I may have to replace my VC Cliche of the Week posts someday with a series on great Shakespeare quotes to keep in mind while you are doing venture investing.

This one, from Hamlet, is some wisdom that I should have kept in mind but didn't.

The story goes like this.

Once upon a time, we had a very early stage company in our sights.

We met the Company shortly after it was formed.

We became users of the service, promoted it to a lot of our friends, and got to know the management team really well.

When it came time to consider an investment, we did what all good VCs do.  We got on the phone and called ten people in the industry that we knew really well to get their take on the Company's service.

We heard pretty much unanimously that they "would never use it".

We passed on the investment.

But it was a huge headfake.

Because within six months all of the people we called had become customers.

What happened?

Is due diligence actually a bad thing to do?

I told this story last night at a dinner party with some friends and asked that very question at the end of the story.

Our friend Tom Evslin played a bit with his beard (which means he's thinking) and then suggested that when you get unanimous rejection you are actually hearing fear.  And fear should be interpreted positively, not negatively.  It meant that all of our friends didn't understand the company's service and were afraid of it.  Probably because it was highly disruptive.

To which I replied, "the lady doth protest too much"

To which Brad replied, "that's the title of your blog post"

And it is.

I wrote a post yesterday on the Union Square Ventures blog about a methodology we use at Union Square Ventures that I call the three case analysis.

Here's a snippet from the post:

For entrepreneurs, I have some suggestions.

- build a good solid model that has at least a couple years of projections for revenues, cost, headcount, etc.
- make sure to create a cash flow projection that ties into the profit and loss. ideally you'd have a full balance sheet projection.
- make it easy to adjust the model so that it can be used for a scenario analysis
- do the worst case analysis before the venture capital investors do it so you'll be prepared for the conversation

If you are interested in how VCs play with financial models, go give it a read.  As always comments are appreciated.

I don't have the inspiration this morning so I am going to turn this post over to the readers.

Please post your favorite VC cliches in the comments section and I'll bring them up to the front page.
--------
While I was away from the blog yesterday, we got 26 cliches.  Thanks everyone!
I may reblog some of these.  Go to the comments to get the explanations for them.

"There's no there there" - Charlie

"skin in the game" - Simon

"shoulder to shoulder" - Simon

"We can move quickly" - Jay Rand

"We're not investing in this space right now" - Charlie Crystle

"You're too early for us" - Derek Scruggs

"We DO seed stage investments" (when they actually don't) - Simon Veingard

Sustainable competitive advantage - Daniel Nerezov

"Orders of magnitude" - Greg

"Sweat equity." - Joe

We provide more than just capital. - Alistair

"That's management's problem" as opposed to "that's a management problem."  - Tom Evslin

Its not just our money its our contacts - Brian

now tell us what you would do with five times the investment amount - Brian

we're entrepreneurs too - Brian

"They have a good story to tell." - Keith Alioto

"let's wait until we get our guys in there to see where the bodies are buried"  - Keith Alioto

"It's the golden rules.  He who has the gold, makes the rules." - Flint

We have a "hands-on" approach. - Hooman Radfar

This ain't my first Bar-B-Q. - Jackson

It looks good from my house. - Jackson

Someday this war is gonna end. - Jackson

Water on the lectern. - Jackson

We don't have a problem building a bridge, but there's got to be another side. - Johannes Ernst

Friendly Fire - Ken Berger

"How will you reach the beach?" - David Churbuck

"What's your Microsoft (Google)(AOL)play?" - David Churbuck

"Eat what you kill." - David Churbuck

Scalable and repeatable sales process. - Chris Yeh

"bowling alley effect" - Ruchit

What's your "unfair advantage"? - An Entrepreneur

"First mover" - An Entrepreneur

Will the dogs eat the dog food? - Bill Bryant

One of the reasons I like Mark Pincus is he is never afraid to tell you what he thinks.

In this post, he tells the world what he'd do if he were Rupert Murdoch.

Some good points about where big media needs to look for web value.

David Beisel is bringing to us another great post in his Startups series: Seven Questions Employees Should Ask Before Joining a Startup.

As usual, very relevant and worth a read for anyone considering joining a startup. Amusingly, a friend of mine asked me the same question last night, as she interviewed today with the CEO of a young venture-backed company. I would add:

• How is the company positioned in its ecosystem: client/users, partners/channels, competitors ?
• What are the 3 top reasons for clients/users to buy/use the company's products/services ?
• How are our competitors funded ? If there is a major difference in stage or size of funding, enquire about the future financing strategy ?
• If the position is a senior one, ask to meet the VC/board members - if ever they were not part of the hiring process.

I had the pleasure to meet David face to face at Web 2.0, after reading and commenting on his blog for a while. Definitely a great addition to your blogroll.

• Organic Holding Company, which offers the Organic-To-Go delivery/ pick-up service, announced a $2.5M Series B raise. The round was provided by Funk Ventures, and brings total capital raised in 2005 to $5.5M.

• There's been much news lately about the continuing strong fundraising in the VC community. And this is being seen in the cleantech portion of the industry as well. Here's a good article highlighting DFJ Element's emergence and discussing the broader trend (mea culpa: also includes a couple of quotes by yours truly, but it remains a good article nonetheless). [Update: Here's a good in-depth article in Red Herring]
  

• Building off of the mention a couple of weeks ago of In-Q-Tel's investment in Tendril Networks, the Christian Science Monitor has an article profiling another investment by the CIA-backed venture group: SkyBuilt Power. No details on the round are mentioned, but we'll provide them when they're available.
  

Good week for my former Partners at RVC: after the acquisition of Moreover Technologies by Verisign (that was officialized yesterday), Yahoo has announced the acquisition of UK-based Whereonearth.

We (RVC, the managers of the Reuters Greenhouse Fund) had invested in the company back in January 2000. I remember my first visit to their London office, where a large number of GIS (as in Geographic Information Systems) experts were producing and/or aggregating multi-layered maps of the world. Each layer (representing contours of the land, countries, counties, zip codes, roads, rail tracks, etc.) could be independently overlayed in a very impressive way. They also had an extensive database of locations expressed in different languages, with distances. Using these assets, they had developed a number of location-based solutions.

