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July 30, 2008

Taking off the blinders

Yesterday, VCMike wrote about what he called the TechCrunch Ecochamber Disease.  The idea is that VCs and entrepreneurs can get blinded by the things that are interesting in their own little world, rather than focusing on what is important to the broad market.  If you go back to the initial Internet bubble, this is one of the drivers of the big tech run up.  There was some initial adoption of various Web services.  This initial adoption was at a pretty rapid clip as initial adoption goes.  Everyone assumed that the rate of adoption would stay very rapid, into the broad market.  Whoops.

The Internet has had a huge impact on communications over the past 12 years or so.  It just didn't happen in 3 or 4 years.  The valuations of the Internet companies were inflated because they assumed that broad user behavior would change very, very quickly.  It rarely does.

This is the marketing concept that I first heard about in the business classic, Crossing the Chasm.  Geoffrey Moore discussed the problems with assuming that early adoption would turn into mass adoption on its own.  He also gave various strategies on how to move into the broad market.  In the unlikely event that you haven't read it, I would strongly suggest it.

I think that a lot of Web technologies are overhyped because no one is thinking about how they cross the chasm.  Many times, the core technology may need to get embedded in something else in order to enable broad adoption.  An example of this is Tivo.  Tivo's core technology is great.  They have an easy-to-use UI for recording programs and playing them back.  People who owned one tended to love them (including me).  But, they never got broad adoption of their own boxes due to the challenge of educating users on why they needed a DVR and installation challenges.

The cable and satellite vendors had already invested huge amounts of money in their customer relationships.  It was only when Tivo embedded their capabilities into the set-top boxes of these types of vendors (or the vendors developed their own) did the DVR capability become more mainstream.  It simplified the installation and became, over time, embedded in how people watch TV.  It took years, and it took a big investment.  Ultimately, Tivo didn't reap as much of the benefit of this as they probably should have.

Services like Twitter may suffer the same fate.  I like Twitter, but haven't really found the indispensible user for it.  For me, it is still interesting, rather than important.  However, I think that the core capability of having controllable broad instant messaging can be real important.  It just has to get shaped and embedded into the right broad market service in order to really catch on.  Like Tivo, a lot of people outside of the tech industry hear about Twitter and say "why would I want that"?

If you are starting up a web service that you think can have broad applicability, make sure you listen to a broad range of users, not just your techno-centric buddies (like me).  Taking off these blinders can give you some insight into how you need to get your service embedded into something that users really want.

July 28, 2008

Classless sports moment

I was at Fenway Park last night for the Red Sox-Yankees game.  Before the game, they had a moment of silence to remember Russ Gibson, a not-so-significant player in Red Sox history.  Mr. Gibson had died earlier that day.  Halfway through the moment of silence, some idiot yells "Yankees Suck".  In the quiet of the stadium, everyone could hear him.  Although some people around me derided him for being classless, many more people laughed out loud.

To make matters worse, and through no fault of his own, the PA announcer ended the moment of silence by saying "Thank You" as the laughter died down. 

Much worse than what you say can be when you say it.

Late Stage or Too Late?

The Boston Globe ran an article today about the venture capital environment and late stage VC investing.  Basically, because the exit environment is uncertain (very few IPOs, M&A exits are at low prices, etc.), companies are raising more late stage capital in order to remain private longer.  Although it can seem nice when a company raises a large round of financing (the companies cited in the article raised $40M+), it also changes the equation for everyone involved.

Even if these rounds are done at pretty high valuations, they still represent dilution for the management team.  And, for the existing investors, they have to commit capital to the company that they were hoping to keep in their pocket for other deals.  You can argue that this is balanced out by the ultimate exit being higher as the company will be even more mature, but I am skeptical of that for most companies.  The slow exit environment can also mean a slow customer spending environment, which can delay a company's growth.

Instead, many companies raise more capital than they should, which dilutes the exit returns for everyone.  What can you do about this?

The most important thing to do is to get to profitability as quickly as possible.  By being very cautious about what you spend and matching it with your revenues, you can minimize the amount of capital you need.  This will improve the investment return for everyone involved.  Of course, you shouldn't starve the company for capital, but it is much more common for VC-backed deals to be overfunded vs. underfunded.

The worst situation is the company where the investors are reluctant to put in additional capital because they don't see incremental return.  They are more likely to pressure the company to sell, even though it may not be the best time.  Being forced to sell a company too early can be discouraging for everyone, but, to the investors, it may make sense economically.  What can you do in this situation?  Make sure you don't get there by ensuring that your investors all have sufficient investment capacity for your deal, that they remain enthusiastic about your prospects, and that you carefully monitor your spending.  Am I sounding like a broken record?

