Posts from May 2006

Replicating Silicon Valley

VC bloggers are a growing category and I struggle to keep track of everyone who is doing it now. But honestly there are few, if any, that do it as well as Paul Graham who isn’t really a VC and who isn’t really a blogger either.

Paul is an entrepreneur who has formed Y Combinator to “microfund” first time entrepreneurs who are willing to drop everything and work night and day on an idea. I think Paul is still an entrepreneur at heart, and he’s playing a game most often considered angel investing. But I call him a VC because I think our industry needs more people like Paul working in it.

Paul is also not really a blogger.  He doesn’t post in the conventional sense.  He writes long essays when he feels the urge to post them. He doesn’t seem to be caught up in the techcrunch/memorandum/technorati groupthink which is refreshing.

So when Paul writes one of his long missives, I read them.

His latest two essays are really one long think piece on replicating Silicon Valley here in the US and overseas.

How To Be Silicon Valley

Why Startups Condense In America

I do take a bit of offense at Paul’s comments about New York City in this post on the Union Square Ventures weblog. I believe that after Silicon Valley and Boston, there is no city in the US that has a more vibrant startup economy than New York City and it is often underlooked as it was by Paul in his first essay. So I had to defend my turf.

Lake Hodges Bike Ride

Lakehodgesmap_1
I flew out to San Diego for the WSJ D Conference yesteday and got here a couple hours early.

I rounded up a few friends and headed down to B&L Bikes in Solana Beach and rented three mountain bikes and headed up to Lake Hodges.

This ride was suggested Chris Ochs and Matt Blumberg from Return Path.

The ride info and trail maps came from an awesome mountain biking site called MountainBikeBill.com.  If you ride on the california coast, I can’t imagine living without this site.  The picture and map on this post also came from MountainBikeBill as I forgot to bring my camera with me.

We rode for a couple hours, worked up a good sweat in the 95 degree heat, climbed one killer hill, and avoided all the rattlesnakes that we were warned about.

I love biking when I am travelling on business. The ability to see the sights, work up a sweat, and have a nice long talk with a couple business friends is really unbeatable.

Lakehodges

VC Cliché of the Week

I am doing my first rerun. I am not sure if this is a good idea or not. It’s not that I’ve run out of clichés, but I have been thinking a lot about making lemonade out of lemons lately and wanted to post on one particular idea I’ve been playing around with.

As I stated in my last post, you generally cannot turn lemons into lemonade and so I start out with the basic premise that this is probably a bad idea.  But I find it intriguing enough to put it out there and let people debate it.

I think Vonage and Earthlink should merge.

Vonage is one of the best known Internet brands. It is also one of the most funded companies in recent memory. I don’t know how much venture capital has been invested in Vonage over the past three years, but I do know that it is a sizable amount.

And recently Vonage raised even more capital by going public.

But Vonage has not fared well as a public stock.  It came public at $17/share, traded down to $15 in the first day and has now traded down to $12.50/share.  That’s a 25% decline which has to be a source of concern among the management and investors at Vonage.

That said, Vonage has a $2bn market capitalization and almost 1.5 million subscribers to its pioneering voice over internet service for consumers. As I alluded to at the start of this post, Vonage is a very well known brand, largely due to its status as one of, if not the, largest marketer on the Internet.

The financial press says the problem with Vonage is that it cannot point to near term profits. That is certainly a big problem.

But I think the biggeest problem with Vonage is that it can’t compete on a level playing field with its rivals, most importantly the cable companies who are offering the triple play – voice, video, and data. Bundling is a powerful marketing tool used with great success by many powerful technology, telecomm and media companies.

Earthlink
is one of the oldest Internet brands.  It trades at a $1.2bn market capitalization and it brings a number of  key assets to the party.  First, Earthlink is profitable with operating cash flow of around $180 million per year. That could go a long way to addressing the profitability issues at Vonage. Earthlink also has 1.6 million broadband internet customers and an additional 3.6 million dial-up customers, some of which will convert to become broadband customers of Earthlink (and Vonage voice) in the future.  And Earthlink owns 50% of Helio, the broadband wireless MVNO started by Sky Dayton, the founder of Earthlink.

But most importantly, Earthlink would get Vonage into the access business, where it has to be to compete with the cable companies who are coming after Vonage.

Earthlink, of course, has its own issues, most notably its ongoing loss of dialup customers. 

Vonage has to date competed effectively by providing a voice service that rides on top of the commodity infrastructure of internet access.  It is able to deliver voice without delivering the pipe. But when the competitors who have the pipe can offer the exact same thing you are currently offering, you have three choices; sell out to them, figure out how to level the playing field, or watch your customer base slowly churn over to your competitors.

If Vonage and Earthlink were to merge, I’d suggest they go after the "quadruple play" by offering access, voice, IP TV (partner with Microsoft on their IP TV effort?) and mobile (Helio). How cool would it be to have one provider for voice at home, voice on the road, access, and video?

I’d suggest that Vonage do something disruptive around the video part, like make it freemium with the premium service being the most popular cable channels which are expensive to carry on a cable network.

Maybe Vonage and Earthlink both think they can do this as independent companies. I didn’t attend the IPO road show and I am not close to Vonage.  And I don’t know that much about Earthlink either.

