Posts from February 2009

I think this is big news although I have not seen anyone pick up on it yet. Last night on Charlie Rose, Marc Andreessen told Charlie that he and his longtime business partner (and CEO of Opsware/Loudcloud) Ben Horowitz are getting into the venture capital business on a full-time basis. They are forming a new firm and raising a venture fund.

Marc and Ben have been active angel investors in web/tech for a while now. They are co-investors with our firm Union Square Ventures in a number of companies, including delicious and twitter. They are smart and experienced and plugged in. That's a formula for success.

The entire interview with Charlie is terrific and I agree with almost everything Marc said on the show. But if you want to get to the news about the new VC fund fund, click thru to the video (no idea why you can't embed it) to 18:30 in and watch Marc talk about it.

If you look at the history of Silicon Valley venture capital firms, there is a rich tradition of experienced entrepreneurs and operators leaving the operating side of the business and starting venture firms in the middle of their careers. Marc and Ben are the latest to do this and I expect they'll be very successful and we hope to continue to invest with them as they build their firm.

UPDATE: Now the news is starting to percolate out across the tech blogs:

– PE Hub

– TechCrunch

– Kara

Note: This is a first for the AVC blog. I did not write this post. It was written by Jeff Minch, known to this community as JLM. Jeff has been leaving comments on this blog for the past six to nine months and I've enjoyed reading them very much. Jeff has a very different view than I do about politics and about other areas as well. But you cannot read his opinions and not come away impressed and thinking differently. That's the kind of voices we have here in our community and I am excited about sharing some of them with all of you every once in a while. I don't plan to do this very often, but I do plan to do it from time to time. With that said, please enjoy Jeff's thoughts on the President's housing plan.

Taking it to the Hood
The Homeowner Affordability and Stability Plan

Fred Wilson asked me to react to the President’s housing initiative and I am honored to do so.  I find “A VC” to be the single best blog that I have the opportunity to read primarily because of the content offered by its participants and their obvious qualifications but also because of the comity of the dialogue and the ability for strong willed folks to disagree without being disagreeable.  Fred has chosen some great blog topics and while there is a “forum” quality to the actual dialogue, it is the selection of the topics which focuses all of that intelligence.

The TARP was for Wall Street.  The Stimulus was for Main Street.  The HASP is for the Hood.  There will be much to like and there will be much to dislike.  A frame of reference:

1.    Our Nation was in great measure formed by folks who had a desire to have their own house.  A gross oversimplification, I am sure but a bit of truth nonetheless.  Increasing home ownership in the United States after World War II was one of the single most important elements in the wealth creation and evolution of the culture of that extraordinary time.

2.    Housing is both physical and emotional as it is where our sweetest memories are made, discussed and lived.  It is where our hearts are and if we fail in this arena we have more than just financial failure, we have broken hearts and a diminishing of the American dream.  [If you knew me well, you would be amazed to hear me say something so “squishy” like that but I have my own reasons.  More importantly, I truly believe it.]

3.    Housing — or perhaps I should say abuses of housing, particularly housing finance — is at the root of our current financial problems.  There is plenty of blame to go around without resorting to political finger pointing.  A good idea got swept up in the euphoria of the times and we allowed basic rules of finance to be violated at the personal, industry, banking, regulatory, legislative, GSE and securities levels.  Housing was the spark which ignited the flames which fanned out of control.  It is good therefore that President Obama is addressing a root cause of the problem.

4.    Homes are very important to the fabric of our Nation from a social perspective and while I cannot readily quote any supporting figures, I can say with some conviction that a child raised in a stable home is more likely to become a contributor to society rather than a cost center to society; and, conversely the opposite is also true.  [At the end of the day, all we are trying to do is to get the taxpayers to outnumber the recipients of government largesse.]

5.    Home equity represents the most important (and generally hidden) asset in most folk’s lives when it comes to building long term retirement equity.

So, I am a big fan of stable homes for a number of reasons.

On the whole, the HASP is a damn good start but it is only a start.  Is it perfect right out of the chute?  Hell no.  Here are the things I like in the order in which I like them:

1.    I think the probability of the plan working is dramatically heightened by the President’s wisdom in originating the plan in his office rather than having the Congress draft legislation and running afoul of the partisan minefields such action would generate.  President Obama can barter a bit of political capital in this endeavor by direct sponsorship and can avoid the unifying opposition of having Speaker Pelosi being the plan’s sponsor.

