The Wannabe Venture Capitalist

New Home for The Wannabe VC

2006-01-20T00:16:00.000-06:00

-------------------- The Switch is Official --------------------

New blog URL: http://www.VentureWeek.com/blog
Feed URL (same as before): http://feeds.feedburner.com/thewannabevc

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So sorry for those who receive my feed. I am working on setting up The Wannabe VC as a WordPress blog on my VentureWeek server and have, therefore, been playing with the feed redirects. I will let you know know when everything is all clear and I appreciate your patience in the meantime. I believe that the WordPress blog will be better for all of you readers out there since I will be able to categorize posts, etc. No worries for all of you that read me via RSS: I will be setting up redirects which means you don't have to do a thing to keep receiving my content as soon as its published!

Fixing the Venture Capital Model

2006-01-15T23:06:00.000-06:00

There has been a lot of talk for a while now about fixing the venture capital model. As it stands now, there are things about the model that do not align the wants and needs of VCs with entrepreneurs. For example, VCs need exits at certain time intervals because their funds only last 10 years (for the most part) and entrepreneurs are sometimes forced to grow too quickly or be acquired too soon because of this. While the structure of VC funds probably isn't going to change any time soon (after all, the people that invest in VC funds need their money back to pay pensions and do charitable work) the question is: What can be changed? The answer: deal structure.

The way VC deals are structured is something that, with a little creativity, can make the system much better for both parties. There is a fundamental problem between VCs and entrepreneurs. VCs want entrepreneurs to shoot for the stars and to be the next Google. Sure, entrepreneurs want that too. If they didn't, they wouldn't be in the game and taking the risks that they are. However, if someone comes along and offers an entrepreneur $25mm for a company he built in his spare time and for little of his own money he is going to take the cash or at least be very tempted to especially if it is his first company. However, that $25mm offer looks paltry to a VC who, lets say, put $7mm into the deal at a $22mm post money valuation (and sees the company eventually being worth $500mm). The return on investment for the VC does not line up with the return on investment for the entrepreneur.

Partial founder buyout can change this dynamic by giving the entrepreneur a little liquidity early on. Let's say that, in the above scenario, the VC actually put $10mm into the deal but $3mm was actually paid in cash to the entrepreneur and $7mm went into the company. Now, the entrepreneur has $3mm in the bank. This is not enough to make him too comfortable but it is enough to reduce, if not eliminate, his urge to sell out quickly for $25mm. Now, the entrepreneur is more likely to take the plunge with the VC and try to become the next Google knowing that his house and his childrens' college educations are taken care of.

If this type of situation was in practice today I think we would have already seen its effects. Let's take Flickr for example. The founders of Flickr built the company on a shoe sting in their spare time. Network effects began taking hold and before they knew it they had an incredible company on their hands. At that point the founders needed to make a decision: do they take capital from a VC and scale the business like crazy possibly gaining nothing or do they take the "sure thing" offer on the table from Yahoo! and cash out early possibly leaving money on the table but also taking in enough money to live comfortably forever? In this case the founders took the Yahoo! deal and probably regret it today but can you blame them? They were looking at a lot of guaranteed cash or getting their ownership diluted possibly for $0 return. The same situation could be applied to a number of other companies including del.icio.us.

With partial founder buyout a lot of entrepreneurs would be still out there building their companies and VCs would be left with more quality investments. Everybody wins (except maybe Yahoo! and Google since they wouldn't be seeing any more inexpensive acquisitions). To make things clear, this is not an original idea. I have seen others write about it and have been surprised that there hasn't been much take up. I thought I would write about it to get it back into the discussion so please tell your friends (especially if they are VCs and entrepreneurs) about this blog entry so they can add to the discussion in the comments and on their own blogs. This is something that needs to be looked at because it could change the start-up game forever and in a positive way for all involved parties.

Outside the Echo Chamber

2005-12-29T12:22:00.000-06:00

I'm writing this post from Salem, VA in my girlfriend's mom's condo. I note my location because it is what inspired this entry. Salem is a different town than what I am used to. In my "regular" life I am always connected, always on, always within seconds of the web. Technology and the web are definitely a passion of mine. Here, however, people are not as aware of the web in comparison to the group of people I normally associate with. At Christmas dinner I found myself explaining what I do to people, some of which, were disillusioned with the web and what is has offered the average user so far. They feel like they have been let down by the technologists. If they are going to use the web, they want it super simple and I can't say I blame them.

I explained RSS technology and what it enables people to do and they loved the idea and wanted to know how to start using the technology. Even with my explanation, they felt it was still a bit cumbersome but I assured them that we are working toward making it very simple to use so the technology can live up to its billing as Really Simple Syndication. To my surprise, the conversation didn't just hinge on RSS and other bleeding edge technologies. It also veered toward the web itself and how usability issues still need to be addressed.

Now, I know some people will never think the web is easy enough to use and that it is just not worth the time and effort to get up to date with the technology but I do think the web could use some improvements and I know I am not alone. With that said, I mentioned to my dinner companions that version 2 of the web, which is being built right now, is aiming to address usability and create communities online. As I went through my explanation people got very excited and one woman actually gave me her e-mail address so I could send her a quick note on how to start reading news via RSS.

This excitement from the average user is what we should always be striving for. It is what gets me excited about what the web can do and how it can transform communications and societies. Sure, I love the latest technology as much as the next geek (at any one time I'll be on 5 or 10 beta tests of some sort) but it is when that technology transcends through the alpha geek stage to the average user that it becomes really exciting and beneficial to society.

The Elegant Universe

2005-12-15T14:19:00.000-06:00

I just finished a book last night that was incredible. If you are a physics geek like I am or even if you just want to know more about a theory that could possibly explain everything than The Elegant Universe by Brian Greene is for you! Greene writes in such a way that anyone can understand the gist of what he is talking about so it is great book for anyone. With that said, it is a pretty intense book and not a book I would recommend for light reading. I took quite a bit of time with the book myself since I really wanted to try and wrap my head around the concepts.

