Some Thoughts On Transparency

28 Feb

Last week I had one of those conversations that kept re-asserting itself in other discussions in the days that followed. The conversation itself was not confrontation nor was the subject matter particularly uncomfortable. Briefly, a colleague and I got into a broad discussion about companies leveraging user-generated content (UGC)–specifically consumer user reviews of and feedback on companies, products and professionals–in particularly novel and innovative ways. While it’s axiomatic that there are significant businesses being built collecting, analyzing and publishing this content (and a great deal of value being derived therefrom), we both struggled with some of the issues coming to light around the impact of this kind of information when propagated without strict quality controls and proper diligence to ensure authenticity and accountability.

With little argument, the notion of delivering “transparency”  — in whatever form – has been at the underpinning of so many web-based business models in recent years. Additionally, with few exceptions, that goal has been a noble and appropriate one. Opacity has been the bane of so many consumers in so many markets that it scarcely makes sense to examine whether or not technology-enabled solutions seeking to open markets to greater and fairer competition have delivered long-lasting value to consumers.  Let’s stipulate that they have and just move on. 

Where things get sticky for me–and, I would imagine, for a growing number of investors and market participants — is the notion accepted almost as religion in some quarters that transparency is always and everywhere a market good. Heretical as it may sound, I think it is time that many in the venture and start-up community have an adult conversation about where and how full transparency is appropriate and about whether enough companies are living up to the weighty responsibilities that come with publishing information that can profoundly damage the reputations of businesses, professionals and/or their products or services.

Regular readers of Adventure Capitalist may recall that I have raised these issues in some form before, particularly in a piece on the state of online reputations. In that post, I drew some examples from the current legal (at least at that time) problems facing Yelp and similar sites from aggrieved small businesses. While I give Yelp and other sites credit for continually refining how reviews are collected, filtered and published, it is clear to me that we are a long way from being able to glean the true benefit of anonymous user reviews and feedback without exposing people and businesses to the risks that reckless and unfair user comments can pose. I remain deeply committed to the notion that platforms that enable users to call out by name and rate/review businesses while those users remain comfortably concealed behind the cloak of anonymity creates a sweeping invitation for mischief.

In the months since that original post on online reputations, I have received an alarming number of reports–both confirmed and anecdotal–about consumers engaging in troubling practices akin to extortion whereby demands are made for deep discounts and freebies that those consumers are not entitled to from local businesses. The not-so-thinly veiled threat is that the consumer(s) will trash the online reputation of those businesses if the demands are not met.

Again, I firmly believe that the majority of users and contributors to online review/reputation sites act responsibly. That said, more work has to be done by companies that reside at the intersection of online reviews and reputation so that all participants are held to the highest standard of ethics and accountability. 

My hope is that this post will spur a discussion. I don’t purport to have an elegant solution to the problem inherent in user-generated reviews and feedback but I am becoming increasingly mindful of the backlash brewing in the small business community against online reputation and review platforms. I am also seeing some of the limits of transparency in specific marketplaces when the end result of that openness is not greater efficiencies and fairness in a given market but, rather, the same kind of unfair leverage, collusion and monopolistic power that transparency was meant to eradicate.

8 Tech Trends for 2011

14 Jan

This being January it is fitting that we take a look at the next twelve months and consider themes that will likely come to define the new year. Given the intense pace of innovation across IT broadly, I’ve kept these themes at a fairly high level.

Last month, we looked over our 2010 predictions and conducted a fairly detailed post-mortem. As such, let’s jump right into a discussion of the themes and trends that I believe will characterize 2011.

1. Globalization:  While many appeared not to notice, some of the biggest names in consumer internet enjoyed robust growth in international and emerging markets in 2010, in some cases dwarfing their US numbers. Expect venture investors in 2011 to spend a great deal of time thinking about globalization, studying the best practices of companies executing successfully overseas, and paying particular attention to web services that can scale effectively across both emerging and mature markets.

2. LBS 3.0: As I touted in my recent piece on the Consumer Internet revival, Location-Based Services is entering what could be considered its 3rd wave of innovation—one defined not by “check-in” gaming mechanics, but by robust applications offering rich, customized user experiences via applications residing at the intersection of location data, identity and content with mapping technologies and couponing/revenue incentives as the connective tissue binding it all together. Travel is the most obvious segment, but expect to see LBS-driven tools and products penetrate a number of new and interesting markets in the coming year.