I think that the late stage VC market is pretty challenging right now.  There is a lot of capital out there searching for deals, and valuations on good deals are going up.  With the exit environment remaining very tight, many good companies will struggle to raise capital because their company progress hasn't kept pace with their capital spending rate.  In other words, it's hard to justify further investment in the company as the upside looks limited.  Existing early-stage investors may be forced to provide additional capital to companies to keep them going until the exit window re-opens.  And, this is not helpful to entrepreneurs as they see their future returns going down.

The moral of the story -- spend slowly and get to profitability quickly.  That give you the most choices.  And, as a VC, keep plenty of dry powder and make sure your companies develop at a rate commensurate with their spending.

July 23, 2008

Plan to Transition

Yesterday, Fred Wilson wrote about Transitions in start-ups.  In general, I agree with Fred that transitions in companies (start-ups or otherwise) are better if they come from within rather than being forced from the outside.  However, in my experience, many times transitions have to be forced.

One question that VCs often ask entrepreneurs, particularly technically-oriented and/or first-time entrepreneurs, is how they would react if a professional CEO is needed at some point when the company grows.  The best entrepreneurs define themselves by the company's success and will want to bring in whatever new management becomes necessary as a company develops.  Companies go through stages where the needs are different.  The professional CEO could rarely start a company from scratch and the technical founder usually can't run a $50M company.  The companies change, and therefore management probably has to change to deliver the optimal outcome.

Some entrepreneurs get this.  I've worked with quite a few who knew what their own strengths and weaknesses were.  They realized that, if they were successful, the company would need more experienced management.  That didn't indicate weakness on their part, but rather success in that they had moved the company from a standing start to some level of success.  Overcoming those odds is the first victory a company must achieve.

However, it's often difficult for an entrepreneur to see this from the inside.  Even if they indicate that they are open to this type of change at the onset of the company, once they are in the heat of the battle their objectivity is compromised.  Many times founders will point to the fact that they haven't made a significant mistake as a reason why they should continue to run the company.  I remember telling one entrepreneur that if I waited for him to make a mistake before we made a change, then I would have made one, too!  The Board's job is to be proactive in assembling the right team around the company, rather than reactive.

These can be some of the most difficult decisions that a Board can make.  Usually, the Board prefers to have the founding CEO continue in some other role at the company.  Sometimes, the founding CEO poisons the ground with their actions, forcing them to have to depart.  This is always bad for the company as the founding CEO is often greatly responsible for the success that gets a company to this transition point.

This is why having an active, engaged, and objective Board is critical to a company.  Generally, VC's bring this to a company.  Non-VC backed companies often make a mistake by not bringing on outside directors who are truly objective.  Also, these types of directors rarely will take action against the founder who brought them in.  And, many public company boards are populated with people who either don't want to rock the boat or are beholden to the CEO.  This creates opportunities that many activist investors try to take advantage of.  For the company's sake, they are much better off with a constructive or operational activist than the alternative.

Companies and Boards should take a hard look at themselves to make sure that there is a truly objective view on the company and the management team at the table.  And, they have to plan on transitions.  Companies should be frequently changing, and that may mean occasional changes in management, too.

July 21, 2008

Farewell, Yardley

My friend, Yardley Chittick, MIT '22, died over the weekend.  Yardley was 107 and lived an incredible life.  He was the oldest living alum of MIT and the oldest living member of my college fraternity, Beta Theta Pi.  He was also the oldest living patent attorney.

I met Yardley while in college.  I thought he was old then, but he was only 80!  To the end, his mind was incredible sharp.  He could tell stories about his life (some of them are mentioned in this rememberance) that would keep you mesmerized.  Who else did you know who turned down a job from Thomas Edison and got into a fist fight with Humphrey Bogart?

In the circles he traveled in, Yardley was a celebrity.  Despite his declining health, he reveled in the attention.  He wouldn't hesitate to sing an old MIT fight song, "Back to Tech".  But, my favorite memory of Yardley was a talk we had on a personal visit I made to him.  I had brought my digital camera.  Yardley had heard of digital cameras, but didn't know how they worked.  Although I'm no expert, I had a general idea and explained it to him.  It was clear that his patent attorney mind was in full gear.  Although he wasn't up on the latest technology, you could tell that he had a keen understanding of how things worked.  It was great to see his curiousity, even at more than 100 years of age!

Although it is hardly a shock when a 107-year old man dies, Yardley will still be missed at events that he would normally attend.  He enjoyed meeting new people, and loved telling stories.  We should all hope to live as long and achieve as much as Yardley Chittick.

The Fein Line in Scott Kirsner's column

Scott Kirsner from the Boston Globe was nice enough to quote The Fein Line in today's Boston Globe.  In addition to his good taste, Scott is an excellent columnist and a blogger.  I like the fact that Scott isn't afraid to take a position on issues.  If you read through his columns and posts, it's clear that Scott wants us all to do more to foster entrepreneurship in New England.  I think he's right.

