Posts from March 2009

A New Approach To Facebook

I tweeted about all this yesterday so some of you probably know this already but I figured I should blog about it as well.

For years, I've had a Facebook account but I've never really used it. I've just pumped information (blog + twitter) into Facebook and that's about it. I've never had a particularly scientific approach to who I friend and who I don't and over the years I built up about 360 "friends" and another 1000 people who I never confirmed but also did not deny.

In that past couple months, a few things have changed about my use of Facebook:

1) My brothers and some high school friends started using Facebook pretty actively. All of a sudden, there were things on Facebook that I cared about that were not happening on Twitter or in the blogs.

2) Facebook redesigned the home page to an interface I understand and like and I started to get real value from it.

3) My two daughters decided they would "friend" me on Facebook, something they've refused to do for over four years. The main reason is that they use Facebook as their default photo sharing service and they are posting photos of me and our family and tagging me in them. And they wanted me to see those photos.

So I started visiting Facebook every day and I found it way too busy. I was having a hard time finding the information I cared about inside all the other information there, most of which I was already seeing on Twitter.

So I decided to do something pretty radical. I deleted about 300 "friends" on Facebook yesterday and took my total friend count down to 56. I've limited my Facebook friends to family and close friends. My methodology is something akin to who I'd invite to a family wedding or bar/bat mitzvah. I realize that a lot of the 300 people I nuked were using Facebook to follow me and they can no longer do that.

My reasoning was as follows: I feel that between Twitter, this blog, and my tumblog at, there are plenty of public places on the web that you can follow me and all of them have RSS feeds for those who want the content pushed to them. I feel that Facebook is by default private and it's become a good place for me to network with my close friends and family privately.

But there was a good discussion on twitter yesterday led by Brandon Wirtz and Adrian Bye who pointed out that I could get the best of both worlds by creating a "fan page" on Facebook and let anyone who wants to follow me there. As much as I dislike the sound of the word "fan", I like the idea and I've done just that.

If you are among the 300 people who I nuked from my friend list on Facebook or the ~1000 people who I never agreed to friend on Facebook, or just someone who wants to follow me on Facebook, you can now do that at this page. I am already publishing all the posts from this blog to my Facebook fan page and I'd like to also publish all my twitter and tumblr posts but I don't know how to do that. The Notes app only allows me to publish one RSS feed to my fan page. If you know how to do this, please leave me a comment and I'll do that immediately.

I hope this works out for everyone who was following me on Facebook. I realize it's a bit insulting that I don't want to follow everyone back, but I honestly don't know how to follow 365 people on two different services. It's all I can do and then some to stay up to date with that many people on Twitter. I am curious to hear what people think of this new approach.

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The Book Market Stares At Ubiquity

Random House gave me a Kindle as a gift for do...Image by fredwilson via Flickr

I was wrong about the Kindle when it first came out 18 months ago. I thought a dedicated device for reading was silly and that I'd be doing all my reading on an iPhone or a Blackberry. And I was pissed, and still am pissed, that you all have to pay to read this blog on the Kindle. That's why I refused when Amazon wanted to include this blog in its blog directory.

But what I missed and now understand is that the digital ink technology makes reading long form text on a mobile device as good of an experience as reading a book. Jacob Weisberg says in Slate this weekend that it is actually better than reading a book.

Jacob's column is well worth reading and he goes on to say that the era of digital books is upon us and paper books (for the most part) are soon to be a thing of the past:

But however the technology and marketplace evolve, Jeff Bezos has built
a machine that marks a cultural revolution. The Kindle 2 signals that
after a happy, 550-year union, reading and printing are getting
separated. It tells us that printed books, the most important artifacts of human civilization, are going to join newspapers and magazines on the road to obsolescence.

