Planet VC

How to think about your customers

2009-01-05T22:12:27+00:00

I spoke to Dave Winer about a bunch of stuff today.

One of things I told him was that I loved the post he wrote yesterday - Why our customers are smart.

Dave makes the point that you have to assume your customers are smart otherwise they wouldn’t use or buy your product. And if they aren’t smart then, well, you have bigger problems.

Our customers really were the smartest people — we made products that you had to be smart to want. But I think every company has to feel their customers are the smartest, or else why bother coming to work?

Read the full post. It’s great.

2009 Predictions: What Sayeth the Maestro?

2009-01-05T21:22:18+00:00

Among my holiday reading this year was Alan Greenspan's biography cum economic analysis, "The Age of Turbulence". In retrospect, the book's publishing date of mid-2007 preceded almost precisely the unravelling of the housing market in mid-2007 that eventually led to 2008 becoming the year of the largest market crash since the Great Depression. The book is thus a fascinating glimpse into Greenspan's brain on the eve of the crash.

In short, the erstwhile "Maestro" (as Bob Woodward tagged him in his 2000 book) clearly "missed it". One quote that really jumped out at me: "I was aware that the loosening of morgage credit terms for subprime borrowers increased financial risk, and that subsizdized home ownership initiatives distort market outcomes. But I believed then, as now, that the benefits of broadened home ownership are worth the risk." Ouch.

To get a glimpse of his current views, read his guest article in The Economist. At the end of the article, he points out that, to date, there has been $7 trillion in global sovereign credit pumped into the system ($1 trilion presumably from the US, which doesn't include the additional $1 trillion stimulus planned). This staggering amount of money is going to have to be inflationary at some point. With US Treasuries at 0%, it appears the market is more worried about deflation. But many economic commentators are very worried about inflation in years 3-10 (today's WSJ had a good range of interviews with some of them, so called "Doomsayers"). Greenspan himself points to long-term inflationary risk as "the rate of flow of new workers to competitive labor markets will eventually slow, and as a result, disinflationary pressure should start to lift".

So my big prediction for 2009 is that we will begin the year nervous about deflation, and end the year nervous about inflation returning. Interest rates will need to go up again in 2010 and 2011 to choke off the inflationary stimulus.

What impact all this will have on venture capital and entrepreneurship, I'm still sorting out. One thing is true, venture capitalists and entrepreneurs are operating at a very different end of the economic spectrum, creating new products and services that never existed and thereby creating value. Hence, I remain a long-term bull about entrepreneurial prospects. As Greenspan points in one section that really resonated with me: "[The 1990s] technology boom came along and changed everything. It made America's freewheeling, entrepreneurial, so-what-if-you-fail business culture the envy of the world." I guess I'll keep that photo of me and Alan on my desk after all...

Is Your City Growing?

2009-01-05T20:56:29+00:00

I’m always amused by articles that are headlined “Jobs outlook uncertain for 2009”. No shit sherlock.

I was pleased, however, to learn that Boulder, Colorado is one of thirteen cities (“metropolitan areas”) out of 381 in the US that are actually growing.

The cities that are growing are Boulder, CO.; Lafayette and Louisiana, LA; Bethesda, MD; Jacksonville, NC; Binghamton, NY; Oklahoma City; OK.; State College, PA.; and Brownsville, El Paso, Laredo, McAllen, and San Antonio, TX.

I get LA, but Brownsville, El Paso, Laredo, and McAllen? Must have something to do with that electronic border fence thing.

The fallacies of risk management

2009-01-05T20:46:45+00:00

Imagine the following scenario:

A commercial airline flight takes off for its specified destination. Unfortunately, the weather at the destination is so bad that the pilot is unable to land. As they execute the missed approach, the plane runs out of fuel and crashes – all on board are lost.

Can you imagine the tragedy, law suits, inquiry and resulting government regulations? The public reaction would be (rightly) overwhelming. Fortunately, there are already regulations in place not to mention extensive pilot and dispatcher training that would make this imaginary scenario (thankfully!!) almost impossible.

Every flight should be planned in advance with a set of contingencies designed to cover the unexpected or to recognize that the assumptions made for the flight are not working out. Contingencies include planning an alternate destination, carrying extra fuel and as the ultimate back stop, finding a runway and getting on the ground as soon as practical. Pilots train for these situations and commercial flights also have a high degree of redundancy in systems (engines, power sources, flight controls etc.) designed to minimize the impact of the 1% improbabilities.