3. Demand Aggregation/Social Buying penetrates unconventional markets. Groupon and HomeRun are successfully focusing upon restaurants, salons and other SMEs that lend themselves particularly well to discounted group buying. Expect to see a number of new entrants cleverly leverage social buying/demand aggregation mechanics in less obvious ways. Examples of emerging categories are Travel and Events, where start-ups are developing ingenious ways of enabling emerging music acts to aggregate their global fan base to pre-sell venues in advance of tours—mitigating the risk of financial loss from engagements that don’t sell enough tickets to cover costs. If successful, this approach could revolutionize how live events are produced, promoted and underwritten. Are you listening, LiveNation?

4. Dramatic growth/influence of ad platforms/exchanges. I expect 2011 to be a watershed year for online advertising given the impressive growth and continued innovation in display ad exchanges, bidding platforms and the increased effectiveness and monetization of online marketing campaigns. Direct marketers are being more effective at reaching their customers than ever before. Moreover, traditional media buyers that until only recently eschewed some of the early exchanges and bidding platforms are refocusing on these channels and more readily embracing social media strategies and “promoted” ad campaigns and putting significant resources behind them. 

5. ‘Institutionalization’ of Secondary markets. Many regard 2010 as a year when the secondary market began to gain credibility as a legitimate exit path for companies, early employees and for direct investors themselves. While there appear some clouds on the horizon—i.e., potential regulatory entanglements and frothy valuations/new entrants putting a squeeze on performance—expect 2011 to further institutionalize the asset class. The stigma that was once often attached to being involved in a secondaries transaction seemed to lose its sting as well-known private equity names tapped the secondary market to either provide much-needed liquidity to their investors and/or to “rightsize” their portfolios to prepare for new investment vehicles.

6. E-commerce is sexy again. A new generation of innovative e-commerce companies has emerged in the past year that is pushing the proverbial envelope and turning the notion of traditional e-commerce on its ear. The two micro-themes behind this renaissance in e-commerce are The leveraging of the Social Graph and Customization/Long-Tail Economics.

Shopping online should be fun; it should be an experience of discovery, of sharing, and of leveraging the wisdom of crowds–ideally, crowds of people users already know and trust. A number of  startups are developing ecommerce platforms that cleverly stack recommendations and opinions from friends across one’s social networks with past order history; get instant feedback before the purchase decision; and, then layer in group buying/daily deal mechanics to drive urgency. 

7. Big data has its day: More data is becoming available as more computing devices come on-line through public and private networks. Moreover, the nature of information processing is changing as more analytic work (business intelligence, data mining, decision support) is being leveraged for competitive advantage.

The nature of data is changing as the number of “entities” in any given database has gone from millions to billions to, potentially, trillions.  Unstructured data is becoming the predominant data by sheer volume and is still relatively unaddressed. Traditional database implementations (Oracle, DB2, MS SQL Server) were not designed to handle these types of data, capacity or distributed nature. Finally, the success of Netezza, DATAllegro, Greenplum and others in taking on the big three (Oracle, Microsoft, IBM) and successfully returning value to their investors through acquisitions by IBM, MS and EMC indicate that there remains plenty of headroom in the sector. Companies such as Algebraix are well poised to exploit this market opportunity in 2011.

8. Tablet boom. The Apple iPhone was not the first smartphone, but it was an iconic, game-changing device that revolutionized the category and spurred a wave of innovation around software and services that is far from over. While consumers use tablets quite differently from smartphones, the tablet category is poised to continue on its torrid growth path in 2011. The Consumer Electronics Association estimates that some 30 million tablets will be sold in 2011, nearly double last year’s figure of 17 million. New entrants such as Motorola, Samsung, Acer and Toshiba either have tablets now in the market or will launch offerings shortly. Not surprisingly, expect to see a wave of innovation around applications and services delivered from and focused specifically on tablets.

The deepening penetration of tablets is impacting the launch of new applications and even new startups seeking to leverage the white space between smartphones and laptops. It is already evident that many companies consider tablets a clever way to extend their services and brands into environments where the options heretofore were unsatisfying. Companies such as Athleon, an online coaching and team management collaboration platform, are developing tablet applications that will enable ‘in-field’ use much more effectively than a smartphone application ever could.

