Posts from November 2008

Last month I attended the New Business Models For News Summit and found myself running the "revenue" breakout group. We talked quite a bit about generating revenue from local merchants. There are a bunch of companies working on this problem, including three in our portfolio, Clickable, outside.in and Targetspot.

The conventional wisdom is that it is going to take a long time for local merchants to move their ad budgets online and that very few Internet companies can afford the large sales forces it is going to take to sell online advertising locally. I think these problems are in the process of getting solved by companies like ReachLocal, Yodle, and our portfolio company Clickable. I also think that local media companies (radio stations, newspapers, tv stations, etc) will start to become local ad agencies and will start selling multiple advertising solutions, not just their own properties.

But one problem nags at me. Local merchants like "Joe The Plumber" usually don’t have a web presence and many don’t really even want one. But if you are going to buy cpc advertising, then you’ll need a place for the clicks to go. The local ad agencies and local oriented web services are happy to create a web presence for local merchants, but they are often poorly designed and there’s no standardization of them.

Here’s where Google can and should step in. The other day David Karp asked a question on Tumblr:

Which messenger bag should I get for a 15" macbook pro?

The answer was Crumpler of course and I went to Google and did a search on "crumpler nyc". Then I found the Crumpler store in my neighborhood and clicked on the link. I got a page that looks like this:

I shortened the url with bit.ly and sent the answer to david via Tumblr.

Every small business that Google knows about has a page that looks like this and a corresponding "pin" on Google’s excellent map service. Here’s the same page for our venture capital firm, Union Square Ventures. I think this is a huge opportunity for Google that they are not currently doing very much with.

Henry Blodget wrote a post the other day talking about what Google needs to do to get its stock moving again and he listed four areas Google should look to for revenue growth. He did not list local/maps. I think local/maps is one place where Google has a huge advantage by virtue of the dominance of its cpc ad network and the dominance of its maps service.

And the thing Google needs to do is make the merchant pages in its service good enough that local merchants can use them as landing pages. Here’s a few things they can do that would help:

1) a user friendly URL:

not this – [http://maps.google.com/maps?ie=UTF-8&oe=utf-8&rls=org.mozilla:en-US:official&client=firefox-a&um=1&q=crumpler+nyc&fb=1&view=text&latlng=5061625533362562256&sa=X&oi=local_result&resnum=5&ct=result]

something like this – [http://maps.google.com/crumpler/manhattan/westvillage]

2) the ability to domain map the page – talk about taking ownership of a page. If Google allowed local merchants to domain map these merchant pages with their own URLs, that would be a huge step in the right direction.

3) the ability to skin the page or at least do some simple branding on it.

4) let the merchant take over the "overview" and "details" tabs and enter their own content in them.

5) calls to action: email, click to call, buy online, etc. Google can power some of these services themselves and allow merchants to enter their own call to actions.

We grew up with the yellow pages. Everyone knows how to use them. Each merchant has a listing and they are all similar. Merchants can pay to dress up their listings and many do. But the standardization breeds familiarity and trust and encourages more usage.

Google should be the yellow pages of the internet. They are already. But they aren’t doing enough for the local merchant and that’s a big problem that’s impacting all of the other local oriented services. Google is the platform that many internet businesses are built on and in local they need to work harder on their platform so that we can build out the local internet opportunity. And there’s a ton of revenue in this for them if they do.

It’s interesting to me that he starts with the recognition that the only way out of this financial mess is a coordinated global action and ends with this comment:

In this country, we rise and fall as one nation, one people, and that’s how we’ll meet the challenges of this time, together.

Of course that’s true, but in fact in the world we live in now, we rise and fall as one world, one people, and as Obama said at the start we’ll have to meet the challenges of this time as one world, acting together.

The Gotham Gal and I went to see Slumdog Millionaire last night. It’s a great movie about destiny, poverty, class, survival, gumption, and above all, love. Go see it.

I have a friend Charlie who is a serial entrepreneur and he says that venture capital "values capital over people". That’s a criticism that has a ring of truth to me (as opposed to much of what Adeo said the other day).

We just spent the past day with our investors and we are blessed to have a collection of great people behind us. They provide the capital that we get to invest in startups. And I am incredibly grateful for their support. But it isn’t capital that drives the startup ecosystem. It’s the entrepreneurs who drive it. And it’s important to remember that.

Back in 2005, I wrote a post called The VC’s Customer. In that post, I made a point publicly that I’ve been making privately for years. VCs that serve the entrepreneurs win and VCs that serve the market lose.

