Posts from VC & Technology

Tom Evslin on why simple subscription pricing beats complicated usage pricing every time.

Nick Denton’s postings of his sites’ traffic vs. the direct competition.  These comparisons are not always flattering to Nick’s sites.  And the transparency he is embracing impresses the hell out of me.

Searchview’s post on Claria going "behavioral" (aka respectable).  Can the prodigal son get back in the good graces of the industry?  We’ll see.

Seth Godin’s post on the absolutely most maddening thing on the web – the stupid dropdown box to select the state you live in.  God do I hate that thing!!!

A friend showed me this great coffee mug available on Cafe Press.

It says:

I ordered a couple for our office!

I used to go to Demo all the time.  It was the best place to go see new companies.

But somewhere along the way, a lot of the most interesting companies got funded before they got to Demo.  And the audience is full of VCs, so the unfunded ones were funded pretty shortly thereafter.  So it became an exercise in frustration for me.

Here is a map, created by IntroNetworks, one of the presenting companies, of Demo’s attendees.  The quadrants are business owners, Fortune 500 companies, venture capitalists, and one other that wasn’t identified on BloggingDemo’s post. 

I will bet that the upper left quadrant is the VC quadrant.

Given the difficulty in actually finding companies to invest in at Demo, the only benefit is seeing all these new products and services live and in action.

But for that we’ve now got BloggingDemo.  I can spend 30 minutes on BloggingDemo every morning, watch the videos, and I’ve replicated all but the schmooze factor.

This is a great service to the VCs who aren’t in the room like me.

I blogged this concept of sell side advertising once before and I think it’s the future for online advertising.

Dave Morgan, Tacoda‘s CEO, does a great job of laying out the arguments in its favor in a piece in ClickZ this week.  Go read it.

One of the big risks in web-based businesses that survive on advertising or data revenues is losing customers via churn.

I am reminded of that when reading this Brianstorms post, called Things I’ve Stopped Doing.

For fun, click through to the main site and check out his Christo inspired motif.

I came across a great article this weekend in eMarketer.

The piece is titled Web Marketers Branch Out Beyond Banners.

That is not news as web marketers have been using other ad methods for years.

But the stats in the article are fascinating.

Here is a chart of the best performing categories of online marketing according to AdTech attendees in December 2004.

First of all, its my pleasure (as a large shareholder of two email marketing companies) to point out that emailing to house lists performs better than paid search (the current darling of online media).

But beyond that, my main point of this post is that behavior matters. The top three performing segments of online media are based purely on behavior.

First comes house lists.  You don’t get onto house lists in this post Can Spam environment without asking to be on them.  Opting into an email list is behavior of the highest order.  You are asking to get info mailed to you.  No wonder they perform so well.

Second comes paid search. Paid search ads result from a person typing in a keyword in a search field.  That’s behavior of the second highest order. It’s a consumer looking for information, possibly on your product or service. Again it’s not surprising that these ads perform so well.

Third comes behavioral targeting.  This technique involves the publisher storing profiles on a consumer’s behavior and serving ads that are targeted to that behavior. This is less active behavior in some regards than the first two, but it’s active behavior that’s driving these ads and I am not surprised to see that this method performs almost as well as the first two.

As some readers of this blog know, we are investors in Tacoda, the leader in behavioral targeting, so I am pleased to see that the market has come to realize that behavioral is in the big leagues along with emailing to house lists and paid search. It’s about time.

Several of the comments to Cringely (continued) and Fisking Calacanis asked me if I had read the Change This manifesto called Fixing Venture Capital by Joel Spolsky.

Yes, I have read it.

Joel makes some good points, but I think he’s wrong that the venture capital business needs to be fixed.  Some VCs should be fixed, but the business as a whole works pretty well.

Here are the major points Joel makes in his manifesto:

• VCs only want 100 to 1 returns and are willing to risk everything to get them while entrepreneurs want a safe high probability bet.
• VCs are so inundated with business plans that they become focused on the process of whittling down opportunities instead of finding the best opportunities.
• The "standard VC deal" is unfair to entrepreneurs and smart ones won’t take it.

Some of this is familiar territory as Jason’s rant articulated a few of these themes as well.

The first two points are accurate about some VCs, but not the best VCs. The third is the classic situation of one side not understanding the other side.

I’ll take each of them in order.

• VCs’s only want to hit home runs – I don’t think this is true. I’ve worked in three venture capital firms and have worked on over 150 deals with probably close to 500 firms in the 18 years I’ve been in the VC business.  My experience is that VCs are interested in making every investment work and are not in the "hits" business. It is true that if the investments don’t work, the VCs have an interest in getting out of the deal so it doesn’t consume any more capital, but that happens in about 1/3 of all early stage venture capital deals. The other 2/3 end up turning into businesses that the VCs are happy to work on and commit more capital too for as long as it takes for them to become sucessful.
• VCs are too overwhelmed with incoming deals to pay attention to the good companies – This is absolutely true of the bad VCs. But they don’t end up staying in business longer than a couple funds. The best firms don’t focus to much energy on looking at everything that comes their way.  They identify a set of markets they like, articulate their strategy clearly as possible, and then go out and find the deals that fit into their strategy.
• The standard VC deal is unfair to entrepreneurs – Joel focused on two aspects of the "standard VC deal", the "liquidation preference" and the "no shop". 
  • Brad Feld has a long post on the liquidation preference that anyone interested in this topic should read. This term is designed to protect the VCs from having the company sold by the entrpreneur at a price that gets the entrepreneur a good return, but results in the VC losing money. Not only is it fair, but its been standard practice in the VC business since the 1970s and very few deals are done without it.
  • The no shop isn’t designed to stop the entrepreneur from shopping his deal. It’s designed to stop the "shopping" process once the entrepreneur has selected his preferred investor so that the VC can complete his due diligence and hire lawyers to get the deal documented and closed.  It makes perfect sense that once both parties need to start spending money on deal expenses they should have an exclusive period to close the deal.

