Posts from 2011

SOPA/PIPA Update

Thanks to everyone in this community who has reached out to their elected officials on the SOPA/PIPA issue. It is hard to tell whether we are making a difference or not. But at least there are signs that Congress is recognizing that this issue is not as simple as the MPAA and RIAA have been making it out to be.

Yesterday Congressman Darrell Issa, who along with Zoe Lofgren, has been leading the opposition to SOPA in the House, tweeted out:

This is an indication that Rep Lamar Smith, who is the lead sponsor of SOPA is having a bit more difficulty ramming this bill through the Judiciary Committee than he thought. Maybe the letter from leading Internet inventors and engineers that came out last week caused everyone to hit the pause button (it should). Maybe your calls and letters are starting to have an effect (they should). Or maybe they just wanted to go home for the holidays.

But when the House and Senate come back in January, the SOPA and PIPA bills will be back on the agenda. We need to keep up the fight, we need to explain that this is very bad legislation, and we need to help Congress understand the Internet a little bit better so they don't fall prey to silly ideas like the ones in these bills. I'm committed to all of this. I hope you all are too.

I'll end with a link to a post written by Prof Laurence Tribe, who teaches Constitutional Law at Harvard Law School, in which he asserts that SOPA violates our constitutional right to free speech.

Lightweight Identity

Last month, I participated in a PII event and sat on a panel (a format I dislike and try to avoid) moderated by Kara Swisher. Kara posted a video of the panel on ATD a few days later.

Sometimes when you are in a public setting you say things that have been coming together in your mind but you have never articulated before. That happened that day. I said the following about 40 minutes into the panel:

Twitter is default public and everyone knows that's what it is. Your Twitter identity is the lightest weight, most public, and therefore the best identity on the web.

Many other online identites we are all developing are heavier weight. They have more private information about us in them. When the companies that operate those identity services share our information with others we get nervous, upset, and anxious.

Twitter and other default public identities (like my daughter Emily's "Things I Like" tumblog) contain only the information we are willing to have the whole world know about us. And therefore they are better identities. They can be portable without our permission. They are crafted by us with the full knowledge that they will be seen by others, potentially many others.

We just completed a long and taxing hiring process. We had over 250 applicants to our analyst position. We asked each and every applicant to share their online profiles with us. Most shared default public profiles like blogs, twitters, tumblrs, etc. We learned so much about each of the applicants through reviewing those public identities. Default public online identities are very powerful and very revealing about people, maybe more so than default private identities. They can be used for almost anything that default private identities can be used for. But they can be used without asking for permission from the owner of the profile because the information is public already.

This is counter intuitive for many. But I'm pretty sure that default public identities are the future for most things (maybe not healthcare and personal finance and the like) and that they are the best form of online identity.

How Much To Burn While Building Product

In last week's MBA Mondays, I wrote about burn rates at three stages of a startup. The first stage is what I called "Building Product Stage" and I suggested that a burn rate of $50k/month was appropriate for that stage.

I got a fair bit of pushback in the comments for that part of the post. My favorite push back came from The Kid, who said:

50k a month?!?!??! maybe it is such in venture world, but if you're a broke ass fool bootstrapping his/her way, try 5k per founder a month until you have paying customers. if you're hardcore (translation: desperate broke ass fool), cut that number in half — it's definitely possible.

The Kid and everyone else who pushed back on that number in the comments are right. You can build a product for less than $50k/month, particularly if you and your co-founders are deeply technical and if you have at least one founder who has great product and design skills.

I was chatting with Naveen, cofounder of Foursquare, the other night. He told me that the month he and Dennis finally raised money for Foursquare from USV and others was the month his savings had run out. Basically he and Dennis worked for nine months without any pay and built V1 of Foursquare all by themselves for basically no money other than their time which they were not charging the company for.

