Archive | December, 2007

Top Five Tech Predictions and Trends for 2008

31 Dec

In these waning days of 2007 thoughts predictably turn to the coming year and the trends that will both foster new investment in emerging sectors and put out to pasture long-simmering “next-big-things” that will not come to pass. If the cocktail chatter along the venture holiday party circuit has been any indication, opinions are particularly varied this year.

Amusingly, year-end prognostications among venture capitalists are fast becoming as commonplace (and weighty) as that of bejewelled psychics on the morning talk shows with all their attendant influence and profundity. That said, I do find myself increasingly spending time rummaging through the cupboards of specific areas of technology that I find especially intriguing and compelling. Therefore, in the same familiar vein of unfiltered, stream-of-consciousness ramblings that generally describes this column; I offer my own technology predictions and trends to watch for in the coming year.

1. The consumer internet revival lives on — with caveats. Depending on how you bookend it, the consumer internet resurgence is arguably entering its fifth year. That said, the boomlet in this revived sector seems disinclined to yield its momentum to the more ‘traditional’ sectors of IT venture investment in the coming year. Much of this stamina has to do with the convergence of specific factors including, but not limited to: (i) increased user comfort and confidence in transacting, connecting and collaborating online; (ii) heightened security protections for financial transactions and clearer paths of recourse; (iii) richer user experiences brought about by more robust applications and the ubiquity of (relatively) cheap broadband access and bandwidth; (iv) greater capital efficiency in launching consumer internet companies in the presence of cheaper infrastructure brought about, ironically enough, by the over-investment and over-capacity of the last consumer internet boom (and bust); and, (v) the maturity of the GYM contingent (Google-Yahoo-Microsoft) and their continued appetite for applications, features and functionality that continues to provide viable exit paths for young consumer internet companies in the absence of a robust IPO window.

So much for the good news.  The cautionary tale here — writ large by several high-profile examples in the social networking space, in particular — is that the consumer internet ecosystem is especially susceptible to what we inelegantly term the ‘hot new club’ problem. True customer loyalty in the ecosystem is extremely hard to build and even harder to retain. New entrants offering ‘cooler’ features, or just a more hip sensibility, can easily poach an established company’s entire user base in weeks. Hence, the newer, hotter, hipper club problem. This exists, in part, because the intellectually beautiful notion of network effects is almost never in evidence in the real world.  Try though they might, few consumer internet companies have been able to demonstrate that they can foster true network effects in the eBay sense of the word.  As such, the notion of ‘locking in’ users has proven to be folly. 

So, in that sense, in the consumer internet ecosystem you truly live by the sword and die by the sword. Those beloved low entry barriers and modest investments that allowed many entrepreneurs to build and launch their consumer internet companies later become their accursed Achilles heels as new entrants jump in en masse as soon as those companies demonstrate that a viable market exists for their solutions.

Several high-profile social networking companies learned these lessons first hand. Although many of those same companies remain active and, with luck and perseverance, could well turn out to be the home runs that they were almost pre-ordained to become, the lesson here for consumer internet companies and those who invest in the sector is that this is an unusually tricky landscape to navigate. Successful marquee investors, experienced management teams, impressive mindshare, and first-mover advantages are no insulation from early stumbles and near-death experiences.  With some indulgence it can be argued that early social networking applications were a form of disruptive technology in the Clayton Christensen sense of the word whereby the particular features and functionality that would ultimately resonate most with users were essentially unknowable at that time. As such, without the benefit of reliable historical reference, management teams underestimated the value and impact of now ubiquitous features and add-ons such as blogging, pix, message boards, and the like on early social networking platforms. Follow-on competitors, however, correctly predicted the importance of those features and functionality and effectively leapfrogged past early entrants.

