Taking Stock of Our Netscape Moment

The LinkedIn IPO came out with a bang Thursday and in the intervening 72 hours the offering has already provoked sweeping re-assessments and re-appraisals of technology markets in general and the prospects for consumer web/social media IPOs in particular. It is hard to argue with success; and LNKD was nothing if not a wildly successful offering. Capital markets elites will bicker over some of the “inside baseball” issues having to do with “small float” mechanics or allegations of mispricing, but such quarrels are really just noise in the overall discussion.  LNKD was the largest technology IPO since Google in August 2004 and provided the much-needed confidence builder for the technology sector that market participants were hoping for. While there have been a number of well-received tech IPOs in recent years – OpenTable, Green Dot, to name a few — LinkedIn was arguably the highest profile name to go public in the past seven years and, as it happens, was one of the fabled five horsemen of consumer web/social media fame — a loose group which typically includes Facebook, Zynga, Twitter, and Groupon — that garner the greatest amount of attention from the media and the highest trading volume in the secondary market.

To be sure, it is hard to overstate the serious ramifications of a failed LinkedIn IPO. That the LNKD offering was an unqualified success bodes extremely well for the long-awaited offerings of Facebook and its peers and provides the proverbial rising tide to lift the respective boats of many lesser-known names in technology. The market validation accorded the LinkedIn offering will have a coat-tail effect across a broad swath of social media companies and venture investors will fast-track plans to find a public exit for many of these companies.

While it is still too early to divine what the long-term impact will be of the LNKD offering, it is undeniable that the morale boost it gave to founders and stakeholders is palpable. The IPO window for tech had been so constrained for so long that there will be some natural reassessment of IPO plans for dozens of companies that were all but assumed to be eventual M&A targets. This is a good and healthy exercise. The notion of “being a public company” has taken a drubbing in the past decade for any number of reasons — too expensive; too much regulation; required disclosures that would only help competitors; plenty of capital already available to good companies in the secondary market; management attention would be siphoned off to cater to Wall Street/institutional demands, and so on.

While the debate over being a public company vs. staying a private one is perhaps a topic for another post, I am in the camp that believes that many of the anti-IPO arguments most often raised in recent years are either overblown or are rapidly losing their relevancy. There are intangible benefits of being a publicly traded technology company that most criticisms — even the valid ones — fail to adequately counter. In the case of LNKD, getting a lofty public market valuation — and, by extension, validation — was critical for the company and for the dozens of social media/Web 2.0 companies that will all but assuredly follow LNKD into the public markets over the coming year or so. The LinkedIn IPO validated recent secondary market valuations of the company and provided the critical corroboration that venture investors and secondary buyers were not simply drinking their own Kool Aid. In time, owning a position in LNKD will become important for many large financial institutions and asset managers, which will in turn support the company’s and the sector’s long-term valuation as well as buoy the prospects of other talked-about social media/consumer web companies as they consider wading into the public markets. And that is a very good thing.

A Bubble over “Bubbles”

 

Perhaps no subject in the venture/tech start-up ecosystem over the past year has received greater attention–and been the focus of more collective hand-wringing–than the issue of bubble/not a bubble. With little argument, there are varied opinions on this and fairly good analysis on both sides. For my part, let me come right out and say it: Yes, we are in a bubble–it is primarily a bubble of prognosticators and market participants of all persuasions tripping over themselves to be the first to call what is occurring in technology markets a “bubble.” Taking a position on this subject might be great for bloggers seeking to drive traffic and for talking heads and Wall Street analysts looking to increase their respective profiles by saying inflammatory things but it hardly gets anyone closer to a reasoned understanding on what is occurring on the ground and, more importantly, on what lies ahead.

Like all good arguments, there are core issues worth having a spirited debate over; and then, there are lots of sideshow marginalia that have little bearing on what is actually going on and what actually matters. [AngelGate, anyone?]

FDR was on to something when he announced that the only thing we had to fear was….(wait for it)….fear itself. FDR knew something about the power of language. The power of language is particularly relevant here because I believe one cannot have a meaningful discussion about current market conditions and the behavior of some market participants without first clearly defining our terms. There are healthy, albeit heated, markets and then there are bubbles, and one does not necessarily beget the other.

I think I speak for many tech market participants in declaring that “the B-word” will be inextricably linked to the 1998-2001 boom/bust cycle that came to define the technology/venture landscape for many participants that were there to experience it first-hand. As such, given the negative connotations and the fairly brief historical context we are dealing with, the word “bubble” is loaded and, hence, problematic. This is not to suggest that one cannot use the word; I simply believe that tossing the word around cavalierly whenever a market becomes heated and — egads! — frothy is overkill and, as it happens, not terribly descriptive.

