March 2006 Archives
As Q1 of 2006 draws to a close, I am getting reacquainted with my office. I spent the better part of January, February and March running around from conference to conference. As Stowe Boyde from Conferenza reported earlier in the year, my conference calendar for Q1 was jam packed. When the dust settled, I ended up attending a conference about every other week: CES, The Entertainment Gathering, DEMO, TED, O'Reilly's Etech Conference, and PCForum .
What did I learn? Who did I meet? Where did I go? These questions and more are answered on the latest edition of VentureCast.
There continues to be a lot of discussion in venture capital and entrepreneurial circles alike about the onslaught of early acquisitions being made by the folks at Yahoo, Google, InterActiveCorp and increasingly Fox Interactive Media. The question I am often asked goes something like, "isn't this really bad news for venture capital?" After all, if all the "good companies" are bought up before they have the chance to raise venture money, how will we VCs make any money?
Early acquisitions are nothing new. While it feels like they are occurring at perhaps a faster pace for the time being, it has always been the case that the "good companies" attract lots of attention quickly and end up with early acquisition offers. Sometimes entrepreneurs accept those early buyout offers. And sometimes they don't. But when the do it is by no means an indictment of the venture capital industry. It is simply a decision made by an entrepreneur at that particular point in time that the risks associated with continuing to build enterprise value in the future are outweighed by the certainty of a particular price paid today. To my mind, these acquisition offers are just like the new TV game show Deal or No Deal.
For those of you who haven't seen Deal or No Deal, it is one of the more brain dead game shows created. At the beginning of the game, a contestant stands in front of 26 models holding briefcases in their hands. Each briefcase contains a particular dollar amount, ranging from one cent to one million dollars. The contestant picks a briefcase but does not get to look at the dollar value in that case. She then proceeds to pick a half dozen briefcases, the dollar values of which are revealed. As each case is picked, its dollar value is removed from the board of potential winnings. Once the first six cases have been chosen, a fictitious "Banker" is asked what price he will pay in exchange for the case held by the contestant (this is perhaps the most glamourous job ever held by a statistician -- for insight into the Banker's psyche, you can visit his ridiculous Bankers Blog). In theory, the Banker knows no more about the contents of the contestant's briefcase than does the contestant herself. If the six cases eliminated were all low numbers, the Banker will offer a number in the tens of thousands of dollars. If the cases revealed high numbers, however, thus indicating a higher likelihood that the contestant holds a low dollar value in her chosen briefcase, the Banker will offer a buyout of mere thousands. The contestant then has to choose to take the offer based upon the information available or risk potential losses while turning over some more cards. The case picking and Banker offers continues until the contestant either takes an offer from the Banker or has chosen all of the cases and gets to reveal what is in the briefcase she originally picked.
Entrepreneurs who receive acquisition offers early in the lifetime of their companies are essentially faced with the same conundrum as that posed in Deal or No Deal. Relatively little information has been revealed about the long term value of the company, yet the entrepreneur must decide whether or not to take the offer and, in essence, stop playing the game. As can be seen from the game show itself, in many instances taking the deal early on is a good idea because as each new briefcase is opened, the perceived value of the case being held by the contestant goes down, as do the buyout offers from the Banker. However, in many other instances, as time goes on and risk is removed (all the low numbered briefcases are picked), the buyout offers from the Banker increase to substantial dollar values.
Some recent acquisitions and acquisition offers reveal the parallels to Deal or No Deal. Companies like Flickr, Delicious, Bloglines, Writely, etc. had early success and were offered solid amounts of money to sell very early on. Little had been revealed about their long term value but the early indications were excellent (the first briefcases picked were low numbers) and therefore Yahoo/IAC/Google were willing to pay millions of dollars to buy them early. On the flip side, Friendster had similar early indications of high long term value and accordingly Google made an offer to buy the company based upon those early indications. In that instance, however, the company decided to open a few more briefcases, and, unfortunately, each new briefcase revealed negative news about the long term value of the business (in other words, the briefcases all held high numbers). As a result, the offers from Bankers to buy the Friendster business have fallen precipitously. Another twist on the same theme is the Facebook story. Early indications on the Facebook were excellent and the management decided to pass on the first set of acquisition offers. Yet, as the Facebook continues to open briefcases, they keep finding nothing but good news. Thus, if the rumors are true, with each additional piece of good news, the Bankers have offered larger and larger numbers to buy out the company. The folks at the Facebook, however, continue to refuse buyout offers and play on. With any luck, their value will continue to go up until such time as they choose to sell or take the company all the way (I suppose, to kill an already wounded analogy, sticking with the original briefcase you chose and discovering it holds a million dollars is the equivalent of a startup going public).
I don't for a second want to suggest that the long term success of companies is purely a question of chance. Nor do I want to suggest that the key to financial success in a startup is only about selling at the right time. Unlike the contestants on Deal or No Deal, entrepreneurs have a lot of influence over what dollar values are revealed in the cases they choose to open. Successful entrepreneurs systematically eliminate risk while building increased value in their companies. While some factors are outside an entrepreneurs control (e.g. market adoption), many of the risks are influenced by the smart choices made by entrepreneurs along the way.
Ultimately there will come a point in time when each entrepreneur will have to ask him or herself, "deal or no deal?" That some entrepreneurs will choose "deal" early in their company's life cycle is not an indictment of the venture capital industry, it is merely an indication that the Yahoo and Google Bankers are making offers some entrepreneurs cannot refuse. That's good news for entrepreuners. And as companies mature and additional briefcases are opened, in many instances the Bankers' offers continue to grow. And that will prove to be good news for VCs as well. I just pray that Toby Coppel isn't replaced by Howie Mandel any time soon.
