Like a Rolling Stone

I am often asked about the theme around my investments and for the past couple of years have answered that I invest in great people in emerging growing areas and the rest takes care of itself. Based on the quizzical responses, that explanation has been inadequate. As I use this forum as a way to flesh out my thinking on points and as a way to communicate with others, here's a stab at a deeper and more nuanced reply to the 'what areas are you investing in' question:

As an overview, the other day I was on a panel with Lawrence Lenihan of FirstMark  and in response to a question about how things are different today from five years ago, he said that the entrepreneurial paradigm has switched to 'it's now easy to start a company, yet so hard to scale it'. He's so right and that remark set me off to thinking much more deeply about what's driving some of the fundamental changes in the market. To illustrate his point on scale of users and infrastructure, here's some recent statistics showing 60 second activity across some major sites:

Facebook  695,000 status updates
Skype:       347,000 calls
Craigs list:   12,000 new ads
Twitter:       98,000 Tweets
Tumblr:       20,000 posts

As a frame of reference, ten years ago investors and entrepreneurs were broadly categorizing their companies as being B2B, B2C, then a hybrid B2B2C. In the last five years, however, the social, broadband, mobile and visual waves have upset many entrenched players (e.g. Yahoo), while driving extreme user and shareholder satisfaction (e.g. Instagram). Thinking about what's behind this has led me to a conclusion that the fundamental market and technology trends have opened greenfield C2C and C2B opportunities. YouTube really was the first notable example of a firm that was born around the recognition that aggregating consumer files, to be distributed to other consumers, could be a massive market opportunity. The founders of YouTube did not have traditional broadcast experience or capabilities, instead, they took an outsiders approach to disrupt an existing market. They validated the notion that there's an opportunity in building consumer to consumer platforms, where the value-add to users is easy self-expression, psychic rewards, and entertainment. For the business, it's a new channel to reach millions of consumers with like interests/demographics, or a vehicle to gain instant insight. Insight is really important as, I believe the John Wanamaker quote of 'I know 50% of my marketing dollars are wasted, I just don't know which 50%' is no longer valid in a world where you can sample

More instances abound, for example, when you hear about 'big data companies', most often the conversation points to an entity that aggregates (Facebook Airbnb or LinkedIn) or creates (Instagram) massive amounts of unstructured data and distributes it (Youtube), or  analyzes it (Tracx), redirects it (Pinterest), or adds value to it (BillGuard) in a way that could not have been done a scant few years ago. The initiation of the value chain is with the consumer, a solitary individual, when massed together has incredible value. The difference in the technology necessary, the road map of key success factors, and capital capital deployment differ markedly from the prior generation. In fact, given the state of technology deployment (smart phones with cameras, social deployment, and 3G, these companies could not have existed five years ago. For this reason no entrenched competitors exist in an opportunity that has sprung up overnight and is tremendous.

As Lawrence so rightly pointed out, building the technology behind these firms is not a herculean task, but scaling the traffic and the systems when you deal with hundreds of millions of identities, or records, is indeed huge and the scaling, not the starting, is what can get to be capital intensive. The good news is that, it does not take that much capital to know if you have caught an express train, and when you do, it's not that huge a risk factor for the follow on investors either.

The first Instagram blog post

It's all about:

• mobile
• the pain
• the product

http://blog.instagram.com/post/8755272623/welcome-to-instagram

And the first review:

http://techcrunch.com/2010/10/06/instagram-launch/

Wake of the Flood

I've been struck by the massive adoption and now returns earned by the Instragram shareholders. It's just about as staggering as the incredible momentum around Pinterest and both are so notable for the reality that they delivered great user (and shareholder) value with around one dozen employees. Each has about one dozen employees, think about that. We last saw this so visibly when Yossi Vardi led a group of innovators who created, then exited, ICQ (and have seeded more new companies than I can count). 

Engineering and UI cultures, no sales forces, field customer service reps, hordes of system admins. Nada. 

On one hand these are screaming advertisements for capital efficiency, fundamental changes in the way companies can deliver value and innovative entrepreneurs. On the other hand, there's no doubt that Steve Jobs was only hitting the tip of the iceberg when he noted that the jobs exported from the US to overseas locations are not coming back. In fact, many of this generation's companies won't be creating those jobs in the first place.

