The Wannabe Venture Capitalist

Saturday, October 29, 2005

VW #1 Has Been Posted!

Just writing to let everyone know that my first podcast has been posted. I hope you all enjoy it!

Tuesday, October 25, 2005

The Web 2.0 Debate: Bubble 2.0?

It is about time I posted something on this. I was waiting to cover it in my podcast (rescheduled to the end of this week) but I thought that a wrap up of all the viewpoints and issues was in order. A Web 2.0 debate primer, if you will, which can accompany the podcast. Now, a lot has been said about Web 2.0. Both good things and bad things. The first major problem was the lack of a solid definition for Web 2.0. Tim O'Reilly has discussed this quite a bit and even created a meme map for Web 2.0 which clears up the space a bit. Wikipedia also has a pretty broad and succinct definition that I like. I guess the real problem is no one can agree on what companies fit into the Web 2.0 bucket and what the business models are. This is where the debate heats up.

Many very smart and capable people including David Hornik and Jeff Clavier have been chiming in over the past couple of weeks with their thoughts on the Three Big Questions. Drum roll please...

1. How will these companies make money?
2. Are Web 2.0 companies being built to stand on their own or just to be flipped?
3. Are we in Bubble 2.0 as well?

David recently wrote a piece called Built To Be Bought (Bubble 2.0) in which he talks about his reasons for feeling like we may in Bubble 2.0. The main reason David has is that there are a lot of "companies" being created with the express purpose of being acquired. David says that he has met with companies who clearly state that they want to be acquired by Google or Yahoo in their pitch. He even had one company pitch him at the Web 2.0 Conference stating that they plan to be acquired by Odeo. For all of those who don't know, Odeo is a company that helps people find, produce and distribute podcasts founded by Evan Williams formerly of Blogger. Odeo is also a very new and pre-revenue start-up. I don't think I need to say anything else on that.

David also gives a good reason why building companies with the sole purpose of being acquired is not very good for venture investors.

Acquisitions in and of themselves are certainly not a problem. The vast majority of money-making venture investments reach liquidity through acquisition. But, by in large, the most successful venture investments end in Initial Public Offerings (IPOs). It certainly isn't surprising that independent, stand-alone companies would in most cases be worth more than companies that can only survive through being consumed by larger entities. Therefore, from a venture capital perspective, startups that have the capacity to be stand-alone entities are by their very nature more appealing than companies that will ultimately require acquisition.

However, build-to-flip can be pretty lucrative for the entrepreneurs involved especially in the current iteration of the web. Bootstrapping a start-up in Web 2.0 is becoming very common due to the low cost of developing new features and applications. In fact, Kevin Burton has developed a very interesting way to bootstrap his new company, TailRank. Jeff Clavier explains a typical flip scenario, and subsequently why it is lucrative for the entrepreneur (and even the early stage VC), in his first ZDNet article.

The early stage flip takes place after one or two years of running the company and a bit of financing has been raising ($1M to $2M). A $25M to $30M exit provides a 3X to 5X return to early stage investors and a nice chunk of change to founders who will then spend a couple of years working for the acquirer, contributing elements of their DNA to a number of projects (e.g., Flickr/tags/MyWeb), take a year off (recommended), and start again. Nothing wrong with that in my book, and by the way, nothing saying that $25 to $30M is the expected exit range for these companies.

While these comments put Web 2.0 in a bad light, David Hornik does mention that,

while Webvan and and Excite@Home were born and died in Bubble 1.0, Yahoo and eBay and Amazon were born and thrived.

This is a very good point as there are some great companies emerging now that could have a long lasting impact and are not "features companies" being built to flip. While I can't knock anyone for being cautious after what happened back in 2000 and 2001, the thought has crossed my mind that we may be getting ahead of ourselves with the Bubble 2.0 talk.

Dick Costolo (CEO of FeedBurner) seems to agree as can be seen in a comment written in response to David's "Built To Be Bought" post.

If people are worried about there being a bubble before there is even the slightest public market interest, I'm wondering of Bubble 3.0 will be declared the first time somebody says "Web 3.0"... by Web 4.0 you'll only have 19 minutes to found and sell your company before the markets go cold. Bubble 5.0 will happen before Web 5.0, which will see companies founded with cash that doesn't yet exist. These organizations will be said to have "futurestrapped" the enterprise. Ray Kurzweil will write FutureStrapped! and claim that he owns a chicken that can pass the Turing test. It's all good.

Dick's comment has a lot of merit. The public markets haven't even caught on to the Web 2.0 wave yet. The blogs we all read and the audience that reads those blogs and our own is a small sub set of people who are are on the cutting edge and keep up with the start-up/tech market. Many people I know, including those in top tier mutual funds and investment firms, don't even know about any of the companies that are already household names to us.

