Posts from May 2008

Taking Risk and Mitigating Risk

When I think about the venture capital business, I think about risk. It’s one of the riskiest investment types there is. But as they teach you in business school, risk and return are highly correlated over the long haul.

What we want to do in the venture capital business is take a lot of risk (which should be rewarded with a low entry valuation) and then actively mitigate the risk we took as much as we can (thereby reducing the risk for future investors and increasing the valuation).

It’s the same thing that entrepreneurs want to do. When they leave their safe job and go out on their own, they are taking a lot of risk. Their entry valuation should be zero, meaning they (collectively if they have partners) own 100% of the business for whatever startup capital they invest.

By the time they offer equity to new investors, they should have reduced some of the risk. By developing a product, or by developing a technical and operating plan, by attracting other talented people to the team, or by getting customers and revenues (and sometimes even profits).

However markets are not rational. Investors will price risk (and therefore value a business) differently at different times.

I think a good example is comScore, a company I helped provide the first venture capital to in 1999. Along with Bruce Golden of Accel Partners, we invested something like $6mm into comScore in August 1999. It was a typical early stage venture round where the investors purchased approximately 1/3 of the business for the invested capital.

A year late, in the summer of 2000, investors valued comScore at something like $140mm. The company had mitigated a lot of risk in the year that had passed. The technology was built, the service was launching, the team was hired, and the future was bright. But investors missed the fact that the Internet market (ie the customers), at least version 1.0 of the Internet market, was a mess and getting worse. And the next twelve months were ugly, really ugly.

The next round was completed at a fraction of that $140mm valuation and it took something like five or six years for the company to get back to that $140mm valuation. Today, comScore is a public company with a market cap of $670mm.

comScore’s founders Magid Abraham and Gian Fulgoni did a great job of mitigating the risk in the deal year after year and they and their shareholders, including me, have been rewarded. But it wasn’t a straight line up. Partially because markets are irrational and partly because new risks showed up that we had no idea were coming.

Both of those things are always going to be true. Markets are never rational in the short term. And almost always rational in the long run. So my approach to that fact is to keep a lot of "dry powder" and invest in every round at our pro-rata share or less if the price seems truly irrational. Early stage venture capital is often less susceptible to market gyrations because we get our ownership at a low valuation and keep it but generally don’t increase it much as the valuations increase. And you have to be patient and ride the gyrations out, as long as the company is doing its job of mitigating risk.

And new risks will always show up. No investment plays out the way you think it is going to play out when you make the investment. So you can never price the risks you are taking correctly. My approach to that is to two fold. Don’t freak out too badly when the risks you never saw show up. And have a lot of "dry powder" to insure that you and the company can face the risks, deal with them, and mitigate them as well.

Risk and return are correlated in the long run. Taking risks is the key to making big returns. But you must learn to live with risk, mitigate risk, and price risk as best you can.

#VC & Technology

Doriot Quote Of The Day

I’ve been reading Creative Capital, Spencer Ante‘s biography of General Georges Doriot, the father of the modern venture capital business. It’s a book that would interest most VCs and probably many entrepreneurs too. The highlight of the book are Doriot’s colorful quotes. I posted one to my tumblog earlier and I just decided that I am going to post a Doriot quote everyday on this blog until I run out of them. Here’s the first:

A team made up of the younger generation,
with courage and inventiveness, together with older men of wisdom and
experience, should bring success.

—
General Georges Doriot, in the American Research and Development 1949
Annual Report. ARD was the first institutional venture capital firm.

                        

#VC & Technology

Memorial Day


  Half-Mast 
  Originally uploaded by Tom Rydquist.

It’s worth remembering that today is a national holiday because on this day our country remembers soliders who have died in service to our country.

Some of you will visit cemeteries or watch memorial day parades. Others will celebrate the day with picnics or outings or sporting events.

But no matter how you celebrate memorial day, make sure to spend a minute or two thinking about the sacrifices that military men and women have made and continue to make.

Having grown up in a military family, I have come to believe that military service is a calling, like the clergy or public service. It’s a hard way to live your life, but thank god that so many choose it.

And speaking of military life, here’s a neat example of two women who met on twitter who have teamed up to deliver a service to families separated by military service.

