'What is" vs the "what was" revolution

I've been involved with a few companies who are riding (or fell off the horse) in the relatively new Discovery space. Over the past 15 years consumers and businesses have derived great utility from search, a function which enables people to find information about what has happened or what was posted, frequently days, months or years previously. Businesses also received great rewards by advertising against the keywords used for these searches. More recently, and certainly the combination of mobile geolocation with sites such as Pinterest. WeHeartIt. Twitter  a firehose of data around what IS, vs what WAS is now available for Enterprises.

All this data, which I call the Social Highway, has many on and off ramps. The on ramps include countless blogs, data streams, photo streams, commerce streams, etc.; all delivered in real-time. Compiling the data is relatively easy, turning it into actionable information is much more difficult and is the secret sauce behind companies which built solutions optimized for real-time big data sets to measure and analyze:

• Buying intention
• Customer support
• Brand health
• Influencers (positive and negative)
• Psychographics

While this information is powerful, the real impact will only be felt as Enterprises adjust their business processes to direct the information to the right people, put in place processes for institutional learning and retention, and do this in a cross-silo manner. Unlike today's Enterprise, where each department has its own information silos, supported by people and processes, the Social Highway's on and off ramps do not respect traditional turfs. Customers may simultaneously require support, sales and marketing assistance. Influencers (and their minions) can be instantly pinpointed for special treatment, akin the TSA fast-lanes and be couponed, receive priority support and surveyed, all in one interaction. And all these interactions are no longer asynchronous.

Enterprise structure will have to be more elastic. It's a revolution in the making.

Looking after business

Last week I had breakfast with 'smart' Larry. Over a bowl of oatmeal he opined that at the end of the day, the role of an investor is to create returns. He went on to note that entrepreneurs, VC's and entrepreneurs easily get confused when caught in turbulent times, or when money flows like a river. He highlited that it's the money, not necessarily company building that is key to investor survival (e.g. building companies, but not showing great realized returns will not get you to the Limited Partner fundraising finish line). As usual, Larry is right.

It's important for entrepreneurs and investors to recognize that it's the making money part of the business that is ultimately key to survival. Often this creates positive alignment between entrepreneurs as well as multiple classes of investors. However, sometimes (e.g. when a company is not doing well) it creates a zero sum situation. When this happens, as is more common than not, the rational expectation is that folk will look after their own interests. If someone acts irrationally, it's usually the entrepreneur, who bends over backwards to take care of employees and investors.

As Tessio said in the Godfather " it was only business"

Constrained, shared, and pirated media

One of the great things about the technology industry is that, when a technology paradigm shifts, hard and fast rules for success begats soft and slow companies which can't or won't adust to them. IBM, Yahoo and Microsoft are examples of survivors which are, did, or will reinvent themselves to deal with the PC, social, and mobile paradigms. One of the early rules of the social web was really a short hand equation:

For every person who posts;
Ten will comment
Eighty-nine will silently read

The explosion of Twitter,Vine, and Snapchat turned that equation on its head, and while doing so, created a massive wealth opportunity for a few entrepreneurs and their backers, opened up new categories for innovation, and took a great deal of 'friction' out of the user experience.

A few months ago I read a great post by Andrew Chen on constrained media. He argues that a class of applications which have intentional limits (140 characters, 6 seconds of video or 10 seconds per photo) blows apart the above rule of thumb. These constraints have the glorious attributes of simplifying product management to concentrate on an easy experience, creates its own context, and most importantly to me, makes casual posting acceptable. It's no problem if you don't have the skills to write the great American novel, 140 characters, replete with abbreviations is more than welcome! Tearing down the walls which hindered sharing, engagement and virality are good things.

One area that he did not mention, and it fits within his theme, is the concept of reblogging. Pioneered by Tumblr and fast followers Pinterest and WeHeartIt, these services greatly reduced the friction associated with repurposing (some may say 'borrowing') photos and other IP via one click snipping. It made it incredibly easy for people to express themselves and visually fashion their online identities. While doing so, it created legions of followers, shared media, and engagement.

A holy grail for wealth creation.

