Posts from November 2008

One of the best posts I read this week was from Fortune’s Andy Serwer. In it, he noted:

At the end of 1999 the Dow was around 11,400. Today the Dow is at
8,400, which means the index has fallen some 26%, a decline of almost
3% per year. With just one year left in this decade – even if 2009 is a
humdinger – it is increasingly likely that first 10 years of this
century will be one big washout for investors. A lost decade.

I’ve been thinking about that since I read it midweek. A lost decade in which if you owned the Dow, you’d have lost money on stocks.

But there’s a problem with indexes and that is the average doesn’t really tell you that much. So I want to look at the Dow stocks and figure out which ones were big winners this decade and which ones were big losers.

Here’s a list of the 30 current Dow stocks. Let’s take a look at six of them;

3M
Citigroup
GM
Intel
J&J
United Technologies

3M is up a bit in the "lost decade" about $10 or a 20% gain in almost 9 years. Nothing to get too excited about but not a loser.

As most everyone knows, Citigroup is fighting for its life right now and is down at least 90% since the start of the "lost decade". But for most of this decade, it was flat. The drop has all come in the past year.

GM’s chart looks quite a bit like Citigroups and it should. It is also fighting for its survival. One difference though is that GM has been in slow decline all decade and then dropped off a cliff this year.

Intel’s chart is interesting. It’s a loser this decade as well, down almost 80% in the decade. But all of its decline happened in the first three years of the decade reflecting the technology meltdown in the first part of this decade. Since then, it’s bounced around a lot but isn’t down much more.

Finally a real winner. Johnson and Johnson has made a slow and steady climb all decade, and is up (even with the recent market meltdown) by about 33% over the past nine years. Even so, that’s less than 4% per year.

I’m glad to see we found a good chart before this exercise was over. United Technologies is down 40% in the past year but is up around 60% for the decade so far.

So what this shows is the Dow is a mixed bag. A few disasters (GM, Citigroup, Intel), a bunch of so so stocks (like 3M) and a some winners (like J&J and United Technologies).

I looked at a few other stocks as I was doing those charts and there’s a lot of yuck in the Dow. IBM, HP, and Wal-Mart are all down for the decade. It’s not really clear to me how the Dow has enough positive energy to withstand the blowups in AIG, Citigroup, and GM. As a group, the Dow looks pretty tired to me.

The point I was trying to make with this post is that the decade we are in has not been lost for everyone. We may have to go outside the Dow to find the best examples. Lets look at two of my favorite stocks; Apple and Google.

Apple has taken two big hits this decade (the tech meltdown in the early part and the recent market bust) and is still up 3.5x in nine years. The run Apple has had from early 2003 to late 2007 is one of the most impressive runs I’ve seen.

Apple’s run mirrors Google’s run. If you had only owned two stocks this decade, Apple and Google, you’d be a happy investor. Google stock has completely blown up in the past year (down 60%) but it is still up 2.5x from its IPO in mid 2004.

When I think about what’s really going on in this "lost decade" it occurs to me that we are finally witnessing the impact of the end of the industrial era and the emergence of the information era. That’s not to say every "information stock" has done well. Intel and Microsoft have been a disaster. IBM and HP are down for the decade to date. But we also have to realize that the late 90s drove all information stocks up to crazy levels in anticipation of exactly this shift taking place. The market got it right, but as usual it overshot.

If we go back to Andy’s post which got this whole exercise started, he made the following point about what happens after the "lost decade":

at some point stock price returns will revert back up to the mean. In
fact, to revert to the mean, stocks will at some point have to exceed
the mean, in other words go up more than 8%. I know it could be years
off, but you see my logic. It’s just math.

And if that does happen, I don’t think it will happen in tired stocks like many in the Dow. It will be stocks like Apple, Google, and companies we don’t even know about yet that will lead us back out of this downturn. And I bet there will be a bunch of companies from what we used to call the "emerging markets" that will lead us out of this mess. I think I’ll call them the "emerged markets" from now on.

I am an optimist, I guess you have to be one to be in my line of work. Even in the midst of the worst downturn in my lifetime, I am thinking about what’s next, how we are going to make money in the next run. Because as Andy points out, there will be one and we should be using this downturn to position ourselves well for when it comes.

I’ve given out over 250 invites to Boxee in the past few days. I will keep giving them out as long as there is demand. Please leave a comment to this post and one will be on its way.

