Venture Capital Trends: By Stage, Round, & Industry

In March, I noted that venture capital is moving "up the ladder" - more money was flowing into latter stage investments, with only about 10% of VC deals going to start-up stage investment (as compared to 25% in 1995).

In August, I examined venture capital investments by financing round which revealed that Series E round financing is on the rise which augments this earlier observation. Extending the March data through the end of Q3 2008 shows no real change - venture capital continues to flow into later stage rounds.

(click on the chart to enlarge)

However, there is a case for the "stability" of the Early Stage round trends. In their Fall 2008 recent report - "The Entrepreneurs Report," Wilson, Sonsini, Goodrich, & Sonsati (WSGR) stated that "this stability is one of the key indicators of the continuing rate of innovation in the sector, and clearly a positive sign in the face of the ongoing economic turmoil impacting world markets." (More on this at the end of these trend charts.)

Extending this analysis with the latest data from PWCMoney Tree, I examined venture capital investments by industry since 1995 to see if there were any structural changes of the industries receiving funding. Here is a summary of the data. (Note: Percentages measured in terms of total dollars invested.)

1. Hardware/Telecommunications: This industry grouping shows a clear downward trend in hardware-related industries since 2001.

This isn't terribly surprising, as many of the operational functions are moving from heavy equipment to cloud computing solutions.

2. Biotech/Medical/Energy: This industry grouping shows a clear upward spike in Biotechnology early in the decade (though waning a bit lately), a lagged spike in Industrial/Energy (reflecting the demand influence of clean and renewable energy technology), and a consistent rise in Medical Devices (maybe because more people are getting older and we're generally less healthy?).

Again referring to the WSGR report - "Early-stage companies are particularly well positioned to successfully respond to the challenges posed by future climate legislation." Further, the National Venture Capital Association released the results of a recent survey conducted from November 24 - December 12, 2008 and includes the predictions of more than 400 venture capitalists from across the United States. In a summary of this survey prepared by VCExperts - "clean technology is viewed by the highest percentage of respondents as potentially growing in 2009 with 48 percent predicting increased investment and 20 percent predicting unchanged investment."

3. Software, Financial Services, and Media/Entertainment: I grouped these together because of the movement towards cloud computing and the ongoing convergence of media and software applications in places like Facebook. No major changes in this group which was a bit surprising. With the influx of angel capital in recent years and the lower start-up costs required for software-related companies, I expected venture capital investment dollars to have declined, which is indeed falling steadily in the Software industry.

Overall, the consensus for the 2009 venture capital industry isn't terribly positive. The aforementioned NVCA survey reveals that 92% of VCs expect a downturn in 2009. The Fall release of the University of San Francisco Venture Capital Confidence Index reflects these sentiments as well.

While a general economic slowdown is an easy scapegoat for the negative outlook, Michael Malone wrote an outstanding piece in the Wall Street Journal - "Washington is Killing Silicon Valley." Malone's opinion article clearly describes the elephant in the room when it comes to innovation and technology - heavy regulation places a long-term management cost when start-ups seek their IPOs. These projected costs outweigh the risk-adjusted benefits to new business ventures. Maybe there's a reason we're seeing the trends outlined above.

A Case for Higher Interest Rates & Lower Home Prices

(Author's Note: This article was also published on Seeking Alpha on December 25.)

With the continual prodding by many to initiate 4.5% mortgage rates to pacify the current housing market glut, it's important to distinguish the effects based on two categories of buyers:

1. Existing mortgage refinancing
2. Home Purchase Mortgages

Fundamentally, the problem with this policy is that it is likely to have a minimal effect on latter category. Saskia Scholtes wrote about this in "Mortgage activity surges at US banks" -

With average rates for a 30-year, fixed-rate mortgage now at about 5.2 per cent, growing numbers of borrowers have an incentive to refinance to bring down their mortgage costs.

But tighter underwriting standards for prospective borrowers, combined with funding and staffing difficulties for mortgage originators, are likely to restrict the supply of new mortgages.

It's clear that rates falling to 4.5% would stimulate mortgage refinancing, but not new mortgage approvals. Everyone from my father-in-the-law to our data clients at Altos Research have consistently pointed out the merits of such action. If you're paying 6% or even 5.5%, if would naturally be in your personal financial interest in the long run to refinance to a lower rate.

However, Scholtes' article indicates exactly what I've been piny about - that lowering mortgage rates will not significantly stimulate housing demand. Here's an example of what I mean:

What if we kept mortgage rates at 5.5% to compensate lenders for lending risk, but awaited a continued aggregate home price decline?

Using Mortgagecalculator.org, I ran the numbers based on a $300,000 home price and a $240,000 loan (though I'm not sure someone buying a $300,000 house will have $60,000 to put down to cover the 20% down payment requirement, but this is an experiment...).

At a 5.5% rate, the monthly payments are $1,712.69. At a 4.5% rate, the monthly payments fall by $146.65 to $1,566.04. The move from 5.5% to 4.5% is a drop of 18%.

Now what if home prices fell 18% from $300,000 to $246,000 (a decrease of $54,000) but mortgage rates stayed at 5.5%? Assuming the same 20% down payment, the loan amount would be $196,800 for a home priced at $246,000 and the monthly mortgage payment would be $1,404.41 - a drop in the monthly payments of $308.28. Which would stimulate demand more - lowering the monthly payments by $146 or $308? Lower mortgage rates will lead to lower housing prices as viewed by the buyer (in terms of monthly payments), but not by as much as lower home prices.

Yes, I realize that this is blasphemy because I'm advocating unchanged mortgage rates and a continued fall in home prices. However, the net gain is that lenders can to more borrowers at the higher rate. Why? Because the extra 1.0% offers a risk premium to lenders that will enable lenders to account for the riskiness of the buyers (we don't pay our bills here in America), thus increasing the number of buyers that would quality for approval. Additionally, a decrease in home prices would lower the income requirements for approval for buyers of this same risk profile. At a lower interest rate (say 4.5%), lenders will be forced to maintain stringent mortgage approval guidelines and the lower rates would have less effect on a buyer's monthly mortgage payments.

Remember - it was cheap money to unqualified buyers that bears considerable responsibility for the housing price mess in the first place.

The counter to this argument is simple - if home prices continual to fall, the number of "walkaways" will increase because more current home owners will be under water in their existing mortgages. This brings us back to why advocates of the 4.5% mortgage rates feel this is a viable proposal to solve the housing problem - these homeowners will be more likely to refinance than walk away. I'm not so sure about that. Using same figures above, will a homeowner that's avoiding the $1712 payment above suddenly begin making payments if at $1566? Probably not. Check out the latest data on loan modification application-to-approval rates with the number of interest-only loans creating first and second-lien situations.

More on 4.5% Mortgage Rates

Came across this article on Portfolio.com - "Against Lower Mortgage Rates."  The author, Felix Salmon, presents some good analysis, digging into Hubbard & Mayer's oped piece in the Wall Street Journal this week and using some of their own research to build a case against the proposed 4.5% mortgage rate.

4.5% Mortgage Rates & Housing Demand

Earlier this week, I suggested lower price levels would spur housing demand far more than lower mortgage rates.  Using John Taylor's position that the Federal Funds Target rate was below the levels recommended by the Taylor Rule, it would appear that cheaper money led to the current housing glut but my conjecture is that cheaper mortgages in today's environment will have only a marginal effect on overall housing absorption.

