Monthly Archives

November 2010

On Groupon, Google and the ever increasing pace of value creation

By | Advertising, Exits, Google | 5 Comments

When I first heard the rumours that Google might acquire Groupon for $2.5bn yesterday I tweeted that it would be a big change of strategy for GOOG to put feet on the street.  If space had permitted I would have expanded the tweet to include something about the price of the deal.  Picking up on those points, if this deal happens (and the latest rumours are that it will), it is remarkable for two reasons:

  1. Google’s strategy up to now has been to build technology solutions that to a large extent sell themselves and certainly don’t require an army of sales people.  Google has sales people for their larger Adwords clients, but their function is to help clients get the most out of Adwords and has more in common with account management than sales – remember also that price of advertising on Google is set by the auction process. 

    To date Google’s employee base has overwhelmingly been highly educated and highly paid, and not wanting to break from this tradition has always seemed to me to be somewhat axiomatic for the worlds largest search company.

    But to get into local you need feet on the street.  Most of the worlds small local advertisers are not yet at the point where they will self serve as small businesses do on Adwords – and Google’s desire to get into local has been clear for some time.  Now it looks like they have decided they can’t wait for the world to get used to their preferred way of doing business.  Mohammed has moved to the mountain.

  2. According to Kara Swisher the deal value will be $5.3bn, including a $700m earn-out.  The pace of value creation at Groupon eclipses anything we have seen before.  According to Crunchbase, the company was founded two years ago in November 2008, and to go from $0 to $5.3bn in 24 months is a) amazing and b) testament to the ever increasing pace of change.  The previous record holders were Skype ($2.6bn in 25 months) and Youtube ($1.7bn in 13 months).

    Groupon has raised more money than either of those two (around $170m) and at a rumoured $50m per month is generating far more in the way of revenues than they were when they were acquired.

Is the valuation sensible?

That is a tough question.  The billion dollar question (literally) is how far you extrapolate their fantastic growth rate into the future and what price you put on dominating the local market.  One thing I will say is that the folk at Google know what they are doing.

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Why content will free and newspaper brands must change

By | News | 7 Comments

There is a good piece in the Guardian today on why the iPad might not save newspapers (thanks to Paul Miller for the pointer).  This passage from near the end of the article is perhaps the best description of modern attitudes to news that I’ve seen:

It’s … easy to jump from one news source to another, because digital has fundamentally changed people’s relationship with printed news sources. Once, a newspaper was not just a source of information, but a statement of identity, where most buyers would not dream of picking up a competing title. Now, in an era where identities are altogether more protean, and when any app can disappear from view at a single touch, it is not obvious that people will simply sit down and spend 20 minutes engaged in silent contemplation over a single title. It’s not how the modern mind works.

The key point here is that we now read news to source information, not to confirm identity, which means the source is only important as to it’s integrity (and maybe sympathy with our politics) and switching costs are much lower – meaning there is less point in paying for content.

The implication for news brands is that they should cultivate a reputation for integrity rather than think of themselves as destination sites.  The upside from this approach is that the brand is then more powerful for driving revenues from alternative activities like conferences, and maybe commerce.

The other reason for making content free is that people are then able to share links with their friends, making them more likely to read it in the first place and also helping to propagate the brand.

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Twitter Weekly Updates for 2010-11-28

By | Weekly Twitter digest | No Comments

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The main use case for connected TVs has to be open access to content

By | IPTV | 5 Comments

Connected TVs are looking like they will be big business next year and I have just read a report on the subject from Colin Donald of FutureScape.  I was struck by the following stat:

A September 2010 survey conducted in the UK for Intel found almost half (45%) of individuals use social networking services such as Twitter and Facebook to discuss a programme while it is being shown.

I didn’t take part in the survey, but I am one of the 45% – my ‘tweeting whilst watching’ activity is restricted to Chelsea football games, but it is now an integral part of my viewing experience when I’m watching alone.

The obvious question to ask is: ‘if people are already using social media whilst watching TV then what do they gain from having their TVs connected?’

It is probably always going to be easier to use a ‘second screen device’ to connect to social media than the TV, which might have other people watching it, has to deal with screen-in-screen or pop-up display options and has limited input via a necessarily inexpensive remote control.  The implementation of Twitter on my Sony Bravia via Yahoo’s connected TV software is almost impossible to use – the set up process was so painful that my first and only tweet through my TV was to say that it would be my last.

The other use cases for connected TVs beyond access to long tail content are researching the shows being watched and shopping online.  I think both of these are also better done via a smartphone or laptop.

So that leaves access to long tail content as the only really strong use case for connected TVs, which in turn implies that an open approach has to make sense because walled gardens mean restricted content catalogues.  Open web access might limit cable company’s and TV manufacturers ability to monetise the content we consume on their devices and over their services, but to me that is the natural order of things.

