Monthly Archives

August 2012

Big web companies doing well

By | Startup general interest | No Comments

I woke up this morning to read Yelp shares were up 22% after the lockup ended and Pandora shares pop 9% after revenue beats expectations. It’s good to see that some web companies are doing well and it’s not all bad news out there.

LinkedIn is another good performer. Their share price is up 63% since the start of the year.

In my Kernel column last week I wrote that the problems at Facebook, Groupon, and Zynga are real and will have a knock on effect on valuations at smaller companies, but don’t amount to a systemic crisis. This mornings news from Yelp and Pandora strengthens my belief in that conclusion.

Musings on freemium

By | Business models | 2 Comments

I’ve been meaning to write a post on freemium since reading Alan Patrick’s When freemium fails, and doesn’t last week.

The point of Alan’s post is to say that whilst having a freemium business model works for some companies it is not as widely applicable as everyone (including me) thought a couple of years back. I think he’s largely right. The basic problem is illustrated by the story of Chargify (from WSJ):

for some, the "freemium" strategy is turning out to be a costly trap, leaving them with higher operating costs and thousands of freeloaders. That’s what happened to Chargify LLC, a provider of billing-management software to small businesses, which used the freemium business model when it started out in 2009. The Needham, Mass., company gave away its software to merchants that billed fewer than 50 customers a month. If a merchant wanted to bill more than 50 customers monthly, then the business owner would have to start paying $49 a month.

Most Chargify users never became paying customers. Within a year, the company was on the path to bankruptcy. Chargify eventually put up a paywall for all users. Last month the 12-employee company became profitable, with more than 900 paying customers. The starter plan is $65 a month.

Alan quotes David Cohen, founder of Techstars, as saying that due to low conversion from free to paid (typically 1-2%) freemium only makes sense for businesses that can reach millions of users. Otherwise they won’t get enough paying customers. This was Chargify’s problem.

For those that can’t reach millions that leaves two choices. Get everyone to pay or find another source of income – e.g. advertising, selling related products, or do something with the data. Of these, getting everyone to pay is at once the hardest model to execute and the easiest model to scale.

The evolution of an investment theme

By | Venture Capital | No Comments

IBM has just announced the acquisition of social recruitment business Kenexa for $1.3bn, the latest of a string of ‘social’ enterprise software businesses to be acquired this year. Other prominent deals done this year are Salesforce’s acquisition of BuddyMedia for $689m, Oracle’s acquisition of Vitrue for $300m, and Microsoft’s acquisition of Yammer for $1.2bn. The first major acquisition of a social business was Salesforce’s acquisition of Radian6 for $326m nearly 18 months ago.

Software to help enterprises leverage social media was the investment theme that underpinned our investment in Conversocial last year and we have been looking for more companies that leverage the same trends. These acquisitions tell us very clearly that the world’s largest software companies now clearly understand the benefits of leveraging social in their enterprise software and new startups in these markets will need to cleverly navigate the existing players if they are to succeed. That stands in contrast to the first generation of social software companies who were successful because they blazed a trail.

The evolution of opportunity as this investment theme has matured is similar to other categories. First the trailblazers define a new category and initially they are viewed with extreme scepticism and many people are convinced they will fail because their business model is unsustainable and/or people won’t want their products. By the time the trailblazer is successful there are typically many entrepreneurs working on derivatives of the core idea. Their startups are characterised by lower business model and market risk than the first generation, but much higher competitive risk. If the investment theme is any good there will be multiple successful startups in each of the first and second generations, but after that the opportunity is typically largely over. If the investment theme is weak then success is likely to either be totally elusive, or confined to one or two of the trailblazers.

In the case of social software all the evidence suggests that the investment theme is strong and there will be more winners in this space, but the next generation will work hard to differentiate themselves from their forbears by specialising in different process areas or distinct verticals. Conversocial, for example, is focusing on customer service for companies with a direct to consumer business model, an area where none of the previously acquired startups (or indeed larger software companies) has put much effort. For those that haven’t followed the sector closely, Kenexa is focused on recruitment, Buddymedia and Vitrue on marketing, Yammer on internal communications and Radian6 on customer insight.

