Monthly Archives

May 2010

Twitter Weekly Updates for 2010-05-30

By | Weekly Twitter digest | No Comments

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Netflix predicts tipping point for internet TV in 2013

By | TV | One Comment

Netflix, the US internet DVD rental giant (and trans-Atlantic cousin of our portfolio company Lovefilm) has a good slide deck up on Slideshare which details their digital strategy and competitive threats.  The slide below is from that deck and it shows they expect their DVD by mail business to peak in 2013.

imageAfter 2013 they expect to their business to continue to grow, but now driven by streaming services over the web. 

Regular readers will know that I’ve written a lot about internet TV over the last couple of weeks and a point which comes up frequently in the comments is that internet TV for the mainstream is a long way off because it is still hard to get your TV connected to the web and because bandwidth is an issue for streaming services.

Here we have Netflix’s prediction that in 2013 their DVD business will go into decline and their driver of growth will be internet TV and movie services – and that seems like a pretty good definition of ‘internet TV gone mainstream’ to me.  It is worth remembering that as a physical DVD business it is in Netflix’s interest to call this tipping point late rather than early (although more importantly they are a $5bn market cap company with a reputation for strong execution, so they are most likely to get it right).

Netflix’s method of getting its content across the living room and onto the TV is deals with a huge range of device manufacturers to get into their devices – TV’s, games consoles, set top boxes etc, and they have done a great job of getting embedded just about everywhere.

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Building a business that will be valued at high multiples

By | Exits, Startup general interest | 10 Comments

I’m going to talk with the board of one of our portfolio companies today about the characteristics of highly valued businesses and what they might do to get into that category, and my thoughts are below.  I only really started thinking about what I was going to say last night and this morning and I’m kicking myself for not publishing a blog post on the topic earlier in the week, allowing time for feedback and debate before I sit down with the company.  As it is my talk starts at noon and there will only be limited time for comments before then.  That doesn’t matter too much though as this is an interesting and enduring topic in its own right.

The first thing to say is that there is no magic short cut here.  Sure, some companies get lucky, but the only really reliable way to get someone to value your business on a high multiple is to be able to credibly argue that your business will soon generate significant and fast growing free cash flow.  Any business school text book will tell you that a business is worth the sum of its future cash flows discounted for the cost of money (Fred Wilson describes what that means in more detail here) and hence that is what public market investors look for when valuing companies and what execs at public companies think about when evaluating acquisitions.

In practice EBITDA is often used as a proxy for cash flow as it strips out the effects of any loans or other financing a company has which will most likely change when a company changes ownership.  Going forward in this post I will talk about EBITDA.

The two best ways to convince people that you will generate significant and growing EBITDA going forward are to be able to show in your financial statements that you have done so in the past, and by being an evidently well run company.  This last point bears repeating – new owners for a business will pay a premium for a business that is a well oiled execution machine.  The management of did a great job of always being very professional and of delivering great service, both to its customers and partners and to the ultimate acquirer AOL and I heard multiple times through the exit process that one of the things that made the company attractive was the perception that it was high quality.

Beyond these basics I think the trick is to build elements into your strategy which could underpin super growth for years to come.  Here are some examples:

  • be in a large market – ideally fast growing and/or undergoing a structural change that you are exploiting.  Our portfolio company Zeus Technology is on a roll at the moment because they are exploiting the shift from hardware in the $2bn internet traffic management market
  • fantastic product – any number of successful internet companies are good examples here – but I will pick out Playfish, they were able to command high multiples for their business from a very early stage because the product was demonstrably awesome, and were recently acquired by EA for up to $400m.  If your product is good enough that people tell their friends and marketing costs are low you will be in a particularly strong position.
  • high margins – an obvious one this, high margins equates to high profits and makes a business more resilient to shocks – I remember Credit Suisse telling me excitedly about how MoneySupermarket was valued very highly when they floated it in part because of its 32% EBITDA margin
  • strong and innovative brand – Zappos (acquired by Amazon for $900m) did a good job of this with their reputation for great customer service, and Apple is probably the best in class in this regard and partly as a result they yesterday passed Microsoft to become the largest tech business in the world by market cap despite being 25-50% smaller in profit terms over the last two quarters.
  • track record of successful acquisitions – many small(ish) companies bolster their growth timely acquisitions.  You’ve got to pay the right price though because the higher multiple you achieve will be on a smaller piece of the pie – our portfolio company Lovefilm is a good example of a business that has used M&A to good effect
  • build a massive customer base – even if many of them are not generating much in the way of revenue today if you can extrapolate from current trends to show that in the future conversion rates will improve and the profits will come then you will reap the rewards – Skype and are probably the best example of companies to pull of this trick recently, and they were acquired for $1.5-2.6bn and $600m respectively, both with relatively modest revenues and extremely modest profits
  • focus on building the revenues first – history has shown that it is easier to improve margins than accelerate growth as a business scales, and hence fast growing revenues businesses showing minimal profits can attract good valuations – provided they can show that the margin improvement will come.  This was another thing that we did well at
  • make it difficult for others to compete with your company – for example:
    • track record of continued innovation
    • structural cost advantage
    • aggregation of large numbers of small business customers
    • aggregation of large number of small business suppliers
    • demonstrable network effects
    • significant know-how

