Monthly Archives

January 2008

Twitter is paying my rent…

By | Blogging, New Media | 6 Comments

There is a lot of negative chat about Twitter – broken business model, river of crap etc. etc. so I thought it was interesting to post this excerpt from Twitter is paying my rent over on Marshall Kirkpatrick’s blog:

People laugh at Twitter, and they can go ahead and laugh for all I care, but I’m here to tell you that it can be invaluable. Aside from the personal connectedness and relationship maintenance it’s good for, let’s be honest – it’s paying my rent. (Thanks Twitter!) I don’t mean they’ve hired me as a consultant, though I would love that, I mean Twitter is great for news discovery. Read on for my thoughts on how you can use Twitter more effectively, but keep in mind that communication has its own inherent value – I swear that’s what I like best about Twitter!

Personally, I’m with Marshall.  I wish I was managing to put more in to Twitter, but from my limited engagement I get the twin benefits of timely newsflow (I learnt about Edmund Hillary’s death first on Twitter) and connectedness with my friends.

Myspace close to opening up

By | MySpace, Social networks | 2 Comments

Ivan on Snipperoo reported Ben Metacalfe’s announcement:

MySpace Developer Platform opening on Tuesday
So, after months of work by an amazing + passionate team (and I genuinely mean that) the MySpace Developer Platform is very close to being launched – in fact it will go live on 5th Feb.

I was thinking earlier this week that the social networks opening up meme had gone a little quiet, so good to see things are still moving forward fast.  From this post at least it sounds like the Myspace folk are now committed to being open and want to put their past behind them.  I guess time will tell if they mean it or not, but for now you have to give them the benefit of the doubt.   We won’t have long to wait to find out.

As a reminder, open-ness of social networks is a big deal because it makes possible a whole new world of innovation.  Single companies will be able to operate effectively across multiple networks at the same time making new things possible and eliminating dependence on individual socnets, which limits value creation.

Future of the music industry

By | Advertising, Consumer Internet, Music | 11 Comments

Music listner

Paul McGuinness, manager of U2 for 30 years yesterday gave his view on the future of the music industry (reported in the FT):

Mr McGuinness, a highly-respected figure in the industry, yesterday told delegates to Midem, the music industry’s international trade show being staged in France, that they had concerned themselves for too long with the small fries who organised illegal peer-to-peer file-sharing on the internet.

Mr McGuinness, who has managed U2 for 30 years, said: “I suggest we shift the focus of moral pressure away from the individual P2P file thief and on to the multibillion dollar industries that benefit from these countless tiny crimes. The ISPs [internet service providers] the telcos [telecoms companies], the device makers.”

I’m sure that Paul forgotten more about the music industry than I will ever know, but I have to disagree with him here. In his vision of the future ISPs and telcos will bundle music subscriptions with internet access and take a cut of the revenues.

To say that, I think, is to misunderstand the nature of the internet.

We expect services we subscribe to on the internet to be available anywhere, therefore to me it doesn’t make sense that access, which is tied to geography, is bundled with services.

Moreover, whilst ISP’s will I’m sure be happy to add music offerings to their product catalogue they won’t want to alienate all their customers who use P2P services in the way that McGuinness envisages. To do so would be commercial suicide.

Instead, the solution for the music industry is to find a way to make money by building services which people want to use – i.e. which are better from a cost+convenience+quality perspective than the P2P alternative.

I think that ad supported streaming services will be the answer. LastFM recently took a step in this direction, and when Fred Wilson blogged their announcement he said the following:

I’ve been saying for as long as anyone would listen to me that one day all the music ever recorded is going to be on the Internet and we are going to have sufficient bandwidth and connections on every possible listening device and at that point file based music is going to be history. I’d go back and find all the posts I’ve written on this topic but it would fill up the whole front page of this blog. I believe this with all my mind, heart, and soul.

I believe it too.

And it might not be that far away.

There are a number of companies making moves in this direction. As well as LastFM there is QTrax, We7 and Spotify, which some are describing as the Joost of music.

Are we in a recession?

By | Venture Capital | 4 Comments

On Saturday Scoble pondered the question that is on everyone’s lips from his standpoint in Davos. I like the way he captures the two sides of the debate.

First the bull side:

I spoke with Steve Forbes last night (yes, that Steve Forbes) and he thinks that the doom and gloomers shouldn’t be listened to. He sees one quarter of bad news and then sees the economy coming back in the second quarter.

