Pandora

I have been speaking with David Hornik of August Capital (and VentureBlog.com) lately via e-mail about various things relating to start-ups and venture capital. Something unique about David, compared to his other VC colleagues, is that he received his undergraduate degree in music. He found out that I am a drummer of about 12 years or so and that I do a fair amount of session work in the Boston area. This spurred a conversation on our musical backgrounds and, in talking about all things musical, David brought up a company called Savage Beast that was recently renamed to Pandora and which was started by a friend of his from the computer music program at Stanford.

The idea behind Pandora started with the beginning of the Music Genome Project (MGP) which was a project designed by a group of musicians and music-loving technologists with the goal of creating the most comprehensive analysis of music ever. They set out to capture the essence of music at it's most fundamental level and assemble a "music genome." The MGP spurred the creation of Pandora after friends kept asking if the founders of the MGP could help them find music they would like based on artists and songs they already loved. With their database in hand they set out to not only help their friends find music but to help the general public as well.

At the time David mentioned the company to me the program they had developed to choose music for a particular listener based on artists and songs they already loved was not in public release. This was about a week ago. David informed me today that the program was released to the public and that I should go check it out. Of course the first thing I did when I got home, being the music/tech geek I am, was to boot up my computer and give Pandora a test run. Well, that test run began over an hour ago and I can't take my headphones off. The songs that keep coming out of Pandora are exactly what I want to listen to.

I used Joshua Redman as my first search, or "station" because I figured jazz would be a hard niche for Pandora to fill. Well, it is doing a beautiful job. It has found me artists and songs I have never heard of and probably would have never found if it wasn't for Pandora. Essentially, Pandora becomes your personal radio station minus the commercials. How great is that?

Pandora also has some great features that allow you to further customize and enjoy your experience. Every song that Pandora picks for you is a link you can click on. When you click on the song's image a little menu comes up that allows you to buy the CD at amazon.com or the song on iTunes. The menu also has a link that allows you to make a new "station" out of the song you are currently listening to and a link that explains why Pandora chose the song for you. Lastly, the menu allows you to tell Pandora "I like the song" or "I don't like the song." The responses given will further customize your "station" on the fly.

Pandora is currently offering 10 free hours as a trial and an annual subscription price of only $36. That is unbeatable as far as I am concerned. I just subscribed. Pandora is the best thing to hit music since the iPod and I commend the developers for their incredible work. I know this may seem like an ad but I can assure you that I have no stake in the company and am genuinely blown away with what Pandora can do.

It will be interesting to see if Pandora is able to work out licensing agreements where iPod and other mp3 player users can download their "stations" onto their devices in the same manner that you can with podcasts. Pandora would also be great to use as a party DJ. I will try out this Thursday at a cookout my girlfriend and I are throwing at our apartment and report back.

Pandora's future will definitely be something to watch. I urge all of you to go check out Pandora for yourselves and post your thoughts and experiences with the program to my blog. I assure you that you will not be disappointed. Pandora is a truly a music breakthrough and a great piece of technology.

Funding FYI: Garage Technology Ventures (Guy Kawasaki's firm) supplied Pandora's $1.5mm series A financing in 2000 with Walden VC and Labrador Ventures supplying the series B round of $7.8mm in 2004.

My Pandora Stations:
1. Melodic Rock Radio
2. Coldplay Radio
3. The Killers Radio
4. Jazz Radio
5. Big Band Radio

Thin-Slicing

So, today I did my civic duty and appeared at the Suffolk Superior Courthouse in Boston for jury duty. It was my first time being summoned for jury duty so I was interested to see what the process was like and if I would be put on a case. Alas, I wasn't put on a case and neither were any of the other members of the jury pool. However, sitting in a room for about five hours allowed me do a lot of reading which spurred this blog entry.

I brought along Malcolm Gladwell's new book "blink" as my reading for the day. I started the book a few days ago and was upset every night when I had to put it down due to my body begging for sleep. The book is great and the concept of thin-slicing is fascinating. For all those who have not read the book yet, thin-slicing is a term Gladwell created to describe how our subconscious works. Essentially, our subconscious makes decisions in milliseconds by extracting the important bits of information from a situation (i.e. thin-slicing) and comparing it to experiences that we have had in the past.

