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For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Archive for January 20th, 2008

The Metered Internet: Another Artificial Scarcity Bad Idea

Posted by Bob Warfield on January 20, 2008

Time Warner is toying with the idea of limiting your Internet access in terms of how much bandwidth you can access in a month.  This bad idea has got the web atwitter with various comments and has been buzzing around Techmeme for a few days.  Apparently the move is prompted by the realization that half the network bandwidth usage is due to just 5% of customers who are taking what the ISP views as an unfair share.  They’ve been trying for years to penalize the other end of the transaction, not the customer downloading, but the businesses serving up the downloads (a concept called network neutrality).  The latter is much like the Post Office wanting to hit up Neflix for running up an inordinate share of mailing costs.  Unfortunately, while this is all predicated on that 5% of unreasonable customers, the fear is that rising use of online video will cause many more customers to be impacted and could stifle growth in these new areas.

Some other countries have had caps like this and worse for some time.  I just can’t get warm to the idea though.  Bandwidth is a commodity that gets cheaper to deliver by the day.  There is a ton of dark fiber out there: fiber optic that is in the ground but isn’t even being used.  We can send more data over a fiber than ever before.  Perhaps the only problem in sight is that a new generation of routers may be needed to take us to the next level.  I agree with Stacey Higginbothom who says this is really a symptom of the duopoly or poor number of choices among broadband providers that most communities have.  As usual, these companies cry out that they must be granted monopolies to build the infrastructure, and then they deliver mediocre service.  What is irksome is that the monopolists get to change the deal after the fact without recourse.  Services like this should get better over time, not worse. 

The reality is that this is just another example of a company creating Artificial Scarcity.  The strategy doesn’t work in the Digital Age, at least not for long.  What it does is to provide the fuel for someone else to come along and disrupt the heck out fo the monopolist that put it in place.  The RIAA are the best known example of a bunch that lost out after creating Artificial Scarcity.  Time Warner will find that if their changes are onerous enough, people will look for alternatives, and it will be profitable for others to produce the alternatives.  The irony is that big companies have watched this strategy tried and failed many times and yet they still keep bringing it up.  Not enough B-school cases on it I guess.

Posted in strategy, Web 2.0 | 2 Comments »

Where Did All the Software Seed Money Go?

Posted by Bob Warfield on January 20, 2008

I read with interest Stacey Higginbotham’s GigaOm post on VC investment in 2007.  The gist was that there’s no bubble here, at least compared to how much had been invested in the last bubble.  The chart presented shows that there was a good-sized drop in investments in the wake of 2001 (a bubble bursting), and that while levels have steadily grown, they’re not really back to the levels of the bubble.  What I found more interesting was the apparent indication that the relative mix of investing stages is unchanged.  The chart shows VC’s invest about as much in startup or seeds as they ever did. 

As usual, the Big Picture tells us very little.  That’s why I can’t leave data like this alone, because you never get the whole story from a single chart or average.  There’s almost always some juicy insights if you drill down.  Fortunately, the data is readily available.  It came from PriceWaterhouseCoopers quarterly MoneyTree report.  The thing that was bothering me about the original article was that I know for a fact seed investing has changed radically.  Once upon a time seed investing was all the rage.  The biggies got big by making the right seed investments.  Many of them used to look with some disdain at firms that were later stage investors.  In fact, the disdain extended to entrepreneurs who accepted Angel money rather than going with a top drawer firm for their seed money.  Such entrepreneurs were doomed never to be able to get the “good” money if they strayed from the path.

These days VC’s will euphemistically tell you they’ve become “stage agnostic.”  Having been out looking at the landscape, talking to VC’s, and talking to entrepreneurs, I have become skeptical.  While there is still some seed money available, it seems that by and large the VC’s would much prefer if you raised your seed from Angels and didn’t darken their doorsteps too much until you’d proven your deal had legs by building a product and getting some customers.  Less risk, in other words.  The question the entrepreneurs ask, and I confess I still don’t have a straight answer, is whether that process means additional dilution.  Many of the entrepreneurs I talk to are taking a view that they’d rather just try to go it without VC rather than deal with “the new model” (as one VC I know called it).

Getting back to these numbers, they didn’t mesh with what I’d heard.  So I started crunching.  First thing is to just look at Software.  I’m a Software Guy, the others I talk to are also Software Guys (and Gals), so what’s happening with Semiconductors or Green Energy is of little interest to us.  Here, the numbers tell an interesting story.  Take a look at what’s happened to the % of dollars out of all dollars invested that go out in seed rounds:

Software Seed Investments

To be clear, these are only software dollars being considered, but as I said, I’m a Software Guy.  And now we can see it.  Seed investing in Software companies started falling like crazy in late 1999 and has never really recovered.  I considered that perhaps the drop was due to the oft-repeated claim that it is much cheaper to start a software company these days (LAMP and all that sort of thing, you know).  The problem is the curve looks the same when we consider the number of seed investments as it does when we look at the dollars.  There are just a lot fewer seed investments being made.  And that’s exactly what one hears on the street.

Did all the money go to Green Energy or something?  Unclear, but VC’s invest about as much in Software as they ever did, just not at the Seed stage.  Here I’ve overlaid the $ of Total VC dollars invested in Software against the other curves:

softwareseed2.jpg

Note how Software took off in the beginning and has been pretty stable ever since, although the last data point has dropped off to a low not seen since the early 90’s.  Perhaps those entrepreneurs who don’t like The New Model are having a go of bootstrapping all the way.  Or maybe software is just not in vogue as much any more.  Still, that green line is pretty noisy.  It’s a bit early to call definitive.

Out of curiousity (some might say spite), I wanted to compare this to Fred Wilson’s data on VC fund returns:

VC Fund Performance

Now that’s just fascinating.  The two are certainly highly correlated:  fund returns fell off at the same time the VC’s quit making seed investments.  Is there cause and effect?  Who the heck knows?  It would be interesting to understand whether those few VC’s still doing much seed investing are the ones showing good returns relative to those who are not.  One thing is for sure.  The VC biz changed for the worse about the time the Software Seed investments stopped. 

Posted in venture | 3 Comments »

 
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