The process of building a contingency plan has been drilled into me by every flight instructor and recurrent training session I've had. If I can't build an adequate contingency plan, I don't fly. It's that simple. Not surprisingly, this form of thinking has carried over into other aspects of my life including investing.

Yesterday's New York Times magazine had a great article showing the impact of the 1% improbabilities in investing – Risk Management and how the professional investors got nailed by the Black Swan events of the meltdown. It's well worth a read regardless of whether you are an investor or an entrepreneur.

If you are a CEO of a company (big or small) you need a contingency plan that thinks about the possible 1% events and how you will react to them – fortunately, the US Government thinks about such things too!

Don't fall into the "oh, we'll deal with that if it happens" trap that I've heard so many times in board meetings over the years. There is too much temptation to put aside the really hard issues that may be improbable- they are uncomfortable to deal with and don't have clear cut answers. As a CEO or board member you should make sure that these issues are put on the table and discussed ahead of time.

It may turn out to be unnecessary but when (not if) the improbable occurs, you will be much better prepared and the actions you take will be considered, not reactive. This will help the company better cope and survive the unexpected. Today's environment is so out-of-the-norm that events you think are improbable are much more likely to occur.

Don't find yourself the victim of fear and surprise…

David Lereah Falls on His Real Estate Key Lockbox

2009-01-05T20:45:30+00:00

Whoa, guess what: Former National Association of Realtors chief economist David Lereah didn't entirely believe what he was saying about the wonders of the pre-bust U.S. real estate industry. It was, as he says, his job to put a positive spin on things.

Q. Were you wrong to be so bullish?

A. I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right in line with most forecasts. The difference was that I put a positive spin on it. It was easy to do during boom times, harder when times weren't good. I never thought the whole national real estate market would burst.

Q. The NAR's latest forecast calls for a slight increase in home prices next year. Thoughts?

A. My views are quite different now. I'm pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we'll see a very modest recovery in sales activity in 2009. But we've still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It'll take a long time to get back to the peak prices we saw in many markets.

Q. Any regrets?

A. I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

More here.

When Has Economics Been Correct on Anything Important?

2009-01-05T20:45:30+00:00

The discussion over at Marginal Revolution of famous economists' errors is a reminder that economics is, in many ways, most famous for how badly it gets things wrong. After all, as I posted earlier, the current AEA meetings contained no papers referencing Keynes, and precious few about the current credit crisis. Economists' record for prescience and accuracy are … checkered at best.

Anyway, a MR reader gets the question about right:

Mistakes in economics is a dull subject.
The truly electrifying inquiry would be to name 10… well… 5… OK just 3 incidents when economics made indisputably correct (in a rigorous scientific sense – since economics dare to call itself a science) prediction/forecast on a more or less significant scale

After some thinking I have my own ideas, but rather than biasing things does anyone want to try the question on?

Readings 1/5/09

2009-01-05T20:45:30+00:00

Despite slide in world share, U.S. science impact still looks strong (ScienceWatch)
Deficits, debt and looming U.S. disaster (St. Louis Fed)
Can the US economy afford a Keynesian stimulus? (Buiter/FT)
Everything But The Sky Falls-in On Spain (afoe)
The daily routines of interesting people (Mental Floss)
Famous economists' famous errors (MR)

Dropping a Rock in the Exchange Pond

2009-01-05T20:45:30+00:00

A quick update on my regular currency graph here. A massive rock got dropped in the exchange rate pond back in September, the waves and ripples spread through the fall, and now we're searching for the new normal.

DEMO 2007 observations

2009-01-05T20:13:33+00:00

I attended the DEMO 2007 conference last week. As usual, a LOT of start-ups launching or announcing new product offerings. No particular company stood out as a game-changer, but many examples of trends and product directions that will influence opportunities in the next couple of years. The only big standouts in my mind were Adobe's Apollo platform for desktop Web applications/services and "Zink" - inkless printing. I list a few other companies worth noting below with a brief description.

Boston Power. Proprietary lithium-ion technology platform. Longer-life battery - 50% faster recharge time and lasts same timeline as average notebook (3 yrs) without degradation/fade.

DARTDevices. Interoperability across multiple devices. Dart application enables a series of devices to function as a single "virtual machine" to sync and propagate apps and data across multiple O/S’s, devices, etc. DART devices auto configure, network, update data and applications, etc.

Devicescape. Small client side software on mobile device or VoIP WiFi that enables auto WiFi connection (no configuration) on any network.