In today's Wall Street Journal, Glenn Hubbard disagrees (not necessarily with me of course) -  but siding with the recommendation of the newly proposed 4.5% standard mortgage rate for homebuyers.   (What's even more interesting is that this proposed plan hasn't really been proposed and is purely rumor according to Treasury Secretary Hank Paulson.)

Hubbard argues:

Moreover, a 4.5% mortgage rate will raise housing demand significantly. A simple forecast can be obtained by applying the 2003-2004 homeownership rates to 2007 households. We use the 2003-2004 home ownership rates because those were the years of the lowest previous mortgage rates (the average mortgage rate was 5.8%).

Hubbard, Taylor, and Paulson know far more about economics, finance, and the housing market that I ever will.  However, applying some very basic financial and economic principles to this case:

1. Past performance is no guarantee of future results.

2. Mortgage rates (and all interest rates) should directly reflect the risk profile of the borrower.

3. If mortgage rates are set at 4.5%, this would implicate that all borrowers fall into a low-risk profile category, as rates at 4.5% are close to historical lows and represent less than a 1% real rate of return for lenders after accounting for inflation (estimated at 3.66% as of October).

There has not been a fundamental shift in the population of buyers in the market.  That is, in aggregate, today's buyer population is not constituted of a fundamentally lower risk profile set. We can probably assume that buyers today pretty much have the same characteristics of buyers in the period from 2003-2007.  As such, providing mortgages at a price lower than a large chunk of buyer risk profiles would dictate would seems to only elongate the current housing glut since offering mortgages at 4.5% would enable those not truly lendable to receive mortgage approvals.  

One might immediately argue that there are tougher lending requirements now, so the lower mortgage rates would not necessitate irresponsible lending practices as seen in the previous business cycle.  However, with the Federal Funds Rate near 0%, banks are in a position to take more risk and provide money supply to those seeking it, which is what the Federal Reserve wants to happen to prompt economic activity.  See the circular logic here?

One could argue that because price levels are lower (and perhaps exhibiting deflationary characteristics), houses are more affordable to today's population of buyers and thus is creating demand.   If that's the case, will dropping mortgage rates from 5.5% to 4.5% really have an impact, or is it the change in price levels that will spur housing activity?  As argued in my previous article, it seems that lower home price levels will have a bigger impact.

The Taylor Rule & The US Housing Market

(Author's note: This article was published on Seeking Alpha on December 26.)

I received a link to this article on Twitter from Paul Kedrosky, author of Infectious Greed, on John Taylor’s criticism of the Federal Reserve’s recent monetary policy. I was drawn to the post because of the chatter that I hear from residential mortgage brokers applauding cheaper money (a.k.a. lower interest rates) -- their belief that sub-5% mortgage rates will spur housing demand. (Much more on this shortly...)

The article described Taylor’s criticism as published in his most recent paper. This is particularly poignant because this criticism comes from John Taylor of the Taylor Rule.

The Taylor Rule is a simple rule for determining the federal funds rate:

Nominal Rate = Inflation + 2.0 + 0.5(Inflation – 2.0) – 0.5(GDP gap)

Using the Taylor Rule, the current federal funds rate would be calculated at approximately 4.5% (assuming that a natural rate of GDP growth is 3.5%, with inflation calculated in October 2008 at 3.66% and current GDP growth at -0.5%).

With current rates well under 2% and looking at a historical graph of the Federal Funds Rate since 2000, we are still well below the level estimated by the Taylor Rule and have been for several years, thus the reason for Taylor's scorn.

Going back even further to the 1990's, we see that that Federal Funds Rate more closely followed the Taylor Rule recommendation:

(Source: Gregory Mankiw's "Macroeconomics" 4th edition)

It was the Federal Reserve's policy starting in 2001 that irked Taylor, to put it lightly. More so, The Federal Reserve has been dropping it's target Federal Funds rate lately in an effort to combat recessionary pressures. This has perceived implications in the real estate industry by many mortgage brokers out there, as mentioned above.

Here's the catch - the demand for money in the housing market is probably not the problem right now, because the aggregated buyer demand will not change unless lending requirements change at the current price levels. There are a fixed number of buyers in the market to which lenders will approve and make loans. Lenders are offering few indications that they will be loosening lending requirements in the near future, and so we can't expect new buyers to enter the market simply with cheaper money available.

However, there are buyers at lower home price levels that would qualify for a loan if the overall price of homes were lower. For example, assume that there is a fixed supply of homes on the market (say 1,000,000 homes) and assume that all of these homes were all priced at $250,000. There are a certain number of buyers that are willing and able to buy a home at this price (meaning that they are actually receiving loan approvals), but given the surplus of inventory on the market, it appears that the number of buyers is below our assumed supply of 1,000,000 homes.

Now, if the price of these 1,000,000 homes for sale dropped to $200,000, then basic economics tell us that more buyers become willing and able to buy homes. That is, some buyers that would not be approved to purchase a $250,000 home would be approved to buy a $200,000 home, simply because income requirements are lower for the buyer at the lower home price. The profile of the buyer doesn't change for the lender under their stricter lending requirements - strong credit scores and meeting income level requirements - there's just more buyers when home prices drop overall.

The cheaper money will decrease the final price of homes to the eventual buyers, even if the actual sold price of homes does not change. This is because the lower interest rates will result in a lower long term mortgage payment. As many Realtors have told their buyer clients - the final price of the home matters far less to you monthly than does the monthly payments that you will be making for the next 30 years. That said, lowering interest rates to make money less expensive won’t spur housing demand in a drastic way.

This would indicate that the fundamental issue in the housing market is total quantity of homes demanded from qualified buyers as determined by the money suppliers – banks and lenders. Only buyers that will be approved are part of the buyer pool, the rest are just lookers. With more stringent (and responsible) lending requirements, the question is whether the true number of buyers in the market is numerous enough to purchase the existing supply. Given that suppliers (home sellers) are continuing to drop their prices, it would appear that the real number of qualified buyers are less that required for the housing market to find equilibrium.

Here's an illustration of this example, courtesy of my AltosXplorer application from Altos Research (shameless plug):

This graph illustrates the point of fixed supply and declining prices. Using a 90-day rolling average value for both Median Price and Inventory, we can see that Inventory has mostly leveled off since the end of 2007, but prices are still falling at a constant rate. There's just no buyers for the homes on the market at the price levels. As such, the suppliers (home sellers) are adjusting their price until they will reach a clearing price where willing, able, and funding-approved buyers will enter the market and begin purchasing homes.

To bring this back to John Taylor and his target for the Federal Funds rate - the problem with the housing market will likely not be improved with a decrease of interest rates, and cheap money bears considerable responsible for the housing price mess. Instead, long-term relief has better prospects with lower price levels that will clear the market.

Just one man's perspective.

Update: Project Einstein now "His Catalog"

Back in the Spring, I met the guys at Project Einstein at the University of San Francisco Business Plan Competition. They are on the move!

They are now His Catalog. Check 'em out for the holidays! Great to see new companies with solid concepts continue to grow. I like their blog as well - lots of interesting articles and tips.

If you want to follow these guys in the social media world:

Twitter: @hiscatalog
Facebook: His Catalog by Project Einstein

Happy shopping!

Revisting Twitterer vs Googler User Valuations

Last week, I wrote did some quick math comparing the value of Twitterers relative to the value of Googlers. My initial thoughts were that Googlers were far more valuable - that the relative value of Twitterers based on the $500 mln offer from Facebook was an extreme valuation. Now I'm not completely sure.

