Monthly Archives

December 2011

The web may not prevail

By | Amazon, Apple, Facebook, Google, Startup general interest | 21 Comments

Regular readers will know that I’m a strong believer in open standards.  I think they provide the best platform for innovation and are the best protection against monopolists.  Hence I would love it if the open web prevailed, and the rising power of gatekeepers like Apple, Amazon, Facebook and even Google annoys me as a consumer and worries me as an investor.

The future of the web has been the topic of much debate since Forrester CEO George Colony predicted the end of the web and an era of the ‘app internet’ in his talk at Le Web earlier this month.  Fred Wilson, Mark Suster and others came out in defence of the web, but it seems to me that the commentary has been largely one sided.  Perhaps that is unsurprising given that as VCs and bloggers most of us have benefited hugely in the past from the open web and stand to continue to benefit into the future.

However, even though the open web is better, it won’t necessarily prevail.  In a great post last September Joe Hewitt set out why.

Firstly, at the most basic level the web is just a collection of protocols and languages.  It has no unique characteristics that assure it a permanent place in our information architectures:

The HTML, CSS, and JavaScript triumvirate are just another platform, like Windows and Android and iOS

Secondly, there are plausible non-web visions of the future:

I can easily see a world in which Web usage falls to insignificant levels compared to Android, iOS, and Windows …. The Web will be just another app that you use when you want to find some information, like Wikipedia, but it will no longer be your primary window. The Web will no longer be the place for social networks, games, forums, photo sharing, music players, video players, word processors, calendaring, or anything interactive. Newspapers and blogs will be replaced by Facebook and Twitter and you will access them only through native apps. HTTP will live on as the data backbone used by native applications, but it will no longer serve those applications through HTML.

An alternative non-open web vision of the future is one in which access to services is controlled by an oligopoly consisting of Apple, Amazon, Google and Facebook.

I don’t come with any solutions, but rather with a request that we all remain open to a full consideration of the strengths and weaknesses of the open web, and of alternative models – there can be no sacred cows.  That way we will have a better chance of preserving what is really important – and that is open and even access to content and distribution for consumers, and by extension for startups.

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Distimo mobile report: Angry Birds has three of the top ten apps for 2011, iOS still monetises better than Android, but the gap is closing

By | Mobile | 2 Comments

There is a new report out from Distimo which highlights the major developments in mobile in 2011.  You can download the report from their website (free and paid versions).

I want to highlight two things, first, that Android apps are now grossing a reasonable amount of money.  Still behind the iPhone and the iPad, but I think closing the gap.  A year or two back the rule of thumb was that iPhone apps monetised 10x better than Android apps.  Judging by the graph below that ratio is now more like 4x.

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And secondly, as we reach the end of the year this is an appropriate moment to congratulate Angry Birds on what has been an unbelievable year.  As you can see from the table below they had three of the top ten mobile apps of the year.

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2012 – the year when traditional retail really starts to hurt

By | Ecommerce | 6 Comments

A few things recently have made me think that traditional retail is nearing the beginning of the end.  That isn’t to say it will disappear, but I think it will undergo some fundamental changes.

Perhaps most notable development was Amazon’s Price Check Promotion which offered a 5% discount to shoppers in traditional stores who looked up items using its Price Check App and then made a purchase through the online retailer.  I love the way this combines a compelling offer with a bold statement about the superior economics of online retail (more of which below).  Unsurprisingly it has been very popular.

Then the backlash from traditional retail shows just how scared they are.  When companies start complaining about unfair competition it is a good sign that they are on the ropes.

Another small example here in the UK is music and games retailer HMV – their market cap is now sub £20m, down from nearly a £1bn in recent years.

I’m putting all this in a blog post now because I have just read an interview with Marc Andreessen in which he makes the prediction that 2012 is the year in which “retail stores really start to feel the pressure”.  He gives a nice explanation of why online retail has a better business model:

as e-commerce gets more and more viable and as these category killers emerge in the superverticals. If I own mall real estate or retail stores in cities, or if I own chains like electronics chains, I’d be concerned…. I think electronics and clothes are going to be a real pressure point. Home furnishing is going to come under pressure. It’s going to get harder and harder to justify the retail store model.

The model has this fundamental problem where every store has to have its own inventory and every store is also a warehouse. The economic deadweight of that entire inventory in each store–that’s what took down Borders.