Dave McClure follows up Dick's comment with a nice piece speaking to the low cost of most emerging Web 2.0 start-ups which is a far cry from the Bubble 1.0 companies. Dave also makes a good point about the types of people looking to buy Web 2.0 companies and how they are much different than the Web 1.0 buyers and sellers.

furthermore, the difference in today's Web 2.0 world is not simply a shift to recognize that M&A is a more likely exit than IPO (as you note, that's always been the case) -- rather, the difference is that there are so *many* public Internet 1.0 companies (YHOO, GOOG, AOL/TWX, MSN/MSFT, ASK/IACI, EBAY, AMNZ, etc) with large cash hoards going shopping, not to mention large userbases with which to monetize the acquisitions.

this is quite different than the "car dealer i-banker/analyst" & "clueless retail investor" driven IPO market of the late 90's which blew up in everyone's faces. the liquidity exits are now being fueled -- rightly or wrongly -- by large platform company M&A that assess acquisition value based on the incremental ROI to their revenue / userbase / market caps from grabbing a new feature/startup & rolling it out to their x00 million users.

With all of that said, I am with Jeff Clavier and Chris Pirillo on this one. Let's all stop arguing over what Web 2.0 is or isn't and just go out and build some world class companies. If we all do what were are truly passionate about great ideas and companies will undoubtedly emerge. (Can you tell I just finished "The Monk and the Riddle" by Randy Komisar? Great book if you haven't read it already. I highly recommend it.)

Looking forward to the podcast! It should be a lot of fun. Click here for the revised guest list.

Monday, October 17, 2005

Pre - BlogOn in NYC

First off, I just want to say that I am sorry I have not blogged in about a week and I should continue the apology to include the fact that this post will not be of my usual thought provoking type. I have been really busy getting my podcast together. The recording date is this Wednesday! In preparation for the first podcast, but really to get out and have some fun, I hopped on the train and headed down to NYC this weekend for the pre-BlogOn festivities. Specifically, I wanted to get to the NYC Geek Dinner (all about podcasting) and the BlogOn Meetup before meeting up with Dave McClure from for some late night NYC Pizza before catching my 3am train back to beantown.

The train to NYC was actually very comfortable and I enjoyed it far more than driving or flying. The comfort of the train allowed me to get some good reading time in and I was able to finish off John Battelle's "The Search." It is truly a great book and far more than just a book about Google. I recommend it highly. After finishing "The Search" my train was about 10 minutes outside of Penn Station so I got to enjoy the beautiful industrial backdrop around me for the rest of the ride.

After spending about 15 minutes or so trying to find my way above ground at Penn Station I hit the sunlight. Ahhhhh, New York City. The Empire State Building was to my right and the Geek Dinner to my back. Time to turn around start walking. The walk to the Geek Dinner took a lot less time than I thought so I had time to start reading Komisar's "The Monk and the Riddle" in the park before heading on in for some beers and podcast talk.

The people at the Geek Dinner were some of the top podcasters in the business. There was Michael Geoghegan of Reel Reviews, John Federico of, Greg Galant of VentureVoice, Cameron Reilly of The Podcast Network (TPN), Scott Beatty of and Adam Varga of the DailySonic just to name a few. For the pictures please check out this flickr stream. Good stuff! There was some great talk about how to produce a podcast, what a podcaster should focus on, show formats, business models, and everything else you can think of. In fact, the chat was so good that Greg, Michael, Jason (GothamCast), Jason's wife and myself didn't get over to the BlogOn Meetup until about 9pm or so.

By the time we got over to the BlogOn Meetup most people had gone but we were able to strike up conversation with a few people and have a few good beers while we were at it. While we were at the BlogOn Meetup Dave McClure called and I headed over to his hotel to meet him. After Dave got his bags tucked away in his room we headed out on an epic quest for food and a laptop power cord. The power cord could not be found in NYC at such a late hour but we did manage to find a pizza place open in Penn Station although it was not the Roy Rogers food we were teased with not once but twice before.

Along with our pizza find Dave and I did stumble on some other weird happenings in our travels including a police officer asleep in a cab parked on the sidewalk and a semi driving the wrong way down a one way (see Dave's flickr for more) and then backing up and parking on the sidewalk. There seems to be a theme here... After that we chatted a bit more about business, entrepreneurship and life to the point where we were both falling asleep so I let Dave get some rest and I headed on my way back to beantown. Dave did make sure that I left NYC with some sweet SimplyHired and SimplyFired swag before I hit the road. Let it be known that I am a swag junkie so please send some my way.

Thanks to all who made my whirlwind pre-BlogOn Sunday such a great time. I look forward to keeping in touch with everyone and to seeing podcasting and blogging continue to grow.

Monday, October 10, 2005

DARPA Grand Challenge

In a follow up to the piece I wrote a couple of days ago about AI I had to mention the DARPA Grand Challenge. The competition, completed on Saturday, October 8th, was designed to accelerate research and development in autonomous ground vehicles to help save American lives on the battlefield. The Stanford team's entry, Stanley (below), won the contest and was sponsored by chip giant Intel and VC powerhouse Mohr Davidow Ventures.

To sum up the event I will quote the same New York Times lines that SiliconBeat did:

The Stanford scientists who led the 18-month effort to build Stanley said they saw their victory as a significant leap forward in the field of artificial intelligence, a discipline that has long suffered from big promises that did not pan out.