Time To Rethink ‘Walking Dead’ VC Firms?

17 Dec

Recently, an entrepreneur I once worked with reached out to me for advice on raising his next round. During the conversation, he rattled off the names of a half-dozen or so venture firms that he was in discussions with. Evidently, these discussions were not progressing as well as had been hoped. I suggested two more firms particularly focused on his space that he should be speaking with. Upon hearing the firm names the entrepreneur responded that he had already dismissed the idea of approaching one of the firms because it had appeared on a list of “Walking Dead VC” firms on a VC/tech-focused blog. I was startled at the entrepreneur’s haste at dismissing the firm and his willingness to so quickly accept as gospel what he read on a blog without further investigation. This was particularly unsettling given the entrepreneur’s company hung in the balance. This got me to thinking…

Over the last few months I have seen various reports in the trade media about ‘Walking Dead’ VC firms and the apparent parlor game going on in some quarters about handicapping which funds will successfully raise a follow-on vehicle in the future and which firms will likely shut their doors. I understand the schadenfreude behind some of these exercises but I think it has reached a pitch that is troubling, possibly damaging, and certainly counter productive.

To be sure, the venture industry is going through challenging times. Some recognized firms are being wound down and more will undoubtedly follow. [I have written on this subject extensively and even called it a 2010 trend to watch earlier this year.] There are those that argue that this winnowing of firms is long overdue. There are others that posit that venture capital has been over funded for some time and that this is simply a Darwinian process that must occur so that the industry can emerge more healthy and so that limited partners can see regular distributions and more stable returns again. For the most part, I have no argument with any of that.  

What troubles me is the idea that there exists some sort of demarcation line between healthy firms that will successfully raise follow-on vehicles and those that will not. I have even heard one observer posit that if a venture firm has not raised a vehicle in the post-2008 financial crisis era, it is as good as doomed. This is nonsense. There are many firms with funds raised pre-2008 that have plenty of dry powder to make investments (both new and follow-on) and plenty of time to shore up their respective funds’ performance–that is, assuming that performance needs shoring up–in order to raise follow-on vehicles. These are hardly ‘walking dead’ firms. Indeed, one could make the argument that firms like these are precisely the firms most likely to be actively looking for new opportunities.

Unless a firm has publicly announced that it is winding down, it is better to avoid labeling a fund as “walking dead.” Tagging a fund in this way has consequences.  As in the case above, it can impact deal flow as companies seeking funding may think twice about approaching a firm believed to be in that category. It can hurt a firm’s prospects of being invited into syndicates and even potentially damage a firm’s existing syndicates. It can jeopardize relationships with current and prospective LPs if a forthcoming fund is even a notion among the firm’s GPs. Finally, and perhaps most troubling of all, it can even damage the prospects of portfolio companies backed by these supposed walking dead VCs.  

These same sentiments apply to start-up companies as well. Talk in the press of start-ups ‘circling the drain’ are often poorly reasoned and based upon shaky anecdotes and innuendo. Venture firms, like start-ups, can go through rocky patches only to emerge stronger and more successful than ever.

There exist many examples of firms thought by some to be ‘walking dead’ that went on to enjoy big exits and raised follow-on vehicles. It’s startling what one big exit can do. One significant success can reverse the fortunes of a moribund fund almost overnight. I’ve seen it many times.

It’s an old cliché that a rumor is often just a premature fact. However, the appearance of problems often brings about precisely those problems. The mere mention of troubles at a certain firm can too often become a self-fulfilling prophecy. Once the proverbial blood is in the water, things begin to take place that can hasten the demise of a firm that might have otherwise recovered from its challenges. Rumors have consequences. Ask Bear Stearns or Lehman Brothers.

Water cooler conversations have their place, but I prefer never to count anyone out until the lights go dark and they start selling off the furniture. Until then, it’s anyone’s game and it’s better to wish them well than predict fume dates and pink slips. The venture business is challenging enough.

My 2010 Predictions: A Look Back

5 Dec

Around this time each year we in the tech/venture community turn our attention to the year ahead and pick trends and themes that will presumably shape the coming twelve months.