Apple thoughts

Yesterday, at its World Wide Developer Conference, Apple presented a series of product-line extensions ranging from an updated operating system, to a streaming music service, and a series of hardware tweaks. By the end of the day, the press was somewhat disappointed and  the stock market was mixed to down.

I think it's important to revisit the DNA of Apple's staggeringly great run over the past decade. In fact, you can point to a similarity over the Company's lifetime. Apple tends to invent, what in hindsight were obvious solutions, which are so self-evident in their presentation as to be accepted immediately by tens of millions of people. As the solutions tend to 'invent' markets, they begin with near 100% share, which the force of gravity and well capitalized competitors continually erode. PC's are in the single digits and the phones have about a 1/3 share. The tablet, being relatively newer, still has share over 60%, but it's declining too.  Revenues are going up, as the markets are growing, but share is declining.

The company is far better at inventing new markets than protecting their position in existing ones. It's not that they are disinterested in doing so, but unlike what Microsoft pulled off 20 years ago, the key candidates for customer 'lock-in' are applications which are now browser, rather than operating system based.  Presenting a family of solutions such as iOS, Airplay, iCloud, iTunes etc helps to influence people to stay in the family; it's necessary, but not sufficient for lock-in. This is good for consumers, and I believe good for Apple. They have to keep innovating to not only stay ahead, but to support a premium position.

Market defining opportunities do not present themselves every year, let alone the time it takes to properly engineer the right solution, at an acceptable price. As a consequence, the company will have up and down performance, and will continue to lose customers in some segments, while gaining share in others. That's just a fact, and again, it's better for them to accept this than to bring out products before their time. After all, it took three CEO's and five years to recover from the Newton debacle.

An original thinker...Scott Belsky

Behance is a community of creative folk founded by Scott Belsky. He recently sold the company to Adobe and now leads their community efforts. He is an original thinker whose passionate about his product and his constituency. Recently, I met with him, and saw his presentation at NJTech Meet-up. Fortunately, here's a version of it given at Internet Week in NY.

Here's some snippets to whet your appetite:

• Meritocracy, innovation and access are not natural to the web
• The problem is the web is verticalizing. This limits creativity and inspiration. Behance leveraged that 95% of creatives follow other fields and would appreciate broad exposure
• Creative meritocracy is about credible mass vs critical mass. Not a crowd sourcing fan. Good to hear a dissenting voice
• I try to hire great people and view my role as to be the wind at their backs

Scott Belsky at NY Internet Week

Random Tumblr thoughts

The Tumblr user metrics were spectacular with:

• 108mm blogs and 50+ billion posts
• 76mm posts were created EVERY day
• In April of 2013, just before the acquisition, the website had more than 13B page views. 

The company was launched in 2006, so the exit in 2013, fits the timeline seen between start-up and exit. Of course, great success, or quick failure accelerates the exit timeframes.

New York has now seen two great exits in the last 12 months, Buddy Media and now Tumblr, Once 'lucky' and twice a trend. Capital flows to where it's 'appreciated'; NY has now generated the type of spectacular returns that investors will accelerate their moves here.

Kudos to Union Square and Spark. They first invested in an untried CEO, in an under performing technology City, and in an arena "social", which was not yet taken seriously. Viva the product guys and the investors who had a great deal of patience. As Chris Douvous said, moves like this are either career threatening, or career making.

Marissa Mayer is changing the culture at Yahoo. In the past year, she has now made 10 acquisitions and is bringing back an entrepreneurial spark to the engineering and product teams for this once proud franchise.
Tumblr absolutely fits her first acquisition screen, she wants Yahoo to be a part of your everyday online routine. You may scratch your head on the price, but this transaction is dead on strategy.

Carol Bartz, was the right CEO for a time at Yahoo, as she cleaned up the run away anarchy, held people accountable, and had a no nonsense approach. Though she was unable to, or was not given the time to articulate and execute on a grow the company plan, she did set a foundation for Marissa Mayer to do her thing.

For the success of the transaction, it's dangerous for the buyer and seller to highlight that Tumblr will be autonomous. Sure they should be protected from all the people who want to 'help', but it is essential that a MERGED singular entity put their best foot forward. Tumblr, now as part of a public company is no longer a science project, there's an obligation to earn revenues and profits. This can best be achieved with some help from the other parts of the company which are collectively earning quarterly revenues in excess of $1B.

