Posts from March 2008

Hitting The Reset Button On Mortgages

Alan Blinder, Princeton economics professor and former Vice Chair of the Fed, has a piece in yesterday’s NY Times business section on how to restructure the mortgages that are in trouble and are causing so much heartburn in our financial markets. He is mostly commenting on the "Dodd-Frank" proposal for the government insuring troubled mortgages.

I think this is basically a good idea. If the government is going to bail out the people trading with Bear Stearns in an effort to calm the markets, then they might as well go right to the source of the poison and clean up the mortgage mess. But it has to be done right. And I think that insuring the mortgages instead of buying them, as was done in the depression, is an idea with some merit.

But there are a bunch of things about the Dodd-Frank proposal and Blinder’s additional thoughts that concern me.

As I understand the Dodd-Frank proposal, the lenders will take a write-down on the non-performing loans instead of foreclosing on the loans. The lenders will then trade the non-performing loans for new federally insured loans and realize a loss on the old non-performing loan.

All of that makes sense to me. These loans are not worth 100 cents on the dollar because not only are they non-performing, but the collateral has fallen in value as well. It makes sense to realize the losses and convert the bad paper into good paper. And it makes sense that the government is going to have to do something to comfort the market. Insuring the loans is an idea that at least ought to be explored, even though we are talking about putting taxpayer money at risk.

But here are my questions/concerns:

1) Who sets the value of the new loan? If the government is going to insure it, how can the market really price it? The best approach would be to have the market price the value of the loan based on a non-insured deal, then have the government insure it. That way the taxpayers are only insuring a market deal.

2) How do you avoid giving the homeowner a total bailout in the process? Let’s say I bought a home for $250,000, put no money down, and have monthly mortgage payments of $1,500 a month. Let’s say the home has dropped in value to $200,000 and I can really only afford to pay $1,200 a month. The market value of that loan is probably in the range of $175,000. The current owner should take a $75,000 loss, and let it trade to a new holder (or keep it), get federal insurance, and get paid $1,200 per month for the remainder of the loan. All of that makes sense to me. But do I (as the homeowner) only have to pay off $175,000 or $250,000? If the deal is I only have to pay $175,000, then that’s a great deal for the homeowner and should we be doing that?

I think we need to look at what would happen if the government didn’t step in and then work from there. If the government doesn’t step in, the holder of the loan is going to foreclose on the loan, take the home, sell it (in my example for $200,000 less transaction costs), and take a loss. That loss is going to be between $50,000 and $75,000.

The homeowner is going to lose their home, but since they didn’t have any money down, they don’t have any financial losses. They do have to give up a home that they and their family may have come to love.

If the government can come up with a scheme to get the mortgage holders basically what they would be getting in a foreclosure situation (the market price of the collateral less transaction costs) and allow the homeowners to stay in their homes and have a high probability of staying current on the loan going forward, then we will have achieved a number of good things.

We will avoid a glut of foreclosed homes from coming on the market, further depressing home prices. We will convert bad loans to good loans. And we will keep people as homeowners who have a vested interest in maintaining and improving their homes instead of putting them back into the rental market.

So let’s go back to Blinders’s piece in the Times. As to my first question about how these loans get priced, he suggests:

My suggestion is that the Super F.H.A. categorize the mortgages it
might refinance into, say, “high,” “medium” and “low” qualities and,
based on its best guesses of fair market value, post initial buying
prices for each type.

I don’t like that idea. There’s not enough of a market at work for my taste. I think they should just do a new appraisal on the property and price the loan at 90% of the appraised value. Then apply federal insurance and reset the payment plan so that the homeowner pays off the new appraised value plus a market interest rate in 30 years. That should do the trick.

As to my second question about how you avoid giving the homeowner a windfall, Blinder says:

The proposal would make homeowners relinquish part of any price
appreciation on their houses for as long as their Super F.H.A.
mortgages remain in effect. Good idea. But I’d go further, by
also making beneficiaries of the plan forfeit the right to take out
second mortgages or home equity loans.