Ecommerce has gone through a similar evolution – starting with the simple idea of selling stuff of on the web, with books as the first category, to filling out all the other, more difficult categories (clothes, jewellery, etc.). Following that derivative ecommerce business models have become popular, predominantly flash sales and subscription business models, and these in turn have seen successful trailblazers like Vente Privee and Lovefilm followed by second generation players in other verticals and geographies – like Graze and Sports Pursuit from our portfolio.

Ironically, social networks themselves were a much weaker investment theme. Despite heralding huge changes in the way we all go about our lives there have only been a few decent exits in this space and Facebook and arguably Twitter are the only large sustainable companies have been created.

Kernel column: Falling share prices at leading tech companies don’t mean the end of the world

By | The Kernel, Uncategorized, Venture Capital | One Comment

My latest column for the Kernel. It was published on Wednesday.


Nic Brisbourne on why the technology start-up ecosystem will remain an important part of the global economy, despite some recent missteps.

You can see from the chart below that the share prices of high-profile internet companies Facebook, Groupon, and Zynga are down 48-60 per cent over the last three months.

This comes on top of a lot of other negative news, including leading investors selling shares in the companies above at minimal profits, and CalPERS, traditionally one of the largest investors in venture capital, announcing that they have made a terrible 0.0 per cent return on venture over the last ten years.

As a result, commentators like Alan Patrick are asking whether we are seeing the end of Silicon Valley as we know it. I think that is an over-reaction. Here’s why.

Firstly, the fundamentals for start-ups are stronger than ever: innovation is still required, the cost of innovation continues to fall, the pace of change continues to increase, and the best people increasingly want to work in start-ups.

Secondly, many of the problems are limited to one aspect of the start-up ecosystem: late-stage funding for some consumer internet companies. LinkedIn, and numerous SaaS companies, are still doing fine on the public markets.

That said, I think the problems indicated by the graphs above are very real. The reality is that we have been dealing with a market failure to provide liquidity to investors in late-stage companies for most of the time since the internet bubble burst in March 2000.

M&A has existed at a reasonable level for much of that period, but IPOs have been thin on the ground, and while small funds can make a decent return focusing on M&A, larger funds need the higher valuations you get from public markets to make their models work. This is one of the reasons that CalPERS returns have been so poor for the last ten years.

For the last couple of years, it looked like specialist late-stage funds like DST, private exchanges like Second Market, and latterly dedicated growth funds from traditional VCs like Kleiner Perkins were stepping into the void. These funders were providing liquidity to early investors and additional capital for growth, just like the IPO markets used to. The market thought it had found a solution to its failure.

The investment thesis for these specialist late-stage investors was to pay high valuations and then drive share price appreciation via revenue growth and hype, leading to an IPO. That worked for a while, but following recent losses for IPO investors I suspect those days are over.

Pinterest is a great company and a great service, and I’ve written about them admiringly in the past, but now they have become interesting as a case study of a deal that made sense a few months ago, but would be harder to understand now. They are rumoured to have recently rasied $100 million at a $1.5 billion valuation. That worked when comparable companies like Groupon and Zynga were worth $10 billion+, but looks chunky now they are at $2-3 billion.

With its $1.5 billion price tag, Pinterest will have a lot of work to do to get to the point where they can go public and deliver a venture return to their recent investors, and they have a valuation now which puts them out of reach for acquisition for all but a handful of massive tech companies.

So these sorts of deals will dry up, and we will be back to the situation we had before DST stepped onto the scene.

Fortunately, capitalism is a resilient beast and I’m sure we will find a new solution to the market failure. This time round, I think it might be that a different type of investor steps into the IPO void, one that is focused on the fundamentals of profits and cash flow as the drivers of value.

That will mean lower exit valuations for successful companies and less cash around to fund acqui-hires – which in turn will mean that angels and venture investors will need to reduce their valuations if they are to make a profit on their investments, probably leading to smaller rounds and smaller funds.