#Random Posts

Words Of Wisdom

I’ve been reading Creative Capital, the biography of General Georges Doriot, Harvard Business School professor and President of American Research and Development (ARD), the first institutional venture capital firm.

I came across some words of wisdom that he imparted to his business school students and I think they are wonderful. So I’ll pass them on.

One should not only be able to criticize but should always have a suggestion to make.

Don’t challenge others’ statements, have them repeat them over again.

Conditions which are best for workers will give best production!

Ask about prospects who didn’t buy product.

Always challenge the statement that nothing can be done about a certain condition.

I love all of these, but I really love the first and last ones.

#VC & Technology

Best Blog Post In A Long Time

I totally agree with Tim O’Reilly’s post about Microsoft/Yahoo! and the web as a platform. If you care about the web, where it is, and where it’s going, you need to read it in it’s entirety. It’s awesome.

I’ve been saying for months that Microsoft should not buy Yahoo!, that Yahoo! should outsource its search to Google, and that Yahoo! should get leaner and meaner and focus on the things it does better than anyone else on the web. I’ve said this so much that I can’t link out to all of the posts where I’ve argued this point, but here is my opening argument on the subject.

Here are some great one liners from Tim’s post:


Microsoft was once motivated by its own Big Hairy Audacious Goal:
"a computer on every desk and in every home." They achieved that goal,
and ever since, they’ve drifted. Now their only goal seems to be to
stay on top of the heap. They need to stop focusing on eating other
people’s lunch and start thinking deeply about what kind of goals might
stretch the company once again.

I believe that we’re collectively working on an Internet Operating System,
and that it will ultimately look more like Unix than it looks like
Windows. That is, it will be an aggregate of best of breed tools
produced by an army of independent actors, all playing by the same
rules so that those tools work together to produce a whole greater than
the sum of the parts.

Fighting over search is a bit like the Free Software Foundation
re-implementing cat, ls, sort, and all the other Unix utilities that
were already available in the Berkeley distributions of Unix.

While they [Microsoft] are locked in penis envy, all the really cute girls are going out with startups 🙂


This is the real Web 2.0, the web as platform.  Search and its advertising economy is only one subsystem of that platform.

Imagine an iPod where you could only buy music from the Apple music store instead of ripping your own CDs

Above all, remember that great companies have "big, hairy audacious goals."

Amen Brother

#VC & Technology

muxfind

I posted about two new web-based mixtape services several months ago, muxtape and mixwit. I’ve played with both a bit and listened to a few mixes since. But neither service has taken me away from my primary web listening experiences; tumblr, hype machine, and last.fm.

Then this morning I saw this twitter post by Jen Robinson:


   
      I love it!  Search results for my favorite band on muxfind.  http://muxfind.com/search/?…

Jen was linking to muxfind, a new search tool for muxtapes. This turns me on bigtime.

Ever since delicious and flickr, I’ve loved the idea of searching "user generated content". Not because user generated content is universally good. But because it takes time and effort to post something to the web. Be it a link/url in delicious, a photo to flickr, a video to youtube, a twitter update, or a song. Better yet a playlist. And so that effort in and of itself is a bit of a quality filter. I think of hundreds of things a day. But only a few get to my twitter stream.

Speaking of searching a twitter stream, I watched the Chelsea/Manu match on Summize, a real-time twitter search engine. That was a pretty great way to follow the big match while working on three other things at my office.

The idea of searching user generated audio content is not new. We can listen to the Beatles on HypeMachine. The Hype Machine aggregates music blogs and the mp3s that are uploaded to them. So listening to the Beatles on the Hype Machine is one kind of Beatles playlist.

Now we can listen to the Beatles on muxtape. Since you don’t have to be a music blogger to make a muxtape (you just need to be a playlist maker), it may well be the case that muxtape will get a larger base of users uploading audio content. That will create a different kind of Beatles playlist. Better than the Hype Machine? I don’t know. But certainly different. Right now the muxfind search result page is not a playlist the way a muxtape is. I hope they change that.

We are entering into a new world, where the search engine result page is a media experience in its own right. And that’s an exciting thing to think about.

#My Music#VC & Technology

Can We Live In Public?