Fortunately, there have been a lot of smart, experienced people developing thought leadership on this issue. Diverse voices such as Mike Arrington, Howard Lindzon and Forbes’ Eric Jackson have all made impassioned arguments worth reading. I could get into an itemization of points and counter-points on where I am coming out on the question of bubble/not a bubble, but it would be a lengthy exercise and, at the end of the day, something of a transient position given the fast-moving environment we are in.

However, I am fairly confident that while there are some broad similarities between the current environment and the 1998-2001 period, few of the underpinnings behind the ’98-’01 bubble appear to be in evidence in the current environment. In short, there are far more dissimilarities than similarities and those differences are profound: much better companies, real (and often, huge!) profits, better monetization and distribution, true scalability, lower development costs, and on and on.

Additionally, the market froth that exists today concerning valuations is still contained within a relatively small segment of the broad technology landscape and among a select group of (largely) professional investors. By their very nature as “consumer-focused” enterprises, consumer internet companies capture the public’s imagination and garner the greatest amount of attention from the media. [Last I checked, no one was planning a major Hollywood film about the founders of SAP.]

Additionally, much of the current froth in valuations has been primarily directed at a handful of high-profile companies (Facebook, Zynga, LinkedIn, Groupon, et al). While it is true that we are now seeing soaring valuations for some very immature companies across the consumer web space, there is little evidence to suggest that this is driven by anything more than healthy competition among investors and by excitement over the rapid pace of innovation. Given the boomlet in new seed stage firms, “super” angels, and in legacy venture firms that have recently augmented their efforts in consumer web investing, this is to be expected.

All this aside, this does not suggest that I am somehow Pollyanna on the current state of consumer internet investing. There are certain areas that I am watching closely and I do have some concerns. As Fred Wilson has suggested, some investor behavior has become alarming. To my mind, certain investors — but still a minority of them — are getting skimpy on diligence and on the need to be methodical in an effort to move quickly to win certain hotly contested deals. Other investors are caving too quickly on terms or agreeing to extremely generous provisions for founding teams in order to win coveted deals. Again, this is just my opinion and is largely anecdotal, but I am hearing enough similar things from other investors that suggests that I am not alone in that view.

I am also wary about the rapid evolution of the secondaries market and with some of the private stock trading platforms that allow early investors/employees to sell their shares. I think these services are, by and large, great tools for investors and for start-ups but some discipline needs to be employed here so things don’t get misaligned. No doubt, regulatory agencies will get more involved as these secondary “paths” get further institutionalized and begin to bump up against current outmoded regulations concerning investor limits and the like. On balance, however, I think these issues, while concerning at times, are self-correcting.

In summation, I think the consumer web is perhaps three or four innings into an extended period of growth with the lion’s share of attention and the highest valuations being accorded companies that are innovating well and rolling out products and services that consumers are passionate about. Jeff Bussgang posited recently in a post that he felt we were in a “bubble,” but that perhaps the question we should ask was where in the bubble cycle we were–perhaps 1996, versus 2000. That is a clever way to nuance the issue although, again, I think employing the term bubble implies that once this market surge cools there will be catastrophic consequences. While there is reason for pragmatism, discipline and caution, given what I am seeing today in the marketplace, I am not finding evidence to support that.

MySpace On Life Support?

MySpace CEO Owen Van Natta is unceremoniously shown the door nine months into his tenure and GigaOm‘s Om Malik and others begin calling it yet another irrefutable sign of the great and inevitable unwinding of a once-mighty web property. Malik’s piece is both persuasive and blunt. There is little argument that MySpace has been adrift for some time now and that parent NewsCorp‘s interest in shedding most of its web properties has been a poorly kept secret. Regardless of where MySpace goes from here, what should strike fear in the hearts of many Web 2.0 venture investors and acquirers of web properties is the inconvenient truth that once these companies begin to go bad, righting the ship is an almost impossible task regardless of who is deputized with that thankless duty.

