By now, regular readers of this blog should be pretty familiar with USV’s investment thesis centered around investing in large networks of engaged users that have the potential to disrupt large markets. I’ve mentioned it frequently here and my colleagues have also blogged regularly about it.
Today I got a tweet from Jon de la Mothe about the growth of professional networks on Facebook:
I think it is possible to bootstrap a network on top of another network. Stocktwits did this on Twitter and Zynga did this on Facebook. But both of them eventually built their own networks directly on the web and mobile. Zynga still gets a ton of game play on Facebook and Stocktwits continues to benefit from tweet distribution on Twitter, but they have made the necessary investments to operate their businesses in such a way that they are not entirely dependent on other networks. In the case of Stocktwits, they did this early on. In the case of Zynga, they waited for a while to do this.
But my question to Jon is a bit different. I didn’t ask if you can build a network on top of another network. I asked if it is a network if it is built on top of another network. I think in that case, the answer is no.
There is a third way, which are networks of networks. My partner Albert has blogged about this and I am 100% in agreement with him that this is the way the market should evolve. I believe that the Internet is an operating system and the networks that operate on the web and mobile via the Internet should interoperate with each other, share traffic and distribution with each other, and act as peers with each other. This is in keeping with the architecture of the Internet and is the most sustainable model and the one I am betting on in the long run.
It's friday, time to talk about something fun. Today I thought I'd talk about mobile games.
I've never been much of a gamer. I reached adulthood just before videogames went mainstream. But I have found the "quick hit" aspect of mobile games to be a good way to add some fun to the day and connect with a friend or family member.
I played our portfolio company Zynga's Words With Friends with my daughter late last year. And I've started playing OMGPOP's Draw Something with a few friends in the past week.
We have an IPO market for web companies again. I don't have all the names in front of me, but this year has brought IPOs for Pandora, LinkedIn, Groupon, Zynga, and TripAdvisor. These five companies are all trading for north of $1bn market cap. Pandora is at ~$1.5bn. LinkedIn is at ~$6bn. Groupon is at ~$15bn, Zynga is at ~$7bn, and TripAdvisor is at ~$3.5bn.
We can (and surely will in the comments) argue about these valuations. Some will say they are too high. Some will say they are too low. That's what makes a market. But in the aggregate, these valuations do not seem ridiculous to me. The public market investors are valuing these companies at prices that have some rationality to them.
What is possibly more interesting is that the public markets are valuing these companies at less than the late stage private market might value them at. Again, I don't have the data in front of me (I'm on vacation), but I believe that some of these companies had private financings at our above these current market caps.
The past decade (post Internet bubble, post Sarbox) brought a new normal to the late stage venture capital market. Companies are staying private longer. They are doing multiple rounds of growth financing privately. And they are doing multiple rounds of secondary liquidity for the founders, angels, and early investors. Mike Moritz calls these financings the "new IPOs".
This "new normal" is allowing these companies to stay private and develop into real businesses. With a lot of revenue. The five companies I mentioned at the top of this post will have close to $5bn in revenue this year. The company with the least amount of revenue is Pandora which, as of its last quarterly report, is operating at a $300mm annual revenue run rate.
These companies also have built sophisticated management teams that are highly capable of managing a business to meet the expectations of public market investors. They have strong operating executives, strong financial executives, and strong product and engineering leadership. They should be well run public companies.
The five companies I mentioned at the top of this post are carrying a combined market cap of $33bn. So they trade at an average of 6.6x revenues. And that is not including the cash they have on their balance sheets. I am not going to do the math, but I would bet if you back out the excess cash, you might see revenue multiples of less than 6x for this cohort. These are full valuations in a historical context, but these are not crazy valuations. If these companies can continue to grow at the rates they are currently growing, and if they can generate significant cash flow from their businesses (some of these companies already are doing that), then they should be more valuable in the next couple years, generating gains for the public market investors who hold the stock.