"This is for people who say, 'Cars can't drive themselves,' " said Sebastian Thrun, the director of the Stanford Artificial Intelligence Laboratory and co-leader of the Stanford team. "These are the same people who said the Wright brothers wouldn't fly."

Congrats to the Stanford team for their amazing accomplishment. To win a grueling 132 mile race through the Nevada desert and be one of only 5 finishers out of 23 entries is truly something nevermind the fact that the car drove itself! The Stanford team walks away with a well deserved $2mm prize for their advances in AI technology.

Saturday, October 08, 2005

Search, and Nano, and AI, oh my!

As most of you know, I have starting working on a podcast called VentureWeek which will be a roundtable of both VCs and entrepreneurs talking about the issues and technologies of the day. In thinking of subject matter for future shows I came up with a show on search (pretty much a given for my format) and a show on the future of technology (inspired by the writings of Ray Kurzweil) along with some other ideas. After jotting down these ideas and e-mailing possible panel members the other day I decided that it was time to relax. So, I sat down in my favorite chair and began reading my fresh copy of "The Search" by John Battelle.

I thought that the book, while being very good, was going to be a pretty straightforward tale of how Google began and how it, along with other search companies, changed the business landscape. Boy was I wrong. In hindsight I should have known not to under estimate John's talent for tech writing. After the first fifty pages I had to put the book down and do some thinking. This thinking ultimately led to the blog piece you are reading.

John brings up some pretty powerful thoughts on search and what it could grow into early on in the book. The thought that really struck me was that search will probably be the first form of artificial intelligence. After taking a moment to think about that profound statement I realized that it made complete sense. We all want a search that can intuitively understand the context of our search. For example, when I searched for "new york hotel" on Google I came up with results that included both hotels named New York and hotels in New York. In fact, the first non-sponsored result was the New York-New York Hotel in Las Vegas which did not help me find a hotel in NYC for the weekend before BlogOn. Google, as great as it is, can not discern the context of my search, yet.

I, and I suspect many others, have always pictured AI coming in the form of humanoid robots (see Isaac Asimov's robot series) or a talking supercomputer like HAL in Arthur C. Clarke's "2001: A Space Odyssey." However, it makes sense that AI would come gradually rather than all of a sudden in a massive breakthrough. It appears that the first real practical use for AI would be developing better search. Once AI search was developed the technology could be built on to create other forms of AI and eventually even merge with human intelligence through nanotechnology and robotics to create the singularity described in Ray Kurzweil's new book, "The Singularity is Near." While this technology would be a huge advance it does not come without a large responsibility.

Michael Crichton's book "Prey" illustrates, albeit in an exaggerated way, what can happen if we create technology (nano machines with AI in this case) that we do not fully understand. In the book the main characters develop a "nano swarm" that learns, adapts, and thinks. Throughout the book the swarm envelops its' creators until there is nothing left of them. The swarm was thought to be a breakthrough and great step for human kind but in the end it took on a life that no one expected. Essentially what happens in the book, and in most of Crichton's tomes, can be described through Chaos Theory.

Chaos Theory, the most important piece being known as the Butterfly Effect, is characterized by sensitivity to initial conditions. The term the Butterfly Effect came from Edward Lorenz who stated that one flap of a butterfly's wings in South America could cause a tornado in Texas (not sure of the exact country or state but you get the idea). One model that is used to effectively show Chaos Theory in action is the Mandelbrot Set (based on a mathematical equation) seen below.

The black portion of the Mandelbrot set represents the stable points, or the points that will gravitate, and eventually stay on, a single point. Basically, if you pick any point inside the black area and run the equation over and over you will eventually get pulled in to a particular point in the black area and stay there. The colored portion of the diagram is a whole different story though. As soon as you pick a point right on the edge of where the black ends and the color begins the point, after iterating the equation repeatedly, will stray off into infinity never settling on a single point or coming into the black portion of the diagram. (The other interesting thing about the Mandelbrot set is that, if magnified over and over again, it can be seen that it holds more and more tiny Mandelbrot sets. Also, each point on the Mandelbrot set is linked to a particular Julia set. Please check out the link above for more information or this link to play with a Mandelbrot set.)

The Mandelbrot set shows that the slightest change in beginning conditions can make a huge difference in the final outcome of anything, keeping one thing stable and throwing another into Chaos. Chaos can happen if we do not watch technology closely. The good news is that people, like the Foresight Institute, know this and are keeping an eye on everything and educating the public about advances in technology.

Nanotechnology and AI are undoubtedly coming and will probably converge at some point in the future. Companies will form to commercialize the technology and VCs will fund them. We don't want to end up in a world like the one portrayed in the Terminator or in the Matrix and we certainly do not want to change the human race into one where everyone is the same and the race is no longer recognizable as described in Kurzweil's "The Singularity is Near." However, the human race is defined by innovation and we can't afford to stifle it. There is a delicate balance that needs to be found and we need to make sure that we do not tip and fall into the multi-colored infinity of the Mandelbrot set.

Whew... all that over a smarter search engine...