Generated Transcript

David Hornik

[00:00:01]
Howdy and welcome to VentureCast. In the last VentureCast that I recorded, I teased you all with the idea that I was going to talk about my post about Deal or no Deal and then ended up only talking about conferences for a half hour. And frankly, after a half hour, who could possibly listen any longer to my voice? So I decided to split the two up and start a new start afresh with Deal or no Deal, starring Howie Mandel. So for those of you who haven’t haven’t seen the post, essentially the post is talking about this idea that there’s this ridiculous game show.

[00:00:39]
And the game show, if you haven’t seen it, it’s called Deal or no Deal, where you stand in front of 30 some odd models who are holding briefcases. And in each briefcase is a number value, a dollar value, and the value ranges from $0.01, I believe, to a million dollars. And you pick one of those cases and that’s your case. And then you start eliminating still left out there by picking the different numbered cases. I’ll take number case 2, numbered case 4, numbered case 7, et cetera.

[00:01:14]
And as you pick each case, then it’s opened up and reveals what number you don’t have in your case, which you can’t look inside of. So if the numbers that you pick when they’re revealed are all low numbers that you know, case number one has a dollar and the next case has $100 and the next case has $200, then the value, the expected value you still hold in your hand is going up because the large number of possibilities are still on the table, but there are fewer cases. And as someone who responded to my blog post put it, it’s actually quite simple to figure out what the expected value of the case that you hold is. You basically look at the big numbers that are still on the board, you add them together and then divide it by the total number of cases that are still out there. And that’s the likely value of what you’re sitting on.

[00:02:06]
So if there’s a million dol and a $500,000 and a $200,000 case still out there, and there are 10 cases on the board and you sort of add them up to a couple million dollars, then maybe what you’re sitting on is worth about 200,000 bucks. And then periodically in the show, the banker, who’s this fictitious character who sits off to the side, you never see his face, calls down and says, I will give you X number of dollars to quit while, you know, while the going look at sort of what’s been eliminated and what’s still left on the board and figure out whether you want to take that offer. And it turns out that in the beginning of the show, in order to keep the show interesting, they basically underbid. They give you offers that are lower than the expected value of your case. And as things get further along and there are fewer cases and there are still big numbers on the board, then they start trying to get you out by giving you bigger numbers that maybe make more sense on a statistical basis.

[00:03:07]
But anyway, that’s the show. And my comparison was to that show, which was to say that, look, there are all these acquisition offers that are occurring these days. And when I say all these, I mean it’s actually not a huge number if you consider how many companies have gotten started in and around new web services. Things, you know, not just rightly, but the businesses like rightly not just Flickr, but the businesses like Flickr, not just Delicious, but the businesses like Delicious. Sure there are acquisitions that are taking place, but the aggregate number of them is not in the hundreds.

[00:03:42]
So it’s still a relatively, relatively rare circumstance. But in any event, there are circumstances where Yahoo and Google and Interactive Corp. And Fox and others are saying to startups, hey, we’re willing to give you 10 million, 20 million, $30 million to buy your company now rather than you go out and raise a bunch of venture capital and drive the business and see if you can acquire a bunch of customers and increase the value. And so companies are faced with this early question, an early decision, which is deal or no deal, Will will you take Google’s millions or will you raise some money and open some more cases and see whether your business is getting stronger or weaker based on whether the acquisition growth curve continues to go up and to the right and whether the cost of acquisition continues to stay low and whether your business is increasingly or decreasingly viral, whether advertisers are increasingly flocking to web experiences or not, and whether the demographic that you serve well is one that’s appealing to advertisers. Are video ads going to increase all of these things? I mean, we sit around those of us A who are investing in the space, but entrepreneurs who are considering services, companies that will serve this particular market sit around all day and night trying to figure out what are the high value things that increase, you know, that when they go well, will increase the expected value of your company.

[00:05:15]
And so, and as an early stage investor, I look at all of those things, things in the same way that I think Google and Yahoo and Interactive Corp. And others do. Which is to say, what do we know? What do we know about this company? We know how many users there are now. We know how quickly that user number is growing.

[00:05:33]
We sort of have a set number of points on the curve. We can extrapolate the curve and take a good guess as to how likely that is. I mean, if the slope of the curve is incredibly high, will that curve continue at that pace? And for how long? You can acquire a million customers a month for a certain period of time.

[00:05:55]
Does it accelerate, does it decelerate? All of those things? So in any event, as entrepreneurs sort of look at the points that they have on the curve, which I equate to sort of the opened cases, the open suitcases. You know, you can say, gee, you know, there are a certain set of positive factors and a certain set of negative factors. And so what do I impute the likely value of this company to be going forward?

[00:06:19]
Is there a long term value? Is there a very big market? And can I continue to capture some of that market in a meaningful way? And so my point of comparing it to deal no deal is that at any given point in time when someone offers you a deal and that deal, as I discussed, it is an acquisition offer. But frankly, it’s the same thing when it comes to a term sheet for an investment.