2.    I just love the idea that a Federal Bankruptcy Judge can intervene in the dialogue between a bank and a borrower and take immediate and almost unappealable action to force a mortgage settlement.  This is a shadow of the “cram down” provision of bankruptcy law but it is even more effective because neither party regularly appears in that Court and thus there is a real balance of terror.  Federal Bankruptcy Judges are the most powerful Judges in the judiciary, they are experienced in dealing with tales of woe, they are very decisive and do not suffer fools well.  It will also motivate banks to settle things quickly once they know the model which will be used.  This will help deal with all of the mortgages, including jumbo mortgages, which are not held by the GSEs.  The Federal Bankruptcy Judges I know will be able to modify a mortgage in about 12 minutes.

3.    The application of a specific financial yardstick at 38% of gross income able to be “bought down” to 31% is pragmatic.  Of course, this will be complicated by the ability of a borrower to free up other funds to inject equity but it is a good start.  I would have liked the final residual number to have been 25% because I think we are still headed downward for about 12-18 months.

4.    The other important element of this buy down approach is the ability to now put a definitive price on the formerly “toxic” assets.  Remember, the most important element to trading this stuff off balance sheets has been the inability to price it.  This solves a lot of that problem.

5.    Discrimination between those already in the ditch and those who are at the edge of the abyss as well as those whose only real problem is the declining value of their home is useful and while it doesn’t cover every single circumstance, it does cover a huge portion.

There a couple of areas which merit a bit of discussion and undoubtedly will require some modification.

1.    First, let me ask that everybody go re-read the Parable of the Workers in the Vineyard.  Why?  Because like laborers in the vineyard, the HASP will leave some folks feeling like they were mistreated because they were prudent in their mortgage dealings and will not benefit from the HASP.  My answer?  “Friend, I am doing you no wrong.”  There are just some things in the life of a Nation in which you simply cannot get the toothpaste back into the tube regardless of how firmly we believe that is the just solution.

2.    The plan is simply too complex on its surface.  This is a problem with President Obama, he is smart and he assumes that others are equally smart.  The average Wharton MBA could not read the Executive Summary of this plan and “brief back” its provisions from memory.  The borrowers?  Hey, they didn’t provide income documentation and were not interested in a lot of paperwork to begin with — do you think they are going to come trotting into their bank with a bunch of documentation now?  The plan has to be simple enough that a high school grad (OK, in the top half of his class.) could understand it.

Does a fish taste any different if you catch it with a worm, hook, bobber, line and a cane pole?  KISS — keep it simple for the stupid!

3.    The plan does nothing to stop pending foreclosures.  I would like to have had a 90-day moratorium on foreclosures currently pending.  It is outrageous that banks receiving TARP funds are not called to cooperate fully with all government sponsored bailouts.  They were first in line to receive assistance and they should also be first in line to provide assistance.  These guys owe us!

4.    I hate the provision that if a borrower who has received a loan modification is current in their payments that they receive $1,000 annually for five years.  When a cute little mouse has his leg removed from a trap, he does not negotiate for a piece of the cheese before scurrying away.  This paternal approach is really insulting to all involved.  Everybody should get one chance to be saved with no do overs.

5.    I wish the plan had a provision that the “work out” financing could also be applied to first time home purchasers in order to soak up some of the excess inventory out there.  Missed opportunity to work down the supply of troubled housing and for banks to reduce their REO.

6.    There is a sense that the mortgage modifications are only going to be for five years.  This is silly.  Make them permanent and make the solution permanent.  Five years is not very long for an asset which is normally financed over 30 years and which can last for 100 years.  There is ample evidence that re-default rates are as high as default rates.  Solve the problem permanently.

7.    The government should get an “equity kicker” for their trouble.  If you participate in the plan and peg a new value on your home, then the government should get either a par payoff of a 25% equity kicker above the marked down price for the next ten years.  Why not?

In closing, let me say that of the three plans advanced thus far I like the HASP the best.  Remember we are only talking about a national mortgage delinquency rate of something less than 7%, so while the problem is huge in terms of dollars it is really more manageable in terms of the numbers of folks impacted.  We desperately need a win on the economy and this may be a promising start.

I rate the TARP at zero probability of working because I think that Darwin was right all along.  I rate the Stimulus at 25% with its most significant failing its disconnect between the spending and the creation of jobs.  I rate the HASP at 50% with the possibility to engineer that upward with some simple modifications.  Thanks for listening.

———

Fred's Update: You might enjoy watching the Rick Santelli rant on CNBC in conjunction with this post. What a great discussion and debate we are having here. I love it.

Fred's Update 2: I measure the success of a post by the number of comments. By that score, JLM hit one out of the park with over 100 comments and still growing in less than 24 hours. Well done JLM, great topic, great post, and great discussion. You will be a tough act to follow.

