Category Archives: investments

Venture Capital: Fred rules but his 3x rule is too optimistic! ?

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Fred Wilson’s got a fascinating post about his history of investments over at Union Square Ventures.   Of course he’s got every reason to post his results, which appear to be exceptional although he has left out a key factor in his little analysis, which is time.  I note over there:

Fred, these are impressive results and to my understanding much better than average VC returns, which are negative, right? Don Dodge posted min-analysis some time ago where he wound up concluding there was a lot more VC failure than is normally thought.

There are elite guys like you and Jeff Clavier who “beat the averages”, but isn’t “making money” with startups an unrealistic expectation, since those VCs and companies that succeed are still around to talk, but those who fail are not blogging about the burgers they now flip to pay the bills?

I’m also noting that without “time” as a factor the return is not meaningful. 3x is easy….if you use a 15 year horizon!

At a very modest annual return of 7.33% one would expect to triple an investment in 15 years.     A 10% return will leave you with 4.5x your initial investment in that same time frame.    More dramatically, if time is not a factor then I’m happy to guarantee you a return of, say, a million percent.  It’ll just take a while.

This isn’t to suggest Fred isn’t a great investor because I think he is the exception to the normal rule in Venture Capital, which are low returns.   After I wrote about Don Dodge’s suggestion that average VC returns appear to be negative  Jeff Clavier also suggested in a blog comment here that only the top 25% of VC firms are averaging positive returns, and this really shook up my understanding of things.

Yahoo! WAKE UP!

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It’s very frustrating being a Yahoo shareholder.

Not because Yahoo isn’t a good company, in fact Yahoo is a *great* company.

Not because Yahoo doesn’t seem to “get it”, Yahoo arguably “gets it” better than almost all other companies in terms of Web 2.0, the social networking space, and in terms of the importance of open architectures and developer support.

Not because Yahoo doesn’t have any of the lucrative search market share. They are the clear 2nd place in search with huge search activity and over 20% of global internet search traffic.

It’s frustrating because despite all the advantages, Yahoo just can’t seem to capitalize on all these advantagesto turn a good buck, monetize the site to full potential, and increase my share price. Google, with total traffic levels about the same as Yahoo, has a stock capitalization some *FIVE TIMES* that of the company with arguably very similar potential for profits.

Little internet companies and even many very big ones have a good excuse for failing in profitability – online biz is a cold and cruel world and for all the but the huge players everything can turn on a dime. Yahoo, on the other hand, has no good excuse for failing. They are a market maker in terms of online search, global internet reach, online video, and …. this just in for me …. they are HUGE in the Social Networking space. Yes, that would be the social networking space everybody is so excited about. What do I mean by HUGE? Let’s review this graph from Compete.com via TechCrunch.

First we need to note that Compete.com is not even remotely a perfect measure, and also adding “unique visitors” in this fashion is counting some folks twice. Also, they are listing sites like Geocities that are arguably not social sites, though I’d argue they could be “open socialed” quickly with an effort in that direction. Since the overlap at these traffic levels is probably not a very big deal, and also assuming they spend time as if the Yahoo properties are separate sites their ad potential may be the same as if they were different folks, these numbers are important and relevant.

So, the big players first:

Myspace: 72 million unique visits in October

Facebook: 33 million

Yahoo: 38 million …..

<screeching reverse halt noise here>

What? Yahoo has more social traffic than Facebook?! Yes they do if you add Flickr and Geocities and Yahoo Groups.

Aside from the fact that Caterina and Stuart and the Flickr gang are probably thinking they sold out a bit too cheap at only 20 million, Flickr is an astounding success with some 14 million users and growing. Personally, I’d rather hang out at Flickr than Facebook anyway.

So, where does this huge number of users in the Yahoo social networking juggernaut leave us?

Frustrated baby, frustrated……

Kindle – market mini-analysis

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OK, I just got it. The Kindle does have a market. Bezos is correct of course that the reason books persist in the digital world is their ergonomic appeal. With the Kindle he’s working to maintain that book advantage while adding the digital improvements modern technology can offer – that is a library of Alexandria at your fingertips.

Yet the obvious challenge here is what I’ve noted before – laptop users won’t switch to a device that offers ergonomic improvements but less functionality and more cost, and non-tech people won’t adopt tech approaches this quickly. So, who does that leave in the Kindle market? Jeff Bezos is one person, and I think he’ll buy one. I’d probably buy one if I had money to burn on a redundant but somewhat better device for my reading.

So the Kindle market will be heavy duty book readers who *also* like technology *and* have a fairly high threshold of disposable income. This is not a trivial number of people, though it’s probably only in the neighborhood of about 1-2% of the US population. Let’s assume that the number of people who are heavy readers and would like a Kindle and can afford a Kindle are 2% of the US population. That’s a potential market of 6 million people, which does not seem all that problematic. If they can penetrate 10% of this market and sell 600,000 devices along with the many books people will buy at 9.99 maybe it won’t lose money, and perhaps even could evolve into a device with broader appeal.