I think in times like we are in, it’s worth remembering this. And I want to thank Charlie for suggesting to me last night that I return to that post.

One week ago, last friday morning, I wrote that I was waiting for the fill on three "good to fill" orders I had placed weeks before. They were:

$AMZN at $40
$GOOG at $320
$AAPL at $90

I got my fill on $GOOG earlier this week and mid-day yesterday I got filled on the $AAPL and $AMZN. I am pleased that I was able to buy stock in these three great companies at these prices.

Of course, when you buy on the way down, you have to be cool with watching the value of your stock go down. At the hedge fund annual meeting earlier this week I saw a hedge fund manager talk about buying bank debt at 80 cents on the dollar and then watch it go to 60 cents on the dollar. He has kept buying it as he thinks 80 cents is a bargain and 60 cents is a fire sale price. But when you play this game, you have to be able to take the 25% paper loss on that 80 cents trade.

I like to focus on my average cost on a given stock. And buying on the way down lowers your average cost. I have taken my average cost in $GOOG from over $400 to around $350 and if the good till filled orders I placed this morning get filled, I’ll take it to below $320.

I am using the exact same strategy with $AAPL and $AMZN. I like the fundamentals of these three companies, I am certain they’ll make it to the other size of this mess with those fundamentals intact, and when the market gives me the opportunity to buy the best businesses I understand well at 8-12x current cash flow, I think you have to take it.

As the prices go lower, I am increasing the size of my buys. I am not betting the farm on any of these investments, but if the market wants to give me $GOOG at 5x cash flow, I am going to put even more money behind that trade. That would be $160/sh by the way, and I don’t think its going anywhere near there.

What’s interesting to me is the analysts have now gotten bearish on $GOOG as Henry Blodget reported yesterday. That may be the final shoe to drop. Cynics always say that the analysts are the "last to know".

I believe that online advertising will be flat YOY in 2009 and that search will gain share and gain between 5% and 15% YOY. I think Google’s revenues will grow next year and I also think they’ll finally work on their cost structure.

So unlike the analysts, I am bullish on Google and getting more so as the price goes lower. Same with $AMZN and $AAPL. So I’m happy to finally get the fill and just placed some more orders at lower prices. Buying on the way down isn’t fun but you have to think like a buyer not a seller.

Our portfolio company Zynga quietly released Live Poker yesterday for the iPhone. Live Poker is the same Texas Hold’em game that over 1.4mm people play every day on Facebook, MySpace, Bebo, and Hi5. Now you can have it on the iPhone and play against your friends who are on the web at one of these social nets. Like Texas Hold’em on the social nets, Live Poker is free but there is also an upgraded version with a larger chip package for $9.99.

The reason I am blogging about this, other than to get all of you to go download the app, is because Live Poker is the first first application to leverage Facebook Connect to allow iPhone users to play with their real friends and access social information such as real player photos. Just think about that for a second. We’ve now got apps on open mobile phones connecting with apps on open social nets. It’s only a matter of time until we see more of these live mobile apps running on iPhone, Blackberry, Android, Windows Mobile, Symbian, and connecting to Facebook, MySpace, and other social nets.

The social web is going mobile quickly with popular mobile apps like Loopt and Twitterific. Now we are seeing popular social apps going mobile. When we sat down at the beginning of the year to identify the biggest investable trends in web apps, we put down words like open, social, playful, and mobile. Live Poker leverages all of them and is a glimpse into our future.

I’ve been reading a bunch of posts recently suggesting that the VC model is broken. But guess what? It’s always been broken. As Jeff Nolan points out in a short and sweet post:

there is a permanent structural imbalance in VC that simply doesn’t
change and serves to exacerbate the amplitude of the swings from good
times to bad. There are maybe a dozen VC firms that generate the bulk
of returns, a handful of “individualist” firms that simply chart their
own path to good success, and a whole bunch of followers that get
slaughtered. This was the case in 2001 and it’s the case today.

Jeff’s truth has been the story with the venture capital asset class for the entire 22 years I’ve worked in this business and probably for long before that. Jeff and Matt’s posts were inspired by this presentation that Adeo Ressi of TheFunded gave at HBS recently.

I don’t buy most of Adeo’s arguments in his presentation but I am not going to critique it. Most of what he says is old news. The chart that TechCrunch picked up in particular is not news and I don’t even think its right. LPs have been telling me that the VC industry has been cash flow negative for years.

