Tag Archives: venture capital

Marc Andreesen Finally Calls The Tech Bubble

Posted on January 5, 2012 | Leave a comment

After months of saying, contrary to all evidence, (like this, this and this) that there was not a tech bubble going on, super-VC Marc Andreesen has finally publicly pulled back from investing because valuations are too high. Duh.

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Lean Startups Aren’t So Lean

Posted on November 15, 2011 | Leave a comment

There was recently an article in PE Hub (that’s Private Equity Hub, for those of you who don’t subscribe) about the breakneck growth of internet darlings like Groupon, Zynga and LinkedIn, and about the massive hiring and marketing spending required to support that growth. Written by the ever insightful Connie Loizos (disclosure: I know Connie and her husband both socially and professionally), the article pointed out that these companies are forced to raise huge private equity rounds (as in hundreds of millions of dollars) to pay for the marketing that drives growth and the hiring that supports it.

As Connie points out, this is a great flaw in the “lean startup” model. Sure, you can build a company with $3 million now instead of $30 million. Open source software and cloud hardware resources allow you to bring a product to market without raising gobs of venture money. But those same trends allow anyone else to bring a competing product to market just as cheaply. So then the race is on to see who can grow the fastest. And that race demands capital, lots of it.

So startups can be lean, but growth companies are fat. All this trend has done is move the locus of capital raising competition a little later in the lifecycle of companies.

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More Tech Bubble Datapoints

Posted on August 5, 2011 | 1 Comment

Here are two more items showing that Silicon Valley is in the midst of another startup bubble:

  1. TaskRabbit, which has A) a dumb name; B) a terrible premise; C) the ridiculous idea that it won’t need to staff up in order to grow (because it has a terribly inexperienced CEO); and D) NO REAL BUSINESS MODEL.
  2. A WSJ article about how PR firms are now turning down clients and taking equity in lieu of cash compensation. Since the main value of PR firms is hiring cute young women who flirt with male reporters to ensure that their clients get press coverage, any time PR firms start feeling as powerful as VC funds (like they did in 1999), you know that you’re in a bubble.
  3. San Francisco apartment rents are skyrocketing, to the point that local real estate people are calling it a bubble.

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Yes, It Is A Tech Bubble

Posted on June 14, 2011 | 5 Comments

We’ve seen lots of talk recently about whether there is another technology bubble going on, with LinkedIn’s super successful IPO, and shares of Facebook, Twitter, et. al. trading on secondary markets at multibillion dollar valuations. I lived through the first dot.com bubble in 1999-2001, and based that experience I am saying right here, categorically and emphatically, that we are definitely in another bubble. I will add some caveats at the end, but listed below are my top reasons for calling this a bubble. Every single thing I list below also happened in 2000, and made rational observers then realize that we were in a bubble. The more things change, the more they stay the same.

A) Insanely high valuations with no reasonable relation to the metrics (revenue, income) of the company (LinkedIn, Groupon)

B) Retail investor hunger for tech stocks. Back in 1999, we were all talking about Joe Kennedy’s famous line: “when you get stock tips from your shoeshine boy, it’s time to sell.” When the public is hungry to invest in a category, it’s a bubble

C) Farcical metrics. In the dot.com era we were supposed to look at eyeballs, not revenues. Now Groupon tells us that we should ignore marketing costs and look at “adjusted consolidated segment operating income”

D) The emergence and venture funding of many copycat businesses. How many flash sale or social coupon businesses do people need? And what about Color, which raised $41 million to launch yet another iPhone photo sharing service, and reputedly only shared 5 photos during the iPhone developers conference and had its president leave within months of launch?

E) Especially the emergence and venture funding of narrow vertical copycats. For example, Juice in the City is Groupon for moms, Pawsley is Facebook for dogs, Everloop is Facebook for tweens (who will, by definition, leave as soon as they are old enough to join Facebook), etc. Anyone who lived through the dot.com remembers “vertical portals.” That didn’t work out so well.

