Posts from July 2010

Foursquare Google Maps Mashup

I'm doing a keynote presentation today at the Geo Loco Conference in San Francisco. In putting together the visuals for my talk, I wanted to show my Foursquare checkins from my recent trip to europe on google maps.

So a little googling around led me to this post which explains how to do it:

  • Visit your foursquare feeds
    page. Right click the KML link and copy it to your clipboard (don’t
    download it).

  • Visit Google
    Maps
    and paste the link you copied into the search box. Hit enter.

It is so simple and easy to do. Here is the visual that I wanted to create:

Foursquare checkins

And you get a list of checkins that you can share via the google maps sharing features. Here's a list of all the checkins I did in Zurich, for example.

Foursquare checkins in zurich 

I would love to save these foursquare feeds in discrete chunks like this for future reference. Someone sends me an email saying "what did you do that was fun in Zurich?". I could simply send them this list of checkins. So simple, so easy, so useful. I love it.

Immigration Reform

Last night my partners and I hosted a fundraiser for NY's senior Senator Chuck Schumer. I've written about my fondness for Chuck on this blog before and I remain a fan and supporter.

Chuck told a story to a small group that had assembled before the larger event. He said that he was meeting with the CEO of Deutsche Bank and asked him "do you think the US will be the world's leading economy twenty-five years from now?" The Deutsche Bank CEO said "of course." Chuck said "not many americans feel that way right now." And the CEO said "America is the only place in the world where anyone, no matter what race, religion, background, can be accepted in business and society and realize their dreams and make it to the top. That doesn't happen anywhere else."

I might disagree with the CEO just a bit. I think Australia and Canada are very similar to the US in that regard. But his point is important and worth blogging about, which is what I am doing.

A welcoming society is our history and that is the special sauce that the US brings to the world economy. We welcome entrepreneurs large and small in the US and support them and celebrate their success and forgive their failures. And I am so very proud that I am a citizen of this great country.

But we have turned inward in the wake of 9/11 and the "war on terrorism." And that is hurting us. The terrorists have achieved their goals if they turn the US into a country that no longer welcomes the best and brightest from anywhere with open arms.

So I was thrilled to hear Senator Schumer's optimism last night that we will get "comprehensive immigration reform" in 2011, after the midterm elections. I hope and suspect that will include visas for science, technology, engineering, and medicine (STEM) grads. I hope and suspect that will include the startup visa. I hope and suspect that will include a lot more H1B visas.

Immigration reform is one of the most important issues in the startup political agenda which also includes net neutrality, patent reform, and a number of other important issues. I know that many of you share my passion for this issue. Let's keep up the pressure on our elected representative to do the right thing and give us comprehensive immigration reform as soon as possible.

Opportunity Costs

We are going to turn our attention on MBA Mondays to some costs that are important to recognize in business. First up is Opportunity Cost.

Opportunity Cost is the cost of not being able to do something because you are doing something else. These costs don’t end up on your income statement but they are expensive, particularly in a small business where you have very few resources.

Let’s use an example. Assume you have three software engineers on your team and you commit to building a new product that ties all three of them up completely for six months. Not only do you commit to build that product, but you sell it in advance and take a deposit from your customer to fund the development.  And then an even bigger opportunity comes your way. You have been invited to build a version of your product that will ship in a hot new device that a major computer company is making a big bet on. But you can’t take on that project because your team is tied up on the first project.

So the cost of the first project is not only the time and salaries of the three software engineers who are working on it. It is also the lost revenues and market share you might have gotten if you had been able to work on the partnership on the new device. That is your opportunity cost.

The problem with opportunity costs is that you can’t predict or measure them very well. They become painfully obvious in hindsight but not at the decision point when you need to know their magnitude.

So what do you do about opportunity costs that are out there but you can't see or measure? That's a tough one. I like what my friend Gretchen Rubin said on the subject:

I also try to ignore opportunity costs. I can become paralyzed
if I think that way too much. Someone once told me, of my alma mater,
“The curse of Yale Law School is to die with your options open” –
meaning, if you try to preserve every opportunity, you can’t move
forward.