To my mind, no view forward is complete without a retrospective on the year drawing to a close and, with it, a re-examination of themes that were ostensibly to define the year. From that perspective, let’s take a quick look at the trends I identified in my Ten Tech Trends For 2010 post from January and assess how I fared.

1. Green Shoots But No Chef’s Salad. Given an abysmal 2009 by most accounts, that 2010 demonstrated greater activity across the tech landscape—from rising public and private company valuations to overall investment pace—was hardly cause for jubilation. That said, the pace of financings, the froth in early stage valuations, and the continued strength of the M&A market surprised many of even the most bullish of observers. Grade A-

2. Physical Media dies..a little more. On September 23, Blockbuster dropped the other shoe and finally, unceremoniously—and mercifully—declared bankruptcy, thereby joining the ranks of now-defunct juggernauts Tower Records and Virgin Megastore  and putting a very public face on the continued disintegration of physical media.  Grade A

3. Strongest IPO market in (almost) a decade. We began the year with some impressive tech names filing their S-1s, or threatening to do so, but few of the most closely watched companies ended up taking the public exit route in 2010. While the pace of IPOs in 2010 was a significant improvement over that of 2009, Facebook, Zynga, LinkedIn and Silver Spring Networks all remain privately held entities, albeit very successful and very well-funded ones. To be sure, the vigorous secondary market and the continued institutionalization of that market played a significant role in enabling these companies to be cavalier about the prospect of going public. With no shortage of capital available at often sky-high valuations to companies like Facebook and Twitter, a key pressure point for CEOs seriously considering a public exit—providing liquidity to early employees and investors—was largely mitigated. Grade B

4. Entrepreneurs Reign Supreme. Facebook, inarguably the most closely watched privately held technology company, is still helmed by its 26-year old founder despite its torrid growth and its having raised hundreds of millions in capital. Groupon, which this past week reportedly turned down a $6 Billion takeover offer from Google, is considered the fastest-growing technology company in history and will reportedly generate $2 Billion in revenue this year. It’s CEO, Andrew Mason, is all of 29. The story of the ‘return of the entrepreneur’ cannot be told properly without remarking on the revival in consumer internet and how there exists renewed investor comfort and appetite for young founding teams that really understand consumer web services and products. Grade B

5. Changing of the VC guard escalates. Despite a frothy early stage market and big (still private) successes like Zynga and Groupon becoming household names in 2010, fundraising for venture firms remained challenging. One explanation offered in my January post was the lack of distributions from many venture firms for the better part of a decade. The fundraising picture did not particularly improve in 2010, despite a strong M&A market and some decent venture-backed IPOs. While first-time managers have long faced headwinds in the LP community, in 2010 many branded legacy firms struggled to raise follow-on vehicles as well. In cases where established funds were successful in raising follow-on vehicles, many of those vehicles were considerably smaller than their predecessors.  

Venture funds that moved too slowly to adapt to changing market conditions, or who have not managed partner succession adroitly, or who missed the boat on fast-moving areas of investment will continue to struggle to maintain relevancy in 2011. Grade B+

6. Vertical Social Networks Catch Fire. My position that users would “continue to demand rich content, ubiquity and connectivity of social networking platforms” has certainly been supported by the marketplace. However, the predicted boomlet in vertical social networks did not come to pass in 2010, although usage across the category expanded dramatically. That said, there were a number of recent product launches and acquisitions by the large “horizontal” social networking companies that appear to support the notion of offering robust vertical solutions with custom applications idiosyncratic to those vertical markets. Grade C+

7. EnergyTech has its Moment. The clean-tech community rang in 2010 with high hopes that a big-name IPO coming from the space would spur a wave of exits in its wake and finally quiet naysayers that felt the sector was overheated and would not generate returns to overcome the significant investments made there over the past decade. Twelve months in, Silver Spring Networks remains privately held and there is some speculation that investment pace and enthusiasm has cooled in EnergyTech as of late. Grade C

8. Early Stage VC Returns To Form. In perhaps the biggest story of 2010, early stage venture investing—particularly around consumer web, cloud computing, digital media and web services—came back with a vengeance. The year also brought new terms to the venture lexicon such as “Micro-VC”, “super-angel” and “Angelgate.” Personal note: Thankfully the BIN 38 kerfluffle has blown over and I can make the wine bar my regular post-dinner nightcap spot again. I don’t have a problem with what happened there (or didn’t happen there, as many insist.) I just wished the people in attendance that night had chosen an iHOP. Grade A