When Zynga was pricing its offering last week and getting ready to start trading its stock, I got a note from a friend who said "let's hope for a '99 style first day pop." I responded that was the last thing I wanted to see. And thankfully we did not get that.
It is not healthy for companies to trade at prices well beyond what they are worth. It puts incredible pressure on the team to deliver results that can't be delivered. And when the stock inevitably comes back to reality, the team feels like they somehow failed. Morale is impacted. The whole things is madness. And who benefits from that first day pop? Only the best customers of the banks who led the offerings. Why should they get a windfall when they did nothing to build the company and when they will be out of the stock so fast it will make your head spin?
The IPO market for web companies we have right now is rationale. We can argue whether it is pricing thse offerings correctly. But it feels about right to me. I believe we will see a bunch of IPOs next year, led by Facebook, which is the poster child of this whole "stay private longer" movement. If we as an industry can be patient, keep our companies private longer until they are truly IPO ready, then we should have a sustainable IPO market. That's where we seem to be headed. Let's not get greedy and screw it up.
Disclosure: USV has a significant holding in Zynga therefore I am long that stock through my interest in USV.
I interviewed Dennis Crowley yesterday at the NYU Entrepreneurs Festival. I tweeted out the livestream so I'm sure some people were able to catch it live. I hope they put the video up soon because Dennis was great and I think people will get a lot of value out of his thoughts on entrepreneurship, startups, and building a product and a company.
But this post is about something Dennis said about product roadmaps that really struck me. Dennis said that all the way back to Dodgeball, the predecessor company to Foursquare, he and Alex had a roadmap for the product that was years ahead of what they could actually build. When Dennis and Naveen decided to start building Foursquare, Dennis pulled out that roadmap and updated it to reflect the power of modern smartphones. And that roadmap goes way out, well beyond what Foursquare is today or what it will be in a year from now.
So when I asked Dennis about the moment when the Foursquare team watched the Facebook Places announcement, he said "I got up and told the team that any company can copy what we have built, but we just have to go on and build the things we want to build because nobody else has that roadmap."
That is the power of a visionary founder leading a team to build the things that are only in his or her mind. I recall Mark Pincus, in the early days of Zynga, tell me about a game he wants to build someday. Zynga still has not released that game. When Jack Dorsey came back to Twitter, he said he was finally going to build Twitter 1.0. Think about that. And think about what Twitter 5.0 is in Jack's mind.
The best founders have these long roadmaps. If they can stay engaged in their companies, they can realize them over extended periods of time. There are so many reasons why this doesn't always happen. Founders leave. Companies are sold. But when it all comes together, the result is magical.
The day Google+ launched, I sent a friend at Google who was involved in building the service an email requesting an invite. I got the invite late that day and started playing with the service. Here's my profile. I'm not sure if this page is public or you need a Google+ login to see it. At some point Google will open the service to everyone and I expect this page will be public, but I'm not sure.
In any case, I hope Google+ succeeds. Given the blog posts saying this will kill Tumblr, Twitter, Foursquare, etc, you might wonder why I feel that way. Well first, I don't think competitors kill companies and services. I think the vast majority of "deaths" are self inflicted. Facebook didn't kill MySpace and Friendster, they killed themsleves by failing to address the shortcomings of their services and their inability to respond to changing market dynamics, in some cases brought on by competitors. Of course, that fate could be in store for any company, including our portfolio companies, but it won't be because of Google+.
every single human being posting their thoughts and experiences in any number of ways to the Internet
Not everyone wants a Facebook experience; default private, mutual follow, best for close friends and family. Not everyone wants a Twitter experience; default public, asymmetric follow, best for broadcasting short burts of information to large networks. Not everyone wants a Tumblr experience; totally public, asymmetric follow, best for posting microchunked media.
My dad, for example, doesn't want any of those experiences. He might like Google+. It's a lot like email. He can curate groups of friends; his friends from school, his friends from the army, his friends from the community he lives in, and share information with them quickly and easily. I can see The Gotham Gal's dad loving Google+ too. It's very utilitarian and functional and powerful for certain kinds of users.