So my advice is to understand the concept of opportunity costs, build them into you mental map, but don't focus too much on them. If you can, try to build some flexibility into your organization so you aren't completely resource constrained. That will reduce opportunity costs. But at the end of the day, you need to "move forward" in Gretchen's words and that is first and foremost what all great entrepreneurs do.

Grumby

Grumby  I’ve been reading Andy Kessler’s novel, Grumby, about a tech
entrepreneur in silicon valley. I’ve known Andy for a long time, since he was a
hot shot tech analyst at Morgan Stanley in the early 90s. He’s written a bunch
of books but to my knowledge this is his first novel.

It’s about a hacker who starts with a small idea,
essentially building a better version of Shazam, and then takes it to a whole
new level by hacking a toy and creating a sensation.

It’s your classic boom bust morality tale and I’ve witnessed
at close range many of the mistakes the entrepreneur makes, and have made of
few of them myself. If for no other reason, you should read Grumby so you are
less likely to make those mistakes yourself.

But the thing I liked most about Grumby was the way that
Andy wove so many of the important trends going on in technology today into the
story. The Grumby is smart because it collects information and knowledge from
its users. The Grumby is open so anyone can build apps for it. The Grumby is
manufactured in China but the software running on it comes from all over the
world.

If you are highly technical, you may have to suspend belief
on many of the engineering feats they pull off. That is the beauty of a novel.
It is the story that matters, not the facts and figures.

And there’s even a cameo by this blog in the book. Which of
course I love.

If you work in the tech business and enjoy a good tall tale,
I think you’ll enjoy Grumby. I read it in my iPad over the course of a week,
mostly on planes. I think you could probably read it from cover to cover on a
cross country flight.

International Wireless Roaming

My family has been in europe for the past couple weeks. And we've been trying to keep our data roaming costs down. The Gotham Gal and I have a sweet blackberry plan on T-Mobile that provides a really excellent international data roaming deal.

My two kids who are in europe with us both use iPhones and they turned off data roaming while we were in Rome and Zurich, except for Josh who turned it on to checkin to places on foursquare and then turned it off. Turns out that Foursquare checkins don't use up a lot of mobile data. Looks like about 140kb based on ATT Wireless' user dashboard.

Even so, he is running up against his 20mb of data that comes with his current international roaming plan.

And now that we are in London, I decided to figure out a better way. It's pretty easy to get an iPhone unlocked over here. There are stores all over Oxford Street that will do it very inexpensively. Then you can get a "pay as you go" plan from one of the mobile carriers here. We chose O2 which is a Telefonica owned carrier. They have a plan for 30 pounds that gives you unlimited data here in the UK, 500 text messages, preferred rates for international calls and texts and that all comes with 30 pounds worth of charges. Once you spend the 30 pounds, you can "top off" the account.

We set this up for my daughter yesterday and I am seriously considering setting it up for my son as well. The only slight drag is they now have a new phone number. Not a big deal for The Gotham Gal and me. We can simply add that new number to our address books. But it is a bigger bummer for their friends and family who don't know they have a new number.

I am going to look into setting up forwarding their calls on their US numbers. I have no idea how to set up forwarding for text messages, if that is even possible.

You might wonder if it is worth all of this effort. Well I have had a number of europe trips that resulted in $1000+ phone bills when I got back. And that was for a couple weeks. There is no way we are going to let that happen, particularly with kids who live on their mobile phones.

I figure 30 pounds should buy my kids at least a week of full tilt mobile roaming. Maybe they can go two weeks on that amount. In any case, even if we end up spending 100 pounds on each of our two kids who are here for a month, that is a lot less than $1000 that we could end up spending if we stuck with their ATT Wireless numbers.

This whole international roaming thing sure feels like a racket to me. We have affordable plans in the US. We can buy affordable plans in the UK. Why do we have to change numbers to make that happen? Why can't we simply buy the affordable plan in the UK via our US carrier and have it work for as long as we are in the UK?

I suspect that people who live here in europe and travel a lot between countries are way more experienced with this problem. I'm curious what they do to deal with this problem.