In the book Greene takes readers on a journey through the history of physics from Newton to Einstein and on to String Theory (M-theory). The background you get in the beginning of the book is a perfect primer to the more advanced string theory. Basically, string theory says that, rather than point particles, the universe is in fact made up of microscopic strings that vibrate in different manners and that the vibrations actually correspond to what we see as electrons, protons and so on. Not only that, string theory also provides for 11 dimentions and possibly parallel universes! Fascinating stuff...

Even more fascinating is the fact that string theory explains all, or most of, the physical properties (relativity, quantum mechanics, etc.) that we already observe. String theory implies that they should be there! Basically, if string theory was the first thing that was found, everything else we (and by we I mean physicists) have discovered would have been a given. String theory also gives rise to some interesting black hole explanations but I don't want to give too much away. Well, OK, I'll give a little bit away but you're going to want to read the book to get the full picture.

The center of black holes actually have the same characteristics that physicists think were in place before the "big bang." They have been able to figure this out, more or less, through string theory. The interesting conclusion that can be drawn is that the centers of black holes are actually universes or universes before the big bang. Why don't we see them you may ask... well, the black holes event horizon shields us from seeing anything inside. The event horizon is the point of no return. No light can escape past it and out of the black hole and all matter that passes the line will be sucked in forever.

The book seriously blows the mind. It is an incredible piece by one of the people on the forefront of string theory but it is still written in a way that "regular people" (who are willing to put in the time) can understand the big concepts. I recommend giving it a read if you want to take a look at the BIG picture through a very small lens.

For more on the Elegant Universe and string theory please visit the Elegant Universe webpage. Also, you can watch the entire NOVA special hosted by Brian Geene himself and entitled the Elegant Universe online. Enjoy!

-- I am going to put a piece up in my "normal" style very soon as I was inspired to write on google and yahoo through a piece written by Jason at 37 signals today. Look out for that or, better yet, if you are not already subscribed please subscribe and you'll get my posts automagically!

FeedFlare is here!

2005-12-13T09:34:00.000-06:00

We at FeedBurner, and by we I mean the incredible engineering and design team, just released a new feature called FeedFlare. FeedFlare adds a whole new level of interactivity to feeds. Here is a screenshot of the pieces of flare you can add.

Just a quick note: you can click on any images in this post for a larger, more readable, image.

This development is very exciting. It ties feeds in with the rest of the web in a way they never were before making the feed a true part of the online community. I went ahead and added FeedFlare to both this feed and my podcast feed. Here is a screenshot of what it looks like in the VentureWeek feed.

From the screenshot you can see that you can now easily e-mail the post to a friend, tag the item in del.icio.us, see what tags others have used and view my creative commons license. The interactivity this will bring about should be amazing. So, start adding your FeedFlare today and remember that the minimum is just not enough. Be like Brian and add some flare to your feed!

In other news... EContent editors just named FeedBurner one of the Top 100 Companies that Matter Most in the Digital Content Industry. Check out this link for more info.

Lastly, we just announced a deal with Reuters, the world's largest international multimedia news agency. They selected us to deliver global news and advertising to its subscribers in the U.S., U.K. and Japan! This is great news and, being a former investment analyst, I am psyched that we now work with a service I used religiously for years.

Well, that is all my FeedBurner news for the day. Great things are happening and I want to thank all of our publishers big and small because, in the end of the day, you are what drives our success.

Media Explosion

2005-12-03T17:32:00.000-06:00

Wow, I have been pretty lax in posting and I apologize for that. Things have been super hectic lately because of my move to Chicago (and because I haven't had internet at home for the past week). In fact, today marks the end of my first week in Chicagoland. Why did I move to Chicago you ask. I just started a new job this week. I am now in Business Development with FeedBurner and I couldn't be more excited! You can keep up with our announcements by subscribing to the company blog. Things are going great and I believe FeedBurner has an incredible future ahead of it (although I may be a bit biased)!

One of the reasons I love my job is that I get to reach out and talk to the blogging and podcasting community on a daily basis. In my first week alone I have spoken with a number of newbie podcasters (plug! check out my podcast) about how to get their feeds set up and distributed to services like iTunes. So many people are getting their voices out today with the help of technology and I think that is an amazing thing. What will be even more amazing will be the growth of blogging and podcasting as the developing world starts to receive more technology like the OLPC $100 laptop.

Imagine a future where you can view someone's daily life in Vietnam or Egypt through a blog, podcast or flickr stream. We will be able to develop a better sense of other cultures and how they perceive things. This will hopefully give people more perspective on the world and the human condition. However, with this explosion of media comes a large responsibility. We need to develop better filters.

When I was in Cairo a couple of years ago my professor asked me to pick up a newspaper and give a read. In doing so I could instantly see the slant that the paper had. The same topic would have been covered much differently in a paper back in the US. I already knew that the news had biases built in (after all, we are only human) but I had never seen it as clearly as I had that day in Cairo. Now, with so many media sources out there, we will have to become better at filtering through them and taking biases into account. I believe we will get better at this as time goes on. I also believe that the larger publishing institutions, like the New York Times, will act as a guide to the average media consumer helping them through the maze of blogs and podcasts out there.

It will be interesting to see what the future of media holds and how it will affect society. Blogging and podcasting are here and are not going anywhere soon so the time to start developing more aware media consumers is now.

The OLPC $100 Laptop & Grameen Bangladesh

2005-11-18T06:45:00.000-06:00

Continuing my series on how tech and finance can enable to poorest of the poor to pull themselves out of poverty I would like to talk about the OLPC (one laptop per child) $100 laptop. The machine was unveiled at the UN summit in Tunis just the other day and it is impressive. It boasts a 500 MHz processor, mesh networking capabilities and four USB ports. It can also be charged up by utilizing the yellow crank (see pictures below). This was designed for countries with unreliable electricity.

The OLPC laptops will be paid for by the governments of the countries whos people will receive them. The governments will then hand them out to children. However, an interesting thing to mention is that the children will own the laptops. They are not going to be on loan from the government. The thought is that the children will take better care of them if they own them as opposed to them being "rentals."