Seagate Technology. Introduced "Wireless storage" - to be available this summer. 10Gb-20Gb wireless storage device (WiFi and Bluetooth), very small, interfaces with a phone or other device. Data on the wireless drive can be viewed via the phone, etc.

Jyngle. Broadcast voice based group messaging over SMS.

GoWare/Domo. Mobile device portal platform enabler. Web-based interface to custom create portal page of personal content, feeds, news, content categories, etc. Designates type of device/phone to customize experience for specific handset.

Vringo, Inc. Video ringtones - video clip plays on both sender and recipient phone when a call is made. Nice Web-based user interface for setup. Could be a nice mobile app but presently requires smart phone and only supported on handful of devices.

TeleFlip, Inc. Provides email functionality to any mobile phone using SMS for transport. Easy setup, elegant solution, seems useful.

Boorah. Natural language search / aggregation of restaurant reviews. Like an automated, more intelligent Citysearch. It is like the inverse of Yelp! Very interesting.

Zoho. Zoho is the most sophisticated Web-based competitor to Microsoft Office. They launched a collaboration site that uses the metaphor of a spiral notebook to organize content. They called it the “next generation wiki.” Separate “pages” for different types of content, video, audio, spreadsheets, text, etc., all of which can be accessed and edited by a group. Pretty impressive.

Me.dium. Reveals online “presence” for collaborative web surfing and discovery. Synchronous browsing. Browser plug-in. See in real-time what sites your friends are surfing, or see web habits of other on the Web with similar interests.

Nexo Systems. "Groups 2.0." Great demo very well integrated product design.

Attendio. Event discovery service - subscription for your calendar. Integrates with Windows calendar, Google Calendar, Outlook. Recommends public events (concerts, etc.) based upon your preferences.

DesignIn. Social network and online project management for home remodeling. Nice interactive home design/remodel creation tool.

Zoominfo. Demonstrated new Power Search offering - positioning as “Semantic Search engine.” I'm biased, but I thought this was one of the best demos, lots of buzz.

Jaman. Internet access to long-tail world and independent cinema. H264, very nice quality. Sidebar access to live discussion, supplemental commentary, etc. 1,000 films under contract, 200 films currently live. $1.99 to rent, $4.99 to buy. Not limited to DVD pricing, etc. "Social Cinema."

Total Immersion. "Augmented reality." Imposing 3D onto real environments, cool demo. Not sure about the applications.

Zink Imaging. Printing without actual ink. Special Zink paper embeds color-dye crystals that when heated form color/ink equivalent to enable printing in a pocket-size wireless device for any cameraphone and digital-camera user. Will enable simple mobile printing. Another product coming out this year is a 7 MP camera with a Zink printer built-in. This was pretty amazing.

Adobe's "Apollo." This is a big deal. Cross-operating system runtime that allows developers to use Web technologies (HTML, JavaScript, Flash, etc.) to build and deploy "Web" applications on the desktop. The demo showed setting up an auction on eBay (using a desktop runtime version of the eBay Web service). Also enables "offline" Web uses - synchronizes data back to the Web once back online. If you about MSFT Outlook's lightweight, less functional OWA Web interface (when not on Exchange server), Apollo is enabling the reverse - every Web app can potentially have a full desktop interactive environment when on your PC.

Topspin Live at CES

2009-01-05T20:02:10+00:00

For those of you who want to know about our portfolio company, Topspin, they'll be at CES this week. Foundry folks will be there as well.

The Return of Arbitrage in 2009

2009-01-05T19:57:21+00:00

One of my takes for 2009 is that arbitrage will start to work again. As most readers will know, convertible arbitrage blew up in 2008, partly because of credit issues.

But that wasn't the only arb strategy that blew up. Merger arb was a mess as well, through a combination of busted deals and absentee traders. Further closed-end fund discounts went out to record levels, and while that came back somewhat toward the end of the year, many funds are trading at big discounts to their historical (I know, I know) levels.

So, will 2009 mark the return of arbitrage traders and the closing of some of these discounts/premia/disconnects? I think so, but I'm happy to hear other views, skeptical or otherwise.

China Net Surpasses U.S. in 2009

2009-01-05T18:44:37+00:00

According to some new research from JPMorgan, 2009 will be the year that China Internet users surpass the entire population of the U.S.

2009 Copyright Public Service Announcement

2009-01-05T18:30:35+00:00

I do this every year just because it’s a pet peeve of mine. It’s now officially 2009 – time to update all those copyright notices if you haven’t turned the ending year into a variable. What’s the point of these stupid copyright notices on the bottom of every web page anyway?

