The--ahem--NEW Dodge Challenger

I’m a car guy.  Always have been. As a penniless student I was one of those people that would make the (false) economy of happily subsisting on a steady diet of Top Ramen and Pop-Tarts if it meant I could pay for that new performance chip on my banged-up 911. But with age comes wisdom, and one reaches a point in life where the Bohemian pleasures of hitch-hiking or crashing on friends’ couches just does not hold the allure and proletarian nobility it once did. It was maybe that or the free breakfasts at Holiday Inn Express. Can’t decide.

In any event, get a car guy to reminisce about early Steve McQueen movies or discuss the plot twists in gear-head classics like Vanishing Point or Dirty Mary Crazy Larry and you’ll be there a while, so get comfortable. Car guys love to wax poetic about vintage horsepower and the evocative shapes and visceral, fry-your-loafers, bugs-in-your-teeth driving experiences inherent in 1960s-70s GT cars. It is perhaps not surprising, therefore, that the auto industry cleverly exploited the graying of the baby boomers by re-issuing versions of its most famous badges - Charger, Mustang, Beetle, Thunderbird, and now, Challenger.

Demographics are only part of the reason. Simply looking at the evolution of car names tells you a lot about the degradation of the automobile from a symbol of power, freedom and often excess to a dull, quotidian appliance. Cars used to have great names: Falcon, Dart, Fury, Cougar, Firebird, Mustang, Charger, Barracuda, Hornet, Starlight. Now we have Elantra, Sentry, Altima, Camry, Sienna, Corrolla, Tercel, Maxima. There’s even a Nissan SUV called the Murano. Murano is a small island off Venice famous for its artisans that produce delicate glass sculptures and figurines. Delicate glass is hardly something you want to equate with a muscular, go-anywhere, do-anything SUV. As Jerry Seinfeld might say, who were the overpaid branding geniuses that came up with that one? That’s almost as bad as the luggage manufacturer that—get this—launched a line of luggage named after Amelia Earhart. Yes, Amelia Earhart luggage. Luggage that honors someone most famous for getting lost and never being found. Braaaavo.

When the Beetle was re-imagined in the mid-1990s, I applauded. Smart thinking on VW’s part, I reckoned. The idea was a simple one: Resurrect the image and nostalgia of that instantly recognizable car that made your company famous–quick!: can you think of any other VW model?– and bring it into the 21st century. It worked wonders for VW. Ford followed suit shortly thereafter with the Thunderbird, although the line between tasteful homage and shameless exploitation was starting to blur. By the new millennium, the Mustang re-appeared and, with its success, the “retro” boom was in full swing. Some automakers that did not choose to resurrect a model from their glory days still played the retro card by simply launching new models that evoked the style and details of earlier road card, often not even their own models. Chrysler’s 300 and it’s PT Cruiser are the most famous and successful examples. The 300’s Bentley-esque front grill and the high waist of 1930s gangster saloons gave the 300 a sleek, slightly menacing stance. A clever marketing push followed and the 300 became (for a while, at least) the ride of choice for rap artists, athletes and urban hipsters.

But, with the Challenger, one must conclude that this trend has decidedly jumped the shark. Too often, what is worth doing is worth overdoing - at least for the Big 3 which have a terrible history of blowing huge strategic advantages by not pivoting quickly enough to address new market realities. GM’s recent shuttering of several SUV and light truck plants is another example of a bloated company not adjusting to changing market conditions. In a $4/gallon world, GM should have been throttling back SUV and light truck production for a while now. Everyone knew this day was coming. Instead, GM continued to stamp them out like CDs. Those blunders will continue to crush the SUV/light truck aftermarket and hurt its dealer network for years to come. How Rick Wagoner continues to hold a job baffles me.

The “new” Challenger epitomizes a troublesome trend of “retro rehash” that I have seen in too many markets now. The fashion and music industries are other segments where the pre-occupation with trotting out new spins on the golden oldies that worked for so long has eclipsed real intellectual work on their part in actually innovating new designs (fashion and apparel) or discovering and promoting new music that is not entirely derivative or referential. Interestingly enough, the woes of the music industry are eerily similar to those of the auto industry. Music industry execs love to whine about piracy, peer-to-peer file sharing, concert ticket prices, and a host of other evils to explain their troubles, but the real culprit is prevalent “me-too”-ism in signing artists and a lack of innovation and creativity on the part of the entire industry. The auto industry–and to a lesser extent, the music and fashion industries–have been for a long time utterly bereft of any real innovation. This “retro” boom is simply the most clear manifestation of this lack of innovation. Why bother creating new products that customers want when you can rest on old ideas that you can simply re-introduce with a little tweaking?