XX Combinator

Tereza, an AVC regular and active community member, wrote a blog post yesterday proposing that someone start XX Combinator, a Y Combinator style startup accelerator focused on women in their 40s.

Here’s the basic argument:

Y Combinator participants are for the most part very young — in their early 20’s. This is not when women would be most inclined. Women who start businesses like to know what they’re doing, and be trained and experienced in it. That takes up our 20’s. We have kids in our 30’s. Our entrepreneurial sweet spot is around age 40. Conventional tech investors are not really into this group and the metrics they look for are really hard for these people to hit. Most of the (few) women’s businesses that go big were funded by friends & family or strategics, not traditional angels and VCs.

She also points out that the Y Combinator program is purposefully focused on hackers and that is not a term often attributed to women. So Tereza proposes that XX Combinator come pre-populated with hackers, kind of like Betaworks is.

XX Combinator is a cute name and makes the point well. But I suspect a different model is required if this were to work. First, it is not so easy for 40 something women to move to silicon valley for three months. Second, if you have a team of hackers in-house, then you are an incubator more than an accelerator program.

But Tereza is right about a bunch of things. First, there aren’t enough women entrepreneurs. There aren’t enough women VCs. There aren’t enough women developers. The startup ecosystem is largely a man’s world and as a result, we see a lot of certain kinds of businesses and not enough of others. People are drawn to scratch an itch. If it is a 20 something developer, then they are scratching a certain kind of itch.

I know what Tereza is working on. I’m not sure if it is cool to talk about it here so I won’t. But it is the kind of idea a women in her 40s would be working on. And it is not an idea a 20 something man would likely work on all by himself.

Tereza is not alone in her evangelism. The Gotham Gal, who talks to and works with a lot of 40 something women entrepreneurs tells me that this group is “breaking out.” She told me about a conference in NYC this fall that she is involved in that is targeted at this group. And she told me last night that TED is working on a conference for women. Brad Feld wrote a great post yesterday about this topic. And he links to an excellent Eric Reis post that also articulates the need for more diversity (especially women) in the startup sector.

So maybe the time is right for an effort to build one or more efforts focused on helping women get started. These startup accelerators need a leader. Y Combinator has Paul Graham and his partner Jessica. Tech Stars has David Cohen and his partner Brad Feld. Seedcamp has Reshma and Saul. Betaworks was started by John Borthwick and Andy Weissman. So we need entrepreneurs to create these efforts, not committees, governments, or companies.

And we need entrepreneurs with a plan to deal with the realities that Tereza lays out. If there are entrepreneurs out there with the idea, the plan, and the passion to do this, please contact me. I’d be happy to help get something like this rolling.

Stack Does Gaming

Forums have been around for as long as I have been on the Internet. I've always found forums useful for finding out "how to" information. But its always been a hit or miss experience. And I've always used search (google mostly) to find the forum post with the info I need.

Our portfolio company Stack Overflow is attempting to change that. As they have done with programming tips and techniques at StackOverflow.com, they are bring social networking and game mechanics and a number of other important changes to the forum model to create vertical communities that allow people to solve each other's problems for each other.

One vertical that has literally hundreds of forums on the Internet is gaming. I'm not that much of a gamer but I watch my son. When he needs a cheat code or wants to find out how to conquer something in a game, he goes to Google and does a search, finds a forum, and finds his answer. There is a huge amount of traffic to gaming forums on the Internet for exactly this reason.

So Stack has launched gaming.stackexchange.com to bring the magic that exists on StackOverflow to the gaming vertical. I'm optimistic that gaming will turn out to be a big vertical for Stack. Gamers love to earn points, badges, and status. You don't have to do anything more than spend a week with my son watching him accumulate foursquare points in europe to see what points do to a gamer. And now gamers will be able to earn status and reputation by sharing the knowledge they have with each other.

If you are a gamer, check out gaming.stackexchange.com and let me know what you think. It is early, the service just launched in beta this week. So there won't be a lot of content up right now. But the mechanics are in place and you can get a feel for it.

Some Thoughts On The Seed Fund Phenomenon

There have been quite a few posts written about this meme in the past few weeks. 