Retail runs at very thin margins. So if e-commerce takes a 5 percent or 10 percent or 15 percent bite out of your category, then it becomes harder to stay in business as a retailer

I can see three broad areas of investment opportunity coming out of ecommerce as a result of this tipping point from offline retail to online retail:

  • traditional retailers looking for ways to get more value out of their in-store stock by building integrated online-offline propositions which make local stock available online
  • software tools which make local stock available via third party sites like eBay (see their acquisition of Milo)
  • ecommerce companies which innovate to make the shopping experience more user friendly and accessible – StylistPick here in the UK is a good example

Note this is different from the daily deals and flash sales opportunities that have been prevalent over the last couple of years.  These models unlocked huge value by getting local retailers online and providing a sales channel for end of line stock, but whilst there is overlap, to my mind they are not the same as true shopping.

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Facebook’s Android app now beats their iPhone app for daily actives

By | Facebook, Google, Mobile | 7 Comments

I’ve been saying for some time now that the fundamentals of the Android ecosystem are stronger than that of Apple’s iOS, largely because Apple doesn’t know how play nice with its ecosystem partners.  I think we are now getting near to the tipping point where Android starts to claim dominant mindshare and the shift in balance from iOS to Android will accelerate.  The latest piece of data to hit the wires that encourages me in this view is that there are now more daily users of the Android Facebook app than there are use of the iPhone Facebook app. 

If I’m right then developers will start developing for Android at the same time or even before they build for the iPhone – something I would like to see.  I have recently switched from iPhone to Android and my experience so far is that most startups launch first on iPhone with many not even having a date for an Android release when they first go live in the App Store.

The charts below were on Techcrunch over the weekend.

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Google’s Page Rank not what it used to be

By | Uncategorized | 4 Comments

If you are like me you have a rough understanding of how Google ranks sites in its search engine results and how those have changed over time.  In the beginning it was all about Page Rank and sites were ranked based on the number of links into the site and the quality of the sites on which those links sit.  Then over time a number of other elements were added to the algorithm including freshness of content, page load times and how popular a site is when Google serves it as a search result (aka ‘user experience signals’).  You probably also have an idea that Google has also been constantly changing its algorithm in an attempt to stay one step ahead of spammers who learn the rules and game the system to get their low quality links high up the search results page.

Search engine optimisation (SEO) or the business of appearing high in Google’s search results, is important for just about any business now, and if you want to understand a bit more about how it works check out the infographic below.  It is a bit anti-Google in its positioning, but contains lots of good stuff.  The section on Google punishing paid links was most interesting to me.  I used to run a couple of paid links from this blog which made a couple of grand a year which I gave to charity.  I took those links down after my page rank dropped from seven to six and I thought Google might be penalising me.  A number of people said that Google wasn’t likely to notice a paid link on a small site like The Equity Kicker, but I thought it better to be safe than sorry.  The prominence of the paid link discussion on this infographic makes me think I made the right decision.

The infographic was originally published on SEObook.  Props to Azeem Azhar for the pointer.

 

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CEOs must lead

By | 50 Questions, Startup general interest, Venture Capital | 2 Comments

The difference between success and failure for companies is making the right decisions – no surprises there.  Another truism is that making the right calls is often a subjective process, with no right or wrong answer.  Decisions like whether to hire candidate A or B, or what your budget should be for next year are at least in part matters of gut feel, and inevitably there will be times when the CEO disagrees with the rest of the board.

In this situation it is imperative that there is a proper debate and everyone takes the time to properly understand everyone else’s position (and I stress properly), and that everyone feels that they have and respected.  However, if there is still disagreement, then the CEO must do what he or she thinks is right, even if the investor board members disagree.  In a recent post on his Information Arbitrage blog Roger Ehrenberg put it like this:

the buck ultimately has to stop with the CEO, and if the CEO cedes effective leadership to the Board it will create both an unhealthy dynamic and an untenable situation as more real-time decisions need to be made

This can be tough for investors who have some real skin in the game and care passionately about the success of the company.  They don’t want to see it go wrong and they are being asked to stand by and let the company take a decision that they don’t agree with that might make it go wrong.  However, none of us became investors because we want an easy life, and tough as it may be we should learn to live with it, as the alternative is worse.  I say that as an investor who in the past has definitely found it tough to stand by as companies take what I thought were the wrong decisions.

