Posts from VC & Technology

I spent some time on Comscore this morning looking at US vs Rest Of World traffic for some of the largest web properties. Here are the stats for Feb 2010:

Google: 890mm worldwide visitors, 745mm non US – 84% non US

Facebook: 471mm worldwide visitors, 370mm non US – 78% non US

Twitter: 74mm worldwide users, 53mm non US – 72% non US

I suspect Facebook and Twitter will both end up north of 80% once their internationalization efforts are fully realized. Facebook is a lot farther along that path than Twitter but it seems like Twitter is growing like a weed outside the US right now. This is a Comscore chart of Twitter's non-US traffic through February 2010.

 

The conventional wisdom is that international usage cannot be monetized as well as US traffic and that is certainly true. But with >80% of your potential users outside of the US, I think the web sector needs to start working harder on international monetization.

Even if international traffic could only be monetized 25% as well as US traffic, when your international traffic is 80% of your total traffic, you would make as much money internationally as domestically. So that's a lot of potential out there to be tapped.

And of course, not every international market is equal when it comes to monetization. Markets like western europe and japan monetize very well today. Emerging markets like the BRIC countries (Brazil, Russia, China, and India) should be big opportunities for monetization this decade. Other markets may be tough for years to come.

What this means to me is that web services that are highly international today should invest in fully localizing their user experience and then start thinking about monetizing outside of the US. Start with local partners and then start putting people on the ground in your best international markets.

There's a lot of money "rest of world" and I suspect that will only be more and more true over time. So we should start building web businesses with that in mind.

There is a big banking reform bill working its way through the Senate right now. It is sponsored by Chris Dodd, Chairman of the Senate Banking Committee. It has a long name I can't remember, so I'll call it the Dodd Banking Bill.

What does a bill attempting to regulate the banking industry have to do with startups? Well unfortunately, it contains two provisions that are quite problematic and hurtful to entrepreneurs and startups. They are:

1) Changing the definition of a "qualified investor" in angel and venture deals. Not just anyone can invest in a startup company. You have to be a qualified investor. A qualified investor is currently defined as anyone with a net worth of over $1mm or net income of over $250k. Dodd's bill would increase that to $2.3mm and $450k respectively. And then index those numbers to inflation.

2) Eliminate the existing federal pre-emption over state regulation of "accredited offerings." Angel and venture financings could be regulated state by state creating a fairly burdensome set of rules  and regulations that each financing would need to be subject to. Currently there is a federal pre-emption that makes getting these kinds of deals done fairly easy.

I have no idea why either of these provisions ended up in a bill designed to regulate the banking industry. Entrepreneurs and startups don't use banks to finance them. They get their initial capital from angel investors and then VCs as they grow. This system works well, did not blow up in 2008, and is not in need of reform of the type Dodd wants to throw at us.

In fact, what we need is to eliminate all accredited investor requirements for small investments of up to $25k. Why does someone have to be a millionaire to invest in a friend's startup? I understand that we don't want someone mortgaging their home, or betting their entire life's savings on a startup. But for a small amount, like $25k, we should not be regulating angel investing.

My dad sent me an email the other day pointing out a news story about an incubator in Texas that was cranking out startups and creating jobs. He told me that he believes that the work entrepreneurs and the people who work with them (ie me) are doing is incredibly important to the health of our economy. He's right and we need to explain that to Chris Dodd and his friends in the Senate. If they are going to reform accredited investor regulations, they should liberalize them, not constrain them further.

I'll get on the phone and call my Senators and Representatives. Hopefully you'll do the same. This is nonsense.

UPDATE: Irene left these details in the comments which will be helpful when you contact your representatives:

The section numbers in question are Sec. 412 for accredited investors and Sec. 926 for federal pre-emption or Reg D.

Link to pdf of bill: http://bit.ly/duxjSr

Link to TechFlash article with more info on possible influences: http://bit.ly/96uuEx

UPDATE #2: Dan Primack of PE Hub has just posted that congress is listening to all the uproar over this. Maybe we'll get to keep things the way they are. But I am still going to make the case that we need an exclusion for small investments made by non-qualified investors.

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• Mendelson's Musings (Jason Mendelson)
• Why Does Financial Reform Punish Startup Companies And Angel Investors? (techdirt.com)
• Robert E. Litan: Proposed 'Protections' for Angel Investors are Unnecessary and Will Hurt America's Job Creators (huffingtonpost.com)
• Too Small To Fail (guidewiregroup.com)
• Shane: How Dodd's Plan Hurts Startup Finance (businessweek.com)
• Proposed Financial Regulations Could Cripple Angel Investing (readwriteweb.com)
• Dodd Bill Could Render Startups Too Small to Succeed (xconomy.com)

I'm on vacation this week and trying to keep work to a minimum. And I've got a post up on the USV blog today bidding goodbye to our colleague Andrew Parker. So I simply going to link to that post.