After posting the article, I was playing on my Twitter feed and found a particularly good patch of tweets and posts by Twitterers I'm following. I'm fairly persnickity about who I follow - if I don't find the tweets useful from a business or personal interest standpoint, I'm quick to cut the cord and "unfollow" someone on Twitter.

During this run of interesting Twitter posts, I got to thinking how I was using Twitter as a personal scouting network for information I find useful and interesting - others are sifting through the morass of information throughout the web to pull out relevant content that they find interesting and useful, and in turn, are posting so that other like-minded people can benefit. I do the same for those following me on Twitter. Felt awfully efficient.

Then, I saw a tweet from @Jim Duncan

"Wondering if Twitter could be more useful than Google"

And this morning, I read Nick Bilton's article on O'Reilly Media - "The Twitter Gold Mine & Beating Google to the Semantic Web."

I'm not vain enough to think that I was the first to consider that Twitter could be valued on par or above that of Google, but there was a certain comfort in seeing others were thinking the same way. I'm still not sure what the structure of my thoughts are on this issue and how Twitter would supercede Google from a user valuation standpoint. Even Twitter hasn't publicly announced a revenue model for itselt, but there's something here...

Are Twitterers worth more than Googlers?

Following up with an additional thought on the Twitter/Facebook saga... In yesterday's article, I approached Twitter's valuation from a "per twitterer" basis - arriving at an estimated value of $45 per twitterer based on Facebook's $500 million which is really worth $150 million using the "Henry Blodget Facebook valuation discount factor."

To put the $45 per user valuation in some perspective, Google's market cap is about $90 billion based on today's opening share price. Public estimates out there show that there are approximately 1.4 billion people in the world on the Internet. Let's discount that to 1.0 billion just in case that includes people that can access once a week or month, or people that can access email and aren't able to regularly use search. At about 70% market share in the search business, that comes to abut 700 million people.

$90,000,000,000 / 700,000,000 = $128 per Googler

If one assume that Facebook's $500 million offer was indeed a legitimate $500 million and not an $500 million in inflated currency, the price per twitterer that Facebook is $150 per user, which would mean that Facebook is valuing Twitter's users more than the market values Google's users. Twitter doesn't have a revenue model. I think Google does...

(Interesting side note - the first search result for the term - "how many people use google everyday" - is a forum post on answers.yahoo.com from May 31, 2006. Still some room for improvement and not surprising that problems like this crop up from time to time...)

"No Thanks!" in 140 Characters or less

Maybe the message was something like:

Twitter: @Facebook "No can do. Thx 4 the offer."

It's common knowledge now that Twitter declined Facebook's "$500 million" offer. Running some numbers yields some interesting results on the offer and valuations of both companies. (We'll come back to the quotes around the $500 million shortly...)

Back in April, Michael Arrington wrote that Twitter was worth between $60-$150 million just before it closed it’s $15 million venture round at the end of May.

TwitDir shows that there are “3,328,420 twitterers we know!” as of the time of this article. Using the $500 million offered by Facebook for Twitter and some simple math, this would equate to a valuation of approximately $150 per twitterer. Not sure if I’m buying that (pun intended….).

Henry Blodget did some interesting analysis on the real value of the Facebook offer, since the $500 million is “overvalued Facebook stock” based on the $15 billion valuation. There are lots of ways to slice and dice Facebook's valuation (including my own perspective based on the "Facebook Multiplier"). Blodget estimates that Facebook’s correct valuation is closer to $5 billion, thus decreasing the real value of Facebook’s offer down to $150 million, or $45 per twitterer.

At $45 per twitterer, which is probably a more realistic number to use, two questions:

1. How would Facebook earn back the $45 per twitterer in future value terms?
2. What does Twitter have planned that makes them think they can do better than $150 million.

Just my opinion, but:

1. I'd guess that Facebook isn't quite sure what it'd do - sort of feels like Yahoo! in a way. Good on eyeballs and users, not so good with the whole revenue thing.
2. Twitter isn't so sure either, but knows that there's a better deal out there than $500 million in monopoly money. Just because they turned down this deal doesn't mean they turn down the same amount or less from another enterprise.

Michael Lewis - "The End"

Just in case you missed it, here's an interesting piece from Michael Lewis, author of Liar's Poker (a book about Wall Street back in the 1980's that you should read if you haven't). His new article - "The End of Wall Street's Boom"- is a new perspective on the current financial market situation. It's about 18 pages printed, so grab a cup of coffee first.

(Chris M. - thanks for sending to me...)

Learn How to Sell

Spent the evening in the office getting some odds and ends worked out. I often listen the the podcasts on the Entrepreneurial Thought Leader Lectures to help make the time more productive.

This evening, I listened to this podcast from Steve Blank, who fastidiously suggested that company founders that can't sell their product will never be successful entrepreneurs. He talked about how founders need to know how and why customers make purchasing decisions, how to process information, and how customers think about the problems that you think you have.

He also suggested that lead engineers should spend 20% of their time in front of customers. Doesn't sound like much, but that's one day every week. Think about that.

The complete podcast is certainly an hour of time well-invested.

Perspectives: State of Venture Capital

This slideshare presentation developed by TheFunded.com audits the state of the venture capital capital. It's a nice synopsis of a huge challenge - getting money to innovators. Whether venture capital industry is the answer doesn't matter. What matters is that we continue to develop innovation as a pipeline to new technology leaps and healthier long term economic growth.

Judy Estrin tackled this concept during her recent presentation as part of Stanford's Entrepreneurial Thought Leader Lecture - "Is Innovation Withering on the Vine." Whether you agree with the politics of the podcast or not, the principle remains the same - the innovation pipeline is slowing.

This supports some of the thoughts presented in a previous article - "Venture Capital: Moving Up the Ladder" - posted back in August. This isn't surprising to most in the industry.

Revelation is not the issue, resolution is...

(And a "Thank you!" goes to Mike Simonsen for pointing out both the presentation on TheFunded.com and Judy's participation in the Stanford series. That's why he's the boss...)

Recent Commentary on Venture Capital Trends

From PWC's report "Exit slowdown and the new venture capital landscape":

"In the second quarter of 2008 there were zero VC-backed exits - on the heels of five in the previous quarter which raised a thin $283 million. In the first half of 2007, by comparison, 43 VC-backed IPOs collected $6.3 billion."

From the Q3, 2008 report of University of San Francisco Silicon Valley Venture Capitalist Confidence Index™:

The Silicon Valley Venture Capitalist Confidence Index reading "fell from the previous quarter’s reading of 3.07 to a fourth consecutive new low since the Index was originated in Q1 2004 and indicates a continuing downtrend in venture capitalists’ confidence."

From Lawrence Aragon's article on PEWeek.com this week:

"The preliminary numbers indicate that VCs are hunkering down more quickly than they did after the dot-com crash. The data show that U.S.-based venture firms invested in just 250 companies last month, down from 565 companies in September and 518 companies in October 2007. You have to go all the way back to January 2004 (when they invested in 232 companies) to find a lower number. The only other October with fewer deals was in 1993."

Some positive does exist out there. The Q3 2008 MoneyTree Report published by PriceWaterhouseCooper indicates that overall venture capital activity is stable if measured in terms of dollars.

"Despite the turmoil in the global financial markets, US venture capital investing remained within historical norms in the third quarter of 2008. Venture capitalists invested $7.1 billion in 907 deals..."

2nd Annual MIT Elevator Pitch contest

Just picked up this link from Guy Kawasaki on Twitter. Good stuff if you have a few minutes...

MIT hosted their 2nd Annual Elevator Pitch contest on October 18. Here's the video of the event.

