Posts from March 2010

Yochai Benkler on The Broadband Plan

Yochai Yochai Benkler is one of a handful of people who our firm regards as inspirators. We've read everything he's written and find ourselves quoting him regularly in meetings. This is a picture of Yochai making a point at our first Union Square Sessions event on peer production.

So when I came across Yochai's op-ed today in the NY TImes on the National Broadband Plan, I stopped skimming and focused, I read it twice.

Yochai agrees with many in the tech industry, me included, that we need a National Broadband Plan. But in classic Yochai fashion, he doesn't think it goes far enough. He says:

Take the commission’s “100 Squared Initiative,” which aims to get
100 megabits-per-second service to 100 million households, at
affordable rates, by 2020. Meeting the speed target shouldn’t be
difficult; industry is well on track to achieve it within the decade.

is the hard part — because there is no competition pushing down prices.
The plan acknowledges that only 15 percent of homes will have a choice
in providers, and then only between Verizon’s FiOS fiber-optic network
and the local cable company. (AT&T’s “fiber” offering is merely
souped-up DSL transmitted partly over its old copper wires, which can’t
compete at these higher speeds.) The remaining 85 percent will have no
choice at all.

This is the problem. There isn't enough competition on the access side of the Internet, both wireline and broadband. The rest of the Internet stack is hypercompetitive and is innovating at a mile a minute. But in access, we have monopolies who go at whatever speed suits them. There's nothing pushing them to go faster.

Yochai ends a fantastic op-ed with this point:

If we stay the present course, the commission’s new policy will build a
better wireless network around a more entrenched monopoly system,
lodging an insurmountable obstacle in the path toward bringing
America’s broadband network up to speed with the rest of the world.

That's a sobering thought.

Enhanced by Zemanta
#Politics#VC & Technology

AVC Redesign

We are starting work on a redesign of AVC. The current design has been in place for a year or two and we'd like to update it a bit. The "we" is yours truly and Nathan Bowers, a member of this community who has been helping me with the design work on AVC for a few years now.

We put a heat map on AVC last week and learned that the main column is where the action is, most people ignore the right sidebar. But people do seem to engage with the header and the "tan box" at the top of the right sidebar.

Both Nathan and I read AVC and other blogs on our iPhone and Android browsers and we've noted that a single column of text is a powerful model for the reader. While I don't think we'll get all the way there on the web (that is how AVC reads on iPhone and Android now), we are going to try to get close.

I suspect it will be a few weeks to a month before the new design launches. If you have any specific requests, please let us know in the comments.

One thing I'd like everyone's opinion on are full posts vs read more links. Brad Feld just updated his blog design and he's gone for a paragraph or two and then a read more link. If you read TechCrunch, you'll be familiar with this approach.

I've never liked to do it that way. I don't truncate AVC's RSS feed and I don't truncate the posts on the main page. It seems like more and more blogs are moving to this design. My instinct is to stick with the full posts at AVC but I'm interested in all of your views on this issue.

That's it. Please share your thougths.


Being Fat Is Not Healthy

Ben Horowitz has a post called The Case For The Fat Startup on the All Things D blog. I don't agree with Ben's take on this issue but I have enormous respect for Ben and his partner Marc Andreessen. They have started and built multiple successful businesses and all I do is write checks. So take everything I have to say with that in mind.

I'd also like to say that my comments are only related to software-based businesses. I don't think it is applicable to greentech or biotech. Those sectors are much more capital intensive than software.

In short, since I started investing in the web in '93/'94, I have invested in about 100 software-based web companies. And the success rate of fat companies versus lean companies is stark. I have never, not once, been successful with an investment in a company that raised a boatload of money before it found traction and product market fit with its primary product.

Boatload is a subjective term. So is traction. So is product market fit. And so is successful. So let me try to define them in the way that I think about them. A boatload of cash is more than $20mm of invested capital. A boatload of cash is monthly burn rates of tens of millions of dollars. Traction and product market fit are customers or users buying or using your product in droves. It is the realization that you've found the sweet spot of the market you were going for. And successful is an investment that pays out multiples of the dollars we invested in it. Getting our money back is not successful in my book. Getting three times our money back is good. More than that is great.

