Venture Capital Thoughts and Reflections

Sustainability of the New Economy?

As the latest wave of irrational exuberance recedes, leaving in its wake issues that were, not so much unseen dangers lurking beneath the surface, as real assets artificially buoyed beyond all proportion to unreasonable heights, I had a particularly scary thought.

What if the growth in PC penetration, Internet usage, broadband adoption, ecommerce, mobile device usage, and other cornerstones of the "new economy" were, not the signs of progress and digital literacy that we congratulated ourselves on, but, like auto sales and sub-prime mortgages, manifestations of our artificially inflated, unsustainable, levels of consumption?

So, for example, we are now all painfully familiar with images of neighborhoods inundated with for-sale signs, parking lots filled with unsold cars, planes being stockpiled in the desert, and super tankers parked at sea.

What if the same phenomena will be true for "new economy" goods and services?

Were people's purchasing habits on Amazon and Ebay unsustainable?

How about their broadband subscriptions?  Purchases of computers and mobile devices?  Or, more close to home, their subscriptions to premium services on Web 2.0 sites?

There are compelling reasons to believe that many of these "new economy" goods and services were not artificially inflated, and may even increase during a downturn, but if they were over-inflated to a similar extent as their old economy brethren, we are in big trouble!

Survival Guide

I have been getting lots of requests for, and inquires about, the Survival Guide that I wrote, so I thought that I would post a little background about its origin.

On September 23rd, 2008, I sent the following email to the DFJ Network:

------ Forwarded Message

From: Simon Olson 

Date: Tue, 23 Sep 2008 18:57:31 -0200

To: DFJ Network

Conversation: DFJ Guide to Navigating a Challenging Environment?

Subject: DFJ Guide to Navigating a Challenging Environment?

Dear All,

In light of the recent instability in global financial markets, how about putting together a short guide for portfolio company CEOs on "Navigating a Challenging Environment" (or words to that effect)?

As you may know, some of our portfolio company CEOs were not active during the last downturn, hence they may not know all of the tricks to managing difficult times.

Rather than leaving them to their own devices or attempting to help them seriatim, compiling a collection of tips from around the Network and turning them into a short guide might be a scalable way of dealing with the situation.

Unless someone else wants to do it, I am willing to compile the tips, edit them into a document, and share the completed guide with all participating firms.

So, if anyone has any tips, please email them to me (I have included a few samples below).

As always, this is intended to be a group effort with value accruing to the Network, rather than any one individual or firm.

Thanks!

Kind regards,

Simon 

--------------------

Sample observations:

- in a difficult environment, focus on clients that will spend money no matter what, ex. When the Dot Com bubble burst, IDEO shifted from doing projects for large corporations to assignments for NASA. 

- in an economic downturn, large public companies will normally only acquire companies that are profitable or breaking even.  As much as they may want market share, they don't want to dilute their numbers with someone else's losses.  So, if you plan to sell your company, do whatever you can to get to break-even.

- don't forget the second half of the demand question, i.e. The question is not just, "Does a customer need my product/service?", but also, "Do they have the money to pay for it?"

------ End of Forwarded Message

In response to my inquiry, I received about nine emails from DFJ Network members, five of which said essentially the same thing: lower the company's burn rate.

While the tips were excellent, they were not enough to produce a comprehensive document, so I started investigating the various ways of helping start-ups survive an economic crisis. 

In the meantime, Sequoia, Bill Gurley, and Ron Conway came out with their respective contributions, removing any sense of urgency.

Since their works did such an excellent job of explaining the crisis and outlining defensive measures for start-ups, I tried to take the survival guide in a slightly different direction.

Specifically, I tried to dig a little further beneath the surface--reiterating many of the defensive strategies that they suggested, while explaining how to actually put them into practice.

So, for example, instead of saying, "lower your burn rate by reducing your head count", the Survival Guide goes one step further, explaining how to figure out who to let go, and how to conduct the process.