I was very happy to see that the Egyptian government was one of the first to order some of these for their people. Having spent some time studying in Cairo I can attest to the fact that there are people that need them. I met so many intelligent people in my time over there who, if they just had the means, could really create something special. Now, keep in mind, I studied in Cairo, a metropolitan area, and I still saw many people that could use these laptops. In rural Egypt I am sure there are multiples more.

Along the same lines I read a post in the Unitus blog about Grameen Bank Bangladesh. The piece was fascinating in that I never realized a microfinance institution could be so large. They have over 4.48 million borrowers and a staff of 13,492! As far as building community is concerned, the bank has issued 5,773 higher education loans, 619,000 home loans and issues 19,000 scholarships a year.

All of this shows that we can help the poor to help themselves through finance and technology if we continue to think outside the box. I hope the next time I return to Egypt, and there will be a next time, I see a little green laptop in the hands of every child empowering them to create freely and to think of their bright futures which can now come to fruition due to higher education loans provided by microfinance institutions.

Microfinance

2005-11-07T17:47:00.000-06:00

I have been wanting to write on microfinance for quite some time and I thought that tonight would be as good of a time as any. Awareness, at least in my case, of microfinance has been rising quickly. I was first introduced to microfinance by Dave McClure of SimplyHired.com who works with and evangelizes Unitus, a microfinance accelerator. Before I get ahead of myself I suppose I should explain the basics of microfinance.

The integral piece of microfinance is what is called microcredit. Microcredit is giving out what we in the US would consider very small loans to the poorest of the poor around the world. The individuals who receive these loans are not "bankable" in any sense of the word. They have no collateral, an unsteady work history and no verifiable credit history. Microcredit is an innovation in the world of finance that originated in developing nations where it has successfully enabled extremely impoverished people to engage in self-employment activities that allow them to earn an income, but more importantly, build wealth and exit poverty. Although there were a lot of people who thought the idea would fail back when it began in the 1970s, microcredit has shown that it has staying power with the UN declaring 2005 as the International Year of Microcredit and a documentary (Small Fortunes) on microcredit being aired on PBS.

Below are the six fundamental principles of microfinance as found in the wikipedia entry:

A savings|investment as preferable aid
Entrepreneurial talent and energy are scarce invaluable resources for economic growth
Traditional private banks should not be expected to offer microcredit
A new generation of banking institutions [and the banking professionals to run them] is arising
Poor entrepreneurs possess the same survival skills as the toughest, most affluent business operators
A radically efficient, large-scale, NEW banking operating infrastructure required

The first of the fundamental principles hits home with me. I love the microfinance concept for the sheer fact that it teaches people to fish so that they can eat forever rather than giving them a fish which only allows them to eat for one day. Sometimes we think that helping someone equates giving them a handout of some sort. However, I believe that helping someone to help themselves is the best method. At the end of the day the person is not only better off but their pride is restored because they know that they have created a sustaining business and will not have to struggle again the next day to find another handout.

Just because these people live in poverty does not mean that they can't pull themselves up from their bootstraps with a little money and start a business that can support their family. They are smart and resourceful. As principle five points out, these microfinance entrepreneurs have the same survival skills as the toughest, most affluent business operators. These people have more to lose as well. If their business doesn't work than they can't feed their family. If a Fortune 500 CEO fails he is let go with a nice golden parachute and is most likely a multi-millionaire. Microfinance entrepreneurs need to make it happen.

Now that we have gone over some of the major strengths of microfinance I think it is only fair to touch on some of the criticisms. There is a concern that microfinance programs divert funds away from infrastructure projects (health/water/education) that are badly needed. I agree that these programs are needed in conjunction with microfinance to form a complete solution and can't comment on whether or not infrastructure problems do in fact suffer due to loss of funds to microfinance. Another problem people have pointed out with microfinance is that they believe some microfinance institutions charge excessive interest rates. This may have been the case in the past but I believe that with the advent of major microfinance organizations like Unitus this will be eliminated.

Some other concerns as listed in the microfinance wikipedia entry:

Turning a profit on the loan
Inability to reach the poorest of the poor
Microcredit dependency
Durability of poverty reduction

I am personally OK with profits being generated on the loans because that is how business works. Again, it comes back to treating impoverished people like people, like true entrepreneurs. When they take a loan to start a business they should pay interest. The money is not a handout and should not be thought of as so. I believe that people are happy to pay the interest especially when they see a great business developing in front of their eyes through their own blood, sweat and tears. The microcredit dependency problem falls along the same lines as the loan profits in the sense that the entire developed world is dependent on continual access to credit so why should the developing world be any different? The lessons of microfinance will apply all the way through an individual's, and even a country's, growth from "developing" to "developed."

I am excited to see what the future holds for microfinance. Unitus is taking large steps as far as making the microfinance world more connected and making it easy for investors to place money into programs. There is another organization which I have begun to help out on a project basis that I think is doing some very interesting things. The organization is called Seed Capital and they are working on a way to integrate web technology into the world of microfinance. I am not sure what they want said publicly at this point so I will stop there but I urge you to bookmark their site and check back for the release of their innovation. It will allow us all to easily become microfinance investors and start helping impoverished people help themselves. We can all be VCs with microfinance. Uh oh! I am going to have to change the name of this blog!

VW #1 Has Been Posted!

2005-10-29T16:14:00.000-05:00

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

The Web 2.0 Debate: Bubble 2.0?

2005-10-25T17:54:00.000-05:00

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 Pets.com 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.

Pre - BlogOn in NYC

2005-10-17T19:11:00.000-05:00

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 SimplyHired.com 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 Audible.com, Greg Galant of VentureVoice, Cameron Reilly of The Podcast Network (TPN), Scott Beatty of Podcast.com 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.

DARPA Grand Challenge

2005-10-10T14:44:00.000-05:00

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.

Search, and Nano, and AI, oh my!

2005-10-08T12:20:00.000-05:00

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...