At the start of this decade, Josh Harris (always ahead of his time) created a experimental web video project called We Live In Public.

This Wired magazine piece from 2001 explains the whole story. Josh outfitted his entire apartment with video cameras and it led to the breakup of his relationship and eventually his departure from the interactive technology scene in NYC, first to the Catskills, then Spain, and now LA. As Josh’s girlfriend at the time Tanya explained:

"Life under surveillance was making me jumpy," she wrote. "I started
looking for hidden cameras in public places and friends’€™ apartments. I
bought Mace and stopped answering the door. I began spending a lot of
time outside the house, focusing on yoga and friends while maintaining
the press schedule Josh had set up."

Fast forward to 2008 and Emily Gould’s story in this weekend’s NY Times Magazine tells an eerily similar story, but this time it was her boyfriend Henry who wasn’t digging the public life that Emily was leading as a blogger who "overshared".

The only difference between 2000 and 2008 is that when Josh was living in public he was basically alone in his extroversion. Today, Emily’s story could have been written by many people, including me.

Between this blog, my tumblog, my twitter stream, my flickr stream, my friend feed, and a host of other social media sites, it’s easy to be a stalker if you were so inclined.

You’d know, for example, that we are out in Long Island this weekend, that we are listening to Bob Dylan records (old school vinyl) this morning, that I went to see two plays this week, Good Boys And True with my wife, and August: Osage County with my daughter. You’d know that we had lunch at 2nd Ave Deli yesterday.

You’d should know (but don’t) that we went to see Indiana Jones last night and I didn’t like it. You should know (but don’t) that I played golf on thursday morning with two VCs and an entrepreneur and that I ate both lunch and dinner at the Spotted Pig that day (and both meals were excellent).

My point is that although I do choose to live in public at times, I also turn it off quite a bit. It’s something I’ve learned to do the hard way. I once posted a picture of myself on vacation living the good life and got a ton of hate email/comments. I once posted a picture of my girls on the beach and was aghast to see that picture had been favorited by a bunch of guys on flickr who collected pictures of girls in bikinis in their flickr account (i deleted that photo from flickr and never did that again). There have been many more instances of bad judgment on my part.

This blog is read by somewhere around 8-10,000 people a day between the web and my feed. I’ve cut out most of my personal stuff from this blog and moved it elsewhere. It’s still public but in places that less people frequent. I don’t think you can expose yourself to 10,000 people a day and not get hurt on a regular basis.

The other thing I’ve learned to do is not take the comments personally. Jessica Coen advised Emily Gould not to read the comments when she started working at Gawker. Emily ignored that advice and got caught up in the thrill of the social interaction with people she did not know. I get off on that thrill too. It’s fun to see over 100 people commenting on a post, something that happens on this blog at least once a week.

But there will be mean things said in the comments. It’s easy to say mean things to a computer. Harder to someone’s face. I’ve learned to take the hit and move on. I never delete the comments unless they are spam or porn or hate speech (and I don’t mean hating me). I figure by leaving them there, I am airing their hateful views for everyone to see. And I love it when Jackson or someone else who knows me well gives them a piece of mind.

The worst is when my wife, the Gotham Gal, gets annoyed at something I do online. It happens for sure. She blogs too so she knows the rules and she calls me out every once in a while. And that’s a good thing. Having a strong wife is the best thing in life. You have to have some balance.

So, back to the title of this post. Can we live in public? I think so. But it’s not for everyone. And you have to learn how to do it. Josh Harris learned. Emily Gould learned. And a lot other people are learning. My kids are learning as teenagers, with their Facebook profiles and all of the social interaction that happens there. We’ll all make mistakes and I hope they’ll be little ones we can recover from. Sadly, some will make bigger mistakes that will be harder to recover from.

But why live in public? It is necessary? No it is not. But humans are social beings. We were social in caves. We are social in cyberspace. And those who are extroverts will be extroverts online. And there is a lot to be gained from living publicly online. As long as you know where to draw the line.

#VC & Technology

Veepstakes

Veepstakes_2
So now the discussion turns from who the nominees will be (McCain and Obama obviously) to who the VPs will be.

McCain has apparently invited two governors and Romney to his ranch in Arizona this weekend. I think he should pick Romney but we’ll see.