I hope that the Survival Guide succeeds in helping entrepreneurs and CEOs execute.

If nothing else, at least people will learn how to survive a rip tide!

 

Links:

http://drop.io/survivalguide 

http://www.slideshare.net/simonolson/survival-guide-presentation

Collective Intelligence Meets Personalized Medicine

The falling cost of genetic screening, with its ability to uncover individual genetic information, has led to a rise in interest in personalized medicine.

Traditional medicine, as it is practiced today, relies on a one-size-fits-all approach.  

Typically, only half of the people receiving a particular medication actually benefit from it.

The idea behind personalized medicine is that, by knowing more about your genetic background, you will be able to receive treatment that benefits someone with your individual characteristics, yielding a higher quality outcome and avoiding unnecessary medicine and side effects.

One of the problems, however, lies in getting access to a large enough pool of personal, genetic data in order to be able to determine optimal treatment.

Specifically, people are reluctant to share their genetic information for fear that insurance companies will use the information to raise premiums or, worse yet, refuse coverage.

In order to have any real value, however, scientists need a large pool of genetic information in order to determine optimal treatment (i.e. the value of the community increases with the amount of data).

How do you aggregate individual genetic information, enabling researchers to draw necessary conclusions, while preserving anonymity?

Think Wesabe.

Wesabe is a money management tool/community/site that anonymously aggregates user's financial data, then harnesses the users' data to generate money saving tips and recommendations.

Perhaps people can do with their personal genetic information, what they do with their personal financial data?

Specifically, in order to unlock the power of personalized medicine, someone should create a Wesabe-type site which anonymously aggregates and analyzes personal genetic information, then automatically generates tips and recommendations that will benefit all of the site's users.

Career Advice for Coping with the Downturn

When I graduated from college, in the wake of the Drexel Burnham Lambert crisis, the economy was awful and I was unable to find a job.

Instead of readjusting my expectations, I tried to work on Wall Street and, while I eventually landed something, it was not a very pleasant experience.

So, if I could share three pieces of career advice for coping with the downturn, it would be:

(1) Reset your expectations: don’t attempt to chase after yesterday’s top career choices.

(2) Look for new areas of growth: instead of Web 2.0, private equity, or hedge funds, try to find a new growth area.

(3) If there are no strong growth areas, don’t beat yourself up trying to chase after something that isn’t there anymore, do something that will add to your skill set (ex. go teach English in China and learn Mandarin; work on an ethanol project in Colombia, etc.).  When the economy turns around, you can go back to chasing your dream and your newly earned skills will make you more attractive to potential employers.

Good luck!

Is there a silver lining lurking among the clouds?

Unquestionably, current market instability and the resulting economic slowdown are likely to make life more difficult for everyone.

Consumer spending will be radically lower, corporate spending will be curtailed, capital will become scarce, and liquidity events, if they occur at all, will be fewer and father between, at lower valuations.

But is there a silver lining lurking among the clouds?

A few thoughts:

Recruiting should become easier, since there will be fewer companies competing for a larger pool of applicants.

The quality of entrepreneur/venture capitalist relationships should improve, since the pace of decision-making is likely to be less frenetic, giving entrepreneurs and venture capitalists more time to get to know each other.

Competition should revert to normal levels with fewer duplicative companies likely to be funded, i.e. There won't be 100 video sites, 30 of which with upwards of US$25 million in funding.

Valuations are likely to be more rational, since there will be less money from non-traditional players, like hedge funds and private equity firms, artificially inflating valuations.  This will prevent companies from falling into the valuation trap and allow them to maintain flexibility.

So, while things will be bad, there will also be a positive side to the economic readjustment taking place.

Non-Correlation Myth

Before the recent market upheaval, it was common to hear people remark that, unlike past events such as the 1997 Asian financial crisis, which triggered a massive sell-off around the globe, markets would no longer fall in tandem due to an increasing sophistication among investors.

Unfortunately, while investors may have become more sophisticated in terms of their ability to distinguish between markets, the links between global economies have simultaneously grown stronger, linking them more closely than ever.