2. The return of the entrepreneur. In technology markets, the pendulum tends to overcompensate when it reverses the direction of its swing. The late ’90s tech bubble, and a pliant media, almost single-handedly created the image of swashbuckling 20-something founders and their teams of young lieutenants building billion dollar (too often, largely on paper) technology juggernauts. The reality was quite different, but the image created by early successes such as and Netscape became both cemented in the minds of many and a sustaining image of that heady time for most. With the subsequent market correction came calls for the proverbial ‘adult supervision’ and ‘gray hairs’ that was to bring steady, measured hands to right the ships run aground by the hubris and inexperience of young founders. While few can argue against the wisdom of bringing in experienced managers for the right company at the right time (and for the right reasons), founders bring something to the culture and fabric of an early stage company that no professional manager, regardless of pedigree, can bring.  

Much has been written about how many of the great, sustaining technology companies are still largely run by their founders or early executives (Microsoft, Apple, Oracle, etc) or how founders have been brought back to right the ship and reinvigorate the rank and file when things went awry (Yahoo, Dell) that it scarcely bears examination here. The management adage that ‘one can teach skills, but one cannot teach character’ is axiomatic. Taking some license with that well-worn phrase, I would add that one can hire execution, but one cannot hire vision. It is vision, I would argue, that is the underpinning of all truly great companies. It is vision that helps navigate a company through great strategic challenges and setbacks; and, it is vision that stirs the spirits of employees and persuades them to make great sacrifices in the pursuit of grand, though often elusive, goals.

I sense greater emphasis among my fellow investors on the importance of strong founding teams again. Correspondingly, I also sense a diminished belief in the notion of being able to engineer a turnaround at a floundering company by stacking the team with experienced outside managers. This equates with greater scrutiny being placed on the entrepreneurial team with an eye to seeing them take the company a great deal farther in its evolution than might have been anticipated even a year ago. So, while experienced managers — especially those who have taken a company through an M&A exit or an IPO process — will always be in demand, 2008 will be a good time for solid, impressive entrepreneurial teams to found great companies and find willing investors to partner with. The image of the ubiquitous 23-year-old internet company CEO circa 1999 may be fit for the dustbin of recent history, but the passion, vision and resilience of great founders — regardless of age — is more important now than ever.

3. The intersection of Location-Based Services, travel and tourism begins to live up to the hype. For several years now, I have sat through at least a couple pitches a month where an entrepreneurial team waxed poetic about what the application of GPS technology would mean to a whole host of consumer services and applications. In some instances there wasn’t a figurative dry eye in the house given the compelling case that can be made for how our lives would be transformed by the delivery of real-time, location-based information mashed up with a host of content and features.

Where things typically came off the rails was around how to navigate the Byzantine complexity of the wireless carrier/device manufacturer competitive landscape and how to develop an architecture that would run on numerous, incompatible devices and still deliver a high quality, consistent user experience. The frontage roads and byways of Calif. Hwy 101 and Massachusetts Route 128 are littered with the carcasses of companies that thought they had these problems licked. That said, significant advances are now being made in this area and 2008 looks to be the year when the long-held promise of robust services operating at the nexus of GPS, travel and real-time information will become a reality.

The “GPS-meets-content” mashup is a broad brush, but we are most excited about developments at the intersection of GPS and travel content whereby travelers will be able to access travel guidebook-level content delivered to their GPS-enabled devices while touring a given area, anywhere in the world. These “guided tours” will be able to be delivered on foot, in a car, or in virtually any other format. The vision is a bold and compelling one, which we have written about before on this site. The concept is to permit users to create their own tours by setting conditions for what their interests are. The tour content creation and delivery engine — which is a vast database of short audio clips with GPS waypoints embedded in them — will deliver the content that is to be heard all along the chosen route.  

Beyond the initial interest one can expect from travelers looking to get off the tour bus and take greater control of their travel experience by being able to create their own tours and enjoying them at their own pace, there will be vast user-generated-content implications as well.  Users will be encouraged to create their own custom tours, upload them, and share them with others.

Not surprisingly, the space is fairly crowded with a number of companies offering compelling solutions. Companies to watch: Node Explore, Platial, and Open Planet.

4. Steeper and Deeper: Search goes vertical, horizontal and perpetual. The search ecosystem will continue to remain an intriguing area for investment in 2008, with exciting new companies offering up novel ways to slice and dice search results with greater speed and relevancy. Regardless of what search result “satisfaction” index one cares to consult, the level of user satisfaction with typical search results at most of the leading search engines has been dropping. In response, “vertical search” engines that offer narrowly focused search results on a given area continue to gain traction. We expect to see a continued growth of vertical search engines as well as companies offering more robust vertical platform solutions where people sharing a common affinity or need can collaborate, share opinions and, of course, conduct targeted searches.