I spent some time this morning reading two articles in the NY Times about Obama's $275bn housing plan. I thought to myself that I wanted to know more about this plan. Is it a smart plan? What are the problems with it? How likely is it that this plan will be helpful in ending the decline in the housing market?

And my mind turned to a blog commenter named JLM who has left some of the best comments here about the pickle we are in with housing and how we are likely to get ourselves out of it.

So this morning I asked JLM to tell us what he thinks of the housing plan. He's agreed to do that and when I get his email I will post it to this blog.

He will be the first and only guest blogger to have posted here in the five+ years I've been doing this.

I still plan to post every day and please don't think I am trying to lighten my load.

But I do think that this blog is slowly turning into a community and its high time that some of the stronger voices get some air time.

Next up will be Steve Kane on IP, if he takes me up on it!

For those that don’t know, Union Square Ventures is an investor in Boxee and I am on the board. For the past several weeks I have watched Boxee's management try their hardest to convince Hulu that Boxee is a big step forward for Hulu and Hulu's content partners.

Unfortunately, Boxee has yet to be successful with that effort and later this week Hulu content will disappear from Boxee. I hope it is a short separation that leads toward a long and happy relationship. Boxee's management is committed to working with Hulu to make that happen as Avner, Boxee's CEO outlined on the Boxee blog.

Boxee is a browser optimized for the 10 ft experience. Much like mobile browsers on phones, Boxee renders the content it finds on the web in a way that optimizes it for the device it runs on (in Boxee's case that is the TV). Boxee is also an RSS reader optimized for the 10 ft experience. Content owners may initially see broswers and RSS readers optimized for TV viewing as disruptive and threatening, but just like mobile browsers are the friend of content owners, so are TV browsers. And Boxee is by far the best TV browser out there for a host of reasons that I outlined in this post when we made our investment in Boxee.

Here's how I came to understand the power of Boxee.

I used to watch Hulu on my living room TV in the Safari browser:

Now I watch Hulu on my living room TV in Boxee:

It's the same content on the same device coming through the same pipe and the only difference is safari is a browser optimized for a computer with a keyboard and a mouse and Boxee is a browser optimized for a TV and a remote.

I spent some time this evening reading the comments on the Hulu blog post. I commend Hulu for being open and transparent about this decision and allowing the community to discuss and debate this decision out in the open. That's the way to do this kind of thing. Naturally, users are upset. There are over seventy comments already on the Hulu blog and over two hundred comments on the Boxee blog. As I tweeted earlier tonite, I hope that Hulu and its content partners take the time to read these comments and think about them.

There's a consistency to the comments and it is confusion first and foremost. Hulu users don't understand the distinction between watching Hulu through Firefox or Safari and wathicng Hulu through Boxee. And many of them are coming back to watching TV because they can watch over the internet, when they want, and how they want. They feel liberated by Hulu and Boxee and see them as a match made in heaven. Which they are. And I sure hope that Hulu and its content partners come to that realization quickly.

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Wall Street research has been in a long and steady decline for years. Between the obvious loss of objectivity brought on by huge investment banking fees being paid to "buy coverage" and regulations like FD which made it almost impossible to get any information out of companies, Wall Street research has lost a lot of its mojo in the past decade.

But that does not mean that there aren't good analysts doing good work. Many of them are not at the large banks and brokerage firms anymore and some of them are even blogging for a living.

There's a new service launching today called Pulse that does a nice job aggregating a lot of these voices, not in the form of research reports, but in the form of relevant comments made about public companies.

I should disclose that I am a shareholder and director of Alacra, the company that is behind Pulse. I've been an investor in Alacra for over ten years and I know the team and the quality of the work they do and Pulse is yet another example of a great product coming out of Alacra.

The thing about Pulse is its "real time" and you get a sense of what analysts are saying right now. Another thing I like is that their definition of analyst is very broad. Most people would not think of Kara Swisher as an analyst, but you can see her comments about companies in Pulse:

You can also see all my comments about public companies here.

But Pulse is really more about full-time professional stock analysts like Doug Freedman, a semiconductor analyst at American Technology Research. You can see his comments here.

If you are an investor or trader who values getting the "pulse of the street" then I think Pulse will be a valuable new service for you. Check it out and let me know what you think.

Over the past week, from Feb 9th to Feb 16th, this blog has been more of a forum than a traditional blog. Here's some stats:

Total Posts: 9
Total Comments Received: 672
Avg Comments/Post: 75
Unique Commenters: 314

What's most impressive to me is that these are not silly comments like LOL or you suck. These are well written, articulate, and informative comments. Many could be blog posts in their own right.

