Posts from January 2009

I am guilty of making observations based on tiny sample sizes and then treating my conclusion as fact. These "samples" are usually my family in one form or another. My kids total reliance on facebook has convinced me of the vitality of that service and its dominance. My son’s approach to video games has colored how I think about gaming. And recently, the Gotham Gal‘s late but inevitable adoption of intraday news consumption has taught me something about news publishing on the web.

The Gotham Gal has been religious about reading the NY Times in paper and doing the crossword as ‘dessert’ as long as I’ve known her (28 yrs now). I haven’t cared about the NY Times in paper form for years but it’s still part of her daily routine.

So this past year, during the presidential election, when she went online 5x per day to see what was going on, you’d think shed have gone to the nytimes.com. But she didn’t. She went to Huffpo.

And that habit has not changed since early November. She reads the paper in the morning as always and then checks in with her trusted blogs and web news services throughout the day and evening, like the trader who reads the WSJ in paper form on the train in and then hangs out on his/her Bloomberg all day long. I’ve asked her to post on all the online news sources she checks every day and she just did that. Here it is.

Although I am basing all of this on a sample size of one, it teaches me some important things. First, the mainstream newspaper reader is just making this transition to intraday news consumption now. Second, they will not blindly follow their offline brand loyalty when they go online. And most importantly, publishing news online is fundamentally different from publishing news offline.

The Huffpo wants to be "The Internet Newspaper of Record." I thought it was a completely audacious goal when I first heard it. Its still a long shot but I think they’ve proved me completely wrong on one point. They have established a large and growing mainstream audience of news consumers on the web. They are a force to be reckoned with and complicate the Times and other’s goals of sustaining themselves with their online businesses.

The Journal faces the same challenges. When I invested in TheStreet.com in 1997, I thought they would do a ‘Huffpo’ on the Journal, but they did not. Neither did Marketwatch although they came closer. I think services like seekingalpha, realclearmarkets, and even tiny (but awesome) new mogul are a better model than the Journal and that’s where I get my intraday non-tech market news.

I am writing this post on the treadmill at the gym on my ‘quill pen’ so there aren’t any links right now (now there are) and I don’t have time to lay out what Huffpo and the other upstarts I mention are doing right but I’d advise you all to spend some time comparing and contrasting and you’ll get the gist pretty quickly.

UPDATE: On my morning visit to New Mogul, I found this Atlantic piece penned by my friend Michael Hirschorn. Seems like Michael has been thinking about some of the same things I’ve been thinking about. Only he’s a much better writer than me. Do yourself a favor and give it a read. Here’s a taste to incent you to read the rest:

In this scenario, nytimes.com would begin to resemble a bigger, better, and less partisan version of the Huffington Post,
which, until someone smarter or more deep-pocketed comes along, is the
prototype for the future of journalism: a healthy dose of aggregation,
a wide range of contributors, and a growing offering of original
reporting. This combination has allowed the HuffPo to digest the news
that matters most to its readers at minimal cost, while it focuses
resources in the highest-impact areas. What the HuffPo does not have,
at least not yet, is a roster of contributors who can set agendas,
conduct in-depth investigations, or break high-level news. But the
post-print Times still would. 

Our portfolio company Bug Labs just announced five new modules for it’s open source hardware device.  They are:

BUGprojector
BUGsound
BUGbee
BUGwifi
BUG3g GSM

The BUGsound, pictured here, is pretty neat:

BUGsound is for music lovers.  With a 20-mm speaker, omnidirectional microphone and four stereo jacks for input, output, headphones and microphone, we’d like to think we can help inspire the next generation of hacker/musicians. And with the onboard hardware codecs, you can also program BUGsound to act as an audio processing server.

You can see all of them in action at the BUG booth at CES which is booth #IP209.

