Went to the Glasshouse "Show me the money" event last night, VC Nic Brisbourne from DFJ Esprit, Michael Birch (who sold Bebo at top of market, see the AOL-Bebo Value Transfer Equation here) and banker Andreas Lazar (Allen & Co) were cajoled by Rory Cellan Jones into showing us their wads. Here are my notes of the responses to the questions put by Rory, Audience etc:
1.Climate for Investment
Nic - UK Investment c £100k per quarter, when good times return then big co's will buy startups again - its a cyclical industry
Michael - Now fewer people lending. If able to pursue a business without money far better
Andreas Good time for Allen to start up in London, lots of requirements for advice. Different crash to dotcom as there is no loss of confidence in tech this time but it's a bigger crash impacting capital - but funds are being raised. Deals are going to businesses with clear paths to making money. (Anyone remember the P2P drumbeat in 2001 - where P2P = Path 2 Profits)
2. Investments
Nic - invested in Graze (food), William Reeve (ex Lovefilm, trusted and known) is chairman
Michael - invested in Tweetdeck because it had Tweet in it (option theory investment)
Andreas - make personal investment in people he knows who are successful. Recently invested in a Patent business system (didn't catch the name).
(I wanted to ask re overconfidence in previously successful people eg Zennstrom et al and Joost, but Rory did it for me - but this isn't going to change in a hurry, its like no-one getting fired for buying IBM )
3. Angels and their role
Once companies get off ground it's helpful to have institutional investors ( Andreas)
Birch's new fund is "between Angel and VC", seem to still be making it up a bit as they go.
4. Paul Carr's view on Web 2.0 and the London wasteland?
Nic - London is growing, was nothing 10 years ago
Andreas - Allen voted with feet (set up in London in 2008), and SV VC's are now investing in UK and Europe
Michael - lots going on in London but Valley still bigger
5. A Rallying Call for eager Entrpreneurs?
Andreas - figure out how to make money in biz plans
Michael - try not to have to raise money
6. People still need to go to US? Are there other routes to valuation?
Birch - look at the stages - no point if small as no one will give you money
7. How do you value businesses with no revenues?
Andreas - need to explain how you make money
8. What's the % take and investment size from panel members
Andreas - Allen & co - £15m and 5%
Michael - between Angel and VC - (iirc he said £250k and up?)
9. What dotcoms would you resurrect now, ie they were ahead of their time?
Nic - Very seldom is the successful company the first one into space
Andreas - most good dotcom ideas have now been done
10. Current Exciting Stuff
Michael - music
Andreas - virtual goods
Nic - businesses that do good things and e-Commerce plays with high growth potential
11. Any deals where founders claw back equity on achievements?
Nic - no, ratchets are a sign of poor initial valuations
Some of Rory's question pitches were very funny, he's good value. Good speakers, good compere, nice place. As to the Glasshouse's own business model, the "Show Me The Money" ploy was clear - only one free drink and no nibbles for a paid evening event
Good article by Jonathan Zittrain in the NYT about the risks in Cloud computing: Key risks are (summarised under the headings):
The Amazon Gambit:
If you entrust your data to others, they can let you down or outright betray you. For example, if your favorite music is rented or authorized from an online subscription service rather than freely in your custody as a compact disc or an MP3 file on your hard drive, you can lose your music if you fall behind on your payments. (See our post on these issues here)
Twitter Flitter
Data stored online has less privacy protection both in practice and under the law. A hacker recently guessed the password to the personal e-mail account of a Twitter employee, and was thus able to extract the employee’s Google password. That in turn compromised a trove of Twitter’s corporate documents stored too conveniently in the cloud. Before, the bad guys usually needed to get their hands on people’s computers to see their secrets; in today’s cloud all you need is a password.
Big Brother was Here
Thanks in part to the Patriot Act, the federal government has been able to demand some details of your online activities from service providers — and not to tell you about it. There have been thousands of such requests lodged since the law was passed, and the F.B.I.’s own audits have shown that there can be plenty of overreach — perhaps wholly inadvertent — in requests like these.