In the end, I think the “new” Challenger is as doomed as was its original namesake. Auto buffs will remember that what ultimately buried the 1970s Challenger was the one-two punch of a gas crisis and performance figures that did not break any new ground. The original Challenger simply debuted too late. By the time production ramped up, the muscle car boom that began in the mid-1960s was well on its way out. The 1973 oil shock was just the final stake through the heart. With the new Challenger, the similarities are ominous. $4 gas is killing the appetite for big, raw, powerful vehicles. Heck, even GM itself is considering selling the Hummer–the epitome of the brutish, thirsty, muscular SUV–and Ford has already sold Aston Martin, Jaguar and Land Rover. Perhaps now, the automakers, the music execs and the fashionistas will begin thinking more about innovation and how their very existence will likely depend on it. There simply aren’t any more bodies to exhume. Old wine in new bottles is simply not a sustainable strategy.

Last week the 19th annual IBF Venture Capital conference convened in San Francisco. Not surprisingly, some of the bullishness evident at recent conferences was replaced by a more cautious, measured perspective from the attendees and panelists. While I would say there are few “new” ideas to emanate from these affairs, having esteemed colleagues articulate in front of 200 people what you have been noodling with in your head for the past few months helps underscore one’s intuitions about what is occurring in the venture business and how the industry needs to respond.

As is my custom, I like to scribble notes from panel discussions and keynote addresses when I come upon a pithy observation or insight. Rather than prefacing these remarks with context, I am simply presenting them here as uttered, without elaboration. Many speak for themselves and, surprisingly, retain more power when they stand alone, without comment or context.

From an “Investing in a Downturn” panel:

- “Money is a proxy for time, so make damn sure your company has enough cash to make it through the downturn. If a dollar does not absolutely need to be spent, don’t spend it right now. Spend for growth, nothing else”

- “There is always a bull market somewhere. The US market is tough, but the dollar is very weak and international opportunities abound. Have your portfolio companies look abroad for opportunities to sell their products and services.”

- “We are definitely entering a period of longer hold times (for venture investors.) Manage your fund and fundraising accordingly”

- “There is a lot of foreign capital in China, Korea, the UAE and elsewhere looking for a home. They will begin competing with venture investors for venture deals. They already are.”

- “Every portfolio company CEO and every VC needs to take a long-term view now. We must re-emphasize capital efficiencies”

- [For VCs] “Try to work with syndicate partners that will be around to support the portfolio company through the downturn. Work with firms that have a reputation for hanging in there in the tough times. Reputation is key.”

- “Make sure the board and the investors are properly communicating with one another”

- “Make sure the board’s investors are ‘walking the plant floor’ - i.e. they really know what’s going on at the company and who the people are at the company, not just grabbing a sandwich and Coke at the board meetings and not even getting to know the name of the receptionist.”

From an “Early Stage Investing” Panel:

- “This is great time for early stage investors because a lot of what we do has little to do with exogenous factors. Because such factors have little bearing on getting a company to build its first product, the downturn often means less froth, less distraction, less competition for talent and resources, and more time and attention to focus on building a young company”

- “In terms of deal flow, the downturn means fewer entrepreneurs, but better entrepreneurs. The ‘born’ entrepreneurs are still going to launch companies and find good partners; the entrepreneurs that are not as talented or driven will likely stay in their corporate jobs fretting over getting laid off, not trying to launch start-ups.”

- “We are seeing a renewed focus on disruptive business models as opposed to disruptive technologies. An example of a disruptive business model is one where a company is leveraging a spin on a large market that an incumbent can’t accomplish itself without cannibalizing its own business.”

- “Spending cash for eyeballs is totally dead as a business strategy right now”

- “Capital efficiency is tossed around liberally with regards to early stage investing, but it applies to all stages of venture capital, not only early stage.  Great consumer internet companies, in particular, have launched with very little money and developed into powerful businesses. Companies that require a lot of money at the outset may still become great companies, but rarely make good venture investments”

And finally, most sobering of all…

- “VCs need to embrace the current market, not complain about it. They must adjust their investment models to the market. They can’t have it both ways: They can’t complain to their LPs that the market is unattractive and not invest and still expect to collect management fees on capital not being managed.”

Angel investing has existed since the very beginning of what we consider the modern age of venture capital. Indeed, long before there ever was much of a venture capital community, loose groups of semi-retired execs assembled regularly to discuss interesting young technology companies to fund. Routinely, there would be a “passing of the hat”,  some cursory discussion of deal terms and, whammo, a seed investment would be made. Colorful stories of just such seat-of-the-pants financings of companies that later became tech industry juggernauts are now the stuff of venture capital legend.

