Generated Transcript

[00:00:14] Craig Syverson
So welcome to episode nine of Elmo’s Corner of VentureCast. I’m Craig Syverson of Grunt Media.

[00:00:21] David Hornik
And I’m David Hornik from August Capital.

[00:00:24] Craig Syverson
And we are back for another conversation, another round of hilarity Capital Hilarity.

[00:00:31] David Hornik
That’s right. Nothing more exciting, nothing more hilarious than economics.

[00:00:35] Craig Syverson
Yes, the economics of abundance and scarcity. First off, we wanted to thank Apple for putting us on itunes. Front page. That was pretty cool.

[00:00:45] David Hornik
That was great. You know, I was actually at a. At the PopTech conference last week, and one of the speakers was. Guys started Ask a Ninja. Oh, yes, great. Just a hilarious video podcast. And so he was asked the question, well, how is it that you got all of your viewership?

[00:01:03] Craig Syverson
What.

[00:01:03] David Hornik
What was it that made you spread so quickly? Or whatever. And his answer was, well, we made this podcast. It was great. We liked it.

[00:01:10] Craig Syverson
And.

[00:01:10] David Hornik
And then the Apple folks saw it and they put it on the front page of itunes.

[00:01:14] Craig Syverson
Yeah.

[00:01:14] David Hornik
And then just went. And he said, we got 12,000 subscribers that week. So now I appreciate all of you who are listening. It turns out there aren’t yet 12,000 of you subscribing, but, you know, you. Each one of you your share.

[00:01:27] Craig Syverson
We’re really open to the form of this show too, so it could be Ask a vc. Look forward to finding you soon.

[00:01:32] David Hornik
Podcasting, right? That’d be good.

[00:01:35] Craig Syverson
No, I. I absolutely love those guys and I’ve had the pleasure of hanging out with them in the past and it’s such a delightful show. And to me, it’s a great example of new media disruption and the fact that two guys with just really pure talent, a good knowledge of technology can do this hilarious thing in their apartment room. And, you know, and it’s totally catching. It’s taking off and they’re finding revenue models. I just think it’s great. I’m a huge, huge fan and to me, it’s so. It’s just so encouraging of the stuff that’s going on.

[00:02:04] David Hornik
Absolutely. No, you look at something like that, or you look at the Mentos and Diet Coke video. I mean, I don’t know if you’ve seen yet, but the guys who made that video are. Call themselves E.P. bird. And E.P. bird were these two out of work actors, I think, and they actually have a trailer for the new one that they’re working on. More involved, more incredible.

[00:02:25] Craig Syverson
Yeah.

[00:02:26] David Hornik
Video. And. And they. And obviously they were encouraged. As I heard it, last time I heard it reported, they had made $40,000 from. From that first video. So, you know, great. They’ve made $40,000. They’re now encouraged to do something even more spectacular and see if that it can be paid for. And that’s great.

[00:02:43] Craig Syverson
Yeah, totally. And on this line, an interesting news thing that came up this week was United Talent Agency UTA opened up an online talent division looking for online media talent. So an actual Hollywood agency is now getting hip, getting cool. Yeah, you know, some of us, it’s interesting because I know a lot of LA podcasters like Ask a Ninja and Tim street of French Mates and then up here as well, I’m up here, so it’s kind of like I’ve always been joking with them. It’s like, you know, you guys, you guys are looking for the agency, you know, and us guys, we’re looking for like the VCs, you know, it’s like the Silicon Valley, Louisiana thing. It’s like we’re all about business models up here and they’re all about entertainment. And you know what, it’s fine. And obviously that’s a gross generalization, but if you do look at the type of programming, programming, the type of programs that people are doing, it is that way the LA people. I mean, I live there, I grew up there. That’s the vibe and it’s pretty interesting.

[00:03:36] David Hornik
Yeah, well, there’s no question that how people approach these things is impacted by where they are and sort of the ecosystem of those places. But I think this idea of an online talent agent, if you look at Lonely Girl 15, is this show that everybody. Oh my goodness, this is this. Is it or is it not this incredibly well done podcast of a group of teenagers? Well, no, it turns out it wasn’t. It turns out that it was this a production of a bunch of talented, but again, not famous, not yet necessarily represented people. And now you look at, I can assure you that that woman who plays, what’s her name?

[00:04:14] Craig Syverson
The lonely girl.

[00:04:15] David Hornik
The lonely girl, yeah, right. Sad. That’s just sad. Anyway, she’ll be represented. There’s just no question. And what’s. Or she’s charming and great and so it’ll be an interesting thing to watch as again, new media drives old media in a way that hasn’t historically been the case.

[00:04:32] Craig Syverson
That’s true. With the whole distribution thing being out of question. And that’s the big infrastructure. It’s kind of once infrastructures tend to crumble or have holes in them, just like the web was. And when it first started, the infrastructure of getting print or just basic data out the door suddenly went away one night, you know, you didn’t need to print things. You didn’t need a newspaper necessarily to tell your story. So it’s so wonderfully. I don’t know, wonderfully it’s worth. But it’s so clearly capitalistic, this notion, because those of us who are doing content, like me, we have to do quality work to make a living out of it. So it’s not like it’s just going to be a complete wasteland. You know, there’s only so much attention people have. It’s the attention economy, to use a buzzword. Here’s a buzzword.

[00:05:15] David Hornik
Buzzword alert.

[00:05:17] Craig Syverson
But it’s true, and I find it rather exciting to. In these early days, we are very. It’s very much a cooperative sort of things amongst us. People are in the podcasting world really into building up the notion of this type of media and working together. And I think that probably will stay as long as we all. If it stays within this smaller, private, individual creator thing, it’ll be great if we start building huge networks and just become the man again, then I don’t think it’s going to work out all that well. So that’s an interesting.