The latest issue of Business 2.0 lists "The Next Net 25" which attempts to better encapsulate the innovation made possible by ubiquitous broadband, cheap hardware and open-source software. The Next Net 25 was pulled together by Erick Schonfeld, Om Malik, and Michael Copeland, who have been living these innovations with all of us. While I'm sure there are folks who will quibble with their choices, the Business 2.0 team pulled together a list of really interesting companies.
In connection with the publication of The Next Net 25, Business 2.0 decided to host a roundtable of executives from the various companies they had selected. That roundtable took place last Thursday with a surprisingly large subset of The Next Net 25 execs -- Joe Kraus, Michael Robertson, Kevin Rose, Sam Schillace, Barak Berkowitz, Phil Wessels, Dave McClure, Mark Fletcher, Jeremy Zawodny, Fred Krueger, Toni Schneider, Joshua Schachter, Stewart Butterfield, Geoffrey Mack, Mark Pincus, Chris Lyman, Rob Seaver, Dmitri Shapiro, Adam Gross, Mike Davidson, Steven Marder, Jim Fowler, and many others who I apologize for not listing. Along with these phenomenal entrepreneurs, a few folks from the "ecosystem" were invited along as well. I had the good fortune to be among those hangers on. In the category of money guys, there were four of us around the table -- me, Jeff Clavier, Bill Burnham and David Sze. Our role at the event was to politely endure being told that we were either irrelevant or, worse yet, harmful to the development of web companies. Ironically, of the couple dozen execs in the room, all but maybe a handful of them were venture funded. Which isn't to say that all companies should be venture backed. But surely some of them should, as I suppose most of the folks in the room recognized in their own cases.
The conversation during the roundtable was wide ranging, covering lots of the typical Next Net topics we have tread pretty broadly on our respective blogs. For example, everyone in the room had clear answers to the "what is your business model" question. But that's where we started the conversation. I suppose it was a little bit like a vocal warm up before a concert or stretching out before a marathon -- by the time the business model question had been beaten to death, everyone was ready to dig into some of the more interesting topics at hand.
The Business 2.0 guys conveniently gave everyone nifty Business 2.0 pads and pens when we arrived, so I actually took a few notes during the event. But I'm not a particularly good note taker. So rather than recount all the twists and turns of the conversation, let me share with you a couple of the interesting quotes from the day and the context in which they were spoken. With any luck, that will give you a flavor for the discussion.
One particular quote that resonated well with everyone and has already started making its way around the Next Net world (in fact, it was just used by Adam Gross in a presentation he gave at the O'Reilly Etech Conference) was Bill Burnham's triple "A" business model:
It's the triple "A" business model: AJAX, Adsense and Arrogance.
Despite the fact that essentially everyone in the room had embraced AJAX and many of the folks in the room had also incorporated Adsense in some way or other, everyone went out of their way to make clear that their businesses were in no way defined by the Double "A," let alone the Triple "A." AJAX for AJAX sake was roundly rejected -- what Jeremy Zawodny called "AJAX info porn" -- but there was a great appreciation for the better user experience AJAX had to offer. As for the third "A" (arrogance), one need read no further than VentureBlog itself to see that I am not one to comment.
If there was a mantra of the day, I think that it was user experience uber alles. Everyone in the room recognized that the key to success was to give the people what they want, whether creating a better PBX or a better Job Search. And the way to maximize user experience is unquestionably through iteration. A comment made by Sam Schillace from Writely particularly resonated with me:
We've probably had more releases already than Word did in its first decade.
The folks at Writely are getting a pile of feedback from their users and they are quickly incorporating it into the product to make it better. While chatting with a couple of really smart geeks at Etech this week, I was reminded of Sam's comment. One developer told the other that in order to increase the agility of his organization they had moved from bi-weekly to weekly release cycles. To which the other developer quipped, "that's great, now you're 1/14 as fast as Flickr." I don't know that revving your product twice a day is the answer (perhaps it is), but rapid iteration is unquestionably one of the tactics that has driven real innovation and customer satisfaction in this most recent wave of web companies.
Far more was said than can reasonably be encapsulated in a blog post, but for more color on the event check out these posts by Erick, Mark and Jeremy. I hope that the folks at Business 2.0 will consider having another gathering in the Fall to see what more we've learned about building the Next Net. I'm certain that there will be a pile of activity between now and then. Thanks to everyone involved for letting me lend an ear and, occasionally, a voice to the event.
For those of you reading this on VentureBlog.com rather than on an RSS reader, you may have noticed a new feature on VentureBlog. There is now a search box powered by Rollyo, my friend Dave Pell's company. The cool thing about the Rollyo search box is that not only can you search for a term on VentureBlog, but you can also search for a term on all of the venture capital blogs listed in my blogroll (labeled "Top VC Blogs" in the search box).
The VB Rollyo search is a pretty great resource. When I started writing VentureBlog three years ago, there was virtually nothing on the web about the real nitty gritty of venture capital. If you were looking for information about the venture capital industry, you could search on Yahoo or Google but would find a pretty patchy bunch of resources. Now, given the number of interesting venture capital blogs, there's a huge amount of information about all aspects of the industry available online. And all of it is now searchable really simply using the Rollyo search box on VentureBlog.
My hope is that other venture capital blogs will adopt the Rollyo venture capital search as well. That way, no matter what venture capital blog you're on, you can search all of them for additional info on any topic you may find of interest. I started writing VentureBlog in hopes of providing a resource for entrepreneurs who were looking for information about the venture capital industry. The combination of the many great VC blogs that have emerged and now the simple ability to search them all, has well exceeded my original ambitions. I hope that the readers of VentureBlog find the Rollyo venture capital search as useful as I do.
