Posts from October 2008

The Donor’s Choose Blogger’s Challenge ends today. The AVC community is in first place in the tech category with about $16,000 donated, ahead of TechCrunch by about $3300 as of 7am eastern. So we are rounding the last turn with a nice lead. It’s time to sprint for the finish. I am going to kick off the sprint with my final donation, another $200 (that makes $800 total for me). I have thoroughly enjoyed doing this again and I sure hope we win this thing. This morning I got an email from a reporter asking why I do the Donor’s Choose Bloggers Challenge. This is what I wrote back:

I did the Donors Choose Bloggers Challenge last year because Charles asked me to and it seemed like a good cause. As I got into it, I realized that it was way more than a good cause. It’s the future of philanthropy. We (our firm Union Square Ventures) did a “sessions event” last year called Hacking Philanthropy in which we discussed how to use the internet and marketplace models like Donors Choose and Kiva and others to radically reshape the world of doing good. Since then, I have been committed to doing everything I can do (within reason) to put the “rubber chicken circuit” out of business. What Obama has shown, and Dean before him, is that the Internet is the most powerful fundraising tool ever invented and we have to harness it to do more and do better. Donor’s Choose is showing the way and I’ve been incredibly inspired by them.

This year’s Blogger’s Challenge has been fun for me because the competition in the tech category (I can’t compete with Sarah at Tomato Nation so I don’t even try) has gotten stiffer with super popular blogs like TechCrunch and O’Reilly in the mix. And Kara Swisher’s AllThingsD has also been stiffer competition this year. But I think the AVC community is going to come out on top again because it’s a real community, not a publication. The people who come here care about the same stuff I care about and spend the effort to comment, discuss, and meet others. And we have taken on Donor’s Choose as a virtual “tip jar” and the results speak for themselves. As of this morning, we are at $16,000 from 68 different donors.  I am hoping we can raise another $2000 today and at least raise as much as we raised last year.

So please join me in the final sprint to the finish line and make a donation here. Thanks. I really appreciate it and I can assure you that the teachers and the kids do too.

Well it looks like we got a win yesterday when the Court of Appeals for the Federal Circuit ruled that software and business method patents must meet a two pronged test that should serve to render many of these patents useless. I am not a patent lawyer and there is a debate in the comments to this Techdirt post that suggest there’s still a lot of debate about how big of a deal this ruling really is. I’ve emailed my favorite patent lawyer to get his opinion.

We can use all the help we can get. Our portfolio companies have been spending hundreds of thousands of dollars per case in recent years fighting off patent trolls who acquire software and business method patents and then sue for infringement. It’s a huge tax on the startup/technology ecosystem and it’s hurting innovation. The whole thing has soured me completely on the patent system. I think there shouldn’t be any software and business method patents at all, but I think that’s not likely to happen anytime soon.

Hopefully the courts and the patent office are beginning to see the problem with software and busienss method patents and rulings like we got yesterday are a hopeful sign.

As I read through all of these third quarter letters from various fund and asset managers I am getting, I keep reading the same things. It’s time to cut exposures, leave equities for now, expect 2009 earnings estimates to get cut a lot more, you can’t buy this market right now, etc, etc. It’s amazing to see how everyone is saying the same thing. I even see it in the the comments to my posts on this topic to my post on this topic yesterday.

It’s the same thing with VCs and entrepreneurs giving advice (me included). We are all saying the same things. And we are doing that because of the lessons we’ve learned in prior downturns. Nothing wrong with that.

But I am reminding myself this morning that conventional wisdom will be wrong. It will not play out exactly the way the best fund managers, VCs, and entrepreneurs think it will. I like what Max Levchin said at the venturebeat downturn event:

Don’t listen to anybody. Nobody knows what’s going to happen next … Better to be contrarian in times like these than not.

I’d alter that a bit. Listen to everyone. Read everything you can. And then come to your own conclusions. It is better to be contrarian in times like these. But do it wisely and don’t bet the farm.

Last night I asked this community to join me in funding a $1,289 LCD for a needy classroom in Los Angeles. This morning I wake up and find the whole thing is funded. Wow. Thanks to everyone who contributed. If you want to fund another needy classroom project, go here and pick one.

I’ve always been a fan of the idea of a tip jar to pay people for the work they do voluntarily (blogs, photos, videos, etc). But I don’t need tips and if I took them, they’d just go to Donors Choose, Grameen, or some other important organization changing the face of charitable giving and philanthropy. That’s what I do with the ad revenue from this blog.

I am going to think some about incorporating tipjoy into this blog. I’d like to do it on a post by post level and I am not sure tipjoy can do that automatically. And I am also not sure I can direct all the money to charity automatically. But if I can work out those kinks, look for this kind of thing on my blog posts going forward.

We use the LCD projector in our conference room every day. I don’t honestly know how we’d function without it. A young friend of mine who graduated from college last year told me that he uses an LCD connected to his laptop in lieu of an expensive flat panel display in his apartment and his friends always marvel at the quality of the video coming in over his laptop and getting displayed on his wall.