Since the “institutionalization” of venture capital, beginning in the 1970s, angel investing has evolved quite dramatically. Sure, there will always be wealthy uncles and trusting friends willing to back energetic young entrepreneurs with intriguing business ideas, but finding strangers willing to do so out of their own pocket has become increasingly challenging. Indications are that it will become only more difficult as many “angels” have found themselves squeezed out of many opportunities and the prospect of backing companies in general increasingly fraught with risk and uncertainty.

To be sure, true angel investing is tough to do - and even tougher to do well.  For this reason, even many successful retired venture capitalists steer clear of angel deals. The reasons for this are many. For one thing, it is not often that an investment comes along that matches one’s direct domain expertise, skillset, and network of contacts. As such, many angels get into the dicey business of investing out of one’s comfort zone and away from a relevant knowledge base that can actually help the company. This is fine when things are going well, but when things hit rough patches many angels find themselves unable to really be of much assistance. This can be enormously frustrating for both the angel investor and the company experiencing troubles and needing sound guidance from its investors.

But this is just the tip of the iceberg when it comes to the challenges of being a good, successful angel investor. For every Andy Bechtolsheim or Ron Conway there are a thousand well-meaning angels who made their money in shopping centers or tanning salons only to lose a chunk of it backing technology or life sciences companies where they had no expertise or understanding of what was really going on at the companies.

However, even with the risks, prospective angels understand that participating in early stage deals can bring staggering rewards for those fortunate enough to come in on the next Google, Skype or YouTube. And thank goodness for that, because angels provide a critical and increasingly valuable service to the venture and start-up community. As venture capital fund sizes have generally increased in recent years, many venture firms have moved upstream into more developed opportunities where more capital can be deployed and where the classic early stage risks can be somewhat mitigated. The result of this has been a dwindling universe of investors that still specialize in truly raw, early stage opportunities. 

For years, the options available to individual investors determined to participate in venture were not terribly attractive. Option one: Become a limited partner (LP) in a top-performing venture capital fund. Sounds good, but in truth many venture funds have increased their average fund sizes dramatically in recent years and, as a consequence, have focused almost exclusively on big institutional investors (endowments, pension funds, etc) to make up their LP base. In many cases, individual investors need not apply — unless, of course, you were in that particular VC firm’s last few funds and have an established relationship with the partnership. Secondly, the need for a venture capital firm to openly solicit funds outside a narrow group of previous limited partners is proportionate to an extent with how successful it has been historically. In short, the more successful and renown the firm the less it probably requires or wants your investment commitment (again, unless you are already a known quantity with that fund and there is a relationship already.)

Option two: Become an angel investor. For reasons cited earlier, this is tough. Even with a technical background and some operating or investing experience, how does a prospective angel begin to create deal flow? How will entrepreneurs of promising companies even find the angel or learn that he or she is interested in making early stage investments? Of course, the prospective angel can try to join a prominent angel fund to gain access to their deal flow, but such groups are often very exclusive, require one to go through a lengthy and competitive membership process that can take months, and are often closed to new members for years at a time.

Now, fortunately, something of a third option which can mitigate some of the inherent risks in angel investing has begun to emerge. Enter the Pledge Fund.

What is a Pledge Fund?

A Pledge Fund is essentially a non-committed venture capital fund, or a fundless VC firm if you will, that operates as a bit of a cross between a traditional venture firm and a loose confederation of individual angels making early stage investments together. The logic is fairly simple: take the best elements of both structures to create a model that enables individual parties to make angel investments in a standardized, formalized way that eliminates many of the traditional pitfalls of angel investing on one’s own.

How it works:

The Pledge Fund is typically run by experienced angels or former (or even current) VCs. These individuals constitute the “GPs”, as it were, of the fund. The GPs handle all of the admin functions of the fund much as one would expect at a traditional venture firm: outreach to the entrepreneurial community; sourcing, vetting and presenting deals to the Pledge Fund’s “investors” (often called “Members” – more on that later); handling term sheet negotiations; drafting documents; and handling post-investment support by means of sitting on company boards, etc.

This GP management layer, if you will, is critical because individual angels are just not set up to handle most of these functions. Even assuming an individual angel can find good deals (and that’s a big assumption), will that person even be able to properly evaluate it? Will he recognize the flaws? Can he properly size up the team and do thorough due diligence on the technology? on the market? Would he have access to broad groups of experts in various fields to help him vett the opportunity and the management team? Even after an investment is made, will the angel sit on the company’s board and, if so, can he really expect to make much of a contribution?