Everything I’ve talked about so far focuses on a company’s own performance.  This post wouldn’t be compete if I didn’t mention one external factor – and that is fit with the strategy of a potential acquirer.  If they can see how plugging your company into their offering will either allow them to increase the sales of your product by pushing it to their customers, or sell more of their own products then they can pay high multiples of your stand alone business, sometimes extremely high multiples, because there are additional increases in profits to factor into the discounted cash flow analysis.

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GPS is an incredible platform

By | Mobile | 6 Comments



Slowly GPS is becoming a platform of incredible reach and power.  It would be an over statement to say that it rivals the internet, but it is probably up there with the cellular networks.  Beyond satnav devices, GPS is used to timestamp financial transactions, is relied upon by paging and mobile phone networks and is used in an ever increasing number of consumer and business applications from Foursquare to cargo and package tracking.

Our reliance on the system became clear in the US three years ago (from the LA Times):

San Diego found out first hand [that the world relies on GPS] in 2007, when the Navy accidentally jammed GPS signals in the area, knocking out cellphone service and a hospital’s emergency hospital paging system for doctors. New York experienced a similar problem a year later.

And the good news is that GPS is about to get more powerful due to an $8bn upgrade that starts imminently, although it will take ten years to complete.  The upgrade will allow greater reliability and much more accurate positioning, down to an arms length from the 20ft or so accuracy today.

As you may know the GPS system is operated by the American military, which has worried governments in The European Union, Russia and China enough that they are developing their own rival systems.  I await the interoperability challenges and opportunities that are bound to emerge.

I use GPS services daily via iPhone apps Foursquare and RunKeeper (which I use to track runs and bike rides) and via the maps on my Blackberry and iPhone, and I use it weekly via the satnav in my car. It is already one of the technology innovations of the last ten years that has impacted my life the most and I can only imagine its impact will increase as people innovate to take advantage of the greater accuracy that is coming with this upgrade.

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Traditional pay TV – death by a thousand cuts

By | Google, TV | No Comments

Hot on the heels of Google TV Sony has announced a deal with HBO to release shows for the PlayStation 3 and PSP.  From yesterday HBOS shows old and new, including True Blood and two of my favourites The Wire and The Sopranos were viewable on the PlayStation Network (probably only in the US).

This deal takes a small piece of value away from pay TV subscriptions.  It will probably only cost them a few subscribers, but it is additive to other developments including movies on demand from Netflix in the US and Lovefilm in the UK (which is now available on Samsung and Sony TVs) and in combination these alternatives could undermine the subscription options from companies like Sky and Comcast.

The emerging challenge to the traditional set top box model looks like it will see third party technology embedded in either televisions or other devices already in the home (consoles, freeview boxes etc.) which are not tied to proprietary services.  My guess is that this will be an intermediate step before we have a PC based model that treats TVs as displays on a network.  In the long run standards based hardware should be the cheaper option.

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Productivity hack – don’t delay asking questions where you might not like the answer

By | Startup general interest | 6 Comments

This morning I got an email post from the Positivity Blog which lists five ways to overcome procrastination (see the box below, all good tips).  The email immediately made me think of a form of procrastination I see frequently at startups, and that is avoiding asking questions where the answer might be one you don’t want to hear. 

The problem typically occurs when progress isn’t as rapid as everyone had hoped and can have any number of reasons, but probably the most important is a desire to not lose the possibility of a development that will rapidly change the company’s fortunes.  That is understandable as everyone needs hope, and complicated by the fact that the issue is never black and white – it can always seem smarter to not ask for a deal today when with a little more background work the chance of getting a yes might increase by next month – but the irony is that it is at precisely these times that a company needs to focus its energy and resources on finding new opportunities that will progress more quickly. 

One thing I can say for sure is that the best executives I have worked with are very quick to call it when a hoped for development starts to look unlikely and at that point they rapidly divert resources and mental commitment to other more promising areas, usually without killing the original opportunity.  The chairman of BuyAt, the late Bruce McLaren was especially good at this.

