Posts from August 2010

The Expanding Birthrate Of Web Startups

There is a general consensus that web startups are being created at a faster rate than ever. The impact of accelerator programs like Y Combinator, Techstars, Seedcamp, and dozens more are one factor. The expanding pool of angel, seed, and super seed funds is another. And the most important factor is how cheap it is to build and launch a web service these days. You can bootstrap your way into existence.

I like to think of the venture capital business like parenting. When I invest in a company, I am committing to the care and feeding of the company until cash flow breakeven (the startup equivalent of adulthood). That care and feeding includes the decision to call it quits and give up on the project sometimes, but honestly that doesn't happen that much in our portfolios.

So when I look at this expanding birthrate, I think "who is going to house, feed, school, and send all these kids to college?" 

Part of the answer is that this crop of startups is going to be way more self sufficient than what has come before them. I believe that is certainly true. We invested about a half a million of seed capital into a company last year and it is already profitable and there is a good chance that company isn't going to need any more capital from us. But it will continue to need advice of other sorts.

Part of the answer is that this crop of startups will get bought out earlier than those who have come before them. Look at Hot Potato. Josh Kopelman said "we've only been investors for a couple of months" about Hot Potato. That is a good outcome for the founders. Not so much for the investors. But it is going to happen more and more as large tech companies look for teams that have a proven record of building and launching strong products.

But even with these two very positive factors, I worry like a parent with too many kids. "Who is going to take care of all of these kids?"

I am an investor in some of these super seed funds personally. I see the capital calls. When a fund has called 40% of its committed capital six months into its existence, I worry. What happens when the money runs out? Will there be more?

Flatiron Partners came into existence in 1996. Today we still manage a portfolio of four companies. That is down from something like 55 total companies we funded. But the fact is fourteen years later we still have four portfolio companies.

Union Square Ventures' first fund was raised in 2004. We invested in twenty-one companies and we still have sixteen active companies. And we still have $25mm on reserve for them. Christina and I calculated last week that about half of those sixteen active companies still might need more funding from us. So we have eight "kids who have not yet reached adulthood". That is six years after we raised the fund.

The thing that nobody understands until you've lived through it is just how long it takes for some companies to get profitable and self sustaining. And just how long it takes for some companies to get liquid and leave the portfolio.

The VCs I talk to who have been doing this for 25 years or longer aren't so much worried about the "dipshit companies" (as if there were such a thing). They are worried about the entry of so many new investors with relatively small funds birthing so many companies. These veterans may not be as connected to the latest web startup, but they sure are connected to the realities of the venture capital business. They've lived through it and they know what is involved with getting a company all the way to profitability and exit.

The venture capital business is contracting. There are less VC funds than there were a few years ago. And there will be fewer in a few more years. And the birthrate of web startups is expanding. That is the challenge we all face.

So, if you are an entrepreneur you should be very focused on either getting to profitability or getting a VC firm or two with deep pockets into your company (or both). If you are a seed investor, don't go quite so fast. Reserve some funds for follow on investments. And help your portfolio companies get to profitability or get a VC firm or two with deep pockets into your company.

I think this expanding birthrate is a great thing. Entrepreneurship is alive and well all around the world. Smart and scrappy entrepreneurs are imaging new products and services and building them. But we all should be careful to think about how we are going to fund all of this company creation. Not just the first part of it, but all of it.

#VC & Technology

Airport Express and Airfoil

We've had all sorts of digital music systems over the years. And they keep getting cheaper, simpler, and better.

We started over a decade ago with an over the top multi-room system that was built on Audio Request music servers and controlled by Crestron. We scrapped that system about five years ago (although I kept two of those music servers for each home we own). We moved to a Sonos based system. We still use that in the main rooms of the homes we own.

But my current favorite music system is an Airport Express connected to a simple and cheap amplifier and speakers. We use that in all of our kids' bedrooms and increasingly in other rooms in our homes like our guest rooms. Basically you bring your laptop and iTunes library and we provide the sound system. I like it very much.

