January 25, 2012

Wither the Giants? The Arrogance of Aging Incumbents

By David Pakman

My friend and former colleague Greg Scholl sent me an article this week and a provocative quote jumped out of it. Here is the view of Irwin Gotlieb, CEO of one the largest global advertising agencies on the planet, as he shared his view on this year’s CES. Given last week’s SOPA/PIPA debate, I thought Mr. Gotlieb’s observations were worth elevating, as they effectively capture a way of thinking that ultimately undermines incumbent media companies and the businesses that serve them:

We have a responsibility to ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business.

A bold statement and, it seems, a common mindset for many incumbent business giants in their respective industries; a mistaken belief that they can somehow coax disrupting forces (be they new companies, or larger macro consumer trends) into conforming to their legacy business models and cost structures. As we have seen countless times, the actions of incumbents, when faced with technology disruption, often is to turn to litigation, legislation or other non-market strategies (i.e., anti-trust investigations, artificial price barriers) in an attempt to delay or block the challenging technology or companies. This perhaps work as a delaying tactic in the short term (Rio MP3 player case, Napster, book publishing agency pricing model with Amazon) but fails in the long term.

Mr. Gotlieb’s apparent belief that he and other advertising agency leaders can “ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business” is futile in the long run but perhaps more pernicious is the implicit arrogance of thinking the market force of the web can be channeled into their bank accounts by sheer force of will. Of the many problems with this way of thinking, paramount is the ability to rationalize away making the hard choices and decisive actions to ensure the Group M’s of the world play a vital role in the new economy as they have done in the legacy one. (Cue Scotty from Star Trek…) “You cannot change the laws of physics.” For Group M and other incumbents, it’s almost difficult to fathom, given how entrenched and advantaged they are, that they could drop the ball. But, many will, as history has shown over and over again in times of market transformation.

Technology forces which bring greater efficiency and transparency to markets simply don’t care about privilege, access, and rolodexes. They disrupt predecessor markets because of structural problems like price opaqueness and false scarcity that no longer “work” in the new market. Look at Google: their entire approach to advertising is to ultimately remove the middle man just as increasingly, the media buying side of traditional agencies is the inefficient middle man, marketing up the cost of media to provide their services. Google is now selling $40B of media every year, the majority of it without a middle man (or at least with different sort of middle man … and in any case, getting far lower margins than traditional media bought by agencies.)

We watched as the music industry delayed their demise by suing Rio, Napster, and literally hundreds of others, delaying adoption of new business models not based on scarcity. We listen to Jeff Bewkes decry Netflix as the Albanian Army as he feverishly works to reduce their influence with his content. We observe the movie industry fight with everything they have to protect the windowing strategy and defend limited access to content instead of move towards open and immediate paid access to their movies. (Fantastic post on this from Rich Greenfield here, “Innovate Don’t Legislate”.)

And, as a microcosm of this larger conversation, we watched, over a very short period of time in the SOPA/PIPA debate, as the web demonstrated the disruptive advantages of network effects and scale, as over a period of weeks, legislation that appeared all but ratified was shuttered, up to and including an implied Presidential veto. Heady stuff. Granted, if we extend the metaphor and use SOPA/PIPA as a microscope, there are extremes on both sides, and it will be messy and require compromise if the big media incumbents and new technology disruptors are to learn how to co-exist. For big media companies and the service businesses that cater to them, this means recognizing the practical realities of changed business models – probably mostly that their cost of production needs to drop dramatically and they need fundamentally to re-think distribution and customer relationship management to remain profitable and relevant. On the tech side, it means recognizing that progress requires some level of institutional engagement and political compromise – because like it or not, this is the way our system of government works and how laws get written. This won’t be easy or natural, as it’s anathema to the culture of how new media tech and the startups that encompass it conceptualize and operate in our worlds. Facing reality and then demonstrating a bit more collaboration and compromise, however, would go a long way and be better for the customer, who, like our democracy, these industries ultimately serve. Because it’s the customer who is in the driver’s seat, and increasingly, they know it.

Perhaps it’s Pollyanna, but if so, my chips go on technology. Big media has the most to lose because after decades of the game being rigged in their favor, increasingly, it’s the opposite. Of course it is difficult and painful for media incumbents to embrace digital markets considering these markets ultimately are smaller and have less attractive economics. That’s presumably why big media executives are so well compensated – if it was easy, anyone could do it. The alternative, however, is to be disrupted by new entrants which don’t have any allegiance to aging business models and who could care less how out of whack someone else’s cost structure is. Coming back to Mr. Gotlieb’s view, I offer these thoughts. First, incumbents won’t be able to meaningfully guide the technology juggernaut of more efficient advertising mechanisms, so it’s perhaps better for them to focus their energies and advantages towards thoughtful reinvention. New technologies are bringing actual measurable performance and more efficient means of buying to a large share of advertisers. The challenge for incumbents is to adapt their enterprise to embrace this chaos and profit from it. The good news is, it’s doable. However, to think they can bluster their way out of this disruption is a fool’s errand.

This work is licensed under a Creative Commons Attribution 3.0 Unported License.

January 16, 2012

As Big Media Goes Digital, Markets Shrink

By David Pakman

Lots of debate, lately, about Big Media and their bumpy transitions from analog incumbents to digital providers. Over the past few weeks we have had debates around the proposed PIPA and SOPA legislation, Rupert Murdoch (that bastion of new media savvy) railing against Google as a “pirate” and @fredwilson chiming in on the predictable monopoly actions of his cable company, Time Warner Cable in their dispute with MSG Networks. Yesterday Fred posted his views on the weaknesses of Big Media extending their scarcity business models to the internet.

My long-time opposition to scarcity models for digital media content online is well established on this blog and before that at Apple, N2K and eMusic. One thing Fred mentioned inspired me to revisit this subject, and that is market size. Fred says,

A bunch of things happen when analog media markets go digital. First, prices come down. The cost of distributing digital content is far less than physical goods that used to carry that content (printed books, plastic CDs and DVDs, etc.). Consumers understand that and expect prices to fall. The music industry hated selling songs for $0.99 when CDs used to sell for $18. But almost no one bought tracks for $3.49 when digital music was first sold online. At $0.99, consumers bought a lot. Next, bundles break. Consumers expect to pay to hear or watch only the songs or episodes they want. TV shows sold as 22 episodes on a DVD for $49 will fail when you can watch any episode for $0.99. Consumers don’t like bundles when they have a cheaper alternative. And then competition increases. Because the old guard doesn’t have monopoly distribution anymore, lots of alternatives enter the market. Consumers get more choice. These are all good things.

But finally, and this is where my view diverges with Fred’s, markets shrink. I used to posit that when content is offered widely online with few restrictions, more of it will be sold. But because prices fall, bundles break, and competition increases, I think the legacy content owners end up with smaller markets. They may reach more people, but in many cases they will ultimately make less money per title.

This is not necessarily a bad thing. Since it costs almost nothing to distribute it digitally and the cost of online marketing is far less than on traditional media, content creators can still have great businesses and make lots of money. But the main reason, I think, so many legacy content companies resist the new digital markets and their new business models, is because their businesses will shrink. And that means significantly changing your cost structure. Fewer private jets and executive dining rooms with 4-star chefs (remind me to tell you about my lunch at News Corp a few months back…)

Because the new economics are scary, the incumbents resist it. But the startups embrace it. And this is why we do what we do. As digital media entrepreneurs, we are not working to preserve a legacy business model, we are hoping to create new ones.

January 4, 2012

Got Klout?

By David Pakman

Marissa and I are pleased to discuss our latest investment (and our first one as a team). We are excited to join with fellow firms Kleiner Perkins and IVP in investing in the internet’s standard for measuring influence, Klout. As the internet moves from pages to people, Joe Fernandez‘s vision of the need for “Pagerank for People” is spot on. Klout’s algorithms score the actual influence of people as they share on the social web. They attempt to measure your influence by observing interactions on the social web. As we all work to build and manage our online identity and profile, Klout helps measure our reach and topics of influence.

In every other mass media, measurement provides a benefit to the advertisers who subsidize that media. Large companies have emerged based on, frankly, less than perfect measurements systems. In TV and radio, panel-based inference measurement somehow have passed as a legitimate way for advertisers to make decisions on where to spend billions in advertising. These incumbent measurement firms became standards for measurement within their domains. Klout has the benefit of being able to measure actual data, not inferred data. They aim to score the entire social web. They currently have scored more than 300 million users and are scoring and re-scoring a mind-boggling amount every day. With more than one billion people on the social web today, they are by no means complete. Nor are their algorithms perfected. Just as Google changes their PageRank algorithms hundreds of times a year, Klout will evolve their data science as the social web changes to provide the most accurate influence scoring on the web.

Klout has the distinction of being one of the few companies whose monetization plans actually benefit its users. Using Klout to identify influencers in particular topics, brands offer new products or special “Klout Perks” to you in the hope that you will like them and share your point of view with friends and followers. This relationship, unlike interrupt-driven advertising, benefits both parties. Klout has worked with more than 100 brands like Starbucks, Audi, Spotify and Microsoft and has hundreds more lined up to do the same. Joe speaks infectuously about his plans for taking Klout to “the real world”. He imagines restaurants knowing your Klout score when you call to reserve a table, airlines printing your Klout score on your boarding pass, and of course call centers knowing your Klout score when you call to complain. Already hotels are using your Klout score when you check in to decide upgrade policies.

Aside from this exciting vision and stellar progress, two other themes draw us to Klout. One, we hold a passion around seeing the relationship between a brand and a customers changed. We believe that the social web requires brands to respect us more. To take our point of view more seriously. To adopt policies consistent with good service and fair treatment. No human should have to sit on a plane for seven hours on the tarmac, of course. But also, utility companies should be held accountable for poor service, cable companies should be held accountable when we stay home from work for a day and the repair crew never shows up. Banks should be called out for imposing hidden fees in the dark of the night. And finally, our governments and elected officials should hear from more of us more often. In this age of declining influence of traditional media, Klout enables our individual voices to be more influencial with instutions who hold power. That is exciting to us.

And finally, Klout supports our view that we are shifting from an attention economy to a data economy. The last ten years of digital media on the web have been built on attention. Those web properties that amassed our attention (generally by stealing our eyeballs away from traditional media) and reached scale have been rewarded with great businesses. Yahoo! got our attention with email. Google got our attention with great search. Facebook gets our attention with photo sharing. We believe the next ten years will be built around data, and in particular, social data. We have invested in M6D for its leadership in social ad targeting. We invested in Singly for its leadership in building a social data locker and app platform. And now we are investors in Klout for its leadership in social influence measurement. We salute Joe and his team for amazing progress so far, and are pleased to be along for the ride.

January 4, 2012

Klout Dominance: Why We Believe

We are big believers in Klout! I was lucky enough to participate in the Series B financing. Since that time, through the hard work of Joe Fernandez and team, Klout has experienced explosive growth. With that backdrop, I am thrilled to announce Venrock’s participation in the Series C Financing. 

Klout measures consumer influence across social media. As social platforms continue to grow, it becomes increasingly important to have a standard system for identifying and measuring influence. Klout is this global standard.