A quick chronology of the broad social networking/social media landscape since early last decade bears some examination as it helps underscore a bit of the brutal Darwinism at work here. A “first wave” of Web 2.0 companies like ICQ, eGroups, Evite and others begat a “second wave” comprising companies such as Friendster and LinkedIn. As has been well-chronicled, Friendster captured early leadership in the burgeoning social networking space, going from 6 million to 20 million users in the space of a year and obtaining venture backing (and instant credibility) from storied firms such as Kleiner Perkins and Battery Ventures. During this nascent period, it was not entirely clear what users wanted and valued from a social network platform, so there was a good deal of iteration and guesswork on what features would be most important to users. The conventional view, offered with the convenient benefit of 20/20 hindsight, was that Friendster erred by not offering the rich user experience that users were demanding and had trouble managing its own growth. MySpace came along and effectively leapfrogged past them, offering pix, blogging, message boards, and other features that users were clamoring for. This clash of the Titans was all playing out at a time when Harvard undergrad Mark Zuckerberg was shuttling back and forth between Calculus and English Lit classes with what would later become current industry behemoth Facebook little more than a crude prototype on his dorm room laptop.

What a difference a few years makes. It’s been said that in the web space one lives by the sword and one almost always eventually dies by it as well. In my view, these words were never more true than when discussing social media/networking platforms. The current early obituaries for MySpace may strike some as a bit of gallows humor and crassly premature, but there is little denying that should MySpace succumb to its current troubles or be reduced to a shell of its former self it should serve as a wake-up call for companies such as Facebook and Twitter. MySpace almost assuredly hurried the demise of Friendster, and Facebook and Twitter could well be responsible for many of MySpace’s current woes, but the dynamics behind this Darwinism has not changed in any meaningful way. The ‘hot, new nightclub’ problem I wrote about some time ago that particularly afflicts social media/networking companies remains unabated without any particular company resolving this issue with any satisfaction. Social networking platform users remain tremendously fickle, are completely portable, and will almost assuredly drift to newer platforms, technologies, and devices.  The key question will be, ‘is there a second Act for these companies?’ Can today’s social networking/media juggernauts continue to expand their businesses fast enough so that once an emerging player begins whittling away users (as is surely inevitable) these companies will have successfully built other core products and services to evolve and remain relevant?

 Facebook and Twitter have made enormous advances and should be credited with continually exploring new ways for users to connect, share and (in some cases) transact on their platforms. Still, the elephant in the room gnawing on the ottoman is now starting on the curtains. Even the nicest, swankiest restaurant in town does not remain on top for long. New establishments pop up, cannibalize the business by wooing diners wanting a flashier, trendier experience, and the older restaurant must evolve or close. Savvy restauranteurs know this and always bake into their financial forecasts a honeymoon period of high growth and revenues followed by a twilight period of declining business and, typically, eventual closure of the business. It’s somewhat remarkable to me that social networking platform start-ups continue to pitch me and other venture investors with investor PowerPoints and financial plans that seem to imply that they will never be outmaneuvered by a newer competitor offering a flashier, if not better, mousetrap that will trigger an exodus of their users. They need to start.

10 Tech Trends for ’10

As the calendar flips to a new year and decade, the temptation to opine on trends for the year ahead becomes almost a parlor game for those in the technology sphere. Predictions in this industry are inherently broad. Oftentimes, so many things must work in tandem for a prediction to play out in the time allotted that one must give prognosticators partial credit if even some notion of what was predicted reasonably pans out. With that caveat, I offer the following — not so much as predictions for the year ahead but as a collection of things I will be watching closely over the next twelve months.

1. Green shoots, but no Chef’s Salad. Saying 2010 will be a better year for technology companies and their investors than 2009 is hardly a bolt from the blue. Fortunately, there is now compelling evidence that the IT backlog is loosening up and businesses are investing again in their IT infrastructure which should provide a nice collateral uptick for devices, software, services, and support. In this new, frugal world, a disproportionate share of the spoils will go to companies offering scalable solutions, often in the cloud, that are cost-conscious, flexible for their customers, and customizable on the fly.

2. Physical Media dies..a little more. Been passing a lot of empty storefronts that were once a Blockbuster Video or Virgin Megastore? It will only be getting worse in 2010. Not a believer yet? Pick up a newspaper. No, wait, on second thought that’s not so easy any longer either. This also applies to new technologies replacing our old ways of consuming media. Amazon’s Kindle is a runaway hit and Apple’s Tablet is enjoying buzz not seen since the debut of the iPhone. These might prove to be the first real wave of consumer devices (after so many flops) to finally live up to the promise of shifting media consumption and media spend from the brick-and-mortar to digital world.

3. Strongest IPO market in (almost) a decade. The moribund exit environment appears to be improving, albeit not as quickly as most in the venture community would like. While M&A continues to dominate as the traditional exit path of least resistance, IPOs are becoming more numerous as well. Prepare to see 2-3 high-profile tech companies go public in 2010 which will have a positive effect on overall tech valuations and provide much-needed coattails to other public technology companies in waiting. Possible 2010 IPO candidates? Facebook, Zynga, LinkedIn, Silver Spring Networks and a handful of smaller cleantech and game companies. If only a few of those marquee names actually consummate public offerings, 2010 could be the biggest year for tech IPOs since the Google offering of 2004.