We see this a lot actually. Many (most??) of our early stage investments are in companies that have bootstrapped in this way. So I feel a bit badly about throwing that $50k/month number out there. But there are companies that are fortunate enough to raise money at the seed stage and use it to build product. And for those, I see $50k/month as a good upper limit.

So I stand by the $50k number, but with a big caveat. If you can do it for less, by all means do that. Bootstrapping is a great thing and leads to great products and great companies.

Why Sound Will Be Bigger Than Video

Alex Ljung gave a talk at LeWeb 2011 in which he argued that sound will ultimately be bigger than video on the Internet. I am a big fan of contrarian thinking and argument and Alex does that very well in this talk. It's about 15 minutes long (there's another 8 minutes at the end of this video that is not related to Alex' talk). If you can find the time to watch it, do that and then let's discuss his arguments in the comments.

Disclosure: Alex is the founder of SoundCloud, which is a USV portfolio company.

Some Thoughts On The Louis CK “Experiment”

Since the early days of this blog, it has been filled with musings on how creativity will be rewarded in the internet age. It is a theme I've come back to again and again. These thoughts have worked their way into our investment thesis and our portfolio. Investments like Etsy, Kickstarter, SoundCloud, and many others have come from this line of thinking.

So when I saw what Lous CK did last week, I was so excited. For those who don't know, Louis CK is a comedian, a really funny comedian, who made a one hour comedy special and put it on the Internet for anyone to buy/stream for $5. You can "buy the thing" here.

This week, Louis shared the finacial details of his experiment with everyone. Here are some of the salient details:

First of all, this was a premium video production, shot with six cameras over two performances at the Beacon Theater, which is a high-priced elite Manhattan venue. I directed this video myself and the production of the video cost around $170,000. (This was largely paid for by the tickets bought by the audiences at both shows). The material in the video was developed over months on the road and has never been seen on my show (LOUIE) or on any other special. The risks were thus: every new generation of material I create is my income, it's like a farmer's annual crop. The time and effort on my part was far more than if I'd done it with a big company. If I'd done it with a big company, I would have a guarantee of a sizable fee, as opposed to this way, where I'm actually investing my own money.

The development of the website, which needed to be a very robust, reliable and carefully constructed website, was around $32,000. We worked for a number of weeks poring over the site to make sure every detail would give buyers a simple, optimal and humane experience for buying the video. I edited the video around the clock for the weeks between the show and the launch.

The show went on sale at noon on Saturday, December 10th. 12 hours later, we had over 50,000 purchases and had earned $250,000, breaking even on the cost of production and website. As of Today, we've sold over 110,000 copies for a total of over $500,000. Minus some money for PayPal charges etc, I have a profit around $200,000 (after taxes $75.58). This is less than I would have been paid by a large company to simply perform the show and let them sell it to you, but they would have charged you about $20 for the video. They would have given you an encrypted and regionally restricted video of limited value, and they would have owned your private information for their own use. They would have withheld international availability indefinitely. This way, you only paid $5, you can use the video any way you want, and you can watch it in Dublin, whatever the city is in Belgium, or Dubai. I got paid nice, and I still own the video (as do you). You never have to join anything, and you never have to hear from us again.

So Louis' experiment was a financial success. But more than that, it is a business model success. He has recouped his investment, is well into the black, and he owns the rights to his creativity without any limits on what he can do with it. He is able to sell it everywhere in the world at the same time without any DRM on it. And he will continue to make money from this content for many months (years?) to come.

Some will say that Louis can do this because he is a star. That is true. And I sure hope other stars will follow his lead and go direct to their fans. They can also go direct to their fans and raise the upfront production costs on Kickstarter. They can use any number of internet services to process the payments (paypal), host the video (vimeo), and get distribution (twitter). This is not that hard.

But this can also work for emerging artists. They won't make as much money as Louis CK, but they also don't need to make as large of an investment either. And over time, if their work is good, their audience will grow and the investments they can make and the profits they can make will increase.