It's an interesting post because in addition to talking about how great it has been to work with Andrew, I explain a bit about how we think about staffing our firm. If you have any comments, please leave them on the USV post.

I'm on vacation this week skiing with my family. I got back from the mountain yesterday afternoon, checked in on email, made a few phone calls, and took a quick look at Techmeme. I saw a headline that said "The Startup Visa Act Must Be Stopped" and I noticed that the post was written by a member of the AVC community, Pascal-Emmanuel Gobry, and that is was running on Business Insider.

I know Pascal. We met once briefly and I engage with him regularly here and also on Tumblr. He's a smart and thoughtful person. So I read his post carefully, thought about it, and slept on it.

Pascal's arguments against the Startup Visa Act are:

1) You have to find investors to get a Startup Visa

2) Once you've obtained a Startup Visa, your personal founder's risk goes up

3) It's bad for investors because the best foriegn entrepreneurs will self select out of this program

Those are all valid arguments and I appreciate that he is raising them. But to suggest that the Startup Visa Act "must be stopped" because of them is ridiculous.

Let me tell you a story. In the summer of 2008 I met one of the founders of Zemanta in London. I heard the story about how two of the founders had won 2007 Seedcamp and how they had started a company in Ljubjiana Slovenia with the funds they secured from Seedcamp. I was by that time already a Zemanta user and really liked the product. Seedcamp and the other seed investors offered our firm the opportunity to join the seed round and we did in the fall of 2008.

In early 2009, I suggested that the two founders move, at least temporarily, to the US so that they could build out the business side of the company here. They did so, but only on a tourist visa. And when that tourist visa ran out, both of them had to go back to Slovenia and wait a long time to get a more permanent visa. Both are now back in the US building the business, but the time they were kept out of the US was a critical time in the business and the company suffered from having them away. Time was lost and you can't get that back.

Had the startup visa act been the law of the land, they could simply have applied for and been awarded a startup visa right after securing their seed funding. None of this would have been an issue.

The startup visa is not just for entrepreneurs, like Pascal, who are thinking of starting a company in the US. It is also for the entrepreneurs who have already started a company and want to build their company, or part of it, in the US.

Pascal is thinking about this a binary choice and it is not. We have a suboptimal visa system here in the US for entrepreneurs. The startup visa will not solve all the problems. It is not a perfect solution. But it is a very good idea and it should not be "stopped." It should be made into law. Then entrepreneurs like Pascal can decide if they want to take advantage of it or not.

While I do not appreciate the headline that Business Insider put on Pascal's post (much as I don't like the headlines they sometimes put on my posts when the re-run them), I do appreciate the debate over the Startup Visa Act. Anything that is going to become the law of the land should be subject to debate.

So in the spirit of debate, here are some more posts on the startup visa act:

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• Monday Morning Startup Visa Articles (feld.com)
• The Truth About The Startup Visa (Manu Kumar)

Yochai Benkler is one of a handful of people who our firm regards as inspirators. We've read everything he's written and find ourselves quoting him regularly in meetings. This is a picture of Yochai making a point at our first Union Square Sessions event on peer production.

So when I came across Yochai's op-ed today in the NY TImes on the National Broadband Plan, I stopped skimming and focused, I read it twice.

Yochai agrees with many in the tech industry, me included, that we need a National Broadband Plan. But in classic Yochai fashion, he doesn't think it goes far enough. He says:

Take the commission’s “100 Squared Initiative,” which aims to get
100 megabits-per-second service to 100 million households, at
affordable rates, by 2020. Meeting the speed target shouldn’t be
difficult; industry is well on track to achieve it within the decade.

Affordability
is the hard part — because there is no competition pushing down prices.
The plan acknowledges that only 15 percent of homes will have a choice
in providers, and then only between Verizon’s FiOS fiber-optic network
and the local cable company. (AT&T’s “fiber” offering is merely
souped-up DSL transmitted partly over its old copper wires, which can’t
compete at these higher speeds.) The remaining 85 percent will have no
choice at all.

This is the problem. There isn't enough competition on the access side of the Internet, both wireline and broadband. The rest of the Internet stack is hypercompetitive and is innovating at a mile a minute. But in access, we have monopolies who go at whatever speed suits them. There's nothing pushing them to go faster.

Yochai ends a fantastic op-ed with this point:

If we stay the present course, the commission’s new policy will build a
better wireless network around a more entrenched monopoly system,
lodging an insurmountable obstacle in the path toward bringing
America’s broadband network up to speed with the rest of the world.

That's a sobering thought.