To make my point real, the sorts of developments and opportunities that I’m talking about are fund raisings, exits, big partnership deals and one off big sales.  Every company needs them and everyone should work hard to chase them down, but my point here is to be very conscious of the point where the returns on your effort start to diminish.

"How soon ‘not now’ becomes ‘never’."

Martin Luther

"A year from now you may wish you had started today."

Karen Lamb

Procrastination is probably one of the most common problems people have in their day to day life. So find a procrastination solution that works for you.

Here are five of them. Try them out and see which one or ones that fit you the best.

1. Do the hardest thing first.

What this means is simply to do the hardest and most important task of the day first thing in the morning. A good start in the morning lifts your spirits and creates a positive momentum for the rest of the day. That often creates a pretty productive day.

2. How do you eat an elephant?

Don’t try to take it all in one big bite. It becomes overwhelming which leads to procrastination. Split a task into small actionable steps. Then just focus on the first step and nothing else. Just do that one until it’s done. Then move on to the next step.

3. Recognize that there is more pain in procrastinating than not.

If you have procrastinated a lot you might have discovered that you procrastinate to avoid doing something that is boring, hard etc. You want to avoid that pain. But after having some experience with procrastination you’ll probably realise that procrastination itself causes your more pain than actually just doing what you were supposed to. Realising the true amount of pain in the two choices will make it easier to get things done.

4. Make a small deal with yourself.

Promise yourself that you’ll work on something for just 5 minutes. After those 5 minutes you can do something else if you want to. But make a note in your schedule for when you will come back to the task and work another 5 minutes on it. No matter how unpleasant a task may be, you can often talk yourself into working 5 minutes on it.

I’ve found this one to be effective to make a dent in those tasks you have put off for a longer while. Because many times you will just continue working after those 5 minutes have passed. It is the first few minutes of getting started that is the hardest part.

5. Use my three step method for doing something even when you don’t feel like it.

Mundane or routine tasks can be a bit boring. Maybe you have a lot or emails to reply to or phone calls to make. Batch them – do them all in row – to get them done quicker.

If you feel inner resistance and just can’t get started try this three step method to be able to reduce that resistance, up your motivation and get going.

Step 1: Accept it.

When you feel resistance within towards doing something the natural instinct may be to try to push that feeling away. To brush it off. I have found that doing the opposite and just accepting that it is there can do wonders.

Tell yourself: "This is how I feel right now and I accept it".

This sounds counterintuitive and perhaps like you’re giving up. However by accepting how you feel instead of resisting it you reduce the emotional energy that you are feeding into this problem. It then tends to just kinda lose speed like a car that runs out of fuel. And oftentimes it becomes so weak after while that it moves out of your inner focus and disappears.

This step may be all you need to reduce the negative feelings enough to be able to start taking action. If not, move on to the next step.

Step 2: List the positives.

After you have accepted how you feel list the positives of getting this thing done. Do it on paper, on your computer or just in your head.

When you don’t feel like doing something it’s very easy to get stuck and just focus on the negative aspects such as it being hard work or the risk of pain or failure.

So you need to change what you are focusing on to motivate yourself to take action. Making a list of positives like benefits and possible opportunities can be very effective for turning your focus around.

If you have problems getting started ask yourself questions that will empower you. Questions like:

– What is awesome about this situation?

– What is the hidden opportunity in this situation?

You can pretty much always find positives about anything. There are lessons to be learned about yourself and your world and opportunities to be found if you look at things the right way.

Step 3: Just do it.

You should now have reduced much of the resistance within and feel more motivated to start taking action and getting your thing done

It is at this point tempting to start thinking again. To reconsider and ponder. But I have found that if you do that then it easy to fall back into the same place where you began. You start to question doing this. Your focus starts to turn back to the negative aspects again.

So when I am at this point I usually just stop thinking and get my butt out of the chair. I get moving and I just do it.
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Twitter Weekly Updates for 2010-05-23

By | Weekly Twitter digest | No Comments

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Google TV the beginning of the end for satellite and cable operators?

By | Google, TV | 15 Comments

As you might have seen Google announced their new Google TV product yesterday which makes the full web available on your TV through software that will either be directly built into the TV or via a set top box (if you want it on your existing TV you will have to go the set top box route).  All you need is a wifi connection.  Note that this is an alternative to connecting your TV up to your laptop and using it as a big screen, and they have made some UI innovations to reflect that – e.g. search is more video focused.

There is a good summary of what it is and what it isn’t on Search Engine Land.  For me the real kicker comes about half way down their post:

Will it replace cable TV?

This is an interesting question to consider and one that will take time to answer. Users won’t need a cable TV subscription (though they will need WiFi in the home) to access Google TV. So it’s at least possible that the web content and video, Netflix and Hulu that GTV offers via the internet could well substitute for a cable subscription.