I think that Paul Kedrosky got the discussion started with this post. Chris Dixon wrote an interesting response. And yesterday John Boyd wrote a thoughtful post on the topic.

John makes a point in his post that I want to second and add to. He says:

While many businesses require a lot less capital to start, they don't require less capital to grow.

John's comment made me think about a blog post I wrote three and a half years ago called "Web 2.0 Is A Gift, Not A Threat, To VCs." If you haven't read that post, I would urge you to go read it. I blog because it helps me think through a lot of issues we face in our business and that post was really useful to us over the past several years of investing.

Here's a chart from that post:

Web_2_capital_requirements

This is an entirely theoretical chart. There is absolutely no real data behind this chart. That said, it does reflect our experience investing in about thirty "web 2.0" companies over the past seven years.

What this chart says is that it still takes on average $20mm to get a web startup to sustainable positive cash flow. But the vast majority of that capital will be required after the business has "traction."

What has changed in technology venture capital is not so much the total capital requirements, but when they are required. This is very good news for everyone involved. It means entrepreneurs that don't have to take expensive dilution early on in the development of their business. And it means that entrepreneurs can raise the big money later on when their business is worth more. It means that entrepreneurs should be able to keep more of the companies they start. That is good for everyone.

It also means that VCs don't have to take big risks early on. They can write checks in $250k and $500k sizes. It means that when the businesses develop into winners or likely winners, they can write the bigger checks like $3mm or $5mm or even $10mm. This is good for the VC business. Less writeoffs, more capital deployed into the winners and less into the losers. 

Where this all gets interesting is the point at which it is clear that the business is going to be a winner. Let's look at our portfolio company Foursquare as an example. We invested in a ~$1mm seed round last summer, investing $500k. By that time, Foursquare had already launched and was growing nicely. Dennis and Naveen had built the service all by themselves and had just lured Harry onto their team. They needed no capital to do that. In fact they did not even have a bank account when we went to close our seed investment. That seed round was highly competitive and Dennis and Naveen could have raised money from dozens of investors. A year later, Foursquare is scaling quickly, adding 1mm new users in the past three months. They need a lot of capital now. And they were able to raise it, $20mm on their terms, a few weeks ago. As competitive as the seed round was, the large round was even more so. The company added one new investor, Andreessen Horowitz. And our firm and OATV got to invest a bunch more into Foursquare. 

Clearly Dennis and Naveen used the capital efficiency of web startups to their advantage. They did not need any money to get the service built and launched. They scaled the service to 2mm users and the employee base to close to fifteen people on just over $1mm of seed capital. And they got the capital they need to scale it to a much larger business on their terms. That's how it is done these days.

And the seed investors, USV and OATV, got to put a little money into the business early on and then got to write a big check when it was clear the business was going to work. At least it is clear to me that the business is going to work. I much prefer doing it this way than putting a ton of capital into the business early on before the outcome is reasonably clear.

But there are two places you don't want to be in this new world. You don't want to be the VCs who wanted to be in the "big round" and didn't get to be in it. The deals that work get very competitive when it is time to raise real money. That's a problem for VCs who don't invest at the seed stage and are betting they can get into the deal in the "first venture round."

You also don't want to be a seed fund that is invested in a company that hasn't scaled yet but is out of money. Then what do you do? You can write off the investment or you can put more money in. Or you can find a VC firm to invest. But what if the company isn't far enough along to attract VC money? 

Very few entrepreneurs will execute as well as Dennis and Naveen did over the past year. Most will need a longer runway before their business scales. And that is an issue for the seed funds. They need to get bigger or find a "bridge" to VC for those companies that take a bit longer.

I think we will see both things happen. First Round Capital, the grandaddy of the web 2.0 super seed funds, has now evolved into a firm that is twice as big as our firm in terms of investors and they have about $200mm in total capital under management. And I've met a couple investors who are talking about creating "seed bridge funds." I think that's a great idea.

Will the seed market crash? I don't think so. Will it evolve and change and look differently in a few years? Absolutely. We are still figuring out to evolve the VC business to reflect the change in financing needs of entrepreneurs and we aren't done by a long shot.