A good venture firm performs most, if not all, of these management, deal-making, and post-deal support functions. So, in a sense, a Pledge Fund does much the same thing on behalf of the angels. The key difference is that, unlike in a traditional venture fund, the Pledge Fund does not operate a blind pool of capital from which to invest in deals. The Pledge Fund can only source, vett, and scrub deals for its members. It is the members that ultimately determine what deals they participate in. Traditional venture capital firms, by contrast, typically offer their limited partners little to no say in what deals the fund invests in and in overall day-to-day firm operations.

On becoming a Member:

Most Pledge Funds have a straightforward process to gain admission to the organization. There are usually some questionnaires to complete and accreditation requirements to meet, but they are far less onerous than one would expect at many private equity funds. Once admitted as a Member, the only commitment is a small annual management fee (usually to cover overhead and ancillary fund expenses) We’ve heard management fees in the $5k-$10k/year range. The thinking behind the fee is not so much to be a revenue generator as much as a way to cover basic costs and to weed out people who are not serious in actually making seed stage investments. The logic goes that if a prospective angel is considering $100k-250k in angel investments over the next couple years, paying $5k a year to see scrubbed and vetted deals should not present an issue; if it does, then the investor was probably not serious to begin with.

This management fee permits the Member to gain access to the Pledge Fund’s deal flow but does not commit him in any other way. Each month, the Pledge Fund’s deal review committee scrubs all that month’s deal submissions, meets with the most promising companies, conducts a preliminary due diligence process, and selects the top 3-5 deals. Those deals are then scrubbed again, executive summaries in the Pledge Fund’s standardized format are prepared, and the deals are submitted to the Members.

Members are then given a fairly narrow window (we’ve heard a few days, some as long as a week) to review the deal submissions and respond back to the Pledge Fund GPs about which deals, if any, they are most interested in. In short order, the Pledge Fund GPs can determine what syndicate, if any, they can pull together among their Members to make an investment.  If it can, then deeper diligence is commenced, the Pledge Fund’s attorneys are summoned to draft deal documents, and things move apace at that point.

Once an investment is made, another interesting twist occurs. In the past, angel deals sometimes suffered from a bit of a stigma within the venture community. Venture investors looking at an investment that was previously seeded by angels sometimes grew concerned that they might be inheriting unsophisticated investors on the board and/or otherwise involved with the company that could potentially cause problems down the road. Stories of neophyte ”friends and family” investors throwing up roadblocks or being obstructionist when a professional investor got involved are fairly common in the venture community. For this reason, some venture investors are leery of angel deals unless the angel group is already well-known and respected within the venture community.

To get around this problem most Pledge Funds structure the investment by creating a separate limited partnership entity to make the investment into that specific company. The Pledge Fund’s Members are then LPs in that new entity that, in turn, makes the actual investment. The impact of this is two-fold: (1) for the purposes of the Capitalization Table, there will not be a list of every Tom, Dick and Harry angel investor and their individual investments; there will only be a listing of the Pledge Fund’s name and the name/number of the LP — i.e. Acme Pledge Partners, Fund I, etc. That keeps the Cap Table pretty clean; (2) If a board seat is part of the investment terms, then a member of the Pledge Fund’s GP group will take that board seat. Since the Pledge Fund’s GP group is often made up of former VCs or well-known angels, there is less concern from professional investors that the member representing the angels will be unsophisticated and/or obstructionist.

Obviously, it’s still early days for this new form of Pledge Fund and it will be some time yet before we can opine on whether this model will become commonplace in the venture community. That said, we have seen versions of this in the past and always found it intriguing for the reasons cited here. It appears that, at least in this 2008 iteration, this modern Pledge Fund approach is presenting a well-constructed and well-reasoned model for those individuals interested in early stage investing while mitigating many of the classic pitfalls long associated with the practice.

[Updated Note: In light of the response to this post, readers interested in learning more about Pledge Funds and/or interested in being put in touch with funds pursuing this strategy are asked to contact me directly at jtower(at)citroncapital(dot)com for more information.]

Time was (and that time was not all that long ago) that the departure of a recognized general partner/managing director at a similarly recognized venture firm would be a buzzworthy 2-3 day story within venture circles.  Turn that “departure” tale into one where the departure involved that same investor joining a competitor firm and tongues would be wagging for some time.

In just the past few days, word has come out of the NVCA annual meeting that not one, but at least four, well-known and well-respected GP-level investors have left their respective firms to — in most cases — join a rival firm. If not unprecedented, this revelation certainly strains my memory to recall anything remotely similar in recent years. To be sure, partners retire. Other times, particularly when a firm has suffered poor returns or during a market downturn, partners are sometimes asked to, ahem, ”make other career arrangements.” This is often so the firm can retrench or reposition itself; it can also just be because of a strategy shift or because there has been internal rancor in the partnership for some time and, as such, a decision was reached to make a change.  