[00:05:46] David Hornik
It’s an interesting question with respect to things like Gawker Media, where you take, okay, here were bloggers who were getting attention, were getting big audiences, and then someone like Nick Denton says, gee, if I aggregate a group of these people and hire people to create content, I can create essentially a media publishing business.

[00:06:06] Craig Syverson
Yeah.

[00:06:06] David Hornik
And so it became more like the sort of old classic Conde Nast than sort of the. The individual boing boings of this world.

[00:06:15] Craig Syverson
Yeah.

[00:06:15] David Hornik
And so it will be interesting to see whether those, whether those models continue or whether the folks who prevail are the individuals who are inspired by whatever it is that they do. The people who are the gadget freaks become the leading gadget bloggers, not the, you know, Engadgets or Gizmodos that are created to. To fill a void.

[00:06:34] Craig Syverson
Yeah. I was just thinking while you were saying that, that blogs are interesting. Obviously there’s this close relationship between blogs and podcast because it is basically the same mechanism of distribution. And still we have a lot of great individual blogs out there. And I was reading a lot last night just in getting the news about what’s happening in the venture world and in business. And it’s really interesting that these individual people are doing this. They haven’t all been bought out yet. And I don’t think it’s an inevitability. I think there’s going to be plenty of room for talented individuals with Good ideas and reasonable production skills.

[00:07:06] David Hornik
Well, if you look at the venture capital blogs, there’s no reason to be bought out, right? I mean, venture capitalists are blogging for reasons other than making ad revenue on their blogs. So, in fact, you know, I know that a few of the venture capital bloggers are putting ads on their blogs, but then they’re donating that money to charity. It’s not. It’s just to understand the medium and understand and appreciate how these tools work. If you look at Fred Wilson’s blog, he’s avc. Fred, you know, says unabashedly, I am going to try everything because people, you know, recently someone complained about that Fred’s blog was so cluttered or, you know, the MySpace of venture capital blogs. And, you know, he said, too bad. I’m not going to change that because I want to try these things. I want to see how they work. The whole point of it is to see how they work. Then, you know, the contrast is if you look at Venture Blog, I mean, it’s the same boring tech. You know, my view of it has always been, I’m happy to comment on the venture capital business, but it’s about the text. It’s about the words and the thought. And you can. I’m just as happy to have you subscribe in RSS and read the whole post there as to come to Venture Blog. You don’t get a whole lot more when you come to Venture Blog, but if you go to Fred’s blog, Get a way lot. You get a way lot.

[00:08:15] Craig Syverson
A way lot.

[00:08:16] David Hornik
Dude, you get a way lot more. That’s, you know, which is a huge amount. A way lot. That’s a, that’s a giant.

[00:08:22] Craig Syverson
Can you quantify that?

[00:08:23] David Hornik
For us, a metric waylot is actually even more.

[00:08:25] Craig Syverson
How do you monetize the weight lot?

[00:08:27] David Hornik
Well, actually, it’s much easier to. Never mind.

[00:08:31] Craig Syverson
So speaking of blogs, you’re wearing a Vox shirt. Your six Apartheid had its launch party last night.

[00:08:38] David Hornik
Yeah, I was over there. In fact, I got this T shirt in the, in the gift bag along with a little Vox bangle for my cell phone. So it was great. I mean, it’s, you know, for those, for those people who are listening and haven’t heard of Vox. I mean, Vox is the next platform, the next blogging platform from Six Apart. Six Apart are the guys who originally wrote Movable Type, which was one of the early platforms for bloggers that gave the flexibility to do, you know, all of the things you want in design and distribution, et cetera. And then that Same team, Ben and Mina Trott. And then a growing organization built TypePad, which is the hosted blogging platform. And then I funded the company and we bought a company called LiveJournal, which is really more social network than blogging platform. It’s a combination and about journals and conversations and so this, this latest, this fourth of the platforms from six apart is a combination of all of those things. It’s, it’s really intended to be a very simple, straightforward way to talk about the things that you care about and post pictures and post video and then not only do that, but also control who reads it. So some things you can post and allow them to be read by the world and other things you post and they’re just viewable by family and groups.

[00:09:53] Craig Syverson
You create custom with.

[00:09:55] David Hornik
Right, exactly. So, I mean, you know, my, my. You can go to Hornet. No, it’s David Hornik. You go to DavidHornick.

[00:10:01] Craig Syverson
Too many blogs, right?

[00:10:02] David Hornik
Too many vlogs. You go to davidhornick.vox.com and you, and you look at it, you’ll see a commentary on random media things, truly random. And. But then if my mother goes to davidhornick.vox.com she’ll see lots of pictures of my kids and video, separate entries, then.

[00:10:20] Craig Syverson
Whole entries that the general public doesn’t see.

[00:10:22] David Hornik
Absolutely they won’t, because as when you, when you log in as my mother, then it recognizes you as someone who has access to this whole set of content that other people wouldn’t necessarily see. And so now I have the capacity to put up videos of my kid where kids where I wouldn’t otherwise have. I mean, my wife is very conscious about the security of putting photos and video up. And now with vox, she’s more than happy to have us post like crazy. So the, in fact, the happiest person on the planet about VOX is my mother. My mother has sent me emails saying, what does Mina Trott want for Christmas? You know, so.

[00:10:57] Craig Syverson
That’s so sweet. Well, she also commented on our thing about names today too. Right?

[00:11:03] David Hornik
She, she.