Software Simulation & Start-Ups

2005-09-30T19:32:00.000-05:00

I was introduced to a really interesting company the other day. The name of the company is iRise and they have a very interesting product that is bound to have implications in the start-up arena once they penetrate it. In fact, I had the chance to speak to Tom Humbarger, a Senior Strategic Projects Manager at iRise, who is working on a "skunk-works" project to do just that. However, before I get into that I would like to discuss the company and product a bit.

iRise started like many software companies, as a consulting outfit, back in 1996. Their core offering to their clients was website programming. Throughout the years and many websites that the company churned out they realized that there was a missing piece in the development life cycle. No one was focusing on the business analyst. Eureka! The idea of software simulation was born and now the only thing left was to figure out how to fund the new software venture (oh, and figure out how to build the software). The company decided to bootstrap the software into existence by doing consulting work and they gained a strong foothold in the market by obtaining about 70 Fortune 1000 companies as clients. iRise took its' first and only round of funding to date, a $15.8mm round led by Morgan Stanley Venture Partners, in January 2005 to expand the company.

Now, to the software. iRise has developed a solution that allows a user to simulate a website or other program without having to do any programming. All the user has to do is drag and drop items into and iDoc in the iRise studio and away they go. In honor of iRise's "a picture/simulation is worth a thousand lines of code" approach I will be using pictures for the first time in one of my posts. Here it goes...

First, the user can sketch out their page flow:

Second, the user can create scenarios to test the software:

Third, the user can layout the end user interaction and business logic:

Fourth, the user can incorporate sample data:

Last, the user can create master templates which, when updated, will update all templates in the project keeping corporate branding integrity intact:

The latest development with the release of iRise 5 was the introduction of an iRise iDoc reader. iRise took a page from the Adobe book and created a reader than anyone can download (it comes with a sample iDoc to play with). This way, users of the iRise studio can send their documents to people without iRise software. The recipients of the document can view the design, use the simulation and make notes on the iDoc. I believe that this functionality is key to the adoption of the software by start-ups.

Two things start-ups want to do is be able to shop their ideas to funding sources (unless bootstrapping) and get their software developed with the least revisions (change orders) as possible. iRise addresses both of these issues with an easy to learn application.

A start-up, using iRise, can model their entire idea at a substantially lower cost than programming a prototype. After the model is created, they can send it out to VCs and other funding sources via e-mail who can open and use the model in order to get a crystal clear idea of what the start-up is going to do and how they are going to do it. This will give the start-up a better chance at getting a meeting where they can use the model in their presentation to hammer home their key points. However, there is another key thing that has already got VCs buzzing about iRise. A 70% reduction in change orders.

The trend with a lot of software development these days is to send it overseas. There are a lot of pluses to doing things that way. The main one is the significantly lower cost of production. However, you do end up with a lot of communication issues when you send software ideas overseas for development. The developers may not speak English well or at all and they may not be used to certain ideas and terms that we take for granted. This can cause problems in the development of the software, which cause change orders. These change orders can be reduced (by up to 70% iRise states) by providing overseas developers with an iRise model of the software that needs to be built. The iRise model allows the developers to "use" the start-ups' software via the simulation in the iDoc which gives them a much better idea of what they need to build. The iRise model will also act as a visual contract between the start-up and their developers.

The reduction of change orders and, subsequently, cost is not the only thing that is getting the VC community talking about iRise. VCs (I know, but can't mention who) love iRise because they view it as a very cheap insurance policy for their portfolio companies. iRise prevents portfolio companies from missing delivery dates, coming up with software users don't want (iRise can be used in focus groups and in usability testing) and coming back with wrong requirements in their product. All of these are issues VCs face every day and issues that can make or break their portfolio companies. The lowering of risk facilitated by iRise is a welcome relief.

I think that software simulation is going to be standard in start-up situations in the future because of all the benefits it provides. iRise is leading the way now and, with its' move to target start-ups, should solidify itself as the software simulation standard for years to come.

A note to start-ups: Tom told me about a program for start-ups that he is working on. For qualified start-ups (pre-funding), iRise will provide a free license for 60 - 90 days in order to allow the start-up to shop their idea to VCs and find funding. Once the company finds funding they will be asked to purchase the program. The pricing for start-ups has not been determined yet. It will either be subscription based or the "traditional" license model with recurring maintenance fees. The only catch is that you have to purchase a three day training seminar for $3 - $5 thousand off the bat and work with iRise on some joint marketing efforts (mentioning them in press releases, a "powered by iRise" icon somewhere in view, etc.). If you are an interested start-up please e-mail me and I will give you Tom's contact information.

Update: US VC in China Post

2005-09-26T10:32:00.000-05:00

Less than 24 hours after publishing my latest piece on China I open up NewsGator and see a link to a Washington Post article stating that China just imposed new rules on internet news. The new regulations will affects portals like Sina and Sohu the most. However, I believe they will have an impact on other start-ups as well. This isn't looking good for investors so far. Free speech has already been severely compromised.

U.S. Venture Capital in China

2005-09-25T15:49:00.000-05:00

I just got back from a great bike ride. Today I was an on-bike marshall for the inaugural 2005 Hub On Wheels event held here in Boston. The idea of the event was to increase bicycle awareness by allowing people to ride an arrowed route with support through all parts of the city to get a different feel for the city and bikes. The event was a huge success. I would estimate that there were about 400 riders (Since writing this piece I have received word from the Hub On Wheels Director that there were about 700 riders in total!) and even more people who attended the festival at Franklin Park. I also rode a lot of miles and now think I could give Brad Feld a run for his money in the fitness area. Probably not... Anyhow, you are probably thinking "What does this have to do with VCs in China?" Well, not too much to tell you the truth. However, after I lead my ride group this morning, I helped direct traffic at a tricky intersection (while simultaneously fixing a flat I got from a huge drywall screw) for about 2 hours so I had a lot of time to think and think I did.

My thoughts drifted to China because of the great bicycle culture there. Then that lead me to think about the amount of VCs starting programs in China. This has become a large trend in the Valley in particular. SiliconBeat has been publishing story after story about VC firms announcing funds in China. In the past couple of weeks Accel (partnership with IDG who has been in China since the 80s), Sequoia, New Enterprise Associates and Burrill have announced China funds. VCs who have not announced funds are furiously trying to figure out what to do in China. SiliconBeat reported that DFJ lost their guy in China to Sequoia but they also said they could not confirm that so we'll have to wait and see what surfaces there. Either way, there appears to be a massive turf war playing out and there is a reason why competition for locals with large rolodexes are in demand.