Regardless of the particular circumstances, in virtually all cases there have been carefully planned transitions and sealed lips on where things went off the rails in these investor-partnership relationships. “Smiles and handshakes all around” is often the party line.

While I send my best wishes to all those investors who have recently moved to new firms, I do ask myself whether this is a harbinger of things to come in the industry. To state that many partnerships have been under strain in the past year is to state the obvious to anyone with regular dealings in this industry. Conventional thinking has long held that continuity is critical in investment partnerships. I think that belief is going to be strained. It is a truism that many limited partnerships, when considering an investment in a venture fund, look at the continuity and ties of the investment team. This is particularly the case when you are talking about venture funds that typically have a 10-year life. That said, with this spate of recent departures — and the community’s response to them by taking the news in stride, for the most part — one has to wonder whether we are entering a new period in the venture community where “moving across the street” from one firm to another much in the traditional style of investment bankers or corporate attorneys will become the norm in the venture community. I don’t have a crystal ball here, but I am anxious to hear other people’s viewpoint.

This is firmly in the Only-In-Silicon-Valley column and is strictly meant to be all in fun: A reporter at a well-recognized periodical called me recently to remark on the odd and disproportionate appearance of exotic and super luxury automobiles on Fridays in the Valley — particularly on and around Sand Hill Road. She wanted my venture perspective on it all. I told her I’d need to do some more in-depth research to get to the bottom of things. And, while I was on the subject would her newspaper push through a requisition order for a lease on a Ferrari 599, preferably Rosso Corso with Tan interior, so that I might better be able to infiltrate the herd unnoticed. The phone went dead. 

Seriously though, in what some folks are saying (tongue firmly in cheek) is a new rite of Spring in the tech world, the highways and byways of Silicon Valley seem bumper to bumper with sleek Italian and German machines on Fridays…and, typically, only on Fridays. What do fast-rising venture capitalists, successful entrepreneurs and senior tech executives drive to work Mondays through Thursdays, you ask? Toyota Priuses, Hybrid Ford Escapes and other fairly nondescript, often eco-friendly, econoboxes.

So, on this lazy and balmy spring afternoon, as you nip out of the office for that critical 3pm coffee reboot, scan the parking lot. If you are seeing more Rosso Corsa than red, more Exeter Blue than Blue, and more Titanium than Grey, you’ve got a Casual Car Friday office. Spring is definitely here. Pass the margaritas. Gran Centenario Anejo, rocks, no salt.

Friday morning I had an exchange with a delivery van driver that seemed to set the course for much of the day’s thinking around the state of the media business, content migration, and overall advertising-based revenue models.  In truth, it was a brief conversation — mostly consisting of nods, grunts and gestures — and one that would not normally interrupt the flow of a workday. On this occasion, however, it directly touched on a sensitive gripe of mine that I had been having trouble finding a succinct way of articulating.

The driver was merely trying to do his job. I found myself, oddly enough, trying to prevent him from doing that job. His job? Delivering new Yellow Pages phone books to my home. (Another set had already arrived at the office earlier that morning.)

He was insistent. I was more insistent. He backed off and sheepishly removed the stack of books from my front stoop and back onto his van. Apparently, I had not been the only one to stymie his delivery rounds that foggy San Francisco morning.

I began thinking about the interchange. I was, in effect, rejecting the delivery of something I had not ordered, was not consulted about, did not offer consent over, and, in fact, did not want. It occurred to me that this was a fairly recent phenomenon. I did not recall many occasions in the past when I was faced with this “opt-out” dilemma. I then realized that this was becoming an increasingly common problem. Searching for supporting data for my emerging hypothesis, I popped the lid of my blue recyclables bin and, eyeballing it for a brief moment, gauged that some 30-40% of its weekly contents consisted of “free” local papers and other media that I, too, had not requested nor been consulted about. Pulling on that thread long enough I quickly saw therein a troubling parallel for what many startup business models were predicated upon — “pushing” content versus having it “pulled” by qualified consumers — and what the implications were for overall valuations for companies adopting this precarious approach.

Think for a moment about the Yellow Pages. Put aside, for the time being, the usual knocks you hear - i.e., it’s a dead business, the internet has disintermediated it, it’s just for the geriatric set now, etc etc. Those arguments, while valid, miss my central point. At its core, the Yellow Pages business is focused upon driving viewership which, in turn, drives its advertising rate and its core revenue model. Yellow Pages prints up half a million books so they can be delivered to half a million homes so that Yellow Pages can tell advertisers that the advertiser’s 1/4 page ad will be in half a million books in half a million homes. End of story. What’s left conveniently out of the discussion is the true value of the penetration of that advertisement to that audience. How valuable is each recipient of the Yellow Pages and how does that translate into revenue for Yellow Page advertisers?