Writing for the Real Estate Market

Just a quick note to let you know that I'm also managing a blog now on ActiveRain specifically focusing on real estate market data and marketing strategy for real estate agents. Check it out here.

More on United Airlines & the Efficient Market Hypothesis

While with a friend today at a rare Saturday afternoon poker game, we got talking about the United Airlines bankruptcy story that inadvertantly crept up to the top of the headlines earlier this week. As a hedge fund guy, we laughed and said he watched the stock fall in real time. His boss asked what was happening - "United's filed for bankruptcy." Once the headline hit his computer screen, the stock began to free fall.

Here's the stock chart from the last 10 days:

And the trading volume:

I found the charts interesting for a couple of reasons. First, the sharp decline on the heavy volume of positions dumping their shares. Second, the subsequent recovery of the stock once the market understood the story to be old news from 2002. Always nice to see the financial markets work efficiently.

The Efficient Market Hypothesis in action

One of the more interesting and hotly debated concepts in finance is the efficient market hypothesis, which "assumes that all important information regarding a stock is reflected in the price of that stock." (Definition courtesy of Brigham's 12 edition textbook.) Personally, I'm not exactly sure where I fall on this argument, thought it's clear that barriers drop daily as technology continues to transfer information at a faster and faster rate.

That said, I have a little chuckle about this article regarding United Airlines and its stock price after an old news release seeped into the regular news cycle.

Our Fearless Leader on FOXBusiness

Just a quick plug for our work at Altos Research. Mike Simonsen, our CEO, was interviewed on FOXBusiness News this week with a focus on potential bright spots in the US Housing market. Always cool to see our little shop get some national exposure. Here's a link to the video interview. (There's a short commercial as with all videos - just a quick 15 seconds then to the good stuff....)

Interview with Spider Juice Technologies

Tim O'Keefe at Spider Juice Technologies and Houseblogger.com interviewed me to learn more about Altos Research and how we support real estate agents in answering "How's the market?" for their clients.

We had a great time talking both before and during the interview. Check out and downloadthe interview here.

If you're not familiar with Spider Juice, they provide web and internet marketing support, including search engine optimization, blogging support, and guerilla marketing for real estate agents.

Viva Monopoly!

With the launch of Google’s new browser – Chrome – I can’t help but consider one of the basic laws of market economics:

Monopolies are good.

Back in 1997, strategy+business published an interview with Paul Romer, a Stanford economist that has been a leader in the development of new growth theory. In the article, Romer discusses how the possibility of monopoly gives incentive to the private sector to innovate new products, so that they may corner the market for a period of time and generate increasing returns on investment.

About that time (in 1997), Microsoft was considered the dominant software company and expected to run the computer world for generations to come. Since then, it's endured tremendous pressure from its destruction of Netscape and ongoing anti-trust battles across the world. I refer to Microsoft, because in the last decade we’ve seen Google emerge as the new leader of the information age. In leveraging their search engine technology and other innovations, they’ve launched Google Docs and Google Spreadsheets to compete with Microsoft Office. Their search has reorganized the way the companies build websites and deliver content. With the release of Chrome, Google is hitting Microsoft head-on in the web browser arena where Microsoft had the assumptive monopoly less than ten years ago.

From October 2007 through August 2008, the Windows operating system has gone from 92.5% to 90.6% market share, with Mac and Linux slowly creeping up. This 2% doesn't seem like alot, but ask Microsoft if they're worried. (Internet Explorer has lost 6% market share during this same period.)

Recently, Firefox nabbed 17% of the browser market and Safari grabbed another 6% according to Market Share. With Chrome now reported to have 1% of the market in just 24 hours, it seems that the monopoly is less than so nowadays.

Going back 20 years to the mid-1980s, Microsoft was the young, nimble company targeted the entrenched monopoly of the terminal computer. Seeing a pattern here?

No company, especially in the IT industry, is safe from competition. This is what drives Silicon Valley and the world to build the better mousetrap. Ten years from now, you'll be reading about how Google’s dominance is fading because of some other new emerging leader. Ten years is just a single business cycle in economic terms. While monopolies appears to exist, they don't last very long. That's why companies strive to acheive them, protect them, and maximize on them, because they know that they are fleeting.

Capitalism works if you let it breathe.

An Entrepreneur's Lessons Learned

It’s been about a year since I closed up my consulting shop – Economic Information Services. The company provided business consulting services, focusing on Central Asia and Ukraine. Basically, our job was to develop local projects in these regions and find investment capital for them from international sources.

I occasionally find myself comparing work with my current company with my previous venture. Over the last couple of weeks, I’ve been recording retrospective thoughts about how I’d do things differently, and wanted to document them so my readers might pick up a useful tip or two. So here goes…

Understand the concept of “search”

Clients find you when they have a question. One aspect to my business about which I was certain – I knew as much or more than anyone about how business in these parts of the world was done. I attended conferences and events talking to companies considering overseas projects and partners. But I never put myself in a position to display my market knowledge to any of these people until I was engaged in a conversation with them.

I chose to build a traditional website (a.k.a. “a completely worthless use of time and resources”) and spent about $2000 to develop and launch an online marketing brochure that no one read, visited, or could find. Any time that I wanted to update the site’s content, I sent the new content to my web developer, waited a few days (or weeks) for the update, then paid an invoice for anywhere from $250-$500. Not too bright.

I set up Google Ads for key terms such as “Kazakhstan economy” and “Kazakhstan investment.” After 3-4 months of $300+ billing, I saw absolutely no ROI. This doesn’t mean Google Ads doesn’t work. It means that I didn’t know how to use the application effectively. I didn’t use Google Analytics to track incoming clicks. I never thought to research what keywords people searched. I hoped, and thus wasted about $1500 on this failed effort without ever understanding what I was doing wrong.

Had I built my website around a blog, I could have updated the site daily with new content - articles, commentary, observations, essays, and on-the-ground observations from my business travel there. Content, content, content. Given the relative obscurity of companies focusing in this part of the world, my company’s search result rankings could have been among the top in Google.

I failed to embrace search, and as such, I was the one searching for clients instead of the clients searching for me.

Skip marketing. Proceed with selling.

Forgive me Father, for I have sinned. I spent $6000 to host a cocktail hour at an investment conference organized by the Embassy of Kazakhstan.

I thought that this was the way to build a brand – show strength, success, and deep pockets. Hosting a cocktail party is a great way to waste $6000. You can’t possibly talk to everyone that attends. Inevitably, uninvited guests will show to poach free food. The important people that you want to talk to already have a line of people also waiting to talk to them. But you leave the event feeling like you made progress because people know who you are now. Fact is, they don’t even remember that you were there, let alone were responsible for the shrimp cocktail and bruschetta that they downed all night.

Small consulting companies don’t have time to build a brand. The clock is ticking – find clients that are willing to pay for your services.

Charge for services earlier in the client relationship

I was a busy guy. I was up at 5:00 AM nearly every day to talk to our local office in Kazakhstan about what happened that day or what projects they uncovered. I would spend my day translating business plans for local projects; setting up meetings with business organizations, investment promotion agencies, and government contacts for upcoming travel; and providing research to US companies I’d met at conferences and seminars that were interested to learn more about the region and business opportunities.

But I never asked for the business. When someone asked if I “could find out this and that,” I never told them the price or sent an invoice. I put myself in a middle-man situation – representing projects for local clients that couldn’t pay, and talking to potential investors that didn’t want to pay. I did sign some contracts and make some money, but some self-assurace could have improved the revenue flow substantially.