A lot of the time we are unaware of this process going on in our brains. We wonder why we get a "gut" feeling about something and begin analyze whether or not we should go with our gut. However, as everyone probably heard from their teachers about the SATs, you should always go with your first instinct. This is because our subconscious does a great job of providing us quick answers to complex problems (although it is not always right). I won't say more because Gladwell does a great job exploring thin-slicing in the book and I want you all to read it and start a dialogue on my blog about what you think.

I bet everyone reading this blog has, at one point or another, had a distinct voice in their head telling them to make a certain choice. I can remember one case in my career specifically. I was working in the equities department at a well known mutual fund house as an intern in the summer of 2003 and I had the opportunity to meet the management team of LifeCell (nasdaq: LIFC). Within a couple minutes of meeting them I had a strong urge to dump a ton of money into their company. Now, if I were managing someone's money and I told them that I just felt this company was going to do well they would probably not let me invest their hard earned cash in it and they would probably question my sanity.

Knowing this I, along with my Bentley Investment Group team, created an elaborate presentation detailing the technology, the numbers and why we thought this company would be a good investment for the group. The group ultimately decided to purchase the stock a few months after I had met LifeCell's team for around $7 per share (when I met the team it was at $4) and the stock currently trades at roughly $23. Without the lengthy analysis my subconscious had thin-sliced the information about the company and essentially gave me a "buy" signal based on the team sitting in front of me. This "buy" signal turned out to be right as had a few other overwhelming urges to buy I had previous to this but I never thought much of this impulse until reading "blink" and reading Dave Hornick's blog about teams he posted today.

Of course the company has to have a good idea or product for one to even consider investing but the product or idea are only half (if not less than half) of the package. The main key to success of any business, either just starting up or public, is the team. I have heard this from every early stage venture investor I have talked with and read and most other investors in general. People, they are the key to a great business.

Our subconscious is good at thin-slicing people because it does it every day. Now, it does make mistakes from time to time based on stereotypes that clog the mechanism (again, more in Gladwell's book) but for the most part, it works. It works even better if one is an expert or knows a lot about a subject (i.e. I know a good amount about young high tech and biotech companies so I am better at judging those opportunities). In a venture investors case, his or her subconscious is probably very good at picking out winning management teams because they have seen a lot win and even more lose allowing their subconscious to build a staggering database of traits to look for to identify a company as either a potential winner or loser.

My thought is that many venture investors (especially those in the early stage area) probably judge a team within the few minutes of their pitch (whether they know it or not) and probably do an accurate job of assessing winning teams and losing teams. However, because many investors would never invest in a VC fund that invests based on hunches, VCs are forced to create piles of due diligence materials before they can invest in a deal. I wonder if all of this due diligence clouds the judgment of VCs who would normally have great investing ability through thin-slicing. I am not advocating that no diligence should be done but possibly less could be done with the investment outcome remaining the same. I bet the best VCs all had "gut" feelings about their best investments after meeting them the first time and, almost as an afterthought, had to find a way to explain the investments to the investment committees at their respective firms.

I suggest "blink" to anyone who is curious about how we think and make decisions. It is a fascinating book and as the book jacket says, "Never again will you think about thinking the same way."

P.S. If you are so inclined, please post narratives of times when you knew an investment/management team was good but just couldn't explain it in words and whether or not the investment panned out. Also, I would like to hear from some VCs as well if there are any reading this blog.

Podcasting

Podcasting... this is a very interesting movement. I find myself listening to more podcasts on my iPod than I do music these days and the quality is just getting better and better. Even VCs are beginning to take elevator pitches over podcast. I think podcasting is seeing a quick take-off because of the "on demand" world we live in. With TIVO and digital cable with on demand we have seen that on demand anything is what the consumer really wants. We want our food, clothes, tv, news, everything "on demand."

This want has created the podcasting craze where traditional radio is disintermediated and the consumer can now choose what shows they want and when they want to listen to them. However, podcasting is not going away. It is not just a short lived fad. In a sense, podcasting is like radio mixed with blogging and we have all seen how popular blogging has been and its' staying power. The question now is: Where is the road to profitibility?

The new media VCs are probably wondering that right now and I am sure some have pretty good solutions. Already, two of the top VCs in the world, Kleiner Perkins and Sequoia, have invested in PodShow. PodShow raised $8.5mm in their series A round led by the two giants which is a serious chunk of change for a podcasting play, or any play for that matter. With the track record of Kleiner and Sequoia one has to think that podcasting is going to work and that it is just a matter of getting the right business plan together.