Let me say it again. I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it's sweet spot. But it has happened. The Loudcloud story that Ben lived and tells in the All Things D post is proof that it can happen.

You can also win the lottery. The odds aren't great that you will. But millions of people play it every day. I don't.

The very best investments that I have been involved in established product market fit before raising a lot of money. That's how Geocities did it. That's how Twitter did it. That's how Zynga did it. That's how every single one of my top twenty web investments in my career did it.

Many of them also went on to raise and spend a boatload of money on the way to getting profitable. Not all of them needed to do that. But the thing that is true about every single one of the twenty most successful web software investments I've been involved in is that they had significant user or customer adoption before ramping up hiring and spend.

I think there are a number of reasons why that is true. Although Loudcloud was able to reinvent itself with hundreds of engineers on the payroll, I think it is very hard to be nimble and quick when you have hundreds (or even dozens) of engineers and other employees. It helps to be lean and agile when you are trying to fit your product to the market. It is also nearly impossible to pull off the kind of funding history that Loudcloud pulled off when you are not successful with your initial product. Ben explains that Loudcloud raised $350mm in four rounds of financing (including an IPO) in the first 15 months of its life. Marc Andreessen and Ben Horowitz can do that. Most of you can not.

All of this said, I think Ben does a service to point out that raising a lot of cash and making a large investment in the business is a big positive. But in my opinion you only want to do that once you are 100% sure and have ample evidence that your product has hit its stride, you've got yourself in the place you want to be in your market, and you can raise the capital without taking much dilution. If all of those boxes are checked yes, then go for it. But please spend it wisely.

Enhanced by Zemanta
#VC & Technology

The NYC Subway System

I've been thinking a lot about the NYC subway system. It was built in the latter part of the 19th century and the early part of the 20th century. It's a lesson in the power of private enterprise to do public good.

There were elevated transit lines in NYC dating back to the 1870s, but the first underground line opened in 1904. At that time, the NYC subway system was operated by two privately held companies, the BRT (Brooklyn Rapid Transit) which became the BMT (Brooklyn Manhattan Transit) and the IRT (Interborough Rapid Transit). These privately held companies raised capital to build the subway lines and operated with the city's blessing. Starting in 1913, the city starting building the tunnels and leased them to these privately held companies.

Then in 1932, the city started to compete with these two privately held companies, and in 1940, they were bought and consolidated into the MTA (Metropolitan Transit Authority).

I ride the subways every day and will head to the L train shortly to get to work. Every time I ride on this system, I am amazed at how it got built given the cost and complexity involved.

The fact that it started out as a private enterprise is not surprising. There is something incredibly powerful about entrepreneurs backed by speculative capital. The entrepreneurs laid the first tunnels, operated the first lines, and showed that it was a profitable enterprise.

At some point the city stepped in and turned it into a public utility. Say what you want about government's ability (or inability) to operate effectively, I will tell you that the NYC subway system works pretty damn well.

So all the debates, including the one I waded into yesterday about mobile broadband infrastructure, about private enterprise versus public spending are like most things – fringe debates. There is a third way which is public private partnerships and I think that is the best way.

Enhanced by Zemanta
#NYC#Politics#VC & Technology

The National Broadband Plan

I went down to Washington, DC yesterday to participate in an event that celebrated the 25th anniversary of .com. I spoke on a panel (yes a hated panel) moderated by Kara Swisher and including Aneesh Chopra, CTO of the Federal Government, Arianna Huffington, and Ken Silva, CTO of Verisign.

Kara started out the discussion by holding up a binder that included the FCC's National Broadband Plan that was submitted to congress this week. She had a lot of fun with the fact that our nation's broadband plan was being distributed to congress and the media in paper form in a binder.