Patent litigation; Now the cost of doing business?

According to Forbes, patent trolls now account for the majoity of  patent lawsuits in the US. It's clearly been a growth industry as the percentage of troll induced suits grew from 45 to 62% in the last year; more than ten new troll suits evey day. Of great concern to me is that 55% of troll defendants earn less than $10mm in revenue (per Collen Chien, Santa Clara University Law School). My experience is that these firms already have enough roadblocks to success and IP suits, no matter how far fetched, have huge potential to disrupt progress, if not the sustainability of young companies. I am confident that, given the uncertainty of ligitation, and the huge exposure in real dollars, many a financing or potential exit needs to have these matters settled before a buyer proceeds with the transaction. Regardless of the settlement, the cost of litigation, in the many hundreds of thousands of dollars, plus the management distraction are huge issues for all of us.

Below is a chart (credit RPX) showing the marketshare growth of the trolls. This only happens when a business, no matter how nefarious is profitable. In fact, per the PWC report cited below, the annual median damage award was $5.3mm. It's significant that when these cases are heard by juries, the rewards to non-practicing entities tend to be many multiples of those awarded by judges. Therefore, there is a peverse incentive for NPE's to not settle, but to push an average of 2.5 years, for a jury trial. Based on performance, the odds are stacked against the defendants


*non- PAE are non practicing entities, usually corporate shells whose only assets are patents


The present administration is trying to help with the reintroduction of the SHIELD Act and hearings are being held by the House Judiciary committee on the topic. The key provision in the Act is for losers in these suits to bear the costs of both parties, akin to the British system of torts. I am not sure this is a good solution as it always favors the 'deep pockets', but something has to be done.

For more information, here's an excellent PWC report on the topic from 2012.

I applaud the efforts of one of our industry associations, the SIIA  (links to their relevant activities) to help. It would be great if they were joined by the NVCA and others too.

When to Sell Your Company

In the past few months I have been busy helping with the sale of one investment, am navigating the sale of a second, are comtemplating a public offering of a third, and saw a  fourth receive an expansion funding round.  Funding and exit events are never far from the center of conversations for venture backed companies. As such,  it caught my eye when a recent acquaintence kindly sent me this really insightful post from EV Williams, co-founder of Twitter.  

Enjoy

When to Sell Your Company

On October 30, 2008, I wrote an email to Twitter’s board of directors, which started:

It seems to me, there are three reasons to sell a company. Any of them will suffice:

This email was in reply to a thread in which we were briefly discussing an overture we’d received from a much larger company. Of course, in 2008 Twitter was much, much smaller than it is today. We were fewer than fifty employees, had raised “only” $20 million or so, and probably had fewer than ten million users. We were still having a lot of technical issues. And while growth had been good in general, it wasn’t yet consistent. (The ridiculous growth curve started in 2009.) Who knew what the future held? Acquisition wasn’t an obviously dumb idea.

After thinking about it a bit, I offered to the board these “three reasons to sell”:

1. The offer captures the upside

Every business has natural growth limits. If someone offered you $10 million for your coffee shop that does $250,000 a year in sales, it’s pretty clear you should sell—from a purely financial perspective. Finances are only one perspective, but if you have many shareholders, it’s one you are obligated to take seriously.

In 2002, Google reportedly turned down a $3 billion offer from Yahoo!. That looks like a no-brainer in retrospect, because Google is such a behemoth. And it was probably clear to Larry and Sergey at the time that if they were successful, the company is worth many, many times more than that.

However, not every company is chasing a Google-sized opportunity. At the time, I cited Photobucket selling for $300 million to MySpace, which seemed like a huge win for that service. Had I been given an offer like that for Blogger a few years earlier, I would have logically said yes.

At the time, the offer we had on the table for Twitter—though a heck of a lot of money and a huge win for investors and anyone else involved—didn’t seem like it captured the upside. Even though we weren’t huge, and there were still a lot of doubters, I believed our potential was unbounded.