The business model of going direct to the fans is powerful, it has none of the negative issues of the existing business model (like fucking with the architecture of the net in a naive attempt to quell piracy) and is going to work bigtime. Thanks Louis CK for shining on a huge bright light on that fact for the past couple weeks. And thanks for the laughs you gave me and the Gotham Gal on thursday night.

Fun Friday: What I’m Reading Now

Two weeks ago, we used Fun Friday to talk about movies to see. It was fun. And I got a list of movies to watch that will last me months and months.

In the same vein, we are going to talk about books today. Not the best books of all time (maybe we'll do that some friday), but what we are reading right now.

I'll start with my list:

The Wind-Up Bird Chronicle – Haruki Murakami – This is the english translation of the Japanese original. It's a surreal story of a man's search for his cat and then his wife. I've been working on this book since the thanksgiving holiday. I hope to finish it soon. I've never read any Murakami and I've been told this is his best work. I'm enjoying it very much.

Super Sad True Love Story – Gary Shteyngart – My friend Nick Bilton told me to put this on my Kindle. It's up next after Wind-Up Bird. It's a "dystopian vision of the near future." I love reading about the future. This is going to be my kind of book.

Feeding Eden – Susan Weissman – My partner Andy's wife Susan has written a book that is available for pre-order and will come out in a couple months. The Gotham Gal has the gally. She read it over the last couple days and blogged about it yesterday. Now it's on my reading list.

Boomerang – Michael Lewis – My father in law and my brother in law both recommended this book to me recently. I like Michael's books and this is a topic – the failures of the weaker european economies – that I'm quite interested in.

I hope to get through all of these books over the next two weeks which I'll be spending on our family's annual year end vacation. If I get through all of them, I'll just reach into this comment thread for the next purchase on my Kindle.

OK, your turn now folks. Please drop links into your comments if you can find the time to do that.

FinTech 2012

I've written extensively about the startup accelerator phenomenon. I think it has been transformative for entrepreneurs and VCs and startups in general. We should all take a second and thank Paul Graham for his insight into how to properly construct such a program. Paul is a visionary entrepreneur who has changed the game.

One of the things I am most excited about in the startup accelerator world is the development of "vertical accelerators." We have seen them emerge in healthcare, education, finance, and a number of other sectors. Last year I blogged about the first FinTech Accelerator here in NYC. I watched that group of entrepreneurs go through FinTech last summer, I talked to them at an evening event, and I watched what has happened to those teams after they came out of the program. I was impressed at every stage.

Last week, the second annual FinTech program, FinTech 2012, was announced. Like last year, the secret sauce of this program is the leadership of the CIOs and CTOs of the largest banks and financial services companies:

The chief technology officers and senior technology executives from 12 financial services firms will pick up to six entrepreneurial companies to participate in the Lab, which begins in May 2012. Bank of AmericaBarclays Capital,Citigroup, Credit SuisseDeutsche BankGoldman SachsJPMorgan ChaseMorgan StanleyState Street, and UBSwill be joined this round by American Express and Capital One.

When I talked to the teams that went through last year's program, this was the thing that all of them gushed about. Getting regular access to the highest level technology execs in these institutions was a game changer for most of the teams.

If you have a fintech startup that could benefit from participation in such a program, you should seriously consider FinTech 2012. There's an information session on January 10th and the applications are due on January 18th. Details are here.

Freedom Of Speech

I've censored the following, in protest of a bill that gives any corporation and the US government the power to censor the internet–a bill that could pass THIS WEEK. To see the uncensored text, and to stop internet censorship, visit: http://americancensorship.org/posts/10183/uncensor

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Uncensor This

Freedom To Innovate

For something like seventeen years, I have been investing in entrepreneurs who have had the freedom to innovate on the Internet. It has been a powerful life lesson for me. These people imagine something, they create it, and they are off and running building a business, hiring employees, generating cash flow. They ask nobody for permission. They don't need any permits. They don't need any real estate. All they need is a server (now rented in the cloud from Amazon and others) and a laptop or two and they are good to go.

