Post Brexit thoughts – we need leaders

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I was as surprised and disappointed as most Londoners after we voted to leave Europe last Thursday but I have been shocked by the depth of everyone’s misery since.

Here’s what I think:

  • We are in for a prolonged period of increased uncertainty
  • There are plenty of hotheads but key figures like Angela Merkel and Teresa May want a sensible compromise that keeps Britain trading with Europe
  • Therefore, the likelihood is that at the end of the day we will still have free movement of labour and access to European markets for most goods and services – i.e. not much will change

The big concern for me is how much damage comes in the short term as a result of the uncertainty, a concern that’s heightened by the almost embarrassing collapse of leadership at the top of our two main political parties. The current run on property funds is a great example of fear induced value destruction. Within our portfolio there hasn’t been much fallout, but we are hearing the odd story of people sitting on their hands and not doing deals. Similarly I was with an Israeli investor today who is revisiting his plans to open a London office.

Paradoxically it seems to me that its elements of the Remain camp that are now causing the biggest problem. Their anger and fear is increasing the uncertainty we’re suffering from which is causing more redemptions, which is, in turn, increasing the anger and fear, and I could make a similar argument about sterling’s depreciation.

So I wish everyone would quit with the handwringing and get on with life, and especially with business. In the case of Forward Partners nothing has changed. I’m a little concerned that with heightened perceived risk there might be less appetite for investing in venture capital funds, and we will work a bit harder on the fundraising side of our business as a result, but other than that it’s business as usual.

For me the most worrying thing about this whole affair is how clear it now is that huge swathes of the country feel totally abandoned by our political system. It’s been hard to see that from within London, but the picture is now very clear. It’s imperative that we fix our fractured society. Otherwise we will get more protest parties and crazy votes like the one we’ve just had. Like it or not immigration is a huge part of the issue, and whilst I am totally sold on the economic benefits of bringing people into our country, it’s clear that those arguments hold little sway with most voters. These are difficult problems which will take strong leadership to fix, and at the moment it’s hard to see where that comes from.

In fact, it’s an absence of leadership that landed us in this mess in the first place.

iPhones, Blackberries and email

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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).

Second Life – more real/alternate world convergence

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See this post from Christian of Electric Sheep Company which describes a Second Life object which plays real world audio and hence raises a WHOLE WORLD (geddit?!?) of copyright issues.
So, you can access real world audio inside Second Life. How long before your Rhapsody subscription is extendable there?

I’m interested in Second Life because it has the potential to profoundly change the (aspects of) society. At the obvious end it offers a new way of spending leisure time. At the less obvious (and more radical) end it offers us the potential to re-organise the way we work and do chores (like shopping – Amazon store opens in Second Life). So far this is of more interest to the sociologist
than the venture capitalist in me as it feels kinda early to be funding companies that live off of Second Life (although Electric Sheep Company is leading the charge).

The other interesting thing about Chritian’s post is the scale he is getting at SLBoutique – a virtual shop run by the Electric Sheep Company that sells artefacts for Second Life. They now ‘stock’ 100,000 items. They will be needing a recommendation engine!

Web2.0 in the enterprise – social bookmarking and tag clouds

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I’ve been reading a lot about this lately – including Framfab blog/discussion page and Jeff Nolan and I’m seeing a few start-ups in this space in the UK.

Cool stuff, and I think there might be a software opportunity here. The idea is that enterprises empower employees to create their own tags for documents which are shared with colleagues to make stuff easier to find. E.g. the finance department can have their own tags that they share and understand which can be different to the tags that the sales department uses, or marketing uses, etc. This has the twin advantages of being cheap to implement and better than a one size fits all taxonomy.

Technically the challenges are in usability and linguistic problems (dealing with synonyms and words with more than one meaning – extreme e.g. one man’s ‘bad’ is another man’s ‘good’). This is where the software opportunity lies – although delivery will be best as a service.

From an investment perspective the challenge is predicting take up rates, ie. how quickly the market will grow.

