Tuesday, March 31, 2009

Speaking of heroes

My buddy Brahms invited the family for a screening of a provocative movie TheCoveMovie filmed by Louie Psihoyos (with backing by Jim Clark of Netscape fame). Rolling Stone called this award winning film "a cross between Flipper and the Bourne Identity". The movie is a real-life docu-thriller, filmed at great personal risk, that exposes the annual dolphin slaughter and subsequent distribution of mercury-laced meat to an unsuspecting public.

The Cove will be released this summer, it will inspire you to make a difference.

Barbarians amongst us

I was speaking with my buddy Robert yesterday and he was relating to me the high octane energy he just experienced at the Game Developers Conference that just concluded. What was particularly striking was his off-hand comment that 'this is like the internet was in 1995', full of can-do people who keep the lawyers at bay while pushing the envelope to create great products. Wow, a high bar from a guy who co-founded iVillage.

His comments set me to thinking about other areas where we are seeing rise of 'noble savages that embody the barbarian (entrepreneurial spirit). No doubt we are seeing it in the mobile space, but only around the iPhone and some signs of savage life in Android land. Nevertheless, the vast majority of the mobile space remains under the yoke of carriers and handset vendors.

It seems as if we are seeing a growing ethnos around the large screen internet experience. After all, who but a native barbarian in a pre-revenue company, would call out NBC and Comcast (hi Boxee)? Of greater significance here is the evolving relationship between Hulu and its parents NBC and News Corp, with Providence Equity as a smaller partner. While the President of NBC bemoans shifting 'analog dollars to digital pennies' his step-children at Hulu, who are emerging as a top 5 video site in less than two years, must roll their eyes and hold their breath for the upcoming Armageddon. For surely, there is an epic battle brewing between analog dollars and digital pennies.

The mother of all barbarian movements in the software/internet space is the open source movement. People such as Linus Torvalds (Linux), Richard Stallman (Free Software Foundation), Larry Wall (Perl) and Brian Behledorf (Apache) paved the way for creating much of the infrastructure for the Internet. These pioneers have spawned thousands of initiates such as Drupal, Digium, Untangle, and http://www.canonical.com/.

It's the passion of the developers at the Game Developers Conference and the thousands of entrepreneurial companies that are the heroes of our industry.

Monday, March 30, 2009

VC Returns

Fred Wilson posted a nice piece here with his thoughts, and those of one of his LP's on investing within the venture asset class. Essentially, the thread notes that the venture 10 moving year return benchmark is rapidly eroding from a current 17.3% as we will soon be dropping 1999, and adding 2009, from the calculation. Also, read the comments, they really add good flavor.

It essentially highlights Walter Wriston's quote "Capital goes where it's welcome and stays where it's well treated." Despite a few notable exits, the venture class concentrating within IT/the internet, is experiencing its second 'bubble' in one decade. To prosper, it's essential the asset class return capital with a sufficient risk adjusted premium.

Absent a technology driven paradigm shift, I think it will take an altered business model, where 'little' venture is one alternative to regain the class' lost luster. In 'little' venture, passionate entrepreneurs, doing innovative things, are staked enough capital to prove their market proposition and individual prowess. It's made clear to all parties upfront that if they don't 'cross the traction bar', additional capital won't be forthcoming. Essentially, 'no mo; no dough'. This leaves the time and capital to concentrate on the early winners where they are given the support to vie for a leadership position.

Another step

BarTor, the first Android based Torrent application was recently released and is available in the Android market for $2.99. While I am sure there are many potential positive uses for BarTor, this for-sale application enables copyright violators to misuse content much easier than ever.

The program allows a user to take pictures of DVD barcodes with their mobile phone, then the program finds the movie title associated with the barcode, and sends that information to a uTorrent P2P client running on the user's desktop computer. Your computer then searches, and downloads a most likely pirated copy of that movie, available from a Torrent enabled site.