Take a look at the comments to my post yesterday on Apple and Flash. I got completely and totally trashed in that discussion and rightly so as I suggested that Flash is open, which it is not, and missed out on the trend toward HTML5 based solutions. But if you want an education on the future of streaming video and audio on the web, you'll get it in that comment thread. You'll also witness commenters calling me stupid and an idiot, which isn't fun to hear. But if you want a community, you have to have tough skin sometimes.

The discussion that ensued regarding my post on patent trolls is equally fascinating. Most of the comments were sympathetic with my views, but as usual, they added a lot to the discussion and I learned a lot from them. If you take the time to read them, you'll hear from the small inventors who would lose out if my suggestions were implemented and the victims of patent trolls who shed even more light on the problems that initiated my post.

But the post that generated the most comments this past week is the one where I outlined the kind of blogroll I'd like for this blog. That got 151 comments and turned into a live discussion of how one could build it and what it should do and how it should work. Even more impressive is I got somwhere around five live working versions of the blogroll that I am now testing.

I believe this community is one of the liveliest blog communities I know of. And it's come about for several reasons. First, being a VC investor is a huge advantage. Entrepreneurs flock here to get a sense of what I am thinking about. If I was just another tech pundit, this blog would not be the same. I realize that. But when you get thousands of web entrepreneurs reading this blog every day, you get magic.

Another reason is the disqus comment system. You all know that our firm is an investor in Disqus and I am biased. But I've used all of the comment systems out there. I leave about five or ten comments a day on blogs other than this one. There is no better system out there. I'll defend that statement until I am blue in the face. And you are seeing the power of the disqus system on this blog. It turns blogs into forums if you use it right.

The final reason is that I engage in the comments. Of those 672 comments, I bet 100 were mine. I don't reply to every comment, but I reply to many. And those replies start threads which are some of the best discussions of all in the comments.

All of this is fantastic for many reasons but there is one that stands out as the most valuable to me. It makes me a better investor. Kontra said this in his comment on the Apple/Flash thing:

I do have people advising me. It's you. And thank you for doing such a damn good job of it.

Matt Blumberg, CEO of our portfolio company Return Path, has a post on his blog today about the patent troll issue. His company, Return Path, is the company that spent $500,000 last year defending itself against a baseless patent infringement claim.

Matt says:

Matt goes on to make one additional recommendation in the ongoing debate about patent reform. If this is an area you are interested in, click thru and read the whole post.

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I think the news that Flash is coming to smartphones over the next year is a big deal. Most of the rich media experiences I have on the web are in flash. YouTube's success had a lot to do with its choice of Flash for its video player. Now almost every video site on the web uses a Flash video player. The same is true of audio. It used to be that when you wanted to listen to streaming audio, you had to use windows media player, the real player, or a link to iTunes, but all that's gone, thanks again to Flash. Whether its last.fm, Pandora, most radio station web streams, or hypemachine, you are listening via Flash.

I have been able to port most of my web activity pretty seamlessly to a smartphone, either iPhone or Blackberry. But the one thing I've not been able to replicate is the seamless experiences of watching video or listening to streaming audio on my phone (downloading an app to listen to music is not seamless). I realize that the mobile networks may not yet be ready for hundreds of millions of people watching or listening to streaming media on their smartphones, but they will be someday and getting Flash onto smartphones is going to accelerate the demand for this.

It's also true that a lot of the interesting new desktop apps like Twhirl and Tweetdeck are written for AIR, Flash's runtime cousin for the desktop. I'd love to have apps like this on my smartphone too.

So it's very exciting to me that Flash is making a big move over the next year onto smartphones. I'm also very excited to see Nokia and Adobe creating the Open Screen Project and Open Screen Fund to promote an open and consistent experience for web browsing and mobile apps across mobile devices. The mobile web needs to be just like the web for innovation to flourish and capital to flow.

Which takes me back to the title of this post. I believe Apple is making a mistake by snubbing Adobe's desire to get Flash on the iPhone. And I believe Apple doesn't share in Adobe and Nokia's vision of an open and consistent experience for web browsing and mobile apps. It seems to me that Apple is interested in replicating its iTunes/iPod strategy it used to dominate digital music to dominate the mobile web.