More on Social Networks business models

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Since my last post I have learned a few things:

1) MySpace is flying – traffic wise – and has passed Yahoo! and Google in terms of page views. Although some claim that MySpace’s design produces a large number of extra page views – maybe 2-3 times as many as are required

2) There is a lot of uncertainty about how much revenue they are making. Information in press releases from Fox Interactive Media (FIM – the division of News that owns Myspace) is confusing in that it talks about Myspace but then seems to give figures for the whole of FIM.

3) Nonetheless they are making big claims – $1bn in revenue by the end of the decade

4) CPMs are VERY low – reported as 10c average – adserving technology costs on their own are likely to be 1/3 to 1/2 of that (note the extra page views point above which should, in theory at least, have the effect of reducing CPMs by 50-67%)

5) One reason advertising may not work (or CPMs will be low) is that people come to MySpace to visit each other, not to access content

6) On the other hand some rumoured numbers I have heard for Facebook penetration of their vertical and average time spent per day on the site are staggering and lead me to question my whole thesis here that the traffic may not be monetisable

7) People are starting to talk about the business model for MySpace not being traditional advertising but instead a recommendation or collaborative filtering tool

It is easy to see why opinion is sharply divided on whether MySpace was worth the $580m or not. I’m still of the opinion that on a pure DCF basis it will turn out not to have been worth that much. For NewsCorp it may have been worth that much to get a foothold in the new world and start learning. It is only 2.5% of their market cap and I can’t shake the suspicion that part of their justification was that being associated with the hype around MySpace will do more than that for their share price over the short to medium term.

Social network business models and value – Bebo and Myspace

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In the wake of the Benchmark Bebo deal and Myspace NewsCorp sometime before that I have been thinking about what these companies are worth.

On the one hand they have A WHOLE LOT OF TRAFFIC – so there is unquestionably some value there. The question, is how much?

Now I’m an old fashioned guy when it comes to corporate finance but to me profits and cash flow are important. To really be worth a lot of money you need to have cash. At the risk of being boring; a company is worth the discounted value of its future cash flows.

Sometimes it seems like there are two investment philosophies out there in the London market. ‘Follow the hype curve’ and ‘invest on fundamentals’. I would be a fool if I never sought to capitalise on hype round a hot sector, but my leaning is towards investing on fundamentals. So before I can put a big value on a company I need to understand how it could make a lot of money, even if it isn’t doing it yet.

So to Bebo and Myspace. They have traffic in abundance, but how are they monetising that?

My understanding is that they are pursuing advertising models. Fair enough. The two issues they face are that advertisers are wary of advertising next to unknown and potentially offensive content (e.g. soft porn) and that users might find advertising intrusive and leave.

The response is to make “safe areas” where the content on the pages is understood. So they almost become traditional content businesses with a radical new method of sourcing traffic. Both Myspace and Bebo are doing this around music, in the first instance.

They have traffic and a clear way to build content so they can generate revenues (in addition there is the not insubstantial home page advertising revenues).

That leaves the questions of how much? and for how long?

To me there is a lot of uncertainty on both fronts.

The “safe areas” strategy sounds like a good one, but it is unproven. There is no way of knowing how much of these sites’ traffic can be monetised in this fashion so there is no way of knowing the quantum of revenues that can be generated.

There is also no way of knowing if the current popularity of these sites will be maintained. They are new, there is no history we can look at to inform us. There are reasons to think it could be sustained – mostly based on the argument that people have invested a lot of time and effort into building their profiles, so they won’t leave. There are reasons to think it might not be – the current crop of 18-24 year olds may not need this form of social interaction when they go to college, or grow old and get married, and the next crop who are currently say 12-18 are currently using other social networking sites targeted at their age group (e.g. Stardoll and Sulake) who are presumably planning to hold on to them.

So these sites could generate a lot of revenue for a long time but they might generate a lot for a short time, or a little amount for a long time, or worst of all not very much for not very long.

To my mind it is hard to put a big value on that. Far too much uncertainty.

