Posts from VC & Technology

I wasn’t sure whether I should have titled this Exploding TV (continued) or Sell Side Advertising (continued), but it doesn’t really matter.  All of this stuff is converging anyway.

Seth Godin has a must read post on how BitTorrent and TV commercials come together.

I’ve always been a fan of the cliché. They summarize situations so well. Like my “hit by a bus” post.

I started out in the VC business working for two guys, Milt Pappas and Bliss McCrum, who had been in the venture business for close to 20 years when I joined them. They had developed a ton of experience and Bliss, in particular, had a tendency to summarize that experience with clichés.

I always loved it when Bliss would say something like “that dog won’t hunt” after meeting with a management team. He could have said, “I don’t see how that deal is going to work”, or “I think we should pass on the deal”, but “that dog won’t hunt” was always more colorful and more fun.

I’ve added a bunch more clichés to my repertoire over the years and I intend to lay one on you each week.

I’ll start out with one of Bliss’ favorites – Hope is not a strategy.

There is always an element of optimism in every venture deal. But often times the optimism gets in the way of critical thinking.

I remember attending a board meeting with Bliss early in my career and the CEO presented the sales pipeline. There were a ton of deals on the pipeline that were going to close within the next quarter.

But the company was running out of cash. The CEO was confident the sales would close and everything would be fine. Bliss asked him, “what happens if we don’t close the deals?” The CEO didn’t have an answer.  He simply hadn’t considered that possibility.

Out came the cliché. Bliss said, “well hope is not a strategy and I suggest you get one, and quick.”  That company developed a plan B which came in handy when the sales didn’t come in and we salvaged the deal and got our money back.

So when developing your business plan, don’t be too optimistic, think about the downside, and develop a strategy for dealing with it.

I was at Denver International Airport (DIA) this morning for an early flight back to NYC from a great Return Path board meeting at their Boulder Colorado office.

AT&T Wireless controls the Wifi at DIA.  I wanted to download my mail before hopping on the plane.  I am not an AT&T mobile subscriber so I had to pay by credit card.  That’s annoying in the first place, but I was willing.  But for some reason the AT&T system wouldn’t take any of my credit cards.  So I went without the Wifi.

Well that sucks.

Instead of ranting about AT&T Wireless’ shitty credit card system, I want to rant about the lack of roaming arrangements among the major Wifi carriers.  I am a T-Mobile wireless customer and I get T-Mobile Hot Spot thrown in.  I love that and visit many a Starbucks for Wifi instead of latte.

Why doesn’t AT&T and T-Mobile do a roaming deal between them so I can use my T-Mobile account at DIA?

Concourse Communications is the Wifi carrier who seems to own the rights to the NY Port Authority Airports.  I’d like them to make a deal with T-Mobile too.

If anyone out there knows why these deals don’t exist, please let me know. This is a major convenience issue that needs to be solved.

UPDATE: Several readers commented that I can use T-Mobile on AT&T.  I tried that today at Raleigh Durham, which is also a AT&T Wifi airport to no avail.  And the credit card thing didn’t work again.  Aargh!

OM Malik’s post on Firefox’ growing market share (now at 5% of all Internet users) led me to look at my blog’s browser market share. 

Back in November, I posted a pie chart that showed that 28% of my readers use Firefox and 57% use Internet Explorer.  That was such an eye opener to me.

It’s interesting that in the two months since, the numbers haven’t changed very much.  Here is the chart as of today:

The percentage of Firefox users has actually declined a tad, from 28% to 26%, and IE has gone up from 57% to 63%.

I suspect that’s due to the broadening of my reader base more than IE taking back share from Firefox.

OM’s reader base is probably more techy than mine and Firefox represents 23% of his users.

No matter how you cut it, Firefox has a large user base among the tech community and a growing base among the Internet users at large.

And it matters because I still find sites that don’t work well with Firefox.  That needs to be addressed by the owners of those sites.

Ross Mayfield’s blog is one of my must read blogs.  He is always coming up with something great to think about.

He blogged two posts yesterday I really like.

The first and longer one is about the "Cornucopia of Commons", Dan Bricklin’s classic 2000 essay on how databases can be built by volunteers working together.  Ross takes Dan’s insights and runs with them, providing insights into social networks, wikis, and tags.  If you care about the "architecture of participation", this post is a must read.

The second post is short and sweet and basically makes the obvious point that subscribers are better than impressions and therefore RSS readers are better than ad-hoc readers. That’s why RSS is so interesting to me.

If you don’t have Ross in your RSS reader, put him in there!

I was at a board meeting a couple days ago and heard about a concept called Sell Side Advertising that John Batelle and Ross Mayfied cooked up.

I was intrigued so I went digging and found the post here on John’s site.  It’s from last August so I am late in getting to this.

Not to digress, but old posts have a lot of value, I find that close to 1/3 of my comments are coming on posts that are at least a month old and at times a year old.

Anyway, back to sell side advertising.

I only heard about this concept a couple days ago, but I am convinced that this is how the market is going to evolve.

There is a huge imbalance between the demand for pay for performance advertising and the ability to meet it right now.  And the reason is that there are huge inefficiencies in the market. 