LCD projectors are also an amazing teaching tool. Yes, a smartboard is more powerful but it’s also a more expensive solution and teachers can do a lot with a laptop and an LCD projector.

So today, I gave $200 towards getting an LCD projector for a needy classroom in Los Angeles, CA. If you click on that link and decide to give to this project alongside with me (I hope you do), please give via this link. It’s the second project on the AVC giving page. The total cost of this project is $1,289. One other person and I have given $275 so there’s $1,014 left to get this teacher the projector.

And if you are so inclined, please do it before friday evening when the Donor’s Choose Bloggers Challenge ends. This community is in first place in the tech category, but not by much and we need every contribution we can get to come out on top again.

This morning on the eliptical trainer at the gym I pulled out a third quarter report for a hedge fund of funds and read it. It had some numbers in it that weren’t particularly good, but were way better than I thought they’d be.

But I really wasn’t focused on the numbers this morning. I wanted to understand what had happened and what is going to happen in the hedge fund market going forward. And this letter was revealing on both fronts.

From what I could tell reading the letter,  it was nearly impossible to make money managing a hedge fund in the third quarter. I am sure that there are some hedge fund managers who made money in the third quarter but most of the biggest and most experienced hedge funds lost money in the third quarter.

And I suppose the same is going to be true for October when the numbers come in. If anything, October has been worse in many ways than September was. And yet, the vast majority of hedge managers are optimistic. It probably goes without saying that you have to be optimistic about your ability to make money to be a hedge fund manager.  

The big themes going forward that I took away from the letter are:

1) Fundamentals matter more than ever. 

This is the only way I know to make money and that’s probably because in my market, private equity, you cannot trade and you cannot be a momentum investor. You must build value the old fashioned way, building cash flow and strong balance sheets.

2) Reduced exposure – I read this term a lot in the letter. I think it means taking risk off the table and having less leverage and more cash. I think we’ll see hedge funds be more conservative for a while until the market stabilize.

3) Migrating from equities to debt/credit markets – This weekend I spent some time with a few public market investors and they all told me that with "high quality" credits trading at discounts that provide 15-20% yields, there’s very little reason to be in the equity markets. We in the equity business often forget that credit/debt can provide equity like returns in down markets. And we are in one of those right now. This is going to suppress valuations in the equity markets and make it hard to issue new equity securities for some time to come.

4) The SEC’s attack on short selling (both naked short selling and shorting financial issues) took a toll on hedge funds. This long quote (sorry about that) explains it well.

In September, the initial announcement targeting “naked” shorting set off a massive
short squeeze as investors that were naked were forced to cover.  This created losses
for all short sellers (even the legitimate ones) as the stocks rallied suddenly.  The dealer
community, which had often lent more stock than they had in their possession (á la an
airline that oversells seats on a particular flight), was forced to scramble to become
compliant with the new regulations.  This led them to force some accounts out of their
short positions, and to become more restrictive in their stock lending practices going
forward.  At the same time, many institutions halted their stock lending programs due to
losses incurred as a result of the Lehman bankruptcy, thereby exacerbating the
shortage of borrowable stock in an already supply-constrained market.

The shorting ban on financial stocks hurt many managers’ portfolios both directly and
indirectly.  Prior to the announcement, some managers had created “boxed” positions
(simultaneously long and short) in the equity of companies on the ban list to be able to
quickly hedge long positions elsewhere in the companies’ capital structures when the
time was right.  The ban was put in place at precisely the time when these shorts would
have been “activated”, but instead the strategy was rendered ineffective, and the long
positions were left unhedged in a declining market.  Others, who had held legitimately
established short positions in these companies (and had even taken losses on those
positions during the rally in July and August), were unable to capitalize on the trade
since the rules artificially propped up the shares and undermined their trade thesis at
exactly the moment it was expected to pay off.  Another set of investors who had taken
a bearish position in the credit of these financial companies (i.e. long protection in CDS)
saw their positions marked down when the market reflected a more optimistic outlook
for the companies in the absence of so called “predatory shorting.”  This move proved to
be temporary as sentiment soured again toward month end, but some positions had
already been sold.

Finally, the combination of these new rules prevented managers from capitalizing on
buying opportunities in the market.  Disciplined hedge fund managers that would only
increase long exposure with a proportionate increase in short exposure were
constrained since shorting was either banned (in financials) or hard to execute (due to
lack of borrow).  Even those with pre-existing long and short positions lost money as all
relative value spreads widened due to forced unwinding by investors caught in the slew
of technical forces described above.

I find that quote fascinating in its recitiation of the law of unintended consequences. Now that managers have been burned with strategies that involve short selling, it will be interesting to see if they lessen their reliance on shorting as part of their overall strategies. It seems likely to me that they will, at least for a while.

5) Shakeout – There’s a shakeout coming in the hedge fund business as the strong funds survive and the weak fail. I don’t want to reveal anything close to confidential from this fund of fund’s letter but I was shocked at how small their redemptions were in Q3 and how small the redemptions in the funds they are investors in were as well. Of course, that may change in Q4 with the December redemptions, but in any case I think investors will stick with the funds that have long track records of success and leave the funds that don’t.