I've never thought that there would be one social service to rule them all. I've never thought that there would be one social graph for the web. I believe we'll need a multitude of social services to satsify the needs and desires of all the users of the web. Google+ fills a void between public and private, it serves what is likely to be an older demo less interested in hooking up or hipstering out and more interested in the social utility it provides. That's a good thing. We'll get more people "posting their thoughts and experiences in any number of ways to the Internet."
Currently all of Zynga's games run inside social networks, largely Facebook, but also Bebo and several others. And that list of social nets will grow longer in the next few weeks.
Developers like Zynga benefit from having multiple large social nets to build on top of. Tech blogs have noted that Google+ has hooks for social gaming built in. That is great. My dad would love some of the Zynga games. Maybe he'll join Google+ and play them with his friends (including me) there.
My line about "don't be a xyz bitch" is all about controlling your own destiny. These social platforms are awesome to build and launch on. They give you instant distribution, instant users, instant social identity. But in a perfect world you don't want to be dependent on any single one of them. The more social platforms of scale there are, and we have a bunch now, including Twitter, Tumblr, and Foursquare, the better world it will be for developers. And our business at USV is investing in and helping developers build companies. So I'm rooting for Google+. I think it will serve users who aren't being served well (or at all) on the social web right now. And I think it will be a strong new platform for developers. And both of those are great things for the web, our business, and entrepreneurs.
Our portfolio company Zynga has been running campaigns in their games to raise money for Haiti and a number of other causes. Mark Pincus, Zynga's founder and CEO, calls this "solidarity not charity." Zynga describes this approach to giving back in this way:
not charity is a culture that is not seeking a handout but instead is seeking a partnership, and a culture that had demonstrated by its past that it is worthy of our respect, of our collaboration and our sustained commitment.
To date Zynga.org has raised more than $3.6 million for
Haiti in more than 13 separate campaigns, along with hundreds of thousands of
dollars for Gulf relief, and other causes. Almost all of these funds have been raised since the launch of Sweet Seeds For Haiti in October of last year. The Zynga.org effort is an ongoing part of Zynga's business operations.
The biggest beneficiary of this effort is a school that Zynga is funding called L’École de Choix (The School of Choice) in Mirebalais, Haiti.
Zynga, in partnership with FATEM (Mirebalais’s community organization), along with local representatives, global NGOs and others, have broken ground on a K-12 school and community center, intended from its inception to meet the most pressing and critical needs of those living in extreme poverty in Haiti, with a focus on quality education, income generation and financial literacy. Programs include traditional K-12 academics (in partnership with DePaul University and Francis W. Parker School), and will also include ESL, work skills for adults, and a youth center with a focus on psycho-social development, and even its construction will create jobs for the local community and use local sources and materials.
Here is a quick 5min video that showcases this effort:
Here are a list of the games and campaigns that Zynga has run. If you play Zynga's games, you may have helped fund these efforts.
You can manage 50 people through the strength of your personality and lack of sleep. You can touch them all in a week and make sure they’re all pointed in the right direction. By 150, it’s clear that that’s not going to scale, and you’ve got to find some way to keep everybody going in productive directions when you’re not in the room.
Maybe Mark can manage 50 people through willpower and lack of sleep but I've seen many entrepreneurs hit this wall with much smaller teams. The question is what are you going to do about it?
Mark says "make everyone the CEO of something."
I’d turn people into C.E.O.’s. One thing I did at my second company was to put white sticky sheets on the wall, and I put everyone’s name on one of the sheets, and I said, “By the end of the week, everybody needs to write what you’re C.E.O. of, and it needs to be something really meaningful.” And that way, everyone knows who’s C.E.O. of what and they know whom to ask instead of me. And it was really effective. People liked it. And there was nowhere to hide.
He goes on to explain how this works and why it is so powerful. Read the entire interview if you are running a startup and looking for some ideas on scaling the team.
