The VC Channel

The Price of Gold in Gold

Fri, 13 Nov 2009 18:13 GMT

From price, the price of gold in gold. This is awfully suspicious. Where is the outrage?

Surprise (Not): Madoff’s Results Were Generated Via a Randomizer

Fri, 13 Nov 2009 14:51 GMT

I’m so clever. Back in December I wrote here that Bernie Madoff’s results, far from being pulled from his hat, showed every sign of having been generated by a randomizing algorithm. My analysis suggested that – based on Benford’s Law fit – his results would have passed muster in terms of looking sufficiently random to be real.

Here is the original chart again:

Now, let’s flip forward to today. We see the following in a new SEC complaint against two of Bernie’s programmers:

Defendants knew that all of this data was, for all intents and purposes,
randomly generated and assigned to purported trades by programs they created.
Defendants knew that this was unlike the [internal] House 5 system, on which trade blotter
came from actual executed trades and was verified through data received from
counterparties and clearing agencies. Some of the House 17 programs even included
randomness checks, i.e., code that analyzed program results to ensure they were
sufficiently random.

Defendants' extensive use of random selection arose from two related
facts. First, there were no real trades from which to draw actual data. Second, Madoff
and DiPascali were concerned that investor representatives and/or regulators would
closely examine the data and notice implausible correlations ~, all fake trades with a
certain counterparty were for a certain share volume, or were executed at uniform time
intervals), which could lead to greater scrutiny. In fact, when Madoff, DiPascali, or
Defendants reviewed the programs' results and found suspicious correlations and
patterns, Defendants would have to make further revisions to the programs.

[Emphasis mine]

Surprise, surprise. Or not.

Where the Jobs Aren’t: Everywhere Except Education

Fri, 13 Nov 2009 14:37 GMT

While U.S. jobs are few and far between in many sectors, this year-over-year data shows that if you really want to be sure your applications get no response you need be sure to avoid education.

[via Indeed]

Superstar CEOs Suck

Fri, 13 Nov 2009 13:12 GMT

From a new Quarterly Journal of Economics paper:

Superstar CEOs

Compensation, status, and press coverage of managers in the United States follow a highly skewed distribution: a small number of “superstars” enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the awards, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak corporate governance. Our results suggest that the ex post consequences of media-induced superstar status for shareholders are negative. [Emphasis mine]

Source: Ulrike Malmendier and Geoffrey Tate, “Superstar CEOs*,” Quarterly Journal of Economics 124, no. 4 (November 1, 2009): 1593-1638.

Readings: Fox Biz, Bill Gross, Real Estate, etc.

Fri, 13 Nov 2009 12:43 GMT

Fox Business News, Where Green Arrows Turn Brown Eyes Blue (Vanity Fair)
Is Fox Business a lost cause? (Vanity Fair)
Bill Gross Says Value Diminishing in Credit Markets (Bloomberg)
Commercial Real Estate ‘Crisis’ Looming for U.S.: Chart of Day (Bloomberg)
I Want More Information, Not Less (Feld)

I Want More Information, Not Less

Fri, 13 Nov 2009 09:35 GMT

I spent the last two days at the Defrag Conference. It was awesome on so many levels including the content, the venue, seeing a bunch of great friends, and meeting a bunch of new people.

The conference originated out of an email exchange that Eric Norlin (the amazing guy who puts on the Defrag and Glue Conferences with his even more amazing wife Kim) and I had as a result of a series of blog posts that I wrote in 2006 starting with There Is A Major Software Innovation Wave Coming and Intelligence Amplification.

Over the past three years there has been an incredible amount of innovation around this theme (which we originally called the Implicit Web.) While lots of it is still messy, sloppy, or ineffective, that’s just part of the innovation cycle. A consistent discussion point at Defrag was “how to deal with this overwhelming amount of information” – there is no debate about the (a) amount, (b) need to deal with it, or (c) value of dealing with it. However, a lot of the subtext was that there was too much information and we needed better ways to deal with it.

I agree with the conclusion, but not the premise. I don’t think there is too much information. I want more. More, more, more, more, more. MORE. I don’t want to stop until I have all the information. MORE! You can’t give me too much information!

I don’t believe the issue is too much information. This is an independent variable that we can’t control. For the foreseeable future, there will be a continuous and rapid increase of information as more of the world gets digitized, more individuals become content creators, more systems open up and provide access to their data, and more infrastructure for creating, storing, and transmitting information (and data) gets built.

Yeah – I know – that’s obvious. But there are a few ways to approach it. My desired way is to accept the thing you can’t control (more information) and drastically improve the methods for consuming it. I spent the better part of two days having this thought over and over again.

By the end of the second day, I’d decided that my original premise was correct – there continues to be a huge innovation wave in software that addresses this. And we are just starting to deal with it. And while software is at the core of it, we’ve learned an enormous amount in the past few years about the power of people to help curate it, both directly (by doing things to it) and indirectly (by software interpreting the broad signals of what a large number of people are doing to it.)

The user interfaces – and user interaction model – for all of this stuff still sucks rocks. And I love things that suck, because that creates huge opportunities for innovation.

Google acquires portfolio company Gizmo5

Fri, 13 Nov 2009 09:28 GMT

Congratulations to Michael Robertson and team at Gizmo5 for all of their hard work and perseverance! There is not a lot I can tell you about the future plans for Google Voice, but I do believe it is important to look back to see how we got here. We made our investment in Gizmo5 (aka as sipphone and gizmo project) in early 2006. What Michael and I shared was a vision of openness for the VOIP and IM World. As I wrote on a blog post in January 2006, consumers want what Google and Gizmo5 will hopefully provide in the near future:

At the end of the day consumers don't care about protocols, they just want it all to work seamlessly and easily, and they do not want to be on their own island for communications. What I want is one identity or phone number that works on any IM network, VOIP network, or even integrates with my PSTN and cell phone identity?

Between 2006 we definitely had some ups and downs but through it all two big decisions helped us get here today. First, we drastically cut the burn rate before the nuclear winter and decided to focus on getting to breakeven. Being capital efficient and reliant on viral marketing certainly helped us grow our business and stay lean and mean. Secondly, when Grand Central came out with their single phone number we decided to integrate Gizmo5 into their service. Of course since both Grand Central (now Google Voice) and Gizmo5 were SIP compliant and based on open standards it certainly made that process quite trivial and easy.

Fast forward 3 1/2 years to today, and all I can say is that I look forward to seeing what Google Voice will bring into the future and whether true openness can trump Skype's proprietary protocols. It also seems like the vision of one number for PSTN, VOIP, or cell identity I wrote about long ago will become a reality. One last thanks goes out to Maurice Werdegar and the team at Western Technology Investments (WTI) who provided Gizmo5 with venture debt and worked closely with us in the tough times to restructure our payments. I would work with these guys any time.

Social Recruiting

Fri, 13 Nov 2009 07:43 GMT

I'm giving the keynote talk at the Social Recruiting Summit in NYC on Monday. I've been working on my presentation over the past few days and some themes are worth talking about.

1) Since we started Union Square Ventures in 2003/2004, we have only been involved with one retained search. Our portfolio companies have certainly used search firms, but our use of them has been extremely rare. We prefer to source candidates ourselves using our networks, and increasingly our social networks.

2) We sourced both of our junior investment professionals, Andrew Parker and Eric Friedman, with blog posts at USV.com.

3) We have sourced countless senior hires for our portfolio companies off of this blog and USV.com. I would bet that we've done a couple dozen successful hires that way in the past couple years.

4) Many of our companies have internal recruiters and we work hand in hand with them, sourcing talent, vetting talent, and closing the sale.

5) LinkedIn is a terrific place to find talent and to find references. When I want to check someone out, I invite them to connect to me on LinkedIn, I find who we know in common, and that is my reference list. Charlie O'Donnell taught me these LinkedIn tricks about five years ago and I use them all the time.

6) Tracked.com is also a terrific place to find talent and figure out who they know. Let's say you wanted to find the top execs at LinkedIn. You can find them all in one place here.

7) Hunting for talent is necessary but not always sufficient. You need to get the word out. Like all things on the internet, there are free ways and paid ways to do that.

8) The best free way is get your jobs indexed by Indeed so they can be found by the over 10 million people a month who go there looking for jobs. We feature all the jobs in our portfolio on the front page of USV.com by running an Indeed stored query of all the jobs in our portfolio companies.

9) Social networks like Twitter and Facebook are also great free ways to get the word out. Post the job on your website and tweet it out, get it retweeted, searched, and discovered and the resumes will start coming in.

10) You can also pay to get your jobs "sponsored" in Indeed. You can post job ads via Facebook's self serve ad system and target them at very specific locations and job types. And we'll see more social media/networks offer paid systems like this in the next year.

11) There are all sorts of niche communities on the web you should be hanging out in if you want to find talent. For tech/engineering talent, we like to look at Meetup groups on certain tech topics (there are eight Ruby On Rails meetups within 25 miles of NYC), open source projects, and niche communities like Hacker News and Stack Overflow. You can play the same game with communities for other kinds of job types. The key is you have to hang out there a bit, get to know the community and the people in it, and build trust and add value.

That last point is the big point. Social media is about showing up, hanging out, and earning trust. If you want to use social media to source talent, you can't fake it. You have to really participate in these systems. But if and when you do, they are incredibly powerful and are changing the face of recruiting.

I look forward to talking to the recruiting community about this topic more on Monday. And if you have ideas for other things I should be talking about, please leave them in the comments.

Exciting news

Thu, 12 Nov 2009 20:58 GMT

Long-time readers will know that in my spare time (ha) I've been serving as President of the Renewable Energy Business Network, a non-profit I and Andrew Friendly of ATV officially co-founded last year (although read below for more backstory)...

Yesterday we were extremely pleased to announce that REBN and the Clean Economy Network have joined forces, with the REBN network of chapters and leaders being integrated into the Clean Economy Network Foundation.

It's an exciting move that will mean bringing a lot more professional leadership to the combined effort, with the existing REBN leadership team (both organizational and chapter-level) joining forces with the very strong CENF team. REBN had, over the course of the last couple of years, grown by leaps and bounds, from an initial handful of chapters to now 17 chapters across the US and Canada, strong support from sponsors like Rosenzweig & Company, Mintz Levin, Holland + Knight, Silicon Valley Bank, and Hattaway Communications, more than 10,000 chapter-level members and a pretty darn big online group at LinkedIn as well. REBN became big enough, at least, that the pursuit of our educational and community-building mission needed some additional support. And meanwhile, we had gotten to know the great team at CEN and found them to be completely on top of everything going on in the clean economy world, especially in regards to policy, which as we talk about on this site is so increasingly important for cleantech entrepreneurs and investors to know about. So when we started talking with each other about making a move like this, it seemed like a good match then and feels like a great match today.

It's been a wild, fun ride with REBN to date. REBN was actually the brainchild of a small group of smart young clean energy businesspeople, including the likes of Dan Kalafatas and Josie Gaillard and others, all of whom early in this decade came up with the idea of a low-key networking group in the San Francisco area to help renewable energy business types meet with each other, learn about the industry, find new business and startup opportunities, etc. That initial chapter did well, and at some point I got roped into taking on the role of chapter lead (I believe I grumbled about it to Dan and Josie at the time, but owe them a debt of gratitude now), and we held get-togethers, organized panel discussions, etc. It was a great, easy resource, so when I moved out to Boston in 2007, I left the group in Nick Allen's very capable hands, and Andrew Friendly and I talked about finding a similar organization in Boston to join and enjoy. But we discovered that there really wasn't one, at least not with the same feel as REBN. So we launched "REBN-East", and what we thought would be a very small thing ended up getting a pretty big crowd. Apparently San Francisco wasn't the only place where there was a big unmet need for low-key, come-as-you-are, open-to-all education and networking for cleantech professionals.

Then we were contacted by Cheng Chang in Houston, who let us know that he'd heard about REBN and liked the idea and was going to launch a chapter there. At that point, REBN was still unincorporated but had three chapters going across the country, and thriving. Suddenly, Andrew and I had one of those moments where we just looked at each other and realized, "wow, there's really something here." And so we decided to officially launch REBN as an incorporated non-profit organization, and put some effort behind it. We press-ganged recruited Laura Bartsch and Helen Fairman to serve as part-time co-executive directors, and then held an official launch event and started spreading the word. Before you knew it, we had nearly ten chapters, and then things just started snowballing from there.

As far as I can tell, the success of REBN has been due to its open-access and low-key educational/sharing format, and in huge part to the way that our volunteer chapter leads have stepped up to help organize chapters in their regions, in a really decentralized format where we in the tiny REBN national leadership team were constantly being amazed by the huge successes of chapter leads in places like Philadelphia, Minneapolis - St. Paul, Denver, New York, and elsewhere, without a lot of guidance, just smart entrepreneurial businesspeople working to build a regional clean economy. An amazing effort by amazing businesspeople, far too many for me to list here, but when you go attend a REBN/CEN event in your region now, make sure and tell them "thanks" for all their volunteer efforts, will you please? And there should be an upcoming event over the next couple of months in every one of our chapters, to celebrate this news.

The Clean Economy Network team now brings a level of policy knowledge to this effort this is exciting to be a part of. We've got some fun things in store that will start with the traditional REBN-type activities that existing members are used to, and will build from there, bringing in even more educational content and business-building opportunities. And we're certainly not going to lose the familiar REBN style -- doing what we can to contribute to regional clean economy efforts in whatever way makes most sense for each community, with dull elbows and small egos. Take a look, and think about signing up at http://www.cleaneconomynetwork.org if you're interested in getting involved. Of course, CEN's c4 sister organization is also doing a lot of community-building in another venue: In the policy realm. Lots to do there as well, lots of opportunities to get involved.

Big thanks to the many people involved in getting REBN launched and growing it to this point, from the early days in SF to the nationwide effort it's become. And big thanks to our new colleagues at CEN! Their vision and execution has been what has really inspired us to take this next step with them.

Of course, now I need to come up with another personal new next big thing. Suggestions are welcomed!!!

Diversions: Powers of Ten

Thu, 12 Nov 2009 15:39 GMT

Fantastically cool powers of ten visualization. Click to try:

[via judell]

Readings: Dollar, Dinosaurs, Deficits, etc.

Thu, 12 Nov 2009 15:11 GMT

Dollar knocked by China renminbi hints (FT)
Google launches searchable access to WorldBank data (Google)
Spanish Wind Power Tops 50% of Electricity Demand (Source)
Interesting new complexity events at Santa Fe Institute (SFI)
A New Geopolitical Jevons Paradox? A Look at Non-OECD Oil Demand (TOD)
Mass extinctions: I am become Death, destroyer of worlds (The Economist)
The significance of the contemporaneous Shiva impact structure and Deccan volcanism at the KT boundary (GSA)
California’s stealth stimulus from delayed foreclosures (ForeclosureTruth)
U.S. ran record deficit in October (Marketwatch)
Gorgeous power-of-ten visualization (Utah)

How to pick a co-founder

Thu, 12 Nov 2009 10:32 GMT

Picking a co-founder is your most important decision. It's more important than your product, market, and investors.

The ideal founding team is two individuals, with a history of working together, of similar age and financial standing, with mutual respect. One is good at building products and the other is good at selling them.

The power of two

Two is the right number — avoid the three-body problem. Think Jobs and Wozniak, Allen and Gates, Ellison and Lane, Hewlett and Packard, Larry and Sergei, Yang and Filo, Omidyar and Skoll.

One founder companies can work, against the odds (hello, Mark Zuckerberg). So can three founder companies (hello, @biz, @ev, and @jack). In three founder companies, the politics can be tough — gang-up votes, jockeying for board seats, etc. — but it's manageable. Four is an extremely unstable configuration and five is right out. When 4-5 founder companies work, it's because two founders dominate.

Two founders works because unanimity is possible, there are no founder politics, interests can easily align, and founder stakes are high post-financing.

Someone you have history with

You wouldn't marry someone you'd just met. Date first. Guess which pair of famous co-founders is in this photo:

Go through something difficult, like a Prisoner's Dilemma or a Zero-Sum Game. If being ethical was lucrative, everyone would do it!

One builds, one sells

The best builders can prototype and perhaps even build the entire product, end-to-end. The best salespeople can sell to customers, partners, investors, and employees.

Aligned motives required

If one founder wants to build a cool product, another one wants to make money, and yet another wants to be famous, it won't work.

Pay close attention — true motivations are revealed, not declared.

Criteria: Intelligence, energy, and integrity

It's not the kid you grew up next to. It's not the person you like the most. It's not the hacker most willing to work for free.

It's someone of incredibly high intelligence, energy, and integrity. You'll need all three yourself, and a shared history, to evaluate your co-founder.