The cloud can be even more dangerous abroad, as it makes it much easier for authoritarian regimes to spy on their citizens. The Chinese government has used the Chinese version of Skype instant messaging software to monitor text conversations and block undesirable words and phrases.
Lock In
The most difficult challenge — both to grasp and to solve — of the cloud is its effect on our freedom to innovate. The crucial legacy of the personal computer is that anyone can write code for it and give or sell that code to you — and the vendors of the PC and its operating system have no more to say about it than your phone company does about which answering machine you decide to buy.
Lock Out
Facebook allows outsiders to add functionality to the site but reserves the right to change that policy at any time, to charge a fee for applications, or to de-emphasize or eliminate apps that court controversy or that they simply don’t like. The iPhone’s outside apps act much more as if they’re in the cloud than on your phone: Apple can decide who gets to write code for your phone and which of those offerings will be allowed to run.
I would also add the following issues that Jonathan missed:
Whose IP is it Anyway
Facebook (and others) have Terms and Conditions that ensure that any content you input is theirs to keep and use as they see hit. (See our analysis of Facebook's Terms and Conditions here)
The SLA of a Free Service is Zero SLA
There is no Service Level for people who don't pay - in fact, you are not the customer. The customer is the person who is paying to keep the service going. Make sure you know who they are, and what they are extracting from you for your free lunch. It could be advertising, behavioural data, or a number of less salubrious benefits. There is unlikely to be any restitution or compensation for major errors, service outages etc. You gets what you pays for.
The Cloud industry has to sort these issues out to gain trust from any except the lowest value players, or else it will seem to any dispassionate observer that they are colluding in building walled gardens with mainframe levels of user responsiveness and innovation, and where they proceed to scrape and pillage you, your data and your future IP. In all new industries there is a "Dodge City" phase, and this - in my view - is where Cloud is now, and the behaviours of many of its players don't yet inspire confidence that it will end yet. As Zittrain points out in his article:
If the market settles into a handful of gated cloud communities whose proprietors control the availability of new code, the time may come to ensure that their platforms do not discriminate. Such a demand could take many forms, from an outright regulatory requirement to a more subtle set of incentives — tax breaks or liability relief — that nudge companies to maintain the kind of openness that earlier allowed them a level playing field on which they could lure users from competing, mighty incumbents.
Our advice for the present - don't put any business critical or sensitive information in free Cloud based systems just yet. If email is business critical, don't put it in the Cloud either. For stuff you have to put in the in the Cloud, pay money to ensure SLAs and go for a high level of security awareness if it can in any way compromise you. Also, back up everything you have in the Cloud, frequently.
Conde Nast have hired consultants, including McKinsey, to sort out their little problem - as CEO Chuck Townsend put it in a memo to the troops (hat tip Gawker):
....we must realign Condé Nast to be a successful business in an emerging economy that is now predicted to be painfully slow in recovering.
This is a considerable and complicated task, forcing us to rethink the way we do business in many instances and incorporate efficiencies in every step of our process. Beginning this week, I am dedicating myself and a team of my colleagues to this project. We will work with consultants, including McKinsey & Company, to develop new perspectives on optimizing our approach to business, growing revenues, and enhancing our brand assets. All areas of Condé Nast will be included in the study.
There is no doubt in my mind that the strength of our brands and people will provide us with the opportunity to participate in America's economic recovery. Ensuring our financial health is paramount to our ability to be part of that process.
In other words there is going to be a lot of hacking of heads - but will it be enough? The print media is going through a "creative destruction" phase right now, and in these sorts of non "business as usual" cases you can't manage your way to success by firing people alone, they will have to address ongoing revenue losses, new competing business models and probably considerable structural change. It will be fascinating to see what they come up with - puts McKinsey as much as Conde Nast on the spot, as everyone will be watching the outcome with extreme interest.