I got a Kindle just over a week ago. It has changed the way I think about reading. I have a couple dozen books on it and I go back and forth between them in a way that I have never done with books. I am in the process of reading about six books in parallel and I love the way the Kindle allows me to read what I am in the mood for at that moment in time. This is what I am currently reading on my Kindle:

The Forever War – Dexter Filkins
Rapture For The Geeks – Richard Dooling
The Fred Factor – Mark Sanborn
Bobby Flay's Burger Fries & Shakes
Buy*Ology – Martin Lindstrom
What Would Google Do – Jeff Jarvis (re-reading parts of it for a second time)

Granted, I was given the Kindle by Random House and they stocked it with a couple dozen books and many of the ones I am reading now I did not purchase. But when I am done with them, I am going to buy a half dozen more (at least).

We've seen this in every form of media that goes digital. It moves from an economy of scarcity to an economy of ubiquity. I have way more music today than ever before. I listen to at least a half dozen artists every day and sometimes a couple dozen. Same with video and news. Success in the digital era is all about embracing ubiquity and harnessing it for economic gain.

The reason Random House gave me a Kindle with a couple dozen books on it is that I spoke at their digital lunch series. During the Q&A, someone asked me about ebook pricing. I had yet to use a Kindle, but my reaction was immediate. I suggested they lower the ebook prices as low as they can (four to five dollars maybe?) and also consider selling chapters with an upsell to buy the entire book (as iTunes now offers).

Reading is addcitive on a Kindle. If authors and their publishers see that and make buying a book an impulse purchase (like a ringtone or a game on a mobile phone) they will see way more purchasing activity, more reading, and more addicted readers.

And as Jacob says in the closing of his Slate piece:

Reading without paper might make literature more urgent and accessible
than it was before the technological revolution, just like Gutenberg

I have no doubt that this is true.

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#VC & Technology

New Disqus Look And Feel

Disqus has rewritten much of its comment system and is in the process of pushing it out to the blogs that use it. The main purpose of the rewrite was to make the service much faster but there are also some nice new interface changes.

Since this blog is one of the more active disqus communities, they've chosen to give us one of the first looks at the new system. We are live with the new code. Here is a description of the interface changes they've made.

Please give it a look over and let me and disqus know what you think in the comments.


What Is A Good Venture Return?

Lawrence Aragon at PE Hub used the news that Cisco paid $590mm (in stock) for Pure Digital the maker of the super popular Flip Cam to ask this question.

it sounds like a pretty good deal, but you have to understand that the
VCs put $95 million into Pure, which makes the Flip digital video
camera. Assuming they own half of the company, that’s a return of just
over 3x their money. For a middle-of-the road VC firm, that would be a
decent return, but for big name backers Benchmark Capital and Sequoia
Captial that’s pretty much a dud.

It's a good question and worthy of a discussion. That's what blogs are for, so let's have it.

My friend Mike Feinstein points out in the comments to Lawrence's post that the VCs probably made well over 3x on their money:

I’ve got no knowledge of the specifics of this deal, but once $95M is
into a deal, you can be pretty sure that the VC’s own 70-80% of the
company. So, the VC’s probably took at least $440M of the exit value.
It’s still about a 4.5x, so your sentiment may be right in the
aggregate. But, the early investors may have done better than that
because they probably had a lower average share price than the later
stage investors.

So let's move away from the Pure Digital story. Anytime you turn $95mm into ~$450mm in the span of three or four years, I'd say that was a good return.

But is 3x a good venture return? It depends entirely on the stage you invest in and your "batting average".

Most people know that "batting average" is the percent of times you get on base (based on the number of times at bat). In VC parlance, the batting average is the number of times you make a successful investment divided by the total number of investments you make.

Let's call a "successful investment" one that you get at least your money back. That's not really accurate, but let's do it anyway.

If you are a late stage investor, like IVP or TCV (two of the better known Silicon Valley late stage firms), then your batting average is very close to 100%. You wait until the early stage risk (technology, team, market) is wrung out of a deal and you invest on a set of price and terms that almost insures you'll get your money back and you attempt to make three to five times your investment if everything works out right. Since there are very few total losses in the portfolio, a 3x on average would be a good return for someone with a 100% batting average.

