Out on the edge, doing things which 'experts' say can't be done....
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Monday, March 16, 2009
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.
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'.
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.
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.
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
Selection
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.
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
Selection
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.
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.
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