Relationships are taken to a much higher degree in China than they are here in the U.S.. The culture demands either locals or a long tenure (10+ years) of doing business in China to get things done. A lot of the top venture firms realize this and have taken steps to recruit locals to obtain better deal flow. Others, however, have just decided to go there and break into the market, a strategy that will probably end in disaster. There are other problems with investing in China that also need to be addressed.

The regulatory climate is not favorable.
The investing landscape looks like the U.S. during the internet bubble in the late 90s.
Very little has been contributed by China in the form of advanced R&D break throughs.

New regulations being levied in China are beginning to make U.S. VC firms chances look pretty bleak. To start, there was a recent regulation passed that deals with the ownership of offshore assets by China's residents. This regulation will significantly impact venture capital investment, M&A activity and stock exchange listings. To make things worse, this regulation and others essentially force foreign venture capitalists to rely on overseas stock market IPOs for their exits. Intellectual property law is also of concern.

The investing landscape of China today eerily resembles the beginning of the U.S. internet bubble. The companies getting funded are even quite similar. There is Yahoo's $1 billion dollar investment into Alibaba, a six year old e-commerce company, for example. Seems like quite a hefty price tag. However, if there is one deal that seems to have caused venture capital investment in China to hit the tipping point, it would have to be the Baidu IPO which has rocketed up and up in price and been one of the NASDAQ's most successful IPOs since 2001. It seems like there is a lot of greed and a multitude of e-commerce companies being formed and funded in spaces with low barriers to entry which makes me a bit leery.

The last thing that I think investors forget about China is that it has not contributed many R&D break throughs to the world. China's core competency to date has been cost cutting and mass production, creating economies of scale if you will, that lead to lower prices for consumers. This has undoubtedly helped many innovations get to the mass market. However, this is not paradigm shifting innovation. This is manufacturing efficiency.

There are a lot of reasons not to invest in China but there are also the usual suspects urging investors to take the plunge. The sheer size of the population, income per capital is on the rise, phone use has dramatically increased, and a number of U.S. educated Chinese entrepreneurs are beginning to move back to China (interestingly enough, the Wall Street Journal recently reported on how many VCs are investing in local Chinese entrepreneurs and not U.S. educated Chinese returnees). However, all of these good signs are not proof that the market is currently there for VCs. It seems to me that this could be a lot of hype. This is not to say that there isn't a lot of money to be made from the hype so I can see why some VCs are going for it. It is just a matter of who will win and who will lose. My bet is on Patrick McGovern and his IDG/Accel China Fund since he has been investing in China since the 80s.

In closing I would like to leave you with a piece of a SiliconBeat article written about a year ago describing Don Valentine's feelings on investing in China:

...Valentine did go on the SV Bank trip to China, but the experience only confirmed his view that Sequoia should stay away from direct investments there, he said. Indeed, Valentine ragged on China all evening long. Summing up his views about the rush by others to invest China, he quoted the title of a song from 1950's jazz singer, Billy Eckstine: "Fools rush in where angels fear to tread." He continued: "China has no laws, no accounting system, bankruptcy banks, and according to Fortune, a stock market that is made up of a den of thieves no different from the ones on Wall Street."

Valentine said Sequoia hasn't invested abroad in its 30-plus year history, and it's unlikely to begin doing so. Even investing in a Boston company is a big deal for Sequoia, he said, and most of our investments are not only west of the Mississippi, they're west of the California border, he said. Concluding with a bang, Valentine prophesied about China: "You're about to see a bubble burst in the next five years, or sooner, that will make our bubble look meaningless."

Definitely some harsh words but, according to SiliconBeat, the statement above is similar to what Valentine told his colleagues about the U.S. market in 1999 when they raised a fund to invest in pre-IPO companies at the top of the bubble. In the end, Sequoia ended up with a loser of a fund to say the least. VC investing in China is going to be very interesting to watch especially considering that we are now armed with fresh insight from the U.S. e-commerce bubble. Ladies and gentlemen, buckle your seatbelts, we are in for one heck of a ride!

Off topic: I just read in PC World that Massachusetts, my home state, will be the first U.S. state in which executive branch agencies will adopt the OpenDocument standard. Pretty neat stuff.

Nanotech & Cancer

2005-09-20T19:28:00.000-05:00

I have been hesitant to evangelize nanotech on my blog because I know VCs are still a little timid about investing in the area. Quite frankly, they should be. Nanotech hasn't made sense for VCs until recently because the bubble isn't expected to hit until around 2010 putting nano far outside many VCs acceptable time-to-exit area (for those who don't know, generally VC funds are set up as 10 year limited partnerships with investing being done within the first 3 - 5 years and exits coming before the 10 years are up). Also, nano isn't the traditional model many VCs are used to. Nano is an enabling technology. Essentially, nano is a way to make things better than they already are or enable things that were impossible without it. This means that you would invest in, let's say, a materials company like Nano-Tex or a pharma company like QuantumDot rather than a "nanotech company." In English, Nano needs to be used in convergence with other scientific disciplines.

How did a business guy get into nano you may ask. Well, for one, I am a tech/science geek and proud of it. However, the real answer is that in my senior year of college I did a lot of work with a professor of mine, Dr. John McIntosh, on nanotech with the intent of forming an advisory company (finding funding, strategy, etc.) to small nano upstarts called Nano-Oracle. In fact, if you click on the link you'll see our web shell my friend Rick built that was never populated with real data. Anyhow, John ended up moving to Boise to teach at Boise State while I stayed in Boston which put a halt on things and some big connections didn't pan out so the venture died. However, it left me with a love for all that is nano. With that said, I was recently inspired to continue my nanotech evangelization by Steve Jurvetson's blog where he is always talking nano and the latest edition of Small Times Magazine.