Search and discovery are critical elements for content viewing and purchase. Now, with BarTor, a quick trip down the aisle of your favorite video store, with your Android camera at hand, enables you to add an element of physical discovery that heretofore was clumsy. I am not sure how great an impact this will ultimately have on the amount of content piracy suffered by the industry (I would bet not much for the BitTorrent audience), but I do know that continued advances in User Interfaces (Boxee), blending of the mobile and fixed worlds, and downward pressures on broadband, storage and computing prices will only dial-up the pressure on content owners and their virtual distributors. It seems as if they are now only a breath away from the morass newspapers and print magazines find themselves in.

For those who wold like a demo, here it is in action. Ironic to see this paid application being used to download content, via one of the most infamous pirate sites, Pirate Bay.

The product demo was posted two weeks ago and already has 121,000+ views.

Friday, March 27, 2009

Question and Answer

Posted on Sandhill.com was the question 'Will Salesforce.com be the last software company to hit $1 billion in revenue?' Salesforce.com just passed the trailing $1B revenue milestone 10 years after its founding and, given the economic situation, this attention grabbing redundant question, was fair game.

Three experienced people follow the softball question with affirmative answers from their different perspectives:

1. Bryan Stolle, Mohr Davidow Ventures- With more connected people than ever, the opportunity to create value is larger than ever

2. Bill Portelli CEO CollabNet- An emerging 'cloud' market which IDC pegs at $42B in 20012 is but one area where the next $B company can emerge

3. Scott Abel, CEO Spiceworks- The opportunity for Social Business Applications (defined here on the SpiceWorks blog) is untapped and has many nascent billion dollar segments.

Each of the commentators make valid points, but from my perspective, a post by Bill Gurley of Benchmark, highlighting the way Tencent, a China based company founded in 1998 as an IM based service, has surpassed $1.2B in revenue by branching out from its IM roots by offering related services to its growing customer base. Its growth seems eerily similar to the way Amazon is no longer solely about books; yet has a powerful set of business principles that naturally lead to adjacent markets.

The company concentrates, though not exclusively, on building revenue via sales of casual games, communications services, payment services and advertising. With more than 60% of its employees involved in R&D, and most sales transacted via self-service that does not require salesforce intervention, the firm seems to embrace a blend of a 'Google' culture, within a commerce driven business model. It's a wonderful post (though a bit too virtual good centered for my taste) and worth reading here.

It's been a wonderful question and answer morning.

Thursday, March 26, 2009


Sarah Lacy of TechCrunch wrote an article earlier this week 'Now that China Is the New Israel…What’s Israel?' that has evoked a firestorm of biblical proportions. At last count, 275 comments, ranging from the provocative to the racist have been posted.

Before I comment, let me share some of her thoughts:

1. Israel represented one of the first times the cozy boutique Sand Hill Road firms ventured overseas and made money as a result. For a time, Israel had more Nasdaq-listed companies than any other country in the world.

2. For much of the last ten years, investments in Israeli companies by Israeli VC firms has roughly equaled foreign investment in Israel, according to stats from Ben Gurion University’s School of Management.

3. Ten years after the peak of the last bubble, it’s clear that when foreign investment fell in Israel from about $4 billion a year to $1 billion a year, the country wasn’t just weathering a recession. Somewhere along the way, the entrepreneur scene here lost its mojo.

4. In sheer numbers, Israel’s place on the global scale of investing has been dwarfed by China, and matched by the United Kingdom. And after three days of talking to dozens of entrepreneurs and investors in Tel Aviv, this seems like a country wandering in the desert, looking for a new tech movement to own and dominate.

5. What happened to Israel is a bit like what happened to Boston—the story and opportunity moved away from what the city’s entrepreneurs were good at. In the case of Israel, security and encryption was always a strength, but that’s not the growth industry that it was. In the case of Boston, enterprise technologies and telecom were always strengths. Now, as media has become the story of the last boom, it’s not a surprise New York surpassed Boston in the amount of venture capital raised.

Now for my thoughts:

Despite her numbers on exits being drastically off (as highlighted by Yaron Samid here) I think the substance of her article, as noted in #5 above, has an important element of truth to it. Israel has produced a number of great security (and infrastructure) firms, but that's not the whole story. The Internet opportunity has grown so large and ubiquitous that Israeli's are also producing great consumer facing sites, SMB applications and serving a myriad of niche specialties. Some will have wonderful exits, but most won't. In a similar way, entrepreneurs in China, India, and elsewhere are doing wonderful things; some will emerge as major global companies; most won't. As the nuclear club spans three vast continents, we should recognize that brains know no geographic limitations.