But this doesn’t mean that the ecosystem is broken. It will still be possible for entrepreneurs and their investors to make good money. But it will take a little longer, be a little harder and the payout will be a little less.

It may be a painful transition, but the tech start-up ecosystem can and must remain an important and thriving part of the global economy.

CEO salaries

By | Startup general interest | 9 Comments

Seth Levine of the Foundry Group has a blog post up today on CEO and founder salaries. His data is US based and it ties pretty well with what we see over here. Apparently these numbers are based on ‘hundreds of data points’ and hold for all areas of the US, including Seth’s home in Boulder, New York and San Francisco:

companies that have raised $1M or less tend to pay their CEO between $75k and $125k (skewed very much to the low end of that scale – companies that have raised less than $500k tend to top out at $75k for CEO comp). Companies that have raised between $1M and about $2.5M tend to pay their CEOs around $125k. Companies who have raised above that amount skew up from there

I’ve been saying for years now that founder salaries should start at these sorts of levels and then rise to what would be market for the skillset in a larger company environment as the company gets to scale and/or profitability. That makes sense to me because higher salaries earlier on have a disproportionately large impact on the amount of cash left for other hires, and less people in the company means slower progress and slower appreciation in value. If a founder has a decent shareholding and believes in what he or she is doing then they wouldn’t want to trade higher salary now for growth in share price. The major caveat being, as Seth points out, that we’ve all got to eat, and it is counterproductive if salaries are so low as to cause stress and heartache at home.

The beginning of the end for patents?

By | Innovation | No Comments

As we come to the end of the Apple vs Samsung patent battle I’m starting to hope that we might be nearing the beginning of the end for patents. I’ve written before that software patents are actually a brake on innovation rather than an enabler so I won’t repeat the arguments again.

I will note, however, that the closing arguments in the Apple vs Samsung case are evidence of a system gone nuts. The fact that the lawyers there are making the case about the patent system overall rather than specifics about ideas stolen or damages suggests to me that Apple sees patents as a tool in its competitive armoury, rather than anything more important or fundamental. After all, it is not as if Samsung’s success has stopped Apple being successful, or that they are likely to stop investing in innovation going forward because they had a bad experience with the iPhone. Additionally, there is too much complexity and breadth in the case to realistically expect the jury to come to a meaningful conclusion.

The good news is that Google is now coming out publicly against patents and is mobilising it’s powerful lobbying machine to see if something can be done. Kind of ironic given they paid $12bn for Motorola Mobility last year in a deal largely driven by their desire to own Motorola’s patent portfolio, but welcome none-the-less. Yesterday Venturebeat reported the following:

“One thing that we are very seriously taking a look at is the question of software patents and whether, in fact, the patent system as it currently exists is the right system to incent innovation,” said Google public policy director Pablo Chavez at a conference in Mountain View, Calif, today.


Google is busy on the long, boring trail to changing patent law by filing amicus briefs, advocating for reforms, and teaming up with other antipatent players in the tech industry.

Hopefully Google’s action combined with the absurdity of the current Apple vs Samsung proceedings will convince someone in Washington to adopt the anti-patent cause. I don’t expect anything to happen quickly though.

The second screen is used for comms not content

By | TV | 3 Comments

There is some interesting research out from Deloitte today on the how we use second screens when watching TV (thanks to Rob Andrews at Paidcontent for the pointer).

The headlines:

  • more and more people have a device on their lap when watching TV – 24% of the sample and 50% of 16-24 year olds
  • the biggest activity is communicating with others about what they are watching – using messaging, email, Facebook or Twitter
  • only 10% browse the internet for information about the programme they are watching

That makes sense to me. It seemed like half the London tech scene was on Twitter during the opening ceremony for the Olympics and it matches my behaviour when I watch football games.

The interesting question is what this research means for dedicated second screen apps – an area touted by some as hot for VC investment. The obvious conclusion is they should focus on encouraging communication about the TV programme rather than surfacing additional content, and work hard to find ways to add value so that people don’t default directly to their comms channel of choice. Helping viewers see what their friends are watching and enabling cross platform comms are two ways of adding value that spring to mind.