The Social Media category continues to fragment with new platforms showing explosive growth. These platforms are quickly becoming real media channels with scale.  As with any media channel, businesses need to understand the nature of the channel, the mix and makeup of the audience, who matters in that audience, and how to reach that audience at scale.  In a broad sense, I like to think about Klout as the Nielsen of social media. Klout enables advertisers to determine where and whom to target to help gauge the efficacy of advertising. Any consumer-facing company that uses a CRM product will want Klout to enhance their customer outreach. Any application can use Klout to better understand their consumers by using influence scores and categories.

Klout uses the data it collects across different social media sites to identify influencers and segment them according to influence category.  Externally, consumers have a single Klout score that measures their general influence online, but behind the scenes these users are segmented according to an incredible array of categories.  Klout currently analyzes a variety of sites, including Facebook, Twitter, LinkedIn, FourSquare, YouTube, Instagram, Tumblr, Blogger, Last.fm, Google+ and Flickr, with many more on the way. Advertisers and businesses can access influence data via an API to run targeted campaigns with consumers in different categories of interest. 

The imprimatur Klout has achieved with brands and agencies is remarkable. The company has achieved a high level of recognition and has emerged as the standard for influence. As the web is rebuilt around people rather than pages, Klout has become the next critical layer of the analytics and measurement stack.

Permalink

| Leave a comment  »

January 2, 2012

Happy New Year!

By Ray Rothrock

Like always, at the end of the old year and the beginning of the new, there are many articles and magazines that try to capture what just happened.  It’s always fun, but hey, we all did just live through it.

I was feeling inspired Saturday morning looking over some of these year-end reports, so to speak.  In my line of venture capital I’m often asked, what’s going on in energy and venture.  We always seem to do these reflections in December.  So, not only did I reflect but I added a bit of  ”where to now?” in my blog piece.  Feeling sporty, I sent it the HuffPost and they published it.

http://www.huffingtonpost.com/ray-a-rothrock/energy-venture-capital_b_1178721.html

December 2, 2011

“Great” is Tough to Pick out of the “Good” Crowd

By David Pakman

The following is a guest post by my partner, Bryan Roberts. (@brobertsvc) He is one of those legendary VCs who, at about my same age, has invested in many of the most spectacular healthcare companies created over the past decade. He has been the highest-ranking healthcare investor on the Forbes Midas List since 2008. He is wise beyond his years and a great mentor to me. I found this post quite inspiring and wanted to share it widely.

The oldest adage in start-up’s, for entrepreneurs and VC’s alike, is “the key to success is the quality of the people.”  Markets and innovative approaches are important, but my experience supports this notion unequivocally. I have had the good fortune to be involved from an early stage with several billion dollar companies, and most found success after a material pivot from their original approach – Athenahealth, Ironwood Pharmaceuticals and Sirna Therapeutics to name a few.  “I invest in people” is the start-up ecosystem’s version of motherhood and apple pie, but how do you identify “Great” prospectively?

Whether explicitly or not, everyone has their own answer to this question, and based on the success rates, those answers by and large stink. I don’t have a Magic 8 Ball on the topic, but two things make this the issue I wrestle with most: (1) the often-unpredicted success or failure of “nobodies” or “sure things” respectively, and (2) the outsized rewards for locating great, juxtaposed with the probability of abject failure when settling for good. The A+ entrepreneurs with whom I have partnered have come in unusual packages – simply put, there has been no central casting: a biology post-doc who thought about opening a microbrewery B&B; a large animal veterinarian who went to business school in his late 30’s; an x EMT who was also nephew to the President among others.  The best VC’s seem to show the same diversity of background.

I now focus on these attributes:

While potentially controversial today, I have come to believe that great entrepreneurs and great VC’s are two sides of the same coin.  Both embody these characteristics.  They are maniacally focused on changing the way we live with innovations others thought were not possible. They are passionate about building a great company and put the company before themselves.  No great VC takes solace in having a portfolio when an individual company struggles – like entrepreneurs, this is deeply personal and about so much more than just money.  Their roles are complementary, like looking down opposite ends a telescope, but those different perspectives to a problem can be extraordinarily synergistic.  Great future entrepreneurs can look like great young VC’s, and vice versa – three of my recent investments are stellar companies started by these “crossover” folks.

All venture firms are simultaneously never, and always, looking for team additions.  I believe this is a direct result of how elusive it is to identify those who will be not only smart, passionate, personable and high integrity, but also successful in this ever-changing, ambiguous entrepreneurial world where what worked last time is no recipe for future wins – and more likely charts a path to mediocrity.   In fact, my own difficulties in finding conviction around potential team additions for our firm is what spurred putting these thoughts on paper.

November 16, 2011

Fighting Disruptive Business Models Through Legislation

By David Pakman

While there are countless examples of emerging technologies disrupting incumbent industries, there are very few examples of new industries beating the old through legislation. Generally, Washington influence and power is amassed over many years as nascent companies and industries grow. Few industries have the power and influence of the copyright industry. Coincidentally, very few industries are under as much business pressure thanks to tech disruption than the content industry. The two are mixing in poisonous ways.

In 1996, I had a front row seat through my friend Nicholas Butterworth and his involvement with DiMA as the Copyright industry forcefully negotiated dramatic changes to copyright law for the digital era. Most importantly, the DMCA included a hard-fought safe harbor protection for online companies providing them protection from infringement claims if they dutifully followed certain procedures. This has served our online community well.

Despite this, the copyright industry, still not comfortable with navigating the transition from analog to digital, is agressively attempting to force new changes to copyright law that would unquestionably cause lots of collateral damage to the internet and to internet companies with digital native business models (which are, coincidentally, a threat to traditional media companies). The Stop Online Piracy Act (H.R. 3261), introduced in the House in late October (which includes the most controversial parts of the Senate’s PROTECT IP Act (S. 968)), would be bad for internet companies, for internet expression, and for the future of copyright law. Right now, the digital innovation community is the likely engine of economic growth. This is not the time to hand out business model protection to traditional media companies.

More information here and here.

November 14, 2011

The Abundance of Scale

By David Pakman

During last ten years of the web, people have focused on scale as proof of value creation. Given that advertising is the dominant business model of the web, it has been presumed that sites which reach web-wide scale are valuable. The presumption was that sites with enormous scale will be able to monetize themselves at big numbers because of their overwhelming access to the web’s users. It is true that in order for big ad businesses to be built online, publishers need scale. But something is changing. Thanks largely to a connected social graph, mobile access, and the web’s global penetration, it’s just not that hard to get to scale anymore.

In 2001, fewer than 33 web properties had more than ten million monthly unique U.S. visitors. Last month, more than 124 did. In 2001, around 70 web properties had more than one hundred million monthly US page views.  Last month, 307 did. [This data comes from Compete.com, which focuses on US only. If you double it, you usually get reasonable worldwide figures.] More and more web/mobile businesses are reaching large audiences very quickly. In its 18 months since launch, Instagram reached 12 million users (not sure if this is downloads, registrations, or active users. My bet is it is simply registrations. Still — it’s impressive for a team of under 10 people!) AppData shows 27 Facebook apps with more than ten million monthly active users.

With it becoming easier to reach such scale, there is no longer a scarcity of scale. This means the value of achieving scale is declining. As investors, if we bet on properties that have simply “become big”, that bet may no longer be enough to establish value. The next 10 years of the web will be about utilizing data on top of scale to build businesses. We are entering a period where the business model innovation will become more important than the innovation producing traction and engagement. It has always been impressive to see startups with incredible traction. But just using this traction to produce scale will not be enough to create the great companies of tomorrow. [Some of these thoughts were expressed earlier in my post "Confusing Traction With Value".]

November 6, 2011

Natural Gas is a Bridge to the Future. But we have to work together.

By Ray Rothrock

David Brooks of the NYT in his op ed on Nov 4, 2011 talks about the shale gas revolution — and what a revolution it is!  Developing and exploiting natural gas through fracking is only the latest technology to come on the scene.  In the mid 1970s the United States figured out how to drill for oil and gas in deep sea.  In the 1990s fracking was perfected by George P. Mitchell (an Petroleum Engineering from Texas A&M ’40, by the way) even though it had been around for some decades.  This event has opened up a whole new source of energy for the United States and many other countries around the world.  (We are a very lucky country, in case you don’t know).  Some say as much as 100 years of fuel is possible.  Further, gas is a key feedstock to many other chemical processes not just a fuel for heating our homes or powering our electric power plants.

Brooks points out that economics drives energy in the U.S.  He is so right.  Now with plentiful gas, a new floor for energy prices has been put in place.  Also what Brooks brings out so well is the demonization and the personal attack element that the various political parties seem to be applying to this find.  His statement that “Especially in the Northeast, the gas companies are demonized as Satan in corporate form.”  Wow.  That’s pretty strong and pretty awful if this what it has all come down to.

Energy is pivotal to modern society.  Without it, we freeze, our economy stops, and basically everything you know will go away — perhaps even the law.  So, rather than going for someone’s throat because they are bringing energy to us, we should open a discussion about how best to do that.  We should make sure it’s done in a way that fairly balances the risks and rewards for the producers and the consumers.  How to have a rationale discussion in this age of political ideology, demonizing things we don’t like, and never listening to the other side is the real question.

We have to start this dialogue now.  We have to embrace this new found source of natural gas from fracking now.  This is a bridge to a new world of cleaner, reliable energy sources.  The road is long and if not taken, the United States will begin to slip.  One day, we’ll wake up and wonder what happened.  I wonder who will be blamed in that day.

October 27, 2011

Thanks

By David Pakman

I woke up this morning with a pleasant, warm feeling in my gut about how thankful I am for all the people around me in my life. In particular, I was thinking about the smart, inspiring people with whom I am lucky enough to interact most days. So much of who I am and what I know is a result of this meaningful people network. I started to write a post actually thanking so many of you by name, but as the list got longer and longer, I realized just how many people I depend on to help me learn, think and shape my view of technology, society and the world at large. Thanks to Twitter, this list includes scores of people whom I really don’t know very well but their thoughtful missives arrive on my desktop multiple times a day. Wow, I am lucky.

The past few weeks have been a pretty stressful time professionally (this happens any time a VC is in hot pursuit of an exciting deal) and have caused me to think about how I conduct myself professionally. Way back in 2000, before the first internet bubble burst, I got a really close look at some nasty professional (or, to many, perhaps unprofessional) behavior. Yahoo! had bid a lot of money to buy Myplay and AOL was blocking the deal. A few of the key execs at AOL, well-documented many years later, acted with inceredible impunity and dishonesty towards other companies in the internet ecosystem. They clearly believed life was a zero-sum game. In order for them to win, others had to lose. I was taken aback by that ruthlessness and really wondered whether I had to adopt such a view in order to be successful in life. For better or for worse, I concluded I probably couldn’t make myself behave that way day in and day out. I am a relentless competitor, don’t get me wrong. But I don’t act vindictively or intentional work to make others lose for sport.

Over the past few weeks, I have had another close look at behavior resembling this point of view. Again, for better or for worse, I don’t operate this way. Life is just too short. I work hard to win, and I want badly to win. But I also want to keep my head up high and work with great, decent people. Venrock is a firm that holds these principles in high esteem. And as I looked around me at those closest in my professional network, I found the same true of these people. It is these folks who inspire me the most and help me succeed in a tough but fun industry. And for all of you, I am thankful.