Moreover, we expect to see a new crop of exciting companies in the coming year offering “perpetual” search solutions — either in a standalone way or in the context of other offerings. The basic premise is to eliminate the tedium of having to check and re-check online rental listings, auto sales classifieds, etc by being able to post what is being sought just once — i.e., 2003, Blue/Tan, BMW, 325i, Automatic, etc, — and have the search engine deliver updates until a match is found. Auto classifieds and real estate listings are obvious, but the solution will also be applicable for any kind of data where a user would like regular, near-real time, automatic updates when new information is posted on the web — company information and announcements, sports team results, events and tickets, etc. Companies to watch: Cartango (autos), SimplyHired (jobs), Trulia (real estate).

Finally, 2008 will see the continued emergence of companies that offer click-by-click search optimization whereby search results are re-populated based upon user inputs — i.e. clicks – to deliver greater relevancy, make better recommendations, and cut the typical search result clutter. As an example, a user seeking information on Dolphins by entering “Dolphins” as a search query will typically get thousands of search results. However, once the user clicks on a result indicating she is interested in Dolphins, the mammal, all references to search results concerning, say, the Miami Dolphins, the NFL football team, will be removed and only search results having to do with the mammal will remain.  Additional clicks bring narrower results, and so on and so forth until a manageable set of highly relevant search results remain. Companies to watch: StumbleUpon, Surf Canyon, Collarity, Mahalo.

5. Social networks get serious…or struggle for relevancy. Forgive the facile analogy, but a common criticism of social networking services among those who have been persuaded to join one is they have become akin to the boring cocktail party where everyone is standing around and nothing interesting or worthwhile is really going on. The host was successful enough in getting everyone to attend but little thought or planning went into how to entertain (and retain) the party’s guests. In the real world, we are finding growing numbers of people of all socio-economic backgrounds creating user accounts at social networking services but admitting to rarely visiting and, thus, getting very little value out of the relationship. One can argue that this is a “user problem”: those darn users have simply not understood how to leverage the features of the social networking platforms to which they belong. That may very well be, to a point, but we prefer to abide by the adage that the customer is always right. Thus, if this is becoming a common criticism (and it is) then the companies are failing here, not the users, and the companies must find ways to add value to the social networking experience lest their users desert them en masse.

Echoing some of the points made in Trend #1 above, one might say this is just another version of the ‘hot new club’ problem, but it goes deeper than that. We are perceiving a sense of social networking fatigue now. Consumers are loathe to join yet another social network given how little they have derived from social networking to date. As such, the ecosystem as a whole is risking damage to their collective reputations unless more robust solutions are offered and better customer service is delivered to help users get value from their relationships with social networking applications.

One response which we are seeing in greater frequency is simply to go deep. Vertical social networks are becoming commonplace – social networks for doctors, teachers, even those thinking about attending grad school, etc — in an attempt to deliver more relevant information for those in a given field. We expect to see these vertical solutions expand in 2008. No one wants to join another social networking application. As such, we also expect to see a great deal of M&A in this space for 2008. This will be driven by the ‘more mature’ social networking applications with millions of registered users but increased customer desertions appealing to newer companies with powerful features and functionality but low user registrations due to the reluctance of consumers to join yet another social network.


Kayak and SideStep to merge

21 Dec

Travel search site Kayak has decided to acquire SideStep in a deal valued at roughly $200mm. Investors appear to intend to take the company out (go public, to the unitiated) sometime in 2008.

Both companies offer a similar solution now fairly recognizable to most anyone reasonably experienced sourcing and purchasing travel products online, although they appear to go at it differently and appeal to slightly different user bases.  Details on the deal and the attendant sound bites from the investors will be well-chronicled in the trade press soon enough, so there’s no sense in rehashing the particulars here, although props should go out to Matt Marshall and the VentureBeat crew for — if not entirely breaking the story — certainly covering it with depth and alacrity.