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• Yochai Benkler on broadband strategy (hyperorg.com)

Ben Horowitz has a post called The Case For The Fat Startup on the All Things D blog. I don't agree with Ben's take on this issue but I have enormous respect for Ben and his partner Marc Andreessen. They have started and built multiple successful businesses and all I do is write checks. So take everything I have to say with that in mind.

I'd also like to say that my comments are only related to software-based businesses. I don't think it is applicable to greentech or biotech. Those sectors are much more capital intensive than software.

In short, since I started investing in the web in '93/'94, I have invested in about 100 software-based web companies. And the success rate of fat companies versus lean companies is stark. I have never, not once, been successful with an investment in a company that raised a boatload of money before it found traction and product market fit with its primary product.

Boatload is a subjective term. So is traction. So is product market fit. And so is successful. So let me try to define them in the way that I think about them. A boatload of cash is more than $20mm of invested capital. A boatload of cash is monthly burn rates of tens of millions of dollars. Traction and product market fit are customers or users buying or using your product in droves. It is the realization that you've found the sweet spot of the market you were going for. And successful is an investment that pays out multiples of the dollars we invested in it. Getting our money back is not successful in my book. Getting three times our money back is good. More than that is great.

Let me say it again. I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it's sweet spot. But it has happened. The Loudcloud story that Ben lived and tells in the All Things D post is proof that it can happen.

You can also win the lottery. The odds aren't great that you will. But millions of people play it every day. I don't.

The very best investments that I have been involved in established product market fit before raising a lot of money. That's how Geocities did it. That's how Twitter did it. That's how Zynga did it. That's how every single one of my top twenty web investments in my career did it.

Many of them also went on to raise and spend a boatload of money on the way to getting profitable. Not all of them needed to do that. But the thing that is true about every single one of the twenty most successful web software investments I've been involved in is that they had significant user or customer adoption before ramping up hiring and spend.

I think there are a number of reasons why that is true. Although Loudcloud was able to reinvent itself with hundreds of engineers on the payroll, I think it is very hard to be nimble and quick when you have hundreds (or even dozens) of engineers and other employees. It helps to be lean and agile when you are trying to fit your product to the market. It is also nearly impossible to pull off the kind of funding history that Loudcloud pulled off when you are not successful with your initial product. Ben explains that Loudcloud raised $350mm in four rounds of financing (including an IPO) in the first 15 months of its life. Marc Andreessen and Ben Horowitz can do that. Most of you can not.

All of this said, I think Ben does a service to point out that raising a lot of cash and making a large investment in the business is a big positive. But in my opinion you only want to do that once you are 100% sure and have ample evidence that your product has hit its stride, you've got yourself in the place you want to be in your market, and you can raise the capital without taking much dilution. If all of those boxes are checked yes, then go for it. But please spend it wisely.

I've been thinking a lot about the NYC subway system. It was built in the latter part of the 19th century and the early part of the 20th century. It's a lesson in the power of private enterprise to do public good.

There were elevated transit lines in NYC dating back to the 1870s, but the first underground line opened in 1904. At that time, the NYC subway system was operated by two privately held companies, the BRT (Brooklyn Rapid Transit) which became the BMT (Brooklyn Manhattan Transit) and the IRT (Interborough Rapid Transit). These privately held companies raised capital to build the subway lines and operated with the city's blessing. Starting in 1913, the city starting building the tunnels and leased them to these privately held companies.

Then in 1932, the city started to compete with these two privately held companies, and in 1940, they were bought and consolidated into the MTA (Metropolitan Transit Authority).

I ride the subways every day and will head to the L train shortly to get to work. Every time I ride on this system, I am amazed at how it got built given the cost and complexity involved.

The fact that it started out as a private enterprise is not surprising. There is something incredibly powerful about entrepreneurs backed by speculative capital. The entrepreneurs laid the first tunnels, operated the first lines, and showed that it was a profitable enterprise.

At some point the city stepped in and turned it into a public utility. Say what you want about government's ability (or inability) to operate effectively, I will tell you that the NYC subway system works pretty damn well.

So all the debates, including the one I waded into yesterday about mobile broadband infrastructure, about private enterprise versus public spending are like most things – fringe debates. There is a third way which is public private partnerships and I think that is the best way.

I went down to Washington, DC yesterday to participate in an event that celebrated the 25th anniversary of .com. I spoke on a panel (yes a hated panel) moderated by Kara Swisher and including Aneesh Chopra, CTO of the Federal Government, Arianna Huffington, and Ken Silva, CTO of Verisign.

Kara started out the discussion by holding up a binder that included the FCC's National Broadband Plan that was submitted to congress this week. She had a lot of fun with the fact that our nation's broadband plan was being distributed to congress and the media in paper form in a binder.