I posted quite a bit late last year about the fact that I was actively buying Google, Apple, and Amazon during the market meltdown. From late september until thanksgiving, I bought these stocks four or five times as they dropped their late November lows. Over that period I built up positions in all three stocks that averaged into some pretty attractive prices. The average price I paid for $goog during that period is $320, the average price I paid for $appl during that period is $87 and the average price I paid for $amzn during that period is $37.50.

My thinking was (and is) that these are great companies and the market was just "giving them away". Nobody was buying them, so I figured I should. And I did.

Last night I went out to dinner after the NY Tech Meetup with a bunch of friends including several pretty sharp public market investors like Howard Lindzon, Roger Ehrenberg, and Phil Pearlman. We got to talking about stocks as the dinner went on and specifically we talk about Apple and Google.

The story on Apple is Jobs and his health. There were eight of us in all at dinner and not one of us, I mean nobody, that believed Jobs is healthy. And none of us believed the Apple’s PR team is being straight on this issue. As good as the company is, I just can’t own a stock when I don’t believe the company is being straight with investors. So I am selling my entire position in Apple this morning including the stock I bought earlier than last fall. My average price on my entire position in Apple is $96, so I’ll take a small loss on this and a small gain on the stock I bought during the meltdown last fall. My partner Albert has a slightly different take on $aapl but comes out in roughly the same place as I do.

The story on Google is more complicated. I still believe completely in my thesis on Google. I think Google is incredibly well positioned in the Internet economy and I think it’s a bargain at ~$100bn. But it’s run from near $250 to almost $350 in the past month and a half and we still don’t know how their fourth quarter came out. I can sell my entire position in Google, including stock that I bought earlier in 2008 at much higher prices, and get out whole. And I can make a small gain on the stock I acquired during the meltdown. So, I’ve decided to do just that, watch how the first quarter comes out, and then think about rebuilding a position in Google once we know how the bad economy is affecting their business and how they are going to react to it. I said in my "wishes for 2009" that I would love to see Google "rationalize their business". If they actively start doing that, then I’ll get back into this one with even more zeal.

I’m keeping my Amazon stock. I love what Bezos is doing with that company and I think Amazon is going to come out of this downturn stronger than ever.

So that’s the story. I thought I’d tell you before I actually sold the stock which I’ll do this morning when the market opens via limit orders.

Our portfolio company Zynga is the leading developer of social games. Zynga games (such as Texas Hold’em Poker, Mafia Wars, and Yoville) are currently available on eight different social platforms (Myspace, Facebook, Hi5, Bebo, Yahoo, Tagged, Friendster, and iPhone) and they are adding new platforms all the time. Zynga’s Live Poker for iPhone was recently featured in a story on social gaming in the Economist.

I’ve known Zynga’s founder Mark Pincus for almost 15 years and when I met him he was leaving the world of wall street and private equity to become a web entrepreneur. Now Mark is going back to his old stomping ground to find smart and scrappy producers to manage the development of new Zynga games.

Mark wrote on his blog the other day:

We are looking for smart, aggressive entrepreneurial game producers.

We are open to anyone from game industry, consumer internet or i-banking analysts and associates or mgt consultants.

You should be numbers oriented, love games and have a competitive spirit.

Our company is a meritorcracy where those delivering great results advance fast.

Email [email protected]

So if you are a smart hungry person stuck in a boring investment banking, private equity associate, or management consulting job who loves games and wants to work in a high growth startup, click on that link and send Flo an email.

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Josh Stylman sent out a tweet yesterday that I agree with:

The Hype Machine is the Rolling Stone of our time – defining, interpreting and pushing culture. http://bit.ly/xuJt

I don’t want to belittle what Rolling Stone was in terms of defining and interpreting culture. It’s impact was much greater than music. In fact, I think it’s political work in the age of Hunter Thompson and Richard Nixon was among its finest moments. And I don’t mean to insult Rolling Stone by writing this in the past tense, but honestly it stopped meaning anything to me about 25 years ago.