There will no doubt be copious amounts of handwringing and pontification in the days to come over the impact of this deal, how it was structured, the profile of the investors (some well-known, others less so), but this observer can only see this as something of a harbinger for a flurry of travel-related mergers, deals and partnering that will inevitably occur in the New Year.

Some might regard all the Doh-See-Doh’ing that will go on as some kind of perverse musical chairs among companies that will now struggle for relevance and survival in a Kayak-cum-SideStep landscape. True, to an extent. That said, I think it will be emblematic of an industry that is consolidating just as rapidly due to consumer demand for more robust solutions offering a convergence of functionality that now exist across platforms, devices and services.

Kayak and SideStep did many things well, but I consider their solution(s) as going beyond traditional travel products (airline tickets, hotels, car rentals, etc) to encompass “experiential” features and functionality that consumers are beginning to demand en masse. In time, the tendency for these two companies to lean a bit farther forward on the skis might very well end up become their compelling and sustaining value. It has been my opinion for some time that there will continue to be an increased convergence of travel products and ecommerce with travel information and experiential features such as GPS and location-based services to deliver as near a one-stop solution as can be envisioned with current technology. For a long time the “last mile” in travel has been the mile from the airport at the traveler’s destination to the hotel at which the traveler is staying. Technology in the travel space has been inarguably front-loaded. In other words, there is tons of it in the sourcing, searching, reviewing, evaluating, and purchasing of travel products from the user’s home base, but once the traveler is in his booked hotel room, he is back to relying on bulky guide books, maps, and the unqualified ‘recommendations’ of hotel concierges and shuttle drivers who might have other axes to grind and competing interests to juggle. Travel search companies that are pursuing strategies to continue to serve travelers even after the outbound flight takes off will be well-suited to competing in this increasingly competitive space and instilling the kind of customer loyalty that is almost without measure.

If anything at all, the Kayak/SideStep deal was a shot across the bow for any players that feel the current travel product search-to-checkout model is sustainable on its own. This is getting interesting…

Earn Your Wings

20 Dec

Without hesitation, I can estimate that I find myself twice monthly responding via email to a query from an aspiring venture capitalist. The question always carries with it some inconsequential variation, but it can typically be surmised as follows: “How do I get a job/begin a career in venture capital?”

The tired bromide that ‘to ask ten venture capitalists how they entered the business is to get ten (very) different responses’ is an accurate one — perhaps, stubbornly so. I believe this has just as much to do with the humble and ragtag origins of what we now consider the modern-day US venture capital industry as it does with the intrinsic speed with which the overall technology industry is evolving, growing and adapting to new market realities at an ever-increasing pace. That said, the venture capital ‘profile’, for lack of a better word, has remained inarguably broad.

Reid Dennis, the legendary venture investor of IVP fame, is a venture conference fixture and is often asked to re-tell his stories of how, in the early 1960s, he and a rogue’s gallery of “angel” investors — most often Reid’s buddies in the San Francisco Financial District establishment — made their earliest investments from a back booth at Jack’s on Sacramento Street into companies that would later form the fabric of the west coast tech industry. Typically, a budding entrepreneur would be hosted to a martini lunch where he (and it was always a ‘he’) would be peppered with 20 minutes of Q&A. After a bit, the entrepreneur would be asked to wait outside the restaurant while the investor group debated the deal. In usual fashion, the “round” would come together when one of those in attendance would inevitably say, “What the heck, I’m in for $10k,” which would then be followed by a chorus of “Yeah, put me down for $15k” and the like until the round was closed. No three-hour conference calls with Wilson Sonsini, no 90-day no shops and due diligence binders. That was how deals got done.

The “investor group” ran the gamut from serial entrepreneurs with multiple successes under their belts who were looking for exciting new invesments, to semi-retired corporate executives who liked the investment game, to investment bankers and tax lawyers who never spent as much as a day slogging away at a startup.