Since I don’t plan on voting for McCain (age, temperment, foreign policy, supreme court nominees, fiscal policy, etc are getting in the way), my concern is who Obama will pick.

The NY Post says this morning that pressure is mounting to pair Obama and Hillary. And:

Bill Clinton is among those who want his wife on Obama’s ticket, Time magazine reported yesterday.

The former president "is pushing real hard for this to happen," says a friend, according to the magazine.

I’d be all for that and have suggested as much on this blog recently. I was torn between the two and voted for Hillary in the NY primary. I’ve been gradually swayed by Obama as he’s weathered the storm I was sure to come at him. I think he’s hardened and much tougher for the experience and will make a fine candidate in the fall and a strong President if elected. But I think Hillary is also a great candidate who would make a fine President if anything were to happen to Obama. And the "unity ticket" is certainly appealing from a political perspective. Obama is struggling to win over significant parts of the Democrat voter base and Hillary could really help him.

And now comes John Heilemann with the news that both Obama and McCain have Mike Bloomberg on their short list:

maybe it was inevitable that the veepstakes would yield a circumstance
this bizarre: the presumptive nominees of both parties seriously
mooting the concept of teaming up with the same dude. And not just any
dude, mind you, but the Democrat turned Republican turned Independent,
divorced, Jewish billionaire mayor of our glorious metropolis. The mind
doth fairly reel at the notion—and even more so at the fact that it
might actually make sense for either of them

I suspect John is right (he’s got access to people who know and I don’t), but this makes no sense to me. Bloomberg is the classic entrepreneur. He needs to be in charge. I can’t imagine him ever agreeing to sit around doing nothing for four or eight years.

My money is on McCain/Romney and Obama/Hillary. And that will be a good race, the kind of race America needs this fall.

#Politics

August: Osage County

August_2
When theater is good, there’s nothing like it. Last night Jess and I were treated to one of the best things I’ve seen on Broadway in a long time, August: Osage County. The Gotham Gal saw it right after it opened and absolutely loved it, so we made plans to see it on our date night. It did not disappoint.

The play is about the Weston family of Osage County Oklahoma and what happens after their father dies. It’s a pretty typical anchor for a story, but this one’s a doozy. The acting, particularly the mother Violet, played by Deanna Dunagan and shown in the photo above, and the oldest sister Barbara, played by Amy Morton, is outstanding. Both Dunagan and Morton received Tony nominations for best actress. That will be a hard choice to pick a winner from those two. The play is also up for a Tony and has already won a Pulitzer.

I am telling you, if you see one show on Broadway this year, make it August: Osage County. A warning though, it’s three hours long with two intermissions. That would normally kill me, but I was on the edge of my seat all night last night.

#NYC

Apple TV vs Roku Netflix

Yesterday, I did a twitter strawpoll to find out what people prefer, Apple TV or Roku’s Netflix device.

I received about 15-20 responses but they weren’t all captured by the strawpoll app. Even so, there was a clear preference for the Apple TV device.

Strawpoll

I was leaning toward the Roku Netflix because I am a fan of streaming audio and video over file based solutions like the Apple TV platform. It seems to me that being able to plug into the huge library of movies and TV shows that Netflix has available for streaming is a lot better than buying movies and TV shows on iTunes and watching them on the Apple TV.

And, I’ve also heard many complaints about the Apple TV device. Including this one from my partner Albert on his blog yesterday.

The default mode of operation for the AppleTV should be to discover
this share and easily let me select a folder and view both the images
and short clips from that folder. That’s what my Sonos does for music
and it simply works — no extra effort required on my part.  Instead,
with the AppleTV I have to first route images through iPhoto, enable
iPhoto for my AppleTV in iTunes, select which albums to share and in
the default synch mode wait for the selected albums to transfer to the
AppleTV

I have argued on this blog a number of times that Apple does not seem to understand the power of streaming audio and video. They seem to be stuck in a PC centric view of the world where you need to have the files on your machine. That’s not the case anymore. Most TV shows are available on the web already. And with services like Netflix, movies aren’t far behind.

So I am scratching my head a bit over the landslide for Apple TV, but maybe I am missing something. Thoughts/comments?

#VC & Technology