Posts from September 2012

We've all had that reaction when seeing that a certain patent was issued – "how the hell did they get a patent on that?". Well now we can have fun outing those ridiculous patent applications before they get issued.

Yesterday our portfolio company Stack Exchange launched a new Stack powered community called Ask Patents. Here's how Stack CEO Joel Spolsky describes it:

Ask Patents is a new Stack Exchange site launching today that allows anyone to participate in the patent examination process. It’s a collaborative effort, supported by Stack Exchange, the US Patent and Trademark Office, and the Google Patent Search team. It’s very exciting, because it is opening up a process that has been conducted behind closed doors for over 200 years.

I don't really need to discuss how badly our patent process is broken to here. We've discussed it ad naseum.

What we can and should discuss is how an open collaborative crowd based approach to patent examination can improve the process. I am hopeful that it will. And I am thrilled that the USPTO opted to partner with Stack Exchange to run this process. Stack's sites, rules, and processes take a bit of getting used to. They are geeky for sure. But they produce very high quality collaborative debates on questions with definitive answers that the community resolves and the quality of the results they get from this process is extremely high.

This is not like asking the Yahoo Answers community to do patent examination. That would be laughable. This is a much more serious effort, based on "prior art". Joel explains:

Ask Patents is a collaborative effort, neatly tagged by keywords and classification, and searchable by patent application number. It is inspired by a research project called Peer To Patent, run out of New York Law School. That pilot project, created by Professor Beth Noveck, proved very successful at identifying prior art that the USPTO wouldn’t otherwise have known about.

So instead of our regular fun friday routine, I'm asking everyone to go spend a few minutes on Ask Patents and see if you might enjoy becoming a part time patent examiner yourself. I am headed there now.

There are many themes that grace this page from time to time. Two of the most common are the rise of startup communities and the role that the Internet can play in allowing society to governing itself. And there are two books out this week that are must reads on these two topics. Further and in full disclosure, they are written by two very good friends. No conflict no interest as it were.

Let's start with Startup Communities by Brad Feld. I met Brad in 1996. He had just moved to Boulder Colorado and was going to help build a startup community there by building a market leading VC firm in Boulder. Sounds audacious? Yes. But he did it. As I was working on the same idea for the past sixteen years in NYC, I was able to watch a parallel universe forming in Boulder with Brad at the center.  In Startup Communites, Brad tells us what he's learned from that experience and how the same thing can be done elswhere. If you want to create a Boulder or NYC tech scene in your community, this is your roadmap, bible, and textbook. You can get it on Kindle today and or pre-order the book for delivery next week.

On to Future Perfect by Steven Johnson. Back in the Spring, Steven emailed me a draft of this book. I put the PDF on my Kindle and started reading. I found myself yelling Yes, Yes, Yes as I was making my way through the chapters. I know most, if not all, of the stories in this book. I have been involved in some of them and have followed the others closely. Those stories tell me that there is a "case for progress in a networked age" and Steven makes that case as only he can, by telling the stories brilliantly and then wrapping the meaning of them together in a crisp, cohesive, and easy to understand narrative that leaves you with a framework to take out in the world. You can get Future Perfect on Kindle or in hardback right now as it was published earlier this week.

The comment thread on my Get Out The Vote post a couple days ago was downright depressing and full of anger and cynicism. So for all of you and everyone else, here is a short 3 min video from Steven talking about the ideas in his book and where they are going. If you need a shot of optimism this morning, watch it.

I am in my second decade as a board member on several companies. It doesn't happen often in the VC business, at least my VC business, because I get off the boards of companies that go public or are headed there shortly. The percentage of portfolio companies that don't shut down, sell, or go public within a decade of their initial VC investment is low. But the ones that make it into their second decade without an exit are special in many ways. They have staying power, an ability to evolve and grow, and a culture that is built to last.

The company in that group that this community is most familiar with is Return Path. Executives from Return Path, including its founder and CEO Matt Blumberg, have written guest posts here a few times. Return Path has reinvented itself three or four times in its history. And yesterday they did it again. They are now the global leader in email intelligence. They actually have been that for quite a while. But they gave themselves that label yesterday.

What is email intelligence? Well in Matt's words, it is:

[Emailers] are struggling with two core problems that complicate their decision making: They have access to so much data, they can’t possibly analyze it fast enough or thoroughly enough to benefit from it; and too often they don’t have access to the data they really need.