In Israel, over the last decade, a wave of capital has largely cured the imbalance between the demand and supply for risk capital available to entrepreneurs. As such, the Valley/Tel Aviv arbitrage has disappeared. Of greater concern to many is that the pace of innovation seems sluggish. It seems as if the time between fundamental paradigm shifts seems stalled.

The PC software world had its shining 15 years in the sun between 1981 and 1996. The internet 'revolution' was kicked into high gear with Netscape's IPO in 1995. It's now been 14 years and, as you would expect with advanced adolescence, growth has slowed. Yes, bright starts such as Twitter and Payoneer are poking their heads through the clouds. But these apparent successes leverage an existing paradigm, rather than providing a new foundation (a la MSFT or Netscape) for others to leap on board. This slowing phenomena is not unique to Israeli entrepreneurs or investors; we are part of a global club.

Nevertheless, I am encouraged by recent and upcoming infrastructure developments that auger a wave of innovation. Advances in 4G, Fiber to the Home (promising 10x improvements in upload/download speed), an upcoming battle in the OS world, renewed browser innovations, stunning advances in the mobile form factor, and a relentless trend to lower costs and prices that opens vast new markets to applications that we can only dream of, and addressed at a fraction of the cost of today's sales & marketing expenses light my fire.

Wednesday, March 25, 2009

OK, so I am compulsive about watching Woz on Dancing with the Stars

Despite multiple injuries, the Woz comes through again.

Like any good entrepreneur, throw him out the door, and he's back through the window.

Monday, March 23, 2009

Mark Twain on burn rates

It's been nearly 6 months since the venture community began advising portfolio companies to pull in their horns and cut burn rates. As the general economy continues its tailspin, and the oversupply of technology companies in many areas persists, I suspect we are now entering a Darwinian period, where the number of active venture backed portfolio companies shrinks and will be notable for more than a few quarters of private to private mergers.

Many companies are finding the path to self-sufficiency is just too far off; while expansion funding is primarily going to select firms with demonstrated hyper momentum. Though difficult to pull off, these private to private mergers are the best way to salvage value, while triaging a portfolio when most potential buyers are on a Corporate Development hiatus. A good example of this trend is the SmartReply acquisition of mSnap reported today.

Today's environment brought to mind Mark Twain. Despite his many accomplishments as a pundit and as an author, his achievements didn't extend to the business realm, where poor financial management and unwise speculation led to a nasty brush with bankruptcy. I seem to recall (but can't find) his quote noting that the path to bankruptcy begins with a slow walk and ends at a dead run.

These words ring so true in the technology business where innovation is encouraged, yet, when you are on the wrong path, there is much reluctance to move quickly towards allocating resources away from failing initiates and to promising areas/products. Stemming the misallocation of resources, as a matter of ongoing management, rather than a reaction to an active board, or a market shock is an essential prerequisite for stayin alive in such turbulent times.

Friday, March 20, 2009


Do two successes equal a trend?

Pure Digital yesterday was acquired by Cisco for $590mm (15x invested capital). They were early advocates for the proposition that people are hungry for a simple point and shoot video experience. No bells or whistles, just get the primary job done without manuals, easy upload, and operations. Perfect for you and I.

Looking at the success, I really have to give credit to the management team, and investors (Sequoia) for sticking with the Company. The failure rate is high enough for start-ups, let alone firms that take two 'left turns'. In Pure's case, they began as a camera rental firm where users returned cameras to their local drug store for printing images. When this market disappeared, as digital camera prices fell, they morphed the proposition for video cameras; with content downloaded to CD's. When this market also commoditized, they pioneered the video point and shoot model and beat perennial also-ran Sony.

In an unrelated area, Twitter is building its user base and ecosystem by leaps and bounds by doing something just as simple. Such simplicity is creating a new category; real-time microblogging. I suspect they too will have a number of business model related 'left turns' which, I hope, they too will navigate successfully.