Take the current crisis in the United States.

The inability of US consumers to continue buying goods, means that production will slow in China, which in turn means that sales of natural resources in Brazil (purchased by the Chinese to manufacture the goods) will slow, dragging down the Chinese and Brazilian economies.

So, while investors may have grown more sophisticated in their reluctance to paint all emerging markets with the same brush, any gain in investor sophistication has been more than off-set by a strengthening of ties between economies. 

Draper Fisher Jurvetson In the News

On Tuesday, my DFJ colleagues and I were featured in an article that appeared in USA Today, the highest circulation daily in the United States (see below).

The author did a good job of explaining the DFJ Network concept, but did not, at least in my opinion, go far enough in explaining the logic behind the model.

Successful venture-backed companies such as Google, Skype, Baidu, and YouTube are the ‘rogue waves’ of venture capital.  

In order to capture these statistical outliers, you need to cast as wide a net as possible.  

One way of doing so is to create a global network of venture capital funds, hence the value of the DFJ network.  

If there is going to be a Skype or Baidu anywhere in the world, the odds are that DFJ, through its global fund network, will be an investor.

Antonio Regalado from the Wall Street Journal took me to task in the comments section of this blog the last time that I complained about press coverage, so this time I am going to keep quiet! ;)

Venture-capital firm transforms global start-ups

By Edward Iwata, USA TODAY

MENLO PARK, Calif. — A decade ago, skeptics scoffed at Draper Fisher Jurvetson's growing affair with entrepreneurs in faraway lands. The large venture-capital firm was pouring millions of dollars into start-ups abroad, and some rivals didn't get it. Why fly overseas when there were so many investment opportunities in Silicon Valley?

But the mavericks at DFJ saw powerful forces converging. The world's economy and financial markets kept growing. Technology was leaping across borders. Visionary entrepreneurs were emerging on all continents.

The long-run global bet by DFJ is paying off. Today, DFJ boasts a network of 20 "partner funds" in Asia, Europe, the Middle East and Latin America, with 160 professionals managing $6 billion in start-up investments.

"People are creating companies all over the world," says DFJ managing director Don Wood, a Stanford MBA who oversees the funds with director Elizabeth Clarkson, a Harvard MBA. "We're building a global brand, and we're doing it collectively."

Over the past half-century, venture capitalists and start-ups in Silicon Valley have revolutionized much of the U.S. economy by launching new technologies in the electronics, computer, software and Internet industries.

Now, DFJ is revolutionizing global start-up financing with what it calls its "federation of independent funds," a kind of United Nations of venture funds.

Early successes

As a global investor, DFJ has in recent years cashed in on two well-known start-ups: Skype, the European Internet phone firm bought by eBay for $2.5 billion in 2005, and Baidu.com, China's largest search engine company, which went public on Nasdaq three years ago and enjoys $9 billion in stock market value.

But since joining forces with its overseas partners, DFJ and its related funds rule the international venture scene. They've invested in more than 90 start-ups in 2007, according to Thomson Reuters and Dow Jones VentureOne, edging out Intel Capital, NEA and other U.S. rivals.

Their global push comes as the U.S. economy matures and as U.S. financial markets have dried up for start-up acquisitions and initial public offerings, or selling a start-up's shares on the stock market. At the same time, the economies and markets for IPOs and acquisitions in other countries are expected to grow at a faster pace than in the USA.

With investments in 26 countries from Brazil to South Africa, the DFJ funds focus on start-ups in clean energy, life sciences, semiconductors, information technology and nanotechnology.

One of the most promising funds is DFJ Athena in Seoul, run by managing director Perry Ha, a Harvard MBA and tae kwon do martial arts instructor. Ha founded a small fund in Silicon Valley before teaming last year with DFJ.