But I think that companies that find themselves in direct competition with cable companies and telcos have no choice but to replicate the triple play offering (or trump it) if they want to continue to grow and thrive as an independent company. If they do figure out a way to offer a quadruple play, their skills at Internet marketing, rapid and virtual provisioning, and web-based self service could make them a very strong competitor to the cable companies who are having a difficult time doing business in new ways.

Something to think about.

The Third and Fourth Screens

Microsoft’s strategy for its emerging advertising business is interesting.

Given that the first screen (TV) is not one they can dominate and the second screen (Internet) is one that they missed the opportunity to dominate, they are working hard at dominance on the third and fourth screens, that being cell phones and games.

Microsoft has already purchased Massive which many believe is the leading provider of in game advertising solutions. If Microsoft manages that acquisition correctly, it can be a bigger player advertising in games than its Internet competitors Yahoo! and Google.

And the Wall Street Journal reported on friday that Microsoft is close to sealing a deal to acquire Third Screen Media which is one of the leading providers of advertising on cell phones.

Cell phone and in game advertising are both miniscule compared to internet and television but they are interactive, measurable, and may represent as much or more consumer face time as the internet and TV does already.

So these seem like smart moves to me.

A lot will hinge on the ability of Microsoft to manage these acqusitions.  The problem with buying companies is that the people eventually leave. AOL made a very smart acquisition of advertising.com several years ago that has made them a significant player in the online ad network business, but now that they key people are leaving advertsing.com, there is a big question about whether AOL will be able to maintain the momentum of advertising.com.

The same question lingers over these acquisitions by Microsoft. But I applaud them for taking the initiative and wish them luck with them.

I Love Jet Blue

I’ve said it before, but I’ll say it again.

I love Jet Blue.  I just flew JFK to San Diego, we left on time, arrived early, I got a great coach seat in the back with plenty of leg room, and they let us deplane out the back door and there’s wifi in the gate area so I can post about how much I love them.

Texting Home

The landline phone continues to lose luster with me. I much prefer my cellphone.

The voice quality of my cellphone can’t compare to my landline, but in every other respect the cellphone wins.

My contact database is totally integrated on my cellphone. My landline phone doesn’t even know what a contact database is.

I get emails on my cellphone, and phone numbers are hyperlinked so I can click and call them. Try that on a land line.

You get the picture. The cellphone rocks.  The landline does not.

This weekend I wanted to send The Gotham Gal a text message. I couldn’t make a phone call without being rude. But a quick text message would have been fine.  Only she was home, on a landline. And I knew she wasn’t on email. I wanted to text message the landline and have the phone beep alerting her to an incoming message.

The cellphone has conditioned me to behaviors that aren’t possible on landlines. And so I don’t want the landline anymore. I’ll take the reduced quality. What I really want is increased funcationality.

Comment Of The Day – Pondering eBay

… it’s also a great
opportunity for eBay to extend the use of PayPal across the largest
collection of content, subcription, and shopping properties on the web.

these days, the value of eBay is more & more based on the value
of PayPal… and depending on how much promotion PayPal gets on Yahoo
properties, that value could be increased substantially.

[full disclosure: i used to work for PayPal]

Posted by: Dave McClure | May 27, 2006 8:44:17 PM

Dave’s comment was seconded by several others in the comments to my Yahoo Extends Their Network post.

So it got me thinking about eBay and what it is becoming. Clearly eBay is still the dominant marketplace on the web and nothing quite compares to it when it comes to buying and selling stuff online. But eBay’s stock is down sharply from the mid $40s at the start of 2006 and got as low as $30 before getting a nice bump on the Yahoo! deal. The stock is still not cheap, but it does trade at 24x the 2005 operating cash flow which is a far cry from where it has traded in the past and suggests that there may be value in eBay if it has a coherent strategy for where its headed.

eBay is at a crossroads as its marketplace is under attack from search, free classifieds like Craigslist, and emerging new marketplaces that are either global or focused on a niche.

But as the comment I started this post points out, eBay has something of tremendous value in PayPal, its transaction payment system which seems to be growing stronger every day.  As Dave and Steve point out in the comments, getting Yahoo! to standardize on PayPal is a big deal and one I should not have glossed over in my initial post on the deal.

It seems that a smart strategy for eBay would be to focus on all the services that enable a marketplace to function, like search, payment, reputation, marketing, and so on, and recognize that overtime the web will become the marketplace but eBay can continue to dominate the services that allow transactions to happen.

I am not sure that Skype is a perfect fit in that strategic model, but I’ve certainly heard a number of arguments that it is a perfect fit.

Either way, a "distributed eBay" model is an interesting one and PayPal is the asset I’d want to start with if I had to execute that strategy.

No More Trackbacks

I’ve decided to turn trackbacks off on my blog for all new posts and moderate all trackbacks for old posts.

There are a couple reasons for this decision.

First, about 90% of all trackbacks I get are spam.

And second, most people don’t trackback to me so I use Technorati, Google, and other blog search tools to track who is linking to me. I find this approach more useful than trackbacking anyway.

So if you are used to trackbacking to my posts, don’t bother doing that anymore.

MP3 of the Week

It’s Memorial Day, a day to remember all of the fallen soldiers who have served our country over the years. Having grown up in the army, I’ve been to a few miliary funerals and I have always found the sound of Taps to be incredibly powerful and moving.

This mp3 (from war-veterans.org) is only 1 minute 15 seconds. Give it a listen and remember all who have fallen in the service of our country.

Taps