[00:06:47]
You have to look at the, you look at the assets that you have and the lessons you’ve learned and you assess the value of the company in light of those things and say deal or no deal, and it’s at a point in time and you make that decision and then you make the best decision you can and then you go about acquiring more information before the next point in time when you have to make a decision. Right? And so I think that’s the appropriate way to run your business. I don’t think it’s appropriate to run around trying to figure out how you can acquire that next deal. I don’t think that it makes sense to try and figure out how to appeal to the banker.

[00:07:27]
How do you build a business that appeals to Google or appeals to Yahoo in a way that you think might increase their particular interest in an acquisition or the likely value that they might perceive, because there are so many extrinsic factors that will influence that. There’s so many things that you will just be plain wrong about, or where the market will shift in a way that you hadn’t anticipated, or a new competitor will come out who dresses some piece of the problem you’re trying to solve. All of those things that you can’t predict. And so the best thing you can do for your business at any given point in time is to look at the things that you think are going to drive the most value for the business as a whole and try and do those things right, try and accelerate the curve, try and minimize the acquisition cost, try and maximize the appealing demographic you’re serving, try and minimize support costs, try and maximize the number of users that can be served on a given, any given piece of infrastructure. All of those things, which are things we can control, which are things that we can test and manage, and if they go the right way, necessarily increase the value of the company and trying to avoid the things that have speculative value, but don’t necessarily increase the value of the company as a whole, increase the value of the company potentially in the eyes of some acquirer.

[00:09:00]
So I guess this is ultimately the big distinction to my mind, between sort of company building and feature building. Company building is where you go about trying to create the greatest possible value in a property that has independent stand alone value. And feature building is where you try and maximize the value of the thing that you’re building as it integrates with someone else’s larger, longer term business. So in the past I’ve talked about the venture business and this idea that, you know, venture investors try to fund those things that are long term standalone businesses, where our money, our venture investment will accelerate the growth of that particular business. But we’re not likely to invest in things that we, at least at the outset perceive to be feature businesses, where their long term value is almost entirely as a piece of something larger, as a piece.

[00:09:59]
And so back to the sort of deal, no deal question. As I sit on boards and as I look at investments, what I assess at any given point in time is where are we in terms of the big picture, in terms of the big win, which is to create a long term standalone company that has huge value as its own ecosystem, which will encompass other things, as opposed to value principally by being encompassed by other people’s businesses. And so as deals come down from potential acquirers, additional funding, et cetera, all you can do at any given point in time is assess the briefcases that you have open. The things that, you know, you say, gee, you know, I know that these things are working well and these things are still are working poorly. And these are the things that we just don’t know and decide at that point in time, deal or no deal, is this company worth putting more money into or putting some money into accelerating its growth, investing behind acquisition or investing behind infrastructure or whatever those things are.

[00:11:10]
Or is it a no deal? Is it? You know, we’re way better off waiting until we answer these particular questions and get statistics that will demonstrate the true value of a customer or the true slope of the curve or those sorts of things. And so no deal we’ll move forward with the business or in some instances, as an investor, you know, gee, there’s enough intrinsic, there’s enough specific evidence to suggest that, that this business works as a good standalone business, but it’s a relatively smaller business comparatively, and that these folks are better off finding an acquirer who can plug the business into a broader ecosystem than to fund it as a standalone entity. And so those are the sorts of calculations that I try to make on a daily basis with the absolute understanding that knowledge is imperfect.

[00:12:12]
Deal no deal is simplistic, right? You have perfect knowledge about the factors that will influence your decision. You know precisely what suitcases you’ve chosen, briefcases you’ve chosen. You know precisely which briefcases still exist. You know precisely which numbers are in the universe of potential, potential prices.

[00:12:36]
And then you know the offer that’s being made in the context of the, of the expected value of those things. So you have that and those explicit pieces of information. Obviously it is, well, more complicated in the startup world. There are huge numbers of factors that you can guess. Some of the answers you have no idea about, some of the other answers you have, market factors that may fall in your favor, may not.

[00:13:07]
So you know, all you can do in those circumstances is make the best guesses based on as much data as you’ve collected over time about, about external and internal factors and decide. But once you’ve decided, then you know the key is to move on with your business until the next opportunity for the banker to say, hey, is it deal? No deal. All you can do then is try and maximize the value of your company, try and pick the low numbered briefcases, and if occasionally you get a high numbered briefcase, then that’s just another piece of data and you move forward with your business. So there you have it.

[00:13:46]
I thought it was worth a few ramblings on this deal no deal concept, because I do think that so much of what we do in the venture business or as entrepreneurs is to try and assess these particular questions at any given point in time. It’s worth a thought or two about what are those things and how can you drive your business forward in an environment where there will be periodic calls from the bankers saying, hey, do you want to sell me your business for $30 million. And sometimes the answer will be yes, and sometimes the answer we know. If you’re lucky, you get to be in a position to have those offers and make those choices and drive your business forward, hopefully up and to the right. Thanks so much for listening.

[00:14:28]
Bye.