The Yahoo Search Blog actually carried the announcement:

Whereonearth’s very talented team of software engineers and Geographic Information Systems (GIS) experts have worked hard to develop sophisticated technology that contains a unique combination of global data and software algorithms that make local search possible. Together, we’ll be able to provide the most geo-relevant information across all of Yahoo!’s products and services.

The corresponding Reuters piece from is here.

Congratulations to Dev Patel and his team.

 

David Beisel gives you the due diligence checklist you need to complete before taking the job.

This is really good stuff that every prospective employee should read and take to heart.

Startups are exciting, fast paced, and potentially very rewarding financially.

But they have issues.  David's list will help you identify and get comfortable with the issues before you take the plunge.

Thanks David.

I posted last month on Reed's Law, the notion that Group Forming Networks (GFNs) create value more quickly than regular networks.  It makes sense to me that a network whose nodes themselves are networks (think MySpace, Facebook, social networking in general) would increase in value more quickly than traditional networks (think AT&T).

My thinking on this has been greatly influenced by Umair at Bubblegeneration and Nivi, both of whom are younger and smarter than me and thinking hard about this stuff.

But it's not just the young guys in the business who are thinking hard about Reed's Law.  Tim Oren has been busy rethinking Reed's Law on his blog.

And yesterday, Tom Evslin came out and said that he thinks Reed's math is wrong.

So, to summarize, Reed is right that GFNs set up the potential to create value much more rapidly than traditional networks.  How "much more quickly" this happens is the subject of some healthy debate.  And whether there is a natural limit to how far this goes is another subject of some discussion.

So last night, after a nice event with the Tacoda engineering and operations team, we got talking about Reed's Law. Joe Wilson, who has been working in the Internet arena for a long time, suggested to me that the value creation equation needs to also take into account the "monetization ability" of each of these GFNs.

Tacoda specializes in helping people who operate online properties "monetize" them. So it wasn't surprising to hear Joe talk that way.

I guess the bottom line for me on this stuff is that its important to understand the underlying fundamentals of online businesses, but getting the math exactly right may not be the most productive use of time. I've met plenty of great entrepreneurs over the years who know that revenues minus costs equals profits, but have no idea what a differential equation is.  And it never got in their way.

Recently, Dan Farber – the Editor in Chief of ZDNet – was kind enough to invite me to contribute to Between the Lines, the excellent ZDNet group blog. My inaugural post is now up: Innovation 2.0: Why Web 2.0 companies might have to flip to avoid being flopped, and I will be back every now and then.

Want the short version on Innovation 2.0 ?

Forget the innovator’s dilemna principle in the Web 2.0 world: established players (Google, Yahoo, Microsoft & al) are bringing in talents by hiring them away or acquiring their companies, and are playing catch up on new features and services at an unprecedented pace. The initial versions of what they produce are not always great and don’t really match startup products or services, but in a relatively short order, they get closer and closer. And since the “elephants in the room” know one thing – scale, they can intercept startups when these start facing scalability issues and their initial architecture can’t cope with their success.

Enjoy, and let me know what you think.

And thanks to Dan for the opportunity to reach a much larger audience.

Almost 100 million copies of Firefox have been downloaded since last September.

Mark Pincus heard rumors that Mozilla (the organization that manages Firefox development) was at a ~$30m run rate, thanks largely to deals with Google and Amazon–but he made the comment after Firefox passed the 64m download figure. Perhaps Mozilla is now closer to a $50m run rate? No wonder Mozilla formed a for-profit subsidiary.

Incredible.

Blog number porn, courtesy of David Sifry, CEO of Technorati:

• As of October 2005, Technorati is now tracking 19.6 Million weblogs
• The total number of weblogs tracked continues to double about every 5 months
• The blogosphere is now over 30 times as big as it was 3 years ago, with no signs of letup in growth
• About 70,000 new weblogs are created every day
• About a new weblog is created each second
• 2% - 8% of new weblogs per day are fake or spam weblogs
• Between 700,000 and 1.3 Million posts are made each day
• About 33,000 posts are created per hour, or 9.2 posts per second
• An additional 5.8% of posts (or about 50,000 posts/day) seen each day are from spam or fake blogs, on average

Here’s a link to the complete post, with even more detail.

Speaking of privacy concerns, one of my favorite tools is BugMeNot. It gives you dummy account info when web sites ask you to complete registration forms. The Firefox extension is great.

Even the NYTimes likes it (see last item)…

I’m at the BlogOn conference today and tomorrow. My takeaways so far:

• From a panel with Jeff Jarvis: centralized control over brand and community identity is no longer possible. This is an interesting, scary, and empowering idea. Think about it: until recently, companies (especially large ones) could generally define and control their own corporate identity through advertising and marketing. Today, with a thoughtful blog, a single individual can create a global media platform; with common search technologies, like-minded individuals can find each other and move markets. Scary time to be a company with a misleading message or bad product. Empowering time to be someone with ideas who wants to be heard. Case in point: Kryptonite, the company that claims to “make tough locks for a tough world.” If you Google “kryptonite locks”, you’ll see that the second result shows a year-old Engadget article that explains how to pick a Kryptonite lock with a common bic pen. Basically, an enterprising individual figured out how to pick the lock, Engadget posted an article complete with a how-to video, and, from there, the message was out.
• Another noteworthy development is the practice of spontaneous, collaborative tagging, popularized in part by sites such as Del.icio.us and Flickr. The idea is that if enough people (working individually) are given a platform that enables users to freely label items of interest (web sites, photos, etc), an organic model will eventually emerge that meaningfully organizes the information in question. This is important because it allows people with common interests to easily find each other. For example, I can quickly find photos of today’s BlogOn conference by checking the “blogon” tag on Flickr. Clearly, I could find such photos in other ways, but tags work well, especially considering that no one decided beforehand that conference photos should be stored in this manner. For another example, check out the “popular tags” on del.icio.us/popular. You can easily skim a list of sites that interest others (today’s most popular site is a list of the top 20 free fonts)–and quickly find related, relevant sites, as well (by clicking on the design tag, you can find similar sites, such as this one showing web design mistakes).
• Finally, consider internet privacy. The difference in behavior between certain (generally older) users and others (generally younger) is astonishing. For examples, take a look at any number of random MySpace profiles–you can find mostly trival information like a person’s favorite band or book, but also more sensitive identifiers such as income, sexual orientation, religion, drug history, etc. It’s hard to know whether those who have relatively revealing MySpace profiles will eventually come to regret what they’ve chosen to disclose, or if increasing openness is just a part of today’s digital life. Either way, the amount of personal information easily found on MySpace (among other sites) is somewhat terrifying, especially considering that certain services, like the Internet Archive, intend to make a permanent archive of publicly available web sites.