One of the most challenging aspects to consulting is converting a non-paying contact to a paying client. While you need to establish confidence with the client early in the relationship’s development, you also need to be firm about the way that you make money with the client. If they can’t understand it early in the relationship, then they never will.

It’s hard for firms to find good people to do good work. I was both and never leveraged this opportunity to develop clients for myself.

Consulting is not scaleable

I occasionally contacted a friend of mine, an entrepreneur in the technology sector that successfully exited a company that he started. He’d often give me some general pointers on developing my business that were helpful, but I ignored the most important advice he gave. Early on, he looked at my website and asked me if there was something I could do to make the company more scalable - maybe offer some sort of service or product through my website. At the time, I said to myself – “doesn’t he know that I’m in the consulting business?”

Looking back, he knew exactly that I was in the consulting business, and that’s why he asked if there was a way to scale somehow.

Given the depth and breadth of my market information, there was an opportunity to develop a simple project database or a series of industry overview reports. Had I understood the concept of search, those looking for “investment projects in Kazakhstan” or “telecommunications Kazakhstan” would have found my company and possibly purchased access to the reports or project database. At a minimum, setting up a more functional website would have help with client lead development. These aren’t products that would tally much per month in revenue, but in could have provided some minor cash flow, and could have given me a way to qualified leads for myself.

See how this is all related? I do. Now.

Convert Visitors to Leads

Related to the previous point, I could have developed a clear value-proposition on my company website – such as offering a free report by industry (which I developed for a conference and never used otherwise), and perhaps I could have grabbed some contact information from those directly interested in business opportunities in this part of the world. Giving away a market report isn’t going to get you a six-month consulting contract, but at least it would have enabled me get in touch, begin the process, and most importantly, expand my network of contacts.

Developing this process also enables a clear ROI for marketing and sales efforts, to understand more on what gets you clients and what doesn’t.

Accounting Good, No Accounting Bad

Keep better accounting records. Like most entrepreneurs, the mind-numbing activity of tracking receipts and expenses every month lacked the glamour that I sought in running my business. My solution? Ignore it. And at the end of every year, I scrambled to organize my receipts, enter my expenses into Quickbooks (okay, so my wife did all the Quickbooks work….), and crank out some semblance of a balance sheet for my accountant. No methodology for understanding how and why I spent money, and how to determine its return.

When the audit came around from the IRS, I scrambled to prepare (and thankfully passed). When it came time to apply for a home mortgage last month, I was nearly dead in the water. (We’re still working out the details of the loan, but it’s looking positive...)

Know when to quit.

I know - not something you hear often.

Write down your dropout clause at the same time as your business plan. You owe it to yourself and your family to avoid the double-down philosophy of the Atlantic City gambler. Be responsible. Objectively find the point in your venture when you know you’ll stop, and stick to it. I know that there are successful entrepreneurs out there that have cashed in their 401k savings (yes, I considered it), maxed out credit cards, tapped friends and family for loans, and gone to other extreme measures to overcome a dearth of failures. Remember that you only hear about the successful ones. BusinessWeek and Wired don’t write articles about the other 99% that are still paying off their debts from failures past.

Two years into my venture, I reached a decision point brought about by financial constraints (read: “running out of money”). These two years included several trips to Kazakhstan (with a six-month stint to get things going there), meetings, bids on government contracts, meetings with government officials, conferences in Washington D.C., meetings with local project owners, subs-contractor submissions through beltway bandits, meetings with contractors, and a few meetings. (Did I mention the number of meetings that I had?) This activity resulted in a couple of small, sporadic contracts, but nothing that provided long-term financial stability.

An angel investor who believed in me and my company, decided to front the cash for another six months of operations. During that period, we won a sizable local project sponsored by the Kazakhstan government. “Yippee!” I thought. When that project was finally finished about a year later, I was faced with the same financial constraints. We couldn’t find new projects because we were tied up with the first one, local market dynamics didn’t change much, and our ill-conceived method of client development described in detail above left us without the next income source. It was then that I decided to close the doors.

Usually, you’ll hear from successful entrepreneurs that the mistakes were the most beneficial to their long term growth. That’s sort of true. It’s not the mistakes that offer the opportunity for growth, but the acknowledgement and deconstruction of mistakes.

There’s a difference between believing in something, and knowing it. (I once believed in the Easter Bunny...) Blind faith is important – you must always believe in yourself or your idea. Being blind to the obvious signs that your venture isn’t working is downright foolish.

I believe in myself, and that’s why I decided to close the shop. Good entrepreneurs know that there’s more than one good idea. Let the failures work for you, not against you.

Venture Capital Trends, Q1 (2008)

Over the last couple of weeks, I've been intending to comment on the recent report released by VCExperts released in June regarding trends in venture funding in Q1, 2008. The graph below illustrates some of the key data from the report. The labels of A, B, etc. refer to the Series Round of Financing.

While recent trends in Series A-D financing have moved around a bit and returned to the same approximate levels from 2006, it's clear that the number of Series E+ fundings are rising over the past year. This may be manifesting a couple of market factors, including the current market constraint of two major VC-funded exit strategies - acquistions and IPOs.

Given the overall volatility of the stock market, perhaps potential suitors are sitting on the sidelines and taking an inward focus to developing operational strength and cash flow rather than seek growth through acquisition. Stock market volatility also appears to affect the number of IPOs filings, with only 13 IPOs filed in Q2, 2008 compared with 56 filed in Q2, 2007 (sourced from the Hoovers IPO Scorecard). Renaissance Capital's IPO Index is showing a -5.2% return over the past 1-year period, with year-to-date returns at -17.8%. It's just not a great time for IPO exits if you're a VC-funded company. (Of course, the DJIA is at about -10% YTD and the NASDAQ is about even so far YTD...)

In December 2007, a National Venture Capital Association (NVCA) press release reflected some bullish sentiments by venture capitalists, with "59 percent of the venture capitalists are predicting further IPO market recovery." I found this optimism particularly interesting given the counterview outlook illustrated by the USF Venture Capital Confidence Index. The most recent update released on July 9, indicates that VC confidence has fallen to an all-time low since establishing the index in 2004. Wish these VCs could make up their mind....

One factor in this trending may be the ongoing movement of venture capital. Data from PWCMoneyTree provides sufficient evidence that venture capital is falling into later stage investments over the long run, as discussed in an article back in March.

I'm guessing the truth is somewhere in between...

Reviewing LinkedIn's Valuation

After writing my weekend post about LinkedIn’s $1 bln valuation ("Locked in on Linked In"), I did a bit of reading about how some others viewed the matter. (I wanted to come to my own conclusion without being influenced too much by others who already wrote about the topic…)

Michael Arrington wrote a nice article back in June about social network valuations, using the “average Internet advertising spend per person in the country they live in.” Arrington mentions the same problem I alluded to in my article – not too many data points from which to base valuations in the social networking industry (Facebook’s at $15 billion, MySpace at $580 mln and Bebo at $850 mln by acquisition). He doesn’t come to any conclusions as far as viability of the current valuations, but the metrics and his responses to commentary make for an interesting read.

Many postings announcing the $53 mln Bain Capital investment mention rumors of how LinkedIn was striving for a $1 bln valuation, seemingly to justify its targeted user base of higher-than-average income user base that can be used to generate higher-than-average advertising revenue. Caroline McCarthy mentioned this back in May on CNET, as did Arrington in his May 5 posting.