Advertisers have to make choices about where they are going to run their ads (Google, Overture, FastClick, Kanoodle, WhenU, etc, etc, etc).  Then these networks have to get the ads onto the sites where they will perform.  Most use some form of technology to do this.

But we still have a pretty closed system where the market can’t work perfectly.

There will come a time, and not so long from now, when advertisers will just post their ads, plus some data about them, and how they want them to perform, and how much they are willing to pay for leads generated by them, and the net will do the rest.

The standards need to develop but there are thousands of talented developers and entreprenuers out there who will drive this from concept to reality. And I’d like to invest with some of them who have the talent and vision to make this happen.

Brad Feld threw out something in his post on Net Sec being acquired by MCI that I’d like to take and run with.

Brad said:

One of the key themes that has been floating around recently in the venture business is that the patient capital through the downturn (e.g. folks that hung in there with solid businesses in 2001 and 2002) is starting to be handsomely rewarded for their perseverance.

There were two kinds of VCs operating in the bubble years.  There were the traditional VCs who’d been investing for a while before the bubble hit, and there were the newbies; corporations, first time funds, individuals, buyout firms, hedge funds, etc that quickly got into the venture game when they saw the opportunity to make big hits.

When the bubble burst, a predictable thing happened.  The newbies ran for the hills and the real venture guys hunkered down and dealt with the carnage in their portfolios.

It wasn’t fun, it wasn’t easy, and it wasn’t immediately obvious that hunkering down was the right choice.

It is now.

If you look deeply at most of the companies that have been sold or taken public in the upswing that started in the spring of 2003 you will see a story of big winners and big losers.  Most of these companies were started in 1999 and 2000.  Most of them had a big syndicate of investors.  Most of them did a recap (or two or three) in 2001 and 2002 which wiped out some of the investors and gave the investors who participated in the recap big slugs of the equity at very low prices.

And when you calculate the gains, the investors in the recaps are making 5-10X on the new money they put in and at least 2-3x on their total invested capital.  The investors who ran for the hills have lost everything.

Brad mentions Service Magic and Net Sec in his post.  I’d be curious how those situations played out.

But I’ll give you an example of our own and we have at least four or five to date that fit this story and a bunch more on the way.  I’ll go with one where the information is public and easier to disclose.

We participated in the seed financing of a company called Portal Player (ticker symbol PLAY) in the fall of 1999.  The Company did a full blown venture round in Feb 2000 where a bunch of new investors joined the syndicate.  That round was done at a stepup to the seed round.  We participated in that round for the same amount we put into the seed round.

Portal Player was the first company to identify the market for chips for portable media devices with hardisks (ie the iPod).  It was doing great engineering work, but the market wasn’t developing nearly as fast as we had all hoped.  And we had all of the normal growing pains in our management team.

So we had to put more money in.  And we did, again and again and again.  From December 2000 to February 2002, we did four insider financings.  Each one was brutal and everyone was questioning the wisdom of pouring more money in. All of these rounds were some form of recap where the investors who didn’t play got wiped out.  And by February 2002, there weren’t many of the initial group left.

But by then, it was clear the company had something.  And so some new investors got interested.  And in the spring of 2002, a big recap got done that allowed the investors who had been hanging in throughout the tough times to maintain most, but not all, of the value of their prior investments.

In the fall of last year, Portal Player went public and is trading north of $20/share.  The early money is basically worthless, but the money we and others put in between December 2000 and February 2002, has made about 5x its money at current market prices.

What’s interesting to me about this story is that even with the wipeout of the early money, our total return on the investment at current market prices is around 3x, which is, in my experience, about an average venture return.

I think this is the story of the venture market of 2001 through 2003.  Those who hung in and supported the good companies in their portfolios are getting "rewarded hansomely" (Brad’s words) for their efforts.  And I think this will result in many of the 1999 and 2000 vintage funds returning the committed capital plus a small return to their limited partners. 

It will take some more time and the final chapter won’t be written until the end of this decade (venture funds are normally ten year funds for a reason).  But that’s how I think it will play out for the good firms in the venture business.

Google is opening up Adwords, its main revenue source.

Sort of.

They are creating an API for advertisers that will allow them much more control of how their ads are placed in search and, I suspect, contextual placements.

This is interesting on multiple levels.

First, its a good thing when someone opens up parts of their system, like Amazon and eBay have done.  It allows the marketplace to work more effectively and should create more value for Google.

Second, its likely that this move will benefit the big advertisers who have the resources to do something with this API over the small guys who don’t.

Third, this is opening up the supply side, but not the demand side of the Google platform.  As a publisher who uses Adsense, I have been very frustrated with the "black box" that Google uses to place ads on my blog.  I would love to be able to control them in some way, but Google has not opted to open up the publisher side.

UPDATE: This post from Searchviews explains really well why this is a big deal for advertisers and their search engine marketing agencies.

Martin Tobias has a good post on tags, what he finds useful, and for what purposes.

Here’s his mix:  PubSub, Technorati, Google, and del.icio.us. 

Very interesting.

I agree with Martin that we need a layer on top of all this to make life easier.