Posts from VC & Technology

Some really good blog conversations going on about measuring new and old media. I got hooked into this from Jeff Jarvis, but Ross Mayfield and Tim Oren are driving this discussion.

My favorite quote from all of this comes from Jeff. He says, “This medium isn’t about impressions; it’s about relationships; it’s about conversations; it’s about influence; it’s about authority. We are starting to measure how many conversations a blog starts (or at least takes part in) with Technorati.”

I’ll go one step further. I think all media (not just the blog medium) is about relationships, conversations, influence, and authority. It’s just that the blog medium is the first that has organized itself to revolve around these concepts. But I believe that all media in a digital world will eventually work this way.

I don’t just want Technorati to tell me which blogs have the most authority. I want to know what media outlet (new, old, or whatever) has the most authority on a particular subject. Until newspapers, TV, radio, film, books, etc organize themselves to allow people to link to, discuss, comment on, and measure the way blogs do, we won’t get there. But it’s going to happen. Count on it.

My friend Seth Goldstein asked me at breakfast last week if I had signed up for Gmail. Seth and a few other friends have invited me to join Gmail but I haven’t done it.

I told Seth that I have a Yahoo! and an AOL email account and don’t use either of them so I wasn’t in a hurry to add another webmail account that I don’t use.

He then said something interesting. He forwards all his mail to Gmail. Whenever he wants to find something, he just goes to Gmail and searches for it. It’s fast, its easy, and its all there.

Hmm. Looks like I’m going to get a Gmail account now and give that a try. I am sick and tired of the terrible search in Outlook. I’ll have to use Outlook when I’m offline, but when I’m online, I’ll give Gmail a shot.

I am a little late to blogging this post from Seth Godin on Search Engine Optimization (SEO for short).

Seth thinks that SEO isn’t worth the money, that its a “black art”, and that there are much better ways to spend your precious marketing dollars.

The post is very thought provoking, but so are all the track backs. If you spend money on paid search and SEO, go read this stuff.

Brad Feld was inspired by my previous post on Valuation to add some more really useful information on this subject. Go take a look.

There’s this dance that entrepreneurs and venture capitalists do when it comes time to negotiate the economic terms of an investment. And it all revolves around valuation.

The question is what is the fair value of the business? This supposedly establishes how much of the company the venture capitalists will own for their investment.

But I think the concept of valuation is often misunderstood by the people engaged in this process. And it’s particularly true in early stage investing.

I do not believe that negotiating a valuation on an early stage venture investment has much to do with the current value of the business. If it did, why would a venture capitalist agree to a $10 million value for a business that will lose money for the next 2-4 years and has little, if any, revenue?

The fact is that almost all venture capital deals are done as convertible preferred stock investments. That means that the money we invest is more like a debt instrument in the event the business doesn’t work out very well. We get our money out before the entrepreneurs do if the deal goes sideways or down.

It’s only in the event that the deal works out that the percentage of the business (the thing that valuation is supposed to determine) matters in terms of how much money we make.

Another important factor to consider is that only a relatively small portion of early stage venture investments really work out in the way they were supposed to when the investment was made. In my experience, which is based on 17 years in the business and over 100 different early stage investments over that time period, there is a 1/3 rule.

The 1/3 rule goes as follows:

1/3 of the deals really work out the way you thought they would and produce great gains. These gains are often in the 5-10x range. The entrepreneurs generally do very well on these deals.

1/3 of the deals end up going mostly sideways. They turn into businesses, but not businesses that can produce significant gains. The gains on these deals are in the range of 1-2x and the venture capitalists get most to all of the money generated in these deals.

1/3 of the deals turn out badly. They are shut down or sold for less than the money invested. In these deals the venture capitalists get all the money even though it isn’t much.

So if you take the 1/3 rule and add to it the typical structure of a venture capital deal, you’ll quickly see that the venture capitalist is not really negotiating a value at all. We are negotiating how much of the upside we are going to in the 1/3 of our deals that actually produce real gains. Our deal structure provides most of the downside protection that protects our capital.

I think it is much better to think of a venture capital deal as a loan plus an option. The loan will be repaid on 2/3 of our investments and partially repaid on some of the rest. The option comes into play in a big way on something like 1/3 of our investments and probably no more than half of all of our investments.

There is more to this whole issue of valuation because there are often follow-on rounds where the deal between the venture capitalists and entrepreneurs gets renegotiated. I’ll save that for another post.

What’s going on with Trackback these days?

When someone does a TrackBack on one of my posts, I get three or four emails. Then the next day, I get them again. Sometimes this goes on for days.

Then today, I got slammed with 29 TrackBack pings generated by porn sites. This may be related to something TypePad did today. Who knows?

But I can tell you this. It’s annoying.

I probably should change the name of this evolving thread that I am developing here on execution as the primary value driver in venture deals. As many commenters have pointed out, it’s not that Ideas don’t matter, it’s just that they matter a lot less than good execution.

Execution takes on many forms. But a really interesting case study is the way that Return Path has developed via a series of mergers and acquisitions. The original idea for Return Path has turned into a small, but very good business. The Company has turned into a big business. Brad Feld does the hard work in telling the whole story on his blog. It’s a good read.

It’s a big day for me. My favorite radio station in the NY market went digital this week.

WFUV not only announced that they had rolled out a digital signal using iBiquity’s HD radio technology, but that they are going to add a second channel using HD Radio’s Tomorrow Radio technology.

That’s great news. Now we’ll get crystal clear sound, song, artist, title info on the reciever, and a second channel for supplemental audio programming.

Now I just have to get my JVC HD Radio. They are hitting the stores this month.

My friend Brad Feld calls it brogging. It’s bragging on your blog about something. I’ve probably done it once or twice, but not often. But I am going to do it now because I am particularly proud of the accomplishment of our portfolio company Bigfoot Interactive.

Bigfoot was just named the clear leader in the email service provider (ESP) market by Forrester Research. Forrester said, “Only one vendor, Bigfoot Interactive, sits squarely in the leader category. They went on to say, “Bigfoot Interactive offers the most comprehensive technology platform, complemented with a strong mix of technology integration and marketing services.”

Kudos to CEO Al DiGuido and his crack team at Bigfoot Interactive. This is an amazing accomplishment in so many ways. Al took over a company called Favemail that had a failed business, migrated the company into the ESP market, changed the name to Expression Engines, and then with the help of the investors in Expression Engines, purchased the failing ESP called Bigfoot Interactive, kept the Bigfoot Interactive name and immediately was faced with stemming huge losses resulting from a collapsing market for email in the middle of 2001.

But Al and his team had a vision. That vision was to create a technology platform that could service the ASP and Agency models at the same time and also satisfy companies that wanted a hybrid of both. They wanted to combine that platform with technology integration services and marketing services to build a full-blown email services solution.

It took three years to realize fully that vision, but they’ve done it. And they are closing a ton of new business as a result. This Forrester Report is likely to help them continue that run.

So that’s my brog on Bigfoot Interactive.

Update: The report has been published on the Forrester site. It is for Forrester subscribers only; but non-subscribers may request a copy of the report by sending an email with your complete contact information to [email protected].