Overall, the initial reaction out there is that the validity of the valuation remains to be seen, but the unique nature of LinkedIn’s user network appears to have some merit according to the first wave of observers. Of course, there were those with a hearty defense of the Facebook valuation when it hit $15 bln last year as Jonathan Richards wrote about in October.

Locking in on LinkedIn

I read about the recent $53 mln Bain Capital investment to LinkedIn and I was prepared to write an article again questioning the valuation of another social/business networking site. Like many, I'm not particularly enamoured with the current $15 billion valuation of Facebook, so my initial reaction to the $1.035 billion valuation of LinkedIn was - "here we go again..."

Because LinkedIn is a private company, their financials and revenue sources aren't available. I did some scouting on the site and they make money in a few ways:

1. Advertising via their Large Budget and LinkedIn Direct Ads to provide targeted advertising to its members.
2. Subscriptions to Premium Services that allow the user to directly contact people out of their network with "InMail" and send "Requests for Introduction" emails. These services range from $20-$200/month.
3. Perhaps some others such as data analytics based on membership statistics and activity (though this is only my conjecture...).

Johnathan Richards wrote an article following the June 2008 venture investment and estimates LinkIn revenues to be around $80-100 million, with "about a quarter" of the revenues coming from subscription services. At first, I was a bit surprised to read that subscription fees could be so high, until I considered the number of recruiters that have contacted me via LinkedIn, as well as my own activity. (I personally subscribed to their $20/month plan when searching for a job a while back, and was able to link up with a great recruiter at Russell Stephens as a direct result of an InMail.)

With the current $1 billion valuation based on revenues of $100 mln, that's 10x revenue valuation, without any knowledge of their profit margins. The News Corp acquisition of MySpace for $580 million back in 2005 supplies some relativity to the $1 bln valution. Though a social site, not a business site, MySpace does parallel LinkedIn in terms of its ability to focus on a large market segment, it's networking component, and the fact that the business world has placed a valuation on it. Since the acquisition, MySpace has reportedly been a boon to the New Corp's Fox Interactive Media Group. (According to the most recent 8K report from June 2008, News Corp reports that Fox Interactive Media grew revenues 57% and increased "operating profits five-fold on strength of advertising and search revenue growth at MySpace.") Two years after the aquisition, things seem to be looking rosy for New Corp according Murdoch in this Wired Magazine article.

Considering the virtual aspect to LinkedIn's product and the scalability of subscription services, I suspect that their profit margins are healthy and growing as LinkedIn acheives a greater lock-in effect with users - becoming the main destination site for business networking. The caveat to acheiving this lock-in effect will be the quality of service and networking effects. However, by providing the ability to remove connections and requiring a subscription for the ability to directly contacts individuals outside of one's network, LinkedIn drastically removes the diluation and spam factor to their networking functions. Additionally, LinkedIn boasts (as they should) that their audience has an average household income of $109,000, about 2.5x's the median US household income of $48,200 according to the 2007 US Census (though I'd like to know the median LinkedIn income to see how much top executives on LinkedIn skews this average figure).

Looking LinkedIn's development, they've taken a deliberate and apparently successful approach so far - develop a user base, find a way to quickly monetize activity with premium subscription services, and then analyze the user base to leverage it for targeted advertisers. From this perspective, LinkedIn is now completing the foundation of its business with the Series A, B, C financing of about $30 mln, while this most recent $53 mln should be intended to move the company into a mature state with specific long-term goals for continued rapid growth.

The most compelling part of LinkedIn's situation is its $1 bln valuation based on $100 mln in revenue. It's high, but justifiable given the apparent success of others in the networking space, and the unique niche of its business and professional membership base. Like everyone, I'm interested to see how quickly it can convert the valuation to practice, or to see if it can utilize its valuation to grow by:

1. Acquisition of higher-end job sites such as TheLadders.com or Vault.com
2. Targeted content partnerships such as their recent NY Times agreement
3. Integration of specific industry content and membership groups such as BAFT, VCExperts, or others to serve as a clearinghouse of industry information for its users.

So here I am at the article's end, completely reversing my initial reaction to the valuation - seems to be okay after all...

AltosXplorer - Cooler than a Liger....

What could be cooler than this?

What 'til you check out AltosXplorer.... I'm referring to it as the "liger of the real estate market."

From our press release:

AltosXplorer is the first rich internet application that enables users to:

• Instantly query the vast Altos Research real estate database: Altos publishes hundreds of useful statistics covering nearly 10,000 zip codes around the country every week. AltosXplorer opens the massive 2 terabyte (2TB) Altos Research database to live queries.
• Automatically chart local market trends: Just a few clicks to grab local market trend charts for your blog, emails, or unique individual analysis.
• Quickly analyze today's conditions: Sift through mountains of statistics to compare local market opportunities, identify previously hidden trends, and make decisions.
• Export the data: Easily save graphical charts and export historical data directly to your PC.

We're just so proud of this product, we're telling everyone we know - and so should you! Check it out here.

Freddie Mac, Fannie Mae, & Cheap Furniture

A friend of mine that works at a hedge fund called me on Friday. He wanted my opinion on the Freddie Mac/Fannie Mae situation. My immediate reaction was – “Good news – the free market works.” Over the weekend, I thought about it some more, and here’s what I think now -

“Good news – the free market works.”

I remember just after college, another close friend (“Mike”) started working as a manager at Heilig-Meyers Furniture in North Carolina. Heilig-Meyers was a chain that focused on lower income consumers – mostly anyone that needed a chair to sit on and a coffee table to eat off of while watching Jerry Springer… (Mike also informed me that the furniture protection upsell is a crock, but I digress….) Their specialty was extending credit to lower-income purchasers. I remember reading one of their credit agreements once – 24% interest for those lacking the cash to complete the transaction. Additionally, Heilig-Meyers sold credit life insurance at a value above the price paid for the purchased furniture to prevent downside risk against “unpaid indebtedness.”

So if I have this right, Heilig-Meyers would sell furniture to non-creditworthy individuals on credit, include additional debt insurance payments for an amount higher than the value of the purchased goods, and charge an interest rate that reflects the appropriate risk level of the consumer to which they were extending credit. Hmmm…. Sounds familiar for some reason. This may be shocking news, but Heilig-Meyers went bankrupt in 2000.

I wonder what would happen if a mortgage company provides financing for a house to individuals lacking the appropriate credit at an appraisal value above market value, and include additional payments on top of the loan for private mortgage insurance for the total loan amount. And, what if the home mortgage lenders had fair confidence that default risk for these loans would be covered by the US government? Oh wait, that’s happening…

Why is it hard for the market to understand that people and companies respond to incentives? (Check out "THE ARMCHAIR ECONOMIST: Economics and Everyday Life" by Steven E. Landsburg for more on this.)

(More info about eventual lawsuits against Heilig-Meyers’ practices can be found here – some interesting reading. How do companies even get this large following such company practices?)

Venture Capital Trends - Q1, 2008

Found this article on VC Experts (a great source for articles and analysis on a myriad of venture capital topics) a couple weeks ago.

In short, Barry Kramer and Michael Patrick of Fenwich & West LLP analyze the venture funding terms for over 100 companies in the San Francisco Bay Area. For those number-crunchers, this is a great piece to read.

I'll spend some more time analyzing this weekend to infuse my own perspectives, but for now, here's a link to the article.

AllAdvantage.com - One Last Hurrah...

Back in late 1990s, I travelled frequently to the Bay Area for work, and during that time, was convinced that I belonged in Silicon Valley working with one of the great new start-ups. It took me until 2001 to finally get here, just a bit past the prime years of gluttony for many-a-startups.

