags: heyzap flash casual_games virtual_goods

Thursday, June 25, 2009

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Inflation, Startups and VCs (Part 3)

Yesterday’s post focused on how the expansion of the Fed’s balance sheet may or may not translate into inflation.  But the Fed is not the only thing to worry about — there is also the growth of the Federal Government deficit.  The Obama administration has been spending a lot of money to fight the recession and prevent the collapse of several “too-big-to-fail” companies.

Here is a chart which the Washington Post put together to show the upcoming deficits:

The first point to make is that government debt per se does not add money to the economy.  The government borrowing is — as a first approximation — no different than say MSFT borrowing.  Somebody else had to have the money already to give it to the government in return for a promise of future repayment.  For instance, China which has bought over $1 trillion of US government debt did so with dollars that were already in existence.

The potential relationship between the creation of government debt and inflation is therefore an indirect one.  It is based on the fear that the government will eventually influence the central bank to create inflation to make it easier to pay off the debt!  For instance, this recent article in the Economist on government debt states:

The sheer scale of their fiscal burdens may tempt governments to lighten their loads by inflation or even outright default. Inflation seems increasingly plausible because many central banks are already printing money to buy government bonds. To fiscal pessimists this is but a small step from printing money simply to pay the government’s bills. Adding to their worries, many economists argue that a bout of modest inflation would be the least painful way to ease the financial hangover.

I believe that is a significant overstatement of what has been happening so far, but it describes a mechanism by which government debt could translate into inflation: central banks issuing new currency to buy the debt.  That is the mechanism that has fueled hyper-inflation episodes in the past, such as the one in the Weimar Republic.

Given the independence of the Federal Reserve and the folks leading it, such an outcome seems highly unlikely in the US.  An econometric analysis conducted in 2008 of post World War II data found fairly little evidence of inflation being used by industrial nations to alleviate federal deficits.  But the magnitude of the upcoming deficits takes levels of government indebtedness back to levels last seen at the end of WWII and we are unlikely to see a rapid growth period which would allow that debt to be paid down through rising tax revenues.  There is a real potential for pressure on the Fed in the future to allow for some meaningful inflation to help reduce that debt burden.  Bottomline is that between the need to shrink the Fed balance sheet and to resist this pressure, there will be a lot riding on cool, smart and independent heads running the Federal Reserve in the years to come!

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Wednesday, June 24, 2009

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Inflation, Startups and VCs (Part 2)

Yesterday, I wrote a post about why startups and VCs should care about whether inflation is a real threat and promised a follow-up about some of the arguments floating around.  The eye-popping chart that prompts one line of reasoning is this:

After 40 years of growth in the 0-10% range (with a brief spike in 2000), the monetary base jumped by 110% 2008-2009.   In absolute numbers, the monetary base went from a bit below $1 trillion to a bit over $2 trillion.  What exactly is the monetary base?  It is currency in circulation (and in vaults) and reserves held by banks at the Fed.  Both of these constitute the liability side of the Federal Reserve’s balance sheet.  Conversely, reserves at the Fed appear on the asset side of commercial banks.  That’s of course also where loans appear.  So how does this potentially translate into inflation?  If banks draw down their Fed reserves and lend the money out, then there is a lot more money out there.

That explains why we don’t face an immediate inflation threat from this explosion in Fed reserves: banks simply aren’t lending.  We are, as Krugman pointed out, in a liquidity trap.  The obvious question then is, but what about when the economy recovers?  Won’t banks then draw down their reserves and start lending like crazy?  The answer to this turns out to be a bit trickier.  The Fed has two fundamental options here.  First, it can try to reduce the reserves by various mechanisms, such as selling assets which would shrink the size of the Fed’s balance sheet.  One potential problem with this is that some of the stuff on the Fed’s balance sheet may not find any takers!  As this nice chart shows, there is $100 billion or so in junk from AIG and Bear and another $400 billion in mortgage backed securities.  The second option is for the Fed to start paying interest on Fed reserves.  This is something that, for instance, New Zealand does.  Obviously, if a commercial bank can earn interest by keeping money at the Fed with zero risk, there is no incentive to lend that money out!  Janet Yellen, the President and CEO of the San Francisco Fed summarized both options in a recent speech:

The simplest approach—the one that we have used traditionally—would be to shrink our balance sheet by selling the Treasuries, agency debt, and agency MBS we accumulated during the crisis. Many of the special liquidity and credit facilities we have developed will be phased out as financial markets recover. But it is conceivable that, even with the economy rebounding nicely, the credit crunch might not be fully behind us and some financial markets might still need Fed support. In this case, we could increase the interest rate we pay on bank reserves.