F) Society and entertainment figures or kids fresh out of Stanford and Harvard business school as entrepreneurs.  (Juice in the City, Rent the Runway, Ashton Kutcher.)

G) Venture funds you’ve never heard of leading rounds in vertical copycats (Juice in the City funded by HU Investments and Tandem Enterprises)

H) Companies you’ve never heard of buying prime time TV commercials (Peel)

I) Ridiculous and nearly identical company names (Buzzr, Socialzr, Apptizr  etc.)

J) Weekly launching of new “incubators,” in which people, some with limited experience, will mentor new companies in return for some equity (Growlab, Capital Factory). Or one incubator, 500 Startups, that funded two nearly identical companies: StoryTree and Vvall.

K) Putting a tech sheen on non-tech companies so that they can raise money at tech company valuations (The Melt)

L) Features posing as companies. A clever little web widget, even a useful one that gets a lot of users, might not be enough to support a viable company. And starting companies that you know can only succeed by being acquired is a classic bubble move. For example, StumbleUpon, Blippy. Actually, Blippy alone is enough to prove my bubble hypothesis. Only in a bubble could that company have even existed.

Now for the caveats, or counterpoints:

As many have noted, some of these companies, particularly the big ones (LinkedIn, Groupon) are generating real revenues. Back in 2000, revenues were a rare thing. However, I should note that neither LinkedIn nor Groupon are particularly profitable. Neither is Pandora. Twitter still doesn’t really have a revenue model. The random widgets and apps that are raising money? Not so revenuefull.

There are more customers now. With the spread of broadband and smartphones, an online business has a much larger base of potential customers than in 1999. That means that the same capital investment can, theoretically, be spread over a much larger revenue base.

This bubble is focused on consumer-facing internet businesses. Not all tech companies are being lifted by the bubble. Microsoft, Google, Amazon and the ilk at still trading at normal to relatively normal valuations.

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More on Microsoft-Skype (Microskype?)

Posted on May 11, 2011 | Leave a comment

The NY Times did a nice summary today of what analysts are saying about the Microsoft/Skype deal. And I don’t think it’s nice just because it confirms a lot of what I said yesterday. I think it’s nice because the author does a good job of quickly capturing and explaining a variety of viewpoints.

FYI, if you are over your 20 article limit on the Times, just clear your cookies. Bing, got more Times!

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Microsoft + Skype = Winning

Posted on May 10, 2011 | 2 Comments

Here are some of my initial thoughts on why the Skype deal is a good one for Microsoft, presented in sections, like a good PowerPoint.

Cool features that won’t make much (or any) money, but might improve market share:

  • In game voice calls when using Xbox
  • Skype someone straight from Outlook
  • Or Hotmail, if anyone even uses Hotmail any more
  • Skypeout someone at any phone number that shows up in any Office application
  • Find a number in Bing and one click call it

Ways Microsoft might use Skype to make money from businesses:

  • Integrate features into Exchange server to enable enterprise VOIP
  • Better yet: integrate features into the suite of online apps for small business – they need the savings on phones more than enterprises and lack the skills to set up their own VOIP
  • Implement a “call me” feature for advertisers

Strategic plays:

  • Integrate Skype into their investee Facebook to help counter Google’s voice products
  • Continue to wall off Yahoo from anything business related, relegating the ‘hoo to being a consumer content company
  • If the SMB play works, leverage it against Zoho, Google docs and other productivity apps
  • Build relationships with phone carriers who are moving to IP networks and losing landlines as fast as Lady Gaga is losing fans

Where it won’t work, even though Ballmer thinks it will:

  • Microsoft mobile OS

Did Microsoft overpay at $8.5 billion? Definitely. But they’ve got about a zillion dollars in cash, earning about zero percent interest, much of it sitting untouchable overseas, where Skype is conveniently located. So what’s a billion or two between friends?

Of course, all of the above assumes that Microsoft executes, which is a big (BIG!) assumption. After all, if Microsoft were good at executing this stuff we would all be using Outlook Live instead of Gmail.