Ha, 45, is bullish on South Korea, whose 50 million consumers embraced the high-speed Internet and new mobile devices several years before the USA and Europe did. Ha says South Korean start-ups are well-positioned to work with Samsung, LG Electronics and other global South Korean corporate giants.

The DFJ Athena fund has invested $100 million mostly in South Korea-based start-ups such as Call Gate, which is developing technology that will let consumers call a company or person's telephone number and instantly see website-like features and online data on their mobile device screens.

"Technology applications cut across borders so much that you can't help but invest around the world," Ha says.

DFJ's partner funds were created a few years ago, when DFJ sought investments outside Silicon Valley and created independent venture funds that focused regionally on start-ups from Alaska to New York.

Then DFJ co-founder Tim Draper and his colleagues realized that the partner-fund model could work globally — with powerful benefits. Foreign venture capitalists use the well-known DFJ brand and resources to raise money from investors, while DFJ gains from the cross-cultural know-how and business and political contacts of their overseas partners. Often, a U.S.-style venture fund is the last missing piece to launch strong start-ups.

In Russia, for one, the DFJ-VTB Aurora fund sees a fast-growing entrepreneurial class, R&D centers, innovative technologies and ample financial resources.

"All the ingredients seem to be there," says managing director Alexandra Johnson in an e-mail. "The only factor missing is a venture fund structured similar to the best Silicon Valley funds. We plan to be that fund."

The overseas venture capitalists know their turfs better than DFJ does, so they choose and invest in start-ups without meddling from the mother ship.

"Each partnership has autonomy to build and manage their VC partnership in accordance with local needs, but also can provide global support," says Simon Cook, managing partner of DFJ Esprit in London, in an e-mail.

Flexibility's value

Simon Olson, a DFJ FIR Capital partner in São Paulo, Brazil, e-mails: "If you try to take the U.S. model and superimpose it on a foreign market, you will lose your shirt."

DFJ touts the power of its network, calling it a giant Rolodex or a LinkedIn for their industry. "You could introduce your entrepreneur to everybody and anybody around the world," Draper says.

The venture capitalists speak many languages, but business is conducted in English. They talk often during dinners, conference calls and a yearly gathering called MegaWeek. The next one is this fall at an ocean-view Ritz-Carlton hotel near Silicon Valley.

Among other cross-border business advantages, DFJ partners "can quickly check any prospective portfolio investment against comparable companies anywhere in the world through DFJ's global intelligence network," says managing director Andy Tang of DFJ DragonFund in Shanghai, in an e-mail.

Start-ups can take up to 10 years to go public or get sold, so it's too early to gauge the investment returns of DFJ-branded funds. DFJ executives say deal flow is strong, with the deals increasing for funds after they join DFJ.

Like other international investors, DFJ hunts for countries with rising economies and consumer markets, low political risk, good universities and a talent pool of entrepreneurs.

Fast results

At DFJ Tamir Fishman Ventures, a Tel Aviv, Israel-based firm with $200 million under management, partners landed several new deals and clients within months of joining DFJ's network.

Moshe Levin, managing general partner at the firm, says in an e-mail that DFJ partners share in-depth information on market and technology trends and business obstacles and opportunities.

To crack into the lucrative South Korean market, the Israeli venture capitalists and one of their start-ups, a chip manufacturer, worked recently with DFJ's South Korea fund to meet executives of a leading South Korean telecom firm for a potential project.

"So much for language and cultural barriers," Levin says.

Além da Web 2.0

A Web 2.0 está morta, vítima de seu próprio sucesso.

O conceito de site como um destino fixo não é mais suficiente.

O próximo passo foi dado e é distribuido.

O que nós vemos é uma separação de conteúdo e aplicações dos sites.

A Web 1.0 visava, em geral, atrair a população para a Internet, simbolizada por empresas como AOL (provedor), Netscape (navegador) e Yahoo (portal).

A Web 2.0 buscava, até um certo ponto, dar à população o que fazer uma vez que já têm acesso à Internet e tirar as dificuldades técnicas pra que isso acontecesse, como, por exemplo, para dividir suas fotos (Flickr), expressar seus pensamentos e opiniões (Blogger) ou postar seus vídeos (YouTube).