Fascinating article in Cornell University's Chronicle Online, showing the shifts in memes around a particular main story (in this case Sarah Pailin's run for Vice President). They note that:
The ideal, Kleinberg said, would be to track "memes," or ideas, through cyberspace, but deciding what an article is about is still a major challenge for computing. The researchers sidestepped that obstacle by tracking quotations that appear in news stories, since quotes remain fairly consistent even though the overall story may be presented in very different ways by different writers.
Even quotes may change slightly or "mutate" as they pass from one article to another, so the researchers developed an algorithm that could identify and group similar but slightly different phrases. In simple terms, the computer identified short phrases that were part of longer phrases, using those connections to create "phrase clusters." Then they tracked the volume of posts in each phrase cluster over time. In the August and September data they found threads rising and falling on a more or less weekly basis, with major peaks corresponding to the Democratic and Republican conventions, the "lipstick on a pig" discussion, rising concern over the financial crisis and discussions of a bailout plan.
Note that the blogosphere feeds of the mainstream media, in the main - which begs the question of what happens if it kills its host....
The slow rise of a new story in the mainstream, the researchers suggest, results from imitation -- as more sites carried a story, other sites were more likely to pick it up. But the life of a story is limited, as new stories quickly push out the old. A mathematical model based on the interaction of imitation and recency predicted the pattern fairly well, the researchers said, while predictions based on either imitation or recency alone couldn't come close.
Watching how stories moved between mainstream media and blogs revealed a sharp dip and rise the researchers described as a "heartbeat." When a story first appears, there is a small rise in activity in both spheres; as mainstream activity increases, the proportion blogs contribute becomes small; but soon the blog activity shoots up, peaking an average of 2.5 hours after the mainstream peak. Almost all stories started in the mainstream. Only 3.5 percent of the stories tracked appeared first dominantly in the blogosphere and then moved to the mainstream.
Fascinating to us, anyway - about 2 years ago we built a similar device for the BBC Innovation Labs (which was then accepted for further development) which does a very similar job, but we haven't had the time to do this level of analysis - broadly speaking though the results look familiar. We did one extra thing, which was track different news outlets to see how the story differed over time (the Memetic Difference Engine bit). That is in its own way as interesting as the development of a story.
Fascinating article in The Technium today on the inevitability of Moore's Law and similar tens one of which was the progression of speed curves from 1953 (above):
It is important to remember that in 1953 none of the technology for these futuristic journeys existed. No one knew how to do go that fast and survive. Even the most optimistic die-hard visionaries did not expect a lunar landing any sooner than the proverbial "Year 2000." The only voice telling them they could do it was a curve on a piece of paper. But the curve was right. Just not politically correct. In 1957 the USSR launched Sputnik, right on schedule. Then US rockets zipped to the Moon 12 years later. As Brokderick notes, humans arrived on the Moon "close to a third of century sooner than loony space travel buffs like Arthur C Clarke had expected it to occur."
What did the curve know that Arthur C Clarke did not?
Except, as we now know, in the 1980's it all stopped, as according to the curve we would have serious interplanetary speeds by now. But that curve has pretty much flatlined for 30 years. Which is the lesson of this post, that change does not come in a smooth progressive power law, it demonstrably comes in fits and starts. What is hard is predicting when it starts to flatline....and when the next S curve takes off.
By the way, if you want to play "interesting trends", here's one using Moore' Law for a device like the original basic iPhone
Price in 2007 = $250
Price in 2009 = $125
Price in 2011 = $63
Price in 2013 = $30
Price in 2015 = $15
Now imagine what a device with that power, retailing at c $15, and the size of iPod Shuffle, will do for mobile computing in 6 years time..... or take it on another 2 cycles, what does a $4 device of this power but the volume of a credit card do in 2019?
Everybody has a view on Web 3.0 (including us) so here is the McKinsey Quarterly:
In effect, that its marketers are being replaced. As markets morph into Web 2.0 “conversations” and consumers gain much greater freedom to pursue their own interests, customers are doing things that online marketing managers don’t necessarily want—or expect—them to do. For example, they can easily connect with one another, often using multimedia sites such as YouTube and Flickr, so they themselves can satisfy their need for information about products. What’s more, consumers may trust information obtained in this way much more than they do information from your company. What will happen when these consumer experiences are much more interesting than anything your marketers have put up on the Web?