[00:11:04] Craig Syverson
For the, for the, for the podcast.

[00:11:06] David Hornik
Yes. She wants me to change it to Venturesome.

[00:11:09] Craig Syverson
Venturesome, which I, I actually think is pretty clever. I like. I mean, you know.

[00:11:13] David Hornik
All right, you know, Craig, it’s all yours. No, no, I defer to you completely. I think you and my mother.

[00:11:19] Craig Syverson
Well, either that or we can do Venture Nation with a, with a bow to the dignation guys. We could have Nation, but we’ll have Root Beer.

[00:11:27] David Hornik
You know, do you think they own. Have you guys trademarked Nation? Shoot Me an email. If you. If you think that you. Because, you know, look, it turns out Apple thinks they own pod. Apple has sued around the word pod.

[00:11:42] Craig Syverson
They’re sued around it because they’re protecting iPod.

[00:11:45] David Hornik
Yes. They’re suing, you know, people who make, I don’t know, this POD and that pod.

[00:11:52] Craig Syverson
Right.

[00:11:53] David Hornik
So that’s an interesting. It’s a tricky one, right?

[00:11:55] Craig Syverson
It’s a tricky one because you do. I mean, you have to protect your trademark. So you are forced to. I mean, you know this probably better than I do. You’re forced to protect a trademark. Right. If it seems like it’s intruding and you don’t do anything about it, there’s an implication there that you don’t care.

[00:12:09] David Hornik
Or it can weaken the value of a trademark if you’re. If you don’t enforce it. So that. That’s absolutely the case. But there are extremes, of course.

[00:12:17] Craig Syverson
But for now, I mention Venture Nation and dignation, because I listen to those guys every week. And so it’s. It’s an homage. But we’re not going to call this Venture Nation.

[00:12:25] David Hornik
Yeah, we promise.

[00:12:26] Craig Syverson
But we could.

[00:12:29] David Hornik
Venture Nation. What else we talked about, I put in my adventure blog, VC Cast. VC Cast. Or.

[00:12:36] Craig Syverson
And I had Venture Rant.

[00:12:37] David Hornik
Venture Rant. You had Venture Blab.

[00:12:40] Craig Syverson
Venture Blab. And.

[00:12:42] David Hornik
And what was the. I had some other one. Venture Blog Cast. That’s awfully long.

[00:12:47] Craig Syverson
Yeah, yeah. It’s got to fit in that. You know, we got to keep the graphic.

[00:12:50] David Hornik
Yeah, the graphic. You’re right.

[00:12:52] Craig Syverson
So Venture Some. Yeah, that fits. Anyway, so I wanted to talk a little bit about the Odeo thing because I found that sort of interesting and I didn’t quite understand it. So maybe you can give me your first impressions on it.

[00:13:02] David Hornik
Sure. You know, I think it is very interesting. I mean, the idea that. That entrepreneurs raise a big round of money and. And try a number of things, some of which work, some of which don’t, and then decide that the best thing for the company is to buy back the company from the investors. And so apparently they’re not talking about how much they paid, which is interesting. I’m. TechCrunch is speculating that they paid more than the $5 million that came in to buy back the assets. And I think that’s probably highly unlikely. I think that they probably paid the $5 million or less for the capacity to kind of move forward. What’s interesting is that venture capitalists are investing a lot earlier now than they were. And this is an indication of why that sometimes doesn’t work. And this is a question. Is this a bubble phenomena or is this just that there’s lots of activity that may prove interesting and may not? And so Odeo was a very early stage company when it went around raising money, and it ended up raising a lot of money, a surprising amount of money given the stage. They raised 5 million doll when EV was thinking about some interesting ideas around podcasting. And so.

[00:14:13] Craig Syverson
And podcasting at that time hadn’t really had any solid revenue modeling behind it. Right? It was still pretty early.

[00:14:19] David Hornik
Yeah, quite. Quite early. And at the time, Odeo was thinking of doing two things. It was thinking of being a directory of podcasts, and it was also going to be a podcast creation engine, a way to make these podcasts. And then what happened was a number of major players emerged doing all of those things. You know, itunes incorporating podcasts had a big impact because suddenly there is a directory of podcasts. Yahoo created a podcast directory, and. And there became a number of ways to create the podcast themselves. So what happened? At best I can tell, and I’m not an investor, I’m friends with Ev. I think he’s a smart guy, but I don’t have any inside knowledge of what went on over there. But they had their Odeo business, and then they started working on this thing called Twitter, which had a big impact. People liked it. And this, you know, the idea of sort of mobile blogging, and. And. And it started evolving in a more interesting way, I think, than what was happening at Odeo. And so I have to assume that there were disagreements about how the company might move forward with the investors who’d put money into podcasting. And I see that perhaps there was an opportunity where the. Where the founders of the company, EV and Biz and the. And the other guys were able to say, look, why don’t we buy back the company and then we’ll pursue the things that make sense to us. And so, you know, if they had taken a small amount of money from angel investors, I think there would have been more flexibility to. To figure out what were the right models and then take a larger amount of money to sort of accelerate the business. So. But again, I’m just speculating, but I think congratulations to the guys for being able to continue to move forward in direction that makes sense. And I hope that it worked out well with the investors and that everybody is leaving the table happy.

[00:16:00] Craig Syverson
I mean, my first take, it seemed like it had a lot of integrity. They were seeing that they could run their funding down, but he just decided, no, he could see that it might not be worth spinning the wheels for the next couple of years to do that. Anyway, we’ll probably learn more about it as the week goes by. But very interesting, it does raise this question about the involvement of venture capital. We touched on this last week where companies don’t need as much money to get going. There’s less nuts and bolts kind of companies out there. So give me the basic rundown or the basic definition and differences between an angel investor and a vc, if you don’t mind such a basic.