Success can be just a simple twist of fate away.

Thursday, March 19, 2009

Firing prospects

I met today separately with two successful CEO's who, unprompted told me they were deemphasizing their marketing/sales efforts to Enterprise accounts; one company is in the application arena, and the other is in the infrastructure space.

Each told a similar story:

They don't have the 'patience or resources to go through the hoops' required in committee sales. Translation, is that they don't want to fund the direct salesforce/field engineers for the traditional 6 month sales cycle, where they have to commit the equivalent of hundreds of thousands of dollars upfront before a decision is made. Moreover, if the decision is positive, it's normal to wait a few more quarters for implementation to move forward.

Each stressed the opportunity cost is simply too high when many alternative channels are present that are open to a 'fast test/fast purchase' decision cycle. Today, their biggest issue is prioritizing their time/resources in an environment where they receive near-instant market feedback from traffic, trial and conversion statistics. Direct Enterprise sales (as opposed to Business Development) is being extracted from their company DNA.

Unfortunately, I suspect that the industries that could use innovation the most (e.g. Utilities, Media, Automotive) have been the historic worst resource offenders. It seems that with every breath they take, they fall further behind. It's a shame.

Wednesday, March 18, 2009

The Woz is back ....part II

The guy is great! For some reason, though he has such an athletic partner, I can't take my eyes off Steve radiating such such a positive glow! Viva the entrepreneur, viva la geek (note the faux eye glasses)

And now presenting...

I will be giving a presentation in a few weeks and went to two of my favorite sites that have emerged as vibrant repositories for all sorts of presentations.

I use Scribd and Slideshare as a portal to see what people have posted on the topic that I will be discussing. Great homework for presentations, and also a good way to keep up on happenings on conferences (where the organizer does not post for open viewing). For example, if you go to Slideshare, a search on the SXSW conference returns these six pages of presentations. Not all relative to the topic, but enough are to satisfy my direct needs, as well as spurring a search journey into other areas.

For example check out Tim O'Reilly's 2008 CIO exchange presentation here. It could use a bit of editing, but the content, concentrating on markets where technology seems to be in the early stages of being potentially disruptive is really strong.

Tuesday, March 17, 2009


After a few frustrating attempts to buy tickets on Craigslist, my buddy Scott and I hit the streets and scalped some tickets to attend the Allman Brothers at the Beacon last night. As a side note, while watching 'tall 'n skinny' Scott engage with the scalpers, it highlighted just how much folk in the VC business have to learn about negotiating from the real pros. His cool demeanor saved us a cool 50 bucks and earned the respect of the street professionals; I think there's an after shmata role for him in this business.

At the show they were handing out fliers for a new video on demand service started by band member Butch Trucks called Moogis. For $125, or less than the cost of one orchestra ticket, you get streamed, and video on demand access to all 15 Beacon shows and unlimited viewing for six months thereafter. With broadband enabled HQ video quality, (512-by-384-pixels) at up to 30 frames per second (fps) the video quality is fine for a living room experience.

Moogis is yet another example of how much progress the industry has made in the last couple of years towards providing an instant, high quality, relatively low cost, access experience.

Ain't wastin' time no more, going to load up my Tversity for the Clapton, Bobby/Phil nights.

Monday, March 16, 2009

Apple's Woz shows why he's an entrepreneur

Out on the edge, doing things which 'experts' say can't be done....


Sunday, March 15, 2009

Sailing towards an iceberg

For the past couple of years, I have been fiddling with various RSS homepage feeds for my PC and mobile devices. Probably, consistent with many people, only a small minority (1 or 2) of the feeds comes from major newspapers. Sure, I do enjoy a good NYT or WSJ read, and, to keep up with my smart friend Larry, I have to read the NY Post's P6. Nonetheless, keeping up with the news, and in the dialog, has little to do with newspapers (or broadcast news).

All Things Digital, carries a synopsis of the speech given by The NY Times CEO, Arthur Sulzberger, Jr. He sees the paper sailing towards the iceberg but does not know which way to turn to avoid the upcoming collision. The full speech is worth reading on NY Times corporate site here. It reads like someone advertising for a CEO, relieving him of the execution burden, while he focuses on strategy and pleads why the the paper is still relevant.