Good question. Apart from creating a new aggregation point that the company doesn't own, that is.... the author, Donna Hoffman is is codirector of the UCR Sloan Center for Internet Retailing and thus advocates using the Sloan LEAD model
Executives can use a model we at the Sloan Center for Internet Retailing have developed called LEAD - Listen, Experiment, Apply, Develop (as opposed to the more usual HALT model - Hear, Argue, Limit, Terminate) to create a road map that will help companies thrive in the online world’s environment of constant change.
How does this apply here? We expurgate it below so you don't have to leave this site.....:
Listen.
Your organization should have a formal process to monitor and analyze what its customers are saying about it online and then use this information as an early-warning system. Even casual observation of these online conversations is better than nothing... ...But simply entering the game is only a start. Companies should always assume that the digital environment will change rapidly—so they must adapt accordingly. Rather than pushing messages at consumers, marketers should listen to them and think constantly about ways to engage with them actively. A social Web presence that is tone-deaf to a customer’s needs augers rough times ahead.
Experiment.
Don’t just monitor social media—engage your newly empowered customers by using the novel tools of Web 2.0 and beyond. Start with simple pilots: for example, create a company profile on social-networking sites, such as Ning, or sponsor a promotion on the innovative social-shopping site Polyvore. Make friends with bloggers and tweet your customers on Twitter....
....While return-on-investment metrics for social media are still in the early stages, these experiments clearly pay off big time in greater customer awareness and brand engagement. Unless you have Web 2.0 experts on your team, stick with small experiments, since big ones can fail badly. [And don't let any Interns near the project habitat]
Apply.
Take the experiments and apply them. To make it easier to reach out to customers, optimize your Web site so that it connects fluidly with online communities and social-media sites. Make it simple for consumers to link to you and tag your content, and find ways to make your site more relevant in social-networking searches. If you have nothing worth linking to or tagging, or if your content isn’t relevant to consumers at all, you’re in trouble. Measuring impact is paramount, so you’ll need to use the Web’s predictive tools and quantitative analysis to track the results of your experiments. As you gain experience, you can apply what you learn on a larger scale.
Develop.
The Internet is a social medium and should therefore be a crucial part of any company’s marketing mix. But it is critical to develop integrated marketing programs that use the Web as more than just another advertising channel. Companies must therefore rapidly flee from the mass-media broadcast mentality: for example, rather than simply buying ads on MySpace, they should make interactive Web 2.0 elements part of their marketing programs.
Bottom line: by focusing on the fundamental aspects of the consumers’ online behavior— not just current best practices—companies will be better prepared when Web 2.0+ morphs into Web 3.0 and beyond.
Not much to argue with, really - though some of its a "bit known" so the ways are well trodden, thus a bit more originality may be required. It plays to much of the thinking around VRM and other like arenas (see here for a starter). But, what I want to know is what the marketers morph into as Web 2.0 morphs into Web 3.0. Is it more of a PR play (Indirect Influencing) or do they disappear altogether, replaced by a direct conversation between the direct buyers and sellers, as the more purist forms of VRM hypothesize.
David Weinberger has written a post today on the subject of Transparency being the New Objectivity:
Objectivity used be presented as a stopping point for belief: If the source is objective and well-informed, you have sufficient reason to believe. The objectivity of the reporter is a stopping point for reader’s inquiry. That was part of high-end newspapers’ claimed value: You can’t believe what you read in a slanted tabloid, but our news is objective, so your inquiry can come to rest here. Credentialing systems had the same basic rhythm: You can stop your quest once you come to a credentialed authority who says, “I got this. You can believe it.” End of story.
We thought that that was how knowledge works, but it turns out that it’s really just how paper works. Transparency prospers in a linked medium, for you can literally see the connections between the final draft’s claims and the ideas that informed it. Paper, on the other hand, sucks at links. You can look up the footnote, but that’s an expensive, time-consuming activity more likely to result in failure than success. So, during the Age of Paper, we got used to the idea that authority comes in the form of a stop sign: You’ve reached a source whose reliability requires no further inquiry.
