VC Confidential

Short & Simple the Research Says

There seem to be two styles of bloggers. Those that drop shorter snippets into posts but do so once or twice a day and those that like to write longer posts but do so once a week/month. While I have always assumed that the former better fits people's consumption behavior, there have been a variety of studies that confirm this. In "Not Quite the Average: An Empirical Study of Web Use", the researchers concluded that the average web page has around 600 words and the average reader only spends time on around 100 of them (about 20-30%). So, keep the posts to under 100 words...(note to self!). We'll see if I can do it...whoops, I just hit 119 words.

Video Tsunami Coming

I was looking at the global statistics page at the back of the most recent Economist Magazine and noticed that it had a chart laying out the % of households in each country that use IPTV (internet) as their primary means of getting their television services (vs. cable, satellite, etc). Below are the top 7 countries on the list:

Hong Kong 31%
Iceland 27%
Estonia 10%
France 10%
Cyprus 10%
Sweden 8%
S Korea 7%
(US <1%)

Much like cellular has leapfrogged land lines as the primary telecom pipe in developing countries, many countries are going with IPTV as a prominent source of distributing content. Homes can get both internet access and video/TV delivered through one pipe. We have seen this phenomenon up close through our Growth Fund's investment in UUSee, the leading IPTV P2P provider in China with over 30 million users.

In addition to this IPTV trend, we are also seeing videos come at us from the hosted video sites like YouTube, Metacafe and specialized channels like Celebtv. My kids are watching entire episodes of their favorite shows on the show's website. While people complain about having too diverse a choice through the hundreds of cable/satellite channels, imagine the complexity when thousands of IPTV channels emerge. With the low cost of production and low cost of distribution, people will be able to set up extremely niched "channels".

This will create quite the challenge for advertisers, who are still trying to figure out how to use banner ads. Instead of a simple decision of what image to put in a banner that is broadcast out, they will have to figure out if they want to use pre/post roll advertising, sponsored advertising, contextual text links beside videos, overlays on top of videos or jump into the creative game and produce content itself. The permutations of types of content with types of channels is becoming mind boggling. However, for creative lead gen players, this will present a terrific opportunity to capitalize on the complexity and the glut of ad inventory arising.

Of course, this doesn't begin to get into the challenges of integrating cross-media promotions (text/SMS, website, etc) or the rise of mobile advertising. It's going to be a great couple of years here as the IPTV revolution swings through!

The VC World Inflates as Well

Following up on my post on the buyout world, the VC world has also experienced valuation inflation over the past year. As more and more liquidity comes into the sector (mostly acquisitions), VC's are beginning to feel bullet proof again. We are starting to see VC's promising entrepreneurs $80m and $90m pre-$ valuations if they can get some proof points in a given area (we'll see if they come through). Since venture does not use much debt, the debt crisis has not hit home yet (it will should the economy go into recession and ad budgets and cap-x budgets get slashed). If you want to get a sense of what is driving the increasing craziness, check out some members of the asylum. Slide at $550m and Rockyou at $325m??? While we have several on here (and fingers crossed they hit Henry's values!), I scratch my head a bit. While not the extremes of 1999, there are a lot of $'s for eyeballs (or "attention" as it is now called these days). Here is Blodgett's estimates of property values:

THE SAI 25: THE WORLD'S MOST VALUABLE STARTUPS

Rank
Company    Valuation
1.    Facebook $9 billion
2.    Wikipedia $7 billion
3.    Craigslist $5 billion
4.    Betfair $5 billion
5.    Mozilla Corp $4 billion
6.    Yandex $3 billion
7.    Webkinz $2 billion
8.    LinkedIn    $1.3 billion
9.    Habbo    $1.25 billion
10.    Oanda    $1.2 billion
11.    Linden Lab $1.1 billion
12.    Kayak $1 billion
13.    QlikTech $850 million
14.    Ning $560 million
15.    Slide $550 million
16.    TheLadders $500 million
17.    Stardoll $450 million
18.    Ozon $450 million
19.    Thumbplay $400 million
20.    Glam Media $400 million
21.    Rock You $325 million
22.    Tudou $300 million
23.    Efficient Frontier $275 million
24.    Zazzle    $250 million
25.    Spot Runner $250 million