Don't settle

If it doesn't feel right, keep looking. If you're compromising, keep looking. A company's DNA is set by the founders, and its culture is an extension of the founders' personalities.

Pick “nice” guys

Avoid overly rational short-term thinkers. There are bounds to rationality. Partner with someone who is irrationally ethical, or a rational believer that nice guys finish first. Be especially careful with the “sales” guy here.

What you don't know

Business founders who don't code use bad proxies for picking technical co-founders (”10 years with Java!”). Technical founders who don't sell also use bad proxies (”Harvard MBA!”). Learn enough of the other side to have an informed opinion. If you're not seriously impressed, move on.

Breakups are hard

If you're going to fall out with your co-founder, do it early, recover the equity into the option pool to keep the company going, and recruit someone else great to fill the missing slot. Build in founder vesting (a.k.a. the “Pre-Nup”) to keep the breakup from getting messy. Building a great company without a partner is like raising kids without a…

Nearly everything I've written on this topic applies to dating and marriage. Coincidence?

Go forth and multiply.

Tracked.com Gets More Social

Thu, 12 Nov 2009 06:16 GMT

I posted about our portfolio company Tracked.com a few weeks ago. In that post, I said:

Tracked.com is social. Users have a profile in the service and can send messages to each other in the service (and via twitter and facebook very shortly). Objects in the service (news, quotes, charts, public filings, companies, people) can be sent around like links in twitter and facebook.

That "very shortly" is now. Tracked released a bunch of social features last night which are live on the website.

Here are the ones I think are important to talk about:

All news items have a share link on them now. Here's the comScore recent news list. Note the share icons on the far right.

When you share a story in the service, you have the option to share it only inside Tracked or with Twitter (and Facebook soon). Here's the UI for that. Send to Twitter is not checked by default and you need to connect to twitter via ouath in the Tracked settings to get this functionality.

I used this feature this morning to share a story about our portfolio company Zynga. Here's the tweet:

You'll note that there are two bit.ly links in that tweet. The first is to the Business Week story I tweeted out. The second is to the conversation page in Tracked about the share which looks like this:

And of course, all of this activity shows up in your Tracked news feed:

So that's the gist of how this stuff works. I'd love everyone who is interested in this stuff to give it a spin and let me know what you think.

And to remind all of you about Tracked and what it is all about, I've put up a new widget on the upper right sidebar. This Tracked widget shows the companies and people I am tracking and if there are any new stories on them. You can click on the company or person's name and stay in the widget or you can click on the number of stories and be taken to Tracked.com in a new browser tab. I'd also like to know what you think of the widget.

The Dow in Gold: Pricing Yo-yos in Meerkats?

Wed, 11 Nov 2009 12:07 GMT

I’m always uneasy about these “Let’s price Thing X in Commodity Y” exercises (hey, let’s price yo-yos in meerkats!) – if thing X was supposed to be priced in commodity Y, it would be priced in commodity Y – but this one is at least semi-useful. Here is the Dow index in gold since 1900:

[via Rolfe]

The long tail of VC twitterers

Wed, 11 Nov 2009 10:28 GMT

We previously posted about the long tail of VC blogs. A few VC blogs capture most of our attention. The rest slog it out in the long tail.

And now, for the first time in the history of mankind, we present the long tail of VC twitterers (click to zoom in):

The underlying data is from Venture Maven's list of 217 VC twitterers. I removed Chris Sacca, Om Malik, and David Pakman from the dataset because they have too many followers (they were on the Twitter suggested users list).

This widget aggregates all 217 VC twitterers:

(Widget: VC twitterers)

Thanks to Venture Maven for aggregating the underlying data and to Tony Stubblebine and Waldron Faulkner for parsing it.

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Board Meeting Lessons From The Supreme Court

Wed, 11 Nov 2009 07:23 GMT

My amazing day at the Supreme Court continued to bounce around in the back of my mind all day yesterday. I was at a board meeting for a company that I’ve been on the board of for almost a decade – it was the best (as in most productive) board meeting we’ve had in a long time.

I’ve written about The Best Board Meetings in the past. One element of the best board meetings is a prepared mind. This is the powerful lesson from the Supreme Court. On Monday (at the Supreme Court), I saw eleven very smart people participate in a very complex discussion that they were extremely prepared for. In one hour they covered an amazing amount of ground. I attribute this to the work they did in advance of the meeting.

In many board meetings, the material shows up at the meeting, or the board members haven’t read the material in advance, or the board material is not very detailed, or the board material is too detailed. Basically, either the board members don’t have the material to have a prepared mind in advance of the meeting, or they don’t take the time to do the work to be prepared.

Then, unlike the Supreme Court session where you can dive into substance immediately, the board members and management spend a long portion of the meeting “getting up to speed”. That’s a total waste of time for everyone in the room.

In my strong board meeting yesterday, everyone was prepared. The board material was comprehensive, but not overly so. It came in advance of the meeting (only 24 hours, but still enough time for everyone to read it). And, rather than go through the material page by page, we picked a handful of key themes and discussed them. For several hours. In detail, but at a level that resulted in clarity for the board members and management.

The other key lesson from the Supreme Court is paying attention. I’ve written about this also in VC Behavior in Board Meetings. I continue to fall victim to the blackberry checking syndrome. In the Supreme Court, phones, computers, and PDA’s weren’t allow. So I paid attention. And as a result I really followed what was going on and processed almost all of the information. Even in yesterday’s board meeting I found myself drifting a little and pulling out my iPhone – bad Brad. It detracted a little from the meeting (my fault), but most importantly it caused me to likely miss a few things I shouldn’t have missed.

I’m at Defrag all day today and am going to try to pay attention.

Hacking Robots – iRobot Roomba Pac-Man Game

Wed, 11 Nov 2009 06:57 GMT

The Boulder Camera highlighted a few CU Boulder students and their newest project in the article CU-Boulder students create Pac-Man Roomba game. For anyone that played Pac-Man as a kid (as I did) or anyone that loves robots, it’s sheer brilliance.

Information about the entire project is up on the web at Roomba Pac-Man. Now they need to do a Ms. Roomba Pac-Man – that would be a nice marriage of technologies.

What Makes Boston's Start-Up Scene Special? - video

Wed, 11 Nov 2009 04:50 GMT

Here's the video from the talk I gave at HBS on what makes the Boston start-up scene special.

Conferences (continued)

Wed, 11 Nov 2009 04:24 GMT

I don't like to go to conferences. I explained why in this post.

But every once in a while I do attend one. Ideally it's a smallish gathering on a specific topic that I am interested in.

I'm doing that over the next couple days in Denver at Defrag.

Defrag is a conference about mining data for insight, with a focus on social data and semantic analysis. You need to look no further than our portfolio to see that is something I am quite interested in.

So I am flying out there this afternoon and will be in attendance for most of tomorrow's sessions. And I'll be doing a panel with my friends Brad Feld, Roger Ehrenberg, Howard Lindzon, and Jim Tybur on Social Leverage in the venture capital business. That should be fun.

While I am on the subject of conferences, I will also be at New Business Models For News at CUNY School of Journalism today. I am also doing two keynotes in one day next monday. I'll be opening the Social Recruiting Summit and closing the Business of APIs Conference.

All four of these events are the kind of thing I like to attend. They are small, not that well known, focused on a specific issue, and in the case of three of them, in NYC. I hope I'll see some of you at one or more of them.

In Case You Were Wondering What I Look Like In A Tie

Tue, 10 Nov 2009 19:07 GMT

Sorry – I couldn’t help myself. I doubt this will be repeated anytime soon.

I know it’s a little self-referential for me to put this on my blog, but it is my blog after all.

Books: The Greatest Trade Ever

Tue, 10 Nov 2009 16:01 GMT

Lots of chatter about Greg Zuckerman’s new book about John Paulson’s subprime trade. Titled The Greatest Trade Ever, the book chronicles how Paulson’s risky trade came together and how it paid out, controversies, warts, timing and all. I have a copy on the way and am looking forward to reading it, but here is an opening excerpt:

The tip was intriguing. It was the fall of 2007, financial markets were collapsing, and Wall Street firms were losing massive amounts of money, as if they trying to give back a decade’s worth of profits in a few brutal months. But as I aid at my desk at The Wall Street Journal, tallying the pain, a top hedge-fund manager called to rave about an investor named John Paulson who somehow was scoring huge profits. My contact, speaking with equal parts envy and respect, grabbed me with this: “Paulson’s not even a housing or mortgage guy … And until this trade, he was run-of-the-mill, nothing special.”

… Paulson’s winning were so enormous they seemed unreal, even cartoonish. His firm, Paulson & Co., made $1 billion in 2007, a figure that topped the gross domestic products of Bolivia, Honduras, and Paraguay, South American nations nations with more than twelve million residents. Paulson’s personal cut was nearly $4 billion, or more than than $10 million a day. That was more than the earnings of J.K. Rowling, Oprah Winfrey and Tiger Woods put together. At one point in late 2007, a broker called to remind Paulson of an account worth $5 million, an account now so insignificant that it had slipped his mind. Just as impressive, Paulson managed to transform his trade in 2008 and early 2009 in dramatic form, scoring $5 billion more for his firm and clients, as well as $2 billion for himself. the moves put Paulson and his remarkable trade alongside Warren Buffet, George Soros, Bernard Baruch, and Jesse Livermore in Wall Street’s pantheon of traders. They also made him one of the richest people in world, wealthier than Steven Spielberg, March Zuckerberg, and David Rockefeller Sr.

A Few Good IPOs?

Tue, 10 Nov 2009 15:44 GMT

There is a new Grant Thornton report out arguing that the U.S. is suffering from an IPO drought caused by high-frequency trading and broken market microstructure (but not SarbOx). The alleged consequences? 22-million fewer jobs in the U.S. than would otherwise be the case.

Whoa, it’s a provocative claim. Does it hold up?

It would indeed be good see more IPOs, so I’m with the authors on that, but after that they mostly lose me. I have multiple objections, including that the authors refuse to recognize that the venture industry has grown too large; that the technology industry is maturing; and that financial markets have changed & are no longer engineered for brokers & bankers to make money via flipping over-valued startups to retail investors via institutional cronies.

Instead of recognizing this, the authors want to blame high-frequency trading. You know, computers. And hedge funds. Baddies in black hats, in other words.

While that is au courant, it is tough to support. It has never been easy to build institutional-class trading volumes in early-stage public companies -- I used to cover them as an equity analyst -- and now is no different. That market-makers in large public companies are increasingly algorithmic – 75% of the trading volume in the largest U.S. stocks -- is something to be applauded, not decried, and it has little to do with the relative dearth of IPOs in the U.S.

Further, the implied claim that market microstructure -- increased efficiency, decimalization, etc. -- has cost the U.S. 22-million jobs via the under-production of IPOs is cargo cult illogic. It is tantamount to ignoring everything that has changed in markets and technology over the last decade, all in favor of positing an immutable relation between IPO rate and GDP. Financial markets are not nearly so neat, tidy and predictable.

The authors have a solution, however. They want to turn the capital market clock back to the days of dealer-driven markets, wide spreads, research analysts who are really bankers, and a brokerage industry that preyed on retail investors. It's like hungry great white sharks proposing that newly speedier seals be fattened up, given weight handicaps and kept in open water, away from dry land & rocks.

Technology has changed the way growth companies are produced, funded, and sold in this country. Some people might not like it, but not liking disruptive change is the response of most industries that have been disintermediated.

Dying Dollar Dings Exporters? Not So Much

Tue, 10 Nov 2009 15:08 GMT

Pace my Marketplace radio comment on the dollar's decline yesterday, this graph from Bloomberg of the recent stock market outperformance of U.S. exporters is noteworthy.

Uptick in October Trade Data

Tue, 10 Nov 2009 14:58 GMT

[via Panjiva]

My Field Trip To The Supreme Court

Tue, 10 Nov 2009 07:48 GMT

I had an incredible experience yesterday. My friend Phil Weiser, who is now the Deputy Assistant Attorney General at the US Department of Justice, Antitrust Division (I prefer to call him America’s Top Cop on Agriculture) invited me, my partner Jason Mendelson, and my wife Amy Batchelor to attend the Supreme Court Oral Arguments for re Bilski. A rare tie sighting ensued as a jacket and tie is required to attend.

For those that know about my fervent anti-patent bias with regards to software, Bilski is an important case. Depending on how the Supreme Court rules, it could open the door for both the invalidation of business method patents as well as begin a serious discussion about the validity of software patents. One can hope. So, this wasn’t a random Supreme Court visit, but rather one that is highly relevant to something I’ve spent a lot of time thinking, talking, and writing about.

As you walk up the steps to the Supreme Court, you can’t help but stop and stare. It was a beautiful day and we just soaked up the sunshine for a few minutes. We then walked to the side entrance, went through security, and proceeded to the Supreme Court Cafeteria where we met Phil for lunch. We were all a little nervous which was evident as we struggled to get salads from the salad bar (how hard is it to get lunch?) before sitting down in the relatively small cafeteria.

The Oral Arguments were from 1pm to 2pm so at 12:30 we mobilized. The process of getting into the Courtroom is tedious, but surprisingly chaotic as they check IDs and accompany people in waves. But once in, it’s powerful.

We sat down and waited quietly. The courtroom was full. At exactly 1pm, the Justices entered. They sat, and immediately called the Petitioner (J. Michael Jakes). Jakes got about thirty seconds into his oral argument when Justice Scalia jumped in with a question. A short attempt at an answer by Jakes followed by a question by Breyer. Another short answer and then a question by Ginsburg. Then Breyer. Then Sotomayor. Within five minutes I was stunned at the high level of understanding the Justices had in this particular case, the insightfulness of their questions, and their level of participation.

Breyer, Roberts, Scalia, and Sotomayor continued to question the petitioner for the next five minutes. Their tone was aggressive – bordering on hostile – but never quite crossing the line. Jakes kept his cool although he didn’t have strong responses to much of anything (at least from my perspective). While I was biased against the Petitioner and could have heard what I wanted to hear, it sounded to me like the Justices were leaning strongly against business method patents and trying to understand how they could possibly be valid.

The Petitioner abruptly finished (reserving the balance of his time) and the Respondent (Malcolm L. Stewart) began. It was a similar drill – the Petitioner got started and Justice Alito jumped in with a question. A short answer followed by Sotomayor. This continued for about 30 minutes. Several times the idea of software came up. Stewart steered the conversation away from this each time or – in some cases – refused to address the question. This was frustrating to me as I thought the Justices were throwing him fat pitches to link software in with business methods as things that shouldn’t be patent eligible. At some point it became clear that Stewart had a clear charge to keep software out of it as he went so far as to say that the government had argued against having the Supreme Court hear this case as there were difficult problems in software innovation that hadn’t yet been worked through. Near the end, the State Street Bank case came up (not surprisingly) although in my opinion Stewart really fumbled his response.

At the end, the Petitioner got a four minute rebuttal. At 1:55 Chief Justice Roberts promptly stated “Thank you, Counsel. The case is submitted.” The justices then rose and left the courtroom. A minute later everyone else left.

We quickly said our goodbyes to Phil (he had to get back to work), wandered around for a few minutes looking for our car, and then headed to Ronald Reagan Washington National Airport to head back to Colorado.

When we landed, the transcript of the Oral Argument was up. And John Schwartz, the NY Times reporter who we stood behind in the security line (he’s got a cool black skull wallet), had his article up titled Justices Hear Patent Case on Protecting the Abstract. The web is an amazing thing.

In short, the experience was awesome. I’m rarely speechless but as I walked out of the Supreme Court afterwards I realized I had nothing to say.

Saturn Is Beautiful

Tue, 10 Nov 2009 06:35 GMT

I continue to love the Astronomy Picture of the Day.

As a result of looking at it first thing in the morning, I insure that I’ll learn at least one thing each day.

Startup Ecosystems Take Time

Tue, 10 Nov 2009 05:23 GMT

Saul Klein, co-founder of Seedcamp and one of the top VCs in europe, has a long and thoughtful post up on the evolution of Seedcamp. In it he says:

In my mind, helping to bring some cohesion to our region's distributed network of talent, capital and is a 15-20 year project. ......

Getting to the right point takes time, and the cycles that kicked off what we now know as Silicon Valley began nearly 50 years ago.

Investing legends like Arthur Rock (Fairchild Semiconductor), Don Valentine (Cisco, Apple, EA), Don Lucas (Oracle), Dave Marquardt(Microsoft) and John Doerr (Netscape, Amazon, Google) and the entrepreneurs they backed created franchise businesses that still dominate the technology industry today. But maybe more importantly, all these businesses created the raw materials (talent, seed capital and technology) for next generation of the today's winners like Google, Facebook, Salesforce.com and many many others.