John C. Dvorak, of PC Magazine, weighs in with his acerbic, yet right on two cents. His view of the newspaper industry's decline, and possible salvation is here.

GM, Chrysler, and Ford greatly contributed to their problems by producing terrible products and reveled in creating a culture where they, and their dealers, were so happy to screw their customers. Though I may not agree with many of the editorial opinions, I do respect the integrity and commitment of organizations such as The NY Times, WSJ, and others.

I fervently hope that what inevitably supplants these institutions has sufficient critical mass to maintain the tradition of the Fourth Estate and keep our democratic institutions vibrant and accountable.

Friday, March 13, 2009

Audience Atomization

Earlier this year, Jay Rosen posted a provocative piece Audience Atomization Overcome: Why the Internet Weakens the Authority of the Press about the effect that bloggers are having on political debate in the US. His premise is historically, political reporting fell into 3 neat categories, but the democratization of discourse is changing the rules. Here's the 3 categories:

1. The sphere of political debate- Mainstream arguments where 'reasonable' people can disagree, such as 'more guns vs less butter'

2. The sphere of consensus- Where we all agree, like Madoff should have a rather large roommate' whose mom lost money in a stock scam.

3. The sphere of deviance- Also known as the fringe element. Where Ronald Regan, Menachem Begin were, and where the press seems to be judging Jerusalem's Mayor Barkat.

The post set me to thinking about the effect of atomization for investing in the technology arena. It seems as if most real disruptive innovations, and the chance to really change things, begin in the sphere of deviance. It is where thinkers, and doers who buck convention, either are ignored, or are labeled whacko's. The nay sayers can be present industry luminaries such as Ken Olsen, the founder of DEC, derisively preaching at a 1977 convention of the World Future Society (such an apt place to be wedded to the past) "there is no reason for any individual to have a computer in his home" or initial press reviews of the first generation iPod.

In the VC world you can be relegated to the sphere of deviance not only by a technology bias, but also the by dint of faint praise 'interesting technology that may be used by millions, but where's the business model?'

When a company attracts its millions of users/customers, its sphere naturally shifts from Deviance towards Debate. Conversations, which began with 'if' shift to 'how' along the lines of 'how can they ever justify their valuation, or support 50mm users?' Today, we are having the same debate over Twitter. The company, a spin off of Odeo (whose VC Charles River sold their interest in a recap) is explosively growing because they do one little thing so gosh darn well that its passionate ecosystem is making huge collective investments to bring it to so many new places. In fact, the fast moving nature of the ecosystem makes it more difficult to declare the business model.

It's within the sphere of consensus to marvel at the breakout being done with such great economies of scale, where it does not take many employees, or infrastructure to build huge shareholder equity. Of course, like many other comparative young vendors, they are subject to the laws of physics, where any ecosystem abhors a competitive vacuum.

It's yet unclear if they will fully capitalize on their success and jump to the sphere of consensus. Nonetheless, I am confident that many VC's will highlight companies such as Twitter, Facebook and Skype to show the great potential for outsized returns by doing 'simple' things really well, and having confidence in supporting a few special 'deviants'.

Wednesday, March 11, 2009

The Zagats' accidental empire

I attended an interview with Tim and Nina Zagat, founders of the eponymous Zagat's guide. Sharing a passion for food, beginning in 1979, as a hobby, this lawyerly couple mailed annual restaurant surveys to friends and tabulated results on mimeographed sheets of paper available to all comers. Today, nearly 40,000 people annually review restaurants, hotels, and shopping locales.

As popularity soared, they incorporated for the simple reason of wanting to fund their hobby with pre-tax dollars (Nina's the tax attorney). Their guiding principle was that 'reviews by many people provide a far better indication of a restaurant's quality and value, than the opinion of one person'. No matter how well trained, or how well they write, one reviewer always comes with a bias that you may not share. Moreover, the role of a critic is to write a critical essay. The Zagats' view their guide(s) purpose is to provide necessary information to help people make wise, and personal decisions.