If you can return 3x on your portfolio before management fees and carry, you can deliver 2.25-2.5x net to your investors and over a ten year period (with an average investment duration of 5 years), that is an acceptable return to the LPs (18-20% IRR).

However, if you are an early stage investor (like our firm Union Square Ventures), then it is a different story. I've said many times on this blog that our target batting average is "1/3, 1/3, 1/3" which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments.

If you do the math with that batting average, and assume the return is 1.5x on the middle third, then you need to average 7.5x on the 1/3 of the investments that make the bulk of the returns.

So does that mean that early stage investors who get a 4-5x on a "good deal" are not going to deliver for their LPs? Not exactly. It depends on how you think about that portfolio of "winners" (the 1/3 that produces the bulk of the returns). I've also said on this blog a bunch of times that we look for one investment to return the entire fund. In the case of our 2004 fund, that would be a $125mm return on one single investment.

If we have $10mm in that investment that returns $125mm, that is a 12.5x on our best deal. So if you need to average 7.5x on the portfolio of winners, you can certainly have some 4-5x deals in that basket as well.

The way I like to think about this is one deal returns the fund, another 3-4 deals returns it again, and the rest return it a third time to get to the 3x gross that a fund must hit to deliver good returns to the LPs.

Going back to the Pure Digital deal to wrap this up, if Sequoia and Benchmark are investing funds of roughly half a billion, and they each took out roughly $100mm in this deal, then Pure Digital is most certainly in the winner category that will produce the bulk of returns for the fund. It's not the deal that will return the fund outright, but its in the next category. It's an investment that worked out well for the investors and I am sure they are quite happy they made the investment and with the returns.

#VC & Technology

More Pageviews on AVC Recently

I visit the various analytics services I use on this blog about once a week. For the past several weeks, I've noticed a significant increase in page views with not much of an increase in unique visitors. So today I took at deeper dive into google analytics to see what's up.

Here's the chart of page views/visit since the middle of last year
Pv per visit since june 08

You'll notice that pvs/visit have been flat at about 1.5 for a long time (really since I started this blog). But in the past couple weeks it has jumped to closer to 2.5.

Here's a shot of just the past month.
Pvs per visit since feb 16
Something changed on or around March 6th or 7th and I am not sure what it is.

I would suspect that Google analytics is now starting to see something it was not seeing in the past but I see the same effect on sitemeter and other analytics services.  Here is the sitemeter chart for the past month and the red bar is additional page views beyond the initial visit.

So it's more likely that something changed with a specific service on this blog and my suspicion is that it is related to disqus since that is where the majority of the page views happen beyond the front page.

But that doesn't really make much sense to me since when you click on the comment link, you are getting another page generated from and the disqus comments are a widget within that page.

So I am scratching my head. I am curious of anyone out there has a better theory?

UPDATE: Mystery solved. This is an artifact created by disqus and facebook connect. If you have the same issue and want a fix, here's a post on the disqus blog explaining how to do that. Thanks to JoeLaz for solving the mystery for me.

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It's not you, it's them that are wrong

Tell 'em to take out their tongues

And bring on the backlash!

Arctic Monkeys – Who The F***k Are The Arctic Monkeys

There was a piece in the New York Times recently (yes I do occasionally still read newspapers) that talked about the Obama administration's fear of a populist backlash against the bank bailouts. Their fear is correct and the backlash is upon us and it is real and it is ferocious.

The Gotham Gal penned her thoughts on the topic yesterday on her blog and suggested we all cancel our policies with AIG. I am with her on that one. We won't be AIG customers in short order. If you'd like to join us in our own populist revolt, please do.

There is no question that the word "bonus" will now be political poison. And that is unfortunate. Because I believe that bonuses, when properly constructed, can be an excellent way to compensate executives.

In the startup world, the primary way that founders and the management teams they hire are compensated is via equity. And that is the very best way to compensate people who run businesses. It aligns the interests of the shareholders and the managers.

But until we get some sort of liquid market for secondary shares, it is impossible to feed a family, send your kids to college, buy a home, and do all the things we all want to do for ourselves and our families with founder stock, options grants, and restricted stock.