But I wouldn’t bet on this.

Blodget: Microsoft implying they may be poised to buy Yahoo

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Henry Blodget’s got an interesting take on the recent UBS talk by Microsoft where they suggested a plan to capture “30-40%” of the search market over the next several years.  Although the literal reading of this does not seem to suggest a Yahoo buyout, Blodget is correct that it is simply absurd, even given the normal Microsoft bluster factor, for Microsoft to think they can capture this much of the market in a short time …. unless they buy Yahoo, which as Blodget points out gives them all this, and more, instantly.  

Given Yahoo’s modest capitalization of some 30 billion, and Yahoo’s huge online prospects (they have similar traffic to Google but with far poorer monetization of traffic), it would not be prohibitive for Microsoft to nab them.

I’ve noted before this would be an excellent move for Microsoft.  It still is.

Disclaimer: I’ve got some Yahoo shares.   Not that they are doing me much good right now.    But they’d probably jump in value if Microsoft bought them.   Did this influence me writing about this?   I don’t think so, but since money is the root of all evil you can’t really trust me on Yahoo analyses, disclaimers or not.   Also important is that nobody can predict the market swings with any forward looking reliability.   So there. 

Google Phone is coming, the gPhone is coming!

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The Wall Street Journal has (ummm – just figured out?) that Google’s phone ambitions are substantial.  It’s not yet clear if they’ll become their own huge phone company, but I’m guessing they will and that they will do a good job solving some of the nagging problems that have been experienced by .. lets see now … 99.9% of all cell users?    I do not think this necessarily bodes well for Google financially though, and release of hardware and a national cellular network may be part of their “jumping the shark” moment.    Google has thrived as a company that could ramp up as profits rolled in.   Not so with mobile, where they will have to anticipate a lot of profit and incur huge capitalization costs in a “bet” that they can capture enough of this market to turn a big buck.     Clearly Google is already going to influence this market quite a bit by spearheading the open handset alliance and other open architecture initiatives, but it’s not clear their bottom line would have a huge positive impact even when you anticipate the revenue from advertising (currently small but sure to grow) and revenue from subscribers  (currently huge but capital and labor intensive).    

I’m torn between thinking Google clearly will fix many technical challenges with the hardware (I see even cheap phones as iPhone clones with great mapping and data and more), but Google has done a simpy *terrible* job of basic customer service over the years, feeling that if a problem solving thing can’t scale up then they won’t put much energy into that problem.    Typically this has related to advertiser problems with adwords and webmaster problems with websites.  Google has made some improvements as they hired legions of people to deal with customer service, but I cannot see Google handling millions of calls along the lines of “now, which button do I press to dial my sister in Toledo?”.  Google culture is not compatible and will become impatient with the slow, labor and capital intensive mobile landscape.   Maybe they’ll change it into something better.    Maybe they won’t.

In any case they’ll bring some great phone online and as I’ve noted before I’m very excited about that.

The Social Network Reality Show: High stakes, big money, false rumors.

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The game is social networks.  The stakes are very high, and the news and rumors are flying fast, furiously, and inaccurately.   Here is the latest in the saga of Google’s Social Networking entry which, with Myspace’s participation, is the new Social Networking juggernaut (though it remains to be seen how all the participants will use it). 

More on the Open Social vs Facebook battle for the hearts and minds of developers and, far more importantly, users:

1)  After a 240,000,000 partnership with Microsoft the blogs (including here) lit up soon after suggesting that Facebook recieved another 500 million from two other private groups.   This was false.   It is very conspicuous in my view that the rumor rose and spread so fast, and that Facebook did nothing to quell that rumor.  This news is still shaking out over at TechCrunch which reported the rumor of the 500 million and now reports it was false.   Another example of how news at the speed of real time may not be news at all.

2) Google says Open Social is open to Facebook and all are welcome (I believe them).

3) Facebook says Google was not keeping them in the loop on Open Social (I believe that as well)

4) Facebook says they may join the Open Social movement, but suggest they have their own great stuff coming shortly.    I’m skeptical they can “out open” Google, though they probably could come up with some great new social networking applications quickly.  

However on balance I think Facebook really is in big trouble here.     Much of the recent hype – which was overdone anyway – assumed that Facebook would be the key beneficiary of the boom in social networking.   The reasoning suggested that although Myspace is  bigger than Facebook it was a “closed” environment, favored by a demographic that has far less value to advertisers.    Facebook, that thinking went, will continue to grow explosively, open up gradually, target advertising very directly, and become the dominant social networking platform. 

Then there was Facebook’s refusal to sell to Yahoo for a reported 1+ billion.  This was followed by big negotiations with many key players, culminating a (much overhyped) 240 million deal with Microsoft to cooperate, run MS Live searches, and drive some MS and Facebook advertising.    Then came the false rumor of 500,000,000 more in capital which for many seemed to solidify Facebook’s valuation of 15 billion – a somewhat sloppy projection of the Microsoft partnership price.