Much has evolved in the 30 years since founding; especially from the days when no self-respecting publisher would publish their guide as the universal rejection was that 'no one cares what ordinary people have to say'. The Company now employees 115 full-time people, publishes internationally, and has branched into guides far beyond restaurants. Though the founding principle of aggregating data from 'ordinary people', not the fortunate few remains the same.

They have embraced the internet experience as a way to speed ratings, assemble more surveys and lower costs. They view individual food bloggers as a latter generation of food critics and non-specific internet portal review sites such as Yelp and Urban Spoon, as not having sufficient credibility to compete effectively in their domain. Interesting perspective when viewing the traffic chart below:

They offer some free capabilities on Zagat.com, however, the key ratings are only accessible via paid subscription and that probably accounts for the low traffic numbers and loss of internet market share (I suspect they have vigorous debates circling around market share build vs current income). Nonetheless, it is a refreshing story and a wonderful way to reflect on seeing yet another entrepreneurial, low capital intensive company building serious equity value through passion and filling a non-obvious, long-standing market vacuum.

NY Video Meetup's March star

Accompanied by my AV buddy Andrew, we attended Yaron Samid's densely packed NY Video Meet-up, where nearly 400 NY based internet participants heard presentations from 5 emerging internet video related companies. If you are interested in investing, or joining a video company, this is a monthly must attend forum.

Of particular note, keep an eye on the impressive progress of open source, not for profit entity Miro. Their recently introduced Miro 2.0 does a great job of bringing internet based HD video to your PC. With a built-in media guide, great codec support and BitTorrent availability, they provide wonderful access and search capabilities. The service seems to be attracting a nice audience. As an example of their market acceptance, here's Quantcast's estimates for Boxee.tv vs Miro:

Per the Miro presenter, they have not yet drawn the formal 'attention' that Boxee's received from Hulu. I suspect we will hear more on this topic as the year unfolds.

Tuesday, March 10, 2009

Why Jeff Bezos is leading a $19B revenue company and will lead a much larger one

Jeff Bezos was given a one hour interview on Charlie Rose the other day. For those pressed for time, I have summarized key take-aways below. Despite being somewhat long, I think it's really worth seeing.

Key points:

Unlike many companies, Amazon's strategy is built around things that stay the same (fundamental customer needs) rather than what will be different. The bedrock of their strategy is built around three common attributes, sought by all customers:

Low prices
Fast delivery

Therefore, Amazon's mission is to serve customers through lower prices, speeding delivery and increased selection. This strategy is married with an execution philosophy that recognizes that we live in a complex world, if you can simplify it for your customers, they will value it.

The Kindle is an example of how expansively the company will dream, and seek to execute the vision. The device disruptively hits all three strategic criteria as its promise is to someday offer every book ever printed (in any language), available in 60 seconds, for a price far less than a physical alternative.

While designing the product, they had the vision of enabling the reader to enter the world of the author, then get out of the way. A B&W 'e-paper' screen was selected as it's easier on the eyes and has a dramatically longer battery life than a color alternative. It was designed to be a purpose driven reading device, and specifically not designed for reading 'sippers'. For these informal readers, the Kindle software was introduced for non-specific devices such as the iPhone.

Turning back to strategy/culture, Amazon chooses to obsess over customers, rather than competitors. Bezos' belief is that if they do well with customers, they will be rewarded with an extension of their trust into new categories.

The company has tried many initiatives that have failed. A9 in search and auctions are two high profile examples. Yet, lessons from auctions led to a different way to look at the business and led to the birth of the successful 3rd party affiliate business. It also drove home his belief that me-too companies tend to not do well. Even if you are a big me-too.

I was struck by the contrast between Sony and Amazon. Sony does not lack for a strategic framework that brings them a timely entrance into many high growth categories. Yet, their execution in e-books, game consoles, music devices, phones and so many other markets has led them to being a consistent me-too in all.

The other shoe

Yesterday, I received a year-end financial report from one of the venture firms that I am invested in. The firm cited adherence to FAS 157 (mark to market rule) and proceeded to list their investment values with markdowns ranging between 10-50%. Such markdowns are greatly predicated on year end values of comparable companies (clearly an art form).