But there are other reasons to sell…

2. Imminent threat

There’s potential, and then there’s risk. And there’s always risk, even in the best situations. But there are cases in which your chances of reaching your potential are slimmer than normal and maybe even totally out of your control.

Consider YouTube’s legal issues or PayPal’s fraud challenges. Both companies had huge outcomes, but seeking a corporate parent at the times they did had safety, as well as financial, benefits. Perhaps they would have held out for much longer and grown to be strong public companies of their own otherwise. They were certainly in big enough businesses.

Sometimes the threat is internal—an inability to execute on one’s opportunity. Friendster might be an example. When they turned down $30 million in pre-IPO Google stock, it was not a dumb move from a “capturing the upside” perspective if you consider they were the first big social network, and they had no real competition. It’s not clear how obvious the internal threat was, though.

In Twitter’s case, one could argue we’d had an internal threat similar to that of Friendster’s at one time. There was a while where our technical issues made us quite vulnerable. But by the time of this email, we felt we had moved past that. (We hadn’t quite, but this was eventually true.) We had competitors who were larger and paying increasing amounts of attention to us, but it didn’t feel like we were in real trouble.

But there might be another reason…

3. Personal choice

Sometimes the founders or other key people may just be done. This is actually quite common and drives a lot of small acquisitions. It doesn’t apply as much as companies get larger, because everyone is (eventually) replaceable—especially if the company is doing well.

Back in 2003, I struggled a lot about the decision to sell Blogger to Google. The financial win wasn’t clear (it was for a small amount of private stock—again, before their IPO). We had tons of room to grow and didn’t have any real threats. And I even had a term sheet for more funding on the table. But I was compelled ultimately because I felt like Google was the best home for this thing I’d built to reach its potential. I also knew I wanted to start another company and thought I’d come out of a couple years at Google smarter and better. I also knew the team was going to be happy to join Silicon Valley’s most esteemed company.

In the Twitter case, we had no desire to sell. I had actually just become CEO and was raring to go—as was the team. Additionally, the company we were having the discussion with didn’t seem like one in which we’d fit particularly well or the team would be stoked about.

---

That email put the discussion amongst the Twitter board to bed—pretty much forever. Since then, I’ve walked through this framework with friends when they faced the acquisition question to help create clarity. If you’re faced with one of the biggest questions you can be posed as an entrepreneur, hopefully this will be helpful to you, as well.

Minimal Viable Product MVP (ugh)

I have been informally advising an entrepreneur who I have a great deal of respect for. He's a second time founder, one who had a great exit in the 'enterprise' world, and is now building an innovative mobile application. Surprisingly, I found us having a debate over his intent to create a minimally viable product for his first release. He's a really smart guy, and his intent is to use the initial few thousand users as live market research. He hopes the 'good enough' feature-set will help prioritize future releases and validate the market potential. I hope he's right. Yet, I was troubled by the approach and thought I would share some background.

The combination of costs steadily declining for designing and launching products, coupled with a social embrace of entrepreneurs has led to a bevvy of start-ups creating things which are only limited by your imagination. Despite declining development costs, many, if not most of these thousands of new ventures are capital challenged. So much so that it's now common to hear an entrepreneur explain that his team is building a 'minimally viable product' with the objective of gaining enough market traction (happy users) to then raise subsequent expansion capital. Heads seem to nod that this is a prudent course of action. I'm not one of them.

Limited capital, though painful, can be harnessed to be a great asset for young companies as it forces the team to make the hard decisions about what is 'really critical' vs 'only important'. It's really essential to do the really critical and to do it well. Often the 'only important' turns out to be not so important after all. My concern with the MVP state of mind is that companies are creating cultures, and producing products, where mediocre user experiences are acceptable as a result of hard product decisions not being made. It's a responsibility cop-out to produce bad product, and it's irresponsible to the stakeholders to think that the market opportunity is so great that bad/mediocre product will instantly gain sufficient momentum to attract capital to support the next phase of growth.

If you don't have enough capital to do the job, or are not in a position to use your team's 'sweat' as a substitute for money, then it just might not be the right time to start this company.