If you check my blog, you will see a new search box and tag cloud on the right hand side. It is a swicki powered by Eurekster, a new product which has just been launched at Blogon 2005 – and yes, it is in beta.

What is a swicki ? It is a community-powered focused search. Like Rollyo, one has the ability to create a search engine only using only a specified set of sources. You can also specify a set of keywords describing your interest/business, which are in turn used in a tag cloud.

I have created an Early Stage Venture Capital swicki, including all the VC blogs in my blogroll as sources. And my keywords are the tags displayed on the back of my new business (tag)card, describing what I am interested in. The initial tag set is augmented by the search terms submitted to the engine.

Whilst the current implementation is sort of one way (I select the sources and the keywords), the tool will be eventually enhanced to integrate feedback from the community to influence the results.

You can find out more about swickis on this FAQ page.

PS: The swicki seems to only search my site… for now. It turns out that I made an error when setting up the swiki, misunderstanding that web searches were restricted to the URLs I selected and that I had to include these to get the intended result. The explanation came in an e-mail from the VP of Engineering of Eurekster who also explained that the search engine was changing the ranking of results based on user clicks, electing to promote the posts that are clicked upon to a higher position.

Thanks for the note, Julian!

Tag: blogon

SmartSynch, which has technology for advanced wireless automated meter reading (we've discussed the topic before here), announced a $12M Series C round. Battelle Ventures (with affiliate fund Innovation Valley Partners) provided the new outside capital in the round, along with existing investors Siemens Venture Capital, JPMorgan Partners, Kinetic Ventures, Nth Power, Endeavor Capital, Lime Rock Partners, Cinergy Ventures, and GulfSouth Capital. The general AMR industry appears to be re-energizing lately.

Brad Feld has a good post on continuous partial attention.  That sounds pretty much like what the Gotham Gal and my kids complain that I give them.

But in his post, Brad describes something I need (and might also address some of my continuous partial attention issues).

Brad calls it an "email prioritization system".

It's the next step for spam filters.

As Brad explains:

“email prioritization systems” (e.g. spam has priority=null, email from Amy or my mother has priority=immediate, email from my partners has priority=high) where the priorities are automatically tuned by my pci based on my behavior things become more interesting.  Finally – add one more layer of abstraction – my pci knows when I am ready to received different priorities and presents them to me only when I’m ready (e.g. I always get interrupted by Amy or my mom, I sometimes get interrupted by my partners depending on the thing I’m working on, but it always comes at the top of the queue, etc.) – and you’re really getting into an interesting zone.  Of course, delivering it one time on the appropriate device (computer, cell phone, television, carrier pigeon) in the right location is a key part of this.

I need this system immediately.

As this blog has grown I am getting ever more email.  And its all good.  And I try like hell to reply to all of it.  In the process, I miss emails from my mom.  It happened a couple weeks ago. I totally blew off my mom. Not cool.

So if I am totally blowing off your email, don't feel too bad.  I am giving you the same priority I gave my mom.

I need one of these email prioritization systems badly.  If you've got one, please let me know ASAP.

Song is the low cost airline operation of Delta Airlines, sort of an in-house equivalent of Southwest Airlines or JetBlue from what I understand. I discovered the airline when shopping for tickets to fly to NYC for Blogon 2005: $292 for an SFO/JFK.

The airline flies single class Boeing 757 with comfortable leg room. Actually I am seating at an exit row and the leg room is *huge*. There is an entertainment system with 20 TV channels, pay per view movies at $5 a pop, games and a selection of a thousand-plus MP3 files.

You have to pay for the food which actually seems OK, and not too expensive, and only alcohol beverages are charged.

Staff is very friendly, with a jean and a cool flashy t-shirt (that matches the color of the cabin). Recorded safety instructions at the beginning of the flight are spoken by an Irish gal with a very thick local accent and Irish folk music playing in the background, cracking a bunch of jokes. Net result: I listened to safety instructions for the first time in years (I know – my bad).

Very clever. I’ll be back.

There has been a fair amount of discussion in the blog world about the bidding war going on for AOL.

Jeff Jarvis reminds everyone that AOL is a "nightmare".

Henry Blodget says there are pros and cons for everyone in such a scenario.

What do I say?

AOL is an aging online business whose audience consists mainly of people who have shown no desire to step out and join the roll your own web that is emerging as the best place to be.

It may be of some value to the big guys as Henry lays out, but its a brand with problem and it may be a big problem.

According to Media Metrix, AOL's audience has been flat at 85 million unique visitors a month for the past year.  It has a reach of about 53% of the total Internet audience and that has also been flat for the past year.

If it were removed from the other Time Warner online properties, alone its audience size would be tied with Google for third after Yahoo! and Microsoft.

Remember, at one time AOL was the biggest thing on the Internet.  It's demise has been slow and sad to watch, but it is a declining asset and Time Warner has not done nearly enough to energize it and turn it around.

Don't get me wrong though, I am a fan of many of the moves that Jon Miller and his team have made, the main one being the move to a fully web centered business.  But it took too long, way too long, to make this move.  That's not Jon's fault.  It's Time Warner's fault.  They weren't willing to walk away from the dial-up business back in 2000/2001 when the writing was on the wall for that business model.

As I was working my way through the Media Metrix report getting the numbers that I quoted above, I came across a stat that honestly shocked me.

Here are the six web properties with the most pages viewed (remember ads run is mostly equal to pages viewed on the web):

Yahoo! - 43,700MM
Time Warner - 31,600MM (AOL is roughly 70% of this)
Microsoft - 21,800MM (MSN is part of this)
eBay - 10,900MM
MySpace - 9,600MM
Google - 6,300MM

Notwithstanding the somewhat interesting fact that Google is a relatively small page view generator, which makes sense given their reliance on search, the shocking fact is how fast MySpace is catching up to the big guys.

And what's even more amazing is that MySpace's page views have grown 50% in the past three months.