The new Small Times cover story was about nanotech's role in the fight against cancer. Now, I absolutely love the materials end of nano which is already being used (textiles, carbon nanotubes, etc.) and is making things like the space elevator a real possibility (self promotion alert: I wrote a piece in LiftPort's SE book about the SE finances so stay tuned for that). I even have an artists conception of the space elevator hanging on my wall. However, the part about nano that always got me going was the fight against disease.

The first thing that got me excited was work on gold nanoshells being done at Rice by Naomi Halas, PhD and Jennifer West, PhD who have since spun out their innovation into a company called Nanospectra Biosciences. Their patented Nanoshell particles allow for non-invasive medical therapies. The interesting thing about nanoshells is that they can be tuned to absorb or scatter light at desired wavelengths, including where human tissue is relatively transparent. This allows specific cells, cancerous tumors for example, to be targeted. Once the nanoshells reach the tumor they can be heated through infrared light, which isn't harmful to surrounding tissue, eventually killing the cancer cells. Here are the benefits of "nanoshell-based tumor ablation" found on Nanospectra's website.

Targeting to specific cells and tissues to avoid damage to surrounding tissue;
Superior side effect profile than targeted chemotherapeutic agents or photodynamic therapy;
Repeatability because of:

no "tissue memory" as in radiation therapy, and
biocompatibility and superior side effect profile; and

Ability to treat non-spherical tumors, such as glioblastomas, metastases, and inoperable tumors.

Nanospectra is just one of the amazing companies using nanotechnology to do great things. However, VC funding hasn't been easy to come by. As with other nanotech companies, Nanospectra is solely funded by grants as VCs investment horizons haven't meshed with nano. However, this is beginning to change. There are about 700 nano companies in the US with about 75 of them receiving some type of venture capital investment. VC investing in the sector in 2002 and 2003 was robust with about $700mm invested. This investment pace slowed in 2004 due to VCs exit opportunities being called into question by the Nanosys IPO pull out. However, more big names are getting back into the game.

Kleiner Perkins, Draper Fisher Jurvetson and Venrock Associates are leading the way with smaller firms like Global Catalyst Partners and Israeli firm MMT Funds investing in nano. MMT Funds, or Millennium Materials Technologies, is dedicating a lot of their fund to nano investing. They can do this because they are focusing on materials which get to an exit much quicker than bio-nano companies. MMT has actually invested in a company called Power Paper which produces batteries that integrate into paper products. The company is initially targeting the electronic greeting card market, games and other consumer products. Clearly a simplified path to revenue compared to Nanospectra.

Before I close out my initial nanotech column I just want to touch on another hot space for nano innovation, cleantech. Cleantech has been thrown into the spotlight again though the tragedy of Hurricane Katrina and the well known aging of the grid in the US. Small Times did a whole issue on the energy crisis and innovation. It was a great issue and I suggest giving it a read. The major thing that nanotech is enabling today in the space is fuel cell creation. There is one company in particular that is worth a look, Integrated Fuel Cell Technologies (IFCT).

IFCT is currently funded by a small venture capital group out of Massachusetts, not too far from where I write this blog, called Echelon Ventures. I had the pleasure of speaking to some of the GPs at Echelon a while back and I heard great things from them about this company. I am not sure what is public so I will just include the company description from Echelon's website.

Integrated Fuel Cell Technologies, Inc. (IFCT) has created, patented, and successfully tested in prototype, a breakthrough design for a fuel cell. With this design, IFCT will make not only the world's smallest fuel cell but also the first fuel cell design to be mass manufactured at an economically viable price. Potential markets for economically viable fuels cells, which are extraordinarily broad and deep, include the market for portable power, stationary power, and, potentially, automotive.

Small doesn't even begin to describe it. These fuel cells are incredible! They will revolutionize portable power and many other spaces.

Well, that is all for my initial nanotech sermon but I will have more coming in the future so be sure stay tuned (i.e. please subscribe to my feed)! As always, feedback is encouraged and appreciated.

Blooks, Lulu & the Publishing Industry

2005-09-18T13:42:00.000-05:00

Today I read the first chapter of Hackoff.com and enjoyed the experience. Hackoff.com is a blook, or book published via the blog paradigm. This particular blook is being written by Tom Evslin. For those of you who are not aware of Tom here is a little background I found on him at A VC. Tom was one of the first successful Macintosh software developers, sold his company to Microsoft, oversaw the development of the first versions of Back Office, Outlook and Exchange. He then went to AT&T where he got them into the Internet and invented flat rate pricing for dial-up internet access, and then finally to ITXC where he invented commercial grade VOIP. As you can see, Tom is an innovator and he is continuing to innovate in his new career, writing books.

I am sure what you are thinking now is that we've seen this before. John Battelle has been writing his blog for a while now which was a window into the book he was writing called "The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture" that is now available in hardcover. There have been others too (Jason Chervokis and Seth Godin) but hackoff.com is different. Tom is making the blog part of an overall reading experience, an essential part of reading the book.

Hackoff.com is a murder mystery set during the internet bubble. Murder mysteries such as this inevitably get people talking: Whodunnit? Publishing a book of this genre in blook format is a great idea because the links, comments and discussions will be an essential part of the reading experience. The blog format has also allowed Tom to leverage the power of the audience through an RSS feed and e-mail list that will deliver the newest chapters directly to your aggregator/reader or inbox as soon as they are published. However, the interactivity doesn't stop there.

Tom has numerous blogrolls for people who link to the blook in their posts, maintain a constant link via services like Word of Blog, write reviews of Hackoff.com, and post about blooks in general. He has also set up a fake company website for Hackoff.com which will hold company press releases and other data to enhance the reading experience. All of this makes Hackoff.com a unique reading experience and I recommend everyone go ahead and read the first chapter.

After reading Chapter 1 of Hackoff.com this morning I got to thinking about the paradigm shift taking place in the publishing industry. Many of the comments I have seen on blooks so far have said that blooks are the new wave that will bring down the traditional publishing industry. Isn't this what was originally said about digital music? What has digital music done to the traditional music labels? It appears to me that it has actually increased sales. I personally love that I am no longer forced to buy a whole CD for one or two songs. Having been burned before in the pre-digital music age I would sometimes be deterred from buying a CD if I wasn't sure of a new band. Now I can sample the tunes and buy the whole CD or single tracks. My music spending has definitely increased and I have heard the same story from many of my peers. Also, with the advent of Pandora, I can now find artists that I otherwise would not have.