Finally, I’m of the opinion that building connected TVs for people who don’t have second screens already doesn’t make much sense as people who are digitally savvy enough to be wanting to use Twitter or Facebook, research programmes or shop whilst they watch will have smartphones or laptops already.

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Netflix launches $7.99 unlimited online service, spends more online than offline

By | IPTV, TV, Video | No Comments

Netflix is at what might be looked back on as a watershed moment in the company’s history.  On Monday they announced a $7.99 all you can eat download service for movies and television and according to the New York Times they are expecting that the cost of streaming movies will pass the cost of shipping DVDs for the first time this holiday season.

Of perhaps equal significance at the industry level, for the first time cable television subscriptions have fallen for two quarters in a row.  Welcome to over the top television.

On the back of this the stock market has sent Netflix’s shares up fourfold since January, and the company is now valued at $10bn.

The studios are now (of course) waking up to the power of streaming video and want in on the action, either via charging Netflix more for their content or by launching their own services.

Here in Europe the market is a little way behind, but we are catching up, and as of earlier this month movies from our portfolio company Lovefilm is now on the PS3.

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iPhones, Blackberries and email

By | Comment | 3 Comments

I lost my Blackberry last weekend and everyone keeps asking me whether I’m going to swap and get an iPhone.  In fact I’ve been carrying an iPhone as well as a Blackberry for eighteen months now and whilst I’d love to go back down to carrying one device if I could it isn’t a practical possibility for me.  Everyone gets why I want to keep my iPhone – superior web surfing and superior apps (Daily Burn, Fitfu/Gymfu, Facebook, Spotify, Kindle, Amazon are my favourites), but everyone is surprised that I also feel the need to keep a Blackberry – so I thought I’d explain.

The reason is email.  In my opinion the iPhone isn’t yet fit for purpose as a heavy duty email device, and as with most VCs I have to process a lot of email.  For me the iPhone has two fatal flaws as an email device (and I suffer from them on both Microsoft Exchange and Gmail):

  • Filing of emails – I store emails in a lot of different folders and the Blackberry has an intelligent system that allows you to file most emails with two key presses.  It is brilliant.  The iPhone has no such system and filing emails takes four screen taps and often a lot of scrolling – and there is no way I can find to collapse nested folders.  I just tested and it can take up to 15s to file an email with this system – way too long when I hope to clear 100 or more emails in a session. 
  • Doesn’t work well offline – the Blackberry works seamlessly offline (including for text messages) whereas the iPhone throws up all sorts of errors when there is no network connection, or even when the connection is dodgy as it is for me right now on a train from Cambridge to London.  I like to do email on the London Underground so this is also a big deal for me.

Note that typing isn’t one of the issues.  I prefer the Blackberry keyboard but I’m pretty fast on the iPhone and if this was the only difference I’d ditch the Blackberry.

I would imagine they are not beyond the wit of Apple to fix, and a bit of surfing on the web quickly shows I am not the only one who is suffering.  Here’s hoping they will come up with a solution.  After every OS upgrade I go straight to email to check (which reminds me I need to download the latest).

VC investment in the games industry

By | Games | 4 Comments

I attended a lunch event today kindly hosted by law firm Osborne Clarke and Nicholas Lovell (co author of our “50 questions you should ask before raising venture capital” series of blog posts – next instalment tomorrow on Nicholas’s Gamesbrief blog).  There were about twenty of us at the lunch, with a roughly equal split between games entrepreneurs and VCs, and the aim of the event was to stimulate dialogue between the two sides and start to eliminate some misunderstandings between the two groups.

As an aside, when I played back the conversation in my head it seemed to me that the communication gap between VCs and games entrepreneurs is a variant of the gap between VCs and all entrepreneurs.  From the entrepreneur side that gap is usually described as a lack of risk appetite from potential investors, or sometimes a misunderstanding of the level or risk involved, and from the VC side we often feel that the entrepreneur sees less risk in her business than we do.

On the back of the lunch I thought it might be helpful to set out some of the characteristics that make a games company attractive for venture investment.  A couple of caveats are in order first:

  1. This is only a guide and it is more than possible that DFJ Esprit, or any other fund, would make an investment in a games company with none of these characteristics
  2. Many companies won’t need investment by the time they develop the characteristics I describe, and earlier stage funds than ours might work with a shorter list, and in particular they may by happy with less evidence of success
  3. The characteristics I describe below are supplementary to the standard venture requirements for big market, good product and great team – in fact they are probably best viewed as indicators that the market is structurally attractive (as opposed to merely ‘big’)

For me the quintessential VC games investment is in a games developer/publisher that is one of the first to exploit a new platform.  Patrick O’Luanaigh of nDreams gave a brief talk at the lunch and he identified being early to a new platform as one of four viable strategies for games businesses.  I would agree with that, and even go a little further and say it is the best strategy, provided the platform is an attractive one.