But in this day and age, when you want to know what’s happening in the music scene, you log onto the Hype Machine and see what’s going down. It’s participatory culture at it’s finest. The Hype Machine is not programmed, it’s a smart aggregator, like Techmeme or Real Clear Politics. The Hype Machine goes out and crawls the music blogs and figures out what’s getting blogged the most and then pulls that together onto a single page so you can listen and link out and go check things out.

I’ve been obsessed with the Hype Machine for years and readers of this blog will certainly be well aware of my fondness for the service. I check it every day to see what’s happening. But it’s greatest strength is when I am tired of what I am listening to and want something new. Pat McCarthy said it yesterday on twitter:

Yes, Hype Machine is great.  Anytime I’m tired of whatever I’m listening to I go to the popular page
to find something new.

The cool thing is that’s how the Hype Machine was formed. Anthony was tired of what he was listening to and wanted to find something new. So he built a crawler of music blogs and the rest is history. Like many of the best web services, the Hype Machine is a low cost lean and mean operation. It’s built and maintained by just four people; Anthony, Taylor, Zoya, and Scott.

There are many web music services with more users than the Hype Machine.

But none of the other web music services (imeem, playlist, pandora, last.fm, jango, blip.fm, lala, 8tracks, myspace music, fredwilson.fm, …..) do what Josh so nicely articulated. The Hype Machine defines music culture.

And I’m telling you all this as a prelude to the big point. Team Hype Machine has launched The Music Blog Zeitgeist 2008. Each day this week, they’ll release the names of ten artists and ten albums that collectively make up the top 50. And they are also showcasing the top 50 songs by month.

They’ve also teamed up with Blog Fresh Radio to produce a radio show featuring all of this music. I’m listening now and so can you.

The Hype Machine is small, influential, and profitable. It doesn’t take a lot of revenue to cover their costs and they are the model of a bootstrapped, scrappy, and useful web service. I love the Hype Machine and think they killed it with the music blog zeitgeist this year.

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This should sound pretty obvious, but it isn’t. And I think a lot of people have been violating this rule, particularly on wall street and in big corporations and the economic mess we are in is at least partly because of this problem.

One of my favorite investors on wall street is a guy I’ve known for almost ten years who has been in and around the hedge fund business for more than twenty-five years. Whenever he talks about his business or the funds he is invested in, he always cites how much of his own money in in his fund and how much of the fund managers he invests with have in their funds. The numbers are impressive. Often 25-50% of the funds he invests in are comprised of the manager’s own money. His business was affected in 2008 like everyone else, but I have a lot of confidence that he’ll come out of this mess way ahead of most others.

In our business, we have put a significant amount of our own net worth into our funds. It’s often difficult to have a lot of your net worth tied up in illiquid assets like venture capital funds, but when you are writing a check every time you make an investment, it has a way of clarifying the mind.

This is particularly important when you are facing the decision to support or walk away from an old and  difficult/troubled investment. Most of the time, these kinds of financings are highly dilutive and very punitive if you don’t participate. It’s really tempting to put more money in because if you don’t, you’ll get wiped out. But if you do put money in, and the investment still fails, then you’ve lost even more of your own money and your partners money. The bigger personal check you have to write, the more likely you’ll make the right decision. If you don’t have to write any checks and all the money you are investing is other people’s money, then it’s incredibly tempting to "pour good money after bad."

If I think about all the issues we’ve had on wall street over the past year (see Michael Lewis and David Einhorn’s two part column for a great description of them), I think most of these issues have been caused by investors playing with other people’s money without enough of their own net worth at stake. Financial leverage is a good example of playing with other people’s money. You put up a tiny amount of your own money and you borrow the rest. If things don’t go your way, you write off the little you put up and the lender takes the bath. That’s been going on in the financial markets and the housing markets for the better part of ten years and we are now seeing the cost of that approach.