[00:16:34] David Hornik
No, sure. I mean to go to the pure, to the very beginning. An angel investor is characterized by typically being an individual who is investing money at the earliest stage. There is an individual or group of individuals, they’re ready to create a business and they don’t want to fund it themselves. So the earliest form is I fund it myself. Maybe you’re Joshua Schachter and you late nights and weekends, create something while you have a day job. Then eventually you say, gee, I want to focus on this thing. You leave the business you had and you have to invest your time and ultimately your own money to develop that company. And then the next phase, when you’ve gotten to the point where you can no longer fund it or it no longer makes sense to you to fund it, typically you’ll then go to an angel investor. And these angels tend to be individuals. Classically they were viewed as doctors and dentists. Right. For a long time it was go to this group of doctors and dentists and they’ll fund you with the money because they were the high net worth individuals of their, of their various communities. And in fact, you know, Subway Corporation has a, I forget what the name of it is. It’s actually a doctors collective. And so it’s, it’s historical name is, it has something to do with that history.

[00:17:56] Craig Syverson
Subway the sandwich.

[00:17:57] David Hornik
Subway the, the franchise sandwich shop. We should check that out. We don’t talk about it this week. We should look it up because it’s, it’s, it’s funny. I mean, that was the history of it. So angels are. Maybe it’s dentists and doctors, maybe it’s the individuals in your family who have the most money that they, they’re willing to put, put at risk sometimes.

[00:18:14] Craig Syverson
And then retired venture capitalists.

[00:18:16] David Hornik
Right, exactly. Then there’s some maybe retired venture capitalists. And, and in Silicon Valley it tends to be individuals who’ve made a lot of money by pursuing their own business that then can invest in future businesses. So folks like Josh Koppelman who started half.com and created a group that’s actually a very organized, organized angel group. It’s called First Round Capital and is in fact a fund. So it’s not your classic angel angel investor, but early stage investor. And it came out of the fact that Josh, you know, wanted to invest in future entrepreneurs and continue to build companies. Reid Hoffman, who was one of the senior execs at PayPal, has invested in a number of companies and as has Peter thiel, the former CEO of PayPal. So you find these sets of individuals. Ram Sriram is a, as angel invested in a number of incredibly successful companies. The biggest, of course, is Google. And he had made a bunch of money by selling his company to Amazon. So that’s the traditional angel as an individual with enough money that they can afford to invest a couple of hundred thousand dollars, five hundred thousand dollars.

[00:19:27] Craig Syverson
And how does the deal work? It’s not a loan, it’s, they’re buying equity in the company.

[00:19:31] David Hornik
Then it depends. Actually, historically it was a loan historically. And, and I speak, I’m speaking mainly for Silicon Valley. But the, the mode in Silicon Valley would be you go to a group of angels and you’d create this thing called a bridge loan. And a bridge loan meant that these set of angels would give you money as a loan, but that it would become equity when you raised money from the professional investors right around a. So the series A investor, which would, which would typically be a venture capitalist, would say, okay, I’m really, I’m gonna invest $5 million at a $10 million valuation and buy a third of the company. And by the way, all of your angel investors, the million dollars you raised in the first instance, will also convert in this round at the same valuation. And so actually it will be like raising $6 million, only you spent a million of it. And what the angel investors get out of that is they get a discount of some sort in this loan to the, to the company that says I’m going to get 130% of the value of the shares. So I’m going to risk something coming early.

[00:20:35] Craig Syverson
Yeah.

[00:20:35] David Hornik
And so I’ll get an extra amount of, of equity on top of what I would have bought with my dollar.

[00:20:43] Craig Syverson
Got it.

[00:20:43] David Hornik
So that’s, that’s a typical angel investment. And then after angel money has been put to use and the company progresses, then they go out to venture capitalists, they come up and down Sand Hill Road or wherever now, nowadays downtown Palo Alto, and try to raise a more significant amount of money. So I’d say a typical angel round is a million dollars or, you know, a million and a half dollars, maybe $500,000. Typically when you get to venture capitalists, you’re raising $4 million or $6 million or, you know, maybe even more. And so then it tends. You tend to go to the professional investors, and those are the venture capitalists who have funds. We raise our funds from foundations and universities. And so for example, August Capital has a $500 million fund, so lots of money that’s been aggregated from foundations and universities and potentially wealthy individuals, and we invest that money on their behalf. And so someone will come to me and have an interesting idea and I will propose buying, you know, a quarter of the company for some number of millions of dollars, and it’s an equity transaction. And then I go on the board and try and help the company be successful.

[00:21:53] Craig Syverson
Got it. How does it work then with Odeo buying out? I see this was Charles river was the venture firm, and then it says a bevy of angel investors. So the angel investors apparently still had skin in the game, even though Charles river in this particular instance had come on board.

[00:22:07] David Hornik
Right. My understanding was that Odeo simultaneously raised money from Charles river and also from a group of angels to get them involved, all in the exact same round.

[00:22:19] Craig Syverson
Oh, at the same time, I believe.

[00:22:20] David Hornik
At the same time. I see that instance.

[00:22:22] Craig Syverson
And so then when Odeo decides to do what they did, they can just do that. Is there a deal with. With your venture people that you. Again, this comes back to my question last week. You know, can the venture people say, no, you can’t buy us back?

[00:22:34] David Hornik
Sure, absolutely. I mean, as it’s described on TechCrunch audio, bought the assets. So essentially what they did was the. The founders created a new corporation, Obvious, put money into, what did they call it?