Web 2.0 baby!

But I am not really surprised by this because of what is happening in my house.

The Gotham Gal and I left AOL years ago, opting for Netscape for web browsing and email in 1996 and AIM for instant messaging a couple years later. We've never looked back. Never.

But we've kept not one, but two AOL accounts for my kids.

But the girls are never on AOL since falling in love with MySpace earlier this year.  They do continue to use AIM, but they "live" on MySpace.  It's the first page they look at when they log on and the last they look at when they log off at night.

I see what's happening.  AOL is losing its core audience of IM/email driven teenagers to MySpace and they are losing it fast.

And MySpace is ramping big time.

If MySpace could grow its page views 50% per quarter for another six months, they'd have close to 15,000MM pages viewed per month by year end, and would catch Microsoft and AOL by March of 2006.

Don't bet against them.

Who is the smartest guy on the Internet right now?

Maybe not Sergey and Larry.

Maybe Rupert Murdoch.

Does $500mm sound like a bargain?  It does to me.

Fellow "former VC who returned to the bright side"  Tony Conrad kindly gave me a preview of Sphere, ex-Yodel Search, at the Web 2.0 conference, and re-kindly gave me access to the beta version of this new blog search engine, “that uses an advanced algorithm to discover high-quality, relevant, and timely blog posts”.

You might think: why do we need yet another blog search engine – especially after Google launched BlogSearch ? The team behind Sphere provides a pre-scripted answer, since one can bet they’ll hear that question many times over:

The first part of that question is easy: We thought we could build a much better search engine to serve the rapidly growing blogosphere.

When we started building Sphere, there were around five million blogs. Nine months later, there were more than 19 million blogs. With so many people reading, writing, and commenting on blogs, finding high-quality, relevant content has become difficult. For a variety of complex technical reasons (such as an exclusive emphasis on freshness, or an overly simplistic computation of a blogger's authority) other blog search services deliver less-than-satisfying results. Our new, advanced algorithm rapidly sorts through all blogs to find high-quality, relevant content that matches a blog search query.

The second part of that question (you know, the Google part) is a little bit harder to explain. Our corporate therapist hasn't led us to the answer yet, but we think it's because we saw firsthand through Oddpost that size doesn't always matter. We like our product and hope you will, too. And who doesn't love an underdog anyway?

In no particular order, here are a few initial remarks I have regarding Sphere (initial because I am “waking up” in three two hours to catch a plane to NYC):

• It crawls the blog website, extracting the full text from all posts, and not the feed. Its current archive dates back January 2003 but the index can be back-filled by crawling blog archives.
• The engine seems to do a good job at extracting the actual content of pages, and not include “surroundings” like blogrolls. A search on “Jeff Clavier” only returned posts containing my name (sorry, for now only the beta users will be able to access these results). The engine actually behaves more like a feed search engine since basic search unit is the individual post.
• There is however an issue with the fact that some of these aggregator blogs that suck my feed (and others) to build vertical content sites get predominantly displayed. This proves the fact that Sphere does a good job at clustering information, but these should be removed from the index – or they should be given lower priority.
• Sphere seems to do a great job queries containing a few keywords. A search on “open source crm” retrieves very relevant posts, much more so than other blog search engines. Switching the sorting to ‘date’ returns results which are far less relevant, and include a bunch of spam blogs.
• I like the idea of displaying relevant blogs and news article for a particular search term. What is not clear to me is which news source are used currently (CNet ?), and how “relevant” blogs are picked up (search term included in the blog description?). For  example, none of the blogs related to Venture Capital include the established VC blogs.
• Also a good idea, building a profile for each blog included in the index. The information currently displayed is not that interesting though (avg posts per week, avg number of words per post, and recent outbound links). I’d rather see recent posts – including the number of references on each post, recent inbound links, etc.
• The overall UI is actually quite clean. I sense the touch of Adaptive Path in the design (?).

We’ll have to see how well the engine scales at capacity – once the index has been backfilled and users are banging on it. But it certainly looks interesting and seems to deliver on the promise of higher relevance which is a big deal. I should point out that Om and Mike recently wrote about Sphere as well.

Congrats to Tony and team!

PS: You can leave your email address on the Sphere home page if you are interested in joining the beta program, but I understand that there are thousands of people on the waiting list. If you are at BlogOn '05, ask Tony for a demo.
PPS: Almost forgot - I don't have any ties with Sphere (especially since I am an angel investor in Feedster :-) but Tony and I share a number of good friends here and in France.

We like to make our initial investment sometime between the formation of a business and the first dollar of revenue coming in the door.  Sometimes that time period lasts a while.  In the interim, how do you monitor how an investment is doing?  Even after revenue starts rolling in, its helpful to have alternative metrics to monitor the growth and health of a business.

What we do is develop metrics for each investment, usually jointly with the management team, that we will use to monitor progress.

I know that this smacks of the bubble era when public companies were being valued on the basis of page views. But absent revenues, earnings, and cash flows, you need something to work with.

Page views are one metric that we look at.  Another is unique visitors per day, week, month. With the advent of RSS, its important to monitor how much consumption happens via that channel.

Most of our companies do something that is more than just content on a website.  So we like to identify a company specific metric and monitor that.

In the case of Indeed, we like to watch the number of searches per month.

In the case of Delicious, we like to watch the number of postings per month.

In the case of Tacoda, we like to watch the amount of behavioral data being captured in the TAN network.

We do not attempt to turn these numbers into a valuation.  That kind of thinking is foreign to us.  I read recently that the Weblogs/AOL deal values blogs at $600 to $900 per inbound link.  That would make this blog worth $2.3 million.  I am not a seller at that price or any price, but that still seems like a crazy way to value something.

What we do is use these numbers to monitor our investment thesis and make sure the opportunity is playing out the way we think it will.  And we use them to find places where we need to work harder on the service to make it better.  And we use them to show new hires, new partners, and new investors that the business is on a solid trajectory.

I was emailing with my friend Tom Evslin yesterday about some data he was looking for. I called him a "data junkie".  It was a compliment.  He wrote back that:

We gotta know whether we’re making this stuff up or it’s real

Exactly.

Web based businesses have incredible amounts of data that they spit out. It is critical that the management team and investors monitor that data closely to keep a handle on the business and its progress.  It's a skill we work on every day.