I made the same point last week to Laura Rich of Fast Company who is doing a piece on startup ecosystems. I think it is good to think about decades when you think about the development of new startup hotbeds.

In the first decade, you are largely making it up, copying what works elsewhere, the VCs and entrepreneurs are largely doing it for the first time, and while you can have successes, they are mixed with a lot of failures. That was 1995 to 2005 in New York City and 1965 to 1975 in Silicon Valley.

In the second decade, you start to get it right. The entrepreneurs are doing it for the second or third time. The infrastructure has developed (lawyers, VCs, recruiters). And it is easier to get talented employees to do a startup. This is where we are in New York City now and is where Silicon Valley was from 1975 to 1985.

In the third decade, the ecosystem is fully formed and producing great companies. That is where Silicon Valley has been from the mid 80s on.

The only other startup ecosystem that is as fully developed as Silicon Valley is Boston. It got started even earlier than Silicon Valley with General George Doriot's ARD in the 1950s. Boston is an interesting case study because although it has all the infrastructure in place and plenty of serial entrepreneurs, role models, and success stories, it has had a harder time making the transition from tech deals to web deals. It is getting there now.

So back to new startup ecosystems developing in europe, asia, and elsewhere. It can happen and it will happen. But it takes time. And you can't fast forward because we are talking about experience which can't be manufactured. You simply have to put in the time.

The Edwards Strikes Back

Tue, 10 Nov 2009 02:16 GMT

The indefatigably bearish SocGen strategist Albert Edwards made some entertainingly grumbling comments in Hong Kong today. Here’s a summary:

Market will hit new lows in 2010 as we go back into recession
Faith in growth stories is a “sick joke”
Japan will fumble into bond sale trouble in 2010 as investor appetite dries up and yields climb

You have to give Edwards credit for having more staying power than most of his bearish brethren. Like Han Solo at the end of The Empire Strikes Back, Edwards is frozen in the bearish equivalent of carbonite – which is part of why we love him so.

More here.

Can Startups Save the World? Startups vs. GDP/Capita

Mon, 09 Nov 2009 16:27 GMT

For a recent presentation, I graphed gdp/capita against ease of starting a company in more than 100 countries around the world. Here is the result for countries with GDP/capita more than $20k:

And here is the result for countries with GDP/capita less than $20k:

Stock Option Vesting Calculator

Mon, 09 Nov 2009 15:42 GMT

Simeon Simeonov, the Founder & CEO of FastIgnite, has put together a nice Stock Option Vesting Calculator. It works just fine for stock vesting as well.

Sim is a dynamite entrepreneur who has also done a tour of duty as a VC so he knows the drill well. In the email he sent me about it he said it was inspired to put it together after reading several of the posts in the Term Sheet Series that Jason Mendelson and I wrote several years ago.

Sim – next up – how about a simple liquidation preference and exit analysis calculator?

Readings

Mon, 09 Nov 2009 15:18 GMT

The great securities delisting machine: A wake-up call for America (Grant Thornton)
Life After the End of History (NYT)
Second Quarter 2009 Cambridge Associates Private Equity and Venture Capital Benchmark Commentaries (PE Hub)
Biased News Has Delayed Impact (M-M)
For “new economics,” look to old economists (Reuters)
Facts About the Length of H.R. 3962, the Affordable Health Care for America Act (CLS)
Rick Bookstaber to the SEC (Bookstaber)
Studies 'overstate species risks' (BBC)
AGRITECHNICA 2009 - The World’s largest Exhibition of agricultural Machinery (Source)

Putting entrepreneurs first

Mon, 09 Nov 2009 14:12 GMT

Shout-out to Sequoia for featuring Omar Hamoui on their home page today (he’s the CEO of AdMob which was acquired by Google today for $750M). Well done!

Monetizing Twitter -- Bring on the Ads!

Mon, 09 Nov 2009 10:00 GMT

True, no one asked me. But here's my two cents anyway. Twitter should open up its platform to advertising. That's right, advertising. Forget all this hoo-ha over selling data or paid business accounts or dashboards . . . Twitter has everything it needs to build a wildly-successful ad driven business model. It should get on with it.

The two hallmarks of successful advertising-driven businesses are 1) massive scale and 2) abundant context. How has MySpace built such strong advertising revenue atop their social media platform? Huge scale and a ton of context. Same is true of Facebook and Yahoo and Six Apart. And, of course, the mother of all ad supported businesses -- Google -- is all about scale and context.

Twitter's scale has been well documented. Huge and growing. Does the fact that much of the Twitter traffic exists on third party clients make in-stream advertising less practicable? I don't think so. I think it actually solves the problem of how Twitter will be able to monetize its off-platform traffic. Third party apps can choose to present ads along with the rest of the stream or pay a fee to receive advertisement-free data.

As with each of the social media platforms listed above, Twitter's unique experience will require a unique ad format. In this instance, I think the format is pretty easy to envision. Twitter should constrain advertisements on its system to 140 characters or fewer. By doing so, Twitter ads will be pretty spartan. But if Google ads have taught us anything, it is clear that a relatively small number of characters and a link are more that sufficient to engage a consumer. Moreover, by matching the ad format to that of a tweet, the ads will not only fit well with the consumption behavior on Twitter.com, it will also work well with the many third party experiences enabled by Twitter's API. Twitter need only create some visual distinction between tweets and ads and it can very simply insert the ads in the tween stream, as can Tweet Deck and Siesmic and Tweety and StockTweets . . . .

What about context on Twitter? Huge and growing. The very data others have suggested Twitter should sell to third parties is invaluable to create the necessary context for a successful advertising model. Not only will Twitter know the things about which any given user is tweeting, it will also know who that user is following and the things about which they are tweeting. That's a huge amount of context for advertisers. I'm guessing Toyota would love to advertise to an individual who tweets about shopping for a new Honda Hybrid. And they are likely just as eager to advertise to an individual who follows numerous eco-tweeters. It is easy enough to envision a self-serve platform that allows a huge range of advertisers to bid for context and get great results.

The best thing about context-driven advertisements is that, when well-executed, they can be viewed by consumers as content, not just advertising. Look at Google's ads as case in point. It has been a long time since I've heard even a hint of objection to advertisements on Google. Why? Because the ads are often more compelling than the organic search results they appear beside. True, Twitter ads won't be a response to a query like in Google. But there should be more than enough signal for businesses to get great results advertising on the platform.

Finally, I think that users would embrace Twitter ads. We all recognize that Twitter needs a business model and we all want a long-term sustainable platform. If executed well (watch out for those lurking privacy trolls!), Twitter ads would become a natural part of the Twitter experience and add value, not take away from it. Better yet, we could all stop speculating about Twitter's business model and move on to more interesting discussions about things like the transformative impact of the real time web. So do us a favor Twitter and start serving ads already. I, for one, look forward to it.

The long tail of VC blogs

Mon, 09 Nov 2009 10:00 GMT

Many VCs use blogs to share advice, wisdom, and other thoughts. A few of these blogs capture most of our attention. The rest slog it out in the long tail.

This chart shows the Google Reader subscribers of 131 VC blogs (click it to zoom in). The underlying data is from Larry Cheng's VC Blog Directory.

I'm not sure Guy Kawasaki (the #1 blog) is still a VC but I left him on the list because he's a nice guy who answers my emails. Also, Venture Hacks would be #4 on the list, if we were on the list.

I'll make a similar chart for VCs on Twitter if someone can extract the follower numbers from this list of VCs on Twitter.

Startup Boy is back

Mon, 09 Nov 2009 10:00 GMT

Naval's personal blog, Startup Boy, is back. His posts, like The 80-hour Myth and VC Bundling, were an inspiration to me when I first moved to Silicon Valley. His latest post, The returns to entrepreneurship, is a return to form:

“I was at dinner the other night with a group of entrepreneurs. One told the story of a 27-year-old whiz kid whose company will likely exit for $500M – $1B – the business now being less than two years old. You can imagine the effect that this had on the brilliant, hardworking 35+ entrepreneurs in the group, who have had their share of hits, but not at that magnitude and not that quickly.

“These stories are getting more commonplace. It seems that the entrepreneurs who “hit” these days are doing it more quickly, making more money, and doing it at a younger age. Back in the 70s, it took a decade plus to build a company and $10M, even in today’s dollars, was a big victory for an individual. Up until the late 90s dot-com boom, even though these stories existed, they were less common and took longer.

“The storyteller explained that this 27-year-old is more brilliant and more hard-working than the previous entrepreneurs he’s seen.

“That can’t be it. There are only so many hours in the day, and the entrepreneurs of yesteryear worked just as hard as the entrepreneurs of today. And the ones who came before were just as brilliant. Human intelligence has not evolved that dramatically in 10-20 years.

“Rather, I posit that the amount of leverage available to a modern Internet entrepreneur is far, far greater than was available to entrepreneurs of previous generations. The number of entrants has dramatically increased as well. The overall hit rate might be lower, but the ones who win, win bigger and faster thanks to the leverage.”

Read the rest of The returns to entrepreneurship for the exciting conclusion.

The New USV.com Launches In Beta

Mon, 09 Nov 2009 06:02 GMT

Taking a cue from the advice we give to companies all the time, we've just launched the new USV.com in beta form last night. It still has a few kinks to get out, but it is mostly there.

When Brad and I first thought about our firm's website back in 2004, we quickly decided it should be a blog and that is what it has always been and it is what it will always be.

Our investment thesis is not a static thing, it is a living and evolving thesis, and the only way we know how to express it is in a series of blog posts in reverse chronological order. As we've added to the firm, our website has grown to include new voices like our partner Albert and also Andrew and Eric. It was time to refresh the look and feel and organization, but we've not changed the goal of the website.

There are three things I'd like to highlight. The first is our "focus" page. On this page we've simply collected all of the blog posts that we've written over the years on usv.com that are about our investment strategy. If you read all of the posts on the focus page, you'll understand what we invest in and why. And as our focus evolves, you'll see new posts explaining how we are evolving and why on this page.

The second thing is the portfolio company page. Each portfolio company has an entire page on usv.com and that page is dynamic. Here is the Boxee page on usv.com. It has a short explanation of the company's business and then links to recent posts from the company's blog, along with photos, videos, and tweets from the company. This page is powered by a slick tool from Magnify. We appreciate their help in making these pages come to life. I think they are terrific.

And I'd also like to highlight the team member page. It is also powered by Magnify and includes a similar set of content as the portfolio company page. Here is my page on usv.com.

The new look is the work of a talented web designer named Phoebe Espiritu. In addition to her considerable talents, she is terrific to work with. The project was managed by Eric Friedman and I'd like to thank him for all of his effort on it.

I'm very pleased with how this came out. Our business and portfolio is changing rapidly and we've now got a website that changes in real time with it. That's the way it should be.

Unsettled in Washington DC

Sun, 08 Nov 2009 15:28 GMT

I’ve felt unsettled since we landed in DC on Saturday. During my run this afternoon on the Washington Mall, I decided to attribute some of it to the redeye I took from Seattle mid-week and some of it to Washington DC itself.

Let’s start with the redeye. I’m 43. When I was in my 20’s and early 30’s, I regularly took redeye's (often as frequently as once a week). Five hours of sleep on the plane due to my superpower of being able to sleep from wheels up to wheels down, a quick shower, an extra long toothbrushing session, and I was good for a full day. Wednesday night I took JetBlue from Seattle to Boston. Five solid hours of sleep followed by a ride to my hotel. I brushed my teeth and then crawled into bed at 8am for a little more sleep. I woke up at 1pm, had a meeting, and then went back to sleep until 5pm. After dinner I went to sleep around 10 and slept until 7. I felt like shit when I woke up, had a full day, and crashed again at 10pm Friday night. It’s Sunday and I finally don’t feel tired. Yesterday, I sent my assistant Kelly a note that said “Don’t ever let me fly on a redeye again.”

Yesterday was a pretty day in DC – a little cold, but sunny. Today has been beautiful – in the 60s and sunny. Amy and I are here mostly to go to the Supreme Court tomorrow and hear the oral arguments on re Bilski. Yesterday was a mellow walk around day with dinner with college friends at Vidalia (mildly ironic since I’m allergic to onions). Today, we went to the National Gallery and the National Museum of Natural History – if you are in DC and you are an art lover you should absolutely make time to see the Meyerhoff Collection – it is amazing. We also got lucky and saw Leo Villareal’s Multiverse light sculpture before it was removed. All I remember from the National Museum of Natural History is the passel of children and the dinosaurs.

Now for the other half of what is making me unsettled. As I ran on the Washington Mall I had chunks of time with the Washington Monument and Lincoln Memorial. Both invoke deep American pride – I find that the best description of the emotion I felt while taking a short break from my run and staring up at Abe Lincoln. However, something just felt wrong. DC feels too busy, the restaurants are too full, there is too much traffic, and just too much stuff. I remembered thinking about the office buildings between Dulles Airport and DC – virtually all of them were filled with companies that generate massive amounts of money from the federal government. Several of the buildings undergoing renovation (such as the Hoover Building) had big pictures of Barak Obama on the signs talking about the scope of the renovations. I started comparing DC to several of the other capital cities, such as London and Paris, and realized that DC is all about the business of government, whereas the other capitals that I’m familiar with are much broader in scope.

Between the damage I did to myself with the redeye and my sense of being overwhelmed by “the business of government”, I think I need to go hide in the mountains for a few days.

Weekend Reading: Goldman, Gold, Vegas, Sex, and Commercial Real Estate

Sun, 08 Nov 2009 13:00 GMT

A few links from my weekly Weekend Reading column:

Just doing God’s work: Inside Lloyd Blankfein’s Goldman Sachs (Times)
Inside the Global Frenzy for Gold (NYT)
Las Vegas construction nears standstill (Las Vegas Sun)
The Technology Behind the Madoff Scam (IDD)
Bank of England says financiers are fuelling an economic 'doom loop' (Telegraph)
U.S. oil reserves down by record amount in 2008 (EIA)
Why this commercial real estate bust is different (BusinessWeek)
First iPhone, now Droid. Who needs Windows? (CNET)
Sex toys sell, even in a recession (S.F. Chronicle)

Add-on-Con09

Sun, 08 Nov 2009 10:14 GMT

My friends at OneRiot and Adaptive Blue are organizing the second annual Add-on-Con. It is being held at the Computer History Museum in Mountain View, CA on Dec 11. If you are involved in a company that makes browser add-ons of any sort, this conference is for you.

The conference is a full day of discussions about the browser and browser add-on market. The closing keynote is on the future of the web browser and is moderated by Douglas Crockford and features representatives from Microsoft, Mozilla and Google.

In addition, if you are a new company and want to get exposure to the community and the browser vendors, Add-on-Con09 has a Sandbox program. Companies that are accepted into the Sandbox receive promotion on the Add-on-Con website, $75 off the event cost of the event (50% discount), and the ability to demo their product in front of Browser representatives and conference attendees the morning of the conference.

If you aren’t a Sandbox company, you can still get a discount by using the discount code Bfeldaddoncon09 which takes $50 off of the $150 registration fee.

The AVC Reader Census: A Day Later

Sun, 08 Nov 2009 06:45 GMT

Almost 750 people took the AVC Reader Census/Survey in the past 24 hours. That's a decent sample size. So if you want to know what the readership of this blog looks like, go here.

I'm sorry to say that it is overwhelmingly male, 92% of the respondents are men. I'm also disappointed that 75% of the respondents live in North America. Other than those statistics which I am hell bent to change, I am pretty pleased with the composition of this audience. We are bloggers, twitterers, early adopters, travelers, and people who want to make their mark.

If you haven't gotten around to taking the survey, you can do so right in this post.

Checking Gold’s Hotness

Sun, 08 Nov 2009 00:40 GMT

A daily heatmap of gold performance – as proxied by GLD – over the last four years. Remarkable change in behavior since 2005.

Credit Default Swaps: Proudly the Tool of the Devil Again

Sat, 07 Nov 2009 14:00 GMT

Lots of people are staking out positions around (and mostly against) investor David Einhorn’s FT-reported anti-CDS musings in his latest investor letter. I agree with David in many ways – and his writing is as fun as usual – but I don’t accept all of David’s reasons (although I agree the ability to so directly influence the path to default can be problematic).

Two of my main CDS issues (which are fixable):

They are congenitally under-reserved , which creates asymmetric risks.
It is possible to write swaps (far) exceeding the notional value of the thing for which you are writing all the swaps. That’s … not good, like being able to create total policies far exceeding the value of a house, thus making it urgent to burn the house down as soon as possible.