[00:22:47] Craig Syverson
Obvious Corp.

[00:22:48] David Hornik
The Obvious Corp. So I guess, which is hilarious. So they create Obvious Corp. And then Obvious Corp. Says, I’m going to buy the assets of the company.

[00:22:56] Craig Syverson
Okay.

[00:22:56] David Hornik
And now that is a board level decision. The board of the company gets to decide how, whether or not to sell the assets. And in fact, in most venture investments, the venture capitalist or the majority of the venture capitalists investing have a right to say yes or no to any acquisition. So that one in particular, I’d be stunned if the venture investors didn’t have to approve the deal. So they must have determined that this was a good thing for the company, the right thing to do with their money, right thing for, for everyone involved. And so as a board, they all collectively vote to sell the assets To Obvious Corp. Obvious Corp. Pays some amount of money, and then I assume what will happen is that Odeo Corp. Will liquidate and, and distribute the money to, you know, to the investors on a pro rata basis.

[00:23:40] Craig Syverson
So, okay, and then like we talked about last week, now you’re in the venture phase. You have venture funding. Then sort of the next phase for a company is, is either the IPO or the acquisition. Then this is sort of another big thing that’s happening now is where. Where are all the IPOs? Where have they gone? Is it. I can’t imagine the joy of creating a public company anymore. I mean, Sarbanes Oxley probably is a big part of that, but is the business environment changing so much that we really are creating less companies these days, less public companies?

[00:24:12] David Hornik
Yeah, I think that the fact that there aren’t as many public companies is more a condition of the market. Right. The market is inherently skeptical these days about technology companies. I think, frankly, they’re inherently skeptical about all companies. And so for new companies to get public, they have to have a real track record of success. And so that takes a while. So I think that we’re starting to see more and more technology companies that have spent the time to create a real business, a big business that has a lot of revenue, is cash flow positive, has an interesting growth rate, and those businesses will continue to get public. And so the question then is, is it in the entrepreneur’s interest to be a public company versus being a private company versus being acquired by a public company and not having to go through that process?

[00:24:59] Craig Syverson
Right.

[00:25:00] David Hornik
So which is absolutely a fair question. I think that for sure there are a lot more burdens these days on companies when they are public companies.

[00:25:10] Craig Syverson
Right.

[00:25:10] David Hornik
And it’s been described in lots of ways, it’s described as a multimillion dollar tax on the company. Compliance with Sarbanes Oxley costs a lot of money. It also requires individuals to assure finances in a way that they hadn’t had to do in the past. Now, you know, from my perspective, I don’t think that that should be a large burden. I think you should feel perfectly comfortable in guaranteeing that the finances that you’re signing off on are in fact the finance of the company. On the other hand, the sets of rules around regulating the control of those corporations and, and who can invest in what and who can sit on boards, and all of those things haven’t, in my mind, seemed to add a whole lot of protection to the public, but they have created a whole lot of cost and a lot more Bureaucracy. And it does make it a lot less pleasant to be a public company.

[00:25:59] Craig Syverson
Right? And then there’s this whole thing of what’s your motive? Is it satisfying the shareholders or your customers if you’re making products? And of course that’s a classic thing that’s been going on forever.

[00:26:07] David Hornik
And that’s a timing question in a lot of ways, right? Because of course you want to satisfy your customers. You need to sell more of whatever it is you have. On the other hand, it will take a long time and cost a lot of money to get to the right answer. You may be punished in a short term by the market if you’re a public company, whereas if you’re a private company, you may have more capacity to lose money for a period of time or make less money for a period of time while you’re morphing your business into the thing that makes the most sense. There’s lots of activity now in the private equity world where there are big funds taking public companies private. And it’s, it’s a, and it’s an amazing market. Companies where you wouldn’t think it was possible to take them private are now being bought out by these private equity investors to the tune of multi billion dollar deals.

[00:26:55] Craig Syverson
Right?

[00:26:56] David Hornik
And you know, we, we were involved in one of those, in fact, one of the very, very early ones in this phase of takeovers and that was the Seagate deal. And it was a big amount of money, billion dollars in cash, $1 billion in debt, plus a whole lot of equity that had that the company owned in a company called Veritas seemed like a monstrously large deal. And yet now it’s paling in comparison to some of these other deals that are getting done. So that that stuff is interesting because it’s being fueled by an interest in getting out of that public reporting world. That does seem pretty onerous these days.

[00:27:31] Craig Syverson
And then super obvious question of the day, what are the benefits of going public? So it’s a fast way to raise money, right? Is that basically you can just get a truckload of capital quickly is that.

[00:27:42] David Hornik
You know what I think that the reason companies go public are. There are multitude of reasons. Amongst our reasons, like Monty Python, fear, surprise, a ruthless efficiency, those are all good ones. The reason the companies go public, for one, they raise a bunch of money. I think that’s right. You can raise hundreds of millions of dollars in a large IPO in a way where it would be a challenge to do, to do that from individual investors or funds.

[00:28:10] Craig Syverson
That’s basically cash. Is that right?