4. Entrepreneurs Rule Supreme. In a December 2007 post, I offered the notion that entrepreneurs were becoming increasingly relevant again. This came after several years of professional CEOs regularly being brought in by frustrated investors to replace ostensibly prodigal 20-something founders that investors felt were ill-suited for those ascetic post-bubble years. While ‘gray hairs’ and competence will never go out of fashion, the unique qualities of a compelling, charismatic founder who can envision and develop products that can change the world cannot easily be overstated. The Marc Benioffs, Mark Zuckerbergs and Sergey Brin/Larry Pages of the world are often the builders of companies that most directly shape our world and create the greatest value for investors. If Facebook ends 2010 as a multi-billion dollar market cap publicly traded company, helmed by its 24-year old founding CEO, it can only bode well for young, visionary entrepreneurs everywhere and for venture firms willing to take a chance on first-time CEOs with potentially game-changing ideas.

5. Changing of the VC guard escalates. Talk has swirled for years now about a winnowing of venture firms, to little effect. 2010 may change things. Now that ’99 and ’00 vintage funds have wound down (or will shortly) there is a bit of a case of the emperor’s new clothes. LPs can now see in the harsh glare of red ink on white paper how poor many investments in some storied venture firms fared over the past decade. The old saw that ‘no one ever lost money buying IBM’ was also a prevalent view among some LPs who, overly focused on brand,  generationally backed storied firms almost out of habit. This trend is on the wane as limited partners get more serious about sharpening their pencils and closely evaluating what firms they want to be investors in over the new decade. The ivy league venture firms ten years from now will not likely resemble those considered ivy league firms today. Limited partners that take a chance on younger venture firms doing riskier, earlier deals may well be rewarded when the ball drops on 2020.

6. Vertical Social Networks catch fire. Some argue that ICQ and Friendster begat Facebook and Twitter, and that Facebook and Twitter have sired companies like Athleon, Gowalla and Foursquare. Sure, Social Networking has gone wireless but it has also gone vertical, and usage is exploding. Users are demanding the rich content, ubiquity and connectivity of social networking platforms but they are also demanding richer tools more focused on their specific needs, like coaches who use Athleon to communicate with their team’s players, parents, and sponsors as well as using the platform’s suite of applications like playbooks, stats trackers, game film storage, and the like.

7. EnergyTech has its moment. Sure, biofuels and hybrid engines may be more intriguing (and capital intensive) but the “energytech” sphere of cleantech, such as the smart grid arena and Demand Response companies like eRadio, is where many of the first exits in the broad cleantech space are likely to come. Watch investment into the space increase substantially in 2010 with participation from unlikely sources.

8. Early stage VC returns to form. Building companies from the ground up is sexy again. Perhaps it was the bloom coming off the buyout rose in 2008, but many investors are realizing that clever financial engineering and interest rate arbitrage plays do not generally build great companies of lasting value. Limited partners who shunned early stage venture firms after the dot-com bubble are returning in force and looking to again be part of the creation of the next generation of great technology leaders. It’s hard to buy your way into that party after the fact; one needs to be there at the beginning to truly realize substantial returns. Just ask Ron Conway.

9. Alternative fund models gain momentum. I’ve spoken of Pledge Funds and Search funds and a variety of other venture/private equity hybrid structures that have gained prominence in recent years. The ’08 financial collapse has only raised their profile. As LPs pressure private equity and venture fund GPs on everything from clawbacks to management fees, more GPs are going off the reservation and debuting new funds with LP-friendly terms and structures. Some are a bit hyped, but many have some real merit and can address specific needs of certain LP groups.

10. RIP the 2 & 20 Fee Model. As a follow-up to #9 above, the traditional 2% management fee/20% carry structure that has supported the venture industry for decades is now under attack and is not likely to survive unscathed or unaltered. True, there have been previous attempts at LP mutinies that have come to naught, but this time LPs seem better organized and more aligned than ever before. They also now confront an industry somewhat chastened by a tough decade and willing to re-appraise prior assumptions about how to work with long term investors than was the case during the dot com haze when we rang in the year 2000. Oh, what a difference a decade makes.