I don't think that will work. In fact, I don't think the iTunes/iPod strategy has much life left in it. Things like Pandora, MySpace Music, music blogging, and other forms of streaming music will eventually chip away at that franchise. But leaving the digital music situation alone for the moment, the mobile web is not going to be dominated by a single device and a single app ecosystem. I don't even think an app ecosystem is the long term solution for the mobile web. It's a bridge enviroment that allows for rich experiences on devices that don't have reliable high bandwidth connections yet.

But the mobile web will eventually just be the web. And a big part of getting it there is to get the tools that allow us to seamlessly consume rich media on the web onto mobile devices. To me that means Flash. I'm rooting for Adobe and its allies like Nokia and Palm (and hopefully Blackberry) to win this game. If they do, we'll all be much better off because of it.

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I've written on the subjects of patents before on this blog and on the Union Square Ventures weblog. There have been good discussions around this issue, both in this post and in the sessions event that the USV weblog posts talks about. At this point, after 22 years in the venture capital business and countless hours discussing this issue, I come out on the side of less patent protection in information technology, no patent protection for software and business methods, and first and foremost the elimination of patent trolls.

This post is about patent trolls. On friday I wrote this twitter post.

I received at least 50 replies, with almost everyone agreeing with me. But as anyone who knows him would suspect, Steve Kane did not completely agree with me. He wrote:

and

Steve makes the important and valid point that the small inventor who comes up with some novel idea and patents it is then entitled to enforce the patent and get economic value from it. If the inventor chooses to extract that value by selling it to a patent troll, well then that's his/her choice, isn't it?

Irwin Gross, a former IP lawyer and now a partner at the top VC firm Sequoia Capital, made this argument at our Union Square Sessions event on public policy issues facing the venture industry. Irwin said:

This is the the "market is always right" argument. One that has been challenged in the past year for sure in the area of mortgage backed and deriviative securities and a lot more.

I'm a fan of allowing market forces to work in most cases, but not in the area of patents. And here's why. It's a huge tax on innovation.

At this very moment, I know of three lawsuits against our portfolio companies being brought by patent trolls. And one other portfolio company of ours spent $500,000 last year (10% of the venture round they raised) defending themselves from a totally baseless claim by another patent troll. That claim was thrown out and our company is now suing the patent troll to reclaim legal fees.

I am all for trying to protect the small inventor, but solo inventor who does not commercialize his/her technology does not bring nearly as much economic value (and jobs) to our society as the entrepreneur who actually takes the risk, starts the company, hires people, commercializes the technology, raises the necessary capital, and builds lasting sustainable value.

When that entrepreneur and the company he/she creates is hit with a baseless claim from a patent troll represented by lawyers working completely on contingency, it's a very big problem. As you can see, it can take a lot of time and money to fight and win.

The other option, and I see our companies do this all the time, is to pay a fraction of that $500k or more to settle the case and make the patent troll go away. That can be $25k to $100k in my experience. But that payment just funds the patent troll to go do it again and again. It's the expedient and rational thing to do for many entrepreneurs, but it's the wrong answer for the venture ecosystem and our society as a whole.

What we need to do is come together as a community of information technology companies, entrepreneurs, and investors to gang up on these trolls. I'm not going to suggest all the things we need to do in this regard. My partner Brad is doing a lot of work behind the scenes to figure out what we can do as an industry to fight the trolls and at the right time I'll write more about what needs to be done.

But there are two ideas I'd like to put forward as legislative reform that I think would be very helpful. The first is to force the plaintiff to pay the defendant's legal fees if a patent infringement case is lost. That would force the trolls to actually do some work and make sure they have a really strong case before bringing it. That is clearly not being done now because the trolls can sue anyone they want with relative impunity and no liability. Of course the defendant, like our company that spent $500k last year, can sue to reclaim legal fees, but that case is hard to win and costs more money that's not going to hiring people, building technology, and delivering new products and services. If the losing plaintiff has to pick up the defendant's legal fees, I think we'll get closer to Irwin's market forces. There will still be money to back a strong case, but there won't be any money to back a weak one.

The second idea, which is more controversial, was suggested by Nathan (who designed this blog for me) on twitter on friday:

Patents and copyright should have a "use it or lose it" clause like trademarks.

I like this idea as well. The small inventor who we are trying to protect can still get economic value from his/her patent, but it must be sold to an operating company that will use the patent to defend an operating business, not a financial investor who is just going to run around suing companies with impunity.

I have no idea whether the political environment is ready for this kind of reform. I would hope with a new adminstration that is tech friendly and desperately trying to find new sources of economic energy for this country, we'd have a more welcome ear in washington for this kind of thinking. Because we can't keep spending 10 cents of every dollar we raise in venture funding fighting patent trolls. That's just too expensive, for our companies and our society.