Contenders
Federated Media    $245 million
Yelp    $225 million
Meebo    $220 million
Indeed    $200 million
Zillow    $200 million
LoveFilm    $200 million
Metacafe    $200 million
Adconion    $200 million
4INFO    $175 million
Photobox    $150 million
Vibrant Media    $150 million
Gawker Media    $150 million
Mahalo    $150 million
56.com $150 million
Youku    $125 million
Digg    $125 million
Etsy    $115 million
LinkExperts    $100 million
Powerset    $80 million
Trialpay    $80 million
Huffington Post    $75 million
Associated Content    $65 million
Live Gamer    $60 million
Twitter    $75 million
Mint    $50 million
Prosper    <$50 million

How to Manage Your Board

JB Pritzker sent this over to me recently. Shades of reality but tons of humor in this...

How to manage your company’s board of directors:

1. Meet by phone whenever possible. Most of them will be doing their email or goosing their admin or something and not paying any attention at all. They’ll just vote when you ask’em to.

2. Never distribute anything in advance; they might read it and get themselves all confused. Just present it all: gets you through most of the meeting.

3. Never number the pages of what you are presenting. Lots of time can be used constructively figuring out what page everybody is on. If you email the material (preferably just after the start of the meeting), send lots of separate files. Turkeys’ll never know what to look at. Bonus suggestion: send slightly different copies of files with different pagination to everyone; it’s a lotta work but it’s worth it.

4. Have your CFO present numbers, lots of numbers. Make sure they get a chance to go over variances in the pencil budget.

5. If you have to meet in person – it is gonna happen sometime – use food. Any discussion you don’t want input on should be right after lunch. No one’s gonna be awake then.

6. Speaking of lunch, you can play this for lots of time. Have your dumbest admin take orders off some huge takeout menu. Get what type of bread they want, dressing, meat, lettuce, all that. Then have a smart admin shuffle the list so NO order is right. Wrong bread with wrong filling etc. No veggies for vegetarians (they tend to be nitpickers anyway). Kills lots of time and helps make sure they meet on the phone next time. BTW, they’ll pay no attention to anything between when lunch is ordered and when it comes so minimum of an hour.

7. Do bring up board comp and director’s liability insurance. Sure to get their attention and won’t interfere with the real business of the company.

8. Have a nine person board with three insiders, four VCs and two people who don’t have a clue. Just four VCs alone should guarantee gridlock.

9. Every meeting should run way over schedule. You control the agenda: presentations up front; substance in the third overtime period.

10. If they’ve gotta discuss something, get’em down in the weeds. Color of the office; words for the new ad campaign; what bank to deposit tax payments in. That keeps everybody out of trouble.

11. If you’re public and their questions are going where you don’t want to go, tell them you’d be glad to answer but that’ll make them insiders for the next two years. You can also tell by who squirms who was planning to sell.

Didn't They Learn from 2000?

Daniel Primack wrote a great piece on the continuing insanity in the buyout world. It is amazing that the writing is clearly on the wall and is nearly identical to the venture world in 2000 and yet the LP's and funds continue unabated. VC's kept raising massive funds even though it was clear that the liquidity engine (IPO's) had died. This capital festered in the funds and either a) was returned or b) was pumped mindlessly into misguided companies. With the credit markets down, the LBO world has lost its primary liquidity engine (dividend recaps, etc). So, I am amazed that LP's are going along with these funds doubling their size. More on the Venture cycle version of this soon...

Warburg Follows the Herd
Warburg Pincus yesterday announced that it has closed its tenth fund with $15 billion, or nearly twice what it secured for its ninth fund in 2005. It’s also $3 billion more than the firm was targeting when it began fundraising last May.

This certainly fits the recent mega-firm pattern, in which Bain, KKR and others have raised record amounts despite a paucity of new deal opportunities. Fee today, call-down in a few hundred tomorrows (unless they spot a problematic PIPE or cratering leveraged loan portfolio).

