Tag Archives: silicon valley

Technology, Hubris and Lunch

As you may know, here in Silicon Valley the latest thing is for companies to provide all their employees with free lunches (and often breakfast and dinner too). I think Google was the first to do this, and Facebook followed them, and now even small startups bring in a catered lunch every day, or even hire their own chef. This week the WSJ reported that the IRS is looking into whether this perk should be taxed like most employee perks are. After all, the IRS thinking goes, this is effectively compensation.

I’m no expert on tax law, so I can’t really say whether these lunches should be taxed or not. The way the WSJ laid out the issue, it certainly seems like taxation is the legal path, but the article may have not framed the issue properly.

But one of the arguments that tech companies are making is that the lunches aren’t compensation, but an essential part of the collaborative culture of Silicon Valley. As one tax attorney put it, “there are real benefits for knowledge workers in having unplanned, face to face interaction.” This is complete crap.

Can anyone say with a straight face that it’s essential for an engineer to run into a marketer at Facebook, but that doesn’t matter at Procter & Gamble, or at Caterpillar? That somehow cooperation is more impactful at technology companies than other companies? Sheer idiocy. Having interaction between various constituents of a company is valuable no matter what the company does. To claim that somehow it’s different in Silicon Valley is just the height of hubris.

Y Combinator: Living the Bubble Dream

Two of the higher profile technology incubator programs – Y Combinator and Tech Stars – recently announced their graduating classes (read about them here and here), and in looking at the companies, I saw, yet again, some reminders of the 1999-like frenzy that the technology industry is currently experiencing.

A few thoughts:

  • Not everything needs to happen online; some things (eg. grocery shopping) satisfy a ton of people in their offline incarnation
  • Lots of things are already online and don’t need a new vendor. Just because you call yourself the Airbnb of vacation rentals doesn’t mean that VRBO, the very successful existing vacation rental website, needs to be “disrupte.”
  • Vertical slicing doesn’t work online. It turns out that the Yelp for contractors is Yelp.

We saw this back in 1999: remember “vertical portals?” Yahoo for gays was PlanetOut, and that didn’t work out too well at all. Vertical slices sound good on paper, but they just don’t work; online it’s just too easy to move from site to site to get what you want. We also saw in 1999 the dot-coming of everything. “We’re going to take your garden online!” Umm, no, you aren’t.

The article about the Y Combinator class even admitted that these companies aren’t world changers, but “perhaps they’ll save a headache or two.” When this is the best that a boosterish tech reporter can come up with, you’ve got problems.

Silicon Valley Shakeout: Yes, Many Startups Fail

The press is going crazy here in Silicon Valley with pieces about the coming shakeout in startups. The basic story is that over the past few years, the growth in angel investors led to a lot of mediocre ideas getting seed funding, and now that the froth is off the market, those mediocrities are finding it difficult to raise additional money from venture capitalists.

PandoDaily gives a good summary here. Dan Lyons, a well known tech journalist (and creator of Fake Steve Jobs), has a more savage take here. The following quote kind of summarizes his piece:

For the past few years we’ve had people calling themselves “investors,” who have no experience investing, swanning around the Valley, slinging money at people calling themselves “entrepreneurs” who have never held an actual job, let alone run a company.

My view is that this shouldn’t surprise anyone. The current social/mobile bubble has been obviously following the trajectory of the 1999-2000 dot.com bubble (see my prior posts on this topic here, here, here and here), and any rational observer could see how it was going to end. Just like a decade ago, the promise of quick riches drew hordes of young, aggressive tech wannabes who launched me-too companies, features posing as companies, or simply bad ideas. And just like a decade ago, huge amounts of capital desperate to be put to work meant that bad ideas got funded. But bad ideas become bad companies, and bad companies start to fail, and VCs don’t put more money into failing companies.

Ten years ago, the mantra was “let’s dot.com category X.” Now it’s “let’s take category X social. Or mobile. Or both.” But either way, good ideas with good execution get traction, and bad ideas don’t. PandoDaily looks at the travel space and explores it as a microcosm of everything that’s happening. Bad companies with bad names ( Dopplr, Tripl, Gtrot) are all going away, because they never should have existed.

This is really a standard Silicon Valley cycle; it’s just getting worse. There was once a time when VCs funded one hundred disk drive companies, which also ended poorly. Now it’s that the cycles are stronger and draw more wannabes from further away. More press and more billionaires mean more people coming to enter the lottery. I mean, now we have a reality TV show about good-looking young entrepreneurs (or perhaps I should say “entrepreneurs,” since the folks on that show are exactly the people Dan Lyons savaged). Back in the 1980’s nobody made a reality TV show about 45 year old engineers starting disk drive companies.

More Tech Bubble Datapoints

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.

Yes, It Is A Tech Bubble

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.

Cloud Computing: New, Cool & Totally Old-Fashioned

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:

 

Has Silicon Valley Stopped Solving Problems?

That is the claim of Dan Lyons in the recent Newsweek, wherein he claims that the trend of consumer internet companies (Facebook, Twitter, Zynga, etc.) making gobs of money by doing essentially shallow things will draw engineers and entrepreneurs away from solving the hard problems that have traditionally driven Silicon Valley.

Erick Schonfeld at TechCrunch disagrees, saying that Facebook and its ilk aren’t shallow and are also technically hard, since they have to scale to support so many users.  Most of Schonfeld’s article is, quite frankly, dumb (I mean seriously, using anti-virus software, which solves a real and burdensome problem, to show that internet companies are useful too, is nuts. And saying that Twitter’s many-to-many communication is a bigger tech achievement than the telephone network…dude, do you even know anything about technology?), but I appreciate his viewpoint and that of the many comments his article generated (as usual with comments, they are split between wisdom and inanity).

It won’t surprise regular readers of Thoughtbasket to learn that I come down somewhere between these two poles. I wrote a post on this very topic recently, riffing off a former Gartner analyst who said pretty much exactly what Gross said. Yes, Facebook makes people happy, and some of the technology required to build it to scale might help build other products. But it’s basically a toy, and the technology isn’t that innovative. More importantly, it sure isn’t curing cancer or solving the energy problem.

It’s OK for fun products to do well; Facebook and Zynga make tons of money because people love using them. But Lyons makes a good point: the wealth and attention being lavished on these fun products could lead smart people to build ever-shallower products (hello Foursquare) instead of solving big and important problems. Silicon Valley is a big place, and there seem to be a lot of entrepreneurs attacking all sorts of problems, but the tendency of the press (particularly TechCrunch) to focus on consumer internet companies as if they were the only things of note in Silicon Valley adds to the problem Lyons describes.