But my main beef with the Airport Express is it is limited to iTunes. In the past couple weeks, two friends mentioned Airfoil to me. So yesterday I downloaded Airfoil to my laptop and gave it a whirl. Basically Airfoil intercepts any audio stream on your machine and sends it to the Airport Express.

This is the perfect freemium experience. I downloaded it and tested it by playing in my Chrome browser and it played flawlessly on the music system in our beach house. I've been wanting to have on our pool deck for years now. I've got it now. Sweet.

So of course I bought a five license bundle just now for $46. We'll have Airfoil on all of our laptops before the day is over.

Of course Apple should offer this feature built in on the Airport Express. There are a lot of things Apple should do. I've given up hoping or expecting them to do it. I'm just happy some crafty software engineers built the hack we all want. Thanks Airfoil.

When our oldest daughter came home from college this year, we had already moved into our new apartment. I showed her how the Airport Express worked in her new room. She said, "cool, how do I play radio on it." I didn't have a good answer for her. Now I do. That's progress and I'm really excited about it.

#My Music#Web/Tech

Some Thoughts On Aging

It's my 49th birthday today. I am taking the day off and spending it with my family at our house on the east end of long island.

For most of my adult life, my self image has been of the 20 year old me. The young smartass punk kid with a chip on his shoulder out to prove something to the world. That caused me some problems in my 20s and early 30s but worked out pretty well in the end.

That's all started to change in the past couple years. I've got a daughter in college and another planning to go next year. I'm starting to notice some gray hairs when the light hits my head a certain way. And I see a different person in the pictures others take of me. I see the wrinkles and the natural aging. And no Tereza I am not ever going to do the nip/tuck thing. That is most definitely not me.

My self image is changing and I'm starting to accept it. I'm getting older, more successful, and also a tad bit slower. I had to go back to yoga this year to deal with the aches and pains largely brought on by years of stress and bad posture. It has worked. I feel great. The Gotham Gal and I have learned to accept that our kids don't need us as much, that they want to make their own choices, and we have let them do that. Parenting is always the hardest thing to learn but teaches you the most.

Anyway, I am happy with the aging process. I like who I have become and who the people around me have become. My partner Brad told me that next year when I turn 50 I won't be able to pretend I am not middle age. Well I think I gave up pretending that in the past few years. I'm enjoying middle age and looking forward to what it brings.

#Random Posts

Tereza's Op Ed

The following is a guest post by our friend and AVC community member Tereza Nemessanyi, founder and CEO of Honestly Now Inc., a web and mobile social media platform which will release its beta product to the market in September. It was initially published by Reuters. The opinions expressed are her own.

Will the next Google be started by a woman?

After decades investing in “white male nerds who’ve dropped out of Harvard or Stanford,” venture capitalist John Doerr broke a pattern in July: he invested in a woman.

Not that Kathy Savitt was a risky bet.

The former CEO of American Eagle Outfitters and a senior executive at Amazon, Savitt built, a social networking and commerce site for ages 13 to 30. She grew it from 50 college and high school students to 15.5 million users in less than twelve months, leveraging natural networks of friends and social influence. In the web technology world, she’s a rock star.

Doerr, and his firm, Kleiner, Perkins, Caufield and Byers, are well-known for prescient, industry-leading investments including Google, Intuit, and Amazon. They estimate they’ve created 150,000 jobs.

But in an industry obsessed with placing bets based on what’s known as “pattern recognition,” women-led companies are funded less than 9% of the time. According to Shaherose Charania, founder of Women 2.0, this recently dropped as low as 3%. For women age 40+, the rates are even lower.

Savitt, a 47-year-old mother of two, breaks that mold.

Mark Heesen, president of the National Venture Capital Association, describes this more recent phenomenon: “There are more women in the world. They represent a greater share of markets and purchasing power. Being more proactive about increasing their presence in the industry just makes sense.”

Recent studies by the Kauffman Foundation and venture capitalist Cindy Padnos of Illuminate Ventures show high-tech businesses with women in leadership outperform the rest. They are more capital efficient, launching with 30%-50% less capital, generate 12% higher revenues, and have lower failure rates.