I forget his name, but a senior partner at Accel Venture Partners told me while we were waiting for a bus together that he’s watching the sales and other data from 250 startups reporting to Accel and he sees nothing but growth and is very optimistic. That optimism has been shared among the VC’s I’ve run into this week.

Then the bear side:

On the other hand, the subprime problems are very real. I know a couple of people who are getting kicked out of their homes because they couldn’t afford to keep up with payments. Now, you can blame these people, but one of these families has an autistic child and so the mom can’t work. That wasn’t something they planned on, but they are getting evicted nonetheless and this is in Silicon Valley in Saratoga, a pretty rich community.

Right now I would say it is impossible to know, which is right. Like the Accel guy our portfolio is still doing well, but then it always takes a little while for falling house prices to feed through to lower consumer demand and reduced spend on IT. For sure there is a lot of pain in the financial sector and if Forbes is wrong and things don’t bounce back quickly we will start to feel it all around the economy. I have seen some pretty gloomy estimates of further massive writedowns to come and if you made get off the fence I would say I’m more worried that the pain will spread than optimistic it will get better.

The comments on Scoble’s post show his readers are mostly in the bear camp. It would be interesting to hear how it feels for you guys, who are a more European crowd.

Brand, new media and big exits

By | Consumer Internet, Facebook, Google, MySpace, Open Source | No Comments

Big exit

Fred Wilson wrote this yesterday in a post lamenting Murdoch’s announcement at Davos that he plans to expand the subscription area of the Wall Street Journal (WSJ):

Here’s the deal. Digital media is not about scarcity and never will be. That’s the old media game. Online it’s about ubiquity, about being part of the conversation, about links, authority, page rank, and if you are a news organization like the WSJ – its about anchoring the discussion

Too right.

This post is not about whether the WSJ has the right fremium strategy or not, but about what it takes to have an awesome brand these days.

Since Sun’s $1bn acquisition of MySQL last week I have been reflecting on what it takes to drive that sort of massive valuation (and congratulations to the entrepreneurs and VCs involved – it is great to have another $1bn deal in Europe – I wish it could have been me, but heh….).

And it was a massive valuation. Revenues were around $70m.

I think it was MySQL’s brand that made Sun want to pay $1bn. Sure there are lots of other great things about MySQL that would have helped get them there, including it’s strong and disruptive position it the database market, but the x-factor around their brand will have been a big help. MySQL is cool, it is a movement, people want to be a part of it, and are proud to be associated with it. It is what Hugh would call a social marker.

This is what Fred is talking about for the WSJ. They will become a social marker by doing the things he describes – by focusing on links, authority, page rank and anchoring the discussion.

A lot of the most successful web companies have captured this x-factor for their sectors and it has done wonderful things for their valuation. Just look at Google, Facebook, Myspace and YouTube in the US and LastFM, Skype, and FriendsReunited here in Europe. All these businesses became social markers. People were asserting their identity by associating with these brands.

Powerful stuff, and as Sun has shown, something that big companies are willing to pay up to acquire.

From supply chain management to the future of web hubs

By | Amazon, Google, Innovation, Second Life, Web2.0 | 2 Comments

I bought a new video camera on Amazon this weekend, and I also bought an extra battery and a couple of SD cards.  So far so normal.  The amazing thing to me is that I ended up buying each of these three items from different suppliers on Amazon’s market place, and the last of the three arrived today, four days after the order was placed.  One came from the UK and two from Germany.  The postage was inexpensive.

That is an amazing piece of supply chain management, and if one company had tried to do it my guess is they would have screwed something up.

This is testimony to Amazon’s incredible transformation into an infrastructure business and also the power of the web.

John Batelle has a number of definitions of web2.0.  The one I like the most is:

companies that let other companies build their businesses

This is what Amazon are doing in spades now.  Third party suppliers open an Amazon Market Place account and their products become available to all Amazon’s traffic through the same search box that you use to buy books directly from Amazon.   When you buy something through the market place Amazon takes a commission and makes a 100% margin.  Amazon also gets to benefit from the innovation and creativity of their market place suppliers in product choice, presentation and pricing.

The website experience could have been a little slicker, but that is splitting hairs really.  Plus I didn’t find another website where I could buy all the items I wanted.

But the really incredible thing is the way Amazon have combined their brand/traffic with a piece of technology infrastructure to become the glue that holds a vibrant ecosystem of suppliers and customers together.  To borrow a thought from Umair this is increasingly how successful companies will operate.  Facebook and their apps are like this, and Myspace with their widgets, Google with search and adwords is similar, even Salesforce with their app-exchange is on the same model.  And I almost forgot ebay.