[00:28:12] David Hornik
Cash, Cold hard cash. You have your public offering and you sell some portion of your company at a particular valuation, and the market then sells it to funds and individuals and allows you to efficiently sell $200 million worth of shares as opposed to $20 million, which you do. So that’s, that’s helpful. Obviously, it gives you a bunch of money to help fund the growth of the company. The second thing is it creates this idea of liquidity. Liquidity is how can I take stock which otherwise, which only has value if I can sell it to someone and create a market that allows you to sell it to someone. Now, there are lots of rules once you’re a public company about how you can and can’t sell a share of stock. But once you’re on a public market, then there is a market for it, right? There are people who look at the value of the company and say, I’ll give you $20 for that share of stock. When it’s a private company, it is extraordinarily difficult to take a share of private company stock and sell it. So this idea of liquidity is important because if you have investors who’ve invested a long time ago and would like to realize their gains, put $10 million in the company, the company is now worth 10 times that. The only way that they can realize those gains is to find some liquidity. And the only forms of liquidity are you sell the company to someone and you get the returns from that, or you take the company public and you have a market on which you can sell your shares. So people do that. They’re. They, they take companies public to get liquid. And then the other thing they. That is a huge advantage of a public company is that you now have stock which is much more valuable in terms of acquisition. Look at Google. When Google bought YouTube, they bought it with $1.65 million of Google stock.

[00:29:55] Craig Syverson
Billion, right?

[00:29:55] David Hornik
Right. Excuse me, did I say million?

[00:29:57] Craig Syverson
I’ll take it.

[00:29:58] David Hornik
$1.565 billion of Google stock, right?

[00:30:02] Craig Syverson
So when they say, when you say that, that’s 1.65 billion, is the valuation of Google stock on that day based on the number of shares they.

[00:30:11] David Hornik
So here’s how you calculate it. When a public company acquires a company for a certain amount of money, as opposed to a certain number of shares, then in the M and A documents, in a past life, I did a bunch of these M and A deals, and the document itself has to calculate the value of the share price, because then the way they get to the total number of shares they Grant is they take the total price they’re paying and they divide it by the share price. So usually the share price is determined by taking the trailing five day average. What was the average price over the previous five days to the day you signed the deal? So you determine the share price by taking this five day average. You divide it up, find the average price, and then you divide that $1.65 billion by the share price of however many hundreds of dollars it was in Google stock. And that’s the number of shares that they issue to the company to acquire it. And so the good news when you’re a public company is those shares are not the same as cash. You. And as long as you can get the authorization to create more shares, then you can use those shares to acquire companies. Now obviously, every time you create a bunch of shares, it dilutes everybody else’s shares. Suddenly you used to own 1% of the company and now you own 3/4 of a percent of the company. Once you’re a public company that, unless you are overly acquisitive with stock, rarely does the market look at it that way. They, they say, oh, you’ve acquired something interesting or not, and how valuable is it to the company? And so as you saw with the YouTube deal, the value of Google stock went up. In fact, it went up more on a percentage basis than they paid for YouTube. So in theory, the market thought it was a smart, smart move and they actually rewarded them. They made more money than it cost them to acquire the company.

[00:32:03] Craig Syverson
So on the first second of the acquisition, Google shareholders had a dilution of value. And then what you’re saying is the market eventually recouped that dilution because they thought it was a good acquisition?

[00:32:14] David Hornik
Absolutely. It cost about a percent of the company to buy YouTube and then the value of the company went up more than a percent in reaction to the deal. That’s evidence of a great deal, that the market thinks that this is an accretive deal, that it’s going to add more value than it costs.

[00:32:29] Craig Syverson
Right, right.

[00:32:30] David Hornik
I mean, it has an impact, but the impact, the overall impact isn’t treated the same way as if you took $100 million of your cash, or, you know, a billion dollars of cash and spent it and suddenly you went from having a billion dollars in cash to having no cash. That would be treated as a major problem in a corporation. Whereas if you spend a billion dollars worth of stock even though it’s dilutive, in fact, spending a billion dollars in cash doesn’t dilute the shareholder value. Whereas sending spending a billion dollars in equity does. And yet they’re treated very differently by the investors and the investment community.

[00:33:05] Craig Syverson
Right. Do we have time to talk about Chris Anderson’s thing? Sure, you bet. Because I found that really interesting. So you met with him at, you heard him at PopTech.

[00:33:15] David Hornik
Right. So I was at this PopTech conference, which is a really fun, interesting conference that takes place up in Camden, Maine. It has the disadvantage of being way up in Camden, Maine, which is this four hour drive out of Boston. I guess you can fly into Portland and that would be. And it would be a mere hour and a half drive, beautiful town right on the ocean. And they have this, this little theater that the conference is held in. And lots of interesting thinkers around technology and economy and, and the world come together and for, for a few days talk about interesting things. Like Chris Anderson’s talk, which was about the. His idea of the economy of abundance.

[00:33:53] Craig Syverson
Yeah, I saw that. I read your blog a bit and it struck my attention because my previous experience with Buckminster Fuller always talked about the notion of the economics of scarcity is irrelevant. You know, Malthus, when he created that theory back in 1810, it was based on a closed spherical system of England. You know, there were so many resources that were growing, and then population was growing greater. And so there had to be a crash at some point. And Fuller argued against that, that technology and better materials and refrigeration really is changing that equation. Is Chris talking about something similar to that or is it in the same theme? Is he carrying the ball forward?