Phone Pitches

I exchanged some blog comments with Tereza yesterday. She's starting a web company and is raising angel money. She said she did some phone pitches against her better judgement and they didn't work out. I advised her not to do them anymore.

Here's my thing about phone pitches. They aren't very effective. I hate taking them and almost never do. I don't think they allow the entrepreneur to show themselves very well which is the most important thing of all.

And it is so easy to say no over the phone. There's no real human connection. It's easy to pay half attention or less on the phone. It's easy to fake that you are listening when you are not.

I admit that I am really bad on the phone. I always have been. It's not a medium that I like very much. So I am probably worse than the average investor. But even so, I think doing phone pitches is a mistake and you should avoid doing them.

I do think a short phone call introducing the opportunity at a very high level and making the case for an in person pitch is an important thing to do. You can accomplish that in a few minutes or less. It's basically an elevator pitch. But don't agree to do the whole pitch on the phone. Ask the investor make time for you in person to do that. That will determine if they have sufficient interest for you to invest your time with them.

And what about a video chat on skype or another similar service? I do think a video chat is sufficiently better than a phone call to make it a semi-viable alternative. If a plane ride is required to see an investor, then a skype/video chat is a decent first step. But again, you should do it with the objective of getting an in person meeting. 

But if you can visit the investor in person without getting on a plane, I think you should always opt for that over a conversation over the phone or skype. There really is nothing like the in person, face to face meeting when it comes to fundraising or any kind of high level sales effort.

Fundraising is such a hard thing to do, particularly for first time entrepreneurs without a track record and an investor following. Don't make it harder by putting a wire between you and the investor.

Purchasing Power Parity

Continuing the international theme, we are going to talk about Purchasing Power Parity today on MBA Mondays. I learned about purchasing power parity in business school and it has always helped think about international exchange rates. The theory is far from perfect and fails miserably in many situations, but I still think the basic construct of purchasing power parity is something everyone in business should understand.

The basic concept is this: a basket of goods that are traded between markets should cost the same in different markets. My favorite example is the "Big Mac Index" which is calculated and published annually by The Economist. If a Big Mac costs $4 in the US and 3 pounds in the UK, then the proper exchange rate between the two currencies should be four dollars to three pounds which works out to be 1.33 dollars per pound.

The reason I like the Big Mac index is it is simple to understand. A Big Mac is not a "basket of goods" however and a more comprehensive basket of goods is normally used to calculate purchasing power parity of different countries.

That said, I will use the Big Mac index one more time to explain how purchasing power parity can be used to determine of a currency is overvalued or undervalued. This example comes from wikipedia:

Using figures in July 2008:

  • the price of a Big Mac was $3.57 in the US
  • the price of a Big Mac was £2.29 in the United Kingdom (Britain) (Varies by region)
  • the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56
  • this compares with an actual exchange rate of $2.00 to £1 at the time
  • [(1.56-2.00)/2.00]*100= -22%
  • the pound was thus overvalued against the dollar by 22%

This is important to understand. If two baskets of goods should cost the same in different markets and they don't, then the implication is that one currency is overvalued relative to another and that difference will eventually unwind itself.

Let's look at China versus the US. The International Monetary Fund (IMF) estimated in 2008 that one US dollar was worth 3.8 yuan using purchasing power parity. And yet the official exchange rate at that time was one dollar for 7 yuan. That situation has not changed much. The yuan dollar exchange rate is now one dollar of 6.8 yuan.

What this means is that US made goods are more expensive in China than they should be using purchasing power parity as a guide. And Chinese goods are less expensive in the US than they should be using purchasing power parity as a guide. If the dollar yuan exchange rate was allowed to move entirely with market forces, the theory of purchasing power parity says that the exchange rate should move to around 4 yuan to the dollar. Until that happens, this price discrepancy will remain.

There are all sorts of problems with purchasing power parity but I will not go into them here. The basic concept makes sense to me and is used widely in international economics. It is worth understanding as it provides a basic framework for how currencies can and should move relatively to each other.