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.
Sunday, March 8, 2009
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.
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
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.
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.
Friday, February 27, 2009
The end of Eyeballonomics?
Reading the details of President Obama's proposed budget makes clear that the Reganomics era has ended. By extension, I have been thinking about the tight economic environment and one of the key measures for valuing consumer facing internet companies, EBV (EyeBall value).
When coming to an appropriate value metric for companies aggregating an audience, but not yet producing revenue, many bankers and VC's have used comparable valuation metrics that have been EBV centered. Components of formulas counting total eyeballs, active eyeballs, and eyeball turnover were matched with an X factor to arrive at a professional number that had the underpinnings of relativity (if company X is worth Y, with 1mm eyeballs, our EBV is Z) at its core.
Perhaps, a great franchise such as Facebook, or an emerging one such as Twitter will breakthrough EBV and into more traditional P/E or Enterprise value/Revenue metrics. If they do, they just may find a disconnect between the derivative valuation of EBV and traditional valuation metrics.
I suspect a sustained capital constrained environment, coupled with great pressure on CPM's will fundamentally alter the eyeball aggregation metric as a way for the masses to realize sustained shareholder returns.
When coming to an appropriate value metric for companies aggregating an audience, but not yet producing revenue, many bankers and VC's have used comparable valuation metrics that have been EBV centered. Components of formulas counting total eyeballs, active eyeballs, and eyeball turnover were matched with an X factor to arrive at a professional number that had the underpinnings of relativity (if company X is worth Y, with 1mm eyeballs, our EBV is Z) at its core.
Perhaps, a great franchise such as Facebook, or an emerging one such as Twitter will breakthrough EBV and into more traditional P/E or Enterprise value/Revenue metrics. If they do, they just may find a disconnect between the derivative valuation of EBV and traditional valuation metrics.
I suspect a sustained capital constrained environment, coupled with great pressure on CPM's will fundamentally alter the eyeball aggregation metric as a way for the masses to realize sustained shareholder returns.
Wednesday, February 25, 2009
Annus horribilis?
As the newspaper industry is suffering its 'Detroit' period, a recent report highlights the difference between soaring demand, and being able to build a proper business from the demand.
Nielsen recently published a study detailing the traffic results for the top 10 newspapers in the US. Year to year traffic was up 16%, to over 40mm unique visitors. The embattled NY Times is nearly 70% larger than its nearest competitor, USA Today, with an industry leading 18.1mm uniques. Fastest growing is the NY Daily News, which nearly doubled its uniques to 5.9mm.
Nine of the top ten newspaper sites experienced positive online growth. The frequency of visits jumped too, with the total number of visits growing 27% to over 252mm.
Traffic and frequency of visit are usually leading indicators for site prosperity. In this industry, where the value of an online viewer (free) is a small fraction of the worth of a 'brick n mortar' customer (paid) it seems like a Herculean mission to properly allocate scarce resources between the two competing efforts.
However painful it is, strategic focus is a necessity to properly deploy now scarce resources.
Nielsen recently published a study detailing the traffic results for the top 10 newspapers in the US. Year to year traffic was up 16%, to over 40mm unique visitors. The embattled NY Times is nearly 70% larger than its nearest competitor, USA Today, with an industry leading 18.1mm uniques. Fastest growing is the NY Daily News, which nearly doubled its uniques to 5.9mm.
Nine of the top ten newspaper sites experienced positive online growth. The frequency of visits jumped too, with the total number of visits growing 27% to over 252mm.
Traffic and frequency of visit are usually leading indicators for site prosperity. In this industry, where the value of an online viewer (free) is a small fraction of the worth of a 'brick n mortar' customer (paid) it seems like a Herculean mission to properly allocate scarce resources between the two competing efforts.
However painful it is, strategic focus is a necessity to properly deploy now scarce resources.
Tuesday, February 24, 2009
Surprising Venture numbers
Dan Primack over at peHub published an interesting post regarding the number of seed and early-stage venture deals completed between 1995-2008. Click here for the link.
Surprisingly, even with a dismal Q4, the number of seed-stage deals, and the % of venture deals that were funded by professional venture firms in 2008 was nearly at a post '00 bubble record. The high volume extended beyond seed, into early stage investing too. Though it's hard to capture all the transactions in any given year in this highly fragmented, and geographically disperse arena, I can only assume the trend data is more or less correct.
If anything, due to the deep participation of Angels in this asset class (for disclosure, I am on the board of the NY Angels), I suspect the numbers are under reported.
With all the talk about 'VC bailouts' and government assistance to the asset class, nothing like some common data to stir it up. My view is that late in 08 many venture funds began to revisit their reserve assumptions. As a consequence to decisions to hold more capital to support existing investments, we are now seeing a pronounced slowdown in funding for early stage companies. This is driving the hue and cry to favor profitability, even at the expense of growth.
Surprisingly, even with a dismal Q4, the number of seed-stage deals, and the % of venture deals that were funded by professional venture firms in 2008 was nearly at a post '00 bubble record. The high volume extended beyond seed, into early stage investing too. Though it's hard to capture all the transactions in any given year in this highly fragmented, and geographically disperse arena, I can only assume the trend data is more or less correct.
If anything, due to the deep participation of Angels in this asset class (for disclosure, I am on the board of the NY Angels), I suspect the numbers are under reported.
With all the talk about 'VC bailouts' and government assistance to the asset class, nothing like some common data to stir it up. My view is that late in 08 many venture funds began to revisit their reserve assumptions. As a consequence to decisions to hold more capital to support existing investments, we are now seeing a pronounced slowdown in funding for early stage companies. This is driving the hue and cry to favor profitability, even at the expense of growth.
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