Anyway, here is Einhorn’s original, followed by two takes on opposite sides:

Einhorn against credit default swaps (FT)
Ehrenberg: Deal with it Dave (IA)
Yves: First, let’s kill all the credit default swaps (NC)

Feel free to find yet another position to stake out in comments.

Protectionism and the Chinese Box of the Renminbi

Sat, 07 Nov 2009 12:24 GMT

I have a commentary piece on Marketplace this coming week arguing that the U.S. dollar must be allowed by Asian central banks to depreciate against more currencies than the Euro. All of the longstanding trade and flow imbalances cannot be funneled through a single currency pair without creating even more grotesque trade & debt distortions.

And, as Michael Pettis points out, if the exchange shift cannot be made to happen to escape the Chinese box of a renminbi loose peg, the imbalances will end up in political hands with worrying protectionist implications:

In that sense the refusal of Asian central banks to permit the needed appreciation of their currencies against the dollar may end up having the same impact on the adjustment process of the overvalued currencies. The 1930s seemed to show, according to the authors, that when their currencies could not adjust, countries became protectionist. So if the overvalued dollar cannot adjust except against the euro, and if the already overvalued euro has to bear the brunt of any further adjustment, will American and European politicians be forced into the “second-best” option of trade protection? No prizes for guessing what I think.

More here.

QOTD: John McCain’s 15% U.S. GDP Cut

Fri, 06 Nov 2009 20:54 GMT

No idea how I missed this wonderfully inflammatory Paul Samuelson quote from a few weeks back, but it’s a contentious keeper:

Had John McCain won [the 2008 election], the present G.D.P. in the United States would have been even lower than it is now by more than 15 percent.

More here.

Who Files for Bankruptcies?

Fri, 06 Nov 2009 20:49 GMT

Books of the Week

Fri, 06 Nov 2009 15:23 GMT

Some books I’ve been reading during my travels this week and that others might like – an eclectic list.

Scroogenomics. The name more or less says it, but why you shouldn’t buy people presents for the holidays.
The Great Cities in History. A lovely series of essays and meditation on what made great cities great through history.
Boulevard of Broken Dreams. Josh Lerner’s new book on how government and venture capital should be kept far apart.
Lords of Finance. I got stalled half-way through this many months ago, but finally finished it off this week. Probably my favorite book of 2009, and a lucid history of how central bankers nearly broke the world a hundred years ago.

Readings: Wind, Tools, Complexity, and Ship-Tracking

Fri, 06 Nov 2009 13:15 GMT

Denmark a global leader in wind power (FP)
Companies lining up for IPOs (E&Y)
Live Ships Map - AIS - Vessel Traffic and Positions (MarineTraffic)
Prezi - The zooming presentation editor (Prezi)
18 truths: The long fail of complexity (ZDNet)

Friday follies

Fri, 06 Nov 2009 09:00 GMT

Some random links and observations on a Friday:

Apparently not every reader picked up on the fact that my last post was tongue-in-cheek. Guess you had to be there. Fortunately, Scott was in fact there...

David Gold wrote recently on some of the same issues, wondering why solar and the like have gotten so much attention from VCs while technologies like geothermal have gotten much less attention. His answer is that it's in large part "much of the bias has to do with the fact that not many VCs have strong networks of geologists, drilling technologists, heat pump engineers and steam turbine power generation experts to build great geothermal companies". I'm directionally in alignment with David's take -- obviously I agree that VCs need to broaden their horizons into other sectors of cleantech, and acknowledge it's easier said than done when it requires learning new markets, new technologies, etc. However, I'm not sure geothermal is the best example for this. VCs going into solar and biofuels are following the few available examples of good exits in the sector, geothermal plays are often challenged in VC eyes in terms of their capital intensity and lack of opportunities for new intellectual property, and it's not yet a fast-adopting market. Same challenges for VCs looking into other sectors like ocean power, grid-scale storage, etc. Like it or not, not all attractive market opportunities are a good fit for the venture capital model.

Not a lot of optimism out there right now about either the passage of a cap-and-trade bill, or that it would have much of a positive impact on individual companies.

On the other hand, Deutsche Bank Asset Management is advising their clients to put their money into investments outside the U.S. in part because all the on-again, off-again support for green technologies is creating a lot of uncertainty.

Valuation and Option Pool

Fri, 06 Nov 2009 05:31 GMT

One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, "it's just another way to lower the price".

I'll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I'll explain.

But first, let me lay out a few things for those who aren't well versed in these matters. The pre-money valuation is the value of the company before the money comes in. Let's say we call it $4mm. And let's say the financing is $1mm. Then the post-money valuation is $5mm and the $1mm round is 20% dilutive ($1mm/$5mm).

But to the entrepreneur it might be a lot more dilutive due to the inclusion of the option pool in the pre-money valuation. Let's say that the VC's term sheet says that a 15% "fully diluted post money" option pool needs to be in the pre-money valuation. What that means is that the investor wants 15% of the company, after the financing is closed, to be in an option pool that has not been granted to anyone.

In the case of the $5mm post money valuation, that means there needs to be $750,000 worth of options in the pre-money valuation. If the pre-money valuation is $4mm, then that means the true pre-money valuation to the entreprenuer is $3.25mm. And therein lies Mark's critique that the option pool is just another way to lower the price.

I am sure I lost a few of you on all of that math. If you want to drill down on it, please leave a comment and we'll help you figure this out. It is very important you understand all of this if you are or want to be an entrepreneur who raises venture capital.

The bottom line is the deal I described leaves the entrepreneur and his/her shareholders with 65% of the company after the financing, the VC investor will own 20%, and there will be an option pool representing 15% of the company that has not been issued yet. The $1mm financing was not 20% dilutive, it was 35% dilutive.

So it is not surprising that entrepreneurs hate this provision and fight about it every time. And like most terms, VCs have been abusing it for years by asking for excessive option pools making the provision hated more than it needs to be.

The first point I'll make is that VCs should be upfront about this provision and the fact that it is simply about price. In the example above, I'd be happy to pay $3.25mm pre-money with no option pool. Or I'll pay $4mm pre-money with one. They are the same thing to me. What an entrepreneur needs to do is find out what the market price for their company is with and without an option pool in the number. Once they do that, the negotiation over this point is a lot less contentious.

The second point I'll make is that the option pool request needs to be reasonable and based on some kind of budget. I generally ask the entrepreneur to put enough options into the "pre-money pool" to fund the hiring and retention needs of the company until the next financing. My thinking on this is that I don't want to get diluted between financings. So I like to see a headcount based hiring plan with expected options against each hire combined with a retention plan for all current employees who will need additional option grants.

In most of the early stage financings I've done in the past few years this work on the option pool has shown a need for around 10% in unissued options. I've seen it as big as 15% but that is rare. I've also seen it as low as 5%, but that is even more rare. But the point is this; don't guess or negotiate this number. Do the work, figure it out, and put it in the pre-money and then negotiate price.

I'll wrap with a true story about this provision. When Mark and I were negotiating the first round of financing for Zynga, we got into a real tussle about this provision. He did not want an option pool in the pre-money valuation. I did. Once we agreed that it was just a fight about price, the conversation got easier. I got him to give me an estimate of the pool he would need. We added it to the valuation we had agreed to. He got an increase in price, I got an option pool. And I got one of the best investments I've ever made.

Why is the Boston Marathon More Volatile Than the NYC Marathon?

Thu, 05 Nov 2009 17:26 GMT

As readers know, I’m fascinated by volatility and our response to it. In capital markets a little volatility is important, and a lot is dangerous – it can result in things flying apart, with unpleasant financial consequences.

In sports it works the other way around. Too little volatility in results and sports is boring. A little makes things more interesting; and a lot can make something compulsively watchable.

I was thinking of this during the recent New York marathon. Yes, an American won, which was a nice change, but the other thing that happened was that result unpredictability continued to fall. The rolling ten-year standard deviation of winning times has been declining for some time, as the following figure shows:

Now, here is the same figure for the Boston Marathon (over a slightly longer period).

The Boston Marathon has consistently had higher volatility in its winning times than the Boston Marathon. Not only that, there has been a recent uptick in the results volatility, with the standard deviation trending up ward since 2004 or so.

We should expect declining standard deviations over time in these events, with the best athletes only differentiated by small-ish amounts of time. And that is, more or less, what is happening in the New York Marathon, but such is not the case – or at least hasn’t recently been the case – in the Boston Marathon.

Why is the Boston Marathon different? Good question. Before positing a few – hillier course, more Kenyans, etc. -- I’ll throw it open. Thoughts?

Welcome Reid Hoffman to the VC Side of the Table

Thu, 05 Nov 2009 16:40 GMT

First came the announcement earlier in the year that Marc Andreessen was joining the ranks of "capital" -- a welcomed defection from "labor." And now my friend Reid Hoffman has jumped into the fray as well, joining Greylock Partners in their new fund (although he is not quite abandoning "labor" -- for the time being he will continue on as Executive Chairman of LinkedIn). Having two superstars like Marc and Reid join the venture business is excellent news at a time when the press is gleefully touting the demise of our profession. While the venture business is, no doubt, under serious pressure these days, Marc and Reid have rightfully determined that there will always be room for brilliant, thoughtful, long-term investors who see the immense value of innovation. There is no question that Marc and Reid both fit that profile and will have long, successful venture careers.

I have known Reid Hoffman for a long time and have greatly enjoyed the time I have spent with him. Reid has fantastic instincts, is a generous soul and is an intellectual powerhouse. But the thing that I think separates Reid from most of those around him is his thoughtfulness. Reid does not shoot from the hip. Ask him a question and he doesn't immediately launch into an answer. He cocks his head, thinks, and -- only when he feels he has an answer worth delivering -- shares his thoughts on the matter. His thoughtfulness as an entrepreneur, an investor, a board member (I have the pleasure of serving on the Six Apart board with him), harken back to his roots as an Oxford-trained philosopher. Reid's opinions are rooted in history and reason. Things need to "make sense" in the broadest sense of the term for Reid to embrace them. And as a result, he shares smart thoughts, builds smart businesses and makes smart investments.

When word of Reid joining the venture business was first announced, a friend of mine lamented the fact that Reid was now the "competition," but I have to say I really don't see it that way. I can't think of a single wildly-successful, venture-backed company that only had one venture firm as an investor (I guess with the exception of Microsoft, in which my partner Dave was the only professional investor). Company building is a team sport and now, more than ever, who's on your team really matters. That obviously includes the team of entrepreneurs who are building the company. But it also includes the team of investors who are supporting that team of entrepreneurs. So I don't view the arrival of Reid and Marc as greater competition in the venture business. I view it as the arrival of fantastic new collaborators with whom I look forward to working. The more smart people around the table, the better. Welcome, Reid and Marc! We're thrilled to have you on our side of the table.

Great Meetup Last Night

Thu, 05 Nov 2009 06:21 GMT

About a hundred readers of this blog gathered last night in the cafeteria of Washington Irving High School just off of Union Square in Manhattan to meet each other and celebrate the generosity of this community in the recent Donors Choose Bloggers Challenge.

It was a great moment for me. I got to meet many readers who I know by name but not in person. Putting a face to a name is a wonderful thing. I also got to meet Sarah Bunting, whose blog, Tomato Nation, raised $315,000 for Donors Choose in October. Talk about "blog stars". I've got a lot to learn from Sarah.

And I got to meet a bunch of teachers. One woman teaches middle schoolers in the Bronx with special needs. A couple others teach music in a middle school in southern brooklyn. A third teaches pre-K in the East Village. I met several others as well.

I am telling you that these people (all women) are doing god's work. And it made my day to meet them and know that we all did something to help them.

It may have been the first meetup I've done with all of you, but it won't be the last. Thanks to everyone who showed up. I know we were competing with the Yankees but I got home in time to see them put the Phils away and I suspect most everyone else did too.

QOTD: Lawyered Up

Wed, 04 Nov 2009 20:42 GMT

For a substantial portion of the American business and professional class, a book entitled "Life Without Lawyers" must surely conjure some of the same feelings evoked in faithful readers of the Harlequin romances, a sort of vicarious fantasy filled by the joy of liberation from burdens, strictures, and anxieties that have come to define quotidian existence. Such people are, in my experience, called clients.

Source: Charles N.W. Keckler, “Lawyered Up,” SSRN eLibrary (September 2009), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1467183.

More Ws in the L Column?

Wed, 04 Nov 2009 18:22 GMT

Looks another W Hotel may be going into the L(oss) column. Joining the San Diego W, which defaulted on its loans this summer, may soon be the Manhattan Union Square W.

Debt backed by the W New York Union Square hotel in Manhattan, named by Conde Nast Traveler as one of the world’s top 500 hotels in 2005, may be at risk of going into default after the travel slump forced it to cut room rates.

The $115 million loan backed by the property, a landmark Beaux Arts tower at Park Avenue South and 17th Street, has a moderate risk of default “given the asset’s weak financial performance and declining hotel fundamentals nationally,” credit rating firm Realpoint LLC said in a report on Oct. 28.

Apparently being hip and expensive and debt-ridden is bad in a marketplace where debt is hard to get and people are cutting back. Shocker.

More here.

Conventional wisdom and cleantech venture capital

Wed, 04 Nov 2009 16:02 GMT

I had the pleasure of speaking as part of a panel this morning at the Mid-Atlantic Capital Alliance's conference in Philadelphia. Here's a taste of what I told them:

1. Cleantech only happens in Silicon Valley and MIT. If you look at the dollars flowing into cleantech from venture capitalists, and read the sunday NYT, that's the natural conclusion you would draw. So my apologies to everyone in Philly (or the rest of the country outside of northern California and Boston), there's clearly very little good entrepreneurial activity in cleantech in your region.

2. Cleantech is really only solar, "smart grid", biofuels and electric vehicles.

3. Cleantech is really only about capital intensive business models.

4. Cleantech startups are only for whiz-bang PhD researchers who have earth-shattering innovations. Business models like energy efficiency services, and other implementation efforts, need not apply.

5. The only good cleantech startups are those backed by VCs. The fact that only 1% of startups get their initial capital from VCs simply means that 99% of new businesses are bad ideas.

I was supposed to describe what I like about being an investor in this market right now. And I told them that what I like about this market is that many people actually do believe the above points.

Readings

Wed, 04 Nov 2009 16:01 GMT

Chaotic evolution defines the market economy (FT)
Bloomberg.com may charge up to $1,000 a year for some web content (PaidContent)
Spotlight on eastern European currencies and gold (Mish)

Front-Running in Domain Bids

Wed, 04 Nov 2009 14:20 GMT

I wonder why Wall Street didn’t think of this first? Front-running taken to the domain name market:

Recently, SnapNames discovered that an employee had set up an account on the SnapNames system under a false name and, under this name, bid in SnapNames auctions. This is a clear violation of our internal policy and was not approved by the company. We deeply regret that this conduct has impacted our customers.

Extent of impact

This conduct affected a small percentage of SnapNames auctions:

* Bidding affected approximately five percent of total SnapNames auctions since 2005, most of which occurred between 2005 and 2007.
* The incremental revenue from the bidding represented approximately one percent of SnapNames’ auction revenue since 2005.

No matter the level of impact, SnapNames takes this matter extremely seriously. When the matter was discovered, the company immediately closed the account in question and began a thorough investigation. The employee has also been dismissed from the company.

SnapNames further discovered that, on certain recent and limited occasions, when the employee won an auction, the employee secretly arranged to refund from SnapNames to the fictitious account a portion of the winning bid amount.

Best of the startup blogs

Wed, 04 Nov 2009 10:31 GMT

We read the startup blogs so you don't have to.

Jason Cohen explains how to hire employee #1 (practical, tested advice). Fred Wilson explains how to make an email intro without making yourself look bad (this is how I do it). Bill Gurley explains why Google will pay mobile device companies to use their OS. Fred Destin explains why, much of the time, he doesn't know why he passes on investments (finally someone admits it — I look for reasons to say yes, not reasons to say no). Chris Dixon explains why he's reassured when Sequoia invests in a Y Combinator company. Fake Steve Jobs is receiving critical advice from Vladimir Putin (from the humor department).

Enjoy the knowledge, understanding, and wisdom.

The Ether and the Scrum

Wed, 04 Nov 2009 00:49 GMT

Every day I get emails from entrepreneurs that make me think. In this case, it’s from a friend who is on the fundraising trail. He started off the email with “I felt compelled to share this with you as someone who would appreciate it.” I thought it was dynamite and asked him if I could share it since – in its unedited form – it captured so nicely what I expect many entrepreneurs feel. And, just as importantly, it’s something I hope VC’s realize that entrepreneurs – even very experienced ones – feel.

I am fortunate to have successfully raised venture capital from top tier investors before.