In effect, by accepting the Yellow Pages, I become one of that audience. I, for one, would be a terrible customer for Yellow Pages advertisers and, I fear, a fairly typical one. My last three editions of Yellow Pages books are propping up a bookcase in my garage (2004 edition), forming a backstop to a trapdoor in the tool shed (2005) and supporting a TV in the home gym (2006), respectively.  And yet, my receipt of Yellow Pages books each year makes me a “viewer” or “user” as Yellow Pages is defining it and, therefore, I, in a minuscule way, have an impact on what Yellow Pages is charging its advertisers to “sell” to me.

Who, then, is maintaining the statistics for the average annual use of the Yellow Pages in a home that accepts copies of its books, at no charge, and still uses it to find local plumbers, personal injury attorneys, and pizzerias that deliver? Virtually any layperson with even a modest exposure to current web technologies would quickly surmise that, all things being equal, ”effective” Yellow Pages usage in any given home has declined, perhaps precipitously, since the emergence of the what we now consider the modern internet.

For decades, in traditional publishing a consumer’s (or, in this case, a reader’s) value to an advertiser was fairly easily gauged. These readers ’subscribed’ to a publication. There was a cost associated with receiving that publication. That cost, even a nominal one, served to “qualify” that lead for an advertiser. That reader, if you’ll permit the analogy, was clearly interested in, say, outdoor pup tents because he was a subscriber to Field and Stream magazine, paid $19 a year to receive 12 issues of the publication, and renewed each year for the past five years. The cost of the subscription was the “entry cost”, or the glue that cemented the relationship and loyalty of that reader to the content matter and the advertisers whose wares mirrored that magazine or periodical’s affinity or area of interest. Simple enough to understand

Now, however, that model is pretty much on life support, if not dead outright. Magazines are being given away in offers and promotions (i.e. trade in your expiring United Mileage Plus miles for these ten magazines, etc) or sold at subscription prices that barely cover shipping and production. The “entry cost” has effectively evaporated to nothing and along with it, the true underlying value of the “readership” figures these magazines, newspapers and periodicals use to support their advertising rate cards. Who is asking the tough questions, then?

Renowned psychology professor and controversial author Robert Cialdini, in his excellent book Influence, uses psychological principles to explain what most laypeople understand common-sensically: people tend to place a low value of that which they acquire with little effort or at little cost. Media, in all its forms, has become so ubiquitous and free that “readership” or “viewership” has little consequence as a gauge of potential revenue. As I see it, for the purposes of venture-backed companies “pushing” content in this way, what needs to happen is a more structured, formalized means of more realistically and effectively gauging the value of viewership, readership, etc in a world where increasingly there exist no “qualifiers” or “entry costs” for consumers to receive the content and engage with the companies providing the service. If you believe that premise, then you must also believe the premise that customer loyalty for these same companies must be at a level far below what we would consider typical or expected for these types of companies in the recent past. Customer “loyalty” for media-based companies, then, (as we have long understood the notion) must be in decline at a frightening rate.

What all this noodling means, to my mind, is a need for investors and management teams to apply greater rigor in analyzing what “viewership” or “readership” really mean to emerging web companies in the internet/content/Web 2.0 sphere where valuations are too often driven in large part by user traffic, content and services are being “pushed” to drive user metrics rather than being pulled by paying customers, and there exist little or no switching costs. We have already seen some “value realignment” in the social networking sphere (see my earlier piece, $15 Billion Folly regarding Facebook) and we will likely see a good deal more carnage as most social networking sites still struggle with the ‘hot new club’ problem or fall victim to it (Friendster, anyone?)

As goes the famous Chinese curse, “may you live in interesting times.” Yes, indeed, things are definitely getting interesting around here.

Like most of my peers, I spend a good deal of my time looking for innovative companies that are not only pursuing big, attractive markets, but that also possess those critical, ’holy grail’  elements that can enable those companies to erect barriers and garner sufficient runway to achieve the scale they need to become dominant, market leading companies. This trail is well-trodden and never-ending.

In recent weeks, however, I have noticed an interesting trend emerging in the business models of some in my current batch of startup company prospects. As yet, I have not heard anyone on my side of the desk come up with a pithy, clever term for this business model structure, so I am just (temporarily) calling it the Luddite Tax approach. It is by no means a “new” way to generate revenue from customers — heck, the government has been doing this for years — but it is beginning to gain in popularity and acceptance as a bona fide business model strategy. I find it clever, timely and quite powerful when done properly.