David Tebbutt recently published an interesting analysis:  Is Europe losing its innovative edge?

It covers many of the topics we covered during the Innovate!Europe conference that a number of my European friends and I attended, and that David used as a reference for his piece.

He lists a number of the issues Europe is facing when it comes to innovation, startup development and building successful entrepreneurship stories:

1. Fear of failure
2. Fear of success
3. Risk aversion
4. The mirage of the single market
5. The VCs’ lack of experience
6. Shortage of funds
7. Expertise is scattered
8. Lack of openness
9. Official ignorance
10. Out of touch

Whilst I agree with many of the points, I have a few remarks. Instead of fear of faillure and success (1 & 2), I would have said that the European culture does not accept failure as a normal course of business, and has a genuine problem with success, fame and wealth. And on 3), I'll always remember the reaction of my father upon hearing that I had joined an early stage startup for my first job: "You mean, you could not get a real job ?" - implying a position with Thomson, France Telecom or any other established French company.

The other impediment to the proliferation of startups is a combo of 5), 7) and to some extent 6): the ecosystem we have in the US, and especially in Silicon Valley, is just not there. And even if there are ample funds available, European entrepreneurs spend a lot of time fund raising and often try and figure out whether a fund raising in the US would be a practical alternative (answer in most cases: no).

Even with all these issues, a number of European startups have had notable to stratospheric exits (Skype of course, Meetic's IPO, Musiwave, Kelkoo,...) and one fund, Index Ventures has become THE new Tier 1 fund in Europe, backing companies like Skype, MySQL, Zend and a number of interesting others. The issue is scale, once again, but at least the trend goes in the right direction.

And every time I am in Paris, I organize an entrepreneur dinner (now referred to as CGS) with my VC friends Marc and Rodrigo, and it is always a pleasure to meet a bunch of thrieving startups. By the way, the next one is on Dec 7th.

As I was going through European PE news for this post, I read that Pierre Chappaz, the fouding CEO of Kelkoo (sold to Yahoo for over $0.5B), had just joined Index as an EIR. This is a great news, and the European market needs more of them.

Shel Israel announced yesterday that the galley proofs were about to arrive. Just had mine delivered this morning.

The plan is to start reading it in the plane to NYC, and give some feedback to Shel when we meet at BlogOn.

As Shel said, this is a major milestone for him and Scoble. Very happy for them.

People often ask about the effects of high gas and oil prices on cleantech investing.

The idea is that many emerging clean energy technologies (solar, fuel cells, etc.) are still higher cost than incumbent fossil fuel-based technologies. And thus, as the cost of clean energy technologies continues to come down, any significant rise in fossil fuel prices only accelerates the market attractiveness of clean energy.

It's not quite that simple. Oil-based fuels aren't the comparable across all clean energy technologies. For solar, for instance, a more appropriate comp would be natural gas and coal-fired electricity generation. Oil prices are not entirely linked to those prices.

Nevertheless, cleantech investors are unsurprisingly very interested in the long-term trajectories of energy prices, and the most visible such prices are oil. Some subscribe to the idea of so-called "Peak Oil", that the production of oil is peaking and will decline, in the near term. While energy demand is unlikely to fall, if fossil fuel production goes down, the energy production must come from somewhere, and new energy technologies are a likely beneficiary. Along these lines, the ongoing debate between oil optimists and peak oil advocates (read parts one and two) is important to follow.

But cleantech investors also need to watch more than just oil prices as they think about the long-term viability of energy tech investments. Natural gas prices have also been rising as well. And new coal generation capacity has been lagging demand, at least in the U.S. But for how long? Or will increasing emphasis on policies to address climate change permanently raise these prices as well?

The point being, it's possible to envision scenarios where energy prices continue to rise in oil-based energy markets (e.g., transportation), but fall back again in natural gas and coal-based energy markets (e.g., grid electricity). Or vice versa. Or where both rise permanently. Cleantech investors need to make their own judgements and be ready for any number of possibilities.

[10/14 update: I received the following good thoughts from another cleantech investor who asked to remain anonymous:

"People seem to think that because the price of oil is high that this benefits alternative energy companies and technologies across the board, but that's not true.

In the energy sector, there are separate commodities, which are not fungible: oil, natural gas, and eletricity.

The price of oil does not directly affect the price of electricity - only 2.5% of electricity in the US came from burning oil in 2004 - whereas 50% came from coal and 18% from natural gas.

Therefore, adoption of solar PV does not depend on the price of oil but on a) the retail price of electricity and b) government incentives and mandates (buy-downs, RPS)."]

My first post on the video iPod prompted some good debate in the comments.

Last night we were sitting around the kitchen table talking about the video content that is available via iTunes.

Jessica said that she doesn't watch Desperate Housewives.

Emily said that iTunes needs to make a deal with Fox (The OC) and WB.

I told them to forget about paying for video on iTunes.

That we were gonna synch the video iPod to the Tivo.

Their eyes lit up.  Wow Dad, can we do that?

Honestly, I wasn't sure we could.  But after reading this post, I think its possible.

I am going to try to make this work once we get our video iPod.

Brad says web services are different than the things we've been investing in IT for the past 20 years.

And he explains why.

Check it out on UnionSquareVentures.com.

Plenty of speculation about a possible sale of AOL to Microsoft or a combination of Comcast and Google.

I think a Google-AOL deal would be difficult for several reasons. First, the two companies have very different cultures; Google focuses more on technology, while AOL is much more a media-driven company. Second, AOL has a huge number of employees–about 16,500 (according to Tom Berquist at Citigroup), compared to Google’s ~4000. Managing a merger of this scale is difficult, and it isn’t something Google has yet attempted. Third, AOL generates most of its advertising revenue from traffic generated by its dial-up customers. It isn’t clear what will happen to these users as AOL transitions to an “open” company that isn’t focused on subscription revenues.

Safa Rashtchy of Piper Jaffray is a bit more grim in his analysis: “By itself, AOL doesn’t have any major asset of use to Google, except perhaps their instant message system. I wouldn’t want them to overbid for it.” (via the NYTimes).