I have been a failed and successful CEO and know the difference.

I have earned my CEO stripes by being a successful operator in startups and big organizations.

I can lead, problem solve and think strategically. I am technically adept, I can sell. I work hard.

Yet, as I set out to raise money, I still have a great feeling of unease of the result. I guess I have humility as well.

I’ve noticed, or maybe more accurately, I’ve become aware of the ether that is between a venture investor and entrepreneur. In the ether, all things that can make or break a deal exist: idea, market risk, technical risk, team competence, economy, deal flow, competition, VC mood that day, entrepreneur pitch that day, first impression, gut feel, blog post for or against the idea read that morning, breakfast/no-breakfast, bias for or against, smarts or not-so-smarts of the VC and entrepreneur.

In my pitch experience, VCs I have been convinced hated me and my company after my pitch have invested. VCs I am sure as shit loved me and my company after my pitch blew me off. I have also been right that VCs I thought hated me and my company told me they in fact did; and, those who loved me and my company did in fact invest. It’s been a crap shoot at best.

Assuming there is something of merit in the idea, market, team and company, somewhere in the ether is a term sheet and a kick to the curb. Coalescing just the right combination of elements in the ether at the right time has proven to be more art than science. Anti-portfolios highlight how successful companies didn’t get it coalesced with one investor but did with another.

If I get it right and a financing comes together for my new company, I hope to have learned something that tips the scales of randomness in the scrum.

The “real” America

Tue, 03 Nov 2009 21:34 GMT

I’ve generally avoided political issues on this blog, but this isn’t something I can keep my mouth shut on.

Yesterday Meb Keflezighi became the first American to win the New York City Marathon in 27 years. Born in Eritrea on the east coast of Africa, Keflezighi moved to the US when he as 12 (more than 20 years ago), is an American citizen and has raced for the US Olympic team.

Still, there are some who are calling his achievement diminished because he’s not “technically” an American by virtue of having been born outside of the United States – chief among them Darren Rovell of CNBC. Rovell writes:

It's a stunning headline: American Wins Men's NYC Marathon For First Time Since '82. Unfortunately, it's not as good as it sounds. Meb Keflezighi, who won yesterday in New York, is technically American by virtue of him becoming a citizen in 1998, but the fact that he's not American-born takes away from the magnitude of the achievement the headline implies.

This is appalling (not to mention racist). I know I’m particularly sensitive to this kind of bigotry because two of our three children were born and lived for a time outside of the United States (not that far from where Keflezighi was). They are not any less American than our oldest daughter who was born in Colorado. It’s amazing (and sad) to me that people really think this way. By Rovell’s definition many of America’s Founding Fathers weren’t “technically American”.

This is a nation that was founded by immigrants and built on the promise of equal opportunity for all those that come to this country. The vast majority of Americans are only a few generations from their immigrant pasts. It’s unbelievably disturbing that we’re losing sight of what’s made our country great. From the basics of our immigration policy to how we handle foreign-born workers looking for jobs in America we’re increasingly becoming a nation of xenophobes.

Darren Rovell probably doesn’t think of himself as a racist or a xenophobe – and therein lies a large part of the problem.

What Makes Boston's Start-Up Scene Special?

Tue, 03 Nov 2009 20:16 GMT

(follow me on Twitter at www.twitter.com/bussgang)

A few weeks ago, Fred Wilson posted a presentation he delivered on What Makes the NYC Start-Up Scene Special.

I was inspired to deliver a similar presentation today to a group of Harvard Business School students who are interested in entrepreneurship in Boston. There's been alot of chatter in the community about a start-up renaissance in Boston. Don Dodge of Microsoft had a great post listing out all the amazing start-up resources in the Boston community that's worth reviewing as well.

I'll post the video as well in the coming days so folks can hear the voice over. Yahoo's ex-president (and fellow HBS EIR) Susan Decker was there to serve as a good foil for my Boston vs. Silicon Valley quips.

What Makes the Boston Start-Up Scene Special?

View more presentations from bussgang.

Lean startups aren’t Cheap Startups

Tue, 03 Nov 2009 10:03 GMT

This post is by Steve Blank, a serial entrepreneur with eight startups under his belt, including two large craters (Rocket Science and Ardent), one dot.com bubble home run (E.piphany), and several base hits. Steve is also the creator of customer development and this is one of his best posts on the topic. If you like it, check out his blog and tweets @sgblank. – Nivi

At an entrepreneur's panel last week, questions from the audience made me realize that the phrase “Lean Startup” was being confused with “Cheap Startup.”

For those of you who have been following the discussion, a Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source.

Lean Startups aren’t Cheap Startups

A Lean Startup is not about the total amount of money you may spend over the life of your startup. It is about when in the life of your company you do the spending.

Over its lifetime, a Lean Startup may spend less money than a traditional startup. It may end up spending the same amount of money as a traditional startup. And I can even imagine cases where it might burn more cash than a traditional startup.

Lets see why.

The Price of Mistakes are Inversely Proportional to Available Capital

In times of abundant venture capital if you miss your revenue plan, additional funding from your investors is usually available to cover your mistakes — i.e. you get “do-overs” or iterations without onerous penalties (assuming your investors still believe in the technology and vision.) In times when venture capital is hard to get, investors extract high costs for failure (down-rounds, cram downs, new management teams, shut down the company).

The key contributors to an out-of-control burn rate are 1) hiring a sales force too early, 2) turning on the demand creation activities too early, 3) developing something other than the minimum feature set for first customer ship. Sales people cost money, and when they’re not bringing in revenue, their wandering in the woods is time consuming, cash-draining and demoralizing. Marketing demand creation programs (Search Engine Marketing, Public Relations, Advertising, Lead Generation, Trade Shows, etc.) are all expensive and potentially fatal distractions if done before you have found product/market fit and a repeatable sales model. And most startup code and features end up on the floor as customers never really wanted them.

Therefore, when money is hard to come by, entrepreneurs (and their investors) look for ways to reduce cash burn rate and increase the chance of finding product/market fit before they waste a bunch of money. The Customer Development process (and the Lean Startup) is one way to do that.

Repeatable and Scalable Sales Model

In Customer Development your goal is not to avoid spending money but to preserve your cash as you search for a repeatable and scalable sales model and then spend like there is no tomorrow when you find one.

This is the most important sentence in this post and worth deconstructing.

Preserve your cash: When you have unlimited cash (internet bubbles, frothy venture climate) you can iterate on your mistakes by burning more dollars. When money is tight, when there aren’t dollars to redo mistakes, you look for processes that allow you to minimize waste. The Customer Development process says preserve your cash by not hiring anyone in sales and marketing until the founders turn hypotheses into facts and you have found product/market fit.

As you search: Customer Development observes that when you start your company, all you and your business plan have are hypotheses, not facts — and that the founders are the ones who need to get out of the building to turn these hypotheses into customer data. This “get out of the building” activity is the Customer Discovery step of the Customer Development Model:

Repeatable: Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.

Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?

Sales model: A sales model answers the basic questions involved in selling your product: “Is this a revenue play or a freemium model going for users? Something else? Who’s the customer? Who influences a sale? Who recommends a sale? Who is the decision maker? Who is the economic buyer? Where is the budget for purchasing the type of product you’re selling? What’s the customer acquisition cost? What’s the lead and/or traffic generation strategy? How long does an average sale take from beginning to end? Etc.” Finding out whether you have a repeatable, scalable sales model is the Customer Validation step of Customer Development. This is the most important phase in customer development. Have you learned how to sell your product to a target customer? Can you do this without running out of money?

Scale like there is no tomorrow: The goal of an investor-backed startup is not to build a lifestyle business. The goal is to reach venture-scale (~10x return on investment.) When you and your board agree you’ve found a repeatable and scalable sales model (i.e. have product/market fit) then you invest the dollars to create end user demand and drive those customers into your sales channel.

If you confuse Lean with Cheap when you do find a repeatable and scalable sales model, you will starve your company for resources needed to scale. Customer Development (and Lean) is about continuous customer contact/iteration to find the right time for execution. (Ed: In other words, eliminate generic startup risks in the right order.)

The Customer Development Venture Pitch

At this point I often hear entrepreneurs say, “We don’t have the money to scale. We’ve been running on small investments from friends and family or angels. How do we raise the big bucks?”

How to raise real money with a Customer Development presentation in the next post on steveblank.com.

The Double Opt-In Introduction

Tue, 03 Nov 2009 05:55 GMT

I'm sure everyone out there gets email intros. Someone who knows you sends you and someone you don't know an email suggesting you meet.

I send emails like that a lot. I might send a half a dozen or more every day.

I get even more emails like that. Sometimes dozens a day.

And I'd like to propose some email intro etiquette which I follow almost religiously myself:

When introducing two people who don't know each other, ask each of them to opt-in to the introduction before making it.

Last night I got talking about this with some friends who also get a lot of email intros. All of us get email intros that we don't want to follow up on. Some just ignore them. Others reply with something like "I'm really busy now and will get back to you in a month." And then never do.

I don't really like either of those two solutions and I also don't like responding to an introduction email with something like "I'm sorry but I don't really want to meet you".

So I often take meetings in these situations that I don't really want to take. And that means I'm less available to meet with people I do want to meet.

My friends said that I should simply keep track of who is giving me bad intros and let them know about it. I'm sure that I should be doing that and probably am at some level.

But I think asking for permission to make an email intro before making it is good form. I try to do it as a matter of practice. And I wish more people would.

Market P/Es: Seven Canadas for One ChiNext

Tue, 03 Nov 2009 02:15 GMT

In a quick look around the world at market price/earnings multiples after the launch of the ChiNext wild-wild west exchange in China, the league tables have really changed. The impossible has happened, with the outrageously expensive Shanghai Composite newly looking (relatively) cheap. Gosh.

I’m particularly fond of how 20 of the 28 ChiNext companies fell by the exchange maximum 10% today, that coming after 23 rose the maximum 10% on the previous trading day.

While some are pointing to the new ChiNext listings as an example of China celebrating growth entrepreneurs, I’m not convinced. The early listed companies are a grab bag of utilities, movie companies, pulp & paper, and machinery makers. And don’t even get me started about the low listing hurdle. As Andy Xie has said, “This is a V.I.P. table built on top of a casino”.

Pretending You Are Luggage

Tue, 03 Nov 2009 01:04 GMT

At dinner tonight we started telling miserable airplane travel stories. Everyone has a least one (or 7,321) so it’s fun to hear some of the really abysmal ones, especially the night before I head to the airport to catch an early morning flight.

We were also talking about various philosophies of life and how to deal with difficult stuff. After a while the conversation circled back to air travel. And then I heard the best line of the night.

“When I travel I pretend I’m luggage. From the moment I set foot in the airport, my expectation is that I’ll be treated no better than my luggage gets treated. As a result, my expectations are so low that any little bit of happiness and politeness brings me great pleasure.”

I laughed out loud. It was said with a sardonic grin, so the backdrop was framed appropriately. There was a quiet pause after my laughter. And then I pondered it – and thought how incredibly right this approach was.

Rather than bitch endlessly about the misery of our air travel experiences, let’s all spend November pretending we are luggage. The only goal of the plane is to get us from point A to point B. I guess there are circumstances where this won’t happen, but in most cases we’ll eventually get there. Time doesn’t really matter to a piece of luggage, nor does comfort. Politeness? I’ve shoved many a piece of luggage into a space that it didn’t fit without even saying “excuse me.” Oh – and I’ve put my smelly feet on my luggage many, many times.

In addition to pretending I’m luggage, I’m also going to make sure I use my super power on every plane flight this month. Luggage is very good at sleeping on planes, as am I. Luggage sleepers unite.

See you at the airport.

Customer development: By-the-book

Mon, 02 Nov 2009 10:00 GMT

Ash Maurya's blog documents his journey through customer development. This is a by-the-book application of customer development. I am following this blog very closely; it's thoughtful and well written. Some highlights:

Is AdWords the right MVP for your product?

“For Timothy Ferris, his MVP for testing new products that don’t yet exist (micro-testing) comprises of a landing page, signup page, and Google Adwords to drive traffic. However, this approach presupposes that:

You can create a good landing page

You can write good adwords copy

Adwords is a viable distribution channel for your product

“Unlike a book title or some other other physical product, startups are usually characterized by products where the problem and solution are unknown and have not yet been validated which makes writing good landing page copy hard, and good Adwords copy even harder (you only get 25 characters for your headline!). At best, you can guess. But starting with that approach is a surefire way of dumping a lot of money on Google Ads fast. Plus the return on learning is low – When your click-through-rate is low, or the bounce rate high, you get zero visibility into why. Was it poor copy, poor product/market fit, or both? And don’t even get me started on how expensive CPCs have gotten in competitive markets.”

Have you ever stated or revised your problem hypotheses?

“Our top 3 [problem hypotheses] were:

Sharing lots of photos and videos is a hassle

A lot of services downsize the images so the quality is poor

Notifying family and friends of updates was manual and a chore…

“During the interview, we were particularly interested in learning what their sharing workflow was like. We set up the stage and let them tell us everything they did with their photos/videos taking them from camera to shared, what they wished they could change, and the magical pricing questions: Would they use a solution like the one we were envisioning if it were free? Would they use it if it were $X/yr? X changed from customer to customer but we kept it as real as we could.

“We talked to enough people until their answers started sounding the same. At that point we had a pretty good idea of what our product’s unique value proposition should be, a list of other benefits, and a price to put on our signup page.

“Our revised top 3 problems were:

Sharing lots of photos and videos is a hassle (stayed the same)

Requiring visitors to signup is annoying

Photo gallery design was too busy or complicated”

Have you ever collected feedback from your customers with, like, your ears?

“By now we had also heard of the merits in listening to your users and decided to follow a release early/release often model. The only problem was we didn’t know how to listen. In the interest of efficiency and productivity, I generally avoided face to face meetings and phone calls and preferred email. Many people were struggling with the software (desktop apps are hard) but we didn’t know how to engage them. After they’d cancel their account, we would send them an email to learn why but many times it was too late.

“We were getting a lot of feedback over email but didn’t know the best way to qualify them. If more than one person asked for a feature and it sounded like a good idea, we built it. The reverse was also true, if the feature didn’t meet our model of “the vision”, we ignored it no matter how many people asked for it. And that’s how we kept busy for a while till I realized we still had a lot of leaky buckets despite all the listening we were doing.

“Determined to get to the bottom of this, I got an 800 number which I put on our website and also started calling on users directly. The findings were staggering. Most of our paying users were using a very small percentage of the application. We had built up a lot of bloated features or waste which had only taken time to build but also continued to create ongoing work with regression testing, feature dependencies, etc.

Thanks to Eric Ries for the link.

Oblong – An Example of Investing In The Future

Mon, 02 Nov 2009 07:31 GMT

We’ve been investors in Oblong since 2007 and I’ve talked about them regularly on this blog including a post titled I’ve Seen The Future from my first meeting with them. I’ve known two of the founders – John Underkoffler and Kevin Parent – since we lived together at MIT (we all lived in a fraternity called ADP on Mass Ave. at the same time, along with a bunch of other entrepreneurs including Colin Angle – the founder of iRobot and Jeet Singh / Joe Chung – the founders of ATG.)

A few months ago my partner Jason Mendelson was introduced to a reporter from Bloomberg who was looking for “innovative companies to interview” for an upcoming Bloomberg TV series called Bloomberg Innovators. Jason immediately thought of Oblong and made the introduction.

Bloomberg Innovators has four thirty minute episodes – the first one titled Turning Point is about Oblong. In addition to highlighting the amazing stuff the gang at Oblong is doing, the show takes you through the history of how the innovation that is called Oblong’s g-speak Spatial Operating Environment was created. As part of this, you get to see some pictures of John Underkoffler 20+ years ago in the Media Lab working on the Luminous Room along with some background on John’s work on the movie Minority Report.

If you are interested in how innovations evolve, the future of human computer interaction, Oblong, how some VCs think about investing in the future, or just want to have your mind blown with some amazing stuff, spend 30 minutes enjoying the show.

Bloomberg TV doesn’t allow embeds, so you’ll have to launch Bloomberg Innovators: Turning Point from here.

Thematic vs Thesis Driven Investing

Mon, 02 Nov 2009 05:36 GMT

As the venture business has grown and matured, many firms have developed specific areas of focus. Our firm, Union Square Ventures, for example only invests in web services. I believe this is a good thing for both the investors in venture funds, called LPs, and the entrepreneurs.

But there are a number of ways that firms can execute their focus on a particular area. Two of the most popular are "thematic investing" and "thesis driven investing".

They are very different.