There is some sound thinking in this part. First, a homeowner who has a federally insured loan should not be able to borrow against the home as long as that loan is outstanding, period. And as to who captures the "discount", it makes sense to me that the homeowner and the federal agency who insures the mortgage should share in the appreciation of the home between the new loan value and the old loan value. You don’t want to give the entire discount to the homeowner because that’s just a huge gift, possibly at taxpayer expense. But you do want the homeowner to continue to have an interest in making the home better and seeing it appreciate. You also want the the federal agency to get some of this appreciation to offset the risk it is taking. As to what the  percentage should be, I say 20pcnt to the homeowner and 80pcnt to the federal agency.

These are my thoughts on the proposal. As I said, I think it’s basically a good idea. This mortgage mess should be cleaned up and using the traditional method of foreclosure and resale is not a great idea in a time of crisis like we are currently in. Let’s hit the reset button, put the government in the mix, but do it in a way that reflects the market values and doesn’t give the homeowners a huge windfall.

Uncertainty

I’ve been having a running debate with Henry Blodget in the comments section of this Alley Insider post on their effort to create a list of the "World’s 25 Most Valuable Startups". I think these lists are dumb (including the SA100 which was an attempt to list the "players" on the internet scene in NYC).

But beyond my distaste for page view driven list making, I also think the idea of trying to determine the most valuable startups is an exercise in futility. Yes, it’s clear that Skype, YouTube, Facebook created a lot of value for their founders and investors. We can state that with certainty. But look at the list of companies they are considering for the "SA25". I haven’t heard of some of them and it’s my business to know about companies like this.

Here’s what is certain, many of the companies they put on their SA25 list will be busts. Many of the companies that don’t make the list will create hundreds of millions if not billions for their founders and investors.

Josh Kopelman hit the nail on the head with these three words "I Don’t Know". Henry asked me to nominate some of my companies. So I nominated all of them. I have no idea which ones will make us a lot of money and which ones won’t. I hope they all succeed and we are working to help them do just that.

If you had asked me back in 1999 which Flatiron companies would be the most valuable at this point, I certainly would not have picked Mercado Libre. Our whole foray into latin america was turning into a disaster and Mercado Libre had a seriously tough competitor in Deremate. But here we are, MELI is worth $1.6bn. At the very same time, The Industry Standard looked like a sure thing. It was the "bible" of the Internet mania and there were so many ad pages in it, it was heavy to lift a copy. And a year and a half later, it was out of business.

Uncertainty is the hallmark of the venture capital business. If you think you know what’s going to happen, you are wrong. The best you can do is be directionally correct about where things are headed, try to back as many good teams as you can find going in that direction, and help them weave and bob there way to creating successful companies.  And most of all, do not ever count your chickens before they hatch.

Little Jackie

Full disclosure: My wife and I are investors in S-Curve Records, an indie label run by our friend Steve Greenberg. Little Jackie is an S-Curve artist.

OK, now that I am done with that, Little Jackie is a cool new act from Brooklyn. It’s a partnership between singer/songwriter Imani Coppola and programmer Adam Pallin. Last month, Steve told me that Little Jackie went up on one of those "zero gravity" flights to make a music video to their single, The World Revolves Around Me – Little Jackie

Here’s the video. Pretty cool.

Where My Traffic Comes From

Every once in a while I like to show some analytics about this blog.

I get the sense that the sources of traffic to this blog have been changing recently. Let’s start by comparing the high level sources of traffic to this blog in the first quarter of 2007 vs the first quarter of 2008:

First Quarter 2007

2007_q1_traffic

First Quarter 2008

1st_qtr_2008_traffic

The total page views didn’t change that much from the first quarter of last year to this quarter, growing from 400,000 page views to 450,000 page views. But the sources of traffic changed for sure. Search traffic was down from 50% to 40%, and direct and referring traffic both grew by 5%, and referring sites now drive as much traffic to this blog as search. That’s a big deal. And I expect that trend will continue.

So what are the top referring sites and how did that change in the past year?

Q1 2007

Sources_q1_2007_4

Q1 2008

Sources_q1_2008

As you can see, the sources have changed a lot. First, Google in this context (at least the Google that is number one in both charts) is Google Reader – the king of RSS readers (at least for my readers). The other RSS readers on the lists include MyYahoo, which went from number 2 to number 9 over the past year, Bloglines, which went from number 3 to number 7 in the past year, and netvibes, which was number 8 in the first quarter of 2007 and is no longer in the top ten.