Boxee, which is now a Union Square Ventures portfolio company, surveyed its users this past week and got over 1100 completed surveys in less than 12 hours. They wanted to know what content people wanted most in Boxee. The results are quite interesting;

Televison Channels:
HBO
Discovery
ABC

Subscription Movies:
Netflix

Video Services:
Joost

Live Video:
Ustream

Streaming Audio:
Pandora

Photo Sharing:
Facebook
.Mac

Keep in mind that Boxee already supports CBS, Hulu, YouTube, Last.fm, Flickr, Picasa and a number of other web services.

Pretty interesting data. Thanks for sharing it Avner.

Earlier this week I was reading my brother’s blog and he listed his top 10 Clash songs on it. I thought, "gee it would be nice to have them as a playlist." So just for kicks I went to MySpace Music and made the playlist and put it on my MySpace profile page. I’d embed the playlist here but for the life of me, I cannot figure out how to do that.

Anyway, when you listen to Jackson’s top 10 Clash songs on MySpace (and you should absolutely do that!), you will notice that the stream stops every four songs until you go back to the myspace music player and click on an ad. That’s what I call "hard interruption" and it’s very annoying.

While nobody is fan of "interrupt marketing" as Seth Godin calls it, it’s particularly annoying if it completely interrupts your experience. I would so much rather see MySpace Music insert a 15 or 30 second spot every four songs that I can listen to without being totally interrupted. I call that "soft interruption" and it’s something that I think the internet radio industry needs to start doing more of.

We have a portfolio company called Targetspot whose business is the insertion of audio advertising into internet streams. They do this for dozens of internet radio broadcasters and they can do it for MySpace Music.

I’d urge MySpace music to think about going with the soft interruption mode. I think it’s a much better user experience.

In the past week, I’ve had two different discussions with readers of this blog who wanted in on one of our deals. One reader wanted to invest in Twitter, the other in Boxee. I told them both it wasn’t possible. There are all sorts of reasons why it’s not possible, but let’s start with the qualified investor rule. To invest in the sorts of deals we invest in, you need to be a "qualified investor" in the eyes of the SEC.

It makes total sense that readers of this blog would want to invest in some of our portfolio companies. We’ve invested in many of our portfolio companies after we became hooked on their products. I am a fan first, an investor second. Not so many people understand our investments when we make them. Certainly not many "qualified investors" do. But the readers of this blog do. That’s because you are often users well before I am.

This is a problem. We have a cash crunch emerging. We have the public markets offering quality companies like $GOOG, $AAPL, and $AMZN at less than 10x current cash flow. I realize future cash flow might be less than current cash flow, but still we have public markets investors who don’t want to buy any kind of equities. I suspect high quality debt that trades at 60% of face value is more enticing right now.

And yet, there are new technologies and business models and services that are emerging that will be the next Googles, Apples, and Amazons and there is no way to invest in them. Our friend Stuart Ellman at RRE Ventures wrote a great post about this last month in which he said:

RRE has a number of companies that had
zero revenues when we invested and which are now doing $100 million or
more in revenues and growing very quickly.  These companies have
achieved what they needed to achieve, become market leaders, yet they
cannot go public or exit under the assumptions that employees or
founders assumed when they began.

The only way for the small investor to get a piece of the companies we are investing in is for them to go public, but that’s not going to happen any time soon, maybe never again. That’s how bearish I am about the public markets right now.

I’ve written extensively that we need a secondary market for privately held shares of venture backed companies that want or need to stay private. This is already happening with Facebook shares and it’s going to happen with the shares of other privately held companies going forward. The public markets have failed to solve this problem so it’s going to get solved in some other way.

We also really ought to find a way for small investors who know what they are doing to place a small bet on a company they really like. And companies like Boxee and Twitter could really benefit from that too.

This is the year that the banking and brokerage industries have completely let us down. They have failed to invest our money wisely. And the regulators who set the rules, the very regulators who make sure that no reader of this blog can invest in one of our deals, have allowed that to happen.

I am pining for a new regulatory regime. One that values small over big, individual decision making over institutional decision making, and innovation and the future over protecting the past. And a test for that new regulatory regime is whether the people who are participating in the creation of a new technology and industry can actually profit from it without having to do what I do.

Back in July, I wrote a post about browser extensions and wondered if you can build a meaningful business by simply extending the browser. I got a ton of great comments on that post that has shaped my thinking on this issue ever since.