The intervening years brought the gradual “institutionalization” of venture capital as firms such as Mayfield in the late ’60s, and KP and Sequoia in the early ’70s began to come together in a formal sense and pursue these investments in a more structured, less seat-of-the-pants manner. Through the subsequent booms and busts, there were evident tendencies whereby firms might shuffle the deck to focus on, say, more technical partners to replace softer-skilled ones so as to better understand emerging “hard” technologies, or, in later years, to bring on consumer internet-knowledgeable partners to pick up the slack (or outright replace) more ‘idle’ partners in busted or out-of-favor sectors where opportunities were few, far between, and not terribly attractive. That said, the professional breadth at many top firms remained “democratic” in their diversity of talent and their bench strength.

That said, for the benefit of the freshly minted MBA or career changer intent on a career in this field, I can only offer my qualified opinion — and it is just my opinion — that given where the industry is and where I feel it is headed, having hands-on operating experience at a startup (or three) is going to become especially valued at the more established firms. [For what it is worth, my firm, Citron Capital, has made it an unspoken requirement that anyone it brings on have hands-on operating experience at an early stage company. That has been an understanding since the formation of the fund and is not likely to become less emphasized in its hiring practices going forward.]

This is not to say that ‘other’ experiences are minimized. Let me be the first to say that I have worked with and alongside many successful and highly competent venture investors who, truth be told, never put in a day at a start-up. However, I would venture a guess that those same investors might struggle to point to their days in a 40th floor conference room assembling investment banking pitchbooks or writing industry reports as being the formative ones that they still draw from each day in helping early stage companies (Ask me how I know.) Investment banking, management consulting and corporate development roles are excellent training grounds for a wide swath of career paths, but there is something true and visceral about having slogged up and down I-280 or Hwy 128 raising funding, building a mangement team, bringing a product to market, and taking a company from zero to 60 (or, too often, from zero to 60 to zero. Again, ask me how I know.)

So, my principal advice is to do something bold. Take some risk. Leave the comfy confines of the 40th floor conference room at the investment bank/consulting firm/corporate development group and get some real start-up experience. Either be a founder or join a company at a stage that is still embryonic enough where you can have some real impact. If you do join the ranks of venture capitalists later in life, you will undoubtedly draw from that experience almost daily as you then begin to advise those young entrepreneurs about all the mistakes they are about to make that you know so well. After all, does it not follow that a chief component of a venture capitalist’s role (particularly an early stage one) is to advise and mentor young founders?

The second suggestion is fairly common-sensical. This is a relationships business. Few venture firms ever hire someone they do not already know in some capacity. That does not mean carpet-bomb the email InBoxes of every partner on Sand Hill Road asking for informational interviews. What it does mean is to make yourself valuable, nay, indispensible to those in The Life. Pick an area of expertise and deeply understand it, know the players (deal flow is a must in this business), have conversational expertise in the technology, and know about which firms are doing what deals and why. If you can advise a venture investor on an emerging area you know well. or find a way to run down deals that they might be looking at, do it. Networking is great, but when you do it, remember the old saying about asking for a bank loan when you don’t need the money. [During the last informational interview I granted, the young chap was relentless in his desire to impress upon me how much he wanted a venture job. Basically, he did everything but hump my leg.]  

In other words, if you are legitimately just trying to meet new investors and not doing the full-court press for a job, great. You will be more successful.

At least when it comes to landing venture roles, success is attracted not pursued.

And now back to your regularly scheduled programming…

18 Dec

With this blog I hope to add more than simply another voice to the cacaphony that is the VC-focused blogosphere. As the industry has expanded and increased in intensity, so, too, have the demands and requirements of remaining, as a venture investor, technically conversant, networked into the relevant communities, and knowledgeable about the players and competitive dynamics in emerging markets. In my view, that means travel – and a LOT of it. Great ideas and the companies that drive them come from all corners of the globe. That does not mean, however, that they come at you from all corners of the globe. All of today’s leading venture investors must get out from behind their mahogany conference tables and go find them. So, with Red Carpet Club pass, Tumi rollaway bagDramamine stash, and, sometimes, bug spray in hand, I have set out on a tireless quest to find these great companies–and the great experiences that come along with the journey. I hope you stick around. It’s just starting to get interesting…

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