In previous years, venture firms would markdown companies that significantly missed plan, or were involved in a tangible transaction (e.g. investment round) that reflected a lower price. Proactive markdowns, based on industry comparables were rare, and that was unfortunate.

I have no idea how long, or how deep this downturn will last, however, it's evident that it will take sometime to right the ship and only rarely does one know the exit value of an investment. Today's proactive portfolio valuation, however imperfect, provide LP's better visibility to true asset value, and enable them to run their businesses better. Rule 157 enables institutional investors to more consistently hold their portfolios, consisting of private equities, public securities, and real-estate to a common standard; which for the long term augers well for the private equity world.

Today, many institutions are suffering from a 'denominator' problem, where the percentage of assets invested in private equity greatly exceeds proscribed limits, due to the collapse of the public security valuations. This round of 'mark to market' will hopefully go a long way towards bringing private equity valuations and percentage allocations into alignment.

Many institutional investors won't be surprised by the write-downs, many will even welcome them as a way to clean house and set the stage for a new approach to their portfolio management. What worries me is that many firms won't be aggressive enough in taking a realistic approach to portfolio valuation. Instead, hoping their portfolio is unique, or that valuations will shortly return to pre 2008 levels, they will be more 'conservative' and leave themselves vulnerable to unrealistic exit expectations that will surely affect the timing and form of the exits which LP's require to fund their requirements.

Expect other shoes to drop:

1. It's easier for a VC to cease funding for a company already written down in their portfolio (less downside). Unless a venture firm has a mature portfolio of self-supporting companies, it is likely a triage process will be undertaken to allocate reserves to support the minority of investments with the best likely outcome. The others will be closed/sold/ignored.

2. Look for more 'carve-outs' for management teams whose paydays sit behind investor preferred securities. Recognizing that maintaining alignment with the teams that bring you through an exit is important, investors often put in place a 'phantom equity' mechanism that rewards teams for an exit; even one that does not return capital.

3. More down rounds, diluting management and non-participating investors, in portfolio companies where the lead investor has already taken a mark down.

Sunday, March 8, 2009

Whose eating lunch?

Tuna Sandwich- 1 share GE $7

Glazed Donut- 1 shares GM $1.50

Small coffee (not from Starbucks)- 1 share Citigroup $1

As anticipated, over dinner the other night, the conversation turned to the dismal state of the economy and areas of future opportunity. That's when my tall skinny friend Scott said something that really struck a chord. For background, Scott is a successful and soon to be executive refugee from the wholesale 'shmatah' retail business. He doesn't say much, but when he speaks, it's good to listen. He noted that so many of the troubled companies in his industry are struggling because they lost their relevance. Sure, the recession pushed them in extremis, but the economy only accelerated and exposed the market reality that they were no longer needed, or even wanted. As an example, he cited once proud Sears and its sole remaining relevance as a place to buy Kenmore appliances or a tools. Not much of a reason to have tens of thousands of employees and a $4B market cap. He went on to say that retail is littered with so many corpses that never made the 'big box' transition pioneered decades ago by Walmart; and being big is not good enough. You have to be different and better.

His observation rings true across many other traditional and emerging industries which now suffer from a massive production oversupply; the slowdown has meerly exposed such over-investments. A combination of cheap production, supply chain efficiencies, open global markets and government subsidies have greatly accelerated production supply, far outstripping demand, and leaving producers vulnerable to a certain, and necessary shakeout.

Looking close to home, the flip side of capital efficiency in the Internet has given us a stunning over supply of little differentiated companies, long on UI, but with scant IP innovation. True, the combination of low cost outsourced infrastructure (thanks Amazon and Akamai), free open source software (LAMP), and pay as you go marketing (Google) lowered the barriers to entry, but the barrier to success, when faced with scores of relevant competitors has never been higher. We have overproduced companies, with far too much capability to serve a finite amount of relevant customers. More than ever, innovation is critical as insulation from the ravages of price competition that inures in markets suffering from supply surplus.

We have seen too few innovative solutions like Wolfram is apparently working on. And too much time, and capital invested in nice product mash-ups which are not destined to ever be self supporting companies.