I had really wanted Warburg Pincus to help retard this trend, which skates the thin line between optimism and greed. Few other firms exude the same spirit of independent thinking – having been an early adopter of globalization and stubborn defender of transacting both massive LBOs and early-stage venture deals out of the same fund. If there was any firm willing to stand on objectivity, it would have been Warburg.

But, alas, it was not to be. Maybe I should have been stripped of my delusions when Warburg propped up MBIA, in a bid to replicate its long-ago success with Mellon Bank (Question: Did LPs who came in on the final close get some sort of discount?). I guess Warburg is willing to stand apart, but not too far apart.

So Blackstone is the now the only fundraising firm left with enough gravitas to help stem market overcapitalization, but looking to Blackstone for moderation is like looking to the Boston Bruins for a Game 7 goal. Sure a few big firms will claim fundraising sanity, but beware the difference of intentional and unintentional fundraising scale-back (yeah, I’m gazing toward Chicago)…

Warburg Pincus would likely respond that it has a flexibile enough investment strategy to handle macro-economic fluxuations, and that it’s investing for the long-term (Note: It declined to comment for this piece). Fine, but it's a specious argument.

How can any private equity firm claim that it requires the same amount of money today that it did in May 2007? Even if Warburg plans to do the exact same number of deals, many of them will require less cash due to decreased valuations. In fact, the only reason Warburg was raising more money in the first place was because the private equity targets were getting larger and more expensive. Doesn't what goes up also go down?

Finally, it’s worth emphasizing that LPs share much blame for this fool’s goldrush. I keep hearing investors complain about 2008 fund sizes and strategy drift, but then learn that Warburg got its highest-ever level of LP re-ups. If you don’t want mega-firms raising so much money, then don’t increase your commitments. It's just as simple as it sounds...

How to Introduce a New Associate to VC

We are very happy to announce that we recently hired Eric Olson as an Associate at DFJ Portage. We originally got to know Eric when he was in publisher services at our portfolio company, FeedBurner. He also co-founded TechCocktail which is now in several cities around the US and is one of the key tech networking events held quarterly. He has a strong interest in making the tech community stronger and in helping to build it up...a strong philosophical match with our mission.

So, today I took Eric out on his first due diligence trip to see a local medical clinic that was using the services of a potential investment. I thought the clinic was on the south side of the Chicago loop. However, as we drove on, the navigation system showed that we had another 5 miles west to go. The next thing I knew, we were in North Lawndale, which is one of the poorest communities in the city, if not the state. I had spent several months there when I was younger and researching the plight of inner city poverty. As we turned onto the clinic's street, I noticed a youth in a padded Bears jacket hand another gentleman a small clear bag with one hand and take cash back from him with the other. Eric asked me if it was often that VC due diligence trips happened around drug deals in front of burnt out houses. I said it was first for me (though I have been around many a burnt out portfolio company...).

We parked the car and as I got out, Eric noticed that the youth was now on our side of the street and two plains clothes officers pulled up suddenly, jumped out and surrounded him. In the melee that followed, the officers cuffed the kid (who was about 220 lbs) and were pushing him into their car. Eric had to step around the officers to get forward on the sidewalk. The meeting and interview at the clinic went fairly routinely after that.

Eric said he could hardly wait for his next assignment. I mentioned that we had some interviews we needed to do in Kenya with Raila Odinga. Who said VC isn't an exciting and adventurous job?

Don't know what we'll do to orient our next hire...

I'm Back: Pausch Lecture

"The brick walls are there for a reason. The brick walls are not there to keep us out. The brick walls are there to give us a chance to show how badly we want something. The brick walls are there to stop the people who don't want it badly enough."  -- Randy Pausch

Well, I am back after a prolonged absence. With the Holidays, several company sales and New Year efforts, I had trouble finding time to post. Once you begin to drift, it is easy for habit and firedrills to take over. I did enjoy one comment from a reader who asked "Is this blog dead because of the credit crisis?". The good news is that we don't use much leverage in venture, so the blog is back.