However, if there are too many disagreements and the board and CEO lose faith in each other then the situation becomes untenable.  Brad Feld wrote about this back in July, saying:

the board – and individual board members – are often involved in many operational decisions, but the ultimate decision is (and should be) the CEO’s. If the CEO is not in a position to be the ultimate decision maker, he shouldn’t be the CEO. And if board members don’t trust the CEO to make the decision, they should take one of two actions available to them – leave the board or replace the CEO.

This last sentence is the rub.  Ultimately if there isn’t a meeting of minds most of the time on most issues between any two people then they shouldn’t be on the same board together.  That said, it can be difficult for some investors to resign as directors, particularly in situations where the number of VCs is limited.  In that situation if the CEO is going to stay then the investor director should, whilst still being helpful where possible, take a back seat and not let their disagreement with the CEO get in the way of the functioning of the company.

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50 Questions: How do VCs make investment decisions?

By | Uncategorized | One Comment

Fortieth in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital.  We expect the series to run for a year after which we will collate the posts into a book.  You can find the rationale behind the series here, and the list of questions here.  We welcome your comments on any and every aspect of what we are doing.

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Most VCs are secretive about the detail of their decision making processes.  Some have spent a lot of time thinking about it and regard their processes as a core part of their IP whilst others are reluctant to share because they haven’t thought about it and don’t have too much to say.  For these reasons it is hard to get a complete picture of how decisions are taken in the industry as a whole, and this post is based on what I’ve observed across the two partnerships I’ve worked in, one we acquired, what I’ve seen at DFJ in the Valley, what my friends at other funds have told me, and the small amounts I’ve read on the web.

Caveat made, I think for most funds, from a practical perspective postive investment decisions go through the following steps:

  1. A partner (or maybe two) falls in love with a deal
  2. They socialise it with other partners, typically at the weekly partners meeting
  3. If there is a positive reception the proposing partner does more due diligence and works to build an investment case, whilst the other partners think about the deal and maybe socialise it with some of their contacts
  4. The proposer makes a formal request of her investment committee to offer a termsheet to the company, at which point if there is a consensus in favour of making the investment an in principle decision to do the deal will be made, and a termsheet will be offered
  5. If the legals go smoothly and any remaining due diligence goes without a hitch the investment is made – often there is a second formal investment committee review prior to completion, but unless something unexpected crops up this is a meeting to check that due process has been followed rather make a decision on the investment

The time from steps two to four can vary hugely, depending on how hot the deal is, and how ready the partnership is to make the investment.  The benefit of getting to know a VC before starting a fund raising process is that they will already have socialised your company with their partners before a deal is in discussion, which makes it easier and quicker to build consensus and offer a termsheet.

The level of consensus required before a positive decision can be made varies hugely, but the general model is that all the partners agree to make the investment.  That is in contrast to the way traditional funds like 3i used to operate where investment managers would find a company they liked, work it up into a deal, and then pitch it to an investment committee that was largely unfamiliar with the deal which would then hand out a ‘yes’ or a ‘no’.  These days the investment committee is either made up of the investing partners in the fund or it is a committee that largely exists to rubber stamp the decisions that the investing partners suggest that it make.

The required level of consensus varies both between funds and also within funds over time.  Smaller and newer funds typically require the greatest levels of consensus, and in a young fund with only two or three partners it is common that a deal will only get done if there is a very high level of buy in from all the partners.  However, the level of consensus necesarily drops when the number of partners increases, when thre is a need to increase the rate of investment, or when portfolio management begins taking up more of the partners’ time.  Different funds approach this in different ways.  Some evolve detailed processes (often based on voting) by which deals get done with only tacit support from some partners.  Others operate less formulaic processes for getting deals done without every partner needing to really love a deal – a common model is for a dominant partner to run the investment committee meetings and drive the group to a decision when there is an appropriate level of buy in across the group.

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Social saturation

By | Facebook, Social networks | 8 Comments

The talk below from Forrester CEO George Colony was perhaps the most interesting one I saw at Le Web last week.  He had two big points to make:

  1. Web service/application architectures will shift to more local processing and storage.  This is a natural result of the fact that processor and storage technologies are improving faster than networks. 
  2. Social networks are so well penetrated now that there is little room to grow – that includes penetration into the population and hours spent per day by the active users.