Startups that have recently been successful with this strategy include:

  • ngmoco, early to the iPhone, recently acquired by DeNA for $303m (plus $100m earnout) on 2009 revenues of $3.2m
  • Zynga, early to Facebook, still private, but slated for IPO with shares trading at a $5.5bn valuation (this may well be artificially inflated due to the limited number of shares available)
  • Playfish, early to Facebook, acquired by EA last year for a rumoured $300m (plus $100m earnout)
  • Jamdat, early to mobile, IPO in 2004 which took it up to c$800m in value.  Jamdat was alter acquired by EA

By now you might be wondering what makes a platform attractive – I would posit the following:

  • first, the obvious one – size – to get the big exit you have to believe that tens or hundreds of millions of people will play games on the new platform
  • a reason to believe a startup can prevail versus larger and better funded competition – that often takes the form of some insight or knowledge about the new platform which larger games companies will take a while to figure out – with Facebook that was a combination of the idea that new and exciting game mechanics were made possible by social, an understanding that Facebook offered a viral distribution model, a view that social networks would be huge for games, and an idea that games could be monetised by virtual goods
  • the ability to launch a handful of games within the lifetime of the investment – one of the attractive things about new platforms is that game development costs start low and only rise once the success of the platform has been proven
  • some early success, both for the company and the platform – in practice this usually means one or two games launched
  • a view that the platform will be stable and that the platform owner won’t be able to appropriate all the value for themselves – with new platforms that usually means there are alternatives to choose from, be they multiple social networks or multiple mobile platforms

There are a couple of categories of games company that we have been looking which don’t have these characteristics and that I want to call out as also being attractive – firstly companies selling software to the growing ranks of independent games developers, and secondly games developers/publishers with a new angle on mature platforms (e.g. I was talking to a guy today who is building a social games company which sounded interesting despite the fact that the Facebook platform is mature – his angle is localisation of games for non US markets enabled by incredibly detailed analytics).

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How to run a board meeting

By | Startup general interest, Venture Capital | One Comment

At the annual get together for all the DFJ Network partners last week we spent Tuesday morning sharing best practices between funds.  The guys from DFJ Frontier (offices in Los Angeles and done some interesting deals recently, including one of my favourite new services Unsubscribe) have written a handbook for the CEOs in their portfolio which has lots of practical tips for running small companies and explains what it means to be venture backed and how DFJ Frontier likes to interact with their investee companies.

I particularly liked the following section, entitled how to run a board meeting:

How to run a board meeting:

While there is often a relationship between time spent preparing and the success of the board meeting, we want you to focus on your business. Preparation for Board meetings should not occupy a significant portion of your monthly schedule because the Board documents should represent the same information that you are working with every day to run your company. Preparation will help you begin and end board meetings on time, so you can get back to running your company.

Don’t surprise your Board, especially with bad news. Talk to Directors at least a few days ahead of the meeting, making sure there are no surprises for them or for you. If there is something new for which you need the Board’s support, let us know as soon as you can. You can think of yourself as the driver of a performance racecar with your Board as the pit crew. We’re here to help you, but we only get an opportunity to see you in person every few laps. It is important to avoid "selective disclosure" (ie, don’t hide bad news), so that we are prepared to help you when we get together for the Board meeting. Regardless of whether you are delivering bad news, a new idea or some other change in company direction, having a conversation in advance can eliminate emotional responses and give all parties a few days to generate potential solutions. Never hide bad news. We are used to hearing good news and bad news, and we know how to take this information in stride.

Help your senior management team understand the appropriate level of detail for Board reports. Board members don’t need to hear every detail of last month’s marketing activity, for example. Directors need enough data to advise on big decisions and enough information to grasp the health of the business. There is an art to providing the correct level of detail at Board meetings, and your investors can help you fine tune your presentation, especially if you share it in advance.

You might be surprised at how frequently bad news is hidden.  In many ways it is a very human characteristic to want to please the board and to hope that problems can be ironed out without the board ever needing to know, but it is emphatically the wrong way to go with startups.  I’m not advocating that every little issue be discussed at the board – the CEO needs to make a judgement call as to materiality, but keeping the trust of board members with an appropriate level of disclosure gives you a better chance of getting the help a company needs to pull through and avoids board meetings getting difficult as non-execs ask difficult probing questions because they aren’t sure they are getting the full picture.  The other thing to bear in mind is that selective disclosure can lead to a slippery slope of keeping bigger and bigger news hidden from the board.  I’ve seen this play out a couple of times now, and it isn’t pretty.

Twitter Weekly Updates for 2010-11-21

By | Weekly Twitter digest | No Comments

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Twitter Weekly Updates for 2010-11-21

By | Weekly Twitter digest | No Comments

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