I hope nobody takes this as a criticism of Joel’s piece because I think its good that he and others are putting the entrepreneur’s views out there for discussion.

My goal is to get the VC’s views out there in response and insure that a healthy and educated debate results.

I’d love to hear everyone’s comments, either in the comments to this blog, or even better on other blog posts.

One of the joys of being a VC is you learn so much from the entrpereneurs you back.

One entrepreneur who has taught me a ton is Tom Evslin. And one of his greatest lessons is about the superiority of horizontal integration over vertical integration.

He laid this lesson on his board a number of times during my tenure on it and I always walked away feeling like I had just been in a lecture hall at MIT or Wharton. Tom is that good.

Well, you don’t have to be in Tom’s boardroom anymore to get some lessons from him.  He’s blogging now and he’s got his first rant (and hopefully not the last) on the subject of horizontal vs vertical integration up on his blog right now.

Horizontal integration is what has made the technology industry grow like a weed for the past 25 years. At one time IBM provided everything a customer might need. Today, you get the chips from Intel, the box from Dell, the OS from Microsoft (or from the open source world), the apps from a host of companies, the services from others, etc.  That’s horizontal integration in action.

Vertical integration was AT&T’s model.  And look where they are now.

That’s why this subject is so important.  And Tom’s a master at explaining all of this and why it happens.

I really enjoy reading Robert Cringely.  I’ve blogged that before so I won’t repeat the reasons I love reading him.

I will repeat that Cringely needs a blog.  This email, then click on a link, then read a static web page just sucks.  It’s old school.  I can’t even find an RSS feed on his site.

Enough about Cringely, the point of this post is to respond to some very interesting comments he made in his most recent piece on Carly Fiorina, the cell processor, and the VC business. I’ll leave Carly and the cell alone and focus on his comments on the VC business.

Cringely says the following about the VC business:

the VCs are sitting on a boatload of uninvested cash that they simply must spend. Get ready for a return to 1998 because soon you will be able to get funding for almost any hare-brained scheme. And while this process of throwing money at the wall is grossly inefficient, it inevitably leads to rapid change.

He goes on to say this:

In 1999-2000 — at the very peak of the dot-com boom — venture capital firms were not only taking companies public at a furious pace, they were just as furiously raising new venture funds — funds that will shortly be coming to the end of their lives. Throughout the fixed lifespan of these funds venture capitalists are typically paid 1-2 percent of the total fund per year as a management fee. If a VC raises $100 million for a fund with a six-year life, they’ll take $2 million every year as a management fee, whether the money is actually invested or not. Any money that remains uninvested at the end of the fund must be returned to the investors ALONG WITH THE ASSOCIATED MANAGEMENT FEE.

Right now, there is in the U.S. venture capital community about $25 billion that remains uninvested from funds that will end their lifespans in the next 12-18 months. If the VCs return those funds to investors they’ll also have to return $3 billion in already-spent management fees. Alternately, they can invest the money — even if they invest it in bad deals — and NOT have to cough-up that $3 billion. So the VCs have to find in the next few months places to throw that $25 billion. They waited this long in hopes that the economy would improve and that technical trends would become clear so they could do their typical lemming-like jump off the same investment cliff as all the other VCs. Well, we’re at the edge of the cliff, so get ready for the most furious venture investing cycle in history.

I said in my prior post that Cringely is "mostly right" and he’s mostly right about this, but not totally right.

It is true that there is a huge "overhang" of venture money left over from the 1999/2000 fundraising binge.  But that money can’t go into early stage deals because those deals take 5-6 years to turn into realizations.

So this "overhang" is going into later stage deals.  Look at $75 million going into Fastclick or $108 million going into Webroot.  That’s where the overhang money is going to go.

The early stage market may also be entering a "furious investing cycle" but that’s not being driven by the overhang from 1999/2000, its being driven by Web 2.0 and the realization that we have entered another wave of innovation around the Internet that will result in a lot of interesting companies being created, built, and sold over the next several years.

We are not happy about the "furious investing cycle" we find ourselves in and we are going to be cautious about it.  We’ve lived through the rapid increases in value, the overcapitalizations, the IPOs in less than a year, and the "get big fast" mantras. We’ll leave those to others and try to find a few good entrepreneurs a year that want to do it traditional way, to walk before you run, to build a business efficiently, and to focus on profits in the business before profits in the markets.