Notwithstanding the packaging of the plan, I am a big fan of the effort by our administration, led by the FCC, to change our country's lackluster performance in the area of broadband infrastructure. John Chambers, CEO of Cisco, is also a fan and he just wrote this in Business Week:

If the U.S. military ranked 17th in the world, you can bet that as a
nation we would make strengthening our armed forces a national priority.
Yet that's just how the U.S. stacks up against the rest of the world in
terms of access to high-speed Internet connections. The vital
communications systems that make our economy work and serve as a
platform for business innovation and social interactions are

I said to the panel, the audience, and our government's CTO yesterday that I believe the most important thing we can do in the area of broadband infrastructure is to increase the amount of wireless spectrum available for broadband internet. The fact is that wires, fiber, and cable aren't going to get us where we need to go. We can spend billions laying more and it will be a waste of money. We can't get to the speeds, capacity, and coverage we need with last century's technology. We need to lead the world in the development of new technology and we need to deploy it here first.

The national broadband plan does call for another 500mhz of hiqh quality spectrum to be used for "terrestrial broadband services" over the next decade. This blog post explains how that is proposed to happen. It appears that most of this 500mhz, if not all of it, will come from the broadcast television industry.

That seems to be politically realistic but there is a whole lot more excellent spectrum out there in the hands of industry, from broadcast TV, to broadcast radio, to wireless carriers that is locked up in the hands of one single provider. And that's huge problem.

As I explained yesterday on the panel, there's huge difference between the efficiencies of circuit switched networks where the bandwidth is allocated entirely to one connection, and packet switched networks where the bandwidth is shared amount many connections. The same is true of wireless spectrum and the unregulated band where wifi devices operate is the best example of this. We have witnessed massive innovation and bandwitdth improvement in wifi devices over the past decade. This is due to the development of new standards, new hardware technologies, and new software technologies. When you take a technology and unregulate it and let the market operate, you'll get way better results than when you lock a technology up in the hands of one owner.

So what I'd like to see in the National Broadband Plan is to make that entire 500mhz available as unregulated spectrum where anyone and everyone can build technologies, devices, markets, and businesses in it. I believe if we did that, instead of auctioning it off to several large established wireless carriers, we would see the kinds of gains our country needs to improve our broadband infrastructure. We'd also lead the world in the development of these new wireless technologies and create a boatload of jobs in the process.

#Politics#VC & Technology#Web/Tech

Filtering Social Media To Find Signal Out Of Noise

Yesterday's WSJ had an interesting piece about Alacra's new Pulse Pro offering. For those that don't know, I invested in Alacra in 1999 via Flatiron Partners and have been on its board ever since.

Alacra has been developing and selling information services to the banking, brokerage, accounting, and consulting businesses for almost 15 years. They use the web, sophisticated data aggregation, filtering, and packaging approaches to deliver powerful information products to the most demanding knowledge professionals in the world.

And so their take on social media is worth looking at. Their Pulse product starts with media available on the open web, from blogs to news articles, and then applies a set of filters to produce useful insights. As they explained to the WSJ:

Alacra's PulsePro tries to tackle the issue in several ways. First, it
only looks at blogs the company deems credible. The blogs are combined
with articles from traditional media companies for a total of about
3,000 sources. Rather than trying to codify all the text within each
source, it focuses on specific items such as quotes from well-reputed
Street analysts and C-level executives. Sentiment ratings are assigned
based on the language used.

What's interesting is this data set apparently is producing enough signal that wall street traders are using it to predict stock price movements. More from the WSJ:

Through backtesting, Alacra has found the ratings generated by its
product can lead movements in stock prices by about one to three weeks
for large-capitalization stocks. In turn, hedge funds and proprietary
traders are interested in the feed despite that it won't work anywhere
near the lightning-fast speeds they've been achieving for much of their
other computer-based trading.

Alacra Pulse is available as a feed for those who want to run it through proprietary algorithms. It's also available as web service for us mortals. And its available as a free 30 day trial for everyone. So check it out and see if you can use it to find signal from what we all know is a noisy world out there.


My Ideal Phone System

We're getting ready to move and it's time to figure out the phone thing again. This will be the fourth phone decision our family is making in the past eleven years. And in a world that is moving fast, we've had an interesting path.

In 1999, we moved back to NYC from the suburbs and picked up a block of about ten 212 phone numbers from Verizon. We used one for our main line, each person in the family got a number, and we used one for fax. We ran them on a panasonic phone system with rollovers.

In 2001, we moved into another home and ported the numbers to a CLEC who provided us a voice T and we bought an inexpensive NEC PBX/phone system. That system worked great but it was overkill and expensive.