Why is it that most of the best managed companies are operated by their owners? Think about Apple, Google, News Corp, etc. All of these companies are run by owners who have a huge amount of their net worth tied up in the business. The same is true of Microsoft until recently when Gates left the business for the most part. But even Gates still has a lot of money tied up in Microsoft. When these leaders make decisions, they are risking their own capital/net worth, not just the capital and net worth of shareholders who they supposedly work for, but really don’t.

We don’t like to overfund the companies we invest in for a lot of reasons, but there are two big ones. First, the less we invest, the more the founders and managers own and that makes them operate like the company is theirs, not ours. And I also like the discipline that managers have when they are operating with small balance sheets. It causes them to look at every expenditure carefully and act as if the money is their own. As I’ve said, that generally leads to better decisions.

It is true that entrepreneurs and managers often are too conservative when all the money they are working with is their own. And that’s a good reason to bring in other capital, ideally sophisticated investors who understand the business and can add value. But even when you do that, you should treat the investors capital as if it was your own. It’s a mindset, and an important one. We’ve seen all too frequently what can happen when people stop operating that way.

I’m writing this on a cross Atlantic flight from Paris to New York City. When we left NYC 16 days ago, I was burnt out, tired, and cranky. Year-end always does that to me. It’s not that I mind the specific year-end tasks but the totality of them does weigh on me.  And in general, this fall has been a difficult period for a host of reasons, some obvious like the market meltdown, some that I’ve not blogged about and don’t plan to.

In the past 16 days, we visited Milan, Munich, Berlin, and Paris. Only Milan was totally new territory for me. But my kids had only been to Paris before so most of the trip was new sights, sounds, and smells for them. That was great to see. They are now totally sold on Berlin, which joins Paris, Sydney, Melbourne, Cape Town, Rome and Florence on their list of top cities outside of the US.

One of the bummers of the fall of 2008 was the terrorist attack in Mumbai which led us to postpone our trip to India until winter break 2009. We’ve got to get our family to Asia. The only part of Asia they’ve been to is Thailand (and Australia if you can call that Asia). It’s time for us to explore India, China, Korea, Singapore, and Japan. I hope and expect we’ll start that in 2009.

The other big milestone coming in 2009 is the departure of our oldest child for college. The college application process was certainly one of the sources of stress in our family in the fall and I am sure it contributed to my burnt out state of mind. We left the application process to our daughter and tried to stay out of the way but her hell is our hell, that’s just how it is with teenagers. Now she has all of her applications in and the chips will fall where they may. I hope she gets into the right place for her. And it’s going to be a different family dynamic starting this fall. I’m counting on these year end trips to keep our family coming back together for a couple weeks every year for at least a few more years (hopefully enough to get Asia done and the rest of our kids in college).

As our kids have gotten older, travelling with them has changed. They are more self-sufficient and can explore cities themselves. They certainly did that in Paris this summer and again this past week. They also did a bit of that in Berlin. But travelling with three teens is always a balancing act. They know what they want and they know what they don’t want. We’ve taken to having our kids help plan the trip and build the itinerary. That helps a lot because the activities we do have been chosen by them as well as us. Even with that technique, I’d say that travelling with teenage kids has taught me a lot about patience, biting my tongue, and handing over the keys to the car. For example, I used to be the navigator in the family. When we needed to get somewhere, everyone would turn to me and I’d show the way. That ended sometime in the past couple years and both my girls are much better at it than me now. So I’ve given up trying to figure what metro to get on and which direction to walk in when we get off. It’s a bit humbling (since I was always the navigator in my family growing up) but I’ve come to terms with it. Better to fall in line than get upset about it.

I used to post a lot about the places we travelled to and what I thought about them. I’ve stopped doing that for several reasons. First, the Gotham Gal does that on her blog and she’s good at it. I think her posts on this trip have been excellent and if you are planning on being in Milan, Munich, Berlin, or Paris anytime soon, you should give them a read. Second, I now prefer to shoot a photo on my blackberry and twitter it (via the flickr to twitter service) than to wait until I’m back at the hotel to post about the activity. And I’ve also been posting a bit of our travel experiences on tumblr at fredwilson.vc (usually by emailing in the post which works great in tumblr).