For me this is one of the biggest questions facing the internet and TV worlds over the next couple of years.  If we see an unbundling of access and content subscriptions there will be massive implications for companies like Sky and Virgin in the UK and Comcast in the US.  And I think we will – because the consumer proposition is much better. 

The video below from Google does a good job at explaining some of the reasons why open web on the TV will be better – their main points are better interface (full search, faster access to your favourite shows) and more convenience (on demand is better than scheduled).  These are two great points, and ones that traditional pay TV companies will struggle to compete on – their businesses are built around channels and scheduled TV, and the UIs on their set top boxes are notoriously inflexible and hard to update (just think about how little innovation we’ve seen in this area – e.g. there is still no search).

Beyond the UI price could be an important driver, in theory at least. An unbundled model could (should?) turn out to be much more compelling from a price point of view.  Currently most of us take expensive bundles of content because it is the only way to get the one or two things we want – e.g. I pay for access to all of Sky Football just so I can get Chelsea – if that is unbundled and the middle man (pay TV company) is bypassed I could pay less and a greater amount could go to Chelsea.  That would be better for everyone in the value chain except the cable companies. 

Whether this pans out in practice, and how quickly depends on the appetite of rights holders to try and break free and the size of audience available on open platforms, as well as the effectiveness of the pay TV companies in fighting a rearguard action to preserve the status quo.  Tellingly with reference to this last point Google has so far refused to comment on pricing.

To close, it is worth remembering that a truly open web TV model doesn’t need anybody’s software running in the TV or set top box.  The logic above works just as well if the TV is operating as a monitor to a web connected PC (embedded or not).  It is better for Google if they can stick themselves in the middle, but maybe not better for everyone else. 

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BlogPress – another blog editor, for the iPhone this time

By | Uncategorized | One Comment

I tried out my second new blog editor in a week today after I downloaded BlogPress to my iPhone.

It is a big step forward from using the WordPress web client, but still a long way behind the desktop.

Setup was easy and I like the way it is very easy to say drafts.

Two extra features I would like are the ability to categorise posts and to add links.

– Posted using BlogPress from my iPhone

P&G selling direct over the web – is this ecommerce 2.0?

By | Uncategorized | 10 Comments

My dad used to work for Unilever and I remember him telling me how they used to have their own brand supermarkets but were forced to close them by Sainsbury and Tesco who didn’t want competition from their suppliers. Back then all the power lay with the retailer because they owned the consumer relationship. That situation hasn’t changed much in the last 30 years. For sure the players have changed, and some new web based companies have emerged of which Amazon is of course the most notable, but the structure of the value chain and balance of power between manufacturer and retailer hasn’t shifted.

As you might have seen, P&G have been making noises about going direct to consumers over the web for a while, and now they have announced they will be selling in the US via their own ‘eStore’. If you read the news reports you can see they are still nervous about upsetting their retail partners, but this move tells us they think they can use the web to radically reshape their industry, presumably with the aim of taking the retailers’ margin for themselves.

This raises the question of how much value multi-brand retailers add and whether they might be disintermediated. It seems to me that from a consumer point of view retailers have brought two things to the table – validation and aggregation. I know that in a single trip to Waitrose I can get all my household shopping done, and that if an item is on sale there it is probably good quality.

From a manufacturer point of view retailers are a cost effective outsourced sales function. For all but the largest suppliers it is too expensive to establish a physical retail infrastructure with sufficient scale to reach a large number of customers.

The web radically changes the first and third of these value add points. Consumers can quickly research products themselves now and don’t need retailers to validate for them, and as we all know it is not expensive for manufacturers to set up a website that can reach pretty much everyone who might want to buy from them.

The third piece – aggregation – is a little more difficult. Without innovation in logistics and delivery to aggregate purchases from multiple brands delivery costs will make it prohibitively expensive to make small purchases direct from manufacturers.

The ratio of shipping costs to purchase price will make it easier or more difficult for different manufacturers to sell direct over the web and hence the ability of retailers to protect their position. Tesco’s position is pretty strong because their customers can spread their £5 delivery charge over a large number of purchases in a £100-200 shop.

So what does all this mean?

Firstly, we can expect to see more manufacturers going direct via the web, particularly those that sell higher value items. Etailers who sell only third party brands might find their positions challenged.

Secondly – there will be more innovation in delivery and logistics. This isn’t an area that has seen a lot of venture activity so far, but the need for innovation could become pressing.

Finally – I expect to see a rise in manufacturing startups adopting a 100% direct to consumer model. The margin and information benefits that come with controlling the value chain end to end are enabling innovative new business and product models.

– Posted using BlogPress from my iPhone