Meanwhile they face new challenges in addition to the ones email marketers have been battling for years. It’s still hard to get to the inbox, and even to monitor how much mail isn’t getting there. It’s still hard to protect brands and their customers from phishing and spoofing, and even to see when mail streams are under attack. And it’s still hard to see engagement measurements, even as they become more important to marketing performance.

Our solution to these problems is email intelligence. Email intelligence is the combination of data from across the email ecosystem, analytics that make it accessible and manageable, and insight that makes it actionable. 

In connection with the new reformation of their company's mission and position in the market, Return Path launched or relaunched three products yesterday. The one that is truly groundbreaking in my opinion is called Inbox Insight. Think of its as ComScore for Email. If you want to know how your mail is doing compared to your competitors across a number of key metrics like engagement, inbox placement, spam complaint rates, etc, you can learn all of that and more with Inbox Insight.

Starting, building, and running companies is hard work. I know this because I see it in the eyes and wrinkles of the people I work with every day. But building a lasting, evolving, growing, and market leading company is a terrific feat. I want to congratulate Matt and the team at Return Path, most of whom have been there as long as I have, on a big day yesterday and a great new tagline, mission, and market position. Well done.

The "net native" generation can be and should be an important political force. These young people grew up with the Internet and they understand how to leverage it in all aspects of their lives. And they understand the importance of protecting the Internet and the concept of Internet Freedom.

But we have to make sure they are registered to vote and that they do indeed go out and vote. That's where The Internet Votes comes in. Over the next week, the folks at Fight For The Future and Personal Democracy Media will be rolling out a series of tools that encourage everyone, but particularly the net natives, to register to vote and then in turn to get out and vote. This effort is non-partisan. There is nothing in this campaign that has anything to do with who you should vote for and why. It's all about voter activation.

The first of these tools, a voter registration widget, is available now (in beta). I am running it on the right sidebar of AVC, under the ad unit. You can get it for your blog here. Please feel free to use it as much as possible so the folks can fix the bugs and get it ready for prime time next week.

As more of these tools launch, I will blog about them, use them, and encourage all of you to do the same. Those who understand the power of the open internet, use it in their lives, and value it as a positive force for society must vote and make their voices heard if they want our elected officials to value these principles as well.

Continuing this month’s practice of pulling an accounting related blog post from the archives, this week we feature the post on Cash Flow. The Income Statement and Balance Sheet get more attention, but there is nothing more important in keeping your business afloat than Cash Flow.

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This week on MBA Mondays we are going to talk about cash flow. A few weeks ago, in my post on Accounting, I said there were three major accounting statements. We’ve talked about the Income Statement and the Balance Sheet. The third is the Cash Flow Statement.

I’ve never been that interested in the Cash Flow Statement per se. The standard form of a cash flow statement is a bit hard to comprehend in my opinion and I don’t think it does a very good job of describing the various aspects of cash flow in a business.

That said, let’s start with the concept of cash flow and we’ll come back to the accounting treatment.

Cash flow is the amount of cash your business either produces or consumes in a given period, typically a month, quarter, or year. You might think that is the same as the profit of the business, but that is not correct for a bunch of reasons.

The profit of a business is the difference between revenues and expenses. If revenues are greater than expenses, your business is producing a profit. If expenses are greater than revenues, your business is producing a loss.

But there are many examples of profitable businesses that consume cash. And there are also examples of unprofitable businesses that produce cash, at least for a period of time.

Here’s why.

As I explained in the Income Statement post, revenues are recognized as they are earned, not necessarily when they are collected. And expenses are recognized as they are incurred, not necessarily when they are paid for. Also, some things you might think of as expenses of a business, like buying servers, are actually posted to the Balance Sheet as property of the business and then depreciated (ie expensed) over time.

So if you have a business with significant hardware requirements, like a hosting business for example, you might be generating a profit on paper but the cash outlays you are making to buy servers may mean your business is cash flow negative.

Another example in the opposite direction would be a software as a service business where your company gets paid a year in advance for your software subscription revenues. You collect the revenue upfront but recognize it over the course of the year. So in the month you collect the revenue from a big customer, you might be cash flow positive, but your Income Statement would show the business operating at a loss.

Cash flow is really easy to calculate. It’s the difference between your cash balance at the start of whatever period you are measuring and the end of that period. Let’s say you start the year with $1mm in cash and end the year with $2mm in cash. Your cash flow for the year is positive by $1mm. If you start the year with $1mm in cash and end the year with no cash, your cash flow for the year is negative by $1mm.