It doesn't appear that Tom is looking to publish his book solely in blook form. In fact, he mentions that a traditional hardcover version of Hackoff.com will be available in early 2006. I am not sure if Tom is publishing via a traditional publisher or a self-publisher like Lulu.com. For those who don't know, Lulu is a self-publisher (or as they say: a technology company that allows people to retain control of their work) not to be confused with your standard run-of-the-mill vanity press. Lulu allows an author to upload their piece to Lulu's site and then Lulu operates in a similar fashion to CafePress. Lulu will publish an author's book on demand as books are ordered managing the logistics as well. Lulu also allows the author to keep much more of the profit than traditional publishers. Leave it to Bob Young, co-founder of open source giant Red Hat, to come up with this business model.

So, it looks like blooks in and of themselves are probably not going to undermine the publishing industry. At least, not yet. However, blooks in combination with companies like Lulu could. Allowing the public to sample books along with additional content that adds to the overall reading experience through the blook format would allow the author to build a strong and evangelistic audience. This audience would no doubt buy the author's book through Lulu if it were offered leaving the author with complete creative rule over his/her creation and a larger royalty check in hand.

This combination combats the detractors of a shift in the publishing paradigm who say that author's need the publishing house's advertising resources and network of book stores to get a book sold in large numbers. The blook is a democratic advertising campaign that allows the customers to decide who and what gets published. When customers decide who will get published Lulu takes over. Lulu eliminates a lot of the costs that dog traditional publishers including the large number of books that do not get sold. These books are shipped back to the publisher at the publishers expense. After returning to the publisher these books are shipped back out, with a publishers mark, to discount booksellers and sometimes even to the store who sent them back in first place. If they are still not sold the publisher pays to have the shipped back again and they are recycled. Talk about inefficiency. Lulu eliminates this with on demand publishing.

It appears as if the tipping point would come with a big author, someone like Dan Brown for instance, publishing via the blook/Lulu system. However, if enough good content gets published via the new paradigm the tipping point could still be reached through the buzz that early adopters would create and the stickiness that would follow once authors learned how the system was better for them. This paradigm shift would allow information to be freely distributed with no gatekeepers involved besides the reading public itself. After all, who says that the best way of deciding what gets published is a small number of high powered publishing executives sitting around with market surveys in their hands as their guides?

The Digital Identity Trifecta & Skype-eBay

2005-09-15T11:59:00.000-05:00

Acquisition day. A day that entrepreneurs and VCs love (not as much as an IPO) because it usually means a big payoff, especially when the company doing the acquiring is of the caliber of eBay. I know that a lot has already been written about the Skype - eBay deal in the past 48 hours but it was too big of a topic to ignore. After reading much of what is out there about the deal I still think I can add some value to the conversation. However, before I get to my revelations I will discuss the best of what has already been said.

One of the most thoughtful blogs that I found on the subject is Nivi's entry entitled "eBay Buys Six Apart." Intriguing title, isn't it? There is an interesting discussion there as well. Nivi states that most of the reasons eBay gave for buying Skype work for other communications media like blogs as well. That fact prompted Nivi to ask, "Why not Six Apart? Or ICQ and Hotmail years ago?" Answer: A blogging platform does not need to be acquired because blogs are not a viral product running on a closed network with network effects. As for ICQ and Hotmail, they were merely missed opportunities for eBay which the Skype acquisition is supposed remedy. With that question answered we can move on to the main reasons Nivi gives for eBay's purchase of Skype. Drumroll please...

1. eBay can't accept the risk of having a powerful supplier that essentially has a monopoly on VoIP because Skype has a viral product that runs on a closed network with network effects. PayPal runs on the same type of model.

2. eBay wants to deprive their competitors from buying Skype or using Skype as a supplier.

I agree with the reasons Nivi gives for the purchase because eBay could have achieved the same synergies as a customer of Skype cheaper and with far less risk. Jeff Clavier also notes in his entry on the deal that Manageability.org had an interesting thought that I feel backs up Nivi's idea that eBay did not do the Skype deal for synergies. The thought is as follows:

"... Trying to gleam any sense of synergy between [eBay's] current business and Skype's business is a waste. Enhancing eBay's auctions with the convenience of voice interactivity isn't worth the billions eBay shelled out... Interestingly enough, it is eBay that has the enviable position of providing digital
identities [as opposed to Google] with true value. eBay's reputation system is without competition..."

So, it appears that eBay bought Skype to continue their leadership role in digital identities. eBay is one of very few who can provide digital identities with true value because of their fantastic rating/feedback system combined with PayPal's verified service that attaches a bank account (and/or a credit card) to an identity. Google has a lot of catching up to do if they want to surpass eBay in the digital identity space.

The talk of digital identities is what really got me thinking. Clearly the formation of digital identities plays toward eBay's core competencies and eBay has the "free money" from investors to make some big moves. The question in my mind is: If this is the path eBay is moving down what else can/will they do to stay ahead of other internet conglomerates like Google that have a ton of "free cash."

To answer this question I first took a look at the sectors that eBay already plays in according to my newly developed three sector digital identity model or, as I like to call it, The Digital Identity Trifecta. The Trifecta consists of the following three sectors that cover our daily lives: play, life, and work where play consists of things like hobbies and extra curricular clubs, life consists of things like money management and paying bills and work consists of things like finding a job and making connections.

eBay has the play category cornered with great companies such as Half.com, Craigslist and of course eBay itself. All three sites allow people to find items that are hard to obtain and items they need everyday cheaper that stores. eBay employs a bidding platform, Half.com employs a "set price" method and Craigslist employs a simple message board style interface targeting local transactions. Craigslist also allows the formation of community through such categories as personals, jobs and stories.