New York, New York, it's a Hell of a town

Over the past 5 years, I have been continually testing my thesis that the best way to make money investing in technology companies is to invest in companies which have the potential to be market leaders; in a market worth caring about. Around ten years ago the folk at Morgan Stanley (at least that's where I recall they were from) did a great piece of research showing that the overwhelming majority of any market segment's capitalization rests with a scant few, mostly public firms. The message was compelling, if you are not in the top three market share spots, an investors risk/reward ratio goes so sky high that you would be better off playing the lottery (the risk increases, while the reward simultaneously decreases). 

Though you may make the right call to invest early in a burgeoning market, unless you execute towards a leadership position, it's going to be a problematic investment. Choosing the right market is a necessary, though not sufficient ingredient for success. It's essential that the management team, supported by investors with sufficient capital and drive have a common objective. 

To paint with a broad brush (exceptions abound) I think it's fair to say that there is a distinct difference between East coast and West coast investors and management teams. I believe that West coast investors and teams have been far more market share driven than their right coast sibling and believe that the preponderance of technology  market share leaders being in the Valley is a direct result of this culture.

The Boston to NY corridor does have its share of companies which are showing great signs of success. Some look really great and have the potential to be market leaders, such as Tumblr, Payoneer, Etsy or 10Gen. But it's also fair to say that since the heyday of Doubleclick and AOL, we may not have a critical mass of companies which are hell bent on being market leaders, in markets which matter.

Mobile company building statistics

Despite having more than 1 billion mobile devices in use and tens of thousands of companies selling and giving away mobile based applications, the number of  successful 'mobile first' companies is still suprisingly small.  Here's some statistics from an end of the year report by Flurry which should help set performance benchmarks for companies to compare their performance and plans against.

For those unfamiliar with the Gartner Magic Quadrants, the upper right corner is where you want to be; clients with high retention and high frequency of use. These can be really fast growers as the churn is so low. The next best place to be is the upper left corner, with intensive use, but high(er) churn. Tough to build a subscription or successful freemium business here, but advertising may work quite well.



 

Social Media explained (image)

From my friends at Tracx:

De-cabling

The other day I realized that we have too many cable connections in the house. Our TV's are just not being used the same way they were in the past and using systems such as AppleTV and Tversity, coupled with a new generation of HD indoor antenna (I purchased a Leaf Plus for $69), we can revert back to an enhanced free TV model where we have access to all the basic channels, libraries of movies on demand, and streaming from our PC's.

Sure, we are keeping a couple of 'cabled-up' sets for viewing, but it's becoming the exception, not the norm in our house.

Big Data

For the past couple of years the explosion of data has opened a great promise for companies to mine data to  identify and better serve customers, identify new opportunities and gain great(er) efficiencies. The research firm IDC estimates the Big Data market is growing 40% per year and is now over $2B. While there's been some great headway with early imnplementations, I think many corporations today are drowning in the holy grail of Big Data. It's not so much that the data is not there for the mining, instead, there's just so much of it that the issue is not the data, it's identifying the proper question. Having access to data is necessary, but not sufficient, to getting value from it.

Knowing what to ask, and being organized to act on the information gleaned from the data are moving to the fore of our industry. Though data has been around for eons, the huge data sets (5 Petabytes and more) available by combining internally generated data with purchased data from social networks, blogs, etc fundamentally is changing the landscape. Traditional relational databases and business intelligence software were not designed to handle inflow of this magnitude, and to do so in real time.

Assume that you are involved with one of the dozens of companies with more than 1B page views per month and more than 20mm unique visitors per month. The amount of data generated around  user behavior is close to infinite. You can slice it by demographics, on-site relationships, borwser, location, OS, engagment, etc. Moreover, you can correlate it with external events like the weather and press releases. Finally, 'special' runs which enable targeting for advertisers or data customers add myriad layers of complexity.

The same way that operating systems have evolved to hide the complexity of computing, it seems to me that the next generation's successes in 'big data' will combine the traits of masking complexity, with a layer of intelligence which highlights the critical data which contains really useful information.  We are seeing a nice wave of this nascent trend through the successes of companies in the IT space such as Splunk, Solar Winds and Puppet Labs.