Kudos to Matt Blumberg at Return Path for (a) reminding me about this and (b) having his copyright notices automated. Google – not so automated. Microsoft – not so automated (although Live appears to be). Yahoo – automated! Ask – not so automated. Ebay – not so automated. IBM – not so copyrighted! I could go on but it’s time to go have lunch with my partners.

Don’t Forget to Play

2009-01-05T16:43:28+00:00

As everyone gets fully back to work after the Christmas / New Year holiday season, there was something that you just did with friends and family that will have a huge positive impact on your work (and life) if you apply it going forward.

While it might sound trite, make sure you spend social time with the people you work with. Or – in English - “play.”

It’s 2009 and we can (and should) be optimistic about the future, but we are still in the midst of an economic down cycle. I have no idea when the cycle turns positive, but the notion of enjoying social time together with the people you work with applies in both good times and bad.

Most of the people I’ve talked to this morning seems rested, positive, and ready to get going again. Some of this is a natural dynamic that seems to happen when the clock in Times Square counts down to 0 and the calendar clicks over to a new year. Some it is because of all the sugar we just ate. Some of this is because many of us got to spend a lot of time with friends and family that we don’t see as often as we’d like (or – additionally – that we are now finished spending this time with family for a while.)

It’s easy to lose sight of the fact that we spend at least 33% of our lives at work (and often > 50% of our waking time working). Don’t forget to hang out and have fun with the people you work with. Lunch anyone?

Zynga Is Hiring Game Producers

2009-01-05T16:00:05+00:00

One of our portfolio companies – Zynga – is looking for great game producers. Mark Pincus, Zynga’s CEO writes about it on his blog.

“We are open to anyone from game industry, consumer internet or i-banking analysts and associates or mgt consultants. You should be numbers oriented, love games and have a competitive spirit. Our company is a meritocracy where those delivering great results advance fast.”

If you are in the bay area and fit this profile, drop an email to flo@zynga.com.

Always Treat Money Like It Is Your Own

2009-01-05T15:52:06+00:00

This should sound pretty obvious, but it isn't. And I think a lot of people have been violating this rule, particularly on wall street and in big corporations and the economic mess we are in is at least partly because of this problem.

One of my favorite investors on wall street is a guy I've known for almost ten years who has been in and around the hedge fund business for more than twenty-five years. Whenever he talks about his business or the funds he is invested in, he always cites how much of his own money in in his fund and how much of the fund managers he invests with have in their funds. The numbers are impressive. Often 25-50% of the funds he invests in are comprised of the manager's own money. His business was affected in 2008 like everyone else, but I have a lot of confidence that he'll come out of this mess way ahead of most others.

In our business, we have put a significant amount of our own net worth into our funds. It's often difficult to have a lot of your net worth tied up in illiquid assets like venture capital funds, but when you are writing a check every time you make an investment, it has a way of clarifying the mind.

This is particularly important when you are facing the decision to support or walk away from an old and difficult/troubled investment. Most of the time, these kinds of financings are highly dilutive and very punitive if you don't participate. It's really tempting to put more money in because if you don't, you'll get wiped out. But if you do put money in, and the investment still fails, then you've lost even more of your own money and your partners money. The bigger personal check you have to write, the more likely you'll make the right decision. If you don't have to write any checks and all the money you are investing is other people's money, then it's incredibly tempting to "pour good money after bad."

If I think about all the issues we've had on wall street over the past year (see Michael Lewis and Daniel Einhorn's two part column for a great description of them), I think most of these issues have been caused by investors playing with other people's money without enough of their own net worth at stake. Financial leverage is a good example of playing with other people's money. You put up a tiny amount of your own money and you borrow the rest. If things don't go your way, you write off the little you put up and the lender takes the bath. That's been going on in the financial markets and the housing markets for the better part of ten years and we are now seeing the cost of that approach.

Why is it that most of the best managed companies are operated by their owners? Think about Apple, Google, News Corp, etc. All of these companies are run by owners who have a huge amount of their net worth tied up in the business. The same is true of Microsoft until recently when Gates left the business for the most part. But even Gates still has a lot of money tied up in Microsoft. When these leaders make decisions, they are risking their own capital/net worth, not just the capital and net worth of shareholders who they supposedly work for, but really don't.

We don't like to overfund the companies we invest in for a lot of reasons, but there are two big ones. First, the less we invest, the more the founders and managers own and that makes them operate like the company is theirs, not ours. And I also like the discipline that managers have when they are operating with small balance sheets. It causes them to look at every expenditure carefully and act as if the money is their own. As I've said, that generally leads to better decisions.