See here and here for NY Times coverage, here for TechCrunch and here for GigaOm.

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On Facebook and Intellectual Property Theft

Posted on October 19, 2010 | Leave a comment

As the non-film press reviews The Social Network, their gloss on the film is driven, not surprisingly, by their philosophy of business. For example, in The New Republic, Lawrence Lessig focuses on how net neutrality enabled Facebook to thrive, because he is a fiend for net neutrality. [Sidebar: his argument makes no sense (typical of Lessig), because Facebook is a low bandwidth application, and net neutrality issues are all about bandwidth intensive applications.] The Wall Street Journal aims more at the lawsuits against Facebook founder Mark Zuckerberg, because it hates anti-business lawsuits (tort reform is one of the Journal’s pet causes; of course, lawsuits by businesses against regulatory agencies are fine) and loves the free market, and nothing is more free market than a successful entrepreneur. TechCrunch also criticizes the lawsuits, not so much from a tort reform perspective but from the Silicon Valley perspective of the heroic entrepreneur who works harder and succeeds; the money quote from this review is when it criticizes the Winklevoss twins because they “spend the majority of the movie demanding compensation over a site that they didn’t build.”

Both the Journal and TechCrunch minimize the lawsuit aspect and emphasis Zuckerberg’s execution of the idea. And to be sure, he executed brilliantly. There were already social networks out there – Friendster and MySpace – and yet it’s Facebook that’s the big winner. Facebook had superior technology, design and social elements, all of which helped it succeed. But to dismiss the Winklevoss claim as a mere “contract dispute” as the Journal does is to slant the story to make a political point. If the claim is true (obviously, I don’t know the facts, but Facebook did pay the twins over $60 million to settle the claim), Zuckerberg signed a contract to build a site for the twins, but instead of working on that site, he stalled the twins while he built a competing site. That is much closer to theft than to a contract dispute. Again, Zuckerberg won on execution, not on theft, but let’s not let that execution disguise or obviate any devious behavior that led to Facebook’s creation.

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Cloud Computing: New, Cool & Totally Old-Fashioned

Posted on October 18, 2010 | Leave a comment

I went to a very interesting panel discussion last week on cloud computing, in particular on go-to-market and sales strategies for cloud and SaaS (two terms that I will use interchangeably in this post) companies. The panel taught me about how cloud company executives view their business, but mostly it reminded me that most businesses are pretty similar: they hinge on cost-effective ways to bring in paying customers. No matter how high-tech your product is, you need to reach potential customers and then turn them into actual customers.

Listed below are some of the key lessons from the panel, split into the few that are cloud specific, and the rest, which could generally apply just as easily to a ball bearing manufacturer.

Cloud points

  • The product has to work. Since lots of cloud businesses are spread via word of mouth, the application needs to work early. Compare this to selling big software packages to enterprises, where bugs and customization are expected
  • Customers that might use a cloud product probably want to try it online, rather than get a visit from a rep. This is because they are, by definition, tech savvy. But of course you should adjust this for geography and age
  • SaaS products tend to have lots of upsell opportunities. So just get customers in the door, even with a small initial usage. This is why freemium works so well in this space. Note: this is really hard for traditional enterprise sales guys to adjust to. They always want to work for the giant sale
  • As a consequence of the above: don’t charge by the seat. That sets up barriers to increased usage. Let everyone use it, but charge by feature
  • Silicon Valley is developing camps: HP v. Cisco v. Oracle. Be aware, because this means that sometimes your backend technology choices might influence who you can partner with