Craigslist, as well as eBay and Half.com to a lesser extent, also overlap into the life category. Craigslist is a good example of a life company because of the community it creates. However, I was thinking of PayPal when this category came to mind. PayPal allows people to get verified online spending accounts linked to credit cards and bank accounts of their choice which, in turn, creates a strong digital identity for each user.

The last piece of my Trifecta is the work sector. While Craigslist does provide job listings I do not think that it creates strong digital work identities since there is no effective rating system in place. There are two early stage companies out there now that have a great digital work identity platform and could become acquisition targets of eBay or eBay's competitors. These companies are SimplyHired.com and LinkedIn.com.

SimplyHired was discussed in my previous post as was LinkedIn to a lesser extent. SimplyHired and LinkedIn have a partnership in place which allows both companies to benefit from the other's technology. Essentially, SimplyHired has created a job rating system (like NetFlix' movie rating system) and a job finding community through their message boards. This system works very well with LinkedIn. LinkedIn has created a phenomenal "connection management" product that allows users to rate, or endorse, other users prior work experience while also allowing them to view the connections of their connections for purposes such as job finding, reconnecting, references and recruiting. All of the features above provide an outstanding digital work identity platform, something that eBay truly needs to complete their mission.

We can all look for eBay to make more "work" acquisitions in the future to complete the Trifecta and make eBay the dominant force in digital identities. The first companies to be acquired, either by eBay or a competitor, could just be SimplyHired and LinkedIn. You heard it here first.

If anyone has any research or knowledge to corroborate this post please add a reply. Also, please post a reply if you think I am completely off base.

3 Keys to Vertical Search

2005-09-06T18:00:00.000-05:00

Vertical search is one of the hot ideas to come out of Silicon Valley lately although it has presumably been tossed around since the beginning of the search engine. While google and other major search engines search everything, vertical search engines look to specialize their searches in a specific market vertical adding significant value to the consumer who may be overwhelmed by the macro search engines. To learn more about the business side of vertical search please see a powerpoint presentation given at the VerticalLeap conference this summer by Dave McClure of SimplyHired.com entitled "Top 10 Rules For Vertical Revolutionaries."

There are many vertical search engines being developed today but one stands out as the most interesting and promising in my mind. The company I am speaking of is SimplyHired.com. As the name implies, the company is going after the segmented job search vertical by creating a search that aggregates all the jobs on the planet but also adds much more value than that. Among the additional features that SimplyHired.com offers is a rating system (a la Netflix) for jobs and a partnership with LinkedIn.com that allows users to find out how they are connected to a certain job opening. The features highlighted above are obvious differentiators from sites like Monster.com but there is another angle that SimplyHired.com is utilizing which will undoubtedly gain them market share, the formation of a community.

SimplyHired.com has set up a company blog where users can see what the team is up to and new developments that are coming down the pipeline. The company has also created a forum where users can post anything from interview tips to their blog urls to funny (and not so funny) stories on how they were once fired. The "fired stories" were so good the company set up a contest and sister site called SimplyFired.com to showcase the best fired stories and pick the best of the best to win certain prizes. They just crowned a winner of the first SimplyFired contest this past Friday and you can read his fired story here. Trust me, it's a good one! You'll never look at left over pizza in the company cafe the same way again.

The formation of a community seems to be working well for SimplyHired because it brings all job seekers together and allows them to have fun while searching for jobs. Fun is one of the keys to creating evangelistic customers who will not only continue to return to your site or to utilize your service but will also enthusiastically spread the word about your site to others. Enthusiasm is contagious (and a lot cheaper than an ad campaign!) so if a start-up can create great users it will really help them on their way to creating a great business. However, one can have a fun site that provides great value-add to the end users but if the site is hard to use and gives the user a headache every time they view it you still have a problem. This is where SimplyHired excels again.

If you look at SimplyHired.com you will notice how clean their site looks (a la Google) and that their colors are few and pleasing to the eye. Let's compare Yahoo and Google to make my point clearer. I recently heard that Yahoo's search gives really great results, possibly even better than those of Google, but Yahoo is used less. Why is this? What helped Google rise to where it is today? I believe a lot of it had to do with them concentrating on their search: i.e. keeping their page simple, easy to use and not busy. Now, compare this to Yahoo. Yahoo went the portal route and did that well but it's search component doesn't get used as much as it should because the portal information chokes it.

In conclusion, SimplyHired is doing a great job at three major things that, in my opinion, help grow a vertical search company. The three keys are:

1. Creating a site that has great search content and great meta data (i.e. job ratings, LinkedIn partnership, etc.).

2. Creating a community of evangelistic users by having fun.

3. Keeping things simple.

Obviously there is much more that goes into a company like SimplyHired.com than what I have listed (i.e. financial modeling, finding a long tail, etc.) but those three keys are a big help in getting a vertical search company off the ground. I have a feeling that SimplyHired will be used as a model for vertical search companies that form in the months and years to come. Now, to do my part as an evangelistic user.

Tired of your current job? Need a change? Recently fired? Then get hired! Check out the SimplyHired search on the right side of my blog. Enjoy!

Funding FYI: SimplyHired.com has received over $4mm to date through two rounds of financing from some very notable angels that include: Rajeev Motwani (Stanford computer science professor and early investor/technical advisor to Google), Ron Conway (founder of Angel Investors, L.P., early investor in both Google and Ask Jeeves), Kanwal Rekhi (successful serial entrepreneur and former CTO of Novell) and Guy Kawasaki through Garage Technology Ventures. Guy was also named to SimplyHired's Board of Directors.

Katrina

2005-09-01T10:22:00.000-05:00

Katrina is one of the worst natural disasters this country has ever seen. Our brothers and sisters in the affected areas need our help. You can do your part by giving what you can to the Red Cross Disaster Relief Fund. I urge everyone to give because there are fellow human beings out there who need our help to rebuild their lives which were destroyed so suddenly.

Pandora

2005-08-30T19:17:00.000-05:00

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

2005-08-25T12:44:00.000-05:00

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

2005-08-18T19:51:00.000-05:00

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

2005-08-15T21:02:00.000-05:00

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 sit e 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.