In 2007, we moved again and this time we ported the numbers to a VOIP provider and bought Cisco IP phones. That was a step backward in terms of functionality, particularly the phone handsets. I'm still paying for that decision at home.

So it's time to move again and this time I've put together this spec of the ideal phone system:

1) get a dedicated 768k internet connection from verizon (dsl probably)
2) buy SIP phones for everyone
3) connect all the SIP phones into a network with router and hang that off the dedicated internet connection
4) find a cloud based VOIP PBX out there that is commercially supported that provides dial tone
5) send my block of ~10 phone numbers to that provider
6) map the phone numbers to the SIP phones via the cloud based PBX
7) live happily ever after

I've been looking around for a "commercially supported cloud-based VOIP PBX that provides dial tone" for the past few weeks and I keep coming up empty on the SIP phones. I want this system to support any SIP phone I choose to put on the system.

That's the mistake I made last time. We went with a very good VOIP provider but they could only support the Cisco phones. And nobody in our home wants an office phone on their desk or in their bedroom. My kids are fine with routing their incoming calls to their cell phones. The Gotham Gal and I still want a traditional phone handset but we want something that you'd typically find in a home; wireless and with a headset.

It's really not about the handsets that each provider "supports." It's about a design principal that I take from the world of computers and the internet. When you get a new laptop, you don't worry if it will work on your home network and the internet. You simply connect to your wifi network or wired network and it works.

That's how I want my ideal phone system to work. I want to be able to walk into Best Buy, select any SIP phone that I like, buy it, bring it home, plug it in, and make a phone call.

So that's my ideal phone system. I tweeted it out last night and I've gotten dozens of suggestions which I will now cull through.

When I find the ideal phone system, test it out, and am sure I've found it, I'll report back and let you know where you can get it.


The Profit and Loss Statement

Today on MBA Mondays we are going to talk about one of the most important things in business, the profit and loss statement (also known as the P&L).

Picking up from the accounting post last week, there are two kinds of accounting entries; those that describe money coming into and out of your business, and money that is contained in your business. The P&L deals with the first category.

A profit and loss statement is a report of the changes in the income and expense accounts over a set period of time. The most common periods of time are months, quarters, and years, although you can produce a P&L report for any period.

Here is a profit and loss statement for the past four years for Google. I got it from their annual report (10k). I know it is too small on this page to read, but if you click on the image, it will load much larger in a new tab.

Google p&l

The top line of profit and loss statements is revenue (that's why you'll often hear revenue referred to as "the top line"). Revenue is the total amount of money you've earned coming into your business over a set period of time. It is NOT the total amount of cash coming into your business. Cash can come into your business for a variety of reasons, like financings, advance payments for services to be rendered in the future, payments of invoices sent months ago.

There is a very important, but highly technical, concept called revenue recognition. Revenue recognition determines how much revenue you will put on your accounting statements in a specific time period. For a startup company, revenue recognition is not normally difficult. If you sell something, your revenue is the price at which you sold the item and it is recognized in the period in which the item was sold. If you sell advertising, revenue is the price at which you sold the advertising and it is recognized in the period in which the advertising actually ran on your media property. If you provide a subscription service, your revenue in any period will be the amount of the subscription that was provided in that period.

This leads to another important concept called "accrual accounting." When many people start keeping books, they simply record cash received for services rendered as revenue. And they record the bills they pay as expenses. This is called "cash accounting" and is the way most of us keep our personal books and records. But a business is not supposed to keep books this way. It is supposed to use the concept of accrual accounting.

Let's say you hire a contract developer to build your iPhone app. And your deal with him is you'll pay him $30,000 to deliver it to you. And let's say it takes him three months to build it. At the end of the three months you pay him the $30,000. In cash accounting, in month three you would record an expense of $30,000. But in accrual accounting, each month you'd record an expense of $10,000 and because you aren't actually paying the developer the cash yet, you charge the $10,000 each month to a balance sheet account called Accrued Expenses. Then when you pay the bill, you don't touch the P&L, its simply a balance sheet entry that reduces Cash and reduces Accrued Expenses by $30,000.