Clearly there is too much money and there are too many firms in the venture capital business. The same is true of every asset class I follow. I was at a hedge fund annual meeting yesterday and they predicted a huge number of hedge funds will go out of business in the next 12 months. I think the same will be true of private equity, real estate, and a number of other asset classes.

The venture capital business is changing if you look closely. Many of the biggest and best firms are slowly but surely turning their attention from information technology to energy technology (ET). Not all of them will be good ET investors and the firms that don’t navigate that transition well will struggle. Firms that continue to focus on IT have largely turned their attention to the web where capital requirements are lower and technology and IP barriers are non-existent. Many firms are struggling with these realities and they may decide to throw in the towel on IT. The VCs who came of age in the glory years of IT venture capital in the 80s and 90s are getting older and quite a few have stepped back or retired outright. While it is certainly true that there will be new firms and new VCs who pick up the slack, the reality that money is harder to come by and may stay that way for years will likely force the venture industry to get smaller not bigger.

But be careful what you wish for. We will get a better, more efficient venture capital industry that produces better returns for investors from all these changes. But we may also get less capital for entrepreneurs. Just like there aren’t thousands of great VCs, there aren’t thousands of great venture capital investment opportunities. When the industry is flush with cash, entrepreneurs are the beneficiary. When it is not flush with cash, entrepreneurs will feel it too.

Adeo is seeking "less funds and better funds" and I think he’ll get that wish. But he’s also looking for "more deals and equal treatment". The law of supply and demand suggests that we are likely to get less deals and worse treatment, at least in the short term.

Good entrepreneurs are crafty and will figure out how to navigate this new reality. They’ll do what they are already doing, which is to figure out how to bootstrap and build a business without VC, or they’ll wait longer to tap into VC. In the web sector, that’s a very good approach and I recommend it to every entrepreneur I meet with. In ET and biotech, it’s harder to do that and a tightening of the money supply there is a bigger problem.

The other big factor that nobody is really talking about is the globalization of startup culture and venture capital. The capital that gets invested into venture capital firms and our portfolio companies is increasingly global and will become more so. And the investment opportunities are equally global. Everyone is focusing on what’s going on in Silicon Valley and to a lesser extent the rest of the US startup scene. But what is going on in China and India and other parts of the world is truly mind blowing. And I think we’ll see non-US startups producing a significant, if not majority, of the investment exits within the next ten years. Much of the "sky is falling" prognostication is focused on Silicon Valley and misses the big picture.

So in the wise words of Pete Townshend, "venture capital is dead, long live venture capital."

Bustup not bailout should be our rallying cry. Once upon a time busting up big companies was a populist movement. Its time for that movement to rise up again. Not so much to rid our society of monopolies but to rid our society of financial minefields that are ‘too big to fail’. I read a quote on twitter yesterday that said ‘too big to fail means too big to exist’.

And yet the govt’s answer to our problems is to push for more consolidation. Its nutty. Scale and complexity is the enemy of innovation and what ails most of the large businesses in this country, auto in particular, is a structural lack of innovation in the industry architecture

It takes something like 5 years to get a new car designed and built in most large auto companies. That’s too long. I realize that designing and building a new car platform is not like hacking up a new web app. But five years? C’mon. We have to do better than that

And we need to completely neuter the auto industry’s ability to lobby our govt to stop important initiatives like clean/alt+energy and mass transit. Its borderline criminal what the auto industry’s political efforts have done to our global competitive position right now

The same is true of the financial services business, the airline business, electric utilities, and a host of other industries

I am sympathetic to the arguments that we cannot allow the entire supply chain of the auto industry fail and I am certainly aware how many plants will close and jobs will be lost if we let GM, Chrysler, and Ford fail. Its a tough call and Obama has already staked out a pro bailout auto position

So I hope someone in his incoming team reads this and the conversations on this topic that went on via twitter yesterday. If we give taxpayer money to the auto business, it should be to finance a wholesale bustup of the business. One PE firm should buy Volt. Another should buy Buick. A third should buy Jeep. A fourth should buy Lincoln. And if a brand can’t find a buyer at any price with a boatload of taxpayer money behind it then it should fail

This is the best way out of this mess. We have to get the biggest businesses in this country smaller and nimbler, we have to get smart money behind them, builders not spreadsheet pushers, and we must focus on innovation not lobbying. That’s the only way forward that makes sense short of throwing them all under the bus and starting over

Note: I wrote this on the eliptical trainer at the gym so no links and prob some typos. I’ll try to fix both later

Thanks everyone for the traffic!