Bottom line, as far as I can tell, the Fed does have lots of tools available to reduce or neutralize these huge reserves, but they will have to use them at the right time and to the right degree or there could be a big jump in lending down the line which would result in inflation.  So nothing imminent but worth watching.  Now this post has already run on for quite some length and that means I will “reserve” another way that we might be headed for inflation for a Part 3.

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Tuesday, June 23, 2009

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Inflation, Startups and VCs (Part 1)

I wrote last September about the competing views around deflation versus inflation.  Interestingly, about 9 months later we still seem don’t seem to have real clarity on the subject.  Over that time we have approached deflation but there has also been a ton of government intervention, which has prompted op-eds predicting future inflation and even a new fund run by Mark Spitznagel (a long time collaborator of “Black Swan” author Nassim Taleb) to bet on inflation.  On the other hand have been responding blog posts like this one by Paul Krugman and op-ed pieces like this one by Alan Blinder arguing that inflation is not a threat.  In a second post I will dissect the arguments a bit, but first why should startups and VCs care at all?

It is hard to remember when we last had meaningful inflation (in the late seventies and early eighties) and so most entrepreneurs and VCs active today (myself included) don’t have a good sense of the implications.  Generally, it turns out to be much harder to run a business during inflation especially when the business is equity-financed such as VC-backed startup or a VC fund.  Expenses tend to inflate faster than revenues — especially true of course for pre-revenue startups.  The amount of venture funding in your bank (or the size of your fund) on the other hand are fixed.  In 1980 when inflation peaked at nearly 15% that would have been a serious consideration.  Even at say 10% annual inflation, a $100 million fund is not really a $100 million fund at all considering that the money is put to work over a 5+ year-period.

Deflation, btw, is not pretty either but it tends to harm existing businesses more than startups.  So as a startup or a VC you should care about whether we might face a return of inflation.  In Part 2 of this post, I will describe why I am (cautiously) optimistic that we don’t need to lose sleep here but also should not dismiss the potential entirely.

Tags: inflation deflation startups vc venture_capital

Monday, June 22, 2009

Posted at 7:42am Permalink Comments (View)

Bing's Design Challenge for Google

I have been trying out Bing last week, as has Fred, and the team at Clickable (and probably a lot of other folks).  Generally, the verdict seems to be that it’s not terrible but has some obvious shortcomings, especially when it comes to integrating blog and very recent content.  Despite these shortcomings, I do believe that Bing represents a real challenge for Google because of its design.  This is not just a question of Bing adding some “bling” (could not resist) in the form of a picture on the home page, but exposing a bunch of things in ways that appear easier for novices to find.

As Danny Sullivan points out, Google has done many of the same things for a long time but they were much harder to find, prompting Google to add a prominent “Explore Google Search” link.  Clearly, the secret here is that Google took a very incremental approach to introducing new features into search, whereas Bing represents a more radical redesign of the experience (not that radical mind you, but still pretty significnat — e.g. search stemming is right in the main results).  Now it is interesting to put this in the context of Doug Bowman’s departure from google.  Here is a somewhat lengthy quote from Doug’s blogpost about his reasons for leaving google:

Without a person at (or near) the helm who thoroughly understands the principles and elements of Design, a company eventually runs out of reasons for design decisions. With every new design decision, critics cry foul. Without conviction, doubt creeps in. Instincts fail. “Is this the right move?” When a company is filled with engineers, it turns to engineering to solve problems. Reduce each decision to a simple logic problem. Remove all subjectivity and just look at the data. Data in your favor? Ok, launch it. Data shows negative effects? Back to the drawing board. And that data eventually becomes a crutch for every decision, paralyzing the company and preventing it from making any daring design decisions.

So the real challenge that Bing represents is a willingness to make more daring design decisions.  I believe in several areas that has already resulted in significant usability improvements over google for the average user.  Of course, Google has many brilliant people and will address this challenge with more than an extra link on the home page.  For instance, Peter Norvig is already quoted as having picked up on this challenge.

Tags: google bing design engineering usability user_experience