These examples show just how much value is created by these fluid hubs where people come together and are matched with each other and products they want.  The scale and fluidity these sites have is only possible because of the internet.  Excitingly as we see more scale and fluidity (more people on the web and more creative ways to match and bring people together) I believe the things that seem incredible today will begin to seem trivial.  Think about Second Life, for example.

Widget monetisation

By | Business models, Widgets | 4 Comments

Reporting on Slide‘s rumoured $500m valuation Ivan on Snipperoo looks again at the question of widget business models.  Apparently the valuation is based on Slide turning itself into an ad network.  Ivan isn’t too thrilled and says:

It looks like all widget companies are trying to turn themselves at one level or another into ad networks – pace Clearspring and Netvibes and others. And while I wish them all the best of luck with this, it will be a bit sad if the promise of widgetization just turns out to be another way to build an ad network.

All the companies he mentions have big audiences and if they are to succeed they need to start monitising.  For me that means either advertising or subscriptions.  I.e. they either turn themselves into an ad network and put ads in their widgets or people start paying to use the widgets (without ads).

I don’t see much evidence of people paying for widgets (I’d love to hear about examples though) which explains why everyone is going down the ad network route.

Even that will be a little challenging though.  Given that a widget takes up only a fraction of the screen it will need to have many many more users/page views/widget views than a traditional site to have the same monetisation potential.  And that is before you consider that in the limited real estate of a widget it is hard to place ads without compromising the user experience.

As the Business Week article, for the ad network strategy to work, Slide will have to build a ‘jaw droppingly huge audience’.  They are on their way though, a bunch of the more famous Facebook apps are from their stable, including FunWall and SuperPoke, and according to their website they have 144 million uniques a month globally and 84 million apps installed on Facebook.

Black swan unfolding – bond re-insurers – and what it means for startups

By | Entrepreneurs, Venture Capital | 2 Comments

On Friday last week Friday Ambac, one of the largest bond insurers was downgraded by Fitch Ratings.  This is undoubtedly bad news for the world economy and stock markets took another pounding yesterday.  You can read more about it in the FT.

I am reading Taleb’s Black Swan at the moment and I’m finding that it is a hard concept to get across to people, so when I started thinking that the crisis at bond re-insurers was a good example I wanted to capture it here.

To set the background, first, Taleb’s definition of Black Swan:

a black swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations

Second, a bit about bond re-insurers.  These are big financial services companies which lend their high credit ratings to smaller companies who can then raise bonds more cheaply.  Effectively the bond re-insurer guarantees the bond which makes the loan less risky and reduces the interest rate.  They run models that predict default rates on the bonds they insure and make sure they have sufficient capital to cover all likely eventualities.

Ambac and the others will have looked at their models and convinced themselves they were safe under all but the most unlikely of events.  They probably even used language like ‘3 sigma event’ to describe the kind of thing that would have to happen for enough defaults to come in at once to get them into trouble.

Yet that is exactly what has happened.

This hard to predict, rare event (multiple concurrent defaults) is now having a massive impact.  The stock markets are falling because the Ambac rating downgrade, and mooted downgrades for other bond re-insurers, could force banks to write down the value of the bonds they hold triggering further massive losses and capital raisings.

This is in large part a story of building risk models and calculating exposure in one world (pre sub-prime collapse) and then finding that the assumptions no longer hold.  The inter-connected world we live in makes this sort of thing increasingly frequent and increasingly hard to predict.

The good news for VCs and entrepreneurs is that black swans work both ways.  As well as negative destructive black swans there are positive ones too, and these often take the form of startup companies.  Taleb cites Google as an example.

Putting yourself in a position to benefit from one of these is potentially a highly lucrative business.  Spotting opportunities that were highly unlikely to come off, but are becoming less so and having the courage to back them early is one way of doing this.  Ironically going after Google’s seemingly unassailable position in search today might just be one of those.  I’m also reminded of Bob Young’s description of how everyone thought he was crazy when he founded Red Hat to take on the dominant position of IBM, Sun and others in the Unix market.

Thinking about it, this line of thought goes a long way to understanding why successful entrepreneurs often seem to be the ones who like taking on seemingly impossible tasks.

The other implication of this is that it pays to put yourself in the position to be lucky.  Which reminds me of the old venture cliche about failing often, but doing it fast.