The point of accrual accounting is to perfectly match the revenues and expenses to the time period in which they actually happen, not when the payments are made or received.

With that in mind, let's look at the second part of the P&L, the expense section. In the Google P&L above, expenses are broken out into several categories; cost of revenues, R&D, sales and marketing, and general and administration. You'll note that in 2005, there was also a contribution to the Google Foundation, but that only happened once, in 2005.

The presentation Google uses is quite common. One difference you will often see is the cost of revenues applied directly against the revenues and a calculation of a net amount of revenues minus cost of revenues, which is called gross margin. I prefer that gross margin be broken out as it is a really important number. Some businesses have very high costs of revenue and very low gross margins. And example would be a retailer, particularly a low price retailer. The gross margins of a discount retailer could be as low as 25%.

Google's gross margin in 2009 was roughly $14.9bn (revenue of $23.7bn minus cost of revenues of $8.8bn). The way gross margin is most often shown is as a percent of revenues so in 2009 Google's gross margin was 63% (14.9bn divided by 23.7). I prefer to invest in high gross margin businesses because they have a lot of money left after making a sale to pay for the other costs of the business, thereby providing resources to grow the business without needing more financing. It is also much easier to get a high gross margin business profitable.

The other reason to break out "cost of revenues" is that it will most likely increase with revenues whereas the other expenses may not. The non cost of revenues expenses are sometimes referred to as "overhead". They are the costs of operating the business even if you have no revenue. They are also sometimes referred to as the "fixed costs" of the business. But in a startup, they are hardly fixed. These expenses, in Google's categorization scheme, are R&D, sales and marketing, and general/admin. In layman's terms, they are the costs of making the product, the costs of selling the product, and the cost of running the business.

The most interesting line in the P&L to me is the next one, "Income From Operations" also known as "Operating Income." Income From Operations is equal to revenue minus expenses. If "Income From Operations" is a positive number, then your base business is profitable. If it is a negative number, you are losing money. This is a critical number because if you are making money, you can grow your business without needing help from anyone else. Your business is sustainable. If you are not making money, you will need to finance your business in some way to keep it going. Your business is unsustainable on its own.

The line items after "Income From Operations" are the additional expenses that aren't directly related to your core business. They include interest income (from your cash balances), interest expense (from any debt the business has), and taxes owed (federal, state, local, and possibly international). These expenses are important because they are real costs of the business. But I don't pay as much attention to them because interest income and expense can be changed by making changes to the balance sheet and taxes are generally only paid when a business is profitable. When you deduct the interest and taxes from Income From Operations, you get to the final number on the P&L, called Net Income.

I started this post off by saying that the P&L is "one of the most important things in business." I am serious about that. Every business needs to look at its P&L regularly and I am a big fan of sharing the P&L with the entire company. It is a simple snapshot of the health of a business.

I like to look at a "trended P&L" most of all. The Google P&L that I showed above is a "trended P&L" in that it shows the trends in revenues, expenses, and profits over five years. For startup companies, I prefer to look at a trended P&L of monthly statements, usually over a twelve month period. That presentation shows how revenues are increasing (hopefully) and how expenses are increasing (hopefully less than revenues). The trended monthly P&L is a great way to look at a business and see what is going on financially.

I'll end this post with a nod to everyone who commented last week that numbers don't tell you everything about a business. That is very true. A P&L can only tell you so much about a business. It won't tell you if the product is good and getting better. It won't tell you how the morale of the company is. It won't tell you if the management team is executing well. And it won't tell you if the company has the right long term strategy. Actually it will tell you all of that but after it is too late to do anything about it. So as important as the P&L is, it is only one data point you can use in analyzing a business. It's a good place to start. But you have to get beyond the numbers if you really want to know what is going on.

#MBA Mondays

Commerce 2.0?

I cringed when I used the "2.0" term in the headline of this post, but I think it's useful. In the past year, when people ask me what I think is interesting in web technology, I often talk about emerging new commerce models. And I point out that two of the most exciting companies to come out of the NY tech scene in the past few years are commerce platforms, Etsy and Gilt Groupe.