This post should be called "the rise of the smart aggregators" because the new big sources of traffic to this blog are techmeme, reddit, twitter, and delicious. Both techmeme and delicious were on the list in 2007, but techmeme jumped from number four to number two and tripled the number of visits it generated. Delicious stayed at number six but grew the number of visits it generated. Reddit is the real eye-opener for me. It wasn’t in the top 10 in 2007 and is currently the number four referring site. Likewise, Twitter was not on the list in 2007 and now is the number five referring site. And check out Hacker News (news.ycombinator.com), it brought this blog more traffic than my.yahoo this quarter. Thanks Paul and everyone at ycombinator.

Some things don’t change. Stumbleupon remains an important source of traffic and there’s always some big source of traffic that is probably a link to a single post. In Q1 2007 it was a cnet link to a post I wrote about not being able to buy an iSight. This quarter is a google images link that I can’t track through to the post.

There’s an important new "smart aggregator" out there, FriendFeed, that doesn’t show up in the Q1 numbers, but this month to date it is the number seven source of traffic to this blog.

March 2007 (to date)

Sources_march_2007

You’ll also note that in March, the ycombinator connection is even more pronounced with reddit ahead of techmeme and hacker news in the number five slot. It’s also nice to see my tumblog being used as a way to follow what’s happening on this blog.

Finally, I should say something about the direct visits. With a blog URL like avc.blogs.com, I’ve always felt that direct visits are most likely driven by browser bookmarks. And it’s also true that a good deal of the search traffic is a proxy for a direct visit.

Google sent almost 120,000 visits to this blog in the first quarter from almost 50,000 search terms, so it’s a very long tail. But the top ten search terms are shown below:

Google_terms_q1_2008

I figure that searches for a vc, fred wilson, avc, and fred wilson blog are basically "search bookmarks" and so 9,500 visits or 3% of my search traffic is really direct traffic.

So what is the big takeaway from all of this? First, that the two big non-direct sources of traffic to this blog are search and aggregators. That’s always been the case. But the second, and possibly more important point is that the aggregator market is changing from rss readers like Google Reader, Bloglines, Newsgator, etc to smart aggregators like techmeme, reddit, hacker news, friendfeed, twitter, delicious, and stumbleupon.

That makes perfect sense to me. I’ve never been able to use a RSS reader, as hard as I’ve tried. But I use all of these smart aggregators every day.

The other thing that is interesting to me is not one traditional content site/blog is in the top 10. Not techcrunch, valleywag, venturebeat, silicon alley insider, or other blogs that occasionally link to this blog. Techcrunch is number 13, Silicon Alley Insider is number 18, Valleywag is 20.

And just to show that this is not all business, Howard Linzon is 21, Brad Feld is 22, and my wife, The Gotham Gal, is number 26 (she sent me almost 1000 visits this quarter, more than read/write web, seeking alpha, and the new york times).

Anyway, that’s all for now. I hope you enjoyed a sneak peak behind the curtain into google analytics.

I Had A Great Day Yesterday


  This Was The Valley We Skied Today 
  Originally uploaded by fredwilson.

This post is a follow-up to last week’s Working On Vacation. I had an amazing day yesterday. Bryce clued me into a snowcat operation caled Park City Powder Cats and I spent the day from 7am to 5pm (we actually skied from 9am to 4pm) playing in this amazing playground (pic at right) with Jess and Josh. I have skied for over 30 years and there is no kind of skiing that I like more than cat skiing. Seven of us (two other skiers and two guides) had a whole canyon and four or five peaks all to ourselves.

But while I was off the grid for 10 hours, some great things happened on projects I have been working on for the past year.

The year long effort of the Pier 40 Partnership, which I am a member of, have finally paid off with the Hudson River Park Trust Board’s announcement that Related’s plan to turn Pier 40 into an entertainment complex are dead for now. According to Crains,

As an alternative, two other development teams were given 90 days to jointly create a viable proposal for Pier 40. The two remaining would-be developers, a joint venture between
nonprofit Urban Dove and camp operator CampGroup, and a group of
concerned parents known as the Pier 40 Partnership, have agreed that it
would be best to create a nonprofit conservancy to run the pier. When
the partnership entered the fray to develop the pier last year, it
suggested creating a conservancy that would be able to sell bonds to
finance the construction.