So when our portfolio companies get to profitability and are growing and meeting all of their goals, but aren't yet ready or able to go public or exit, I am always in favor of a bonus plan for the management.

Let me start with what I am not in favor of:

1) guaranteed bonuses – This is, I believe, a big part of the AIG problem. Guaranteed bonuses are not in anyone's interest other than the person receiving them. I don't like them and will do my hardest to make sure they never are part of a compensation structure in any of our portfolio companies.

2) multi-million dollar bonuses – We want the majority (ideally the vast majority) of management's compensation to be in the form of equity so our interests are aligned. When management is generating millions (or tens of millions of dollars) of cash compensation via bonuses, the equity becomes immaterial to them and that is very dangerous. That is what went down on Wall Street as the Gotham Gal pointed out in her post.

3) contractual obligations – all bonuses should, at the end of the day, be subject to board and compensation committee approval (even if the goals that trigger the bonuses have been met). The board has a fiduciary responsibility to look after the stockholders first and foremost. If paying the bonuses (even if they have been earned) puts the company in trouble, then there needs to be a mechanism for the board to avoid paying them. Compensation committee and board approval does that.

4) Bonuses should not be paid in unprofitable companies. I have violated this in a few instances when we wanted to recruit a CEO who had a compensation need that we could not meet with base compensation. I feel that bonuses in unprofitable companies are really just a form of additional base compensation. But the nice thing about bonuses is you have the board approval "kill switch" and we have used that recently to deal with a need to reduce burn rates. Bottom line on this one, I am very uncomfortable with bonuses in unprofitable companies and getting more so.

Now that we've dealt with the "no nos", here is what I like to do with management bonuses.

I prefer bonuses that are based on ebitda. My thinking is that value creation in companies comes from earnings growth. The more ebitda you have, and the faster it is growing, the more value you are creating for stockholders. But I don't like the idea that management is incented to maximize ebitda in the short run to create bigger bonuses for themselves while starving the business of needed investment.

So I've become fond of an approach where the company pays management bonuses on "incremental year ove year ebitda." The way this works is you pick a base year and for the next year you pay management a bonus of x% of the incremental ebitda they generate. The best way to do this is a five year plan with a goal of obtaining a significant increase in ebitda so management has time to make the investments needed to get there.

Let's take a hypothetical example. Say a company has just had its first profitable year and made $1mm in ebtida. The plan is to get to $20mm of ebitda in five years. So the board approves a plan to pay out 10% of incremental year over year ebitda as management bonuses. Let's say that the next five years produce the following ebitda numbers:

Year 1 – $2.5mm

Year 2 – $5mm

Year 3 – $9mm

Year 4 – $14mm

Year 5 – $20mm

Then the management bonuses would be:

Year 1 – $150k

Year 2 – $250k

Year 3 – $400k

Year 4 – $500k

Year 5 – $600k

The management team could choose in any year to not grow ebitda at all (and not get any bonus) if they had an opportunity to make an investment in the business that would generate significant incremetal ebitda in the out years and they would get paid for doing that.

There are some issues with this approach. One is acquisitions which generally force a reformulation of the numbers in the plan. Another is that this plan does not allow for incentives for "qualitative goals" like building a high quality management team, creating a long term strategic plan, etc. You can pair those qualitative goals with a quantitative plan but it dilutes the laser like focus on long term ebitda growth and that is not always good.

There are plenty of other approaches I've seen over the years for management bonuses and as long as they meet the four rules that I laid out, I am generally in favor of most anything that helps management get some incremental cash compensation for generating shareholder value before they can get liquidity on their investment of time and energy in building the company.

In summary, the word bonus is going to be a loaded term going forward and it is going to be harder for boards of all kinds to put in place bonus plans for management. In many ways that is a good thing and hopefully we'll see less of the bad bonus activity that I laid out in my four "no nos." But a well structured modest bonus plan for management can be a very good thing for shareholders and I believe we should not walk away from the concept entirely.