Points that apply to all businesses

  • Your distribution channel must match your customers. E.g. Big companies like P&G are unlikely to buy via self-service model
  • Find a keystone/reference customer, especially one who can lead to other target customers. E.g. Accountants led Quickbooks to small business customers
  • SMB is a bad term. A 15 person company is totally different than a $500M company
  • Look at who is using your product, then target more of them. E.g. If you see that 3 ski resorts are using your product, then plan a marketing campaign targeting ski resorts. This is generally true in business, but it’s easier with online products where you can see who the end user is
  • Understand your business model: Cost to get someone in the door. Cost to get them to become a customer. Conversion rate. Revenue per customer. Margin. Productivity per sales rep. Online businesses have more data, so it should be easier to do this. But still, this is basic business knowledge. Revenue per customer needs to be greater than cost per customer. Revenue per sales rep needs to exceed compensation per sales rep
  • Don’t throw your venture money at the market by hiring too many sales reps too early. Develop your sales force as your model develops. Reps will always try to game the system, and the better you understand your model, the less they can game it
  • A better product makes for an easier sale. Duh! This is true everywhere. But here is an interesting, tech only metric that was postulated: aim for an a-ha moment within 10 clicks

Hat tips to all the people involved:

  • Chad Lynch, who put together the panel as part of the Total Access educational program at the law firm Orrick
  • Greg Heibel, a partner at Orrick, who moderated the panel

The panelists:

 

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Virtual Companies Also Unfocused Companies?

Posted on September 21, 2010 | 2 Comments

One of the hot new trends in Silicon Valley is the “virtual” company: a firm where everyone works from home, only coming together for the occasional meeting at Starbucks. This can be a great thing, part of the lean startup trend. Obviously, saving money on rent and furniture and the like allows a company to get farther along before it needs to raise capital.

However there are also special challenges for virtual companies. I am consulting for two of them now, and I’m seeing some of these challenges first hand. These challenges primarily stem from the difficulty in communicating at a virtual company. With employees spread out, communication is usually via email or IM. These are mediums that tend to promote brief, sometimes inconsistent, communications.

Sometimes when “discussing” an issue with my clients there will be 15 or 20 emails, each only 1 or 2 lines long, with multiple people chiming in, often with their missives crossing each other, and thus not incorporating other thoughts and comments. It can be difficult in this environment to drive toward a conclusion, particularly if you want any kind of consensus. Ideas and concepts are more likely to fall through the cracks. Email can be super efficient, don’t get me wrong, but it can also make group communication less effective than it would be if everyone were together in same space.

A possible consequence of this sort of fragmented communication is that it makes solving difficult problems more difficult. A virtual company is likely to be better at solving problems a single person can tackle than at solving problems requiring cohesive group effort. Based on my consulting experiences, this is true whether the problem is technical or business oriented.

Technology can help mitigate these communications challenges. Skype and other services provide free conference calls, so you can at least communicate in real time. Web conferencing and virtual whiteboards can replicate meetings, and project management software can help ensure that everything gets done on schedule. But if the management of the virtual company isn’t aware of the communication difficulties and does nothing to address them, the company is likely to generate fragmented products or strategies.

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On Super Angels and Lean Startups

Posted on August 17, 2010 | 3 Comments

Both the Wall Street Journal and TechCrunch recently wrote articles about the new breed of “super angels” in Silicon Valley, individuals who are aggressively investing in technology startups, often in amounts large enough that they are starting to squeeze out traditional venture capitalists.

TechCrunch states that this movement is enabled by the rise of the “lean startup,” in which companies use new technologies to reduce their costs:

“But the last several years have seen the rise of the cheap startup. Internet startups can use open source software and new scripting languages to ship products fast and cheap.”

That’s true, but only for a certain segment of technology companies. Sure, consumer internet companies can leverage these new technologies and launch without gobs of capital, but much of the technology world doesn’t have that luxury. Any company that produces hardware is in a different situation. Chips, devices, networking appliances – these guys all need just as much capital as they ever did. And even folks working on software for the enterprise are still somewhat tied to the old ways of building products.

TechCrunch tends to see Silicon Valley as consisting solely of web startups fueled by former Googlers, but there are still entrepreneurs out there working on traditional products. So before you start writing the obituary for venture capital, remember that consumer internet may be fun and sexy, but there are plenty of technology companies that still need the sorts of resources only large funds can provide.

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