 

October 19, 2011

Is Social Data The Next Investing Frontier?

By David Pakman

Much of the excitement around internet startups over the last five years has been around social services. From Facebook to Foursquare, from Twitter to Instagram, from Yammer to Zynga, significant investment dollars and entrepreneurial effort has gone towards capitalizing on the fact that we are all linked together by connected devices. These connections present great opportunity to disrupt the traditional ways of attacking markets like shopping, travel, communications, media consumption, gaming, etc. There are plenty of other big investment themes, of course, like local commerce (Groupon) and cloud services (Cloudflare and Dropbox), but social has been the dominant theme. The first wave of social companies were social utilities and social media (including gaming).

I believe that is shifting and has been for some time. Other agree. We have been pursing alternate investment themes these past few years and the largest recurring theme for us has been data. This is also not a new theme, but it is growing in prominence and awareness, punctuated by this week’s Web 2.0 Summit whose theme is “The Data Frame”. We have invested deeply in data-based businesses whose efficiencies disrupt their less-efficient or less powerful legacy brethern. AdTech is one such area. Healthcare is another. Payments is a third. Security is a fourth. And soon, the consumer web is likely to be further transformed by businesses based not on social utility, but on social data.

Plenty of consumer startups use data to make product decisions. That is not what this post is about. It is about consumer businesses actually based on the value of our individual social data. Through the use of so many exciting social utilities, we are creating more data about ourselves at an increasing rate. This data becomes more valuable to us when developers can access it in an aggregated and trustworthy way.

Today, an investment we seeded back in March called Singly is making its intentions known at Web 2. Their vision is audacious; individuals must be in control of their social data. I blogged a little bit about this opportunity here. Today Singly emerges as a developer platform to bring that vision to reality. John Battelle blogs about it here. I think their emergence shines a light on the investment opportunities around social data as well as the opportunities to launch open personal data platforms.

Jeremie Miller, Singly’s Co-Founder will present today, Wednesday October 19 at 2:20pm PT/5:30pm ET. You can catch the livestream here.

September 6, 2011

Where Oh Where have the Green Jobs Gone

By Ray Rothrock

David Brooks in today’s NYT (Sept. 6, 2011) talked about where jobs aren’t.  Great question.  The column dives into the government spending on green jobs and various mechanisms with which it assist companies.  This is worth talking about.

I have heard from every politician from Vice President Biden to every congressman or Administration official I’ve met in my role at the NVCA who says, “The government should not pick winners or losers.”  SO TRUE!  So why does Uncle Same go ahead and pick companies to back in either tax incentives, loan guarantees, and other measures.  This backhanded picking distorts reality. Digging into details as Brooks does reveals some favoritism in the process.   UGH!  I think it is impossible for a government process not to be political, if even only 1% political.  It tries to put in lots of red tape to cleanse a picking process but this is not good either.  The only way to eliminate unnatural forces in picking winners and losers is the private capital markets, or venture capital.

Venture capital is the greatest invention in the history of the world to pick winners and losers.  It is the most efficient allocation of precious capital and human capital towards a problem.  Creating a company is very very hard and the constraints are many.  It is these complications and many moving parts that if a company survives makes it a winner.   Entrepreneurs are special people who see problems and go about solving them in the hopes of profits and doing something great all along knowing that if it works out well, it will create wealth.  You all know the great examples of these successes – Intel, Apple, Genetech, Cisco, eBay, Google and many many more.

Venture capitalists don’t always get things right.   But in the long term over a variety of investment opportunities it gets it mostly right.  Otherwise the industry would die – and it hasn’t.  And it is not going to die.

Since energy companies take more time, usually more capital and have inherently different risk than many other startup companies including the Valley of Death, it would be best to let the professionals take on the task.  So here is my proposal.  Let the USG put in side by side capital into venture-backed energy deals.  Capital is precious and time is a startup company’s biggest enemy.  Vetting by the venture capital industry means that a company has been given a “market” chance to try their business plan.  Red tape is minimum and the risk is shared by all.  This capital will provide time for the startup to get it right.  Some will not work for sure.  But some will.  And when they do, then good things happen.  Jobs, jobs, jobs.  It is early days for Green Tech.  We should not give up now.  We should support investment in energy but through a market mechanism the US perfected – venture capital in partnership with the US taxpayer.

September 1, 2011

The Magic of Minecraft

By David Pakman

On the Saturday night before Father’s Day, I called my three kids together and asked them if they’d like to earn an extra five dollars. My wife and I were having a dinner party at our home that evening, and if they agreed to take baths/showers themselves, put on their jammies, brush teeth and settle into bed themselves, they could earn the extra money. Highly motivated, they took the challenge and went to bed without parental involvement. The next morning, after awarding them their well-earned compensation, the older two (ten and eight years old) immediately asked if they could buy the paid version of Minecraft with their money. And from that moment, my eyes have been opened to a magical creation.

What is Minecraft? It is a java-based web computer game the kids had been playing for a few weeks. The free version allows them to play a primitive version of the game in single-player mode. I checked out the paid version and upgraded them each for €15. The game was created by a mysterious and revered Swedish indie game developer named Markus Persson, known as Notch (@notch) and his team of 8 others called Mojang. As my kids showed me the somewhat crudely drawn lego-inspired world of trees, grass, oceans, islands, zombies, spiders, skeletons and the dreaded creepers, I was intrigued. They were mining for ore, collecting supplies, crafting new items with pre-determined recipes and sharing their learnings. There were no spaceships, no lasers, no bullets, no armies, and no blood. In place of the fast-twitch first-person-shooter games dominating console and PC gaming was a construction oriented world set in primitive times that has captured the imagination of about 10 million free users and 3 million paid users worldwide. (Yep, that’s more than $66M in revenue in less than two years.)

Watching them play in parallel on two different computers, I assumed there was a multi-player version. After some googling, I found literally thousands of multiplayer serversrun entirely independently from Mojang. We tried one and found very rich worlds with scores of simultaneous players and lots of rules. Not feeling advanced enough to join these evolved worlds, some googling brought me to a free java version of the server. It was Father’s Day after all and I’d rather be playing with my kids than not, so I launched a local server in our house. It worked like a charm. We all logged in and then the magic really started. We were now playing in the same world, chatting with each other, banding together to mine, build and defend our creations. After a few hours glued to our computers and to each other, it was clear we were going to be playing this for a long time. I was flying to California that night and thought this would be a great way to keep in touch with the kids, so from the car on the way to the airport I spun up a Rackspace linux box (Ubuntu, of course), installed java, and brought the server up. I made some DNS changes to the pakman.com domain name and launched our server more publicly. It would now be possible for us to play together no matter where we all were. Quickly addicted to the tasks of mining and building, I awoke at 4am California time each morning to play with my kids online for an hour before they left for school and I left for meetings. At night I’d check out what they made. They wanted to play Minecraft every waking hour of the day. And so did I.

Fast forward to today. The three of us have played probably more than 200 hours of this game, mostly together. We pray for bad weather on a Saturday to cancel tennis or other outdoor commitments so we can build and explore more of our Minecraft world. My kids have invited many of their friends, almost all of whom were already playing Minecraft, to join our server. We have more than 30 kids who have tried our world and at least 4 kids on at any waking moment of the day. I have consulted other Minecraft server Operators (“Op”, for short) and become a sophisticated Op myself. I upgraded the server to an 8GB quad core box to allow more simultaneous players. I moved the world onto a RAM disk to accelerate the delivery of graphic chunks to the clients. I now wrap our server in the community-created Craft-Bukkit framework to allow me to add and modify server mods without bringing the server down (the kids hate downtime). I added an economy to our world so the kids can buy, sell and trade items in exchange for money. I added a bunch of NPCs (non-player characters) to richen the world experience. I added a Group structure. New players come in as guests with limited abilities so they cannot trash the world (“griefing” in Minecraft parlance) until we trust them and know them. We even added an alternate world called The Creative where kids are encouraged to build elaborate structures. These kids created an entire town complete with a church, fire station, castles, restaurant, airport, farm, houses and a library (okay, I made the library).

A few weeks into the experience, I got a frantic call at work. Some kids had come into the server and were destroying homes and killing players. “Dad, quick, you have to do something. You have to ban these kids from our server!” So, I banned a few of the wrong-doers. It may not surprise you to find out that the few who were banned were already somewhat known as the trouble-makers at school. Now we have griefing-protection tools and anti-cheat technology on the server to help bring a little order to the world. Not too much, but just enough to keep the community healthy. What is happening here? First, it is important to understand that Minecraft is not just a game. Although known as a “sandbox” 3D construction game where users create in a virtual world with basic rules and logic that determine the way the world operates, Minecraft is a true phenomenon. Head over to YouTube to see this first hand. There are more than one million videos uploaded by gamers showing off their creations, tips and ways to mod the game. In this video that made its way around twitter a few weeks ago, a group in the UK created one of the most elaborate looking dams I have ever seen. In another one, a group on a server created a Happy Birthday message to Notch. Most extreme? This block for block replica of the Starship Enterprise or the Arc de Triomphe. The game is actually still in beta, the server is buggy and there is very limited developer support from Mojang. Despite this, there are tens of thousands of developers who have written mods and plugins, hundreds of thousands of skins and texture packs to alter the look of the game, and many community wikis and forums with hundreds of thousands of posts and articles. (It’s not particularly easy to mod the game without a nice API…these devs are disassembling java code and hacking it to make the game work differently.) Unconvinced? Watch this Best of Minecraft 2010creations video.

Notch and his unbelievably gifted team at Mojang have unlocked an enormous reservoir of creativity largely among kids. I was not too surprised to find my ten year old’s teacher allows the kids to play Minecraft in the classroom to teach construction and encourage creativity. But more than that, I am observing first hand how the players develop ad hoc rules for social interaction in these worlds. This is so much more than a game. This is the inevitable progression from one-dimensional social networks like Facebook to virtual world social networks. If the Mojang folks supported a more robust server architecture and possibly larger game maps, we could see worlds with hundreds of thousands of simultaneous players. I believe Minecraft fulfills the promise Second Life and IMVU have not; these players are not waking up and deciding to go into a virtual world. They are deciding to play and build in Minecraft and the world and social rules follow from that. Minecraft gives its players a reason to come together to interact, much like an outdoor BBQ brings us together to eat and socialize or a dance club brings us together to dance and socialize. Minecraft also presents a number of challenges to traditional video gaming in general. One of the reasons I believe kids love it is because every single block in the game is moveable and alterable. The entire game landscape can be redrawn by the players, one block at a time. This is enormously empowering to a child who lives within a strict set rules about what may and may not be touched in the real world. In Minecraft, you can touch everything. (The blocks do adhere to primitive logical rules like gravity and the effects of states of matter, so it is not a complete free for all.) In addition, the marvel of the game’s success cannot be understated. It has not even been formally released and it has 10M players? And it was developed by a tiny team (relative to big game development) who built and then leveraged a rabid community of their users, many of whom are technical enough to hack and improve the game in all sorts of unimaginable ways. So where can this all go? If the team at Mojang wanted to and thought this way, I think this game could be a platform for global social interactions and easily become the largest virtual world social network. I can see this reaching 100M players. They could more formally support the developer and multi-player server interfaces to really let the game be extended in more reliable ways. They could allow for different world generation algorithms to be used to create more variety in the basics of the map structure (which could unlock a different set of creativity). My friend (XMPP, Telehash and Singly co-founder) Jeremie Miller excitedly hopes for an ability to teleport among various servers without re-starting the game. This would require intra-world permanence of your items and state but would allow people to move from community to community very quickly. As constructed today, each client actually can create and run its own single-player game. Why not allow every client to be a server and host additional players? If they used Telehash, Jeremie points out that “anyone can portal to any other running world on any computer anywhere in the world.  Any server you’re on you can always build a “home” teleport to a world on your computer, as well as build portals from yours to all your favorite multi-player servers.” This is an exciting vision. Jeremie also suggests allowing media assets to be delivered from the server to client, currently not permitted. The only way for new characters and scenery to be introduced is to simultaneously mod both client and server. Allowing the server to add new elements to the client would obviate the need for all users to upgrade their clients just to receive new game items. This all being said, I wouldn’t change much. Ecosystems like this are fragile and are very hard to get right. Notch and his crew have gotten it pretty much perfect as it grows organically every day. I truly believe this team is quite genius. The amount of thought that went into getting this balance just right to encourage us to explore and learn on our own and then want to share our learnings is staggering. This week I purchased three tickets for me and my two kids to attend MineCon in Vegas in Novemeber, a community-created convention when the game will be officially released. Wanna come? If you’d like to try out the Pakman Minecraft Server, please send me an email and I will happily send you the address.