So, what is Facebook worth in an Open Social world where even Myspace is a Google partner?   No, the answer is not 15 billion.

Facebook chalks up another $500,000,000 ::: UPDATE – NOT TRUE!

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 Update:  This story was FALSE.   Facebook had an MS deal but not additional capital

Facebook founders were still sipping champagne from their 240 million deal with Microsoft as they scooped up 500 million from two hedge funds yesterday.   I’m not clear yet if the valuation was the same but presumably this was all a related deal, and Facebook is now solidly valued at 15 billion.    WoW. 

That’s a lot of money, especially when you recognize that the value is all in people like …. me and you.   Facebook sold our eyeballs to advertisers for something like  $175  per user eyeball.   15 billion / 42 million users   Jeez – I think they are cheaper on Ebay!

[No, this really is not a legit metric – investors are placing huge value on Facebook’s team and future potential more than simply the users, though users are the key to any social network kingdom as the information serfs, and deserve more respect from the social network kings and queens and capitalists]

Marcus at PlentyofFish always has great insight about the relationship of ad revenues to success and to expenses.     Marcus notes that even with the  huge pageviews at Facebook he calculates the advertising to yield to be only  $0.10 per thousand views compared to the $15.00 per thousand Google expects to pull in at their site.     Marcus’ important point is that even as online advertising is exploding most of those revenues are going to the very top sites, most revenue comes from very low CPM advertising, and the number of sites dipping into the advertising pool goes up every …. second.    He doesn’t sound as optimistic as he used to, and that should be alarming for small time web publishing guys like … me.

Hmm – it would be interesting to calculate a theoretical upper limit to the total social online advertising market using:

Total number of online people x  hours spent online x pageviews per hour x  .10 CPM. 

Just off top of my head I get this for USA:

200 million x 2 hours online day x 30 views per hour = 12 billion pageviews per day
 x .10 CPM =   $1.2 million per day

Huh?   This is incredibly low, but I must be missing something here.    The .1 CPM is a fraction of what is normally negotiated so I’ll recheck that..

Google v Microsoft over Facebook

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Henry Blodget over at Silicon Alley Insider has a thoughtful post today predicting that Google will beat out Microsoft in the Facebook sweepstakes, and that the real winner here is Facebook founder Zuckerberg who will walk away from any deal with a jaw dropping, market driven valuation of Facebook.     Blodget notes that even if Microsoft spends enough to win the Facebook bidding war Google wins again because Facebook will simply milk Microsoft’s cash cow leaving them with little in the way of a superior online MS environment.

I think this last point is particularly relevant, and poses one of the key threats to Microsoft’s long term viability.    Unlike Google and even Yahoo, new companies don’t appear to see a Microsoft aquisition as much more than a big payday.   It’s not clear to me that Google does any more for the companies it aquires than Microsoft does, but I do think the perception is that Google will inject innovation and enthusiasm where Microsoft will just absorb you into their failing online collective.    I don’t think these assumptions are, on balance, valid, but I think they are part of the equation when new companies and their generally young, inexperienced founders are courted by the big players.

Information Sharecroppers of the World, Unite ! ?

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Update:  I think Nick (and I) may owe Newsvine an apology, because Newsvine does not really practice sharecropping.   The members own their own content and this means a lot more control than otherwise.    Obviously the landscape is complex with any social media but I don’t think I can object to Newsvine’s model.    My concern is where the site takes ownership of the member content.

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Nick Carr  has a good post today noting how the Newsvine aquisition, and other deals like this, can lead to some information “sharecropper” dissent.     As I pointed out yesterday social media is a great thing, but it seems to be dramatically failing to fund the very forces that make it a great thing – the hardest working content providers that often form the backbone of these entities.     Kevin Rose is worth tens of millions because tens of millions of diggers work for him – for free.   Sure, he’s smarter than most of his minions and he pulled it all together which means he should get a big digg payday some day, but should he, the founders, and the VC funders get *all* of the money when even they’d all agree that digg is valuable primarily because of all the people that do the digging.

Newsvine was a superb project that was beautifully implemented, but like Nick I wonder how long those who helped make Newsvine such a great site will keep working for nothing.     Is  Web 2.0 simply a new twist on feudal economics?

Talent Oregon Real Estate

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Wow, Talent is for sale these days as hundreds of houses go onto the market at prices that appear to be coming down, down and I predict down more now that the winter doldrums are approaching.    Under normal real estate circumstances people would be pulling houses off the market now, but the sub prime mortgage fiascos have put a lot of folks in the terrible position of “having” to sell their house or lose it.    I’m not clear when we’ll hit the bottom but I think this winter will be a great time to buy and a bad one to sell.

I’ve got two friends now working the Talent Oregon Real Estate market.   Dave doesn’t have a site up yet but Jack’s Talent Oregon Real Estate website is  a good resource for some local information and houses.  Jack also covers Ashland Oregon, Jacksonville Oregon, and Medford Oregon Real Estate. However best to email or call him directly for the latest information since the market is changing rapidly around here.