But as you might imagine the accounting version of the cash flow statement is not that simple. Instead of getting into the standard form, which as I said I don’t really like, let’s talk about a simpler form that gets you to mostly the same place.

Let’s say you want to do a cash flow statement for the past year. You start with your Net Income number from your Income Statement for the year. Let’s say that number is $1mm of positive net income.

Then you look at your Balance Sheet from the prior year and the current year. Look at the Current Assets (less cash) at the start of the year and the Current Assets (less cash) at the end of the year. If they have gone up, let’s say by $500,000, then you subtract that number from your Net Income. The reason you subtract the number is your business used some of your cash to increase its current assets. One typical reason for that is your Accounts Receivable went up because your customers are taking longer to pay you.

Then look at your Non-Current Assets at the start of the year and the end of the year. If they have gone up, let’s say by $500k, then you also subtract that number from your Net Income. The reason is your business used some of your cash to increase its Non-Current Assets, most likely Property, Plant, and Equipment (like servers).

At this point, halfway through this simplified cash flow statement, your business that had a Net Income of $1mm produced no cash because $500k of it went to current assets and $500k of it went to non-current assets.

Liabilities work the other way. If they go up, you add the number to Net Income. Let’s start with Current Liabilities such as Accounts Payable (money you owe your suppliers, etc). If that number goes up by $250k over the course of the year, you are effectively using your suppliers to finance your business. Another reason current liabilities could go up is Deferred Revenue went up. That would mean you are effectively using your customers to finance your business (like that software as a service example earlier on in this post).

Then look at Long Term Liabilities. Let’s say they went up by $500k because you borrowed $500k from the bank to purchase the servers that caused your Non-Current Assets to go up by $500k. So add that $500k to Net Income as well.

Now, the simplified cash flow statement is showing $750k of positive cash flow. But we have one more section of the Balance Sheet to deal with, Stockholders Equity. For Stockholders Equity, you need to back out the current year’s net income because we started with that. Once you do that, the main reason Stockholders Equity would go up would be an equity raise. Let’s say you raised $1mm of venture capital during the year and so Stockholder’s Equity went up by $1mm. You’d add that $1mm to Net Income as well.

So, that’s basically it. You start with $1mm of Net Income, subtract $500k of increased current assets, subtract $500k of increased non-current assets, add $250k of increased current liabilities, add $500k of increased long-term liabilities, and add $1mm of increased stockholders equity, and you get positive cash flow of $1.75mm.

Of course, you’ll want to check this against the cash balance at the start of the year and the end of the year to make sure that in fact cash did go up by $1.75mm. If it didn’t, then you have to go back and check your math.

So why would anyone want to do the cash flow statement the long way if you can simply compare cash at the start of the year and the end of the year? The answer is that doing a full-blown cash flow statement tells you a lot about where you are consuming or producing cash. And you can use that information to do something about it.

Let’s say that your cash flow is weak because your accounts receivable are way too high. You can hire a dedicated collections person. You can start cutting off customers who are paying you too late. Or you can do a combination of both. Bringing down accounts receivable is a great way to improve a business’ cash flow.

Let’s say you are spending a boatload on hardware to ramp up your web service’s capacity. And it is bringing your cash flow down. If you are profitable or have good financial backers, you can go to a bank and borrow against those servers. You can match non-current assets to long-term liabilities so that together they don’t impact the cash flow of your business.

Let’s say your current liabilities went down over the past year by $500k. That’s a $500k reduction in your cash flow. Maybe you are paying your bills much more quickly than you did when you started the business and had no cash. You might instruct your accounting team to slow down bill payment a bit and bring it back in line with prior practices. That could help produce better cash flow.

These are but a few examples of the kinds of things you can learn by doing a cash flow statement. It’s simply not enough to look at the Income Statement and the Balance Sheet. You need to understand the third piece of the puzzle to see the business in its entirety.

One last point and I am done with this week’s post. When you are doing projections for future years, I encourage management teams to project the income statement first, then the cash flow statement, and then end up with the balance sheet. You can make assumptions about how the line items in the Income Statement will cause the various Balance Sheet items to change (like Accounts Receivable should be equal to the past three months of revenue) and then lay all that out as a cash flow statement and then take the changes in the various items in the cash flow statement to build the Balance Sheet. I like to do that in monthly form. We’ll talk more about projections next week because I think this is a very important subject for startups and entrepreneurial management teams to wrap their heads around.

We see a lot of startups who want to build networks but they start by connecting with existing networks and providing utility that is cross network. Aggregation is a very common example of this. Cross posting is another.