Which of course begs the question about what we (the Gotham Gal and I) are doing with our hedge fund investments in light of the carnage we have witnessed and the losses we have taken. We like the funds we are in and the managers and have a lot of confidence in them. We’ve taken the hit already and my gut says it’s up or at worst flat from here so we arent’ likely to be redeeming. But as a friend said to me this weekend, "are you putting more capital in at these levels?" And that has me thinking. I don’t have an answer yet, but I do agree that you are either a buyer or a seller. If you don’t want to buy more, that tells you something.

That’s all I’ve got. I’m looking forward to the discussion in the comments. In fact, I welcome it because it will inform the answer to that last question.

Full disclosure – this post is a about a new service from our portfolio company Adaptive Blue. I have a vested interest in the success of Adaptive Blue and the new Glue service.

What if you could join a social net that you don’t have to check all the time? That doesn’t require you to visit a destination web site, but is present whenever and wherever you want it.  That connects you to people and things that you share in common with others. That is smart and only engages you when you want it to.

You can join that kind of social net today. It’s called Glue and its now available for everyone to try. I’ve been using it for the past month and it works great. You install a quick firefox extension, log into Glue, and you are good to go. Then whenever you visit a web page about a thing you care about (a stock, a book, music, a person, movies, gadgets, actors, etc) you’ll see the other people you know (and some you don’t) that also are interested in that item. You can favorite things and tell others about them. It’s easy and quick. It’s lightweight and doesn’t require much of a commitment.

It all happens in the glue bar that drops down when you visit a page that Glue recognizes. This morning I was on last.fm and visited Ben Kweller’s page. Glue recognized Ben Kweller as a musician and dropped down this Glue Bar:

I also visited the $AAPL page at Google Finance and got a different Glue Bar:

Different pages (things) generate different glue bars, but that’s exactly the point. At last.fm I’m likely to want to interact with my music friends. At Google Finance, I’m likely to want to interact with my stock friends. They are different for the most part, but in a few cases they are the same. Glue understands all of that and more.

There’s a great five click quick tour of Glue on this page. There’s also a screencast if you want more detail. Give it a try and let me know what you think. I hope you like it as much as I do.

As Brad Stone and Claire Cain Miller talked about in the New York Times piece about startups slimming down to survive, we are seeing many companies looking at their cash balances and burn rates and deciding to cut burn to increase runway. We’ve done an exercise with our own portfolio that I wanted to share with all of you. I am calling it the survival matrix.

First we create a table of our entire portfolio and chart current cash balance, burn rate, and runway (cash/burn). We leave out the profitable companies from this analysis unless we think the downturn will cause them to start burning cash. Here’s a look at a theoretical runway table:

We then do a scatter plot of burn rate versus runway with runway in months on the x-axis. It looks like this:

My excel graphing skills are lacking so this chart doesn’t look exactly the way I want it to. I’d prefer that the x-axis numbers be at the bottom, not the top of the chart. And there should be four quadrants made via lines that run at a $200,000/month burn rate and at the 18 month line (those are subjective numbers, each fund would have their own views on where those lines go).

Thanks to Danny Moon, this chart now looks exactly the way I wanted it too. This blog post is now peer produced!

When you do that, you’ll get to four quadrants.

Where you want your company to be is in the upper right quadrant, which I call "the comfort zone". The comfort zone is a low burn rate combined with a long runway.

The upper left quadrant is not a bad place to be as well. I call that the "too small to fail" quadrant. While your runway is not long, your burn rate is so small that your investors can fund your company for a while without any new money showing up to join the party.

The lower right quadrant is also not a bad place to be. I call that the "betting on revenue" quadrant. These are the companies that are carrying high burn rates but also have long runways. They are betting on revenues to start coming in and lower their burn rates over time. One thing about this quadrant though, you don’t stay here forever. Your runway will come down and you’ll either go into one of the upper quadrants because your burn has come down, or you will go into the lower left quadrant.

The lower left quadrant is the "danger zone" – high burn combined with short runway. You don’t want to be there.

We’ve done this analysis on our portfolio recently and we came away from the exercise feeling very good about where things stand. We’ll keep doing this every couple months as one of several "macro screens" we do on our overall portfolio health.

If you are an entrepreneur, you should know where your company fits on the survival matrix and if you are a VC, then you probably are already doing this kind of analysis on your portfolio as well.

A while ago, I bought the urls fredwilson.fm and fredwilson.tv and have been sitting on them. A few weeks ago, someone called the banners that run at the bottom of this blog and my tumblog "fredwilson.fm". It made me think that I should activiate that url.

So with the help of Nathan Bowers who did the redesign of this blog during the summer, we’ve now got it up and live. It autoplays, which I would not ordinarily recommend, but since the only purpose of that page is to listen to music, I think it’s appropriate.

This was pretty simple to do. We used the tumblr api, the streampad player, and a web server. I’d love to see tumblr and streampad work together to make it even easier to do. Everyone who posts music to the web should have their own radio station.

Let me know what you think.