This is music to my ears because from the day I got involved in this debate, a year ago on a little league ballfield, I’ve thought that the best way to fix up Pier 40 is to form a non-profit conservancy and finance the renovation with tax free money. Ninety days is not very long, but I sure hope we can pull it off.

And one of Union Square Ventures’ portfolio companies shook hands on an important hire that I have been helping them with for the past year (yes, some hires take time). And another portfolio company of ours is getting very close to an important hire which I am very excited about.

And we got all of our annual reports and K1s done and out for all the venture fund entities I am involved with between Flatiron and Union Square Ventures.

Jess_shredding
All of this happened when I was skiing powder with my kids and completely off the grid. And I am sure there were a bunch of other great things that happened yesterday that I don’t even know about yet.

None of this would have happened without a lot of work by a lot of people who I work with, from the companies we invest in, to my colleagues at Union Square Ventures and Flatiron, to the lawyers and accountants we work with, and the parents who make up the Pier 40 Partnership.

Thanks everyone for a great day!

Thoughts On Online Video

Remember back in 2006, I used to write about online video and youtube all the time. I used to embed a lot of video in the blog. I invested personally in Wallstrip and leaned a lot about online video with that.

YouTube was sold to Google, Wallstrip was sold to CBS, and I kind of lost my enthusiasm for online video. Union Square Ventures has not yet invested in online video and at this time it’s not clear when we will.

I mention all of this because I read my friend (and Wallstrip founder) Howard’s post about online video on Silicon Alley Insider this morning. It’s a slightly edited version of something Howard posted on his blog last week.

Here is the essential point:

hundreds of new online video companies have launched with thousands of
programs, business models, tools and services. The result…it has never
been cheaper to make, distribute and analyze video content, BUT, never
been harder to get attention.

We learned at Wallstrip that you cannot get potential viewers to come to your site to watch video, you have to go where the audience already is. From the very start, Wallstrip posted its daily video to something like a dozen video services. I remember how time consuming the posting and the tracking was and I believe I posted a couple years ago that someone needed to solve that problem. Someone did, it’s called Tubemogul, and Howard is an investor in that company.

What’s interesting to me is that in the ensuing year or so since online video left the front of my brain, not much has changed. In fact, YouTube appears to be even more dominant than it was when Google bought it. YouTube serves almost 50% of all the video on the web.

If the best way to reach potential viewers is to be on YouTube, and it is today, that’s not a great thing. It makes the attention problem even worse.

Howard has a suggestion in his post(s):

If I was a video entrepreneur (again) or producer, director etc… and
knew the tools of the web trade, I would approach the fast growing
internet brands like Etsy, Yelp.com, Zillow.com – that have the traffic
– and help them build more community and brand loyalty through a web
show.

That makes sense, but how do you build your own equity in the show if you do that? If Wallstrip was built for TheStreet.com, it could not have been sold to CBS.

I think online video continues to be a very difficult place to be an entrepreneur and that’s why we have avoided it so far at Union Square Ventures. That could change, and I hope it will, but we need some inspiration and I certainly don’t have it right now.

But I will leave you with something from my favorite online video service, blogotheque.

One A Day

One_a_day
I am not talking vitamins here. I am talking curation or maybe creation.

As I went through the process of building several mixtapes over the past day leading up to the post I just did, I came to realize that putting something together on the fly is not always the way to create the best result. A measured but routine approach can often produce something special.

At dinner last night my brother in law Jerry told me about a cinematographer friend of his named Jamie who passed away almost ten years ago. Jamie was an artist who worked in many mediums; fim, music, photography, etc. One of Jamie’s hobbies was that he took one polaroid a day, every day. Jerry said he’d be hanging out at Jamie’s apartment in the west village late in the evening and Jamie would say "shit, I forgot to take a photo" and he’d rush out of the apartment and shoot something. Apparently Jamie did this for something like ten years and his collection was recently shown somewhere. I can’t recall where but I’ll find out and add a link to this post.