Valuation is an art though, not a science, and people have different ideas. NewsCorp paid handsomely for MySpace, and good luck to them. But you can’t bet on people paying more for your companies than you think they are worth, it happens, but you can’t make that your investment thesis.

Trust and certificates

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The promised post on trust awaits your perusal below.

In what is starting to be a tradition in this blog lets start by postulating what trust might be (and I’m talking in the very specific context of web trust systems – there is a very interesting wider debate on trust in society which I’ve blogged about before).

Forms of trust on the web:

  1. Certificates that say you can trust a site to be something – e.g. VeriSign for security against theft of your credit card information
  2. Trust systems that let you trust an individual in a given community – e.g. EBay’s rating system

I’m trying to answer the question of whether there is an infrastructure play in trust on the web.

In the first category VeriSign has built a business based on a single very specific area of trust but I think security of credit card information is probably the only area where trust is missing on such a broad scale. Other areas where certificates are prominent are child safety (ICRA), accessibility (RNIB and others) and more recently readiness for mobile. There will be a lot of certificates required (at least in the first two areas) which tells me there is a volume of business in administering them, although I’m not sure how profitable it would be. There is an element of natural monopoly though, which might be helpful. The million dollar question (and maybe that should be billion) is whether the list of three certificate areas I gave above is (or soon will be) much shorter than it should be. If it is much too short then there ought to be a play in “trust certificate infrastructure”.

In the second category I don’t think there is an infrastructure play – the technology to administer an eBay style trust system will be coded on a site by site basis and it doesn’t strike me that there is much of a software product opportunity here. Instead, everyone is talking about a service play which allows people to export their rating from e.g. eBay and use it elsewhere. This would be great but it strikes me that implementation will be challenging. There is little in it for e.g. eBay to let this happen, indeed people could use their eBay rating on competing auction sites, and there is the hazard that eBay will not be able to police abuses of eBay ratings outside of their site. The play then morphs to some kind of meta rating system which is probably tied in with the holy grail of detailed individual profiles. It’ll come, but it will take a while.

(An aside – I’ve been saying for a long time now that one day we will all have profiles on the web that we love, nurture and cherish like people used to love nurture and cherish their cars. )

More on Web2.0 models

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This has been a big week for us – spin out from Caz and merger with Prelude completed. Office move started, and ongoing…..

All good fun and very exciting. I might have managed to have a few beers on Friday as well. And then a barbecue at Bob Hook’s house on Saturday for all the new Esprit’ers. Great pad. Fantastic garden.

So very busy, but I’m going to attempt two posts tonight. This one explores a little more where I think the money might be in web2.0.

In my first post (which was a month ago and this is only number three – I need to speed up a bit) I put web2.0 companies into three categories:

1) Stuff people have always done – simply moved to the net – e.g. ActiveHotels
2) Old stuff done new ways on the net – e.g. LastFM, betfair
3) Stuff people have never done before – e.g. Myspace, Blogger

Now I’m trying to figure out where the money is going to be made in the next few years. To take each area:

1) Stuff People Have Always Done – Simply Moved to the Net
This is the easiest to understand and unsurprisingly the most developed. Opportunities for small companies here are limited to the increasingly small universe of “what hasn’t been done before”. Furthermore it is the easiest stuff that has been done, meaning the remaining opportunities are the ones with the most execution challenges. Nonetheless as the web develops things that are on the margin of feasible today will become good opportunities tomorrow and the great thing about a lot of companies in this space is that they have transactions at their heart and the business models come naturally.