Social Climbing in Social Networks

Accepting Uncle Leo's friend request can bring its own set of problems for social network users

I had (briefly) planned to title this post ‘My Facebook friends can beat up your Facebook friends’ but thought better of it. Regular readers of this space will know that I am particularly conflicted when it comes to social networking companies. On the one hand I am increasingly impressed with how viral the better social networking platforms have become, how they can augment communications between broad groups of people, how they can facilitate social group overlap and instant information exchange, and how they can become–broadly speaking–quite robust as a communications tool. On the other hand, I’ve also found most to be vastly overvalued by the capital markets, too focused on branding and customer acquisition without sufficient development of applications and tools to help drive lasting, “sticky” value to users, and too vulnerable to being displaced by other social networks.

All that being said, as a lay consumer, I am endlessly fascinated by how emerging technologies typically alter cultural dynamics–both positively and negatively. We have all heard the lamentations in the popular media about how ubiquitous cell phone usage has turned us into a nation of unrefined bufoons blathering away about that evening’s dinner plans in line at the Post Office. In recent years, that might have prompted unapproving scowls from other patrons, but too often in today’s climate those “other patrons” are now too busy recounting their own details of last night’s cocktail party or their upcoming dental surgery on cell phones of their own to bother pointing out your faux pas. To hear talk radio tell it, it’s all become one big cacophony of jackasses.

Accept that premise of not, it’s hardly surprising to witness the crumbling of social peccadilloes when seemingly everyone is engaged in the same untoward behavior without any particular rebuke from society as a whole. Those of a certain age might remember when it was almost unthinkable for a gentlemen to enter a dining establishment sans blazer…and sometimes even sans blazer and tie. If one did, the penalty was to end up wearing the house blazer they kept in the coat closet, which typically was ill-fitting, came with a silly embroidered crest over the breast pocket, and had some vague coating on the right sleeve reminiscent of dried fettucine alfredo.

But times do change and in the current climate most dining establishments, with the exception of the most formal of restaurants, would fail if they insisted on adhering to that dress code standard today. Nowadays, in any given restaurant in New York, San Francisco or Los Angeles, the guys in the tailored suits are often not the power players—they are the accountants, agents and media consultants who work for the billionaires sitting next to them in the same booth wearing velour track suits, ironic T-shirts, and three-day razor stubble.

In the web 2.0 world, one social “slight” becoming increasingly evident among social networks has become the winnowing or “window-dressing” of Friends’ Lists. It’s subtle, but pervasive. One particularly cynical practice is for a new user to a social network to carpet bomb their friends’ email boxes with friend requests in the interest of getting a critical mass of friends and contacts and, by extension, links to other–ahem–more important friends and contacts. Once established the user then begins to quietly push the first batch of friends outside the herd, if you will. Indeed, de-friending has become such a common issue that a new wave of widget providers are rolling out new tools to manage this practice–secretly, of course.

To be sure, winnowing friends’ lists is to be expected in this new age of social networks. In some cases, it would be inappropriate not to allow the practice–particularly when it comes to removing an ex or former boss whose continued access to your updates and profile would be–gee, I don’t know–awkward? But I am not referring to that practice. Indeed, my comments are specifically around the ‘social climbing’ aspect of social networking. As more people use their social networking page as a business tool, this practice will only become more common. Two independent consultants who work with the tech start-up community confessed to me recently that they window dress their LinkedIn and Facebook pages quite regularly. Their rationale? A lot of their business comes from other VCs and successful entrepreneurs, so they felt that as they were Googled and Facebooked and LinkenIn’d by prospective employers, they wanted those prospective employers to see an impressive array of bold-faced silicon valley VC and CEO names…not crazy Uncle Leo. As such, these advisors strategically “friended” every tech industry notable, bold-faced or not, that they came across in the hope that they might be able to get to other, even more notable, bold-faced “friends” through that contact.

Cynical as it may appear, the practice of window-dressing friends has been going on since time immemorial. People were quietly dropped off the Holiday card lists,  return calls to unwanted parties–when returned at all, that is–were strategically timed in order to get voicemail, messages were conveniently lost by the maid, or the new admin, or due to “bad cell coverage.” We are all, to a certain extent, judged by the company we keep. Guilt by association, if you will. What web 2.0 social networks have done is simply take all the subtlety out of it. Furthermore, truth be told, we all do it to a certain extent. Next time you open your Facebook or MySpace or LinkedIn profile, chances are excellent that you’ve got a few friend requests sitting in your in-box aging like a fine wine. You are not ready to archive them quite yet, but you are not ready to admit them to the party either lest they make an ass of themselves once inside, put wine glasses down on your expensive stereo equipment, and generally embarrass you. So, they stand there behind that red velvet rope, waiting for your decision. I say, admit just about everyone whose call you’d return in normal circumstances. If they don’t merit that level of “friendship”, then listing them as a friend at all rather distorts the entire concept.