Unlike other approaches, the idea is not to “impose” a cost on a consumer or to ever “force” one to convert. Indeed, the notion is very much to give something away for free (or at very little cost) at the initial stages. Like the concept of Network Effects, the point is to build traffic first and foremost. The comeuppance is that eventually that tidal way of traffic creates a self-sustaining and self-fulfilling gravitational pull that brings aboard all users into a pay scheme. Sound familiar? It is. The Luddite Tax is in evidence in a number of everyday situations. You probably do it already in your daily commute if you are a FastTrak customer.

FastTrak is actually a great example. To the uninitiated, FastTrak is a program whereby residents sign up for an account with their local municipality to receive a “transponder”, a plastic device the approximate size of a garage door opener. The transponder is mounted to a vehicle and a signal is transmitted between the transponder and a receiver placed on a toll bridge or other toll-taking infrastructure for the purpose of collecting a toll. The toll is collected by either debiting the customer’s bank account or by having an account set up with the municipality where funds are deposited in advance and periodically replenished. Having a transponder permits the driver to use dedicated FastTrak Only lanes — which are unmanned toll booth lanes where one can drive through at up to 25 miles an hour — thereby saving time during peak commute hours by avoiding the typical manned booth lanes often clogged with drivers handing over their dollar bills the old fashioned way. As an added incentive, municipalities often charge a slightly lower toll fee to a transponder user than for one paying cash. [However, don't expect this discount to last. See why below.] 

Everybody wins, right? The municipality gets traffic moving faster and saves costs on having to retain toll takers for the toll booths. Transponder users get to fly by toll booths and save commute time. The planet benefits from there being fewer vehicles clogging roadways burning fuel as they sit in long toll booth lines. 

The catch is that the government is careful to never force anyone to become a FastTrak user. Indeed, they do not need to. People who wish to pay tolls in cash can always elect to do that - probably forever as there will always be tourists, etc whose vehicles are not (and needn’t be) transponder equipped. They will need to pay in cash.

The rest of us have a decision to make: We can be one of the “I don’t want Big Brother in my car”contingent and refuse to be joiners. That will guarantee us many hours of sitting in overheating cars each morning (and sometimes each afternoon) rummaging for loose change in our glove boxes. Sure, we can say we are “bucking the system”, but at a cost that soon becomes pretty unbearable, particularly each time a Lexus whizzes by us in the next lane over on its merry way through a FastTrak lane.

Municipalities, therefore, are enforcing a kind of compliance by letting the “old system” become so unbearable that, in time, virtually all drivers with the exception of once-in-a-great-while drivers, tourists, and hard-core “off the grid”-type anti-government activists will yield and get a FastTrak. This is the municipalities’ design all along, but they choose to reach their goal by letting a “reverse Network Effect” do the work for them. That reverse Network Effect is that as users gravitate to a new, pay system, the old system becomes increasingly chaotic, outmoded, inefficient, and downright painful. While it’s not quite the “upgrade or perish” business model of many software applications, it is decidedly a “migrate or wallow” business model of sorts. You won’t perish if you stick with the old system; you’ll just sometimes wish you did.

Another example of this – only now emerging – is around the burgeoning area of “smart” thermostats.  California recently added a regulation, temporarily sidelined, that would have mandated all new construction to have installed a communicating thermostat that could receive messages from the utility companies. The core purpose of this is for the power companies to better manage power usage and requirements in the event of power emergencies like those that afflicted California in the summer of 2001. [Clearly, it is only a matter of time before these communicating thermostats will be remotely adjustable by users -- "Honey, I forgot to lower the heat before we left on vacation! Let's do it from my laptop or cell phone!" -- and before they will be able to communicate with other smart devices in your homes.]

Predictably, privacy advocates threw a fit insisting that this was a thinly veiled attempt by the state to take over your thermostat. The dust hasn’t settled on this, but it is already appearing that there will be an element of Luddite Tax in the model that will ultimately emerge in this initiative. Existing structures will be grandfathered. As such, homeowners will not be required to upgrade their thermostats with the the new, smart communicating devices. However, as communicating thermostats become ubiquitous, having an “old school” thermostat that is not remotely adjustable by either the homeowner or the power company will become inefficient, costly, and perhaps dangerous.

Tech companies thinking of pursuing this kind of approach would do well to closely examine some of the ways government agencies are embracing the Luddite Tax model to get apathetic citizens to adopt new ways of interacting with government. Believe it or not, startups can learn a lot from watching government work. Wait a second! - Looking to local government for innovative ideas?? In my years in the technology and venture environment, I truly never thought I would ever find a rationale for saying that…

NPD data, just released, depict an interesting shift in consumer electronics purchases through the holiday 2007 shopping season. [The chart is courtesy of Infectious Greed's Paul Kedrosky, who has his own interesting riff on things. Click on it to enlarge.] Predictably, LCD TV sales were a big winner. Nothing terribly surprising there.