AGC Partners 2012 Venture, M&A and IPO summary report

Here is the annual technology M&A report which highlights M&A volume was off 30%, and Q4 was particularly slow for IPO's and M&A. Not a good liquidity period for most. Some highlights:

• The most active acquirers stayed active, though seem to be doing many small deals
• The 25th cash richest technology company had nearly $2.5B of cash on hand
• The large VC's, many with multiple funds continue to build capital war chests
• Median acquisition premium was 33%

Though public companies continue to have hefty cash balances, it seems as if a combination of a mismatch between buyer and seller expectation of value, a concern over  government M&A scruitny, and an uncertain stock market has put a damper on activity. Though there is a way, the will is not keeping pace.

Justice department and M&A

Yesterday, the Justice Department filed suit challenging Bazaarvoice's mid- '12 acquistion of PowerReviews. If you blinked, you may have missed the transation as it's value was $168mm and PowerReview had revenues of $11.5mm.

Bazaarvoice offers a SaaS solution for customers to create and share ratings, reviews, etc and they syndicate these reviews across the web. Its clients more easliy create online social communities and have analytics to drive marketing and sales. PowerReviews is/was a competitor to Bazaarvoice.

I have not looked too deeply into the merits of the case, however, the low profile of the deal, the size of the seller, and the acquisition value seems to represent a very public statement by the government that they are going to be ever more mindful of the technology space for M&A and other anti-competitive actions. This suit, coupled with the FTC's recent review of Google's anti-trust position, and the FTC review of the Instagram buy should be a boon for lawyers.

Notwithstanding the merits of either of these cases, an active government oversight of the industry should mean that stakeholders should expect some dampening of  the M&A path to liquidity.

Customer lifetime value

The other day I attended a VC/Company founder seession at Lowenstein Sandler, where Devon Parekh, a partner with Insight Venture Partners spoke about customer lifetime value.While his presentation was skewed for enterprise type companies, the thinking has relevance for consumer companies too. In his view, it is one of the most important tools for estimating the value of a company, and as important, a means for management to manage and allocate assets.

Here's the summary of his thoughts:

• First they look at the size of the market (e.g. # of potential customers, number potential of seats, multiplied by average value/seat)
• Then they make assumptions, by distribtuion channel as to the number of seats a company may obtain (e.g. market share)
• Next is to look at the existing business, where they look at customer retention metrics by month of sign up. For example, they will assume that in the second year 90% of customers will renew, and in the third year, 85% of these will renew again
• They take these % and look at the components of customer lifetime value. They divide customers by market and simultaneously divide them by distribution channel (2 analysis)
• They determine revenue and gross margin by customer segment and by distribution
• Then factor in sales/marketing expenses (customer acquistion costs) to support the channel
• They use this information to reach a net contribution (pre-overhead allocation) by channel and by market
• They apply the customer lifetime value metrics to the potential addressable market
• They discount the future cash flows and apply a market multiple to reach a valuation conclusion

While I find this type of analysis incredibly useful for management and for later stage companies, I am not sure it's so relevant for early stage investors which tend to invest in companies which zig and zag before reaching their true market calling. Of course, this analysis does highllight how mature companies, who build their economic models around lifetime customer values can be blindsided when a new competitor, or way of doing business comes on the scene. Just think of the pain Enterprise software companies are facing as they now have to rely on the equivalent of their maintenance streams, without the initial 'pop' of large sales, to compete with SaaS vendors.

Search innovation

A few times each year I experiment with different search engines, yet have stayed with tried and true Google. Prior to looking at my latest nwe friend Izik,  I gave DuckDuckGo a whirl. I liked the clean interface, speed, and search suggestions for DuckDuckGo. While it's clear that the company has built a really nice product, it was not 'different' enough, nor, way 'better' enough for me to make a permanent switch.

Izik was built from the ground up for the tablet experience and offers a highly differentiated and intuitive search experience. The product was built by Blekko, which also offers a traditional desktop search experience "the spam-free search engine", as well as Rockzi, which is a highly visual (think Pinterest-like) social news/hobby board. According to Quantcast, Blekko has 1.8mm US unique visitors (Quantcast says DuckDuckGo has 248k monthly US visitors), so it could be called a large niche, or tiny mainstream player.