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#Politics#VC & Technology

Can Amazon Run The Table On Cloud Services?

I was reading my partner Albert's post on cloud services yesterday. Albert explains that he'd like to see all startups building on top of the cloud.

All of this is great news for startups because it is further driving
down the cost of hosting.  At this point I am encouraging everyone who
is starting up to write for the cloud from day one.  In fact, I think
it is time to be somewhat suspect of a technical team that is not doing

But what really got my attention was a comment to Albert's post:

I think Amazon is so amazing that there is no point in bothering with the other guys unless the application actually needs geographic redundancy. I would say that's when an hour of downtime directly costs more than $5k (i.e. >$20MM annual revenue through the site). Aside from Google itself, I can't think of a situation where geographic redundancy didn't introduce application-level downtime in exchange for the datacenter-level uptime.

Originally posted as a comment by NYIndependent on Continuations using Disqus.

Is it possible that AMZN will come to dominate cloud services in the same way that Google has come to dominate search (or Amazon has come to dominate online retailing)?

Not only are cloud services commoditizing the dedicated hosting industry, but its not even clear yet that other cloud services are making much headway in competing against AWS (Amazon Web Services). I know that all of you are much smarter about this stuff than me, so I'd be interested in hearing your thoughts in the comments.

Disclosure: I am long Amazon and thinking about getting longer.

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#stocks#VC & Technology#Web/Tech

More Proof That The iPhone Is A Killer Living Room Remote

Last fall, I posted about the Sonos iPhone/iTouch remote and explained that every CE device should have an iPhone/iTouch app to control it. Today, we got more proof of the superiority of the iPhone/iTouch as the ideal living room remote with the release of the Boxee iPhone remote.

This video does a great job of showing you how great it is to use an iPhone to control your TV (or laptop) running Boxee.

You can get the Boxee iPhone app here.

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#VC & Technology

In The US, Mobile Internet Usage Is At Least One-Third And Maybe One-Half Of Wired Internet Usage

comScore (a company that I used to be on the board of and am still a large stockholder in) put out some interesting data on US mobile internet usage today. comScore has been the leading internet measurement provider for a long time. They bought M:Metrics, the leading mobile measurement firm last spring and now they are the leading measurement firm for both wired and mobile internet.

I thought it would be interesting to compare their data for both mediums.

Here's a chart from the post today about mobile.
Comscore mobile internet
So we know that 63mm users in the US access "news and information" on their mobile at least once a month.

But that is just for "news and information". Here's a chart that breaks down the most popular mobile categories:
Comscore categories
So we know that "news and information" is by far the most popular category of mobile internet usage. But social networking is growing much faster and has a significant audience (almost 10mm/month).

So I'd assume the total monthly US audience for mobile internet is between 70mm monthly uniques and 80mm monthly uniques.

Given that comScore reports that the "wired" internet audience in the US was 192mm monthly uniques, that means that the mobile audience is at least 1/3 and probably a lot closer to 1/2 of the wired internet audience.

What that means for developers of web services is that you cannot ignore the mobile audience, it's big, its growing faster, and someday soon it will be as big or bigger than the wired internet audience. That means making sure your service works well in mobile browsers and is available via apps for iPhone and other phones that support mobile apps, like Blackberry, Nokia, Palm, Windows Mobile, etc.

If I had a way of measuring how much time I used the wired internet and mobile interent every day, I am sure I'd find that I use the mobile web more frequently but for less total time than wired internet. But that too is changing as I spend more time on the mobile web every day.

One interesting stat is I have not added a photo to iPhoto in months where I have added a photo to flickr (where I post photos I shoot on my blackberry) almost every day this past week. My digital camera is mostly gathering dust these days. Someday that may happen to my macbook.

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#VC & Technology

A Cool YouTube Mashup

A couple friends sent me links to this youtube mashup video. Apparently the creator Kutiman just mashed up a bunch of youtube videos to create this one.

There's some debate about whether this is "real". I hope it is because I see a new art form emerging here.

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#My Music#Web/Tech