One also sees a curious drop in MP3 player sales (are you listening, Apple?) and digi-cameras. Off the cuff, I’d say the ’mobilization of everything’ trend is what’s to blame for some of that. Clearly, as photo quality improves on cell phones, and as MP3 player functionality gets embedded into such devices, we are going to see a slow erosion of standalone MP3 players and digi-cam sales due to cannibalization. Pretty soon, such standalone devices will be the exception rather than the rule for the majority of consumers. I can hear the chorus now: “What, it’s ONLY a camera!?!; What, it’s ONLY an MP3 player!?!”I am already weary of “lugging” my cigarette-pack sized camera around when my trusty Treo does a serviceable enough job for quick and dirty snaps. I fear I am not alone.

Granted, this will take some time, but I am a bit surprised to see the turndown so early in the product cycle. If this isn’t evidence of product cycle compression, I don’t know what is. 

But, by far the big surprise is how GPS sales were virtually off the chart in the most recent quarter. I have written extensively on GPS-enabled software solutions, devices, Location-Based Advertising and the like on this forum. So, clearly, I am not an impartial observer here. That said, I was taken aback at these figures. Like most people on the venture side, I see rosy device penetration forecasts in most every funding pitch having to do with GPS-enabled services. However, this data supports a lot of those scenarios in ways that are rare from an investor’s perspective. Seldom does an investor see sales figures that seem to map nicely with PowerPoint figures from an entrepreneur’s presentation.

What was only spoken about in hushed whispers but a few short years ago has suddenly taken on the dimension of a full-on evangelical rant–and none too soon. I’ve been accused — fairly, at times — of drinking a little bit too much of the Location-Based Services Kool-Aid in recent posts as I waxed poetic about the impact of the intersection of GPS and that of content, advertising and a variety of pushed, targeted services. So be it. If one is too afraid of being wrong (or, more often in this technology venture business of ours, of being early), then one can never be right.

What has been heartening to see in recent months, however, has been the ‘thought migration’ in the punditry about Location-Based Services’ rich, well-dressed cousin — Location-Based Advertising. GigaOM’s Om Malik has a nice piece on it that bears review. As serendipity would have it, in my return commute from the office this afternoon I heard another piece on this topic on NPR, and a good discussion of the Loopt/CBS Mobile relationship in particular. If that is not indicative that this field is going mainstream, then I do not know what is. As a side note, it is probably also an indicator that if your GPS-meets-content meets advertising business model start-up has not raised capital yet, you’re probably too late.

 Stay tuned. This is starting to get interesting.

OK, enough with the alliteration, but it is certainly intriguing to see how much buzz (and grumblings) I am hearing about the much bally-hooed networked GPS system just launched from Dash Navigation. The idea is a simple one and fairly obvious - decouple the promise of Web 2.0 from the browser and make that data available everywhere the user is in a format that is digestible, relevant and accurate. Dash’s approach is an interesting one: how would you like to get restaurant listings, suggestions and reviews from Yelp, or real estate data from Zillow.com, or mapping from Platial, all while behind the wheel or even while in another city? Dash will pull that information with the ease of your in-car navigation system–coffee shops, gas station locations, post offices, etc — while layering in more robust content (reviews, etc) that most in-car nav systems can only hope for. Add to that real time traffic, weather, etc. and you have a fairly compelling little travel companion.

We have been openly evangelical about the broad Location-Based Services space for some time [see an earlier post here], particularly around the convergence of GPS and various content offerings (both private labeled and user-generated), so perhaps we are an easy sell. That said, we suspect that the folks at Dash and their capable investors at Sequoia Capital and Kleiner Perkins Caufield & Byers might have their work cut for them. This is a crowded space and the sands shift fortnightly around these parts. As has been well reported by GigaOm and Venture Beat (here and here, respectively) Dash is expected to be available with a $600 price tag, plus $10-13 in monthly fees depending on the services the user signs up for. This, in a space rapidly being filled by GPS-enabled phones — with new ones launching almost daily — and by hand-held GPS devices (Tom Tom, Garmin, etc) by manufacturers that know the space well and are not likely to give up their cushy franchises without a nasty fight. While we are excited by the emergence of Dash and believe it both validates this space and ratchets up innovation in this increasingly competitive and exciting area, we will be watching closely to see how consumers will react to the seemingly high price point of the device amid clear competitive offerings that surround them.