One of those companies that was particularly interesting to me was AllAdvantage.com - a company that paid its users to surf the Internet. A close friend of mine (who shall remain nameless), worked as an analyst there and still tells stories about how the company would announce how many millions of dollars they paid out to its users (generally denominated in millions); followed by an employe cheer on at the recital of how much money was lost that month. Even as a analyst working on the AllAdvantage.com version of TPS reports, something didn't seem right to my friend.

Now in the lore of Silicon Valley start-ups long gone, AllAdvantage.com managed to resurface in a recent piece on The Industry Standard.

Quite ironic how The Industry Standard is doing pieces on failed Internet start-ups. I attended one of their rooftop parties many years ago - they weren't exactly the frugal type themselves....

Employee Retention at Yahoo!

Things aren't looking terribly rosy at Yahoo! nowadays. It's never a good sign when webpages like this start sprouting up.....

http://yahoorezinr.com/

(Mike - thanks for the link....)

The Altos Research Blog

Been busy of late gearing up our new sales rep at Altos Research and bringing on new clients by the truckload - we're busy and life is good there!

For those interested in some local flavor and perspectives on real estate market data, you might enjoy my latest blog post on the Altos Research blog. Check it out!

Google's Employee Retention & Entrepreneurship

About a year ago, I explored Google’s investment per employee during their growth phase, noting that the Google’s employee retention might suffer in the long term as a result of simple mathematics. As Google continues to grow its revenue and employee numbers, maintaining the investment rate per employee to pay for its innovation and development would become increasingly more difficult.

As is well-known, Google inherently breeds entrepreneurialism by allowing its employees to spend 20% of their time on self-developed projects. Projects are presented to Google's product councils for further internal funding and support. Once the “true entrepreneurs" (which I am defining in this case as individuals that would actually leave their corporate binds to strike out on their own) learn the skills necessary to develop and incubate a new innovation, it is a natural progression to expect that they will move on to work on their own.

The brightest minds that have been with Google since the early days have little monetary incentive to stay now that their share options have vested. Those that came aboard Google after their successful IPO and subsequent share price growth have even less upside to sticking around in the near term. Why give up self-developed intellectual property to the “mothership” when you can add the Google brand name to your resume, retain ownership of your idea for a few years, and pursue your own interests afterward. This raises an interesting management question – is it possible that current Google employees are sand-bagging? Could they be working on only a part of their own ideas while working with Google, but saving their very best for a planned departure in the near future?

Adam Lashinsky’s article a recent issue of Fortune Magazine – “Where Does Google Go Next?” – examines the departure of key personnel at Google leaving to create their own start-ups. Some of the individuals and examples that Lashinky cites are Paul Buchheit who co-founded of FriendFeed (with three other former Googlers), Yanda Erlich who founded Mogad, and Nathan Stoll who founded Mechanical Zoo (with other ex-Google engineers). Which of these companies (if any) and their core ideas where actually developed during employment at Google?

The natural metamorphosis of many start-ups is to create a product model legitimized through a rapidly growing user base (and sometimes even paying customers!), and then an exit via acquisition to a larger firm seeking new technologies and products not otherwise developed in-house – companies like Yahoo! and, of course, Google.

Following this line of thinking, Google’s growth creates a reduced incentive system for the true entrepreneurs, but the corporate culture formalizes their employees’ entrepreneurship skills and strengthens their ability to develop and build their own businesses. During this employment period, the true entrepreneurs may sandbag on their ideas, then leave to start their own technology companies that conceivably end up as an eventual acquisition target for Google and its competitors.

This presents an interesting moral hazard for Google. While they deliberately strive to hire people with a penchant for entrepreneurialism, they may not know which employees are “true entrepreneurs” and which simply have an entrepreneurial spirit willing to share their best ideas with Google. This places even more emphasis on the recruiting and hiring process to vet out which applicants are entrepreneurial, but are not necessarily true entrepreneurs.

While each of these thoughts require additional analysis and research, Lashinsky’s article and listening to Paul Buchheit at a recent SVASE Panel Speaker event got me thinking about the Google-employee incentive relationship. More to come on this idea....

Getting Started with Bootstrapping Your Business

Traditionally, angel capital became known as “angel capital” because they were the first investors – the “pre-seed” funding, but with deals becoming more numerous and requiring more stringent expected ROI requirements, the entrepreneur in need of $50K or $100K in seed capital is left to bootstrap their business. If you are looking for that first installment of seed capital, here are some concrete ideas to consider.

1. Attend local start-up events. Get out and meet people. Yes, you’ve heard this time and again. Check you calendar. When was the last time you attended an industry event? If it’s been more than a month ago, that’s too long.
   
   Here in Silicon Valley, I’ve been a huge fan of the Silicon Valley Association of Start-up Entrepreneurs (SVASE). You probably won’t find funding at one their events, but you will surely uncover great ideas from their guests, panelists, and speakers.



2. Keep a regular blog. You don’t need to divulge company secrets, but keeping a regular blog provides you with some very tangible outcomes. First, a blog provides a written history of your idea’s development, so if you meet a potential investor or partner, you can show them your progress over time, not just where you are at the moment. It shows the outsider that you can keep a commitment to yourself and are able to communicate effectively with the outside world. Or perhaps a potential investor will find you when they are out searching for projects.
   
   Second, this helps you to see your own progress. As an entrepreneur, it’s easy to feel discouraged when you’re developing a new technology or innovation. You can’t always look back at the end of a weekend grinding away in your garage to see your progress. A blog enables you to see your accomplishments over time – everything from setting up an LLC to installing and understanding some new project management software to jotting down thoughts or ideas you’ve recounted from meetings and events you’ve attended.
   


3. Ask for advice and then listen. At a recent SVASE event, one of the panelists mentioned (to paraphrase) – “If you ask for money, you’ll get advice. If you ask for advice, you might get some money.” As an entrepreneur, you need to learn how to take constructive criticism and listen. Listening skills are the foundation of good sales skills, and enables you to improve your idea without taking the criticism personally. Remember Dale Carnegie’s book – “How to Win Friends and Influence People.” And if you haven’t read this book at least once in the last three years, then good back and read it again.



4. Ask for referrals. Memorize this line – “Thank you for your time and your advice. Do you know 2 or 3 other people that I can talk to for their advice as well?”



5. Carry a 5” x 3” Memo Book. These are about $1 at the local Walgreen’s and fit in your back pocket or jacket pocket. Great for writing down ideas that you get at the spur of the moment, or for jotting names and phone numbers of people you meet.



6. Stay positive. “It's supposed to be hard. If it wasn't hard, everyone would do it. The hard is what makes it great.” (Jimmy Dugan, played by Tom Hanks, in "A League of their Own" in response to Dottie (Geena Davis) saying she's quitting the team because "it just got too hard.")

"I've got the conch!" - What now for Facebook?

Jessi Hempel’s article in the most recent edition of Fortune Magazine – “Finding Cracks in Facebook” - intends to uncover some new foundational flows with Facebook. The article itself doesn’t necessarily reveal any new revelations about Facebook, but further asserts some of the ongoing concerns that those in the technology arena have long had about Facebook (an inexperienced CEO, an emerging firm without a clear revenue growth model, and an extreme market valuation).

As I wrote several months ago, Facebook’s economic value may vastly different from its business and market value. While the company is bringing several new experienced executives on board, I can’t help but imagine that Facebook corporate headquarters at least mildly reflects the tensions in the Lord of the Flies.