All that notwithstanding, AOL has sufficient scale to merit attention. For the first half of 2005, AOL:

• Had 27 million subscribers,
• Generated $4.2 billion and $692 million in revenue and operating income, respectively, and
• Owned a variety of well-known brands, including MapQuest, Moviefone, Advertising.com, and, of course, AOL Instant Messenger (see table for market share numbers, taken from News.com)

Favorite statistic: AOL sent roughly 660 million “free account” CDs via snail mail over the years (US population = 295 million).

All that said, I think Microsoft has the most to gain or lose in any AOL deal. Although MSN has made a number of improvements in the past year, it still lags Google and Yahoo in many key areas. The recent announcement that MSN and Yahoo will open their respective IM networks gives Microsoft interesting leverage–by adding AOL IM to the mix, MSN could effectively control the game. Most important, Ballmer seems determined to improve MSN’s competitiveness. Given that, and the cultural differences between AOL and Google, my guess is that Microsoft will end up with some sort of deal or partnership here (even if the price tag is high).

Too bad there isn’t a way to bet on the action at Yahoo’s Tech Buzz game…

I wrote a post about this cool web service called Word of Blog back in mid August.

I have been using Word of Blog here on my blog since early July to power my House Ads.

And I love it.

It allows me to upload small "tile" style graphical ads to a central place. From there anyone can put them on their blog. In some cases, I may be the only one running these ads. But in other cases, the ads will get picked up by others on their blogs.

See what has happened with the Tedstock ad or the Hackoff.com ad for examples of how this can spread.

It's a social network for sell side advertising.

A couple things have happened on the service recently that caused me to want to post again about Word of Blog.

First, they have an ad up for Recovery 2.0 which is an effort of many in the Web 2.0 world to come up with better disaster reaction and recovery web services.

I know a bunch of people who are working on Recovery 2.0 and I support what they are doing and so I've added a Recovery 2.0 ad to my blog.

But I am even more excited about the ad rotation system they have implemented at Word of Blog.  If you register, you can build a portfolio of ads. First you put the "portfolio code" on your page.  Then by simply clicking on "add to my portfolio" whenever you see a cool Word of Blog ad, it goes into rotation on your blog.  When you tire of the ad, you go to your portfolio and delete it.

Very nice and very simple.

I was starting to build a very large tower of Word of Blog ads on my right sidebar.  And so I moved it below my Adsense ads.  But now that I can rotate ads, I have moved my "House Ads" which are World of Blog ads back above Adsense.  And you'll only see one each time you come to my blog.  I think this is great. 

One thing I'd like to see the Word of Blog guys do is let you pick the number of ads you want in your rotation scheme.  For example, I might want to run two ads on every page instead of one.  Or three.

Word of Blog is still in its infancy.  They have about 150 ads up there now.  And about 500 bloggers using it.  But because its so easy to join, easy to use, and easy to submit ads, I think it has the chance to spread virally and scale quickly.

There is no payment system in place now.  It's just a cooperative effort at this point. Which is the way a lot of these things start. If it turns into something real, I am sure a commerce system will follow.

If you want to run some Word of Blog ads on your blog, go check them out.  I hope you like them as much as I do.

Are you having trouble getting your legitimate permissioned email through spam filters?

If so, you are not alone.

Return Path, a Flatiron portfolio company, and the leader in helping marketers get legitimate mail delivered, reported yesterday that:

The blocking of permissioned-based email by users' Internet service providers and Web-based e-mail providers remained just as big a problem this year as it was last year.

and

Mistaking legitimate e-mail for spam, ISPs, and Web-based e-mail providers failed to deliver 21 percent of permission-based e-mail to consumer inboxes during the first half of this year, compared to 22 percent during all of last year.

I know that I've blogged a bunch about this problem already, but how would you like that email annoucing ticket sales to your favorite band's local concert to get blocked?  How about your visa statement this month?  Or the impending shipment of something that has been backordred that you want asap?  Or the verification email from that cool new service you just joined?

This happens all the time and the spam cops don't give a damn about it. They think their job is to block spam and if some legit email gets blocked, too bad.

Return Path helps legit email like this get through.  So if you are sending permissioned based email and having deliverability issues, give Return Path a shot at helping you. I am certain they'll deliver for you.

Yesterday we flipped the switch and turned our website, UnionSquareVentures.com, into a blog.

Like most things, we should have done it a year ago when we first launched our firm's website.

But better late than never.

Why did we do it?  Because, as Brad explains in his first post:

We realized that our [investment] thesis evolves incrementally as a result of our dialogue with the market, and that the best way to manage that was to accept that we would never get to an answer, so we should just publish the conversation.

Go read the whole post. It's short and to the point, like all good blog posts.

So what does this mean for A VC?  Not much, I suspect. I do not plan to stop blogging here.  And most of what I blog about here isn't appropriate for our firm's blog.  But some of it is.  When it is, I'll either post it here and cross post it there.  Or, if it's the announcement of a new investment or something specific to Union Square Ventures, then I'll post it there and link to it from here.

But there is something you'll get at UnionSquareVentures.com that you won't get here. You'll get a complete picture of our firm. You'll get to read Brad's views on the market which until now were only available to me, Charlie, our portfolio companies, and a few friends (but often ended up on this blog with me taking the credit).  And you'll get to read Charlie's posts about our business.  And all of my posts that I put up there.

So if you are interested in the complete view of Union Square Ventures, subscribe to our blog via RSS or via email (enter your email address on the left sidebar of our blog) and then let us know what you think by commenting or linking back.  As Brad says, please join the conversation. We think it will be a good one.

A couple of updates on previous discussions:

• Here's a well-done profile of USRG, which recently announced a capital raise.

• Referring back to the series of posts on the intelligent grid, this analysis of the impacts of the new energy law on transmission is an interesting read.
  

Apple introduced the video iPod today.

I gotta get one.

60gigs for $399 seems like a pretty good deal.

It was never heavily advertised by Apple, but iTunes has been able to play video for a while now, at least since version 4.9.

And since iTunes also accepts RSS feeds, I've been watching funny videos in iTunes for a while.

I do that by putting the following feed into the "subscribe to podcast" field in iTunes:

http://del.icio.us/rss/tag/funny+system:filetype:mov

So now I can watch the funny videos I get with this feed on an iPod while killing time on the subway.

Cool.