Thematic investing involves identifying big themes and going after them. Examples from the world of web services would be "social networking", "online video", "ad networks", "social media", "real time", "mobile". I know many VCs who go about it this way. They identify the themes and then get busy filling out their portfolio with companies that fit those themes.

Thesis driven investing involves drawing a picture of where your particular area of focus is going. I like to take a five to ten year view. And once you have mapped out that picture, it becomes your thesis. And you evaluate every investment you make in the context of that thesis.

The two venture firms I've been involved in founding are good examples of these two approaches. Flatiron Partners was largely a thematic oriented firm. We identified the web as a big theme and within it we identified content, commerce, and community. And we made big bets in those themes. It worked out pretty well but we didn't see the web changing at the end of the decade as much as we should have.

Union Square Ventures is a thesis driven firm. I owe that to my founding partner, Brad Burnham, who has the discipline to force everyone to do the work to develop our thesis and the discipline to make sure we put each and every investment through the thesis test.

Just last week, we were meeting with one of our LPs and I was talking about the mobile web in that meeting. Later that afternoon, Brad walked into my office and put our thesis on web vs mobile web on the table and we made sure we were seeing the mobile sector play out the same way. An important factor in thesis driven investing is everyone in the firm needs to buy into the thesis or it won't work.

Thematic investing is good for bigger firms. It allows each partner to pick a couple themes and go after them. Thesis driven investing is good for smaller firms. It requires a tight team that works to keep themselves on the same page executing after a singular vision.

I believe thesis driven investing produces the best returns when the thesis is directionally correct and probably also the worst returns when the thesis is wrong. I believe thematic investing works less well because it can lead to "bucket filling" where the firm just runs around filling the themes with deals without much thought to why and how they will work. It also leads to a lot of "me too" investing which is a scourge that the venture industry can't seem to figure out how to rid itself of.

But both thematic investing and thesis driven investing are better than a generalist approach because they both promote domain expertise which is critical to building a sustainable investment advantage. I think "generalist" or "opportunistic" investing is likely to underperform domain expert driven investing in all but the most turbulent markets.

It would be good to talk more about how one goes about building a five to ten year map of where an industry is headed. That's a longer conversation than I have time for this morning. But I'll leave you with the thought that this blog is a part of how I build mine.

U.S. is a Net Oil Exporter, Sort Of

Sun, 01 Nov 2009 14:15 GMT

Interesting chart from the EIA/DOE showing that the U.S. is a net exporter of oil, at least of the distillate product kind. It is a funky reflection of the kinds of distortions in world oil markets with wholesale distillate prices staying higher than gasoline, in part of regional subsidies in Asia.

[The U.S. as net importer of distillates] trade pattern changed significantly in the spring, summer, and fall of 2008 as wholesale prices for distillate soared above those for gasoline. Distillate prices have rarely been higher than gasoline during the summer months but, the summer of 2008 saw an unprecedented and sustained premium for distillate. A variety of factors were behind the unusually high margins. In South America, price controls were limiting Argentina’s production and export of natural gas, and a severe drought in Chile was reducing its hydroelectric generation. Distillate fuel for electrical generation was a convenient short-term substitute for these shortages. Prices began to rise quickly in the face of this extra demand, but several prominent distillate consumers, including China and India, shielded their domestic consumers from the increased costs through fuel subsidies and price controls. The normal economic process of higher prices encouraging reduced consumption was therefore muted or absent in these countries.

Gold as a Dollar Thing

Sun, 01 Nov 2009 13:17 GMT

Gold in three currencies this past year: the Euro, Canadian dollar, and U.S. dollar.

Weekend Reading

Sun, 01 Nov 2009 12:53 GMT

A few links from my weekly weekend reading column:

There is no “new normal”: This time isn’t different (Forbes)
Why world's post offices are ailing (The Globe and Mail)
Changing distillate export patterns (EIA)
BP chief Tony Hayward says oil industry mega mergers are dead (Times Online)
Country Clubs: Stuck in the Rough (BusinessWeek)
Fertility and living standards: Go forth and multiply a lot less (The Economist)

The Donors Choose Threepeat Is Complete

Sun, 01 Nov 2009 09:23 GMT

We did it, for the third year in a row, this blog has won the tech blog category of the donors choose blogger challenge. Most importantly, we raised a total of $37,504 for teachers' projects in public schools. That number includes a $19,680 match from HP. Backing that out, this community contributed a total of $17,824 this year.

Here's our three year history:

It is interesting to me that the total amount raised by this community has been relatively constant over the past three years but this year we really took up the level of participation.

That may be a result of the meetup I am doing this coming week on wednesday evening. The deal is anyone who gave to the donors choose campaign via my giving page is invited, irrespective of the size of the donation.

There are 115 people rsvp'd for the meetup which is almost equal to the increase in donors this year over last year. That tells me that the meetup strategy worked. I am looking forward to meeting all of you on wednesday evening.

I'd also like to point out that donors choose raised a total of $630,938 in the blogger/social media challenge. That number includes the $200,000 match from HP. Even without the match, Donors Choose was able to increase the giving from $270,000 to $430,000. Some of the big new categories were Twitter, led by Livia Stone's $18,422 and Craig Newmark's page which tallied $12,091.

But nobody can touch Sarah Bunting's Tomato Nation, which has dominated this whole campaign the past three years. This year, the Tomato Nation community pulled in $314,158. I believe Sarah will be at the meetup on wednesday. I'm dying to meet her as she has proven that blog communities can do amazing things.

In conclusion, I want to thank everyone for putting up with my non stop promoting of the donors choose bloggers challenge this month, and I especially want to thank everyone who contributed. It's a great cause and I'll bet that many of you will make additional donations when you see how amazing the follow up/thank you process is. Donors Choose is a fantastic public service and I'm really proud to be involved with it.

Maniacal Crazy People

Sat, 31 Oct 2009 18:14 GMT

Three of my VC friends (Santo Politi, Mark Suster, and Kate Mitchell) were on Fox Business’ Capitalist Ad”Ventures” series. The underlying theme of this segment was the characteristics of entrepreneur that VCs look for.

Fox doesn’t seem to have embeds, so you’ll have to use this URL to watch “The Future of Venture Capitalism”.

While Santo, Mark, and Kate weren’t the maniacal crazy people (although I’m sure some will argue that), they were clear about the ones they are looking for. Nice job gang!

Interview with Jim Grant

Sat, 31 Oct 2009 15:53 GMT

Lengthy video interview with one of my favorite cantankerous contrarians, Jim Grant of Grant’s Interest Rate Observer.

Creativity and Compression

Sat, 31 Oct 2009 01:50 GMT

I spend a lot of time writing, and I'm constantly amazed -- even after decades of this stuff -- how much better things get when you say less. Take out words, and dull prose sits up. Take out sentences, and prose kicks up its heels. And take out paragraphs ... well, let's just say that's you often need to clear the room -- it can be that much more kinetic.

It is hard, of course. The expression "kill all your babies" is passed back and forth like contraband among writers for a reason: You have to learn to love killing the things in your writing (or coding/song-writing/etc.) you like best. Compression, compression, compression.

One of my favorite examples of this comes from Gene Wilder's great memoir KIss Me Like a Stranger: My Search for Love and Art. In this excerpt Wilder writes about being in the editing room with director Mel Brooks, and being distraught about a scene in his classic film Young Frankenstein that didn't work the way he hoped it would when writing it:

When we saw the ascension scene -- where I rise with the Creature on an elevated platform and cry, "LIFE, DO YOU HEAR ME? GIVE ME CREATION LIFE!," my heart sank. I thought this was going to be one of the highlights of the film, and instead it was a boring blob. I put my head down. Mel didn't vomit. Instead, he got up and started banging his head against the wall. He hit it three times, hard. Then turned his face to the rest of us and said, "Let not get excited! You have just witnessed a 14-minute disaster. In one week you're going to see a 12-minute fairly rotten scene. In two weeks you're going to see a 10-minute fairly good scene. And in three weeks, you're going to see an 8-minute masterpiece."

That's a cute speech, I thought, but you're kidding yourself, or just trying to make us feel better. How much can you change without reshooting? I saw the scene. I don't believe in miracles.

The next three weeks were my second lesson in directing: thousands of little pieces of film can be arranged in thousands of different ways. Almost three weeks to the day after Mel's speech, the lights went out in the screening room, and I witnessed an 8-minute miracle.

The White House Doesn't Represent America ('s Surname First Letters)

Sat, 31 Oct 2009 01:25 GMT

In idly scanning the data dump today of visitors to the White House, I got to thinking: How representative of America are these people? You know, are they just more ... whoever/whatever it is that people think are the kind of people who get invited to visit the White House when they don't get invited to visit the White House?

The thought of actually looking up who these people are, what they do, and why they might be visiting was excruciatingly boring, so I didn't do that. Instead, I looked at the distribution of first surname letters of the people who visited the White House, and then I compared that distribution to the actual frequency of the same first surname letters in the U.S. writ large.

Here is the result:

The red columns are the distribution of surname first letters according to census data for the 1,000 most popular surnames in America. The blue columns show the distribution, by surname first letter, of visitors to the White House. The x-axis letters are organized from left to right by decreasing Census frequency

As you can see, there are big differences between Census data and the 492 logged White House visits between January and now. For example, visitors with a surname beginning with the letter "s" are much more likely than you would expect based on the Census distribution of such names. Census data suggests that surnames beginning with "m" would have been the most likely, but they rank 5th among the first surname letter of White House visitors.

There are lots of other things in there too, like the White House dislike of people whose surname starts with "h". And there is also the Obama administration's outright letter-centric discrimination against people whose surnames start with "q" or "v", both of which had zero surname-sporting visitors to the White House. Where's the outrage on that, Glenn Beck?

How long should your “trial” period run?

Fri, 30 Oct 2009 15:43 GMT

I’ve had this running debate with a handful of friends – I’d love to throw it out there for comment. The questions at hand are 1) whether companies should offer a “free trial” period for their software/web service; 2) if they do, how long should it last; and 3) what information should you ask for before starting a trial (specifically should you ask for credit card information up front).

Here are a few thoughts. I’d love to hear your opinion.

While you know that your web service is the greatest thing since sliced bread, it’s really really hard to convey the chocolaty goodness that is your product to the average consumer. You have to pull them in and offering a dry run of what you do is a good way to do this (maybe you have a free version of the service as well, but even so, you’re saving the best features for your paid users and you need to show them what can do).

Now on to the question of how long your trial should last. While avoiding the obvious cliche answer (“as short as possible”) I’d point out that many (most) companies default to 30 days. I think this is a mistake. If you can’t show value in a week or two you’re doing something wrong. And by waiting 30 days you’re just extending the number of people in your trial funnel and making more work for everyone involved (not to mention stretching out the trial and potentially losing customers). Your product should be designed to quickly get people up and running and to show value right away (see some ideas on that here). I believe your trial period should have three parts: 1) onboarding – quick and as painless as possible; 2) show value – make sure you’ve designed what you do in a way that you’re in front of your customers immediately after they input information; 3) ask for the conversion to paid – once you’ve shown them what great value you add, ask them to fork over the dough. Most companies err in all of these categories. Onboarding is too difficult. Value comes over time, not right away and the product forces users to remember to come back to it rather than the other way around. The “ask” comes too late, after people have forgotten what the service did in the first place.

Lastly open for debate is the question of how much information you should collect up front. On the one hand are people who believe that you should collect as little as possible – probably just and email – and get people into the system and up and running. On the other are people who believe that since you have their attention you should grab their credit card information up front so you can start charging if they don’t opt out. I’m in the former camp. I couldn’t find any scientific study on this, but in my experience asking for a credit card (or even having a two page sign-up form) significantly drops the number of people who get from the beginning to the end of the sign-up process. In one case, asking for credit card information resulted in 9 out of 10 people who started the free trial process dropping out. That’s not worth the back-end trade-off of having the information to charge them later (plus the opt out thing isn’t cool in my opinion).

Your thoughts are welcome/encouraged!

No Credit Cards For You!

Fri, 30 Oct 2009 14:29 GMT

The latest Mintel data on credit card direct mail offers to consumers showing Q3 of this year against the preceding few years. The drop is ... precipitous, from 2.1-billion a quarter in 2006 to 391-million in the most recent quarter.

Friday folderol

Fri, 30 Oct 2009 13:37 GMT

Some random items, including some administrative housekeeping:

1. If you haven't seen it, it's worth reading DOE Secretary Chu's op-ed on weatherization and all of the governmental support being thrown toward that part of energy efficiency. Heady times for residential and commercial energy efficiency efforts. Side note: The Secretary of Energy is publishing his op-eds in the Huffington Post now? Wow, this Internet thingy might actually be catching on.

2. How the government "picks winners and losers" is a topic of much conversation these days, re: cleantech and otherwise. It's especially a topic given the structure of some of the programs being used to accelerate commercialization and adoption of clean technologies -- such as the DOE loan guarantee program, etc. See, for example, this interesting editorial in the Washington Post that a colleague pointed out to me today, and the very good discussion we had on the PE Hub panel on the topic here in Boston this week (note: link may disappear behind subscriber wall soon). It's tough, though, to come up with strong alternative solutions to what's being done. There are gaps that need to be specifically addressed, especially at the seed / very early stage (where ARPA-E is intended to aim) and at the "first of a kind" project finance stage (which is where the loan guarantee is intended to aim). There isn't enough funding to support every deserving effort, nor would we necessarily want that (define "deserving"?). I've seen proposals to do it more hands-off, by having the money go in some form to private sector investors who would make the decisions, perhaps as matching funds to provide leveraged returns for private LPs in the fund, to fix the risk v. reward imbalance that created the capital gap. Some of these ideas have merit, but even then some government body needs to be determining which funds would receive the leveraging support and which wouldn't. Broader market-based systems (including cap and trade, carbon taxes, ITCs, PTCs, etc.) are more diffuse in impact and harder to target at specific capital gaps. And doing nothing is not an option. So I'll let the debate go on, but my feeling is that you simply have to design the best policy you can, hope the DOE can attract the best decision-makers that they can (and I've seen some really smart people go into the DOE over the past year or so), and accept a necessarily imperfect process. Easy to say, hard to stomach.

3. Speaking of policy issues, a few days back I wrote about a study which examined coal-fired generators in the U.S. and concluded that there could be a relatively low natural limit on carbon prices under a cap and trade scheme. I mentioned a few gaps I saw in the analysis, and for you wonks out there like me, a reader wrote in and pointed out another important one: Elasticity of demand means that some of the costs on the generators will be passed downstream, so that they would require higher carbon prices than indicated in the study before making the decision that shutting down is worth it. Of course, generators would also be able to pass some of the costs upstream as well, in all likelihood. It's still a very intriguing study conceptually, but between failure to address elasticities of demand in the electricity value chain, and the other factors I mentioned in the post, I'm not sure I would want to do any significant investment planning around the specific price limits they indicate.

4. An administrative note: Over the 4+ years of writing this column, I've attempted (not always successfully) to hew to the most rigorous of blogosphere rules regarding notification of self-interest, in that I've tried to note whenever I've mentioned a company in which I have some stake in their success. But in my current position that's becoming impossible, due to the breadth of indirect investment activities involved. I can't reveal self-interest in many cases without possibly revealing some fund's confidential information, and I can't mention some companies and not others because then the occasional obvious failure to mention a deal becomes an indicator by itself. So my choices are either to never mention any companies at all ever again, or simply to ask you all to trust me that I won't too horribly pump up a company or fund where I have a significant self-interest, without noting that. I may still mention self-interest sometimes if I can, but not always. Is that okay? Tough call, and I've wrestled with it for a while. Flames, suggestions, etc. are all welcomed in the comments or via email.

5. Another administrative note: Yes, I know I'm horribly behind on listing deals that get announced in the sector. Apologies, but still, no one seems to have complained yet. Maybe I can stop that practice? Or maybe a smart Sloan student reader wants to help me with it?

Home Networking Is A Crappy Phrase

Fri, 30 Oct 2009 10:02 GMT

We spend a lot of time talking about “computers in the home” as part of our Digital Life theme. Over the past year, I’ve heard the phrase “Home Networking” with increasing frequency. It made the rounds a while back (anyone remember when it was called a HAN – home area network) but seemed to fade into the background for a while. I’m not sure what caused it to show up at our party again (although I’m suspicious that it is Windows 7), but it’s back.

My mother doesn’t know what “home networking” is, nor does she care. And she is an example of a typical user. Virtually any home that has a broadband Internet connection now has a HAN because of the router involved in the broadband connection. These routers are generally wireless at this point so people now have wireless networks in their house, whether they realize it or not.