The financial services sector is also an industry that I have been closely involved with. Now that Lehman and Bear are gone, outside of the market shock, is there really an effect on clients? The twin towers of innovation and globalization, where the banks down the block are headquartered in Canada, Hong Kong, and the UK, and operate seamlessly in NY, has fundamentally altered the banking relevance map. If a few more disappear will it really change the customer landscape? I think not.

The Private Equity sector is not immune from the relevance test. In Israel it seems that the combination of low returns, global competition and an institutional liquidity crisis is well along to shrinking the domestic venture market by at least one third. I suspect that they are a leading indicator for the US market.

I see little friction in the type of companies entrepreneurs choose to start; bridled passion knows no bounds. I look forward to more successes from innovation perspiration and am confident entrepreneurs will again shake it up.

Thursday, March 5, 2009

A Tale of Two Companies

It was the best of times (NFLX), it was the worst of times(BBI).

I was in Dallas yesterday, corporate HQ for Blockbuster, and their rumored bankruptcy filing was big city news. For consumers, who are voting with their purses that the mail-in DVD/streamed video offering is far superior to the brick 'n mortar and too little/late stream, it's no surprise.

The torrid growth in the NFLX streamed subscription service, coupled with anticipated improvements in bandwidth and large screen access, again highlights that content access is trumping content ownership, and it's only going to get far worse for the ownership folk. DVD sales will continue their steep decline and it will be a challenge for the content owners to replace an ownership revenue stream with subscription dollars in a permacheap and disposable world.

It seems as if the whole content related world is undergoing fundamental and permanent change. Newspapers have gone free on-line, where CPM's, and ARPV (avg revenue per viewer) have plummeted. Cable and broadcasters are under assault by the combination of WiFi and cheap storage/bandwidth that enables folk to disintermediate the set top box. Publishers are staring down the Kindle, Sony Reader and iPhone that will slash their existing business models and, perhaps be a step towards self-publishing going mainstream.

Traditional media is getting that Old and in the Way look.

Tuesday, March 3, 2009

Search opportunity

Kara Swisher posted today an internal MSFT memo regarding their new new new search initiative. It was particularly interesting for me as earlier today, I downloaded Xmarks to enhance my search experience, through their service that aggregates bookmarks as a way of discovering relevant sites.

I find that Google is fine for many things but the cat and mouse SEO game is continuing to hurt the quality of relevant sites displayed. Moreover, the mostly simple text display is not too helpful in facilitating a decision to click or not; there are just too many 'false positives'.

Back to MSFT, here's an excerpt that seems to highlight why I, and many others, are looking for alternatives. I am not ready to through away my love for Google, but it seems as if there wonderful opportunity available to bring the search experience forward as:

40% of queries go unanswered
half of queries are about searchers returning to previous tasks
46% of search sessions are longer than 20 minutes

Monday, March 2, 2009

Riders on the Storm

Dan Primack of PEHUB posted on what seems to be a growing trend amongst Venture firms; raising 'Annex funds'. In the post, he cited prestigious firms such as Kleiner, Mohr Davidow, Tallwood and First Round Capital all going down this route.

Venture firms usually seek to raise annex funds when the world changes mid-fund, causing a change in their investment thesis or in execution strategy. Such changes most often are symptoms of a firm finding, for whatever reason, they have insufficient capital to carry out their stated initial mission.

In today's market, it would be reasonable to assume that VC's (and the list is surely much broader than these organizations) are faced with a dual market reality of portfolio investments taking a longer period of time to be self-supporting and finding a paucity of like minded firms sufficiently interested in leading follow-on rounds. This double whammy means that prudent firms ought to provision reserves, to support their portfolio, at much higher rates than budgeted. An Annex alternative would be to either reduce the breadth/depth of new investments (e.g. strategy change), or deeply triage existing investments (perhaps prematurely). These actions 'create' more reserves for surviving portfolio investments.

We were last confronted with firms raising Annex funds when the internet only bubble burst. Unfortunately, I don't think many of these funds did well for their LP's. Though, that was before many of these experienced managers garnered experience riding the storm.