I want to focus on the second of these today.  Both have been bouncing round my mind since I saw the presentation on Thursday, but I think the second is more topical.  Firstly it was the subject of debate on Fred Wilson’s Avc.com from yesterday, and secondly it is more pertinent to the activity of most of the readers of this blog – as entrepreneurs, investors and consumers.

My first reaction to the argument that social is close to saturation point made sense to me, and most of the people I spoke to about it at the conference afterwards agreed.  The reasoning is logical and comes from research Forrester conducted research with over 1m US consumers which found that ‘social is running out of hours and people’.  Taking the hours piece first – people are spending more time on social than they are volunteering, praying, emailing and using telephones, and more than they are exercising, and only a little bit less than shopping and childcare.  His argument is that people simply don’t have much more time to give to social.  The second piece of the argument is that at around 80% in the developed world social is already so well penetrated that growth can’t come from adding new users either.

Colony’s conclusion from this is not that social will go away, but that the next generation of social apps will be about doing things more efficiently and saving time.  That contrasts with many of the current crop of social apps where the use case is often killing time.

Fred Wilson posted the video below yesterday and invited debate in the comments of his post.  Many commenters were simply outright critical of Colony, but several drew the distinction between social as an app, which might be peaking, and social as a platform, which is only just getting started, and this I think probably hits the nail on the head.  Applications are where people spend time, platforms are where things happen.  There might not be much time left in the day for all of us to spend much more time in social apps, but we can all increase our engagement with social by using the platform components more – that means hitting more like buttons, sharing more generally, connecting more sites to Facebook and Twitter, and using social more to help discover online content and interact with the brands and companies we love.

This might have been what Colony meant when he said the next generation of social services will be about driving efficiency.

 

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VCs are people too

By | Venture Capital | 3 Comments

"VCs are people too". That was what I was thinking this morning as I read Fred Wilson‘s post about approaching VCs when they are out in public.

Fred says it is ok say hello and hand over a business card, but make it quick and don’t pitch.  That makes sense to me.  All decent VCs love meeting people and are in the business of getting to know companies will be happy sparing a few seconds to share contact details.

People spend a lot of time worrying about how to behave around VCs, about how or when to make an initial approach and then at subsequent chance encounters about how much to pitch.  The right answer depends on context – are they with family or is it a work social, how many other people have pitched them that evening, do they look tired, are they standing on their own or talking to other people etc.  VCs are humans too, just like you, and the best way to figure it out is to put yourself in their shoes and think about what you would like.  If you do to others as you would have done unto yourself you won’t go to far wrong in this world.

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LeWeb – Path and Flipboard moving away from lean startup methodology

By | Startup general interest | 16 Comments

Dave Morin CEO of Path and Mike McCue CEO of Flipboard were both interviewed on the main stage yesterday at Le Web.  They are both high profile CEOs of high profile startups that have raised a lot of money for very design focused mobile apps.

They have also both recently launched new iPhone apps and we had demos of both.  Morin and McCue were both at pains to show how beautiful their apps are and how much time and effort they had put into making the interface intuitive and easy to use.  They both also explained that they had wanted to get the apps right before launching and had preferred to take their time and get it right rather than launch early with an imperfect product.

Morin explained how with the first version of Path they had launched early with a minimum viable product but they found that iteration cycles on mobile were too long to make the lean methodology work, which was why they switched methodology for the second release.

So we have two leading companies that are moving away from the lean startup methodology just at the point when the rest of the world is adopting it as an orthodoxy.

I haven’t figured out what to make of this yet.  Path and Flipboard have both raised huge amounts of capital so they have the luxury of not being lean if they don’t want to, and that might explain why they are adopting a different approach to everyone else.  Alternatively, it might be that as great design becomes more and more important there is less and less to be learned from minimum viable product.  Put differently, if great design is the essence of the product there is no way to quickly develop a rough version.

The point about iteration cycle times on mobile is also interesting.  I’m assuming that is because of app store approval processes, and if we move back towards a more web oriented world that will become less of a problem.  And if we don’t, it won’t.  I’m not sure which way that will go, but if Morin is right the outcome will have a big impact on the way startups approach product development.

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