When I time travel and find myself in 2015, I notice that every electronic device in my home is “network enabled” and connected to the Internet. For example, I just bought a new Withings Connected Body Scale which connects to my “home network” via Wifi (and subsequently to the Internet.) Yeah, I get all the old cliches about my refrigerator being connected to the Internet, but as the Jetson’s have proved over and over again, the future that was envisioned in the past often eventually arrives.

Calling this stuff “home networking” is kind of like calling the electrical closet in a house a “home power plant.” While I realize that make the technology disappear into the background is part of the mission, I’ve always felt that “getting the words right” as things go mainstream also matters. All of us nerds (and our marketing friends) playing around with “home networking” probably have another shot to get the language right. I’m going to spend more time talking to my mom, Amy, and other non-techies about what they call it other than “that fucking computer shit.”

Entrepreneurs Unplugged – Steve Halstedt and Nir Barkat

Fri, 30 Oct 2009 09:21 GMT

There are two CU Silicon Flatirons Entrepreneurs Unplugged events next week – one on Monday November 2nd at CU Boulder in Atlas Room 100 and one on Wednesday November 4th at the Denver Art Museum.

The 11/2 Entrepreneurs Unplugged is with Steve Halstedt, the co-founder of Centennial Ventures. Steve co-founded Centennial in 1981 and was one of the fathers of the venture capital business in Colorado. When I moved to Boulder in 1995, Steve was one of the first VCs I met with here and he’s been a great friend and mentor ever since. I look forward to interviewing him about his experiences, especially how entrepreneurship has evolved in Colorado since the early 1980’s. Please register and join us!

The 11/4 Entrepreneurs Unplugged is with Nir Barkat, the Mayor of Jerusalem. This is a special Entrepreneurs Unplugged event Silicon Flatirons is co-hosting with Governor Ritter, the Colorado BioScience Association, CSIA, and the Mizel Family Foundation. I’ll be in Seattle at the TechStars 2009 Demo Day in Seattle so Brad Bernthal will be interviewing Mayor Barkat. In addition to being the Mayor of Jerusalem, Barkat is a successful entrepreneur and VC having started BRM Partners and subsequently Backweb Technologies. While I’ve never met Barkat, I remember Backweb well as SOFTBANK was an investor in the company when I was a SOFTBANK Affiliate – shortly before a group of us created Softbank Technology Ventures. This promises to be a special event held at the beautiful Denver Art Museum from 2pm to 4pm on Wednesday 11/4. Registration is now open.

Our first online workshop: How to pitch investors

Fri, 30 Oct 2009 08:00 GMT

We're teaching our first ever online workshop on How to pitch investors on eduFire — a platform for live video teaching online. I've taken classes on eduFire and it works really well.

What you'll accomplish

You could be building the next Google — but investors won't know it if your pitch doesn’t sing. You're going to “walk” out the workshop with:

A great pitch for your startup.
A list of things your startup will need to accomplish before you can raise money.
An understanding of the fundamentals of pitching so you can revise your pitch anytime and teach your friends how to do it.
A copy of our Pitching Hacks e-book.

First we'll cover the fundamentals:

What investors want to see
How to get intros to investors
High-concept pitches
Elevator pitches
Decks and presentations
NDAs

Then we'll work on your pitch as a group. You’ll get lots of hands-on advice from me and other students. I’ll also be sharing some of my latest pitching techniques which we haven’t published anywhere.

This is the first time we've ever done anything like this and I'm psyched.

Time and Cost

The workshop costs $98 (just like Wal-Mart) and there are only 3 2 slots left (uh, somebody signed up while I was writing this). It consists of 2 sessions on Tuesday Nov 3rd 5-6pm Pacific and Thursday Nov 5th 5-6pm Pacific. You go to both sessions.

Reviews

We’ve helped startups raise tens of millions of dollars from investors like Sequoia, Benchmark, Bessemer, etc. See the reviews of our pitching advice from entrepreneurs like Adam Smith at Xobni and Jonathan Grubb from Get Satisfaction.

Prerequisites

The only prerequisite is determination. You'll be even better prepared if you read the fundamentals above.

Contact me on eduFire or email nivi@venturehacks.com if you have any questions and sign up here.

Slow Capital

Fri, 30 Oct 2009 02:59 GMT

Last friday my partner Brad attended a company offsite for our portfolio company Meetup.com. On monday of this week during our regular weekly meeting, he gave our firm (all five of us) a report on the day which he said was excellent. One thing that stuck in my mind all week was his description of the lunch talk by one of the leaders of the "slow movement" (whose name escapes me now).

I'm familiar with the slow food movement and I would say that our family, led by the Gotham Gal, are active participants in it. I'm less familiar with the broader slow movement. This quote from Guttorm Fløistad via Wikipedia explains:

The only thing for certain is that everything changes. The rate of change increases. If you want to hang on you better speed up. That is the message of today. It could however be useful to remind everyone that our basic needs never change. The need to be seen and appreciated! It is the need to belong. The need for nearness and care, and for a little love! This is given only through slowness in human relations. In order to master changes, we have to recover slowness, reflection and togetherness. There we will find real renewal.

There are now sub-movements like slow travel, slow parenting, slow art, slow sex, etc. All of them promote the idea that we should slow down, relax, and take our time at things instead of "getting it done and moving on".

I'm not much for any orthodoxy but I do appreciate the sentiment behind the slow movement and I've been thinking all week about what "slow capital" would be. And of course, I believe that Union Square Ventures practices slow capital. Here are some basic tenets of slow capital:

1) doesn't rush to conclusions and doesn't expect entrepreneurs to do so either

2) flows into a company based on the company's needs, not the investor's needs

3) starts small and grows with the company as it grows

4) has no set timetable for getting liquid: slow capital is patient capital

5) takes the time to understand the company and the people who make it up

I've spent almost twenty five years in the capital markets watching investors behave. Way too often it is a "wham bam" experience and then off to the next deal. Things like exploding offers, "fly by" board members, and shotgun marriages are so common that you sometimes wonder how anyone makes any money.

There's a reason why Warren Buffet is the best investor of his generation. He practices slow capital and I am proud to say that our firm does as well.

Oblong on Bloomberg Innovators

Thu, 29 Oct 2009 15:40 GMT

Bloomberg TV is running a show called Bloomberg Innovators. One of our portfolio companies – Oblong – is the focus of the first episode that airs this Friday (10/30) on Bloomberg TV at 9pm and 11pm ET. As a special bonus, Jason and my Donkey Kong machine are in the trailer and both Jason and Ryan are in the episode that stars John Underkoffler, Kwin Kramer, and a bunch of the Oblong gang. Oh – and Jason’s hair looks funny.

It's Alive, It's ALIVE, It's ALLLIIIIVVVE!

Thu, 29 Oct 2009 12:55 GMT

Turns out coursing a few gigavolts of financial stimulus current through even an economy the size of the U.S. will still get Frankenstein off the slab, however briefly.

Spiritual Guidance

Thu, 29 Oct 2009 10:39 GMT

Notes from Startup School 2009

Thu, 29 Oct 2009 10:00 GMT

Mark Bao has posted his notes from this year's Startup School. Here are my favorite parts (everything below is cut-and-pasted directly from his notes — read the full collection):

Mark Pincus, CEO, Zynga: My Startup Experience

what really matters is that YOU CONTROL YOUR BOARD. Mark Zuckerberg claps.

How? (1) Create a board that reflects the ownership of the company. (2) Make a new board seat for a new CEO.

Mark Zuckerberg, Founder and CEO, Facebook: Q&A with Jessica Livingston

he says he never pitched Facebook a lot. Just got introduced to people because already had x00,000 users

Traction solves every problem. Profit erases every sin.

cognizant of the fact that engineers tend to move around companies. Facebook is a place to learn; he’s cool with moves.

That's a neat solution: retention is a problem — so we “don't care” about retention. Jeffrey Pfeffer and Bob Sutton from Stanford offer other solutions for retaining employees.

Twitter Founders Biz Stone and Ev Williams: Q&A with Jessica Livingston

motivation behind Twitter: two week hackweek at Obvious. they built, used it over the weekend, and they were passionately engaged

Hackdays are a great way to boost morale, clear out the ideas you can't stop thinking about, and build small, low-priority, high ROI features and products.

Tony Hsieh, CEO, Zappos: Delivering Happiness

Zappos’ Committable Core Values are grounds for hiring and firing, very serious about it

Greg McAdoo, Sequoia Capital

good recession-era startups “buy the cash register early,” — they execute their pay business model earlier to generate revenues earlier and bank earlier
enterprise sales tip: promote and talk about the HARD DOLLAR ROI. it’s the most important thing to talk about. make them scared to reject your product. make them think “if my boss ever found out we could have saved 50% on software X, he would be pissed.” make them fear that the competition get the product in their hands and beat you out.
startups that gain revenue early are disciplined earlier, and get used to being an actual business earlier, and generally are better and more recession-proof

Jason Fried, CEO, 37signals: Funding and Charging for Your Product

the difference between a boostrapped and funded company is easy to understand.
the bootstrapped company starts off thinking: we need to make money.
the funded company starts of thinking: we need to spend money. these investors have given us x million dollars—we should spend it!
funding is like crack. it’s an addiction with names like Series C. Don’t keep going back for more and more funding; it’ll make your addiction worse.
sorry, failure is not a rite of passage. you don’t have to fail. failing once doesn’t prevent another. Fried thinks the idea of “you have to fail once” and having to “learn about failure” is ridiculous.
learning a lesson from failure is learning what not to do. learning what to do is a lot better than learning what not to do.

Read all of Mark Bao's notes.

Snow Day In Eldorado Springs

Thu, 29 Oct 2009 09:52 GMT

In case you were wondering what the Boulder Snowstorm resulted in (so far – it’s still coming down) at my house in Eldorado Springs, here you go!

So there is no ambiguity, my dog Kenai loves it.

And – no surprise, so does Brooks!

Readings: Energy, Lego, Pig Farmers, etc.

Thu, 29 Oct 2009 04:13 GMT

Can renewable energy save the world? Not without better batteries(voxeu)
Breakthrough Inventions and Migrating Clusters of Innovation (NBER)
Happy Anniversary Wall Street (Keen)
Lego’s business comes to boom (CNBC)
Foodservice Traffic Declines for Fourth Consecutive Quarter (NPD)
Chinese railways and speculating pig farmers (Pettis)
The myth of uncorrelated returns (CFA Institute)

Back to the VC Future? Small as the New Big

Wed, 28 Oct 2009 19:52 GMT

The future of the venture capital industry? With ten-year returns tumbling toward negative numbers, lots of people rightly wonder where the venture business goes from here.

My argument has been that its future needs to look a like its decade-plus ago past. We will see more small funds, fewer large ones, and less capital committed in total. And those are all good things.

Josh Kopelman of First Round echoes that view, with a post up that (in addition to saying nice things about me) has some great nuggets about the venture industry’s early days. Among other things, Josh points out “… that in the 1980's there were just 12 venture funds above $250M. Today there are over 408 - and 30 over $1B. And most of this fund-size growth took place in the last 10 years.”

And one more nugget:

“the initial funds of Accel, Kleiner Perkins, CRV, Mayfield, Venrock, Greylock, NEA TA & Sequoia COMBINED were under $125M!“

Spot-on, Josh. Bringing the venture industry back to health doesn’t mean financial engineering, exotic funding options, or entrepreneur-unfriendly deal terms. It means, more than anything else, a return to its roots.

More here.

Great returns from cleantech

Wed, 28 Oct 2009 13:11 GMT

Did you see the Q2 venture returns report from Cambridge Associates and the NVCA (note: pdf)? If so, you were probably as intrigued by the chart on page 7 as I was.

On that page is a chart of "US Venture Capital Dollar-Weighted Internal Rate of Return on Vintage Year Companies" broken out by sector. They don't break out cleantech as a category, but they do break out Energy. And the numbers are pretty noteworthy.

Energy category IRRs vs. All Companies IRRs

2002 Energy = 43.0%, All = 8.75%

2003 Energy = 46.0%, All = 12.3%

2004 Energy = 10.4%, All = 12.8%

2005 Energy = 33.5%, All = 9.66%

2006 Energy = 23.7%, All = 4.46%

2007 Energy = 20.1%, All = 0.65%

2008 Energy = 9.10%, All = (0.04)%

So what is this really saying?

On the surface, it looks like there have been great IRRs in Energy as compared to other sectors like IT, Software, Health Care / Biotech, etc. In almost every year post-Internet Bubble, VC investments are producing pretty healthy returns in the Energy category, in all but one year beating the performance of the overall VC pool. If energytech VCs are getting these kinds of IRRs, that looks good compared with current criticism of venture capital that it's been producing sub-par returns versus the risk level inherent to the category.

But wait a minute, there's a big catch.

If you read the fine print in the methodology, some (and most likely, the predominant portion) of these IRRs have been calculated based upon NAVs (net asset value), not actual cash returns. So, for example, if a company took in a Series A in 2002, and since then they've had significant up-rounds but no exit, the value of the company is pretty much* set at whatever was the valuation of the last round. In the aggregate, 2002 vintage companies who took in money that year and later are looking at pretty significant up valuations versus where they were when the money went in. At least in the numbers CA is tracking.

What this really reflects, therefore, is just what we've talked about here many times over.

1. The aggregate dollar totals in cleantech venture capital have been dominated by a relatively small number of really huge late-stage deals.

2. While overall economic conditions are definitely having an impact, many of those well-capitalized companies hadn't had to take in lower-valuation follow on capital through Q2 2008. So on paper, they're still being carried at those previous high valuations.

In fact, in another part of the report they show that the actual cash distributions across all VC categories are just about nil from 2004 vintage funds onward, probably moreso in cleantech (I'm guessing).

So don't read this chart and get all excited. These numbers will likely be revised downward in future such reports (but we can hope!).

The most important takeaway is probably that cleantech valuations have held up better than others, at least through Q2.

...Note I'm not at all criticizing the methodology used in this report. It's great data and hard to do anything more than what CA's done with it. Just pointing out what we can conclude from it.

+++++++++++++++++

(*it's really not nearly so simple, but let's not get too wrapped around the specifics here)

Regulation Didn’t Break Banks; Police Don’t Cause Crime

Wed, 28 Oct 2009 12:06 GMT

Good comment from John Kay in the FT:

Their activities underwritten by implicit and explicit government guarantee, it is increasingly business as usual for conglomerate banks. The politicians they lobby sound increasingly like their mouthpieces, espousing the revisionist view that the crisis was caused by bad regulation. It was not: the crisis was caused by greedy and inept bank executives who failed to control activities they did not understand. While regulators may be at fault in not having acted sufficiently vigorously, the claim that they caused the crisis is as ludicrous as the claim that crime is caused by the indolence of the police. [Emphasis added]

More here.

The problem with VC motivation

Wed, 28 Oct 2009 09:27 GMT

Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas' general partners. If you like it, check out Fred's blog and tweets @fdestin. And if you want an intro to Atlas, send me an email. I'll put you in touch if there's a fit. – Nivi

Many VC's, particularly in Europe, are disappointing in their (lack of) intensity. They are not 24/7, passionate advocates of the businesses they fund; neither do you meet them at random conferences scouting for new companies; nor do they necessarily come across as particularly engaged at board meetings. Why is that? Let's talk VC compensation and motivation for a second.

My motivation as a VC

Introspection is as good a place as any to start. Here are my top motivations for being a VC (leaving out the personal stuff):

Company building: Every VC is different, some like doing the deals but don't really care for the long-term relationship that ensues. With me it's the “deal management” (as we call it) that provides me with the greatest satisfaction. An engaged relationship with the management team and co-directors towards building a great business. That's when I feel I am part of a greater whole, of creating jobs, of the whole great forward human movement of innovation and entrepreneurship.
Intellectual stimulation: I am a fairly consistent guy, but I do get bored. As a VC you get to see 100's of new projects every year and meet a ton of creative people, and understanding each one challenges your (dwindling number of) neurons in a different way. Every company you invest in is different, and requires fresh thinking. So being a VC keeps me entertained, frankly. This is the primary reason why I never started a company. The trade-off is that you work through others (the management teams you fund) and hence never quite get that satisfaction of achievement in the same way.
Personal recognition: Let's face it, I love being recognised for what I do. Thankfully my wife keeps that ever-burgeoning ego firmly in check.
The Hunt and the Deal: I don't think you can be an effective VC if you do not like to be a Hunter, to be always out on the move looking for the next big thing, to want to win the confidence and trust of entrepreneurs and co-investors to take your money and no-one else's. Inking that term-sheet and closing that deal gives me a great buzz every time. After all, I grew up on a trading floor !
Money: More on this below.
Lifestyle: I work hard, but on my own terms, when and where I choose. The less glamorous reality is that I spend 2/3 of my time on the road and that they greet me by name at hotels in at least 3 different cities, but I remain a master of my own destiny.