It is true that entrepreneurs and managers often are too conservative when all the money they are working with is their own. And that's a good reason to bring in other capital, ideally sophisticated investors who understand the business and can add value. But even when you do that, you should treat the investors capital as if it was your own. It's a mindset, and an important one. We've seen all too frequently what can happen when people stop operating that way.

Magazines

2009-01-05T14:11:07+00:00

I’ve been using Magazines.com for all my subscriptions as it is a nice central place, but the latest dip on Discover, National Geographic Traveler shows Amazon.com does have lower prices.

The big difference is Amazon has 50% off on most magazines for a 2 year subscription. So discover is $12 for one year and $18 for two.

How To Avoid Being Burned By An Earn-Out

2009-01-05T13:51:31+00:00

In my recent post, Earn-Outs: Distributing Risk, I provide a high-level description of how an earn-out works. While in they are quite simple, these structures can make it difficult for unprepared entrepreneurs to get their fair payouts.

One of my mentors, Jed Katz, has lots of his experience as both an operator and investor. During his time as an entrepreneur, he learned a few tactics that can help entrepreneurs increase their chances of maximizing their payouts.

I'll cover the the top-four ways to avoid being burned by an earn-out in the ensuing posts.

Bowie’s Live at Santa Monica (1972) album has been in...

2009-01-05T13:44:09+00:00

Bowie’s Live at Santa Monica (1972) album has been in heavy rotation all year for me. Good way to start the morning.

The diligence never stops

2009-01-05T13:35:47+00:00

Reading about the SEC's many fruitless investigations of Madoff over 16 years has me thinking of due diligence this morning. It's easy to criticize the SEC in hindsight for not finding anything. Obviously, Madoff was a master at covering his tracks, making any diligence process difficult. He also played off of reputation and trust to swindle his clients. This probably worked on the SEC as well. I'm guessing that they cut corners on the investigation because of who (they thought) Madoff was.

As an investor, I never stopped the due diligence process, even after making an investment. Pre-investment, I would try to do 360 degrees of diligence, talking to anyone I could find who knew the people, market, or technology involved in a prospective new investment. I would try to get them to meet first-hand with the company to get their direct impressions. I would also talk to previous employers and investors from the founders' companies. As is the case with anyone, no one gets 100% scores. You have to weigh issues and risks with the potential upside.

People learn from their mistakes, and I tend to be a forgiving guy (one of my weaknesses, some may say). I wasn't necessarily put off by a failure in a previous situation, but I wanted to learn as much about it as possible. It's startling to hear the different perspectives that multiple people can have on the same situation. On one company, I had one board member tell me that a key person was barely involved with the company while another said that this person was chiefly responsible for the company's success! How do you know who to believe?

If you talk to enough people, you can form your own opinion. If you weren't there yourself, you can be like an investigative reporter, digging up as many facts as possible and stitching the story together. You can listen to your own instincts and see how they line up with what you've heard from others. But, there are some things I'm not very forgiving on -- honesty and ethics. If someone lied once, they'll certainly do it again. That's an almost impossible habit to break.

I'm always amazed at the lack of diligence that some investors and entrepreneurs do. I've seen some investors back entrepreneurs from failed companies without talking to any of the previous investors. Maybe they wanted to keep the new deal to themselves, but is that worth the risk of missing out on the other investors' perspective? And, very few entrepreneurs perform diligence on VCs. Those investments are two-way partnerships. If you have a choice of investors, shouldn't you do your homework on them?

As I mentioned before, I don't stop this process after investing. If I am working with a CEO and I come across someone who knows them well, I'm going to ask a lot of questions. This has bothered some people who thought I was 'going behind their back'. But, I just want to continue to learn as much as possible about the people I am in business with. I always put a much greater emphasis on my first-hand interactions because they are only colored by my own judgment, not someone else's, too. However, if I can learn how to help a CEO be more effective by understanding a past situation they were in, it only helps all of us for me to take advantage of that.

Also, be very wary of someone who doesn't want their background to be an open book. I've encouraged people checking my references to call anyone. And, I don't feel I need to prep my references on what to say about me. I've got nothing to hide and am happy to discuss any situation I've been involved with, including those that haven't worked out. I'm guessing that Bernie Madoff didn't consider his fund to be an open book for the investigators. He certainly controlled the information that anyone could find out, much to everyone's dismay.