Unlike Blekko, Izik really is different; it saves clicks.

I suspect that if someone is going to really mount a serious search threat to Google's search position, it will have at its core a fundamentally different user interface. Microsoft won the application marketshare race by leveraging Windows, Apple's resurgance is, in a large way due to its smartphone's use of touch, and I am sure there are plenty of other examples, like Pinterest, where a fundamentally new approach to the user experience changes markets.

With Siri, Apple is betting that verbal commands will be at the core of a new user experience. Moreover, we are already seeing how mobile apps are changing the search paradigm as in-app search efficiency saves so much time/clicks that users don't think about exiting an application, such as Flixster, to search for movie or theater information.

Hopefully, for Google shareholders, the company is not getting too infatuated with self-driving cars, or with replicating many Kansas City wired experiments. It seems as if the times are changing in the core business.

Marketplaces

Bill Gurley of Benchmark posted to his blog a couple of months ago about a new investment his firm made in a new online marketplace, Dogvacy. Essentially, the company is similar to an Airbnb for pets. Here, people who are looking to board a pet are matched with individuals who would take it in, for a fee.

Along with his announcement of the investment (note, Benchmark was the first investor in the online marketplace Ebay), he posted the marketplace screen which the firm uses as a guide to determine if they are interested in an investment in the marketplace arena.

I am a big believer in marketplaces, especially ones where services are sold. I see a huge pool of underutilized talent (supply), available to meet the price and convenience needs of people who are increasingly comfortable with interacting online, have online payment capabilities and the infrastructure (e.g. broadband, VOIP, chat, and video) to effect online commerce (demand).

With one marketplace successful and a second now early in its launch, Bill's post gave me an interesting few minutes to look at what we are up to through another investor's eyes. So, here's his screen applied to our new venture:

Marketplace screen used by Benchmark

Rated (A-F)

New Experience vs Status quo

(  (A)   Users of GG reach counselors via the internet. It’s not simply cheaper or closer, it’s a whole new alternative. Location and identity are no longer tied together and this reduces anxiety about the timing to reach and a background to trust counselors dramatically. This should fuel word of mouth demand

Economic Advantage vs status quo

(  (A)   Economics are better for both sides of the equation; buyers and sellers. Prices should be better for consumers (can be 50% lower) as you are working with incremental time for counselors who alrady have practices and the rates should not upset local in-office billings. 

Opportunity for technology to add value

(  (A)   Offering a seamless, closed-loop, experience from search to trial to consult to payment should add great trust and transparency for the consumer

Fragmentation of suppliers

(  (A)   The American Association of Christian Counselors has grown from 15,000 to 50,000 members over the past decade. Specialized services from eating disorders to trauma or life coaches are under the umbrella of just this one organization. Other Associations exist specifically for Christian Coaches, Pastors and Mental health professionals. Perhaps, as interesting, is that availability of counselors should not be an issue since cross-time zones work in favor of finding someone who is available for a consultation.

Friction of supplier sign-up

(  (A)   All a supplier needs to do is to fill out a profile, download Skype, and attach their Paypal accounts

Size of market opportunity

(  (A)   According to Pew, nearly one-third of Americans identify themselves as Evangelical Christians, though the opportunity clearly spans a global market. This site sits at the intersection between religion, mental health, and coaching. The need spans all demographics, for example 46% of college students felt that ‘things were hopeless’ at least once in the previous 12 months and 31 million US adults received mental health services over the past 12 months  (NY Times survey)

Expand the market

(  (A)   Making it easier to find a professional to provide a service at a lower expense and from the comfort of your home should expand the number, and frequency, of consultations clients seek.  This is complemented by the mismatch in the professional training and client requirements. For example, the majority of traditional counselor training programs have no courses dealing with spiritual matters, while three-fourths of Americans say religion is critical to their life approach. Many Clients look for a faith based Advisor for two key reasons; one is faith perspective; they want a therapist who resonates with their worldview. The second is moral ethics; they want a counselor who understands what guides their decisions." It is incredibly difficult for clients to find counselors who are accessible, share their view, and are affordable. In one marketplace, GG bridges these difficulites.