August 19, 2011

You Cannot Save Yourself to Prosperity (Part 2)

By Ray Rothrock

Everything in business starts with selling something.  Some businesses sell cars; some sell turbines; some sell software; some sell groceries; some sell consulting services.  And so it goes on and on throughout the full $14.12 trillion GDP of United States.  Fourteen trillion – the largest production facility in the world is the United States.  This is sometimes called the top line in a business report like an income statement.  This is where our modern economy starts and defines itself. 

As a business’s top line turns down and shrinks, as happens from time to time, in order to stay in business that business must reduce expenses so that it can still make pay its bills with its sales.  If a shortfall is temporary, sometimes that business will borrow money to pay its bills.  And then, when the business recovers it pays the loan back.  If the downturn is longer the business may have to reduce the number of jobs or idle production equipment.

Sometimes business expenses go up for external reasons.  External reasons are things like regulations, taxes, and the like.  This can happen in a normally healthy business.  When it does, it reduces the amount of cash left over after paying all the expenses that the business might be able to invest in itself and grow.

When a top line turns up indicating more sales are possible, a business must invest capital in its production capacity in order to keep up and expand.  This investment can be either machines or people, but to make more you must have more capacity of production, and usually also make things more efficiently.  Everyone benefits in this mode – the business, its employees and its customers all benefit.

In a downturn, sometimes business go into a saving mode.  That works in the short run but the not the long run.  If you are saving, you are not investing.  If the sales continue to decline (for a host of reasons perhaps), then more saving is required.  Ultimately, you cannot save any more.  Your expenses are at their minimum to maintain the business. Drastic action is required.  This action might include ceasing production for some period of time.  You may lay off your sales force or reduce your marketing budgets and even benefits for your employees.  It’s hard to get ahead of the down pressure, so the business must act quickly.  Unfortunately, your employees may lose their interest in your business and go elsewhere, if they can.  Your customers start looking elsewhere, too.  In short, it is a death spiral.   And this is a death spiral that is very hard to recover.

Drastic action is required when the death spiral begins.  The same is required of a country.

 

August 15, 2011

We Cannot “Save” Ourselves to Properity — We Need Growth

By Ray Rothrock

Column: The Reagan stimulus vs. the Obama one

By Paul G. Kengor

When Reagan signed the Economic Recovery Act at his ranch near Santa Barbara, it was the largest tax cut in American history. He also revealed leadership that Democrats and Republicans alike agree we are not seeing currently from the White House. Even TheWashington Post called Reagan’s action “one of the most remarkable demonstrations of presidential leadership in modern history.”

Confiscatory tax policy

The enemy that day was America’s progressive federal income tax system, birthed in 1913 by Congress and President Woodrow Wilson. It was revolutionary, requiring a constitutional amendment. That tax, which began as a 1% levy on the wealthy, would rocket up to a top rate of 94% by the 1940s.

Ronald Reagan personally felt the toll. In the 1940s, the so-called “B”-movie actor was one of the top box-office draws at Warner Bros. Then a Democrat, Reagan saw no incentive in continuing to work — that is, make more movies — once his income hit the top rate. He also realized who suffered from that choice. It wasn’t Reagan; he was wealthy. It was the custodians, cafeteria ladies, camera crew and working folks on the studio lot. They lost work.

Reagan viewed such rates as punitive, confiscatory — “creeping socialism,” as he put it. In speeches in the 1950s and 1960s, he blasted the tax as right out of Marx’s Communist Manifesto.

By the late 1970s, Reagan concluded that out-of-control taxes, spending and regulation had sapped the economy of its vitality and ability to rebound. And so, on that August day in 1981, Reagan, with a Democratic House and Republican Senate, secured a 25% across-the-board reduction in income tax rates over a three-year period beginning in October 1981. Eventually, the upper rate would drop to 28%.

As biographer Steve Hayward notes, even when Reagan compromised with Democrats on tax increases in exchange for promised spending cuts in 1982, he “never budged an inch on marginal income tax rates.” Reagan understood that not all taxes, or tax increases, are equal.

After a slow start through 1982-83, the stimulus effect of the cuts was extraordinary, sparking the longest peacetime expansion in U.S. history. The “Reagan Boom” not only produced widespread prosperity but — along with the attendant Soviet collapse — also helped generate budget surpluses in the 1990s. Carter-Ford era terms such as “malaise” and “misery index” vanished. Only now has America re-approached similar misery-index levels, reaching a 28-year high.

Reaganomics myths

Unfortunately, liberals have so maligned Reaganomics that they are unable to separate facts from myths — to the detriment of their party and president. Among the worst myths is that Reagan’s tax cuts created the deficit, even as the deficit increased under Reagan.

In fact, Reagan inherited chronic deficits. Since Franklin Roosevelt, the budget had been balanced a handful of times, mainly under President Eisenhower. From 1981-89, the deficit under Reagan increased from $79 billion to $153 billion. It peaked in 1983-86, hitting $221 billion. Yet, once the economy started booming, the deficit steadily dropped.

Tax cuts were not the problem. Tax revenues under Reagan rose from $599 billion in 1981 to nearly $1 trillion in 1989. The problem was that outlays all along outpaced revenue, soaring from $678 billion in 1981 to $1.14 trillion in 1989.

The cause of the Reagan deficits was the 1982-83 recession and spending — as is always the case. And, yes, the culprit was not just social spending by congressional Democrats but Reagan defense spending designed to take down the Soviet Union. What a bargain that turned out to be: It helped kill an “evil empire” and win the Cold War, paving the way for a peacetime dividend in the 1990s.

Yet it is clear today that we have refused the proper lessons of history. For one, our problem remains excessive spending. Obama must bear this in mind if he’s considering tax increases (which hamper growth) as part of his “balanced” approach to deficit reduction. More than that, the best “stimulus” relies on the tried-and-true American way: Let free individuals stimulate the economy through their earnings and activity.

Ignoring such realities explains the mess we face in August 2011 — a millennium removed from the wisdom of August 1981.

 

Paul Kengor is a professor at Grove City College in Pennsylvania. His books include The Crusader: Ronald Reagan and the Fall of Communism and Dupes: How America’s Adversaries Have Manipulated Progressives for a Century.

July 27, 2011

1.4 Billion People Cannot Read Your Website

By David Pakman

It’s just a fact. Eighty per cent of internet users don’t speak English. In the US, we see that usually about half of most sites’ traffic is from outside the US. The competitiveness of the tech startup scene has never been greater, so the risks you take launching an English/US-only product is pretty great that, if you are successful, someone else will beat you to launching in most other markets. European tech startups appreciate this and almost always launch their site with multi-language support. But here in the US, we often punt on worrying about translation for a few years. In the meantime, we leave room for competitors to capture market share from the larger community of the non English-speaking web. It’s also important to note that all of the growth of the web is happening outside the US.

Why do we punt on translations? Because we used to only have brain-dead options. Working with technologically unsophisticated service agencies who over-price translation relative to ROI. Also, there were no web-friendly solutions: real-time, low-touch, clean API, etc. That all changed when Smartling launched.

Now companies simply manage their English site and Smartling does the rest, in real-time.

I have discussed them previously, and I am an investor in the company. I wanted to report that the company is solving the translation problem elegantly for scores of well-known big sites like Foursquare, IMVU, SurveyMonkey, Scribd, EventBrite. They have launched a self-service product for long- and mid-tail sites. By allowing companies to get their site translated in a few days or a week, there becomes very little reason not to launch your web business as a multi-lingual product on day one. With professional translation or crowd-sourced translation options, I am excited about the multi-lingual web they enable. Others are excited too: Smartling just announced they raised $10M to enable every site to be fully translated in a matter of days or weeks.

July 12, 2011

CloudFlare is Shining Bright

By Ray Rothrock

Today CloudFlare announced a $20 million equity financing lead by NEA and joined by Venrock and Pelion. For a 15-person company, raising $20 million is a lot of money.  So what’s up?

CloudFlare provides security and web performance for any company with a website.  The company initially targeted the Long Tail, which typically includes small companies that do not have the skills, capital or technology to deal with the ever-increasing security threats that come from everywhere.  Big companies often have the resources to fight the fight, small companies do not.  So, CloudFlare provides security for everyone… for free.  Maybe the most amazing feature is that every attack thwarted by CloudFlare actually makes the service stronger for everyone, to the benefit of all website owners and their visitors.

CloudFlare introduced itself to the world at Tech Crunch last September 2010.  As of this past weekend, CloudFlare has had tens of thousands of customer signups for the service and is serving billions of pages a month presently at a rate of about  seven billion and growing.  This equates 10% of the web page traffic on the Internet.  Let me say again –10%!  This is staggering growth.  Further, these websites are not only more secure, they are also faster.

The engineers at CloudFlare are busy coming up with new ways to improve customer’s websites.  One idea was to improve the code served to anyone’s browser. Another idea was to provide an Apps environment for your website.  There are so many things every website owner wants and serves in addition to security and performance.  It’s as if there is new “real estate” out there on which to build.

Internet security has always been important.  But now, with frequent front page news often above the crease, security is important to anyone operating on the Internet with just about any kind of website.  Everyone knows this is an issue.

CloudFlare represents our 15^th security sector investment and I have sat on the Board since our investment in the company’s first round. In my investment experience over the past 23 years, the world-class companies I’ve help build and those I’ve watch built have a few things in common.  They build excellent product, provide low friction to adoption and acceptance by customers, and make their customers very happy.  Market leaders get many rewards, not the least of which is final valuations 3 to 5x the #2 player in a market.  CloudFlare has all the attributes of leadership in this exploding market as early as it is.  CloudFlare has strong creative management, has established thought leadership, is garnering market share at a prodigious rate, and most importantly, is growing a team that wants to win, that is committed to win, and will.  Adoption by customers is amazingly simple.  And the customers love it.  Without any marketing, the impact of word of mouth has generated all the sign ups the company enjoys.  You don’t get that kind of multiplier if the customers are not happy.