Going mobile

Somewhat obscured by the iPad announcement the other day is the speed to which Apple has led the 'post-PC' vanguard noted for its mobility. Here are some of the stats for Apple:

• 172mm "post PC devices" (e.g. iPads, iPods, and iPhones) sold in the last YEAR
• In the past quarter 85% of company revenue came from these devices. 
• Apple is now the largest manufacturer of computing devices
• The iPad sold more units than any other computer manufacturer
• 40.5mm iPads were sold last year

These stark numbers represent the five year mobile paradigm shift, starting with the iPhone, that will only gain momentum as 4G LTE networks proliferate. With the realistic potential for 10Mbt/s on the upload and 15-25 Mbt/s on the download, it represents substantial improvement over existing 3g networks. No doubt software and media players will be enhancing applications and content (e.g. more video) to take advantage of the enhanced connectivity and giving even greater utility to mobile users.

Goodbye Classic

The new iPad has been introduced, a worth successor to my increasingly pokey iPad Classic. Over the past couple of years, each new software update and next 'can't live without' application, has brought it to its knees. The march to pokiness was greatly accelerated when the iPad2 was released and developers optimized for the faster processor and took advantage of the improved graphics. The new iPad with an even faster processor, more RAM, a 'retina' screen and LTE communication capability will be too tempting for developers to again optimize. So, good-bye Classic iPad, you really were magic.

On the right Tracx

Yesterday, Tracx announced that it raised its first institutional venture round. Led by two quality venture firms with complementary experience; Flybridge and Revel Partners and joined by Crossbar and existing investors. Over the past twelve months, the company has literally come from the garage to securing more than 100 Enterprise and Agency customers.

Tracx has built a service which enables Enterprises, in real-time, to monitor what people are saying about their brands. Amongst its many attributes, it lets them identify sentiment (+/-), influencers, and trends. It helps firms filter the 'signal from the noise'. Looking at the market, here are the reasons why I am bullish about the opportunity:

1. In an era of instant communications ranging from customer support, to sales, to marketing messages, all brands will need to have a component of their behavior to be like media companies. Today, they don't have the tools or experience to actively manage real-time communications involving millions of comments. Specifically, today I see; pent up demand, home grown patchwork systems, and many disparate point solutions cobbled together to address the growing issue. I've seen this happen before and know these quick solutions often don't scale and integrate well.
2. Community management is going to be an essential part of the brand 
3. The opportunity is Global and knows no geographic boundaries
4. Technology can be a real differentiator when you need to scan hundreds of millions of conversations and categorize the data to present cogent information
5. Enterprise web presence now extends beyond their web sites, beyond Facebook, Twitter, Tumblr, Pinterest, Instagram etc. Brand content is everywhere, placed directly and re-purposed by the public and edited with a human element. There is no control over content, but there is a response to it.
6. User generated and re-purposed content is not controlled by the brand, but it's essential they know it's there, who are the key positive and negative influencers, and the trends associate with their actions.
7. Crisis Management. It's essential to get a handle on issues, when they are still small, and get insight into the one's which spiral (e.g. McDonalds and the spilled coffee scandal)
8. John Wanamaker said that he knows that he wastes 50% of his marketing dollars, but he didn't know which 50%.  With real-time data, there is now no excuse for such a high ratio of wasted resources.
9. Companies need a common framework to communicate progress, best practices and challenges across various divisions

Of course, the Management team, led by Eran Gilad, is a huge part of any investment. They see the potential to seize a market leading position through product innovation, which has the potential to fundamentally disrupt the competitive dynamic within this nascent, but potentially huge market. 

Tim Cook on Apple core values

• We believe that we’re on the face of the Earth to make great products.
• We believe in the simple, not the complex.
• We believe that we need to own and control the primary technologies behind the products we make.
• We participate only in markets where we can make a significant contribution.
• We believe in saying no to thousands of projects so that we can really focus on the few that are truly important and meaningful to us.
• We believe in deep collaboration and cross-pollination of our groups, which allow us to innovate in a way that others cannot.
• We don’t settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we’re wrong and the courage to change.