July 15, 2008

The Power of Deregulation

Regular readers know that I love The Colbert Report.  Here is his 'The Word' segment from last night, describing the power of deregulation.


July 14, 2008

Free speech, but...

I'm a big believer in free speech.  I don't like political correctness and think that almost all types of speech, including hate speech, should be protected.  That doesn't mean that I support hate speech.  But, once you start drawing the line on any form of censorship, it becomes a real slippery slope.  One person's freedom cry is another person's treason.  If the government can decide which is which, then the government can't be challenged, even challenged to improve.

With all that said, this week's New Yorker cover disturbs me.  You can see a slide show of many poltical satire New Yorker covers on their web site.  In just about all of the covers, the satire is that the leaders are depicted as incompetent idiots.  The reader can decide if they agree with this.

However, the Obama cover above takes the 'terrorist fist bump' (man, is that ridiculous) and extends it to a terrorist image.  Does that mean that the reader gets to decide whether or not they think Obama is a terrorist?  And, this image includes a picture of Bin Laden over a fireplace with a burning American flag. 

No matter what you think of Obama or McCain, can you really question either one of them on patriotism?  You may not agree with where they want to take the country, but that doesn't mean that they want the country to fall.

So, as a free speech zealot, why does this cover bother me so much?  I think that it's because The New Yorker has a certain amount of credibility.  Also, the cover goes beyond satire in my opinion.  Now, I don't think that anyone should stop The New Yorker from being able to publish this.  But, Obama has decried this, and McCain agreed.  And, I hope that regular New Yorker readers express their outrage so that The New Yorker apologizes.  The only penalty that should be imposed on improper speech should be from the marketplace -- people who disagree shouldn't buy it.

July 11, 2008

Burst of blogging

Sorry about the flurry of posts after more than a week away.  I have been thinking of these things for the past week but haven't had time to write anything down.  I'll try to be more steady in the future, but no guarantees!


I listened to an interview with Bill Bishop, author of The Big Sort: Why the Clustering of Like-Minded America Is Tearing Us ApartThis reinforced my belief that one of America's greatest strength is that we are a melting pot.  But, if we all gravitate to communities and social circles where everyone is just like us, we will all miss out on the benefits of the diversity.

When I think about entrepreneurship, I always associate it with new ideas, high energy, and commitment.  This is exactly what you get with new immigrants who come to the US to make their lives better.  My grandparents were immigrants, and my paternal grandfather was an entrepreneur.  He built up a pretty big wholesale and retail grocery business after coming the country with very little.  While there is nothing stopping native-born Americans from being just as entrepreneurial, our privileged upbringing probably removes some of the inner hunger that an immigrant who has to overcome large obstacles probably has.

But, even more important than making sure we continue to have a steady stream of immigrants coming into the US with new ideas and new energy, we all need to continue to expose ourselves to new people and new ideas to avoid complacency.  We tend to settle into our comfort zones where life is predictable and less challenging.  That's a recipe for stagnation.  Instead, we need to force ourselves to meet new people, from different backgrounds, and embrace new ideas.

Unfortunately, it seems that too many people are pulling back into a comfortable cocoon of familiarity.  Even our news sources are reinforcing this, with opinion and news being all mixed together so that our minds are made up for us.  You have to work hard to get multiple points of view on an issue.

The more we learn about other people, other cultures, and other ideas, the better we will be able to deal with the world's problems.  The more innovative we will be.  The better our solutions will be.  So, fight the tendency to stay with your comfort zone and push out of it once in a while.  Travel to really different places and countries.  Push into social circles with people of different backgrounds -- ethnic and financial.  And, make sure your kids do the same.  You'll understand the world in different ways.

This brings me to Barack Obama.  Despite my real disappointment that he zig zagged on the FISA/telco immunity issue, I still think that he is the rare candidate that can pull the different parts of the country together.  He's not perfect, and he's not as experienced as some people would like.  But, I think that we are all going to have to sacrifice somewhat to solve the big problems facing the US.  It will be easier to sacrifice with someone who really unites us at the helm.  I think that one reason Bush won in 2000 was his 'uniter, not a divider' line.  If only it were true. 

(PS - read the Salon article from the last link.  Is that really the same person who has been President for the past seven years?)

Contrarian is the way

Wee Willie Keeler - "Hit 'Em Where They Ain't" 

Whether it's in private company investing or public market investing, I have become more and more of a contrarian as time has gone on.  Certainly you can make money as a momentum investor following the herd, but you also have a big risk of crashing hard when the bubble bursts.  It took most VC firms years to dig themselves out of the tech bubble crash (and some are still digging).

As a contrarian, I look for opportunities where others aren't looking.  Sometimes you can be the first one to start a new trend.  Once the new trend becomes a tidal wave, it's time to get out...The beauty of being a contrarian is that competition is less, valuations are lower, and it's easier to build relationships as people are appreciative of the rare attention.