As the name implies, let the light shine from behind the cloud and make everyone’s website safer, faster and better.

July 6, 2011

More thoughts on market sizing

Update: This is simply a market sizing exercise for people building a business in a market that doesn’t exist. It does not reflect my actual thoughts on value. If you notice, I rewinded to 2009 and only explored one business model for clarity.

The New Market

Yesterday we talked about the established market but the market sizing exercise starts to get really interesting when you think about markets that don’t exist.  Let’s take a company like Twitter circa 2009, when there was still a lot of ambiguity around what the size of their market opportunity looked like (some might say this ambiguity still exists today).  The executive team probably had a vague sense that there was going to be some kind of advertising supported model to the business and I’m sure their investor decks contained the requisite ad-supported slide: “$300B in advertising spending in the US and only $25B of it is online!” 

Like most consumer internet companies, the key market sizing question for Twitter is very simple: what is their annual revenue per user at scale? 

Let’s start with a very simple model. Let’s suppose that Twitter will be purely ad supported. The basic market size equation that we’re going to start from is as follows:

Twitter Market Size = (Users) * (number of ads/user) * ($CPM of ads)

We can begin by decomposing the number of users. What does a typical Twitter user look like?  A simple assumption to make is that over the next 3-5 years, the typical Twitter user will be somewhere between 15-34, with a lower diffusion rate in the 35-49 year old category and a very limited diffusion rate above 50.  The Zynga case might make us question some of those assumptions around people over 50 but let’s play it safe.  To begin, let’s start with the following numbers, based on US Census Data from 2000:

·       15 – 34: (79MM people) * (100% possible diffusion) = 79MM users

·       35 – 49: (65MM people) * (50% possible diffusion) = 32.5MM users

·       50+: (76MM people) * (10% possible diffusion) = 7.6MM users

·       Total Potential Twitter Users = 119MM users

There are several factors that will influence this number, including what percentage of people have internet access, socio-economic factors, and general appetite for digital media.  Clearly, this number can be refined. 

From here, we need to think about the number of ads each user will see.  This is particularly tricky with Twitter given that a lot of users are on 3^rd party clients where it may be difficult to track ad views and CTR’s and where Twitter may not even be able to serve ads into.  This is a whole other discussion but for purposes of this analysis, let’s assume that everyone goes directly to Twitter.com.  This is where the wheels start to fall off the proverbial VC short bus. Twitter has no idea what the ad units will look like, what is the ideal number of ads served, how much time a user will spend on Twitter.com, or whether ads will work at all.  Oh well...  The analysis must go on.  Let’s assume that our thesis is that Twitter.com will be primarily a source of news distribution.  During the week, most users check a news website once in the morning and once in the afternoon, for an average number of daily visits of twice per day.  On the weekend, let’s assume that an average user won’t check Twitter at all since they’ve got a lot more time on their hands to read magazines, browse their favorite sites, and won’t need the quick-news-fix that Twitter provides.  Given the short format of Twitter, serving 1 ad per visit is not unreasonable.  Putting these assumptions together, let’s look at how many ads an average user will see in a year:

Number of Annual Ads Per User = (1 ad per visit) * (2 visits per day) * (20 visits per month) = 40 ads per month. 

As a sanity check, this feels a bit low. Just browse the web for 20 minutes and count how many banner ads you see.  We’ll want to revise this number upwards later on.

Lastly, what is the average $CPM that Twitter will be able to charge?  At scale, let’s assume that Twitter directly sells out 75% of their inventory at a $5CPM and uses 3^rd party ad networks to fill the remainder at a $1CPM after revenue-share to Twitter.  These are reasonable numbers based on average CPM rates across all categories for banner ads, but there is a huge open question of whether Twitter ads will behave like banner ads in terms of branding value, CTR’s, and other metrics.  The ad effectiveness profile could be wildly different, in which case our $5/$1 assumptions could be materially off. 

Now, let’s put all of this together to see what the potential ad-supported annual market size is for Twitter in the US:

Twitter Market Size = (119MM Users) * (40 ads / month * 12 months) * ($5 CPM * 75% of ads) / 1000 (necessary to calculate CPM) + (119MM Users) * (40 ads/month * 12 months) * ($1CPM * 25% of ads) / 1000 (necessary to calculate CPM) = $228,480,000 revenue/year.

As a sanity check, is it reasonable to expect Twitter to capture $228MM of advertising revenue, given that online advertising revenue in the US will hit $50B or so in the next 3-5 years?  Probably. As I noted, there are a number of areas where the analysis can be refined and it is likely that our core thesis of Twitter as a distribution medium of news is too limited.  Beyond that, we haven’t explored a variety of other business models that Twitter could pursue, including subscription, commerce generation, data sales, and so forth.  This is where the really interesting discussion points begin. 

Hope this was helpful!

MC

 

Permalink

| Leave a comment  »

July 6, 2011

Some thoughts on market sizing

Over the last few weeks I’ve had some meetings where the topic of market size could have been a bit more rigorously addressed. It’s a hard issue to tackle – particularly when you’re creating a new market – but the topic is critical in every pitch.  There are some occasions where the market size is fairly straightforward.  For example, I’ve looked at a few female focused online fashion companies recently and while I know this is a huge market, it’s still helpful to dive into the issue of sizing for a couple reasons:

1.     Most companies are going after a slice of the market.  The fashion market for 15-44 year old females with household income of $40,000-$80,000 dollars is quite different than the market of all female fashion.  This is an obvious point but I’d say that about 1/3^rd of the pitches I see contain market size estimates that include sectors that are outside of the focus of the business.

2.     The market sizing discussion is incredibly helpful in getting to know how you think. Most of the time the intro pitch is the first meaningful interaction between entrepreneur and VC.  I like to think of the market sizing discussion as almost an intellectual discourse between professor (entrepreneur) and student (vc).

With that in mind, I’d like to share a couple different ways that I like to think about market sizing in the consumer internet space.  There are a variety of other ways to think about sizing and a lot has been written on the topic. I’d encourage everyone to spend some time on Google and read up on other opinions.

Established Market, New Product 

Continuing on with the example above, let’s say I’m starting a women’s fashion company that aims to sell scarves online.  Those of you that know me are probably chuckling right now since I’ve been wearing the same 3 scarves for the last few years now and am thoroughly unqualified to run such a business. 

Let’s take a first cut here.

Market Size = (number of females in the US in the target market) * (average number of scarves purchased by females) * (average price point)

The types of scarves that I’m selling will appeal to 15-44 year old females with a household income (HHI) between $40,000-$80,000/year.  The US census data groups people into segments of under 15, 15-24, 25-34, and 35-44.  The data tells me there are 8.7MM females in this category. Not a bad start.  Unfortunately, my instincts tell me that scarf consumption varies dramatically by geography. I’m going to make a simplifying assumption and segment consumers into two groups: California People (which also include people from Arizona, New Mexico, Texas, and other states where scarf consumption is de minimis) and Everyone Else.  Note that I’m a New Yorker, though, I must admit that some of my favorite people are from California! After looking through a map of the US and segmenting different states into warm and cold climates , I’ve decided that 20% of the US population are California People and 80% are Everyone Else. 

Next, I need to determine how many scarves are purchased by the average 15-44 year old female in both of these segments. To do this, I got on the phone and called up 20 friends in each of these groups.  Those of you that did not major in History like I did will likely groan that this is not a statistically valid sample.  I agree.  It’s a start. If you want a statistically valid sample, there are a number of online survey companies that can get you this data fairly cheaply.  My very un-rigorous survey reveals that the California People buy 0.3 scarves/year and Everyone Else buys 1 scarf/year.  Moreover, I got the sense that Everyone Else takes the quality and fabric of their scarves seriously and probably pays more on average per scarf than the California People.  More on this later.

Now we’re on to the final stretch.  What is the average price point of a scarf?  In my informal survey above, I asked my friends for their average price point but most of them didn’t remember and those that did seemed to give me inflated numbers (so snobby!).  To get insights into this question, I went on Amazon, navigated to the women’s clothing section and searched for the keyword “scarf.” Here is the breakdown:

·       Under $25: 3,758 (50%)

·       $25-$50: 1,728 (23%)

·       $50-$100: 1,348 (18%)

·       $100-$200: 524 (7%)

·       $200+: 107 (1%)

·       Total: 7,465

Using this informal technique, let’s assume that the average price point is $25 for Everyone Else and a slightly lower $20 for the California People.  These are a decent ballpark approximation but can obviously be refined further.

Taking the data we’ve gathered, our first cut at a market size for my new company is:

(8.7MM females * 80% Everyone Else) * (1 scarf/year) * ($25 average price point) + (8.7MM females * 20% California People) * (0.3 scarves/year) * ($20 average price point) = $187,050,000

Does this number seem reasonable or is it out of line with reality? As a quick sanity check, the next thing I did was go to the Consumer Expenditure Survey maintained by the Bureau of Labor & Statistics and look at the total amount spent on clothing by US households and the look at what percentage of the total clothing market the $187,050,000 represents. 

Lastly, I asked myself, what is a reasonable amount of the market that I could capture? Fashion is a particularly fragmented market and even if I become the category killer in scarves, it’s unlikely I’d get more than a few percent of the overall market.  Let’s say I can capture 5% of the overall scarf market – an extraordinary number in any fashion related category, then I’d be making around $9.3MM/year given the numbers above. 

Note that this is a quick-and-dirty analysis. An actual analysis should be significantly more rigorous in terms of data quality and layer in more refined assumptions.  For example, my segmentation of California People and Everyone Else, while entertaining, is too simplistic to withstand real scrutiny.  The same goes for my methods of data collection. Tommorow I’ll post some thoughts on how to approach a new market.

 

 

 

Permalink

| Leave a comment  »

July 6, 2011

‪Venrock’s Campise Doesn’t See `Bubble’ in Technology Yet‬‏

Permalink

| Leave a comment  »

June 27, 2011

Aging Nuclear Plants – Overreaction

By Ray Rothrock

Ever since the Fukushima Dia-ichi nuclear power plant crisis resulting from the earthquake and tsunami in March there has been a drumbeat in the press with concern over the age of current nuclear plants. The Dia-ichi plants were within one year of the their design lifetime to being shut down and decommissioned. These 40-year-old plants, designed as state-of-the-art in the 1960s, did a remarkable job surviving events well beyond their design limits after producing pollution free energy for almost 40 years. Though there is still risk and the Japanese are working hard to bring this to a totally safe situation, I must say, something designed 40 years ago, surviving a natural disaster well beyond design limits, is an amazing and remarkable feat of engineering.

The AP recently released a report on their “exhaustive research” into a claim made that time after time, the regulatory body in the United States, the Nuclear Regulatory Commission, has repeatedly relaxed safety standards in operating plants claiming that previous standards were too conservative. The article makes clear that this has created a certain level of anxiety in the public’s mind and indeed even reduced the safety levels at operating plants. They further state that, “Examples abound” to support this conclusion. The article also spends a few hundred words citing examples and then states, “The AP found proof that aging reactors have been allowed to run less safely to prolong operations.” While the NRC may not be perfect, is the AP really qualified to make such a judgment and statement about safety? Where is their analysis to back up such a claim?