That's my list.

Let's zoom in on money

Here is the issue with venture capital as a way of making money:

It's easy to get a comfortable lifestyle (say $300,000+ a year, often multiples thereof).
It's (really) hard to make it really big (say $20,000,000+).

The not-so-secret fact about venture capital is that it has not made serious money for 10 years now. That means many, if not most, venture capitalists have not seen a large carry check in a decade. For those who don't know venture economics, the partners in a fund contribute the first 1-3% of a fund with their own cash, which means most of us write checks worth > $100,000 every year to our own funds, sometimes a lot more. So if you are a VC in a median return fund, you keep writing these checks vaguely hoping you will make your money back; some will tend to get more and more focused on the nice salary they can take out every year.

To generate real carry, you need to work hard with no obvious improvement in the probability that your fund will be a wild success. In other words, the marginal return on effort expanded is not obvious and may well be zero. You won't know until much later… And that, my friends, is the core problem with VC motivation.

Because it takes a very long time to know whether you are a good VC, partners can keep taking comfortable salaries for a decade or more before any form of verdict is placed on their money-making abilities. In the meantime, they manage their own calendar and work at their chosen intensity, with no immediately obvious return on effort expanded. Q.E.D.

The Solution

The solution is not simple. As an LP you would only want to invest in partnerships that provide:

Accountability
Meritocracy
Paranoia
Professionalism
Absolute hunger
True Passion for the business

…and of course, deal picking skills, deal building skills, and returns!

Paul Kedrosky at Xconomy has considered this problem from the LP angle with the following recommendation: pre-agree on budgets and/or find out what your chosen partnership uses its money on. Good advice, with plenty of practical problems, but clearly sound.

In a good partnership, paranoia and professionalism mean that emulation keeps everyone on their toes. And your passion for the business keeps you working all the time. And you really want to make a ton of money. And you want to be remembered for all the great business you contributed to. All of the above!

Hence:

VC is only a lifestyle business if you do not fundamentally care about being wildly successful. Now how do you screen for that, when every manager that comes into your office sings the same song?

Thanks for reading. If you like this post, check out Fred's blog and his tweets @fdestin.

Add Another Zero

Wed, 28 Oct 2009 08:10 GMT

Talking about scale and growth is hard. Many people talk in percentages in pre-determined time periods (e.g. let’s grow revenue 100% next year). I find this to be relatively useless. Instead, I like to challenge people to think on a bigger scale over a variable time period. My favorite line of late is “add another zero – you pick the metric and the time frame.”

I used to call this “increase X by an order of magnitude” until I realized that lots of business people don’t actually know that an increase in an order of magnitude is equal to multiplying by 10. While it’s silly, there’s no ambiguity when you talk about “adding a zero to the end of a number.”

For example, I’m an investor in a company that is growing its user base as they had planned. However, they are coming up far short on a variety of measures, including daily active users (DAU’s) and virality measures (they have several that are good, well defined, and easy to measure.) So, my simple statement to them is “Nice job on user growth. How do you add a zero to the number of DAU’s and the virality measures – you pick the time frame?”

In another case, I’m an investor in a company that had a great year on all accounts. They are the clear market leader in their segment, well funded and – while still losing money on a monthly basis – have a very clear path to being cash flow positive in 2010 on the cash they have in the bank. We are no longer worried about them becoming a relevant company – our attention is now shifting to how to grow to be a very big and important company. The question I asked them was “How do you add a zero to your annual revenue number – you pick the time frame?”

This question can apply to any metric. If you have one customer, how do you get to 10 customers? If you have 10 customers, how you get to 100? If your users are on your site for 1 minute a day, how do you get to 10 minutes a day? If you are generating $100,000 per customer, how do you get to $1,000,000 per customer? If your largest customer has 1,500 seats of your software (or service) deployed, how do you get to 15,000? Add another zero – you pick the time frame.

While there are natural limits to this when you approach it top down, it becomes very powerful when you approach it bottom up. I call this cascading leverage. For example, if you focus on individual user behavior and try to add zeros to key user-based metrics, you’ll increase the metrics all the way up the chain. If you happen to find two metrics that impact each other (e.g. you get value out of the growth of X multipled by the growth of Y), you can actually get 100x impact on higher order metrics if you can add a zero to both of them. Understanding the linkage from the bottom up also helps create better clarity on what to measure and where to invest to grow the business dramatically.

The variable time period is a key aspect of this. I tend to match the time period up to the natural rhythms so I can remember them – daily, weekly, monthly, quarterly, annually, two years, five years, ten years. But this isn’t necessary – any time period is fine. The key is to let the time period vary by metric to which you are adding a zero as this changes the texture of the conversation (e.g. you tend to have a very different conversation when you talk about adding a zero to a metric over the course of a month vs. over a course of a decade.)

So – as you go into your annual planning cycle for 2010, try the “add another zero” approach on some of your numbers. Or, get granular, and try it today on some of your underlying metrics. Just don’t default into “let’s grow revenue 100% in 2010”.

Swinging For The Fences

Wed, 28 Oct 2009 04:21 GMT

There has been a lot of talk about young entrepreneurs creating all the great companies; Gates, Jobs, Yang/Filo, Bezos, Dell, Brin/Page, Zuckerberg, etc, etc.

I agree that visionary young people are worth backing and we do a lot of that at Union Square Ventures.

But there is another kind of entrepreneur I love backing even more. It's the serial entrepreneur who has had a number of successes under their belt and now wants to swing for the fences. We have a bunch of them in our portfolio and there is nothing more fun than watching someone who has a ton of experience get behind the wheel and really step on the gas.

When someone has two or three startups under their belt, they understand a bunch of things that a first time entrepreneur doesn't. They understand the value of setting a very clear vision and getting everyone on that page. They understand that they need to hire the very best people. They understand how to raise capital and pick their investors carefully. They understand how to make quick decisions and not let issues fester. They have a rolodex of talented people and potential business partners they can get on the phone or email quickly when they need them. Most of all, they ooze confidence and make everyone better around them.

These entrepreneurs usually have enough money in the bank that they are not looking for a payday. They don't build their companies to flip. They build their companies to go all the way. They are doing it for money, but they are also doing it for the thrill of the game, for ego, and to build a legacy. Those are very powerful motivators, much more powerful than money if you ask me.

If you look at our portfolio, you'll see quite a few startups created by young visionaries and quite a few startups created by serial entrepreneurs who are swinging for the fences. There isn't much else to be honest.

We are open to all kinds of entrepreneurs and we don't screen for age or track record. If you have built a web service that fits into our investment thesis, you'll get a hearing at our firm regardless of who you are and what you have done. But it is also true that we tend to back young visionary founders and successful serial entrepreneurs most of the time. That's because we've made a lot of money doing those two things and not so much doing anything else.

Time To Sign Up For Defrag

Tue, 27 Oct 2009 19:58 GMT

The Defrag Conference in Denver is just around the corner – November 11 and 12 to be exact. Eric Norlin has put together a remarkable agenda for this one including an incredible closing panel titled Cluetrain at 10 staring JP Rangaswami, Chris Locke, Doc Searls, and Rick Levine. This will celebrate the 10th anniversary of the The Cluetrain Manifesto and as far as I understand is the first time in a decade that Chris, Doc, and Rick have shared the stage. If we are lucky, Rick might even bring us some Seth Ellis Chocolates.

I’ll be there the entire time as will my Foundry Group partners. Last year at Defrag was the first time I spent any time with TA McCann and that worked out pretty well for Gist (at least so far) – who knows, maybe this year will be someone else’s turn.

In the spring just before the Glue Conference, I offered up a group dinner event at a Boulder NewTech Meetup for anyone in Colorado that attended. A bunch of people ended up coming and I never followed through on the event. I’ve finally started to get my act together – we’re going to do an event in The Bunker (with lots of food and booze) in the January time frame. As a special bonus, I’m going to open it up to anyone from Colorado that also comes to Defrag (no – you don’t get two events if you went to Glue also, but I’ll give you a hug.)

But wait, there’s more. Use the discount code “fndry1” to get 20% off of your registration.

A Diary of the Great Depression

Tue, 27 Oct 2009 16:36 GMT

The excerpts from the Jim Ledbetter-edited Diary of the Great Depression continue to be riveting:

October 14, 1931. Last night’s paper reports the closing of eight banks in West Virginia and Philadelphia. Also that the 14 banks in Atlantic City have been combined into four banks. Also that the government bank aid plan is not going so good because the stronger banks do not want to guarantee the weaker. The proposed capital has been cut from $500 million to $100 million.

Stocks are on the way down again.

October 15, 1931. Great excitement in Youngstown. It finally happened here. The Dollar Savings & Trust Co, The City Trust, and the 1st National Banks all fail to open for business this morning. This leaves only the Mahoning Bank and The Commercial open for business. Both of them are besieged by depositors seeking to withdraw their deposits. I do not see how it can last. The town is panic-stricken and the streets are crowded with people excitedly discussing the situation. I was aroused this morning at 4 a.m. by newsboys shouting Xtras. It still seems like a bad dream.

October 15, 1931 2 p.m. Banks in the small towns around Youngstown are either closing their doors or refusing to permit withdrawals except for emergency use.

Several of the wealthiest families in Youngstown had all their funds invested in local bank stocks or in the local steel mills. With these investments almost worthless and with double liability attached to the bank stocks they are wiped out.

More here. And also read News from 1930, of course.

Bill Gross: One of Our U.S. GDPs Has Gone Missing

Tue, 27 Oct 2009 15:19 GMT

Some good stuff from Pimco’s Bill Gross in his latest monthly missive. A sample:

[The last fifty years] produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually. That’s another way of saying you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce. We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds. Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been. Financial leverage, in other words, drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels – at least compared to 1956 – and there could be payback ahead as the leveraging turns into delevering and nominal GDP growth regains the winner’s platform.

…Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.

Important reading.

The Googlization of IT

Tue, 27 Oct 2009 13:55 GMT

Today I took a sales team from a portfolio company to meet with a couple of senior IT executives at a major retail company. Towards the end of the meeting, it started to become quite clear to me the effect that Google and the web has had on IT to date and where it was going. In an oversimplified way, it seems that there have been 3 distinct phases to how the web and Google have impacted the enterprise, first starting at the app layer and increasingly diving deeper into the core infrastructure.

Phase 1 - Consumerization of IT - all internal corporate users are consumers first and then employees second. we have all seen how consumers have gotten used to using browsers and SAAS-based applications and how successful startups have been able to provide web-based applications that users can pull into the enterprise environment starting at a department level rather than having to go out and sell and push technology into enterprises.

Phase 2 - Rise of open source - I would call Phase 2 the rise of open source software over the last 10 years - most of which is hardcore infrastructure type software such as databases, virtualization software, and the like. IT folks leveraged the web and Google not just for applications but also to download core software to help run their internal operations.

Phase 3 - Googlization of IT - have as much of your infrastructure as you can run like Google's - distributed, commodity-based, and in the cloud on a private basis.

Phase 1 and 2 are ongoing and Phase 3 is where I see a few of the more forward-thinking IT departments I have met with over the last few months going. I am not just talking about Google Apps (like email, etc) but about how companies can run their infrastructure internally like Google. If Google can deliver a number of highly scalable web-based apps by clustering commodity servers, then how can enterprises do the same for themselves. This is not about getting sucked into buzzwords on the cloud but really understanding the cost savings and performance benefits a company can get from transitioning some of their infrastructure to a Google-like model.

One company in my portfolio that is leading the charge in the data warehousing space is Greenplum. A customer can buy our data warehouse, cluster commodity servers like Google, and get petabyte scale and much better performance for less than the cost of maintenance of many existing solutions on the market today. In addition, large global companies can have these nodes accessible to anyone anywhere in what we call the Enterprise Data Cloud. One of our large customers said that data was a strategic weapon and that he wanted to make the cost of a running a new query zero. In today's world and without the enterprise data cloud initiative I can tell you that running new queries in a global organization is an expensive and time consuming task of replicating data, creating data marts, running the processes, etc that can take months to get going and days to run reports. Another company in which I am an angel investor is called Eucalyptus Systems whose tagline is your hardware, your data, your cloud. Eucalyptus is an open-source system for implementing on-premise private and hybrid clouds using the hardware and software infrastructure that is in place, without modification. Eucalyptus adds capabilities such as end-user customization, self-service provisioning, and legacy application support to data center virtualization features, making IT customer service easier, more fully featured, and less expensive. Yes there are public clouds like Amazon EC2 which is now also offering virtualized private clouds. But the reality is that many large IT organizations want to control their own data, find ways to make it more easily accessible to everyone, significantly reduce infrastructure costs, and be able to launch new apps or services quickly and cheaply. This is where I believe many IT organizations will be headed in the next 5 to 10 years creating private and hybrid clouds for existing and new applications, a phase which I call the Googlization of IT.

Readings: Galleon Wind-down, Solar, Biotech, etc.

Tue, 27 Oct 2009 12:06 GMT

Bleeding Biotech (which argues for more money for biotech, an idea I disagree with) (American)
Professional Money Management and Peak Oil (Gregor)
The market is 25% overvalued; 15% correction coming (Grantham)
We must overturn the status quo in derivatives (FT/Griffin)
Solar Projects Are Going To Need Plenty Of Water (BI)
Galleon Wind-Down of Funds Is 'Largely Complete' (WSJ)

The VC Channel

The Price of Gold in Gold

Surprise (Not): Madoff&rsquo;s Results Were Generated Via a Randomizer

Where the Jobs Aren&rsquo;t: Everywhere Except Education

Superstar CEOs Suck

Readings: Fox Biz, Bill Gross, Real Estate, etc.

I Want More Information, Not Less

Google acquires portfolio company Gizmo5

Social Recruiting

Exciting news

Diversions: Powers of Ten

Readings: Dollar, Dinosaurs, Deficits, etc.

How to pick a co-founder

The power of two

Someone you have history with

One builds, one sells

Aligned motives required

Criteria: Intelligence, energy, and integrity

Don't settle

Pick “nice” guys

What you don't know

Breakups are hard

Tracked.com Gets More Social

The Dow in Gold: Pricing Yo-yos in Meerkats?

The long tail of VC twitterers

Board Meeting Lessons From The Supreme Court

Hacking Robots – iRobot Roomba Pac-Man Game

What Makes Boston's Start-Up Scene Special? - video

Conferences (continued)

In Case You Were Wondering What I Look Like In A Tie

Books: The Greatest Trade Ever

A Few Good IPOs?

Dying Dollar Dings Exporters? Not So Much

Uptick in October Trade Data

My Field Trip To The Supreme Court

Saturn Is Beautiful

Startup Ecosystems Take Time

The Edwards Strikes Back

Can Startups Save the World? Startups vs. GDP/Capita

Stock Option Vesting Calculator

Readings

Putting entrepreneurs first

Monetizing Twitter -- Bring on the Ads!

The long tail of VC blogs

Startup Boy is back

The New USV.com Launches In Beta

Unsettled in Washington DC

Weekend Reading: Goldman, Gold, Vegas, Sex, and Commercial Real Estate

Add-on-Con09

The AVC Reader Census: A Day Later

Checking Gold&rsquo;s Hotness

Credit Default Swaps: Proudly the Tool of the Devil Again

Protectionism and the Chinese Box of the Renminbi

QOTD: John McCain&rsquo;s 15% U.S. GDP Cut

Who Files for Bankruptcies?

Books of the Week

Readings: Wind, Tools, Complexity, and Ship-Tracking

Friday follies

Valuation and Option Pool

Why is the Boston Marathon More Volatile Than the NYC Marathon?

Welcome Reid Hoffman to the VC Side of the Table

Great Meetup Last Night

QOTD: Lawyered Up

More Ws in the L Column?

Conventional wisdom and cleantech venture capital

Readings

Front-Running in Domain Bids

Best of the startup blogs

The Ether and the Scrum

The “real” America

What Makes Boston's Start-Up Scene Special?

Lean startups aren’t Cheap Startups

Lean Startups aren’t Cheap Startups

The Price of Mistakes are Inversely Proportional to Available Capital

Repeatable and Scalable Sales Model

The Customer Development Venture Pitch

The Double Opt-In Introduction

Market P/Es: Seven Canadas for One ChiNext

Pretending You Are Luggage

Customer development: By-the-book

Surprise (Not): Madoff’s Results Were Generated Via a Randomizer

Where the Jobs Aren’t: Everywhere Except Education

Checking Gold’s Hotness

QOTD: John McCain’s 15% U.S. GDP Cut

Regulation Didn’t Break Banks; Police Don’t Cause Crime