If women are so good at starting businesses, then why does it take them longer to start one? Well, according to a Tampa University study, women are bitten by the entrepreneurial bug later than men. Our startup sweet spot is between the ages of 35 and 45 — after we’ve finished school, gained professional experience, had children, and transitioned out of the early “interruption parenting” years. We are eager to apply what we know, to create new businesses on our own terms.

Nonetheless, the two-white-guys-in-a-garage stereotype remains the romantic ideal.

Consider Y Combinator, the tech industry’s most prestigious startup incubator.

Founded in 2005 and located in Mountain View, CA, Y Combinator’s mission is to introduce many ideas to the market quickly and cheaply, so mistakes are small and earnings arrive early. The model works.

It’s funded by big, smart tech money, which is backed by internet pioneers Paul Graham, Trevor Blackwell and Robert Morris. Its participants, who hail from around the country, get to rub elbows with the biggest names in technology. A Y Combinator badge is like flypaper for investors.

But it turns out that fewer than 3% of Y Combinator participants are women. According to Y Combinator partner and author of “Founders at Work” Jessica Livingstone, this ratio represents their applicant pool.

Now, I’m a swing-for-the-fences kind of gal so last year I looked into applying to Y Combinator. They require a three-month relocation to the Valley. Trouble is, I’m a 40-year old suburban wife and mother of two young kids from the New York. So no can do.

blogged and commented in recent weeks about it, and learned I’m not alone.

Leading venture capital investor and blogger Fred Wilson also blogged about the topic to his 10,000 daily readers. And out came a tidal wave — four times his average comment activity. Hundreds of women emerged from the shadows.

Do we need an “XX Combinator” for women entrepreneurs age 40+? Perhaps.

But many male voices of “a certain age” came out too. So did women in their 20s and 30s, without kids. So did African Americans.

They offered compelling alternatives such as the “Kids-In-Bed Combinator” — prime work hours from 9pm to 2am!

Or we could call it “NY Combinator.” The New York startup scene is breaking out. Great wins are happening for our home-grown, such as Gilt Groupe, Foursquare, Etsy and Tumblr. While these groups weren’t conceived by women, despite some of them directly serving that population, New York’s creative class does provide a mother lode of female talent. According to Richard Florida’s 2007 “singles” map, he counted 185,000 more highly-educated, creative single women than men.

These creative juices could be flowing to tech startups if they could get products to market and raise capital. We should grab this moment to support the diverse technology innovation that is popping up all over New York and start serving up the best of what New York — and everywhere else — has to offer, including young-white-guys-in-garages too.

It’s taken me, a Wharton grad with 18 years experience and several startups and an IPO under my belt, twelve months to get from idea to product introduction. In an era where speed-to-market is the name of the game, that is way too long.

Our country is in desperate need of jobs. Innovation creates jobs. And great ideas can come from the most unexpected of places. Including a mom from the ’burbs who yearns to build the next Google.

#VC & Technology

Is The Web Dead?

My friend Howard Lindzon DM'd me on Twitter last night. He asked if I would agree to be interviewed on Skype next week on a series he is doing titled "The Web Is Dead." When I saw the DM, I shuddered. My good friend the web is dead? No way.

But then I thought about a conversation I had with Saul Klein when I was in London a few weeks ago. Saul told me he is using the web a lot less and his iPad and iPhone a lot more.

I don't personally have that experience. I use the web more and more. I've moved most everything I do to the web from desktop apps. And on my Android phone, I mostly use the web browser. I have a few apps, but the browsing experience is so good on Android and so familiar to me. And on the iPad, I mostly use the browser and the Kindle app.

So the web is not dead to me. But if Howard is asking the question and if Saul is a case in point, it is a question we must get our heads around. Our firm invests in web services and they have been very very good to us.

In a board meeting yesterday, the founder said, "everything we do is cloud-based, with an API, and mobile friendly". He did not say "everything we do runs in a browser." So to me that means the Internet and the cloud is more important than ever. But the web browser as a platform may be losing some of its importance as it turns 18 and becomes an adult.