It is a fact that in certain countries the regulatory bodies are indeed enmeshed in the industry they regulate – nuclear, oil, electric utilities, transportation, you name it. These problems exist even here in the U.S (offshore oil rig regulation, for example). But, the US NRC is considered the gold standard worldwide in this regard. Is it perfect? No. Is it a failure? Heck no.

In absolute terms, I’m sure some of the items mentioned by AP are true – probably most. However, nuclear power plants are complicated machines built with redundant safety measures, and overdesign – standard engineering practices. The AP did not evaluate all the systems and every item in the plant and their interactions.

Netting it all out, I think the AP could have better served the reading public by not wholesale claiming that all nuclear plants are unsafe because of this handful of troublesome things they found in the “exhaustive research.” I only wish they would have cited the number of problems found and fixed, or the increased retrofit engineering after Three Mile Island required of all plants to make them more safe, or the capital expended on maintenance and upgrades of components and systems, and the better training, or even the incredible safety record of the industry, just to put in perspective.

June 7, 2011

Germany Decides No Nukes – No Sense!

By Ray Rothrock

Germany cancels nukes.  It’s amazing to me how politics trumps logic and economics.  I would have hoped that the German leadership would have looked long and hard at the bare facts about energy, their economy, and the world in which they are living.   Turns out they did within the last year.  Their recent decision to exit nuclear power as a source of electricity, coming so quickly after they planned to expand nuclear, was politically motivated. 

One nuclear plant provides power 24×7 at capacity factors around 90% . . .that’s pretty much all the time, and it can do it for five decades.  Not to rain on renewables parade, but a wind facility or solar facility, on a good year will have 20% capacity factor, and doesn’t provide power when the wind isn’t blowing and the sun is shining, respectively.  So, even if you could coordinate when the wind blows and sun shines, you’d need 5x as much capacity of wind and solar to cover for just one nuclear plant.  At hundreds of square miles per plant for wind and solar compared to one square mile for nuclear, land will be consumed at a prodigious rate to make up the elimination of nuclear power.  Otherwise, Germany will be looking to its neighbors for electricity in short order.  Or burning more fossil fuels which also is hard to imagine given the pollution and impact it has.

I’ve read that Germany plans to buy power when those nuclear facilities start to shut down.  I’m sure France will sell electricity to Germany from their nuclear fleet.  But I wonder at what price?   I’m sure the planners for electricity consumption in Germany are fine tuning their economic models and telling the government of Germany all will be fine.  Economics is a real law.  Electricity is a commodity.  I predict that supply and demand will take over and prices will rise.  Even if German demand remains constant prices will rise because its supply will fall off.

At the end of the day, I suppose it boils down to an optimistic view of one’s economy versus a pessimistic view reflecting a country’s population self-image and plans for the future.   In other words, to grow or not to grow.  Germany has made their bet.

May 27, 2011

Exclusive: Venrock Doubles Down On Healthcare IT, Hires Healthcare Reform Architect Bob Kocher – Nicole Perlroth – Everything Ventured – Forbes

Permalink

| Leave a comment  »

May 27, 2011

Joining Venrock

The conversation with Aneesh was inspiring because it brings into focus the reason that I got into venture capital in the first place: to find and invest in great entrepreneurs that are tackling problems of vast importance.  Venrock has a long and rich history of executing on this goal and I’m proud to be working with such an accomplished group of investors.  With such an exciting entrepreneurial community bubbling here in New York ($2.2B of venture money in NY in 2011!), I’m enthusiastic about what this next year will bring.

Permalink

| Leave a comment  »

May 3, 2011

Bill Gates: Front and Center on Nuclear Power

By Ray Rothrock

There is a lot written these days about nuclear power. Whether it is comments about the post Fukushima impact on the world’s view of nuclear energy, or the nuclear renaissance in the United States, or just the simple fact that energy demands in the world will be hard to fill without nuclear energy. All those articles and comments are interesting at some level, but Bill Gates is different. Here is a man who is putting his money and reputation to work to solve the world’s energy problems – not just talk about it.

Thank you, Mr. Gates. I applaud your enthusiasm, your understanding of the issues, and your willingness to make a public case that needs to be made. VentureBeat reports an interview with Bill Gates where he points out the obvious (again) that lack of innovation in nuclear energy is an opportunity ripe for transformation by entrepreneurs. I love entrepreneurs. Maybe Mr. Gates is ready to make his mark in energy too.  He’s backing TerraPower.

Gates is an evidence driven guy. He completely understands the “million multiplier” that uranium has to coal in terms of energy density and ability to bring energy to the market. And he understands when economies are growing at 10% (China) or 3% (US) or India (8%) that these economies need energy to keep growing. Further, he understands the energy density issue around industrial economies. This is not trivial and is essential. Dispersed energy production is a good, big deal, but it will not power a car factory, or a battery factory, or an agricultural enterprise. He understands that while nuclear energy in the past was not perfect, he is investing to make it better – a lot better than where it is today. The U.S. has already done a lot to make it better.

Believe me, I’m not anti-wind or solar. I’m a huge green fan. I’ve got 13 KW of solar PV on my roof generating more power than I personally consume at my home during afternoon hours and most of the day. But, the density of wind and solar energy sources and the requirement for storage is such that they are unusable when the fundamental source of wind or sun is not available are obstacles to deployment for growing and developing economies. Just building the grid to connect the sources of wind and solar to the where the people live is a daunting figure and task.

Gates understands the fundamental economics and doesn’t quibble with the need for an improvement in the quality of life. His foundation is all about improving people’s lives so it is not surprising he is personally also on the energy case, and in particular the nuclear energy bandwagon. His personal investment in TerraPower is not only massively important, but massive symbolic. Why can’t the United States make these investments? Why aren’t other billionaires doing this? (turns out they are!)

So, thank you Mr. Gates for taking the podium and pounding home the reality of the need for energy and in particular, the role that nuclear plays on the world stage in improving our lives, and supplying our economies with energy that is green, safe, and economical.  If you need a partner to carry the message, please call.

April 23, 2011

Nuclear Power after Fukushima Daiichi

By Ray Rothrock

The nuclear power plant crisis at the Fukushima Daiichi in Japan is certainly devastating.  A major public health disaster seems to have been avoided, but the disruption to the citizens living in the surrounding area is severe, and will continue for a very long time.

The effects of the nuclear crisis pale when compared to the loss of life and property from the earthquake and tsunami. And, by any and all measures, the affected plants performed better than expected, and the other nuclear power stations in the area of the earthquake reached cold shutdown states without incident.  Nevertheless, these nuclear crises, like the ones in the past, have badly scared people – and have the potential to derail the construction of new nuclear power plants at a time when we need them to meet the world’s growing energy demand.

Nuclear power has always been a polarizing topic for the public.  For decades nuclear power has enjoyed a majority of public support, but the anti-nuclear movement has been loud, sustained and effective. At times nuclear power is a national political issue, sometimes a local political issue, but always an issue based on the fear of what might happen if a nuclear plant had a core meltdown. We’ve seen the images of the effects of radiation on the populations of Hiroshima, Nagasaki and Chernobyl. The health and safety aspects of the debate will likely never end.

At the same time, the need for non-carbon sources of electricity continues to mount all over the world.  Emerging economies can’t get enough electricity and are constructing nuclear plants as quickly and as practically as they can.  Why? Because the scale and concentration of electricity from nuclear power is unsurpassed compared to any alternative.  Nuclear power, even with the handful of incidents of the last 33 years, continues to produce 13-14% of the world’s electricity in an economical, safe and reliable way.  It has a capacity factor approaching 85%, far greater than any other source of electricity, and produces no green houses gases.  By every measure – land use, pollution, fuel cycle impact, human life – nuclear power remains an important source for electricity.

So, while the fear of nuclear power remains in the minds of a minority of the populace, its benefits are measured daily and shared by all – and its presence in our global energy mix is inevitable, at least for the near term.

The lessons from Fukushima are still being learned.  It stands to reason that there will be rethinking about fission as a source of electrical power.  Nations such as Germany, Switzerland and Italy have already drawn a conclusion regarding nuclear power and concluded to ban it going forward. But these bans were already a foregone conclusion – Fukushima only cemented them.

In contrast, just a few days after Fukushima, President Obama reaffirmed that the United States remains committed to nuclear power and that nuclear power must play a role in meeting the future energy needs of the United States along with all the other viable alternatives.  China also quickly reaffirmed its commitment to press ahead with nuclear power – post Fukushima China reaffirmed its Five Year Plan of building 400 GWe nuclear over the next 40 years.  That would be four times the nuclear power output of the United States today.

The United States and China are pressing ahead with their nuclear plans for one simple reason: electricity is essential for growing industrialized economies. As people seek better standards of living, they consume more energy. That energy today can only come in sufficient quantities from electricity or oil.  Those governments have little choice but to proceed with new electric plant construction with the best available technology – nuclear or other.

Consider China. Its economy has been growing 10% per year for a decade, and it can barely keep up with the demand for electric power.  It brings a gigawatt scale coal plant online every week and continues to expand it nuclear fleet now with 26 plants under construction.

The U.S. economy is five times larger than China.  However, the U.S. is faced with the need to replace and upgrade its electric infrastructure.  Though the U.S. GDP is modestly growing at less than 3%, it is central policy of the United States to expand this growth rate.  Taken together, the replacement and the incremental demand for growth puts a demand to the electric base load of the United States, which is projected to increase 50% in the next 40 years.   This is a huge increase.  No single source of base load will provide the answer.  Nuclear must play a role in filling this gap or the U.S. will fall behind.

While there have been no new nuclear plants in the United States for 30 years, the U.S. has continued its leadership in nuclear power research.  New designs continue to emerge, each one better than the last.  Certainly this is significantly based on the belief that someday the United States would begin to build plants again.

Today the state of the art in nuclear power plant designs is known as Generation IV+.  [Fukushima was Gen I.]  Design concepts of walk-away shutdown and passive safety are front and center. The Nuclear Energy Section of DOE budgets approximately $900 million per year and continues its important research on nuclear fission power.  The growth of the undergraduate and graduate programs in nuclear engineering at American colleges and universities has been increasing for years after a nadir in the 1990s.  The apparent belief that nuclear power has a future is clearly evidenced in the priorities of the U.S. government, the research establishment and even the young citizens in our nation’s engineering schools.  Even recent surveys by MIT show a majority support for expansion of nuclear power in the United States.  Similar surveys do indicate increasing concern over the lack of a solution for nuclear waste.

Today there are 438 operating plants in 31 countries with 60 under construction in 13 countries.   Leading the way with 26 under construction is China.  These 438 plants are generating spent fuel waste.  This waste is a growing concern for all nations and must be dealt with.  The production of spent fuel waste products from a potential world fleet of 1000s of nuclear power plants is not sustainable, nor practical without a solution to this problem.  It would be better not to create the waste in the first place but the practical demands of the world economy simply will not allow this to be the case.