Mesmo sendo cedo demais para determinar os aspectos que irão compor a Web 3.0, algumas características já podem ser vistas, como:

(1) Um conhecimento mais abrangente da convergência entre criadores e consumidores de conteúdo;

(2) Um movimento de sites fixos para distribuídos, conteúdo e aplicativos livres;

(3) Um acompanhamento mais avançado do graficos socias dos usuários;

(4) Uma camada de sites em cima do outros sites, e;

(5) Uma tendência à interoperabilidade universal entre sites.

Como com qualquer mudança, algumas empresas ficarão entre os dois lados, o antigo e o novo, mas o principal é que algo diferente está aparecendo, além da Web 2.0.

Beyond Web 2.0

Web 2.0 is dead, a victim of its own success.

The concept of the "site" as a fixed destination is no longer sufficient.

The next evolutionary step has been reached and it is distributed.

What we are witnessing is an untethering of content and applications from the underlying sites.

Web 1.0 was, in large part, about getting the masses on the Internet, epitomized by companies such as AOL (ISP), Netscape (browser), and Yahoo (portal).

Web 2.0 was, to a certain extent, about giving the masses something to do once they got on the Internet and removing the technical hurdles to doing so, ex. share your photos (Flickr); express your thoughts and opinions (Blogger), post your videos (YouTube).

While it is still too early to determine exactly what traits will define Web 3.0, there are certain characteristics which are emerging, among them:
(1) A more widespread acknowledgement of the convergence between content creators and content consumers;
(2) A movement from fixed sites to distributed, free floating content and applications;
(3) A more advanced tapping of a user's social graph,
(4) A layering of sites on top of other sites, and
(4) A trend toward universal interoperability between sites.

As with any shift, there will be companies which straddle the line between both camps, but the point is that something different is beginning to emerge, beyond Web 2.0.

A Etica da Viralidade

Frequentemente é discutida a ética sobre privacidade de informação e portabilidade, mas e a ética de viralidade?

Especificamente, em sites como o Hi5 que usa táticas inescrupulosas para aumentar sua viralidade?

Eu amo técnicas para ganhar tempo como processo de registro por um click e portabilidade instantânea, por exemplo, sites que acessam automaticamente seu e-mail, messenger e redes socias, importando todos seus contatos do Hotmail, Gmail, Yahoo, Orkut e MSN.

Elas ajudam o usuário a ganhar o tempo que gastaria ao tentar descobrir como importar a informação, ou pior, o tédio de ter que colocar toda a informação manualmente.

De um ponto de vista de experiência para o usuário, isso é de grande valor.

Mas usar essa mesma técnica para mandar spam para toda a lista de contatos de um usuário, com o propósito de aumentar o tráfego do próprio site – é destruir qualquer crédito que o usuário deu ao site quando forneceu as ferramentas.

Se eu gosto de um produto ou serviço, eu recomendaria para meus amigos.

Mas sites como o Hi5 aparentemente não confiam muito em seus usuários.

Ao colocar “convidar todos” como configuração inicial e instantaneamente mandar e-mails indesejados para todo mundo da lista de contatos do usuário, antes de um usuário em potencial ter a chance de conhecer melhor o site, estarão destruindo qualquer boa impressão causada pela ajuda proporcionada e, mais importante, tornando-a uma má experiência.

Atenção empreendedores:

Quando tiver que escolher entre a experiência de usuário e viralidade, sempre escolha a experiência de usuário.

Eu recomendaria o Hi5 e outros sites que usem esta prática para terem mais confiança em seus usuários.

Se você criar um ótimo produto ou service e torná-lo fácil para os usuários contarem a seus amigos, eles contarão.

Mas usar ténicas inescrupulosas para se apropriar dos contatos do usuário resulta em má experiência e, pelo menos na minha opnião, é antiético.