The other implication is that outside of quiz shows and reality shows programme makers should focus on the TV a most viewers don’t want content on their second screen (quiz and reality shows are different because viewers value the chance to participate directly by voting and playing along).

Push notifications: the latest communication channel to become gummed up

By | Mobile | 3 Comments

notifications-iphoneWhen I saw a Techcrunch article this morning titled App developers: Stop abusing push! I tuned right in. The notifications on my Android have become a mess recently and the cluster of notifications on the homepage of my iPad are far and away the least well designed part of the iOS user experience. In short notifications are starting to suffer from a spam problem. If you’re not suffering from this problem yourself (yet) then check out the Techcrunch article for a ridiculously long list of types of push update that developers are building.

As I read the post I was struck by the parallel with stories in our Facebook feeds. When Facebook first opened up their platform app developers pushed lots of stories into our feeds, and when that got too much Facebook moved to protect the user experience by restricting access to the feed. Android and iOS notifications are now reaching the point where the user experience is suffering and it will be interesting to see what happens next.

I think we what is happening with mobile notifications is the latest version of a three part story that has repeated itself many times over the years. The first two parts of the story are always the same:

1. A new communication platform emerges
2. Entrepreneurs leverage the platform to communicate with customers, eventually reaching a crisis point where the signal to noise ratio falls to a level which threatens the viability of the platform – this is a great phase for startups like Zynga and Instagram who can leverage the platform to grow extremely fast

The story then ends one of two ways:

3a. The user experience is saved by restricting access to the platform is restricted (closed platforms) or by the creation of filters (open platforms) and the platform thrives
3b. Users drift away from the platform

We’ve seen this play out well for the platform with email and spam filters (now built into email services like Gmail), and on the telephone with legal restrictions on cold calling, and we’ve seen it play out badly for the platform with numerous small discussion groups and email lists, and arguably on Second Life. I’m sure there are many, many more examples.

Smartphones are obviously here to stay, but there is a risk that users will start turning off notifications, which would hurt the app ecosystem and therefore the underlying platform. I suspect that Apple and Google will soon move to protect the user experience by restricting the notifications that apps can send us. These restrictions might take the form of guidelines for app developers who want their apps available from the app stores or they might be UI innovations which group notifications from individual apps or frequency cap the number of notifications an app can make. Or both.

In advance of those restrictions app developers who are building for the long term would do well to heed the Techcrunch article and avoid abusing push. Sending lots of notifications might be good for short term traffic, but in the long run it will lead to people churning off the app.

American’s are embracing Over-the-top-TV – some figures

By | IPTV | One Comment

Americans are deserting their cable providers in droves. According to reports on BGR and Comscore:

  • 400,000 US homes left their cable supplier this year (including 169,000 from Time Warner Cable and 52,000 from DirecTV in the last quarter along and 176,000 customers who left Comcast since the start of 2012)
  • 1m cancelled their cable service in 2011
  • Estimates are that the 2008-2012 total will be 3.58m

The population of the US is 311m with around 120m housesholds, so 3.6m homes cutting the chord is around 3% of the total.

The shift to OTT television has well and truly started and it isn’t surprising that in Hulu and Netflix we have two large companies in this space already.

Rackspace cloud–competing on performance

By | Startup general interest | No Comments

I’m a big admirer of Amazon’s cloud offering. They’ve done a great job of building a service that it seems just about every startup wants to use, and I like the way they repeatedly drive down prices.

What I don’t like, however, is that they are just about the only game in town. Competition provides a great incentive for companies to improve their services and whilst there is much to like about Amazon there is always room for improvement.

So, I was pleased to read this morning that Rackspace Cloud is coming on strong, and expected to account for $250-300m of their $1.2bn revenue this year. Their positioning is to compete on performance and service rather than price, and I think that will be attractive to lots of companies. Website speed is an increasingly important to delivering a good user experience and a good percentage of our companies are currently running projects to reduce page load times, many of them hoping to get down to the 200-500ms range.

Equally pleasing is that Microsoft and Google are also stepping up their efforts to compete with Amazon’s cloud services.