Fukushima demonstrated the risk to keeping this spent fuel in bundles in the plants.  Policies regarding what to do with the waste have varied over the decades and Administrations.  Methods for handling of spent fuel waste are often criticized as not practical for the long-term and a political debate with no end ensues.  New methods for removing the long-term dangers of this spent fuel and reducing it to much shorter lives are under development, more in the scope of a nation’s lifetime and capabilities.  There is ongoing research at premier American universities where spent fuel would be reused to produce power and in that process render it impotent at the end of its extended use.  What is clear is that even with a viable method of managing the waste from nuclear fission, it too must also be replaced with a new source of electric power with no long-term transnational impact.

There is no doubt the Japanese will bring a good and proper closure to the Fukushima Daiichi nuclear stations.  Further, there is no doubt the Japanese will clean up the affected areas and bring life back to normal even if it takes a decade and costs upwards of $300 billion as some estimates project.  For an island nation with practically no natural fossil fuel resources and concentrated population centers, nuclear is the only option at Japan’s disposal for base load electric power.  The Japanese have 49 remaining nuclear power plants running after losing the six Daiichi plants, with two more under construction.   Nuclear power generation represented 30% of the base load for the Japanese grid before Fukushima.   Losing Daiichi is significant to the Japanese economy and the world economy because Japan is the source of much of the modern world’s supply chain.  As that nation recovers, it will be challenged to meet the demand for power in the short term.

Like the rest of the developing world, Japan has no choice but to pursue nuclear power in the near-term.  And if the world is going to pursue it, then the United States, a leader in nuclear energy, must again step up to this challenge. The United States must assure itself and the world, through its own example and its own R&D and its own investment, that nuclear power can be deployed in a reliable, economical and most importantly, safe manner.  It is an obligation to ourselves, to our children and to the world that cannot be shirked or compromised.

April 6, 2011

How to Moderate a Panel That Doesn’t Suck

By brianascher

On April 14^th I am moderating a panel at the Digital Healthcare Innovation Summit in New York City titled “The Hospital as Production Center:  Holy Grail or Impossible Dream?” [For anyone who wants a discounted registration rate, see the end of this post.]  In an effort not to suck, I’ve put some thought into what makes a great panel.  Like many conference junkies in the tech and finance worlds, I’ve sat through hundreds of panels, been on a bunch, and moderated a few handfuls over the years.  Here’s a list of a dozen suggestions that I plan to implement:

1. Have at least one colorful character on the panel. Conferences can be a grind, and lots of people find the most value is in the lobby, meeting people.  For those willing to actually sit through your panel you want to entertain them as well as inform them if you expect them to pick their heads up from their smartphones and remember anything from the hour of so they give you of their (partial) attention.  Having at least one spicy rebel on the panel that is willing to share provocative views and mix it up with the other panelists is key.
2. As the moderator, get your panelists on a call ahead of time to brainstorm and interact with each other. This is your opportunity to figure out if you’ve got the right mix of characters and also form a plan for what you’ll cover and set expectations.  Don’t procrastinate on this.
3. Know your audience. Conference organizers purposely cast a wide net in their marketing and promotional materials so they can get the best turnout.  Find out for sure who the bulk of the audience is really likely to be.
4. Send questions ahead of time. Your goal as panel moderator is to make your panelists look brilliant, not to try and stump them so you look like the smartest person on stage.  Give them the questions ahead of time and know who is likely to have the best answers for each of them.
5. Keep intros brief.  Maybe not at all. Most intros take too long and are pretty boring.  If the conference materials have speaker bios, I personally don’t think there is any need to go into detailed introductions other than to identify who is who.
6. Know the context of the rest of the conference.  Pay attention and make reference. Planning your topics and questions ahead of time is great, but you want to keep in mind the context of the rest of the conference so there is minimal duplication but appropriate linkages to other topics and speakers, etc.  If prior speakers or panels have covered topics relevant to your panel, make reference to them.  It shows the audience you were not sleeping through the earlier sessions, so maybe they won’t sleep through yours.  J
7. Use social media to promote, distribute, and even moderate in real time. Twitter, LinkedIn, Facebook, your blog, are all great ways to promote your panel ahead of time.  SlideShare is a great way to distribute PowerPoint or materials afterwards.  Set up a Twitter hashtag to solicit questions ahead of time and from the audience during the event.  I’ll be using #hosprod as the Twitter stream for my panel.  Feel free to send me questions ahead of time, and check for comments during the panel.
8. Hit the hard deck, dig for details and examples. Give the audience reasons to take notes by getting granular.  Force the panelists to get specific and give real information.
9. Stir the pot.  Incite a riot. A panel where everyone agrees with every point is boring.  Elicit differing viewpoints and force the discussion to explore the conflicting opinions.  This will likely be the most useful content, as well as the most entertaining.  Avoid chair throwing.
10. No crop dusting. It can be very monotonous when the moderator goes up and down the row asking each panelist each question.  Pick your respondents strategically and use them for different purposes.  Move on to the next question as soon as the topic has been sufficiently covered, regardless of whether everyone answered.
11. Engage the audience, but moderate ruthlessly. Audience Q&A can be very useful and fun, but can also attract rambling questions, people shamelessly plugging their own company/viewpoint, or all manner of unexpected divots.  It’s your job to be respectful but firm in keeping the Q&A on track out of respect to the rest of the audience.
12. Watch the clock. The ultimate respect for your audience is to finish on time.  Even if your panel is rockin’ and everyone is having a great time, you should finish within the allotted timeframe.  If they still want more, they can follow-up with you and the panelists afterwards.

If you are interested in attending the www.digitalhealthcaresummit.com enter the special key code VNRPR  to receive the discounted rate of $695.00.  You can also contact Cathy Fenn of IBF at (516) 765-9005 x 210 to enroll.

February 6, 2011

Forget Super Bowl Commercials…these web companies know how to create awesome marketing videos.

By brianascher

By the time you read this post, Super Bowl XLV will be over and everyone will be talking about the … commercials.  Why?  Because most of them are entertaining, some are memorable, and the $2.5 million price tags (for air time alone) pique our curiosity.  Why are brands willing to pay so much?  Because it is one of the only ways to reach 100 million consumers simultaneously, and because a great 30 second video ad packs an emotional payload in support of your brand unlike virtually any other form of advertising.

Over the past few years I’ve noticed more and more web companies producing great videos to market their companies, often presenting them front and center on their homepage as the introduction to their company.  A great video overview can really help explain what you do for customers, how you do it, and present your brand in a flattering light.  The best videos go viral and bring you exponential attention and new visitors.   And web videos have never been cheaper to produce (at 1/2000^th the cost of a super bowl commercial even a start-up can afford them.)  So, here are five thoughts on what makes a great marketing video for web companies, and a bunch of examples:

Answer WIIFM: A great marketing video should clearly and convincingly articulate a few simple benefits that customers care about.  Mint.com does a terrific job of this, as does Dropbox, both front and center on their homepage.  The Dropbox video is particularly noteworthy because it takes an esoteric concept and uses analogy to demonstrate user benefits everyone can relate to.

Show how it works: A great overview video shows just enough of the product and how it works to lend credibility to the benefit statement.  Word Lens does a terrific job of this for a product that truly needs to be seen to be believed.  A full blown demo would have been less effective than just these short glimpses of the product in action.

Be yourself: Video is such a rich and engaging medium it is perfect for showing the personality of your brand.  It is a great way to set tone and speak to your customers and prospects in an authentic voice.  Flavors.me does a terrific job of this through music and images alone, letting actions speak louder than words in convincing you that they can make your personal homepage look amazing because they do such a killer job of presenting themselves through this video.  Style personified.

Be fun, get remembered: Great marketing videos are fun to watch and somewhat memorable.  You don’t have to be knee slappin’ funny or so hip it hurts, just smile-inside funny will go a long way.  SalesCrunch and SolveMedia both take pretty dry categories (CRM SaaS and AdTech respectively) and rivet their viewers through entertaining use of cartoons and wit.

Be Brief: Even a great marketing video starts to feel long after two minutes.  Shoot for less.  This video from Smartling gets the job done in 38 seconds.  [Disclosure: Smartling is a Venrock investment.]

These are the five characteristics which I think make for a great marketing video for your web company.  If you think there are points I missed, or have other great examples, please comment and add to the list.  If you are the production agency responsible for making any of these videos please take a bow by claiming your work.  I’m sure others will want to contact you.  If you are looking for more of a live action marketing video, TurnHere can help produce custom video for ridiculously low rates [disclosure:  TurnHere is a Venrock investment.]

Thank you to Ward Supplee, David Pakman, Dev Khare, Dan Greenberg, and Arad Rostampour for sharing some ideas for this post.

January 18, 2011

The single best financial reporting tool ever

By brianascher

Today I faced a choice.  Should I go out and enjoy the beautiful weather and waves and go for a surf or should I blog about my favorite financial reporting tool?  Seems like a pathetic question for a surfer to ask, or maybe this financial reporting tool is really that great.  I’ll settle for an answer of “both”.

The tool in question is the Waterfall Chart.  It’s a way to compare actual results across time periods (months or quarters usually) against your original Plan of Record, as well as forecasts you made along the way as more information became available.  It packs a ton of information into a concise format, and provides management and Board members quick answers to the following important questions:

1.      How are we doing against plan?  Against what we thought last time we reforecast?

2.      Where are we most likely to end up at the end of the fiscal year?

3.      Are we getting better at predicting our business?

The tool works like this:

Across the top row is your original Plan of Record.  This could be for a financial goal like Revenue or Cash, or an operating goal like headcount or units sold.  Each column is representative of a time period.  I like monthly for most metrics, with sub-totals for quarters and the full fiscal year.  Each row below the plan of record is a reforecast to provide a current working view of where management thinks they will wind up based on all the information available at that time period.  Click the example below which was as of August 15, 2010 to see a sample, or click the link below to download the Excel spreadsheet.

Waterfall Report spreadsheet

Periodic reforecasting does not mean changes to the official Plan of Record against which management measures itself.  Reforecasts should not require days of offsite meetings to reach agreement.  It should be something the CEO, CFO, and functional leaders like the VP Sales or Head of Operations can hammer out in a few hours.  Usually these reforecasts are made monthly, about the time the actual results for the prior month are finalized.  When you have an actual result, say for the month of August, $2,111 in the example above, this goes where the August column and August row intersect.  On that same row to the right of the August actual you will put the new forecasts you are making for the rest of the year (September through December.)  In this fashion, the bottom cells form a downward stair step shape (a shallow waterfall perhaps?) with the actual results cascading from upper left to lower right.  You can get fancy and put the actuals that beat plan in green, and those that missed in red.  You can also add some columns to the right of your last time period to show cumulative totals and year to dates (YTD).  With or without these embellishments you’ve got some really powerful information in an easy to visualize chart.

Two questions an entrepreneur might ask about this tool:

By repeatedly comparing actual to plans and reforecasts, won’t my Board beat me up each month if I miss plan or even worse, miss forecasts I just made? If you are a relatively young company, most Board’s (I hope) understand that planning is a best-efforts exercise not an exact science.  Most Boards will react rationally and cooperatively if you miss your plan, as long as you avoid big surprises.  By giving the Board updated forecasts you decrease the odds of big surprises because the latest and best information is re-factored in to the equation as the year progresses.  They probably won’t let you stop measuring yourself against the Plan of Record, but at least you’ve warned them as to how results are trending month to month and course corrections can be made throughout the year.