Social networks are a great platform for games

By | Casual Games, Facebook, Social networks | 2 Comments

Kristian Segerstrale of Playfish left the following comment on my post last week about widgets and social networks.  He is excited about the prospect for widget games on socnets – and if you read this post my guess is that you will be too (always assuming you aren’t already).

I’ve knows Kristian a while now and he is a smart guy.  He is a veteran of the gaming industry and was founder of successful mobile games company Macrospace.

Thanks for the great post. Let me add a little to it from the perspective of video games. After all, we are used to the idea of existing purely in the context of different platforms created by 3rd parties.

Socnets make great game platforms – perhaps the best there ever was. Despite the lack of screen real estate They have so many advantages over other game platforms that they are likely to have a significant impact on the games industry as a whole over the coming years. Here’s why :

1. Knowing who your friends are allows for entirely new types of game design centered on the emotional want to play together and express yourself rather than escape the real world. This is very difficult to do on platforms who don’t know who your friends are – be it a website, XBox360, DS or a Wii.

2. Having access to a vocal user community, tons of player data AND the ability to tweak the game at will allows you to make better games – even if a particular player wants to play alone. You can constantly learn from your users, perfect how your game is played and distributed and communicate with your players about changes. Something that most other platforms can only dream of.

3/ Monetisation of a game in the context of a socnet cuts out the retailer and allows for far more inventive and interesting business and distribution models than what is available on most other platforms.

Video games have always been dependent on 3rd party APIs and socnets are no different. If anything socnets are better in that they tend to be more open and have no first party game publishing interest to worry about compared to other platforms.

So games will for sure continue to exist on platforms outside of socnets. But socnets could well turn out to become the primary platforms for many of them – particularly at the casual end of the market.

This turned out more as a post than a comment – but there you go. :)

More on the subject here:
http://blog.playfish.com

Check out his game and if you are curious about this space check out his blog.

Union Square’s recent investment in Zynga is evidence of more of the same thinking.

Macro-economic gloom and startups

By | Entrepreneurs, IBM, Venture Capital | 9 Comments

My last post of 2007 was entitled No predictions for 2008.  I wrote that in part because I’m reading Taleb again and you can’t turn a page of his book without being reminded of how people are wrong more often than they are right when it comes to the business of forecasting the future, and I’m now glad I took that line because if you had pressed me at the time I would have been a lot more optimistic about the year ahead than I am now a mere three weeks later.

As an aside which I may come back to later, as I read Black Swan I increasingly think that managing day to day is an almost totally different activity to managing over the long term.  Maybe so different that that doing both adequately at the same time is going to be prohibitively challenging.  The problem is that day to day management requires decision making based on short term predictions which you need to make with confidence (this sale will close next week, we can get a successful partnership with Google etc. etc.) yet if Taleb is right, and I think he is, long term planning requires you to embrace an almost overwhelming amount of uncertainty.  Taleb would argue that at the moment we effectively ignore this challenge by pretending the long term is more predictable than it really is – to our detriment when it all goes wrong.

Back to the main point of this post which is what the current macroeconomic gloom means for startups.  This topic is on my mind because of two conversations I had yesterday on this topic, one with an entrepreneur and the other a VC (Damon Oldcorn of Zebtab, and Paul Fisher of Advent), and in both cases we ended up concluding that if economic picture continues to deteriorate it will make a difference to budgets and financing strategies.

Hopefully we are all working in high growth markets and so even if the overall economy slips into recession we will still be operating in growth areas – albeit growing more slowly.  Which means that all things being equal our companies will still grow, just more slowly than before.  Slower growth means less cash in the door which for loss making companies either means bringing the next fundraising forward or reducing expenses.

That is the general case – obviously different areas of industry will be hit to a greater or lesser extent and we all need to look closely at our individual market.  Remember how internet advertising was disproportionately hit last time round, for example.

The other thing to consider is that if recession really does bite then the fundraising environment will get a bit tighter.

Putting all this together, it looks to me like the downside risks will become more acute for many businesses, whilst at the same time the upside is moving further out.  This is not an armageddon scenario, but it is definitely less rosy than it was 6-12 months ago.

Maybe all this is a bit obvious, but it is easy to forget the big picture when you are working 25 hours a day down in the detail of a startup.

Reading about Intel’s results didn’t do much to improve my mood either, although it is good to read today that IBM is more positive.

To finish on an optimistic note, the best companies come through periods like this stronger than ever and ready to capitalise on the fact that most established businesses under invest in innovation through the low points of the economic cycle.