On the other hand, when you are part of the herd, you can more easily get caught up on group think, missing key issues.  Also, you have tons of competition and will definitely pay a higher price for a deal.  The upside can be high, but, as in musical chairs, when the music stops some people will be left out.

Being a contrarian brings up its own issues.  Other investors will wonder why you pursue out of favor opportunities.  You may have to wait for your target to come back into favor to have the best chance of an exit.  But, when it is time for an exit, there will likely be fewer competitors vying to be bought.  The scarcity factor can be significant.

As is the case with any type of investment strategy, the most important thing is to stick to your principles.  Don't let the market dynamics convince you to compromise your investment criteria.  Strategy drift is a big source of mistakes.

Also, I don't think I could be a day trader, moving in and out of positions very rapidly.  I focus on the long term and patience is required.  Since I'm investsing other people's money, I need them to be patient, too.

Convincing someone to go along with your contrarian strategy can be difficult, but when you turn out to be one of the only people who was right, it's all worth it.

Good2gether on Fox

Good2gether is getting a lot of traction.  I'm real happy for them.  They launched on Boston.com and will soon be launching in some other major cities on the largest local aggregation sites.

Boston's Fox 25 interviewed Bob Kempf from Boston.com about their DoGood channel, powered by Good2gether.  It's great to see the media partners take this on as if it was their own.

I first saw this on Greg McHale's Good2gether blog.  If you want to rack up some vicarious frequent flyer miles, track Greg's travel schedule on his blog.

Disclaimer: I am an advisor to Good2gether.

July 02, 2008

Did That Really Just Happen?

I still shake my head when I think about it.  Yesterday, my partners and I were in New York City.  We were taking a cab from one meeting to the next, and the cab driver was dealing with typical New York City traffic.

As the cab driver was trying to squeeze through an intersection, he ended up blocking a crosswalk.  Definintely not a good thing, but if you've walked through New York, you know that this happens all the time.  One man who started to cross the street yelled an unbelievable string of epithets to the cab driver which included two of the "George Carlin 7 Words you can't say on TV" (both forms of the 'f-word') as well as "towel head".  My partner and I were stunned.  We just don't hear hate speech like that.  Maybe the cab driver could have been called an idiot for blocking the crosswalk, but not this.

As you can imagine, the cab driver was wearing a turban.  I'd guess that he was a Sikh.  I know from other Sikh friends I have that they are often targeted by discrimination, particularly after September 11.  Ignorant people confuse them with Muslims, although I would have no problem being confused with a Muslim.  In the aftermath of September 11, we have demonized so many people, instead of just the radicals who are the real problems.

I'm lucky that I don't hear such hatred daily, aimed at me or anyone else.  Although we made a comment to the cab driver when it happened, I wish we had something even stronger (or better yet, called out the window to the moron who insulted the cab driver).

One reason why the 'Barack Obama is a secret Muslim' rumor persists is that people believe that it would be bad (or unacceptable to the American people) to be a Muslim.  Of course, everyone prefers to be identified correctly, but it would great of Obama said something like "I don't happen to be a Muslim, but so what if I was?"  He's done a great job of deftly discussing race, and I think one thing that excites so many people about Obama is that he seems capable of bringing so many taboo issues to the fore.  That won't solve them, but discussing them in the open, clearly and rationally, is critical.

That's one reason why I like the show 30 Days on FX.  Check out this episode called Muslims & America from Season 1.  If you have negative feelings about Muslims, this will help you learn more and break down some barriers.

This is probably the first Biblical reference I have made in my life:

Proverbs 4:7 - ...get wisdom and with all thy getting, get understanding

July 01, 2008

Netflix Profiles Are Staying!


Your Account
We Are Keeping Netflix Profiles
Dear Michael,

You spoke, and we listened. We are keeping Profiles. Thank you for all the calls and emails telling us how important Profiles are.

We are sorry for any inconvenience we may have caused. We hope the next time you hear from us we will delight, and not disappoint, you.

-Your friends at Netflix


Netflix had announced previously that it was killing it's Profiles feature.  As a longtime Netflix customer, I loved this feature.  It let you divide your Netflix queue into sub-queues to accomodate family members with different tastes.  It allowed my wife and I to split up our movie queue and keep our (very different) preferences in movies from mucking up the Netflix suggestions.  Each profile had its own suggestion.

Netflix had announced that they were taking this away.  The word was that only 1-2% of their customers took advantage of this, and it was adding complexity to their programming.  But, many, many customers blogged about this being taken away, and Netflix responded.

Making every customer a potential media outlet will really change how companies deal with their customers and their markets.  I think that the bloggers did a better job promoting Profiles than Netflix did!

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