I have my mother-in-law to thank for bumping me out of blogging retirement. She sent me an article to read from the WSJ "A Beloved Professor Delivers The Lecture of a Lifetime". In academics, professors will do "Last Lectures" in which they give parting words of advice as if they were dying. Well, Randy Pausch at Carnegie Mellon has pancreatic cancer and actually is dying. Rather than feeling sorry for himself or dropping deeply into depression, he decided to pull a presentation together for his three young children. He gives an amazingly motivational talk that I think all entrepreneurs should see. It has an incredibly deep array of messages in such a short period of time.

Helpless or Master

"Genius is one percent inspiration and ninety-nine percent perspiration"
                                                                                     -- Thomas Edison

I have often written about how the lessons and factors affecting us as children seem to strangely enough, also impact us in similar ways as adults. I find that I will see something at work and then go home, only to see a modified version of it at home. One of the most recent experiences in this realm I've had relates to a Scientific American article,  The Secret to Raising Smart Kids. In it, the author writes that there are two types of mindsets they see in children: fixed & growth (or helpless vs mastery). In the former, children view their success as being reliant on their inherent abilities which are fixed. In the latter, they view their success as being driven by effort and that any setback can be remedied over time by additional effort.

This distinction is also critical regarding successful entrepreneurs and those pulled under in the Darwinian tech eco-system. This has implications on how one views & motivates employees as well as how one views themselves. I won't do the article justice summarizing it here, but highly recommend it as a read both as a parent and an entrepreneur.

"A brilliant student, Jonathan sailed through grade school. He completed his assignments easily and routinely earned As. Jonathan puzzled over why some of his classmates struggled, and his parents told him he had a special gift. In the seventh grade, however, Jonathan suddenly lost interest in school, refusing to do homework or study for tests. As a consequence, his grades plummeted. His parents tried to boost their son’s confidence by assuring him that he was very smart. But their attempts failed to motivate Jonathan (who is a composite drawn from several children). Schoolwork, their son maintained, was boring and pointless."
                    -- Carol Dweck, The Secret to Raising Smart Kids

Black Swan or Ugly Duckling?

Last Thursday, I gave a speech at Ignite Chicago on the relevance of "black swan" events on entrepreneurship. I had originally been asked to talk on fundraising.  However, after a compelling talk by Steve Jurvetson on our monthly network partners call, I made an audible at the line.  So, thanks to Steve for inspiration and content here.

A lot has been written on "black swan" events since Nassim Taleb's book, The Black Swan: The Impact of the Highly Improbable. In my mind, there  is some overlap with this and chaos theory & non-linear systems. I have attached my presentation if anyone is interested Download 2007_12ignite_blackswan.ppt

Quick points:
-- a Black Swan is 1) a rare event, 2) with high impact, 3) that is hard to predict (pattern attributed post event)
    * examples include 9/11, stock market crashes, discoveries like Penicillin, start-ups (eBay, etc)
-- most of mankind's development has been driven by black swans (unstructured randomness)
-- black swans key in driving big entrepreneurial successes (payoff inverse to predictability)

When this is coupled with the Law of Accelerating Returns (Ray Kurzweil's book, The Singularity Is Near: When Humans Transcend Biology), you realize that the opportunity for entrepreneurs continues to grow exponentially. As technology improves non-linearly, this means we will experience as much change in the next 20 years as we have over the past 100. Buckle up...

Ignite Chicago Fundraising Presentation

I am talking tonight (Thurs, Dec 6th) at the Ignite Chicago event (click for the site) at the Debonair Social Club (1575 N Milwaukee Ave). I was originally going to do a talk on Venture vs Angel fundraising. However, I have decided to change topics last minute and do it on Nassim Taleb's book, The Black Swan: The Impact of the Highly Improbable. I have written in the past on this topic, The Turtles of Omaha, but was inspired to do another post (coming) and change the presentation after Steve Jurvetson gave a compelling talk on our monthly partners call this morning on the book & topic. For those interested, you can download the original presentation on fundraising, Off to See the Wizard, by clicking. Download 2007_12ignite_talk.ppt.

Wikipedia gives a brief overview in its Black Swan Theory entry.