I already posted about this a couple of days ago, there is more!. As West Coasters converge to Big Apple for BlogOn 2005, a number of meetups are being organized. Here are the ones I plan to attend – and note that they are all open to everyone:

• VC Bloggers Meetup on Sun 16th, 7PM

Where:  Local West - 1 Penn Plaza (33rd Street and 8th Avenue)

More information: Wiki sign-up page

• BlogHer Meetup on Mon 17th, 7:30PM

Where:  La Bottega Cafe, in the Maritime Hotel (363 W. 16th St)

More information: BlogHer meetup announcement

• Buzznet Meetup on Mon 17th, 9PM

Where: Lolita Bar, 266 Broome Street (East Village).

More information: Tony Pierce’s announcement

Come hang out with MC Brown and meet Tony Pierce, the newly appointed Buzznet Community Manager.

Let me know if you know of any other, and I’ll add to the list.

Tag:  BlogOn2005

The widely anticipated announcement is now out: MICROSOFT AND YAHOO! ANNOUNCE LANDMARK INTEROPERABILITY AGREEMENT TO CONNECT CONSUMER INSTANT MESSAGING COMMUNITIES GLOBALLY. One of the longest standing Internet “Berlin walls” is about to collapse, as these two giants are working together on connecting their back-ends and create a virtual community of 275M users. This is slated for release sometime in Q2 2006 (why so late ?):

[…] In addition to exchanging instant messages, consumers from both communities will be able to see their friends’ online presence, share select emoticons, and easily add new contacts from either service to their friends’ list, all as part of their free IM service.

The next three questions that come to mind are:

1. OK, how about AIM and Skype ?
   AIM is still the largest IM network, and from what we heard in the “Web 2.0 Teens Panel” it has a strong foothold in the younger generation of Internet users. Will AOL be able to maintain its virtual segregation now that its largest two competitors have agreed to do this or will they use the usual “respect for the security and privacy of our users” excuse ? Or is Rafer right in thinking that AOL is about to do a deal with Microsoft ?
   What about Skype’s IM ?
2. What if the integration backplane was XMPP/Jabber ?
   This would create a level playing field for other IM networks - consumer and professional ones – to connect, deliver presence information and text communication. Client Userplane would be able to offer federated access to the 10,000 communities they power with such an approach.
3. What is being connected: text messaging and presence at a minimum, but what about voice and video ?
   The press release does not mention voice and video, which is not surprising. Even if most voice-enabled networks provide a SIP interface one way or another, implementing voice integration might be a step that these companies want to consider taking a bit later. Om thinks that voice bridging is actually part of the interoperability ?

I am going to do a mashup this week.  I am going to combine my Nuggets, MP3 of the Week, and VC Cliche of the Week posts. Let's hope this works.

In high school and college, I was a big fan of Ian Hunter and Mott The Hoople.  Ian Hunter released a brilliant self titled solo record in 1975 which I still listen to every now and then.

It's has a fantastic cover of Who Do You Love and a bunch of other really rockin tunes on it. If you like straight up '70s style guitar driven rock n roll, I bet you'll like this record.

The opening number is called Once Bitten, Twice Shy and it is a fantastic song.  Ian opens it with the classic "Allo". I'll never tire of that opening.  The song is about the corruptive powers of rock and roll. It's a pretty well known song and has been covered a lot. Here it is in case you've never heard the song or just want to hear it again.  Man, did those guys rock.

OK, so now that we've gotten through the Nuggets and MP3 of the Week parts, here comes the cliche of the week.

Life is a learning experience. The older you get, the wiser you get.  But there is a cost to all of this learning.

I attended the Return Path open house last night and we got to talking about how some of the greatest works of art, music, science, literature, etc were created by people in their 20s.  And how these same people never did anything close to that brilliant for the rest of their lives.

There is something about not knowing the impossible or improbable.  It allows you to take risks and achieve at a level that can produce amazing results.  Look at Microsoft, Dell, Yahoo!, Google, etc.  All created by kids who had a dream and made it happen.

Life takes its toll on that blind enthusiasm.  You get bitten or burned.  And you become more careful and cautious.  Once bitten, twice shy.

I know. I've been there.

My post on Web 2.0 last week was taken by most to be a "yellow light" as Jeff Jarvis put it.  And so it was.

It's human nature to be more careful the next time.  But caution isn't all good either.

Venture Capital is about taking risks.  Not stupid risks, smart risks.  Risk and return are always correlated in the end.

So, the trick is to learn from life's lessons, get smarter, wiser, but not shy.  You have to take risks to make money.

Once bitten, twice shy.  Gotta work against that tendency.

Every rupee invested in Bharat Forge 3 years back would be worth over Rs. 12 today. Infosys’ profits have grown on average at 67% annually since 1999. A single investment in Spectramind returned ChrysCapital’s entire first fund. These and other impressive factoids stem from one underlying concept – labor arbitrage. The logic for this opportunity is simple – 40% of the world’s working age population is in India and China. And for most of the workforce, salaries are as low as 10-15% of those in US, Western Europe and Japan. And how large is this opportunity, to relocate jobs to these countries? Just look at the P&L of any company, for labor cost that is embedded into COGS, sales/marketing, G&A, R&D and overheads. It doesn’t end there. There is labor cost in their service providers’ billings – utility companies, telcos, banks, insurers employ large numbers of people to service their customers. Then, go one level deeper into each company’s salaries and see how their employees spend their money – retail, consumer goods, healthcare, hotels, airlines all have their own labor cost. As long as cost savings more than cover increased physical and virtual coordination costs, several labor-intensive activities (except a few high-touch and critical ones) can be performed remotely from low-cost countries such as India and China. And to restate the obvious, coordination costs have dropped dramatically over the last decade, allowing a thousand call centers to bloom!

Personally, this opportunity is the most boring and the most significant among the three that I mentioned. Boring, since these are simply existing products/services being delivered from a new location. Significant, since this can comfortably scale into the 100s of billions of $ over the next decade. India’s FY05 exports of IT, BPO, textiles, auto components and pharmaceuticals add up to $12.2 billion, $ 5.1 billion, $ 14 billion, $ 1.2 billion and $ 3 billion respectively. At a 30% growth rate, this would reach $100 billion in 4 years! For that much money, I can put up with some boring stuff! (FYI, China’s exports are 6x that of India).