The features of markets that are ripe for this kind of disruption are:

  • Large
  • Fragmented
  • Information is far from perfect – i.e. buyers and sellers struggle to find each other
  • There is a path to critical mass
  • Transaction size is not too large

2) Old Stuff Done New Ways

Companies in this space often seem to start by giving their stuff away for free and they only come to VCs for the big money once they have thousands (or millions – pick it) of “users”. And therein lies the rub. What exactly is a user? This is all obvious stuff, but to get it down for completeness users can vary from registered and used once for 10mins, to occasional free user, to regular free user, to paid once user to regularly pays user. Ultimately there is only value (and I mean real value, the sort that can get your company bought for a LOT of money) if it is clear that there will be lots of “regularly pays” users. The problem is that valuation expectations start to leap up when there are lots of non-paying users and the risk that there will never be many regularly paying users remains substantial. I thank Zennstrom and all involved at Skype for putting European VC on the map last year, but people need to understand that emulating them is not a viable investment thesis! So will there be a lot of big companies created here in Europe? My gut is telling me there will be a few. Collaborative filtering has the potential to disrupt a lot of media consumption. It will take a while though – people’s behaviour needs to change, people need to start forming more communities, learn to tag etc.

The features of service ripe for this kind of disruption are:

  • Large market
  • Structural problems with the way things are done currently (e.g. telephony too expensive)
  • Ability to launch a basic service at little cost and therefore give it away for free
  • Ability to market virally (that is why comms services spread so quickly – from Hotmail to text to Skype to blogging)

3) Stuff people have never done before

The growth in blogging is astounding. In March 2005 Technorati announced it was tracking 7.8m blogs and that the blogosphere was doubling every 5 months – in April this year they were up to 37.3m blogs – the growth continues. This is phenomenal. Teen social networks and geek social networks have also had dramatic growth. Ajax personalised home pages may be the next place to go. To my way of thinking this is all stuff that is new – it is true that kids used to hang out together in the street and now that we won’t let them outside at night they are doing it online, but there is a personal expression thing going on here that is new. Making money here is not easy either. Most of the business models are long-tail advertising based and unproven. The sustainability of these properties is also more a matter of faith than evidence, to my knowledge at least. It would be wrong not to mention here the online personality extension plays – e.g. sulake and stardoll – they have a revenue model at their core – selling lots of stuff to lots of kids that adds to their identity for pennies a time. I think there will be more opportunities here as well, although they will be for the brave.

I don’t think it is useful to be prescriptive here as I have been for the first two categories. Spotting the next thing is a matter of keeping ones’ ear to the ground (and maybe keeping a close eye on what my brethren on Sand Hill Road are doing…).

There is a little opportunity in (1), a little more in (2) and a little more still in (3). Which tells me that this is not a useful categorisation for the purpose of identifying where the opportunity will be! But nonetheless, this has given me some kind of framework for thinking about opportunities in this arena.

So it is only going to be one post tonight after all. One to follow shortly on infrastructure/trust.

On Trust

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My starting point here is that trust is somehow missing and that there may be some kind of opportunity here to build a big or probably even HUGE company providing that thing which is somehow missing.

It is easy to find examples where trust is present and has been a crititcal success factor – ebay’s rating system, Verisign’s logo, and open source development groups are three from the modern era.

To define it, however, is a little more difficult.

I would postulate that trust is a mechanism that regulates behaviour according to a set of communally understood principles that are probably not written down.

(Thanks to JP for this insight which came when I was reading Four Pillars – Further Musings on Trust).

In the ebay case people know without needing to be told what consititutes acceptable behaviour on that site and do what they know they should to avoid getting a bad rating or to get a good rating and increase their standing in the community. In open source communities people know without needing to be told what constitutes good software and know what they have to do to get their code accepted and to increase their standing in the community. I suspect Verisign’s case is similar – merchants abide by a set of rules that are written and in return are allowed to display Verisign’s trustmark which in turn gives them a standing that lets consumers trust them. I would be interested to know whether Verisign retains the right to unilaterally expel a merchant from its community if its behaviour was unaceptable, but still within the letter of Verisign’s T’s and C’s.

So the important notions here are “community”, “standing” and “communication”.

Which leads to the conclusion that the opportunity might lie in providing mechanisms that allow communities to bestow status on members who deserve it and communicate that status to other members.

Come to think of it Google’s link algorithm is an example of this in operation on the whole web.

There will be more on this, I hope.