On this trip, my family never really got off of NYC time. They’d all go to sleep around 2-3am and get up around noon. I made the shift pretty quickly to a midnight to 8:30/9am sleeptime and so I had a lot of free time in the mornings. I’d generally go to the gym for an hour and then hang out in the hotel lobby reading all the English language papers (FT is my favorite, then Int’l Herald Tribune) and checking email, twitter, blogs, and blogging on my blackberry.

I’ve written a lot about this already, but the blogging I did on this trip was some of the most enjoyable blogging I’ve done in a long time. First, I had the time and was relaxed and eased into it. When I’m at home, certainly during the week, I generally post between 5am and 6am so I can get to the gym and home in time to wake the family at 7am. That puts a certain time crunch on my blogging and I often will bang out my daily post in 15-20 minutes once I decide what it is I want to write about.

I’ve learned this trip that having more free time, getting more sleep, and a relaxed morning schedule has a very positive effect on me. I am going to try to figure out how to carry that forward into my daily routine. If I made my first appointments every day at 11am, that could really work out well for me. I’d sleep later, go to the gym later, and have a more relaxed breakfast routine in which I could blog on my blackberry with an espresso and a yogurt in front of me.

That would mean eliminating breakfast meetings, which are a big part of my weekly schedule. It would also mean taking less meetings generally which is something I’ve been wanting to do for a while but is hard to reconcile with the “always available” mode of engagement I want to take with entrepreneurs. But I think I’m going to give it a try and see how it goes. I can always break the 11am start time rule when necessary but having it in place could be very good for my productivity and state of mind.
I said I wasn’t going to have a new year’s resolution this year and I meant it, but at dinner on New Years Eve, everyone in my family went around the table and made one goal for 2009. Mine is to “say no more often”. My mom always lamented that she had a hard time saying no and I do too. It’s not that I don’t say no all the time. It feels like I do it 20 times a day with entrepreneurs who send their proposals to me. But I am going to do it more. No to meetings. No to interviews. No to conferences. No to returning every email. No to investments. I think it’s something I need to do more of and will do more of this year.

But I don’t want to end this post on a negative tone. If you’ve been following this blog over the past two weeks that I’ve been away, I think you’ve picked up a very hopeful tone. I am with the majority who think that 2009 will be a difficult year on many levels. But I am optimistic because I believe in the work that I do and I believe in the people I work with and the people we’ve backed and the people that we will back this year. Starting companies, particularly technology-based companies is something we need even more of today in our country and our world and I am proud to be an active participant in the venture capital/startup ecosystem that makes this happen. And I’m happy to be re-entering that world in 2009 with a clear head and a positive outlook.

One of the great things about being in business with serial entrepreneurs is that they have a wealth of talented people they’ve worked with in past startups to tap into as the company grows.

Some founding teams stick together from startup to startup and its always great to get the chance to back a whole team of successful serial entrepreneurs. But that doesn’t happen very often.

Success creates wealth and wealth and ambition generally lead talented startup people to try their own startups. Its like when the Beatles broke up and John, Paul, and George each went on to solo careers.

But sometimes a startup is so exciting and full of potential that it pulls the dream team back together. Everyone in startup land likes to work on a big winner and so many entrepreneurs are willing to give up on their own startup dreams (at least temporarily) and get the band back together for a while.

We are seeing this play out in a number of our portfolio companies right now and its a very encouraging sign. It may also be true that as times get tougher, the best teams are coming together and consolidating around the best opportunities.

Whatever the reason for it, it’s very exciting to see. Teams that have worked together successfully before know the strenghts and weaknesses of each other and they know how to get along, make hard decisions, and move the ball forward each and every day.

One thing that’s really hard in putting the band back together is equity stakes. When you have a team that was together in a prior company, they have the knowledge and history of their respective value and ownership stakes hard wired in their mind.