All this is nice, but where do I invest? Let me start with manufacturing, for a change. Auto components offers great potential, since the opportunity is led as much by high-skill engineering as by low cost shop-floor labor. Industry cost pressures are immense, as reflected in this morning’s headlines on GM, Delphi and Dana. I’ve personally spoken to purchasing managers at global auto OEMs who have a target to move 30% of their components to low-cost countries (the math works out to $250 billion). With a premium on quality/precision, timely delivery directly to the production line and turning around new designs quickly, this plays to India’s advantages. The key is to look for companies that have strong in-house skills in product design, tool/die design, indigenization of capital equipment (this can reduce capital cost by as much as 5-10x) and a focus on high-precision components. Earlier this year, we invested in Rico Auto, for precisely these reasons. With industry exports at $1.2 billion, there is a lot of headroom left to grow.

Pharmaceutical exports, that leverage process chemistry skills, also offer similar scope. However, I do find a few concern areas here. To start with, product costs are a very small part of the final sale price, with R&D and sales/marketing being far larger cost heads. There are also regulatory risks in patent challenges that are very hard to assess. Unlike relatively stable car (and component) prices, drug prices tend to crash once they go off-patent, potentially squeezing margins more than anticipated. To address and/or bypass these risks, companies are evolving new business models around contract research, contract manufacturing and clinical trials. While I remain bullish on the sector, picking specific companies to invest in requires a thorough understanding of each of these risks, in the context of the company’s focus area and business model. I’ll be honest in admitting that I am not a pharma expert, and actively invite comments on this topic.

Textiles are India’s largest export category, in revenue terms. However, the China-factor looms largest here, especially in products with lower levels of value-add. I find the argument that ‘retailers will buy from India, to hedge their China concentration risk’ hard to accept as a sustainable demand driver. I would rather invest in companies that can sustain their market and profitability in their own right, through making finished garments that meet global design and quality levels, at a competitive price. Companies like Gokaldas and Zodiac are succeeding in doing this, and I see more of these emerging.

Now, services. I’ll pass on IT Services in this piece, since this is too well understood for me to say anything interesting. Further, most players are generating so much cash, that they don’t really need growth capital from external investors like us.

The 1st wave of BPO companies were funded in 1999-2000. I compare these to the first 15 overs of a one-day cricket match, played on the sub-continent. You’re in early. Huge opportunity (hardly any fielders outside the circle, docile wicket). The strategy is to get going quickly and make the most of it. Who cares about sound technique. Someone else can consolidate the innings later! My test for separating these first-15-overs deals from later ones is very simple – do a ctrl-F for words such as ‘profit’ or ‘margins’ in any press release on both the entry and exit. If you get zero results, there you go. These are top-line and potential driven, similar to internet deals in the days gone by. An astute reader would figure out that Skype falls into this category!

BPO today is more of a test match. Minor details such as cost and profitability matter. Consolidation and big-getting-bigger are imminent. While I wish I were investing 5 years ago, I have to live with what I have now. The basic horizontal services – data entry, customer service, transaction processing – are well covered by the incumbents. There is a second wave of more focused, niche BPO services companies that are emerging. I find the KPO phrase quite contrived (When was the last time you used the phrase ‘knowledge process’ in everyday conversation, with a straight face? If you did, my condolences!). Like web 2.0, it is a good catch-phrase that may yield higher valuations from the unsuspecting. The main challenges facing these niche-BPO companies are scalability, a much harder selling process and people-retention. Niches are called that for a good reason. Several such areas are amenable to companies reaching $10+ million revenue, but not a lot more. Further, individual contracts tend to be both project-like (as opposed to ongoing processes) and small (I’ve heard of 1 FTE contracts), in areas such as analytics and research. Such services are more core to what the client does, making it a hard-sell. Internal teams at the client themselves are fragmented and de-centralized (retailers and consumer goods companies have research/analytics people embedded into each business division/department, making outsourcing even harder). By definition, such BPO companies employ people with higher skills and commensurate aspirations. Such people are harder to retain. A good financial analyst would rather work in a client-facing role with an investment bank, than in a back-office, vendor set-up.

If you are running a niche BPO company, and have figured these out, what are you waiting for – give me a call!

The alarm:clock was first to report on the recent Series C funding of SugarCRM, that brought $18.77M to this open source CRM software maker. According to Thomson VentureXpert, NEA led the round with participation from Walden International and initial investor Draper Fisher Jurvetson. NEA’s Scott Sandell has joined the board of directors.

Why am I writing about this ? Because this is one of the few enterprise software companies I have been interested in tracking. The company had raised their $5.75M Series B and their $2M Series A respectively 10 and 15 months ago, and did not require a new cash infusion – based on its reported market success. By implementing a dual license strategy, and leveraging the community to develop portions of the product, and make available through 21 languages less than 18 months after launch (which is more than Salesforce.com after 8 years).

VC friends of mine looked at SugarCRM’s Series B, which was very competitive, and priced the company over $20M. Given this newly raised amount, one can expect that NEA must have offered a pretty hefty valuation to convince the company and its investors to take that additional investment.

DFJ has scored a double whammy with Baidu and Skype exits this year, and it feels like SugarCRM is a nice one in the making. Congratulations to Josh Stein who led the original investment – and recently made Partner.

More:

• BusinessWeek published last week this interesting piece on open source, mentionning SugarCRM.
• Matt Marshall over at SiliconBeat features SugarCRM and Scott Sandell

Tom Foremski and Rafat Ali have both been on the story very early on, which has just been confirmed by two of the three founders of Moreover (Nick Denton and David Galbraith). So I'll get out of my reserve and congratulate the team led by my friend Jim Pitkow for the great job they have done over the past couple of years, leading to this acquisition.

I have been pinged by a number of bloggers and journalists over the past few days, asking if was aware of the deal. As a former GP of the fund that led Moreover's Series B, I obviously was but could not talk about it. I am sure you all understood.

Buddy, and fellow co-investor, Ed Sim just posted his "can't comment" note. I guess that Jeff Jarvis' will come soon (Jeff was an independant Board Member of Moreover).

If you are like me, you get a lot of spam touting penny stocks.

I just hit the delete key, but a guy named Joshua did something much cooler.

He built a page where he tracks all of the stock spam he gets.

Take a look.

Too bad you can't short most of this crap.

And I do mean crap.