This morning I read Josh Kopelman's post on this topic. Josh notes that:

  • More than half of today's top 15 most trafficked websites today did not exist back in 1999.  That is not a surprise, as Facebook, Youtube, Wikipedia, Myspace, Blogger, and Twitter are all new — and are representative of the massive amount of innovation and disruption that has occurred in the last decade.
  • Yet, of the top 15 most trafficked eCommerce websites today, just one of them did not exist back in 1999 (NewEgg – which launched in 2001).  Which means that over 90% of the top eCommerce websites are over 12 years old!  That is pretty remarkable to me — and reflects an amazing lack of external innovation (and disruption).   

    But just as social technologies changed the game in the media web in the last decade, I believe social technologies will change the commerce web in the coming decade. 

  • Josh mentions some examples of where we see this happening already:

    group buying, demand aggregation, game mechanics, flash/group sales, leveraging the social graph for customer acquisition and mobile

    So the question is who will the YouTube, Facebook, and Twitter of commerce be? Maybe they exist today and will emerge as large scale web services soon. Or maybe they are still ideas in the minds of entrepreneurs and will be hatched in the coming years.

    It's an area I am excited about and will be on the lookout for. Clearly I'm not the only one.


    The 0.00% Yield

    The Gotham Gal and I don't normally keep much cash in the bank. We like a portfolio of tax free municipal bonds for our cash that is not invested in venture deals, private companies, real estate, and the like.

    But recently we closed a few transactions that resulted in some cash being wired into our bank account. I emailed the banker and asked him to move the cash to the brokerage account connected to our checking account and into a tax free money market. 

    A few days later I was thinking about whether to keep the cash in the tax free money market account or move it to our tax free bond portfolio. So I emailed the banker again and asked what the yield was in the tax free money market account. The answer I got surprised me:

    Unfortunately, both the Tax-Free Money Market Sweep and Federal Money Market Fund in your brokerage account are currently yielding 0.00%.

    Yup, that is right. 0.00%.

    Needless to say the cash won't stay at the bank much longer.

    But I didn't leave it at that. I did some digging around. I looked at treasuries. Here are the current treasury yields:

    Treasury yields
    You can see why a federal money market fund yields 0.00%. The treasuries the fund likely owns are yielding 10 to 25 basis points. And I guess that yield is totally gone after their fees are applied.

    I've got emails out to a few other banks we do business with to find out what their money markets are paying. I'm curious if the 0.00% money market yield is standard across the market right now.

    Regardless of whether or not my bank or any bank is taking advantage of its customers (and I am not sure they are), this zero interest rate environment is worth thinking about.

    I was at dinner last night with friends and we got to talking about the stock market. Our friend asked me why I thought the market was doing so well (the S&P 500 is up 65% in the past year, from its post meltdown low). I told him in an environment where cash in the bank yields 0.00% two things happen. First, people chase yields elsewhere and the US stock market has been a big beneficiary of that. Second, you can borrow money at very low cost (not 0.00% though) and put it into the market.

    That's why this "hyper low" rate environment is dangerous. Because it won't last and when rates start to go up, the market will stall or even decline. Many of the places people have gone to chase yields will not be great places to be.

    So what to do when your bank is paying you 0.00%? Well as I said at the start of this post, we like a portfolio of highly rated (AA and AAA) municipal bonds. In this low rate environment, I like the stub end of a long term muni bond that has a year or two left on it. You pay a premium to its face value to buy it and when it pays off, you will get less than you paid for it. But in the interim you'll get a decent tax free yield and all in, including the loss on the purchase price, over the one or two year hold period you can get 2% to 2.5% tax free. I don't recommend trying to buy these bonds yourself. Find a good manager who has been doing it for years to do this for you.

    And then wait for rates to rise. Because I am certain they will. And don't jump in quickly when they do. Because when rates rise, they tend to do that for a while. And of course, the money markets will start to pay interest again.

    The take away from this post is that rates are at historical lows. You can't really go below 0.00% without having to pay someone to take your cash from you. It's a dangerous time. Don't chase yields. Find an acceptable place to put your money for a year or two at a low, but positive, yield. And then wait for rates to rise. Because they will and you don't want to be in the wrong place when that happens.