I am certain that these cross network utilities can become good businesses but I wonder if they can become networks. We debate this a lot inside USV. I am in the doubter camp.

I'd like to explore this a bit today with all of you. If the initial utility of an app is to connect to a bunch of networks, collect information, present it, and then let the user engage with one or more of those networks, what incentive is there for the user to engage directly with other users of the app and help build a network inside of it?

Let's look at a few examples.

Take Flipboard. It is an excellent app. They innovated on the consumption interface in mobile and they present media and social media in an easy to consume and beautiful way. But is it a network and will it ever be?

Take FriendFeed. It was possiby the best UI for social media engagement ever created. But, because they allowed people to pull in content from and engage with other networks, it never really built up a network of its own. It could have taken on Facebook and Twitter. It was a much better Google+. But it sold to Facebook for what has now turned into a lot of money, but it did not build a sustainable network of its own.

Take Oodle. It pulls listings from lots of marketplaces, including Craigslist, eBay, Facebook, and showcases them in an excellent UI. But is it a marketplace itself? I don't think so.

There are a few examples I can think of where cross network utility has built a semblance of a network. Hacker News aggregates content across networks but by providing its own engagement platform, they have built a network. Reddit aggregates content across networks but because of the strong community elements in the platform, they have built a network. 

So clearly it can be done, but I am struggling to find a lot of examples where building on top of networks, instead of building your own, has resulted in a large network of highly engaged users. I'd love to hear more examples of that. Because this is an issue that keeps presenting itself to us and we are struggling with it.

I've written a bit about our move from landline telephony to VOIP telephony in our family. We use a cloud based VOIP PBX called Onsip and we have ported all of our land lines to their cloud based system. We have several homes on one Onsip account and our total phone bill including international calls, across multiple homes, is generally $100/month or less. It's fantastic.

But we have struggled to find the perfect phone handsets. We like wireless handsets that have a small charging cradle and nothing else. We sometimes connect headsets to them and sometimes not.

We've tried a bunch of vendors but this spring we finally landed on the answer. It's a Panasonic DECT system called the KX-TGP500. It looks like this:

The black box is called a gateway and that is what you connect to your home network. It connects via the Internet to your SIP provider, in our case Onsip. It's about the size of a CD jewel case and it sits easily underneath a desk somewhere. The handsets connect wirelessly to the gateway.

The range is very good. We get good connectivity a floor up and down and throughout a 3000sf space.

The handsets look nice, are not too large, and have good build quality. And they appear to be very reliable, although we've only been using them for four or five months. You can get additional handsets for the gateway.

Here's a review of the system I found on Amazon. I agree with it completely:

3 simultaneous calls and up to 6 cordless handsets, perfect for small business or home office.

Range and call quality is amazing. All the basic features: Speakerphone, Transfer, Intercom, Message Waiting Indicator, etc.

Setup was easy, since our VoIP provider (voiSip) was able to do it remotely in about 2 minutes.

If you have a VOIP provider and are looking for a new SIP phone, I strongly recommend this Panasonic phone. If you are still on a traditional land line carrier and are getting bilked, I strongly suggest you go VOIP.

Google Chrome on the Jelly Bean version of Android is a joy to use, particularly on the 7" screen on the Nexus 7. I do almost all my web reading on that device now. Actually I do almost everything other than blogging on that device now, but I digress.

One of my favorite features in Chrome for Android is something called "link preview." When you touch a part of a web page with a lot of links on it, you get a popup that looks like this:

[image credit: http://www.mobilexweb.com/wp-content/uploads/2012/02/links.png]

That popup allows you to select the exact link you want. It is awesome.

However, it doesn't work on all websites. I am not entirely sure what is required on the website side to power this feature, but, for example, I can't get this feature to work on Hacker News where it would be awesome. It's entirely possible that I am doing something wrong. If so, I'd love to know what.

But this works on most websites I use and I have found it to be a very handy feature. I suspect it will become standard on mobile browsers, particularly on smartphones.

Nicely done Google.

The Gotham Gal wrote a post on monday in her Woman Entrepreneur Mondays series on Elizabeth Ormesher who is building a startup called Everpurse. She is starting with a Kickstarter project and attempting to raise $100,000. Here's the video explaining her idea:

I bring this up because apparently Apple thinks that wireless charging is not easier. I would beg to differ. I think wireless charging is the future. And I think we will make more progress with wireless charging faster than we will increasing battery life, at least in the near term.

I just backed the Everpurse project (no reward for me) because I love the idea and I love the concept of wireless charging.