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Archive for March 18th, 2008

The Disruptive Entrepreneur’s Dilemma: Seeds Ain’t What They Used to Be

Posted by Bob Warfield on March 18, 2008

Robert Scoble has an interesting post. He muses about the difficulty one entrepreneur has getting funded versus another.  Andrew Mobbs has a dream of using cell phones to replace credit cards.  It’s an interesting idea.  The trouble he has is a little chicken-and-egg problem.  It’s a big idea that requires a fair amount of capital to test.  In the old days, there were lots of deals rambling around where “a guy and a slideshow” could get a couple of million dollars to build the product and get the first customers.  Yet investors these days expect you to come to them with ideas that are at least partially tested.  They’ve moved out of the seed business, despite what various rounds may be called.  The current paradigm expects you to develop your 1.0 product and get some initial customers signed up for it on angel money.  That typically means $500K to $1M at most. 

Scoble contrasts Mobbs idea with that of Omar Hamoui’s AdMob, which is a mobile advertising network.  Apparently it got funded by top-tier firm Sequoia within 24 hours.  Why?  Because they had a product and customers before they went calling on VC’s.

The Seed Funding business has gone way South in the wake of the last Dot Com bubble bursting.  I’ve written about this before and put together some data on it:

Software Seed Investments

I’m sure the VC community feels like they’ve taken a less risky approach that will improve returns, but you have to wonder.  Returns tanked almost in exact synchrony with the move out of seed funding:

VC Fund Performance

There’s another important factor at work here that Scoble touches on.  Reducing access to capital will tend to focus the deal flow around deals that can get done with minimal capital.  That’s why we see so many me-too ho-hum Web 2.0 deals.  It’s easy to build the software.  The Valley and its current bootstrapping strategy has got everyone focused on quick experiments that don’t add a lot of value.  It’s fun, but it seems to be largely a fad that isn’t discovering many new killer apps.  What happened to asking whether an idea is a feature, a product, or a business?  How does Fred Wilson’s new investment baby, Disqus, add lasting value?  It’s an add-on to blog comments.  In other words, a feature, not an application or a business.  Why can’t the top 2 or 3 blogging platforms add the Disqus functionality and commoditize it out of a future?  It’s not even that there’s just one of these.   We also have IntenseDebate, TechStars, SezWho, and CoComment.  Wow, now there are 5 companies focused on this feature for blogs?

Mathew Ingram reports that Fred Wilson says that he seesthe company as doing for comments what RSS did for blog posts and other information, and that Disqus could be the one that “unlocks comments from blogs and brings them into the mainstream” and also “surfaces the most interesting blog comments and blog commenters.”   Let’s suppose they’re successful, which is a big if, because I’m not sure comments are as valuable as RSS.  RSS boiled down to one company, as David Winer has lamented, and that was Feedburner.

There’s a whole passle of similar deals out there.  I just signed up for the latest wunderkind, FriendFeed, becauseScoble said he’d converted and saw it as a TechMeme and Google Reader killer.  Scoble got bored with TechMeme because of the sameness and big media presence (yeah, I warned you this would be the case) and he was fed up with the performance of Google Reader.  “Does FriendFeed solve a problem or highlight it?” asks Josh Catone.  Well, it puts things in one place, sort of.  I haven’t found a way to import the OPML from Google Reader yet so I don’t know how Scoble imported his 800-1000 feeds.  Perhaps he’s just quit reading them and gone totally aTwitter.   But, now that you have all that stuff there, it seems like you’re tee’d up to be a total Attention Overload victim.  I can’t see much in the way of tools to help you manage that.  It’s just another simple minded piece of software that’s cute and was quick and cheap to build with modern web technology, but does it really help anybody?  Is it profound.  No.

Maybe it’s time for VC’s to move on from Web 2.0, at least if this is as fresh as it’s going to get.  Marshall Kilpatrick points out that the long tail is absent from MySpace just as on Facebook.  I’m not sure it’s really absent, but it is pretty slim pickings.  More importantly, maybe its time to actually consider looking into funding something significant.  VC’s are not unlike any other portfolio manager.  If their portfolios are too highly correlated, risk increases.  If they’re correlated with their whole market, their returns regress to the mean. 

Who is going to do something different to change this boring status quo?  What Would Warren Buffet Say About VC Investing Today?  We’re missing out on a lot of good ideas simply because the initial capital required is too great for today’s model.

Time to move on, these are not the droids you’re looking for.

Related Articles

VC Confab:  Please, no more Social Networks…

Fred Wilson quotes General Doriot in saying that the best returns are from seed investments:

The riskiest part of the spectrum has to date proved the most rewarding, and the greatest capital gains have been earned in companies which were started from scratch.