[00:34:31] David Hornik
Well, I think that historically, the way technology has been thought about in terms of scarcity and abundance is that even with scarcity, technology makes it possible to create more from a scarce resource. So, for example, with spectrum technology said that you could move a certain number of bits across a certain amount of spectrum. And so cell phone carriers were buying up spectrum and they were hamstrung by the amount of information that they could transmit over that particular spectrum. But technology over time made it possible to move a whole lot more information over the same amount of spectrum. And so even though it was a scarce resource, by, by using technology, you could increase the value of that scarce resource to be more abundant. But the point of that was to create abundance, which you then would sell. And what Chris is saying, and in this sort of corollary to Long Tail, is that technology has so overpowered, that question has so moved beyond the idea of creating greater capacity within a scarce resource to creating abundance. This idea that there is no scarcity, that storage is so cheap now that Google can say, we’re going to launch an email service that has no, for all practical purposes, no storage requirements. So if you were using Yahoo. Mail or you were using hotmail and had 100 megabytes of storage, suddenly Gmail comes in and says you have a gigabyte of storage. It essentially blew the doors open and said, you need not worry about erasing things. Whereas if you were a Hotmail or a Yahoo user, you could easily have gotten to log in at one point and it says to you, you’re out of space. Erase some stuff if you want to save anything more. Right? Google said, no, you know what? It doesn’t. The cost of us just giving you more storage is so small that we’re just going to do that. And it changed the nature of how people then used their email client. It changed the nature of the competition, it forests, Yahoo and Hotmail to then remove barriers or to change the nature of the barriers to storage. So as you look at how storage gets incredibly cheap and therefore borders on free or microprocessors. Now, microprocessors, the number of transactions that you can do per, you know, square inch of a microprocessor is so much larger, courtesy of Moore’s Law, this idea that the processing power is doubling and doubling and doubling again, that you can do all sorts of things that you wouldn’t think of before. And in fact, as, as Chris pointed out in his talk, you know, this idea that you can throw away transistors. In the early days of microprocessors, you had to be so efficient with every single transistor, and it had to be the most efficient path and the most so that you could get the most out of a very expensive commodity. Now you can really do a lot more and in some ways be inefficient. And yet that’s the efficient thing to do. And you know, maybe, maybe again, we reach a point where we’re using all of the processing power and so we need to be more efficient. But that is not the controlling factor now, right? Storage is no longer the controlling factor, and microprocessors are no longer the controlling factor. And bandwidth is increasingly not the controlling factor. And so as these things go from scarcity to abundance, then it changes the nature of how you should think. Think about the software and services and hardware that you’re building. And that was sort of Chris’s point and that it was time to start thinking about the economy of abundance, not the economy of scarcity.

[00:38:03] Craig Syverson
But what makes me think then There is an abundance. I see that, I see the trend of abundance with these increasing technologies. But isn’t there a commodification of the markets that are providing storage and providing bandwidth? Isn’t there a shrinkage in their world because it’s so abundant? Don’t they start to lose a viability as a very profitable company or do they make it up in volume?

[00:38:25] David Hornik
Yeah, right, right. If you are producing something that is purely commoditized, then the capacity to compete is always challenging. This is really about saying there are sets of commodities now that are approaching zero, that the way you approach the services you build on top of them is different.

[00:38:45] Craig Syverson
Right.

[00:38:45] David Hornik
You still have to build differentiated services, but they can no longer be differentiated by these sets of commodities that you control. They have to be differentiated by the experiences that are built on top of them. So if you are X drive versus iDrive and before, the way you competed for business was to say, we’ll give you 100 megabytes of storage. And, and the only reason you could do that is you were incredibly efficient about how you use that storage, even though it was expensive then. Now you have a competitive advantage around the technology of making a scarce commodity less expensive. But if you’re now one of these storage companies, the cost of 100 megabytes of storage is so small for both of them that you need to create value added services on top of it that are not based on the efficiency of the storage itself, but are around how do you use that storage? And so these new, in fact these new next generation storage companies that are out there are really thinking about that, thinking about the experience and how storage can now be used more interestingly in other things. And that’s what they’re enabling.

[00:39:46] Craig Syverson
More and more, it seems it comes down to the user experience, the services that you’re offering, the design. Maybe I’m biased, but that does make me, you know, it makes me think that, that if the infrastructure is there, if the materials are there, if the technology is there, then people just have to be smarter about how it’s used and how, how elegant it can be.

[00:40:05] David Hornik
Well, so the, I think the, the, the flip side of what Chris was saying about this economy of abundance is that if you have abundant capacity to do something, then you shouldn’t try to figure out what the answer is. You should try and do it all, do everything and allow your end users to determine which are the right ways to do things. Right. Find out what are the. If you want to know what particular piece of content is compelling, create a whole bunch of it and see what people use. If you want to create a service that otherwise you might have been constrained by, you know, storage or bandwidth or whatever. Now you have the capacity to make a service that does a whole bunch of things that may make sense and allow your end users to determine what is the compelling thing. So you look at interesting example that Chris gave was Wired magazine. Wired just bought back the website wired.com and now it’s reunited. Reunited. And it feels, oh, no. Singing I’m sorry, I can’t help myself. So Now Wired and Wired.com are, are now under the same roof. And Chris was saying, as the editor in chief of Wired, the magazine, he has a certain number of pages, he has a scarce resource which is the pages, and he has to make a decision which are the stories that he’ll run and try and determine in his own mind what are the things that are compelling and put those in his magazine, despite the fact that he has more information that he could put in. But he has to make choices. Whereas in Wired.com, he said, Now I have the capacity to run everything and perhaps use something like a dig like experience or you know, a Reddit experience that will allow all of these potential pieces of content to rise to the top based on their popularity and interest. And so as an editor of dot com he doesn’t have to make the choices about which of the things are compelling, he just has to make the choice of what things. You know, go do stories on a bunch of things and let the community determine which are the interesting things.

[00:42:01] Craig Syverson
Right.

[00:42:02] David Hornik
And so it’s a, it’s an interesting paradigm, right?

[00:42:05] Craig Syverson
Well, the community and, or the search engine for an individual maybe doesn’t really care about what the larger community thinks they can, you know, so we have that combination now with social networking and dig models, with those, with the combination of those two things, we have the best of both worlds. We have a somewhat of an editorialized process with the social group thinking what a good story is. And you have that nano level specificity of the search that is actually starting to work.