When Fotolog first launched, it was a photo sharing service just like Flickr. For reasons that aren’t entirely clear to me, Fotolog quickly gained traction in Brazil whereas Flickr took off in the US. In Brazil, the users went nuts, posting huge numbers of photos. But given the less developed nature of the marketplace it had taken hold in, Fotolog was worried about the monetization options and was facing huge infrastructure and bandwidth costs. So they did something about it. They limited the users to one photo per day. And that transformed the service. The users embraced it and the quality of the service improved.

When Tumblr offered music uploading, they did the same thing. You can only post one audio file (max of 10mb) to tumblr each day. It’s funny. I can post as many mp3s to this blog as I want. I can only post one mp3 per day to tumblr. And yet, I post one mp3 every day to tumblr and don’t post many mp3s here anymore.

If you take the aggregated set of music posts, you get this (check the autioplay button)


There’s just something about limiting yourself to one a day that creates something special. You don’t want to waste the opportunity on something average, so you carefully select the one thing you are gong to showcase or possibly create. And when viewed over time, it’s way more than that. It’s a timeline to your life. Jerry told me that Jamie went out with one woman for a while and during that period, you’d see her in many of his daily polaroids. Then one day, she just stopped showing up. That’s life and that’s the power of one a day.

Mixtapes – A Hobby That Just Won’t Quit

Maxell_ad
Back in the day of the cassette tape, making mixtapes was one of my favorite pastimes. I made them for friends. Friends made them for me. The Gotham Gal and I still have a whole drawer full of tapes we made for each other. We keep them at our house at the beach and every now and then we go on a nostalgia binge and play them all day to our kids dismay.

Then the age the CD arrived and the cassette deck got used less and less. Sure you could rip the songs off the CD and burn them onto a mix CD. I’ve done that a bunch as have my kids, but honestly it never was as much fun for me.

The web is the new mixtape medium. There have been widgets for some time now that allow people to build mixes. The most successful have been imeem and project playlist. Both seem to have gotten a bit tired as of late but still have large audiences as this compete chart shows

I’ve made several imeem playlists and posted them on this blog. I made one projectplaylist mix when Lindsay told me I had to give Bjork a chance. But neither of these services really made it into my routine music habits the way last.fm, hypemachine, and tumblr have.

Now we have a new wave of mixtape services hitting the scene. I played around with two in the past day called muxtape and mixwit. Muxtape is like imeem in that you have to upload songs from your library to create your mix. Mixwit is like projectplaylist in that you search the internet for the tracks you want and add them. I vastly prefer the latter approach. It’s faster and more fun.

Muxtape, however, makes up for the harder work with its elegance and simplicity. Here’s a link to my muxtape. Muxtape takes it’s inspiration from services like tumblr. It’s a minimlaist music blogging service that just happens to function as a playlist, like tumblr’s audio only dashboard should.

Mixwit is much more like imeem and projectplaylist. It creates widgets you can post anywhere you like. Here’s my first mixwit widget which I built in about 30 seconds.

Of course the question is what is the business model for all of these mixtape services. imeem and projectplaylist have been forced to license the music from the rights holders and now face large royalty costs which they are funding with advertising, largely banner and CPA for now. I suspect (and hope because of our investment in targetspot) that they will also try an occasional 15 or 30 second audio ad in their streams.

If muxtape or mixwit get big, like imeem and projectplaylist have, they’ll have to face the same issues. For now, it’s just about building out the service and letting us all share music. Which continues to be one of my favorite pastimes and the web has certainly made it so much easier.

I Just Fell In Love With FriendFeed

Several days ago, I whipped off a quick list of feature requests for FriendFeed which I published on this blog.

First, I got a comment from Bret Taylor, one of the founders. He said they had passed the list around the company and agreed with them. Cool.

Then yesterday they launched one of them, posting an @reply to twitter from friendfeed.

This gives me great confidence that they’ll get to all of them and pretty quickly.

The very best thing a startup can do is create passionate users and listen to them.

FriendFeed has done both and they are on their way to doing something great.