In the Age of Links, we still use credentials and rely on authorities. Those are indispensible ways of scaling knowledge, that is, letting us know more than any one of us could authenticate on our own. But, increasingly, credentials and authority work best for vouchsafing commoditized knowledge, the stuff that’s settled and not worth arguing about. At the edges of knowledge — in the analysis and contextualization that journalists nowadays tell us is their real value — we want, need, can have, and expect transparency. Transparency puts within the report itself a way for us to see what assumptions and values may have shaped it, and lets us see the arguments that the report resolved one way and not another. Transparency — the embedded ability to see through the published draft — often gives us more reason to believe a report than the claim of objectivity did.
I was fairly uncomfortable with this post on a number of points, and turning to the comments I found I was not alone - here's Dean Procter:
The objective is eyes on page, and there goes the objectivity. From that point on all objectivity is lost. If you don’t point out your sources either someone will ask, and it becomes a discussion, or the readers will accept it at face value because they want to, or they’ll go somewhere else, either because they don’t believe you or perhaps because they want a different viepoint which agrees with their sensibilities.
The web creates the infinite argument problem, because the number of links possible to support a balanced and ‘objective’ view would in all probability swamp the reader or lead them astray on some tangent. Where do you stop being ‘objective’?
One man’s objective is another man’s bias.
Media is just a filter through which people get a packaged view of information, like coffee, some want instant, others require a specific blend and grind. For a writer you need to decide whether you are a Starbucks, supermarket or boutique coffee shop information grinder and hang up your shingle for all to see. Sticking to your shingle will see you get a following.
.
The conclusion seems to be admit it and get on with it. The great thing about the new media is that there is plenty of other new media. Everyone is a star with their own channel.
In other words. just delivering "transparency" will achieve very little, it just allows a plethora of different parties to filter the information for their own ends. And as Dean notes, those ends often have more to do with being stars in their own personal channels than any objective commentating.
I have a related concern, which is the old User Generated Activity issue - roughly 1% of the readers will interact with the work, c 9% will read it, and 90% will just ignore it.
My second (related) concern is that pure "transparency" just generates a surfeit of unfiltered data that drowns the average reader. Without objective filtering, into this breach steps the classic case where an active and vigorous minority can seize and divert the transparent flow into a curated stream that suits their own (non-objective) ends, and the silent majority won't realise (or in too many cases, care). In other words, Transparency in and of itself will not increase the sum of human objectivity.
What is true is that Transparency reduces the transaction costs of getting the data, and in theory then allows more resources to be spent on the analysis - but it does not in and of itself create objective information. In order to create Information from Data, what is still required is energy and effort input into the system, and to be objective that energy and effort has to come from an objective source, and it needs to be rewarded for objectivity.
My third concern with this model is that it makes the implicit assumption that the Social Media cycle - links to 3rd parties, wisdom of crowds and/or friends, whatever - provides that input of energy and effort. But, as Procter implies above, the people inputting the effort into such a system have (not necessarily transparent) agendas of their own, and are thus systemically unlikely to be objective.
Thus the onus is thrust on the end-reader - who in most cases does not have the time or interest to read every commentator, follow back every link etc. Thus they will still need the role of the "Trusted Editor" - the function that aggregates the inputs, prunes the cr*p, simplifies and structures the data to provide information, and then distributes it in a trusted form. That function does not disappear. Transparency and Social Media systems just move it along the value chain a bit.
So far the "New Media" has not exactly set the world ablaze with its increased objectivity - all we seem to have got is a massively increased number of mutually contradictory non-objective sources. The credentialed commentator role may shift, but still retains importance as they take the load off the end reader.
For the record, I also don't buy the view that paper implies lack of transparency or non-objective thinking either. A good essay or book provides links, footnotes and arguments so that one can get back to source. (As Dean notes in an earlier comment, the number of people who follow an online link back is tiny). The Weinberger post is probably correct for daily print news and blogs, but even by the time you get to weeklies like the Economist, never mind papers and books, it is starting to look less applicable in my view.