Status is a powerful motivator in social systems. People go crazy over their follower counts on Twitter, or number of friends or business contacts in Facebook and LinkedIn. So it makes sense that social status can be leveraged for social good.
Yesterday I logged into my Tumblr dashboard and saw this set of posts from my friends Jason and Dave, and my colleague Andrew.
You'll note that Dave and Andrew's avatars have a ribbon on them. I thought "well how the hell do I get one of those?"
And then I noticed at the top of my dashboard, the Tumblr logo had one of the ribbons next to it.
So I clicked on the ribbon and it took me to Tumblr.com/Haiti where I was presented with this choice of charities to support.
After I did that my avatar got a ribbon on it as you can see in the image above.
I don't know how many Tumblr users got ribbons yesterday but it could be a lot. Tumblr has millions of users. Even if only 5 or 10% of them did what I did yesterday, that could be hundreds of thousands of donations. Maybe Tumblr will post about this at some point. I'd certainly be interested to know how well this works.
Zynga will run a special relief campaign in three of its top games that reach over 40 million users daily. Users can purchase limited edition social goods in FarmVille, Mafia Wars and Zynga Poker, and 100 percent of the proceeds will go towards supporting emergency aid in Haiti.
Social services like Zynga and Tumblr reach millions of people every day. And they have powerful status driven systems that can drive users to do good things. That's a big deal when something awful like the earthquake in Haiti happens.
Disclosure: Tumblr and Zynga are both Union Square Ventures portfolio companies.
At our Hacking Philanthropy event a few years back we talked about all kinds of new philanthropic models that were emerging online. One model that did not come up in our brainstorming sessions was the sale of virtual goods for philanthropy. And yet, based on the data I am seeing this weekend, this could be a very big one.
Our portfolio company Zynga's Farmville game is the most popular social game online ever with almost 20mm people playing the game every day. On Friday Zynga released a new kind of seed into the game called "Sweet Seeds for Haiti". Since Friday, they have sold about 100,000 of these seeds which cost 25 FV cash.
Here is how the offer is described in the game:
Salutations, y’all! Today, FarmVille is proud to release “Sweet Seeds
for Haiti”. In this event, y’all will be able to purchase Sweet
Potatoes that NEVER WITHER, yield XP and 125 COINS PER HARVEST! Even
better than that is the fact that 50% of the
proceeds will go to helpin’ children in Haiti. What could be sweeter
than lending a helping hand to children in need? You’ll also get a
SPECIAL GIFT with your purchase so hurry on over to FarmVille and check
And here are the details about where the money is going in Haiti:
Haiti is the poorest country in the Western Hemisphere
and the 7th poorest in the world. Zynga’s mission of connecting the
world through games is enhanced by our opportunity to support the
health and education of these children and their families. For
additional information on the recipient organizations, please see www.FATEM.org and www.FONKOZE.org.
FATEM is a non-profit organization based in Mirebalais, Haiti, and
originally organized to bring information technology to the people in
the region, thus helping with the economic advancement of the area.
More recently, however, FATEM recognized the need for a sustainable
means by which to support the general education of Haitian children and
to ensure that these children have the necessary meals that will permit
their young bodies and brains to learn and grow.
FONKOZE, based in Port-au-Prince, is an alternative bank for the
poor. It is Haiti’s largest micro-finance institution and is committed
to the economic and social improvement of the people and communities of
Haiti and to the reduction of poverty in the country.
It's a bit tricky to estimate how much money the Sweet Seeds For Haiti has raised to date because you can earn FV cash and you can buy FV cash. When purchased, 25 FV cash costs $5. So if everyone bought the FV cash that has been used to buy the roughly 100k of sweet seeds to date, then $500k will have been raised, $250k of it going to charitable organizations in Haiti.
Even though that is best case, it's a pretty big number for three days. The key to this is that the seeds have value in the game and are tied into the game play and game mechanic. So not only are players doing something good when they buy sweet seeds, they are also advancing their own interests in the game.
I can imagine this approach being adopted across a multitude of online social games. It's an exciting development and an area to keep an eye on.