Now it turns out there’s a whole conference dedicated to discussing this issue. It’s called Add-on Con and it takes place on December 11th in Mountain View at the Computer History Museum.

There’s a great list of speakers including quite a few of my friends and colleagues in the venture business. And, of course, there will be execs from Google, Microsoft, and Mozilla there to talk about the future of the browser as a platform.

The cost is $150, but readers of this blog can get in for $100 with the discount code "fred".

If you are building a business on the browser, I think it’s well worth the time and minimal cost to attend.

Slideshare is doing a contest to pick the top credit contest slideshow. There are a bunch of good ones. Here’s my two favorites.

That’s a question I used to get all of the time in the early days of this blog. I don’t get it so much anymore. Because slowly but surely people are wising up to the fact that blogging is work and its a very valuable use of my time

Take yesterday for example. I wrote a longish blog post on the Union Square Ventures blog about our most recent investment, Boxee. That post got picked up on techmeme where it ran for most of the day yesterday. I don’t yet know how many people visited that post yesterday but I am sure it was thousands of readers

About 75 of them left comments on the post asking for an invite to Boxee’s invite only alpha. I got a bunch more invite requests on this blog where I had linked to the USV blog post yesterday.

So this morning I spent an hour, between 5am and 6am, going through all of those comments, harvesting the email addresses from disqus, and inviting everyone to try out the boxee alpha.

That’s about 100 trials. Not that many when you think about it in the context of the 50,000 registered users of boxee.

But the time and energy I’ve put into this blog for the past five years has built a unique and very sophisticated audience. You are connectors and hubs of influence.

I know that one person out of the 100 I invited this morning will be incredibly impactful for boxee. It could be five people, it could be ten. Who knows?

But in the world of social media, word of mouth and word of link marketing, it is connectors and influencers like all of you that make the difference.

And that’s one of the main reasons I keep writing, commenting, discussing, and participating in blogs, tumblr, twitter, disqus, and the social media world at large.

Its about the "realest" work I do.

I wrote a post about our most recent investment, Boxee, today on the Union Square Ventures blog. Boxee founder and CEO Avner Ronen wrote a post on the Boxee blog about the investment. I encourage you to click on those links and read all about Boxee. You can also click here and see what people are saying about boxee on twitter right now.

But for those who aren’t going to do that and still want to know what Boxee is, I call it the "firefox of the media center software sector". That’s my view anyway. Here’s a ~ 2 min video that shows Boxee in action.

quick intro to boxee from boxee on Vimeo.

The post of the day comes from Andy Finnell who writes that iPhone app developers must abandon the $0.99 price that many apps are selling for these days.

Andy calculates that a developer who wants to make a living off an iPhone app (at $40k/year) must sell 196 apps per day to do that. He also calculates that at $9.99 per app, you’d need to sell 16 apps per day to do that.

But Andy’s best point is this one:

Competing with another application solely on price is a sure fire
way to go out of business. Your product should have a selling point
other than the price, whether it be more features, better usability, a
unique approach to the problem or all of the above.

There will always be students and hobbyists in the market who can
sell a competing product for way less than you. They don’t need to make
a living off the app, so they’re not trying to. This happens all the
time in the Mac market. If you charge enough for your app that you can
make living off it, then you can spend all your time improving it. With
that extra time you should be able to make a superior product to your
lower priced competitors.

People are willing to pay more for superior products. Unfortunately,
with the App Store developers haven’t given them the opportunity to do
so.

I personally think that the best approach is to have a free and paid app with the free app being enough of a teaser that it gets the loyal users to pay up for the premium product. That is, by the way, the strategy our portfolio company Zynga is taking with their Live Poker app.

A developer would be much better off with 196 apps per day being downloaded with 180 of them free and 16 of them paid than 196 of them at $0.99 because there is no "decision cost" on the free apps.

Josh Kopelman wrote a great post on this a while back called The Penny Gap. Getting someone to pay anything is hard. Once they’ve made the decision to pay, the difference between $0.99 and $9.99 isn’t as big as many think it is.

But the bottom line in all of this is you have to build something really useful to get someone to pay for it. Free apps outsell paid apps in the iTunes store by something like a 10 to 1 ratio. And Andy is right, make something unique and useful and charge real money for it and you’ll have a better chance at making a living that way. It’s good advice.