There are some aspects of the web that I will hate to lose. The first and foremost is links. If we are going to retire the web browser some day, we cannot retire links. They are what makes the Internet work. I also will miss the "write once read many" aspect of the web. Sure there are differences between the various web browsers out there but for the most part, when you write a web app it runs on most popular web browsers fairly well. That is very much not the case with all the various mobile environments that are emerging.

I am personally rooting for HTML5 to reverse this trend. But I hear that HTML5 is a few years away from where it can be the platform we all want it to be. I am very curious what the readers of this blog think about that.

As I was writing this post, I realized (courtesy of our portfolio company Zemanta's blogging tool) that Howard was inspired by a Wired piece penned by Chris Anderson called The Web Is Dead. A Debate. I will go read what Chris has to say on this. And most of all, I am curious what all of you think.


Flying Blind vs Flying With Instruments

I don’t fly airplanes. But I imagine that flying them without instruments would be challenging at best and terrifying at worst.

Some friends came to visit me the other day. They have recently bought a failed business and are going to relaunch it. The business had spent a small fortune on radio and TV advertising before it went under. They asked me if I thought they should return to the airwaves. I told them “hell no” and my reasoning was that you can’t measure it. It is like flying without instruments.

I suggested they only invest in advertising and marketing that they could test, measure, and then scale what works. And that is Internet advertising. Not just search, but the whole ball of wax. Search, display, video, social, affiliate, and of course, audio.

Speaking of audio, here is a short video created by our portfolio company Targetspot showing how Internet audio can be measured. If my friends do want to go back on the airwaves, I’ll make sure they watch this and buy internet audio versus old school radio.


Bookings vs Revenues vs Collections

A reader suggested this topic for MBA Mondays. It is a good one.

When a customer commits to spend money with your company, that is a “booking”.  A booking is often tied to some form of contract between your company and the customer. The contract can be simple or very complicated. And some bookings do happen without a contract. Examples of these contracts with customers include an insertion order in advertising, a license agreement in enterprise software, and a subscription agreement in “software as a service” businesses.

Revenue happens when the service is actually provided. In the case of advertising, the revenue is recognized as the ads are run. In the case of licensed software, the revenue is recognized when the software is delivered and accepted by the customer. In the case of a subscription agreement, the revenue is most often recognized ratably over the life of the subscription.

The customer’s cash shows up in your company’s bank account when it is collected. That can happen at the time of booking the business (as is typical in subscription businesses), or it can happen at the time of revenue recognition (as it typical in ecommerce), or it can happen a long time after revenue recognition (as it typical in advertising).

It is important to track all three of these metrics very closely. You want to know how much revenue your company has booked, you want to know what your monthly revenues are, and you want to know how much revenue you have collected, and most importantly, how much you have not yet collected (that is called Accounts Receivable).

It is also possible to collect cash at the time of booking in advance of when the revenues will be realized. That is called deferred revenue and it is a liability because delivery of the revenue is an obligation of the company. Many companies have four revenue oriented items they track; bookings, deferred revenues, revenues, and collections.

An interesting metric that many analysts and financial managers track is the book to bill ratio. You get that by dividing monthly (or weekly or quarterly) bookings by the revenues in the same period. If bookings are lower than revenues, that can be a negative sign. If bookings are a lot higher than revenues, that can be a positive sign. But it can also mean that your company is having a hard time getting revenue realized.

In some industries, not all bookings turn into revenues. In the advertising business, for example, it is often the case that not all the booked business can be delivered (and thus recognized as revenue). This is a big issue in highly targeted advertising businesses. If you have such a business, it is important to track your yield which is the percentage of booked revenue that you actually deliver in a given period.

I like to think of the bookings to billings to collections as the way revenues “flow” through the business. And since revenues are the life blood of any business, it is important to understand your company’s specific flow and measure it along the way.