Almost of two decades of this environment of "permissionless innovation" has led to the creation of a huge new industry, which is global in nature, but unquestionably led by the US. Almost every young person I meet coming out of college these days wants to work in this industry.

This industry is the Internet industry. And the Internet and this freedom to innovate is under its first existential threat right now from the MPAA and the RIAA and their legislators in Congress. They want to fundamentally change the way the Internet works and they want to regulate the Internet. We must stop this and the time to do it is now. Here's how you can help:

1) Visit fightforthefuture.org, get your talking points on jobs, free speech, and security, and then call your representative. I'm told that making the phones ring in Washington is still the best way to let your representatives know that you are upset. So please do this. It's super easy thanks to, of course, the Internet.

2) Visit I Work For The Internet, snap a photo of yourself, and add your face and first name to a list of all the people who work on and for the Internet. There are a lot of us, more than anyone in Congress knows. It's time to show our faces and names.

3) Censor your blog posts, tweets, and/or facebook wall posts. Fill the internet up with blocked out text. Show those in Congress the world they are taking us toward. You can do that here. I will do it tomorrow.

4) Read what our contry's leading information security scientists have to say about the SOPA and PIPA proposals. Not surprising, the approaches outlined in these bills will lead us to a less secure Internet.

But most of all, we need you to Occupy Congress this week in opposition to PIPA and SOPA. We have the facts on our side and we have the numbers on our side. But we are behind in this fight, the votes are not on our side. It is time to change that.

Burn Rates: How Much?

In the comments to last week's Burn Rate post, I was asked to share some burn rates from our portfolio. I can't do that. But an alternative suggestion was to write a post suggesting some reasonable burn rates at different stages. I can do that and so that's the topic of today's post.

The following applies to software based businesses, and most particularly web and mobile software businesses. It does not apply to hardware, life sciences, and energy startups. It is also focused on startups in the US. It costs less to employ teams in many other parts of the world.

Building Product Stage – I would strongly recommend keeping the monthly burn below $50k per month at this stage. Most MVPs can be built by a team of three or four engineers, a product manager, and a designer. That's about $50k/month when you add in rent and other costs. I've seen teams take that number a bit higher, like to $75k/month. But once you get into that range, you are starting to burn cash faster than you should in this stage.

Building Usage Stage – I would recommend keeping the monthly burn below $100k per month at this stage. This is the stage after release, when you are focused in iterating the product, scaling the system for more users, and marketing the product to new users. This can be done by the same team that built the product with a few more engineers, a community manager, and maybe a few more dollars for this and that.

Building The Business Stage – This is when you've determined that your product market fit has been obtained and you now want to build a business around the product or service. You start to hire a management team, a revenue focused team, and some finance people. This is the time when you are investing in the team that will help you bring in revenues and eventually profits. I would recommend keeping the burn below $250k per month at this stage.

A good rule of thumb is multiply the number of people on the team by $10k to get the monthly burn. That is not the number you pay an employee. That is the "fully burdended" cost of a person including rent and other related costs. So if you use that mutiplier, my suggested team sizes are 5, 10, and 25 respectively for the three development stages listed above.

Once you get the business profitable, you can scale the team larger and larger to meet the needs of the business. I don't think of that kind of expense as "burn rate", I think of it as "scaling the team." I believe you want to use a bottoms up budgeting process to determine your headcount needs at this stage of the business.

One final caveat – there are outliers. Twitter had a higher burn rate than I am recommending during the second stage due to the massive scaling costs they encountered. And Facebook had a higher burn rate during the building the business stage due to the size of the revenue team that they assembled and other needs of the business. There are some business opportunities that are large enough that they can justify (and fund) larger burn rates. The mistake we all make is assuming that many of our companies are outliers. There are very few companies that can justify a million dollar/month burn rate or larger. There are many more that thought they could and are no longer around.