And yet he goes on to explain why VC’s prefer later stage investing:

Its about money. Let’s say we own 20pcnt of a company and we have to invest 5mm over five years to get to an exit. Let’s say that exit is 250mm. That’s 50mm of value for 5mm of investment or 10x. The partners in the firm get 20pcnt of 45mm or 9mm

Let’s say you buy a company for 100mm. And then you sell it three years later for 200mm. That’s 2x but a 100mm gain. The partners in the firm get 20pcnt of 100mm or 20mm.

This math doesn’t work for me.  First, what VC has 20% of the company?  More like 80% of the company owned for $50M by the time all rounds are counted.  The company will likely go for more than $250M too if it IPO’s.  And we’ve left aside all talk of the liquidation preferences that are always present in these deals.  Though the 10x is probably representative. 

My math would be more like 70-80% ownership for $50M over 5 years.  That gets the VC’s 80% * 250M = $200M, or a $40M carried interest.  Note that this is not an especially happy outcome for $50M invested–a 4:1 return.  The happy outcome is an IPO at $500M or more.  Now we’re looking at 80% * 500M = 400M on 50M, an 8:1, and the partner’s carry is $80M for 5 years work vs $20M for 3 years work. 

The real issue is there aren’t going to be so many $100M late stage deals to join if there isn’t enough seed money to fund getting there.

Posted in strategy, venture | 5 Comments »

NDA’s And Other Obsolete Paper Artifacts

Posted by Bob Warfield on March 18, 2008

While we’re on the subject of obsolete paper artifacts like resumes, Zoli Erdo brings up the topic of NDA’s.  Specifically, that VC’s won’t sign them.  Most big companies won’t either, or if they do, they want you to sign their paper, which may say something completely different than you’d expect.  The last time I signed an IBM NDA, for example, (it’s been many years!) it said they owned whatever it was you were about to show them automatically.

What about the shoe on the other foot.  You go to interview for a job with a startup, and they want you to sign an NDA.  Do you sign it? 

You’re going to have to sign an NDA and Intellectual Property Agreement if you take the job, but personally, I have a hard time signing an NDA as part of a job interview.  I usually will just ask them to stick to talking about things they’re comfortable with outside an NDA.  And, I’ll remind them I’m a person of integrity who won’t reveal their secrets.  If they’re overly uncomfortable with that, maybe we shouldn’t be talking. 

Let’s face it, the biggest reason for an NDA is to protect the patentability of ideas.  That’s a real reason to want an NDA.   A clock starts running when you show an idea outside an NDA that limits you ability to get a patent on it.  But, the clock is a year long.  If you aren’t going to get that patent filed within a year, aren’t you kidding yourself?  Especially if you are a startup? 

There’s one other piece of paper I file as obsolete.  That’s the non-compete.  Again, companies will require one if you join, and you’ll need to sign it, but I’ve had them presented for lots of other types of much more casual relationships.  For example, I was being asked to a very short-term consulting gig by a VC one time and as part of the agreement they wanted me to agree that I would not attempt to hire anyone from any of their portfolio companies.  I had to pass on that one.  It didn’t make sense to me.

Posted in strategy | Leave a Comment »

This Blog is My Resume

Posted by Bob Warfield on March 18, 2008

Interesting flurry of blog posts about how blogs make better resumes than resumes.  If you think so, you should certainly consider this blog as my resume.

People ask me what I’m up to a lot.  The answer is, I’m looking for my next gig, and meanwhile, I’m learning new things and networking a lot.  The SmoothSpan Blog gives me a chance to share back some of what I learn along the way.  I’m lucky enough to have  a large enough network that it has reached critical mass and continues to grow without too much effort.  The blog helps that networking process too.  If you’re interested in cloud computing, whether SaaS, Web 2.0, or Enterprise 2.0, and you want to get a cup of coffee to compare notes, drop me a line and let’s get in touch.  I may or may not want to get a cup of coffee, but I’ve met a lot of great people that way.

Meanwhile, I’m not sure if the resume is dead or not.  A lot of good people don’t have blogs and may not enjoy writing as much as I do.  For certain professions, such as markets or product managers, its hard for me to imagine why you wouldn’t have a blog, but for engineers it is more rare and less highly correlated with essential skills.  I would say that you can learn a lot about a person reading their blog, so I’m always excited to find someone I have just met has one. 

For those of you not yet ready to throw the resume in the trash, mine is available and current as well, but I suspect this blog will be more illuminating.

Cheers!

Posted in strategy | 5 Comments »

 
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