While Yahoo!, once an Internet powerhouse, slowly fades into oblivion as a Microsoft acquisition target and under talk of selling off company assets, it would be imprudent to consider Facebook’s market share and daily visitors as validation that the company has assured a long-term future for itself.

The latest scoop has Microsoft considering an acquisition of Facebook themselves - another story unto itself.

In looking at the lack of revenue growth and ongoing struggles with launching new platforms and working with developers, the technology development and appeal of Facebooks seems to be reaching an entropic stage. Perhaps this would be a good time to cash out and start anew with the next idea that is inevitably rolling through the minds of Zuckerman and his cohorts. I only wish I had such decisions to consider in my our career and the opportunites available to him should be nearly boundless.

CBS - The CNET Acquisition

The acquisition of CNET by CBS – let’s take a quick look at the numbers.

I began by checking out the Balance Sheet, and as a content and media company, one would expect what I saw – relatively low base of assets and liabilities. Pretty tough to determine the value of CNET based on assets on the books.

Then moving to the Income Statement, annual Revenues have been growing modestly each of the last three years (from Yahoo! Finance):

2005 = $354 mln.
2006 = $387 mln.
2007 = $406 mln

But the bottom line income tally reveals the results of some interesting accounting activity:

Total Income 2005 = $19.6 mln
Total Income 2006 = $6.8 mln
Total Income 2007 = $176 mln

The jump in 2007 looks impressive, until you see that CNET accounts for a $178.8 mln “Income Tax Expense,” thus propping up the overall bottom line income for the year.

Looking at the Cash Flow Statement, nothing here seems terribly appealing.

Change in Cash Flow 2005 = $26.3 mln
Change in Cash Flow 2006 = ($24.5) mln (CNET paid off $125 mln from convertible notes issued in 2004.)
Change in Cash Flow 2007 = $57.3 mln

Aside from debt retirement, it seems that cash flow situation seems is fairly stable as you look at cash flow from operations. But, nothing seems particularly compelling or attractice here from an acquisition standpoint.

So what does all of this mean in terms of the $1.8 billion price paid by CBS for CNET? The $1.8 billion represents a premium price per share of $3+. It also represents about 4 times revenue, slightly less than the price Microsoft offered for Yahoo! (which was 6 times revenue). CBS isn't in a situation where top line revenues really matter, so to acquire CNET simply to add to top-line revenues probably isn't a valid reason for the acquisition.

Total annual income is unimpressive, and the annual changes in cash flow are appealing but don't provide the case for the acquisition either. Overall, as seems to be the case when old media companies are attempting to keep with consumer demand for innovative content, the $1.8 seems to be an overpayment. CBS is obviously buying the CNET brands in hopes (yes, hopes) in evoling these brand names to consumer mindshare.

The bigger question is whether or not CBS can convert and integrate the acquisition into a positive gain to justify the price. I’m guessing not.

Yahoo's Entrepreneurial Capacity

Attending local Silicon Valley events always seems to provide great fodder for articles and conceptual gymnastics --

I attended an SVASE event last week – “Startup Founders – New Kids on the Block” – where Eric Marcoullier, Founder & CEO of Gnip, served as one of the panelist. Eric developed MyBlogLog (I'm a member) which sold to Yahoo! for $10 million back in January 2007. After less than a year, Eric left Yahoo! and is now in the process of launching Gnip, a stealth company that no one seems to know exactly what it does.

Could this showcase the pending problems that Yahoo! might have with its acquisition spree over the past few years? Yahoo’s strategy has been to acquire new technology companies and then fold them into their product and service offerings. To account for the prices that they pay for these companies, the “Goodwill” account on Yahoo’s Balance Sheet continues to grow – a practice that I’ve recently criticized. When a company’s accounts for intangible assets by using the “Goodwill” account, those intangible assets may include the future innovation and development that the acquisition’s management and employees with bring with them. Advocates of overpaying for an acquisition will often defend the price paid by infusing the argument with the future intangibles yet to be realized.

Entrepreneurs inherently dislike the bureaucracy and structure of a large corporate organization. So what happens when these unrealized intangible assets disappear when key managers decide to leave the acquiring firm? When key managers leave the acquiring firm in short order, then the expected future benefits from those managers are lost.

(Sidenote #1 - Gary Becker, Nobel Prize-winning economist for contributions to the concept of Human Capital, estimated that human capital represented 70-75% of a company’s value.)

(Sidenote #2 - this is one of the reasons that acquiring firms will use its own equity shares in acquisitions instead of cash – the equity paid to the target firm managers can be spread out over a period of time to increase retention of the acquired managers and key talent.)

When Yahoo is purchasing new technology companies such as MyBlogLog, they are attempting to buy “entrepreneurial capacity” that otherwise doesn’t exist organically within its own corporate structure. The struggle that acquiring firms face is that increasing entrepreneurial capacity, according to Becker, is accompanied by “significantly rising costs and that the “accumulation of human capital is not instantaneous” (from Becker’s book - “Human Capital”). If ineffective incentive programs are implemented, this purchase capacity flies out of the window as the key managers walk out of the door.

If other key managers like Eric are walking, so too are Yahoo’s "Goodwill" assets.

H1B Visas: E2 Visa Requirements

I came across an interesting article on TechCrunch that provides a straight-forward guideline to the categories of work visas available for foreigners seeking entrance to the US, especially those seeking employment in Silicon Valley's technology sector.

One of visa categories is the E2 visa - this visa is designed to permit entrance to the US for a foreign investor that adheres to several strict requirements. I did some quick research, and found the specific guidelines for attaining an E2 work visa from Workpermit.com (unfortunately the US Customs and Immigration site doesn’t lay out the requirements as clearly as this…):

1. There has been and will be a substantial capital investment in the US. There is no specific cash threshold defined, but $40,000 is probably an absolute minimum, and any investment below $100,000 would need a very strong case to support it.

2. Risk Capital has been Committed; the investment must entail some risk to the investor (it may not be all in the form of unguaranteed credit). At a minimum, there must be a long-term lease of an office in the US.

3. The investor will control his/her investment. In this respect control is considered to entail owning over 50% of the US enterprise.

4. The cash invested is not marginal when compared to the total investment. In general, unless it is common to the industry to have higher amounts of 'leveraging' (such as in the property industry), 51% of the investment should be in the form of cash equity. Where debt is secured against other assets of the investor, it is considered to be 'at risk', and may be considered as part of the equity invested.

5. The enterprise is (or will be) active. In order to be 'Directing and Developing' their investment, the investor will require an enterprise that involves active management. 6. US workers are (or will be) employed. The treaties envisage more than just creating a job for the principal investor, but there is no requirement to employ a particular number of US citizens. Obviously, employment of large numbers of US citizens would be viewed very favorably.

7. The enterprise, or its principal investor, has a past history of successful trading.

8. That the 'investor' has sufficient acumen to direct and develop the investment enterprise. 9. That the principal investor, and any other E2 staff, are able and willing to leave the US upon termination of their E2 status.

As you can see, the requirements are strict and complete. The E2 Visa should not be considered to be a loophole or back office channel, but for foreigners that are willing to invest in the United States, it can be a very effective entrance opportunity to the United States. With the value of the US Dollar compared to the Euro and British Pound, this might be a good time to think about investing in the United States from abroad if you are a business owner overseas.

Michael Arrington’s complete article on TechCrunch includes a guest posting from Peter Nixey, founder of Clickpass, a start-up firm founded in the UK and now based in Silicon Valley.