When some come back to join the band well after the company has been formed, the equity stakes that can be offered are often much less and certainly in a different balance. I’ve seen this problem delay and even prevent putting the band back together.

One thing I generally advise is to be more generous with equity being offered to a former colleague or partner than the market might dictate. For one thing, you know the value of the person much better. And also, you can argue that even though the stake being offered is lower than they might want or expect, its higher than market. That often does the trick.

The one area I think this approach is the most effective is with engineering talent and engineering management. Its so hard to build a technical team that can deliver the right product in the right timeframe and works well with the rest of the company.

I once flew from SF to NYC seated next to Steve Chen, co-founder of YouTube. When I asked him about their ability to scale the service without many issues he said ‘I never worried about scaling issues. Whenever we needed more engineering talent, we’d just tap into our network of former colleagues from PayPal and eBay’. It didn’t hurt that eBay/PayPal had become a big company by then and talented people were vested and chomping at the bit for a new challenge.

Putting the band back together is a key reason why places like silicon valley have a competitive advantage over other startup regions. But locations like New York City, Boston, Seattle and a few other regions around the world certainly have enough history of startup success now that they benefit from the same effects.

So when you are growing fast and trying to find the right talent to match the opportunity, you should always try to put the band back together if you can.

I’ve been reading a "pre-galley" of Jeff Jarvis’ new book What Would Google Do?  It comes out on January 27th. It’s a good read, perfect for a flight. It’s not too dense, full of great quotes and insights. I’m enjoying it. One of my favorite take-aways from the book is the value of public interaction.

Early in the book, Jeff quotes Caterina Fake, co-founder of Flickr, saying that early on they made an important decision when each photo uploaded to Flickr "defaulted to public". The ensuing interaction around the photos gave life to the service and helped it become what it is today.

But my favorite story on this topic from Jeff’s book is about Mark Zuckerberg while he was still a student at Harvard. It goes like this:

At Davos, Mark told the story of an art class he took at Harvard. He was busy starting Facebook and didn’t have time to attend the class or study. The final exam was a week away and he was worried about flunking. So he went to the Internet and downloaded images of all the art that he knew would be on the exam (not sure how he knew that – Jeff leaves that part out). He puts them all up on a web page and adds blank boxes under each of them. Then he emails the web page to all of his classmates and tells them he just put up a study guide. The class responds by marking up the page, editing each other, and getting it perfect. Zuckerberg aces the exam, of course, but also the professor told him that the entire class had done much better than usual on the exam.

I like this story because it shows the value of public interaction. Yes, Mark in classic Tom Sawyer fashion got them to do his work for him, but they also got better as a group. They did it together.

I got a comment from a reader named Michael Rattner last week.  In it he said:

When I was an engineering TA about a decade ago, I made a rule: I would
not provide homework help over email, but only provide it in the class
forum. My initial reason was that, with 150 students, I didn’t have
time for so much email and I wanted all my hints to be available to all
the students, equally. The students weren’t happy about this, until I
proved that any question asked in the forum was answered by me within a
couple of hours (and generally, minutes).

But what was cool was
that once the discussions became public, the answers kept getting
better, because rather than me interacting with one student at a time,
I was continuously challenged by all my students at the same time! And
students were helping students.

Unfortunately university policy
was to delete the forums after a class was over, to prevent cheating,
or some such petty reason.

But to summarize, many to many
communication still does not have the respect it deserves, but it is a
very powerful communications medium.

That’s an equally powerful story with a bad ending. Deleting public forums is wrong in my view. This is knowledge we’re talking about folks. And deleting knowledge is a bad idea, period.

I encourage all of our companies and all the companies that I meet with to "default to public" as much as they possibly can. Sure, there are some things that should remain private, but not nearly as many things as people initially think. The value of public discourse and enagement around content/information/knowledge vastly outweighs most of the privacy concerns most of the time.