9. Alternative Fund Models Gain Momentum. 2010 undeniably brought creativity back to the structuring of investment funds. The clearest winner was the Pledge Fund, which never really went away but, rather, benefited from renewed interest in seed stage investing. While the emergence of novel fund models was partly an answer to a tough venture fundraising environment, 2010 also brought new categories of funds that were derived for specific purposes—such as to purchase early employee and angel investor stakes in popular technology companies. Grade A

10. RIP the 2 & 20 Fee Model. Tough fundraising environment or not, the 2 & 20 model is alive and well and remains baked into the subscription agreements of a majority of venture firms. That said, few new venture funds were actually raised in 2010, raising the prospect that should 2011 be similarly difficult for fundraising this debate may re-ignite. Grade C+

In summation, I’ll give myself a B+ average. A few items were clear winners and there were no glaring missteps. Share your thoughts here. In next week’s column I will issue my Top Tech Predictions for 2011.

Mary Meeker Talk at Web 2.0 Summit

27 Nov

Morgan Stanley’s Mary Meeker delivered an interesting speech at the Web 2.0 Summit on current market trends in the broad consumer internet/Digital Media space. Ordinarily, a talk on this subject from a banker/analyst would not move the news-worthiness needle enough for me to make it into a blog post, but Meeker has had a unique voice in the space for some time and the content-rich 18-minute clip gives a good overview on where the sector is and what macro trends are most in evidence.

Ten Lies Entrepreneurs Tell Investors

21 Nov

Bill Reichert, a partner at early stage venture fund Garage Technology Ventures, gave a talk recently at Dublin SmartCamp 2010 in which he offered some thoughts on how entrepreneurs often get themselves into trouble with investors with ten lies that they often tell in pitch meetings. Personally, I would say “lies” is a strong term. More accurately, these are statements that are either unknowable or that lack foundation or sufficient evidence to support them.

While the statements are largely self-explanatory, I thought it helpful to provide some additional commentary in the interest of helping entrepreneurs understand why investors have a difficult hard time finding these arguments credible and why, in most cases, it’s best to simply avoid making them altogether.

1. Our projections are conservative

This kind of argument typically lacks foundation. What is a conservative estimate in a new industry where much is unknown about the growth path of companies in this space? Are there reasonable comps to reference? A better approach is to build sensible, data-driven financial assumptions and make sure they are supportable.

To be clear, making aggressive growth forecasts in a financial model is not a deal-killer. Indeed, venture investors want to see the potential for explosive growth in the business and will likely not invest if they are not convinced that the business can become a juggernaut. That said, whatever growth assumptions are made should be grounded in some logic and consistent with how the industry functions.

 2. Our target market is $56 billion

Are there $56 billion markets? Of course there are. That’s not the issue. Having a large market is one of those necessary but not sufficient components to securing funding. An entrepreneur must also make a compelling case for what portion(s) of that large market are truly addressable, how the company intends to attack those addressable segments of the market, and, once a beach head has been secured and early validation has been achieved, how the company intends to roll out its solution more broadly.

3. We have a world-class team.

Sounds terrific. Based upon what, exactly? How are we defining world-class?  This is just sloppy semantics. Like the word “genius”, “world-class” is one of those phrases that is bandied about cavalierly in the start-up community.

Let the investor be the one to judge how impressive the team is. Insisting that the team is world-class at the outset won’t impress investors to suddenly embrace it as gospel.

4. Our average sales cycle is 90 days.

There are few sales cycles this short, so insisting a company can enjoy that privilege will strain credibility. Entrepreneurs should shy away from making this kind of statement. As in #1 above, making this argument is not necessarily a deal-killer nor entirely wrong if it is indeed the case for this company and this market. However, if this argument is made then the entrepreneurs need to be prepared for a lot of collective eye-rolling and some pointed questions demanding data to support it.