#MBA Mondays

In Defense Of Religious Freedom

Park place mosque  As a longtime resident of lower manhattan, I have watched the debate about the planned mosque near ground zero with interest. I stood not too far north of the planned location almost nine years ago and watched the first plane bank and smack right into the north tower. That image will be with me for the rest of my life.

My takeaway from that experience and the aftermath is that our best weapon against the hateful terrorists who planned and executed that act is tolerance and a renewed dedication to freedom of all kinds.

I am so proud of our mayor, Mike Bloomberg, who has taken this debate to heart and made it his role to defend the right of the islamic community to built a mosque near ground zero (see the location on the upper right of this post).

Here is the text of the mayor's speech on Governor's Island a few weeks ago. I particularly like this part:

Whatever you may think of the proposed mosque and community center, lost in the heat of the debate has been a basic question – should government attempt to deny private citizens the right to build a house of worship on private property based on their particular religion? That may happen in other countries, but we should never allow it to happen here. This nation was founded on the principle that the government must never choose between religions, or favor one over another. "The World Trade Center Site will forever hold a special place in our City, in our hearts. But we would be untrue to the best part of ourselves – and who we are as New Yorkers and Americans – if we said 'no' to a mosque in Lower Manhattan. "Let us not forget that Muslims were among those murdered on 9/11 and that our Muslim neighbors grieved with us as New Yorkers and as Americans. We would betray our values – and play into our enemies' hands – if we were to treat Muslims differently than anyone else. In fact, to cave to popular sentiment would be to hand a victory to the terrorists – and we should not stand for that. "For that reason, I believe that this is an important test of the separation of church and state as we may see in our lifetime – as important a test – and it is critically important that we get it right.

The President joined in on Friday evening at the annual Iftar dinner:

As a citizen, and as President, I believe that Muslims have the same right to practice their religion as everyone else in this country. And that includes the right to build a place of worship and a community center on private property in Lower Manhattan, in accordance with local laws and ordinances. This is America. And our commitment to religious freedom must be unshakeable. The principle that people of all faiths are welcome in this country and that they will not be treated differently by their government is essential to who we are.

I am so pleased that our leaders think this way. Nate Silver says that two-thirds of this country believe that building a mosque near ground zero is "inappropriate", so this is not an easy position to take politically. But I believe it is the right position to take and I am with the President and the Mayor on this one.


Peer Index

I've been following Peer Index for a month or so. Peer Index is attempting to "help you discover the authorities and opinion formers on a given topic."

The idea is to use the world of social media (blogs, twitter, facebook, linkedin, etc) to determine who are the "authorities and opinion formers" on the web.

I like the idea. The execution is the hard part. When I first tried it out about a month ago, I thought the service was too thin. Too few topics and too few "authorities" in each topic.

Sometime in the past week or so, they added a bunch of new topics and a lot more authorities in each topic. And they've added a bunch of new ways to navigate the service. I like where they are headed with this.

In a perfect world, you could enter literally any topic, like "sushi in london" and find out who the experts are. Then you could follow them, read their opinions on the topic, and possibly even contact them.

In order to reach that perfect world, I think they are going to need to open this up. Let the "crowd" source the topics and the authorities and then use their algorithms and systems to maintain the topics and rankings. At least that is my gut on how this would work best.

In any case, this one is worth watching.


The Family CRM Service

I want a web service that I can enter all of our family's friends and other relationships into. We've been doing this by word and excel files for fifteen years and I am tired of it.

I am looking for a nice, clean, lightweight web service that can take word and excel imports. I want to tag our contacts with words like #christmasparty, #vegan, #potluck, etc, etc. I want to be able to search by tag, location, and of course name. I want to be able to make lists on the fly and email them directly from the service. I also want to be able to export these lists to services like Red Stamp and Pingg.

I would like to be able to access this service on my android phone or the Gotham Gal's blackberry either via a dedicated mobile app, or a nice mobile web app. Integration with the contact databases on our phones would be nice but is not a requirement.

So if you know of such a service, please let me know in the comments. The last time we did this, I ended up with a very nice printer on the Gotham Gal's desk. I'm hoping for similar results.