...in a fascinating paper over here (hat tip Coding Horror for the link). He notes that:
I'm gradually coming to the conclusion that software engineering is an idea whose time has come and gone.
Software development is and always will be somewhat experimental. The actual software construction isn't necessarily experimental, but its conception is. And this is where our focus ought to be. It's where our focus always ought to have been.
(ii) But, for someone as revered as Tom deMarco to say it is tectonic plate shifting stuff in geekland
In our thought piece linked to above we were extrapolating the trend from Web 2.0, Open Source libraries and self-designing software agents (eg Genetic Algorithms) and we predicted that :
(i) The Software Release cycle would be virtualised - we are already putting together systems from existing libraries of proven code. Software engineering is now about assembly.
(ii) We can imagine code automation increasing, just as 3GLs and then 4GLs and so on automated coding of earlier systems, so we can imagine smarter and smarter algorithms being used to assemble code blocks, and eventually automation of engineering.
After all, its happened in every other type of engineering application (for example a mechanical engineer no longer does real calcs on pressure vessels but uses trusted standards), and as the current crop of technologies become understood, standardised and classified the need for engineering per se goes away. As de Marco notes, proper engineering is always in the new stuff, the experimental end.
The days of infinite margins, 1,000% productivity gains, and growth of market throughout the universe are long over. Internet companies now should be treated, at best, like utility companies that get bought at about 10 times earnings and sold at 13 times earnings. Even then, I'm not sure I would give the Internet sector the same respect as the monopoly-protected utility sector.
Don't just ask me. Ask the best. Nobody can figure out a business model.
Time Warner would rather keep their legacy old-media businesses like People magazine than hold onto one of the biggest Internet companies out there, AOL. And News Corp. is shaking up its MySpace business as it figures out its next steps. (News Corp. owns Dow Jones, publisher of this newswire.) Microsoft has spent billions on Internet strategy without a dime of profit. And even Google can't seem to find any other business model other than the one they stumbled into when they bought Applied Semantics in 2001 that had a little piece of software called AdSense. And the new guys: Twitter and Facebook are still scrambling for profits despite blistering usage growth.
We (my partners and I at Union Square Ventures) think the Internet is one of those transformative technologies that changes everything. We see it like the industrial revolution or the invention of the printing press. It is a huge game changer. The Internet has been a commercial technology for about fifteen years now. And we are beginning to see the impact of it on everything around us. The industrial revolution and the Renaissance before it lasted a century or more. It takes a long time for such fundamental changes to work their way through the system and produce a new "normal".
Periods of great change produce fantastic investment opportunities and also destroy stable predictable businesses. Investors have the choice to take a chance on the new opportunities, stick with the stable predictable businesses, or sit on the sidelines. I prefer to do the former.
Depends on where you sit. In essence the WSJ article is talking about public stocks, Fred is talking about early stage VC investments.
Internet stocks by and large don't give dividends, and rely on growth to create value (assuming one is not trading on volatility, of course). The current market conditions are not good for any big companies, and many big internet companies are "Web 1.0" era, and are finding the current transformations as disruptive as many a "Web 0.0" business.
Previous comms revolutions (railroads, telegraphs, cars, etc) created huge value, as Fred notes - but also took a lot of people's shirts via speculative bubbles, dead end investments etc.
Fred is investing in early stage internet companies, a small % of which grow very fast and return major value, a far larger % of which fail. Fred has to ensure he has a few home runs in his portfolio or he too will find Internet companies are a cr*p investment. Biggest risk in this sector right now is lack of ways to exit.
For the private retail investor it is virtually impossible to buy into Fred's deals, so the WSJ article deserves close study. Most "Web 2.0" exits are trade sales, not IPOs, which proves the WSJ's point for public investors. Biggest risk here is the emergence of newer companies with (often speculatively funded) disruptive technologies that crash existing value without replacing it. Only invest in public Internet businesses with real business models and growth potential.
- see here points 4 and 5; 