This should directly impact the top reasons people don’t see counselors;  44% of people who are not getting help could not afford the cost, and 21% did not know where to go, 15% did not have time and 10% did not want their friends to know they were seeking help. (National Statistics on Mental Health)

Frequency

(  (A)   The frequency of Advisor visits varies by individual, requirements, and type of service required. Often counseling sessions are monthly, lasting for a period of years, while coaching may go for an intense, shorter duration, followed by quarterly check-ups.

Payment flow

(A) GG is in the payment flow and as the revenue represents a new economic opportunity for the caregivers, which can only be achieved by being on the system, the relationship is symbiotic

Network effects

(B+) Religious adherence is highly social as has been demonstrated via  early Facebook results. Caregivers develop a reputation and it’s transparent for all to see and reputation has real value in the marketplace. The best providers are rewarded with better placement and more business. Therefore, a high premium is placed on providing a quality service.

compensation

Around this time of year boards have recently, or are about to finalize compensation plans for companies. WilmerHale and Ernst & Young publish an excellent survey:

Executive Compensation: Insights from the 2012 CompStudy Survey of Venture-Backed Companies

The data is an important indicator for what is 'market' for employees of venture backed technology companies. Here's a link to the survey of 4,000 startups, 10,000 founders and 20,000 executives. It takes a look at companies who have raised zero to 5+ rounds of capital, are located in the US and looks at equity % held by founders and non-founders....by title.

Some of the numbers that resonated with me are:

• Non-founding CEO's have approximately 6% of fully diluted equity holdings (post round 2)
•  CEO direct reports are in the 1-2% range
• CEO base salary of $250- $267k (median and mean)

I am confident that every company is different in its philosophy and execution of their compensation plans. I am also confident that having good data and transparency gives people more comfort that fair dealings are taking place.

This study helps give that confidence.

Irving, Newton and Janis

I had the opportunity to spend some time with Irving Wladawsky-Berger the other day. He's been a forward thinker in the industry and, before retiring, led IBM's e-busineess and cloud computing strategies. Now, he is assisiting Citibank with their digital money strategy and, in his spare time, lectures at MIT.

Irving was sharing with me his insights into big data and the primary point he was making is that big data arereally HUGE data sets and it's still quite easy to make bad decisions using big data (note to self...think of this when folk cite the 'wisdom of the crowd' religion). We are still way early in providing proper toolsets to harness and highlight what's really important within these data sets. When we do, it will prvide huge value for users and corporations. I've seen the early value for customers of tracx.com and the prople there have great plans to take their social media management application deep within the Enterprise. In many ways fulfilling the promise CRM left unfilled.

This brings me to the deeper point which I later gleaned from Irving's blog. He spoke about the major change in scientific perspective from Newtonian physics, where objects exhibit deterministic behaviors, that is, if you apply the same forces to the same object, you should yield the same results to a new world where Quantum mechanics and relativity rule the day. In this bizarre world, counter-intuitive behaviors abound.

When you use these theories as a background, it seems as if investing in young technology companies is much more like embracing quantum mechanics than following Newton. Meteoric rises by companies such as Pinterest, Zinga and Groupon have not been duplicated and, I am confident, that duplicating most, if not all their 'magic' will lead far different results. Being a follower is fraught with danger in technology. Though, it's not the point of who gets to the market first, nor is it necessarily that the 'better' product wins. I do think, however, that the management of the companies, through incremental tweaking of their products can, and do, match their solutions with an unmet need/fascination which the market embraces. Or, bold entrepreneurs  go against conventional wisdom in designing their products in a way which people suggest are doomed for failure. For example, Google had a stark homepage while Yahoo embraced ad and content clutter (and early revenue). Today,  current darlings Box.net, Evernote and Dropbox were all founded when the conventional wisdom was that forcing the consumer to download a client was a non-starter and the kiss of death. I suppose that it was....until it wasn't.

We live in an era of uncertainty where the answers obviously change...as do the questions. Let's all try (just a little bit harder) to be just a little bit different.