Another deal that recently happened was the series A funding of Odeo lead by Charles River Ventures (another great firm). The amount of the deal has eluded me as of now but if I find out the amount I will be sure to post it.

What are the VCs looking for in a pocasting business model and why are they investing such large sums so early the game? Let's start to answer this question by looking at the similarities and differences between PodShow and Odeo.

What do PodShow and Odeo have in common?

1. Both sites enable you to create podcasts.
2. Both sites list and categorize podcasts for listeners.

Where do they differ?

1. PodShow has a partnership with Sirius which should entice good podcasters.
2. PodShow offers to help you make a profit producing a podcast.
3. Odeo appears to have a better sync system allowing podcast subscriptions.

From the similarities and differences outlined above it can be seen that PodShow is aiming to be the complete solution for podcasters while Odeo has a more listener friendly vibe. While I do like both businesses, I think that PodShow has a better shot because of their model. As far as I can see, PodShow has a clearer path to revenue creation through adverting and their partnership with Sirius. This is not to say that Odeo won't being able to create revenue with their model and, perhaps, by integrating something like PodShow's advertising plan for podcasters.

Update since original post:
I have since tried Odeo's offering and partly retract the statement above. Odeo's target appears to be the regular user and not the "pro podcaster." So, in a sense, they are going for the long tail of podcasting. The model seems to be working nicely and I think the company will be very competitive. Try the application(s) for yourself (when it is in public beta). I think you'll enjoy it. End update...

So, the VCs are looking for a complete solution for podcasters and listeners. A podcasting community platform if you will. A place where podcasters can record and disemminate their podcasts and where listeners can download them. That makes sense, but why the the large amounts of money for such an unproven model? The answer could lie in the inevitable integration of mainstream music podcasts into the mix.

As of now, podcasting has been a disruptive innovation picking up significant strength while hiding behind the shield of asymmentric motivation (i.e. the radio companies haven't been worried this far because talk radio is not where the big money is (most of the time) and they have been willing to lose some of those listeners). However, when podcasting begins to move further up market by adding music it will almost be too late for traditional radio to catch up. I believe the situation will be quite similar to the takeover of the telegraph by the phone which Clayton Christensen describes in his book, "Seeing What's Next: Using the Theories of Innovation to Predict Industry Change."

Initially, Bell tried to sell his phone to Western Union and was laughed out of their officies. He then began to issue the phone in small towns wher people lived a couple miles apart and were happy to have the phone to talk to their neighbors rather than either not talk to them or walk the few miles down the road. Western Union was not worried about this market as they provided little if no income to them because the telegraph was mainly a long distance communication device. The time came when Bell figured out how to build long-distance phones and the fact that many people had phones in their homes already meant that they just needed the long distance hook up and, there you have it, Bell hid behind the shield of asymmentric motivation and beat Western Union (this was a quick sum up to prove a point so please do not shun me for small historical errors - please read Clayton Christensen's book for more).

Anyhow, back to podcasting. It appears as if podcasting could be the next telephone with "videocasting" likely to follow (possibly a video playing iPod as well?). It will be interesting to see what other ideas come out of this medium as I am sure there is more than one way to create value from podcasting. If anyone has any thoughts or more info about podcasting please reply to my post and spread your knowledge.

The First Entry

Ahhhh... I have finally stepped into the new era and started a blog. What spurred me to do this? Well, a number of Venture Capitalists started their own blogs and I thought that a wannabe venture capitalist should have one as well. Currently, there is VentureBlog.com written by Dave Hornik of August Capital and Feld Thoughts written by Brad Feld of Mobius Venture Capital just to name a couple (see this site for more VC blogs) and I suggest to anyone reading this that they check out both of those blogs as Brad and Dave have a lot of great insight to share.

As for what I plan to do with my little corner of the internet: I plan to make this blog about new, emerging technologies, how they will be commercialized/formed into profitable businesses, who is funding what, my thoughts on start-up companies that have received funding along with thoughts on their technology and my thoughts on the venture capital industry as a whole.

Please stay tuned for more as I ramp up my blogging effort over the coming weeks and months. I plan to have a lot of good information to share (possibly through a podcast as well) and I encourage feedback on the blog (I am new to this medium and all) along with replies to my blog entries which promote good discussion because that is what will help all of us learn and become better entrepreneurs and investors.