[00:42:32] David Hornik
Absolutely. This is why I say this is the flip side to the long tail. Because what it enables is the long tail. It enables incredibly niche content to find an audience and to be created. If you didn’t have the capacity, if you had to make choices about which stories to save, you wouldn’t save the story that appealed to 17 people, you’d save the story that appealed to 17 million people. But now with this economy of abundance, you can save it all. And using search engines, find things that otherwise would have been very difficult to match a market and the content, because the combination was so small. And that’s exciting. I mean, that’s what’s powering the new economy, as far as I’m concerned. That’s what’s powering new media and how music is being created and consumed and video and podcasts and all of that.

[00:43:19] Craig Syverson
You said it’s the opposite of the long tail. And it made me think of a comment I got from Rajat Baharia, a friend of mine from formerly Vidio is now with SpongeBob. And we were talking this week over email, and he sort of threw out this idea. Like, it seems like YouTube and Digg got really popular because of hits like YouTube got popular from Lazy Sunday, Saturday Night Live sort of got that ball rolling. And Dig got notoriety through this thing with, I think it was Paris Hilton or something. It was. An interesting point is that they kind of rose to the top. And did they rise to the top because there was a hit, or did they rise to the top because they had the structure in place to make that hit happen? Just a sort of. I thought it was a really interesting thought. Like, you know, what about the other people who didn’t get the hit? Is it. Is it luck? Is it the roll of the dice?

[00:44:07] David Hornik
Well, it is an interesting question. To what extent does the head content, the stuff that appeals to big groups of people, then drive the capacity to serve the tale?

[00:44:20] Craig Syverson
Okay. Right.

[00:44:21] David Hornik
Right. And so it’s absolutely the case that if you look at a YouTube, there are pieces of content that resulted that were spread wildly and resulted in lots and lots of people coming to the site who hadn’t been there before, and then they found a whole bunch more that they found appealing. And so. And the same with. With Dig or. Or with any of these phenomena, where they get. They get very interesting by virtue of something that’s. That’s really compelling. Right. Look at Jib Jab’s a great example that this land is your land, this land is my land piece of animation that they created around the election was unbelievably compelling. People shared it like crazy. And then people found Jib Jab. And Jib Jab was able to create a larger community and a larger business and is ongoing. So it’s. It’s a very interesting question because if we think that this is an economy about the little guys finding audiences, it is to a certain extent. But it is still about the hit. The hit will. But. But what’s changed is that the Hit is not driven by the record industry or the movie makers necessarily. Maybe it is, but you don’t any longer need to have millions of dollars in marketing budget to find an audience. And so you can be the Eepy Bird guys with their, you know, Mentos and Coke video and find an audience that they were having trouble finding as actors in New Hampshire or Vermont, wherever they were. So that’s a, you know, that’s what’s changed. But there’s still always going to be these hits that create attention and this is a big attention economy and people tell their friends about it and suddenly you have these communities that grow, but they have to have something compelling so that when you find your way there, you stick around.

[00:46:02] Craig Syverson
Right. That is an interesting differentiation because you do have the hit. But in the old days, in the old media model, the hit was isolated. It was an isolated phenomenon. If there was a hit song, you maybe went to the album as a consumer, but that’s kind of as far as you got, you know, just in the record store. Maybe you went to the record store. Yeah, maybe you saw other things at the record store, but you didn’t really have this capacity to get immersed. But now if there’s a hit, it’s no longer an island. Usually it’s in this, like we’re saying, in this sea of this other material. So that’s, I think that is actually a very significant difference. And that’s probably what’s, what’s the most interesting thing part about that question.

[00:46:37] David Hornik
And what’s happening is that the design of these services is not just about serving that content so that people come and find it compelling, but then also creating an experience that makes it easy to go look at other things. So if you’re, if you’re a blogger, if it just showed you a blog post, someone pointed you to a particular blog post and all you found was a blog post, you’d be done. Yes, but blogs have this incredibly interesting structure now where you can read the past blog posts, you can click through to links of things that they’re talking about, which then link to other things and find your way around. And so this referential and self referential system allows you to spend a whole lot of your time consuming a host of new media that you wouldn’t have otherwise. And that’s, and so it’s product design, it’s that, that, that YouTube is designed in a way to make you watch the next video. And Six Apart is thinking about how to build blogging software that allows you to, to bring in an audience and keep them right.

[00:47:34] Craig Syverson
Excellent. Well, Speaking of Web 2.0 things, we’re going to be at the conference next week.

[00:47:40] David Hornik
Absolutely.

[00:47:41] Craig Syverson
So warning everyone that we’ll invade with microphones.

[00:47:45] David Hornik
Possibly we will track you down and ask you questions.

[00:47:50] Craig Syverson
And I want to thank again, Cash Fly for providing bandwidth for this show. And do we have any closing thoughts, prayers, incantations?

[00:48:01] David Hornik
Let us know. We need to know what you think you should be calling. If we should change it from venturecast to something else, we’d love to know. And more importantly, we want to know what you are interested in hearing about.

[00:48:11] Craig Syverson
Because thank you for the emails and the comments we’ve gotten so far. It’s great just to open the dialogue up a little bit more because we’re both geeks in our own kind of way and we love talking about stuff. So send us your ideas, story ideas, and we’ll go from there. Thank you very much.

[00:48:26] David Hornik
All right. Those who have savings often invest or lend them, hoping for a share of profit and in so doing, help to build the industrial might of the nation. It seems that capitalism means different things to different people.