5. We have no direct competitor.

This is perhaps the one comment that is most likely to persuade me to end a pitch meeting early and abruptly. There is always competition. Before pitching any investor, an entrepreneur should have thoroughly investigated the entire competitive landscape and identified not only current competitors (direct or tangential), but also developed an understanding of all the potential competitors that could enter the space at any moment. Like any good chess player, an entrepreneur must be thinking several moves ahead. She should ask, ‘Who could easily get into this space? Are there incumbents in tangential markets that could extend their reach into the market? How would our company compete with those better-financed, more established incumbents and their competitive solutions? What is defensible in our solution and our approach?’

If the start-up is fortunate enough to obtain funding and if the company executes well, one thing is sure to happen: if there wasn’t much competition previously, there will certainly be fierce competition now. A market entry plan should incorporate not only the thinking around how to enter the market but also how to stay competitive once new entrants emerge—both other start-ups and incumbents extending their reach.

6. No one else can do what we do.

This statement strains credibility because it assumes that the management team has hit upon something no one else has actively considered nor has the capabilities to successfully execute. In reality, this is very very rare.

7. All we need is 2% of the market.

Investors are not interested in a company that can be content with 2% of the market. As I like to say, “You are either in the lead, in the hunt, or in the way.”  Venture investors aren’t just interested in backing potential market leaders; they must be backing potential market leaders. There is little room for ventures that can, at best, be a nice little business. There is nothing wrong with “nice little businesses,” mind you. Most small business in this country would fall into that category, but that does not make them appropriate venture investments.  

8. We’ll be cash positive in 12 months.

This argument is problematic on a number of levels. First, it strains credibility. Few businesses can achieve cash flow positive one year after launch. Second, if the company hits this milestone this quickly it raises a lot of uncomfortable questions about whether this business is really that attractive, whether this market is that substantial, and whether the management team is being penny wise and pound foolish by focusing on achieving this at the expense of investing in growing the business. 

While it may appear counter-intuitive, most investors are not primarily focused on getting a company to achieve cash flow positive in a narrow time frame. Their primary interest is in building a substantial company. This usually means embarking upon a torrid growth path which, in turn, often means that a great deal of capital will be necessary to fuel and sustain that growth which will, in turn, often push out the timeline of becoming cash flow positive.

9. I’ll be happy to hand over the reins to a new CEO

This is one of those ‘live by the sword, die by the sword’ dilemmas for entrepreneurs. Typically, one of things that influenced the investors to consider investing in the entrepreneur’s business was the entrepreneur’s sheer determination and tenacity. Investors love vigor and drive in a start-up CEO. However, that zeal also often comes in a personality not easily persuaded to step aside in the face of challenges and outside pressures. A CEO who is so invested in the business and considers it her baby is not likely to readily hand over the reins once investors feel a change is necessary at the top. That said, a good chief executive must grasp the effectiveness of everyone on the team and when that team member may no longer be the right fit for the company’s needs at that time. This is best communicated through actions over time, not through empty pronouncements.

10. Our contract with [Big Company] will be signed in two weeks.

Investors who have been involved in partnership agreements will agree that when it comes to large companies nothing takes two weeks.

The real danger in raising this argument, and many of the previous ones, is that it signals to the investor that the entrepreneur is naïve. This is, perhaps, the greatest risk to the entrepreneur. Investors are quite forgiving. They understand that there are many unknowables; that market conditions can change at any moment;  that exogenous factors can creep in and fundamentally alter a business’ prospects. This is par for the course. However, what is critical for the investors is for them to feel supremely confident that the management team is capable enough to be nimble and to navigate through the speed bumps as they occur. What truly alarms investors is the sense that an entrepreneur is not savvy nor experienced enough to know how to react to these headwinds nor how to think about sales cycles, nor what typical growth expectations should be for a company in this market, etc. Gaffes such as these can effectively kill a financing because they can have the effect of undermining the investor’s faith in how the entrepreneur will manage the business post-financing.

Candid Doerr, Wilson talk @ Web 2.0 Summit

17 Nov

Proving one man’s bubble is another man’s boom, venture capitalists John Doerr and Fred Wilson offered a refreshingly candid talk on the current venture market. Not surprisingly, given the focus of the event their perspectives were centered on the broad consumer/digital media space. That said, many of the insights — particularly around the health/attractiveness of public offerings for tech companies, the “nexus” of innovation (the NY vs. Silicon Valley debate), and other topics– apply easily across broad IT. The video runs about 37 mins, but is worth watching.

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