Won’t this take a lot of time? Hopefully not a ton, but it does take effort.  However, it should be effort well worth it beyond just making the Board happy, because as a management team you obviously care about metrics like cash on hand, and this should be something you are constantly recalibrating anyway.  The waterfall is the perfect tool to organize and share this information.

Most of my companies using this tool track five to ten key metrics this way.  Typical metrics include:

• Revenue
• New bookings
• Cash on hand
• Operating expenses
• Net income
• Headcount
• Units sold or new customers acquired
• Some measure of deployed/live customers (if there is a lag between a sale and a live customer)
• For internet companies, some measure of the “top of the funnel” such as Unique Visitors or Page Views

Whether or not you agree this is the single greatest financial reporting tool ever, I hope you give it a try and find it useful.  Now I’m going surfing….

November 8, 2010

Why Are VCs So Scared of Hospitals?

By brianascher

There is much conventional wisdom in venture capital.  One such belief is that hospitals are a really horrible market for tech startups to pursue.  Back in 2002 when we invested in Vocera, an innovative communications system for hospitals (think Star Trek), many other firms had looked at the deal and passed.  Although this was the company’s third round of financing, the company was still pre-revenue and pre-launch, and this was the first round raised subsequent to their strategic shift from a horizontal solution to one vertically focused on hospitals.  Most VCs ran from it.  Following are some of the reasons potential investors gave for hating the hospital market then, most of which persist as concerns, often valid, today:

1.      Hospitals are highly budget constrained

2.      Most hospitals don’t have profits motives and are not subject to the same competitive forces as for-profit businesses

3.      Hospitals are complex political environments with many forces that influence decision making and purchase behavior that seem counter to rational business judgment.  Those who decide, those who approve, those who pay, use, benefit from, can all be different roles in the organization.

4.      Sales cycles are very long, often measured in years.

5.      Hospitals are technology laggards when it comes to adopting information technology.

6.      Hospitals are dominated by large technology vendors such as GE, Cerner and IBM.

There is some truth to each of these, but here’s the counter argument that led us to make a second investment in the hospital market, namely Awarepoint, an indoor GPS system for tracking people and assets in the hospital.

1.      There are lots of hospitals.  Over 5500 in the US alone, and there are little blue signs pointing you to each of them.  Given the annual budgets of your typical hospital, this translates into a very big market.  Vocera now serves over 650 hospitals and more than 450,000 daily users, and is still growing very rapidly, believing they have tapped less than 10% of their core market opportunity.

2.      Hospitals are sticky.  Once your product is adopted, and assuming it works well, they are reluctant to switch you out because solutions get so enmeshed in different processes and systems, and so many employees get used to them.  You can’t screw up, or raise prices dramatically, but you may not have to sing for your supper every time a competitor issues a press release.

3.      Hospitals are willing and able to spend on IT if it is a priority and they see an opportunity for a large return on investment.  This is one of the things helping Awarepoint penetrate the market, and they are not alone. Companies like Allocade , which creates dynamic patient itineraries to improve throughput, are also having success based on the ROI they can deliver.

4.      Because hospitals are underpenetrated by information systems, there is lots of low hanging fruit and relatively basic problems to be solved.  Electronic Medical Records vendors are having a field day, both because of stimulus incentives but because many hospitals, especially the 72% of all community hospitals with under 200 beds, still don’t have this basic form of digitizing their information.  The trend towards Accountable Care Organizations, and the related financial incentives, will require greater clinical integration of care across health care settings (inpatient, ambulatory), greater financial efficiency, and increased transparency and flow of information about the process, costs, and outcomes of health care, all of which will require better healthcare information technology.

5.      Hospitals are similar to each other and willing to serve as references to each other.  Yes, they do compete in some ways, and each has its unique attributes, but you find a higher degree of collegiality and similarity than most industries where competitors hate each other and each may have very different ways of doing their core activities.

There are a few reasons why the hospital market is ripening for startups and the VCs who love them:

1.      Hospitals are feeling financial pressures to run efficiently.  With healthcare reform there will be more patients coming in their door requiring services, while price caps will get tougher.  And there will be financial penalties for things like readmission rates that often correlate to operating inefficiently, and which technology can help prevent.

2.      With the EMR mandates and installations, the Chief Information Officer is now in an elevated position in the organization and even considered a revenue generator.  Many EMR installation projects are leading to ancillary projects and opportunities to automate and digitize other aspects of hospital operations.

3.      New IT paradigms like cloud based services, open data initiatives (thank you Todd Park @ HSS), APIs, and Open Source means that it is less expensive to build and deliver better products into the hospital.

4.      Wireless technologies, and relatively cheap and robust devices like iPhones and iPads, make it easier to reach caregivers on the go, whether nurses at the bedside or Doctors on the golf course.  Companies like AirStrip are getting real-time info to the caregiver wherever they are, and caregivers love it.  Also, WiFi and Zigbee in the hospitals means your equipment and monitors, and even staff, can transmit their info from wherever they are without wires and expensive, disruptive installations.

5.      This current generation of Doctors and are used to technology in their personal lives.  They use email, carry iPhones and Blackberries, shop online, etc.  And the residents entering hospitals today are Digital Natives.  There will be an increasing expectation that hospitals adopt these technologies that most other verticals have embraced.

While we fear the unexpected visit to the hospital as much as anyone, Venrock is looking forward to more investments in companies that serve them with compelling HCIT solutions.

October 5, 2010

Building Healthcare IT Companies: 11 Insider Insights

By brianascher

This blog post was a collaboration with my Venrock colleague Bryan Roberts, who in addition to being a great bio-tech and medical device investor, was also an early lead investor in athenahealth, and currently on the Board of Coderyte and Castlight, two really hot HCIT companies.

Having participated in healthcare IT for the last 10+ years, we decided to collect and share some lessons learned. The list is by no means exhaustive, so let us know your thoughts – where you disagree, what you would add, etc.

1. The product must be a true “have-to-have”, not a “nice-to-have”. Any healthcare IT product needs to solve an important problem for a defined customer base (providers, payors, patients) and this is where lots of companies go astray. The product needs to help someone enough for them to be compelled to adopt it, while they are busy worrying about a lot of other things, and it is not enough to have a product that helps out the “system”. If you can’t convince yourself that it is one of the top three things that your specific customer is concerned with, forget it.
2. Healthcare is actually an aggregation of many small “markets”. While the overall healthcare market is measured in billions – if not trillions – very few needs, ideas or businesses can span the entirety. Many companies/ideas are only applicable to a subset (breast cancer, arthritis, heartburn, etc.) of healthcare or require significant re-work as one moves from one disease area to another – think content for different diseases. This dynamic also substantially impacts some of the revenue stream opportunities and the critical mass needed to make a business viable. For example, pharma advertising for a given drug is targeted at patients with a specific disease, not all healthcare consumers, and so the number of overall users needed to amass a specific target population and access that ad revenue, is many multiples of that target market.
3. Start-up revenue streams and value propositions are elusive. There are lots of potential revenue streams in healthcare, but many are only accessible to a business that has hit scale (perhaps $100MM revenue) and critical mass creates an ecosystem such that the network has value above and beyond the interaction between the individual customer and the product. This is especially true for advertising and data revenues, but also for lead generation and others. It is much simpler to create viable revenue streams when your business reaches a substantial size than it is to find the revenue stream that gets you from $0 to $50MM… So think hard about the value proposition and revenue stream for the start-up phase of your business before you hit critical mass and dominate a space.
4. Customers must have more money with your product, than without it. There is no room for broad adoption of products that are a financial drain. Remember that every participant in the healthcare system is strapped for cash – hospitals are lucky to run a profit, doctors’ earnings have decreased consistently over the last decade and patients are used to “free” healthcare. You have to offer hard, demonstrable ROI. You can get away without it for a small number of leading edge customers for a while, but the primary goal of those customer engagements must be to get the ROI data that will be necessary to support broader customer engagement. Adding another cost, even with a long-term ROI is very hard.
5. Businesses with strong network effects are gold mines. Given that healthcare has complex problems and customers are tough to secure (long sales cycles), a network effect can solidify a first mover advantage and continually decrease sales cycles, as well as afford sub-5% annual churn rates. Happily, the healthcare industry is ripe to create businesses with network effects given the historical underinvestment in the space and the proliferation of “big data” business opportunities. Every customer should benefit from the cumulative customer base, with each subsequent customer deriving and creating more value than prior customers.
6. The customer is mobile. Unlike many verticals, most health care providers do not sit at their desks all day; they are doing rounds and moving between exam rooms or even buildings. Meanwhile, consumers are making decisions that impact their health (eating choices, exercise, lifestyle) while out in the real world, living their lives. This situational complexity cuts both ways. On the one hand it makes some traditional enterprise strategies more difficult, while on the other, especially when combined with the proliferation of smart wireless devices, it creates opportunities for a new breed of mobile healthcare applications not seen previously.
7. Expect to have a service component to your business, but avoid becoming a customized consulting shop. Healthcare is complicated and confusing, and although technology may solve a multitude of problems, it will require some handholding and take time. There is nothing approximating shrink-wrapped software in healthcare – and you want to use the service component of your business to help improve your software product. There is a virtuous cycle between the software and service. On the other extreme, the technology infrastructure should not be stove piped or custom-built for each individual client, even “marquee” clients. In healthcare, for a variety of reasons, there are significant pressures to bring your technology infrastructure directly under the thumb of the customer—the servers, the code, the management of the upgrade schedule, etc. Try to resist these pressures and ensure that you build a common chassis that you own with “plug-ins” for individual clients as needed.
8. Beware of businesses dependent upon heroics…Make it easy. The healthcare sector is a notorious technology laggard, and for good reason. The environment can be chaotic, collaboration is complicated and staffing is convoluted. Simplicity is key with user interfaces and alerts are essential. For businesses targeting health systems, if your business depends on the brilliance, creativity and bandwidth of hospital IT, think again. Hospital IT is massively overworked and understaffed and has a list of number one priorities a mile long. The perfect solution for hospital IT is one that requires little or no effort on their part. For business targeting consumers, it’s dangerous to assume that consumers will wake up and start taking better care of themselves. Consumers will eventually start taking better care of themselves, but it is unlikely to occur before you run out of cash.
9. Know your domain. Healthcare IT is neither healthcare nor IT. Concepts and actions that traditionally work in each of those established spaces can run afoul in Healthcare IT. Navigating this sector is complicated – from a regulatory perspective, privacy, relationships, etc.
10. Secure customer references and studies. Winning “lighthouse” accounts, such as the prestigious clinics and teaching hospitals (Mayo or Johns Hopkins), can be great validation for your product or service. These customer references will earn you respect, but unfortunately many customers will look at those institutions as fundamentally different from their own situation (whether based on size, financial resources, scope, etc) and thus not relevant as case studies. Often you will need multiple, credible local references in each geography before you can enjoy the efficiencies of reference selling. Same goes for ROI and effectiveness studies.
11. Do well by doing good. Healthcare can be viewed as a business or a calling, but the most successful ventures view it as both. It is hard to beat an entrepreneurial team that is powered by the dream of both financial and social rewards. So strive to create value across the board (customers, investors, community).