Notwithstanding the packaging of the plan, I am a big fan of the effort by our administration, led by the FCC, to change our country's lackluster performance in the area of broadband infrastructure. John Chambers, CEO of Cisco, is also a fan and he just wrote this in Business Week:

If the U.S. military ranked 17th in the world, you can bet that as a
nation we would make strengthening our armed forces a national priority.
Yet that's just how the U.S. stacks up against the rest of the world in
terms of access to high-speed Internet connections. The vital
communications systems that make our economy work and serve as a
platform for business innovation and social interactions are
second-class.

I said to the panel, the audience, and our government's CTO yesterday that I believe the most important thing we can do in the area of broadband infrastructure is to increase the amount of wireless spectrum available for broadband internet. The fact is that wires, fiber, and cable aren't going to get us where we need to go. We can spend billions laying more and it will be a waste of money. We can't get to the speeds, capacity, and coverage we need with last century's technology. We need to lead the world in the development of new technology and we need to deploy it here first.

The national broadband plan does call for another 500mhz of hiqh quality spectrum to be used for "terrestrial broadband services" over the next decade. This blog post explains how that is proposed to happen. It appears that most of this 500mhz, if not all of it, will come from the broadcast television industry.

That seems to be politically realistic but there is a whole lot more excellent spectrum out there in the hands of industry, from broadcast TV, to broadcast radio, to wireless carriers that is locked up in the hands of one single provider. And that's huge problem.

As I explained yesterday on the panel, there's huge difference between the efficiencies of circuit switched networks where the bandwidth is allocated entirely to one connection, and packet switched networks where the bandwidth is shared amount many connections. The same is true of wireless spectrum and the unregulated band where wifi devices operate is the best example of this. We have witnessed massive innovation and bandwitdth improvement in wifi devices over the past decade. This is due to the development of new standards, new hardware technologies, and new software technologies. When you take a technology and unregulate it and let the market operate, you'll get way better results than when you lock a technology up in the hands of one owner.

So what I'd like to see in the National Broadband Plan is to make that entire 500mhz available as unregulated spectrum where anyone and everyone can build technologies, devices, markets, and businesses in it. I believe if we did that, instead of auctioning it off to several large established wireless carriers, we would see the kinds of gains our country needs to improve our broadband infrastructure. We'd also lead the world in the development of these new wireless technologies and create a boatload of jobs in the process.

 Sorry for the inside baseball title, this post is not about net exercising options or warrants.

It is about an exercise I've been going through since the beginning of the year. I've always walked around with hardly any money on me. It drives the Gotham Gal nuts, but it's who I am. I don't like carrying cash and never have.

But the past few months, I've been walking around with no cash, not a dime. I carry a host of stored value cards and credit cards on me. The picture at the top of this post is my wallet. The black cord is my daughter Emily's hairband. In that stack is a metrocard, my drivers license, a parking pass for my garage, several american express cards for various personal and business entities, a visa card, and several debit cards. That's it.

I've gone without a wallet for years and this stack of cards has been my system for the past decade. But I've always supplemented it with some cash in my pocket as well. Not anymore.

What this exercise has taught me is that cash is almost unnecessary these days. Almost is the operative word. You have to work a little bit to operate without cash. I avoid the $2 or $3 purchase. I've never been much for the $2 or $3 purchase, but it does happen. Earlier this week I stopped at Joe, The Art Of Coffee for an espresso on the way to work. I forgot that Joe is cash only. Fortunately Joe gave me the espresso and took an IOU from me. I felt bad about that and now I have to figure out how to pay him back without breaking my no cash diet.

The thing that was holding me back from going no cash was the time it took to check out with credit or debit. But in the past year or two, most merchants have moved to a no signature required on transactions less than $20. If no signature is required, a credit or debit transaction is faster than a cash transaction.

And then there's cabs. It took me until this year to give up my 25 year habit of paying cabbies in cash. I thought the credit transaction would take too long or be unreliable. My kids told me I was being foolish and to give it a try. And I was sold in the first day. Paying cabbies with a credit card is simply a superior experience. It's fast, there's no waiting for change, and tipping is easier and I find myself being more generous. All in all it is much better.

So I believe we are on the verge of a cashless society, at least in NYC. I may be on the bleeding edge of it, but if I can go cashless, so can others.

The other thing this cashless exercise has taught me is walking around with plastic cards wrapped in a hairband is silly. We need to take the next step which I am sure is the phone. I've always got my mobile phone on me unless I am home. It would be so nice if I could simply enter all those stored value cards, credit and debit cards into my phone and stop with the stack of plastic entirely.

I hope to continue this cashless exercise going, at least when I am in NYC and not traveling. I honestly think I can do that. And as for the stack of cards in my pocket, well I'd like to get rid of them too.