Category Archives: Entrepreneurship

Games Are Different

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I’ve become generally negative on most pure software projects.  I think it’s very hard to build large value there, for a variety of reasons:

  • It’s insanely crowded; lots of people code these days
  • Open-source stacks make it easier than ever to crank things out
  • Cloud-based hosting (e.g. EC2, S3) removes most up-front capital requirements
  • If you’re successful, it’s easy to get copied

It’s a great time for consumers — the innovation rate feels higher than ever.  It’s just tough for entrepreneurs:  there will be some nice software exits, but returns are becoming so skewed, it’s more like a lottery than anything based on skill.

One exception to all of this:   games.

Games are different, for a variety of reasons.  One big reason is content:   many games aren’t pure software projects, they’re really engines wrapped with levels, puzzles, art, 3d models, textures, sound effects, designs, characters, AI, story lines, scripts, music, etc.

This makes the rules a bit different.  Content takes real time and money to create, and it’s harder to copy (copyright law tends to apply more). You can enjoy the online gambling games such as prediksi togel that can bet and make money. Playing online casino games like happyluke is getting really popular in the gambling community. However, content-centric games, like movies, can have limited re-play value.  Which in turn leads to a franchise strategy for the biggest titles (e.g. Halo on Xbox).

So, one question:  will we see any large, content-centric, non-game software businesses?

How Many Groupons Can We Stand?

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Groupon, the deal-of-the-day company, certainly left a trail of salivating investors from their last round of funding.  Now, it’s rumored that they’re seeking funding at a valuation around $3 billion.

First, congratulations to them:  they’ve built a real business with real revenues, and created a whole new category in the market.  That is a real accomplishment.

But, this is now bordering on crazy.  It reminds me of the early days of email marketing, when marketers were paying $0.15 (yes, 15 cents) per email.  It was a new medium, so nobody knew how to price it.  And, in those early days, it actually worked well.

Then email fatigue set in with customers, and effectiveness dropped.  Some high-flying, fast-growing email marketing companies saw revenues stall, then drop steeply.

I think the same thing happens with the deal-of-the-day category.   As more offers become available from various companies, effectiveness fades and fatigue sets in.

Also, some existing content sites are much better positioned to offer daily deals as a feature, not as the premise for the entire company.  For example, Yelp’s first deal of the day in San Francisco reportedly went quite well.

I wish Groupon (and clones) the best, but at a $3b valuation, I want to go short.

Repeat After Me: “Location” is a Feature, not a Product

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Two years ago, Daniel Cozza and I spent a lot of time looking at location-based apps.  We brainstormed tons of ideas and prototyped one.  But we ultimately decided not to pursue it; the space (and the iPhone app space, generally), was starting to feel really crowded.

Later, it also became clear that many of our ideas were really nice features on existing platforms, not new products.  For example, Twitter and Google have been steadily adding new location features.  And a few days ago, Facebook finally launched their check-in feature, Facebook Places, as (presumably) a first step to making Facebook much more location-aware.

Facebook’s news is interesting from a number of angles, some I’ve written about before:

  • Gorillas rule. Facebook watched the app evolution closely, then made their move.  They won’t let anyone get big enough to threaten them in any one area, and if they do, they’ll (a) use their policies to control things (as they’re attempting with Zynga and payments), or (b) take over the functionality (as they’re doing here).
  • APIs are a great way to seed an ecosystem. Foursquare’s original integration with Facebook was a huge part of their growth.  A continuous stream of check-ins in the news feed is a great way to acquire users.  Now, Foursquare’s integrating with Facebook’s new location API.  Foursquare PR spin aside, make no bones:  Facebook just grabbed a huge chunk of strategic functionality from Foursquare.  (My bet is that Foursquare devolves over time to a location-based game, or set of games).

For users, this is all great news — having Facebook be more “location aware” is hugely useful.  I can’t wait to see what new features become available.  For entrepreneurs and ecosystem players, it’s a bit more tricky:  how can you play here without having Facebook stomp you when you get too big?

More on the “Seed Fund Crash”

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Following up on the “seed fund crash” meme that I commented on last week, Chris Dixon wrote a thoughtful blog post.  His main point:

It’s not the seed investors who are smarter – it’s the entrepreneurs

He makes a fine argument about how entrepreneurs today are more informed, with new seed funding options available.  And he cites a key seed fund advantage:  they’re in early, at lower valuations, before the VCs.

However, my issue is not about entrepreneurs (or investors!) being “smarter”, it’s about the overall ecosystem.  From a macro viewpoint, I’m feeling a replay of Bubble 1.0:

  • Many new investment entities and professionals (e.g. new angel investors, new seed funds, existing VCs that want to do seed investing, etc.)
  • Excess of capital (most investors will tell you there are too few projects, and the ones that are investable, are too competitive)
  • Follow-on financing rounds driven by bid-ups, not by business fundamentals

Capital efficiency amplifies these issues, because small amounts of capital quickly make things very crowded.  I’ve written before about the “weedy ecosystem”.  Being just smart is not sufficient, because entrepreneurship is ultimately zero-sum:  a dumb, poorly funded set of competitors will still steal mind-share, confuse customers, confuse investors, dilute your brand, and make it harder to build your business.   I see evidence of this every day:   ever narrower ideas, because it’s just so insanely crowded.

In the limit, the ecosystem becomes a lottery.   We’ll see a few nice exits, I’m sure, but it will be (mostly) because of luck, not skill.  For an entrepreneur, that’s a very tough game to play, I prefer the Slotzo games.

(Note:  these comments apply to the most crowded, most capital-efficient technology projects:  such as software pure-plays, consumer Internet, “new” mobile, etc.   For ideas that have real technology, real IP, or some other non-replicable component, things get a lot more interesting, for both entrepreneurs and investors).

Coming Seed Crash?

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In a recent blog post, Paul Kedrosky wrote:

[T]he super-seed crash is coming. We have silly numbers of companies being seeded — I had someone at a well-known, larger venture fund tell me yesterday in San Francisco that they were seeing dozens of Series A-seeking newly angel-funded companies a week. Valuations are escalating as super-seeding angels compete against one another, while fourth-quartile incumbent VCs jack prices to buy deals through dint of having more money to put to work.

I think he’s spot on.

Between angel friends, friend starting seed funds, VC friends doing seed investments, and VC friends starting seed funds out of their venture funds, it’s getting a little absurd.   This hasn’t felt right for a while, and I think Paul nailed it.

Some argue this supply of capital is nothing but good for entrepreneurs.  I disagree, and Paul touches on this as well:

[M]ore companies seeded means more full-cycle money required to break through the noise and competition, which while drive dilution of seed investors who can’t follow-on in subsequent larger rounds

Easy and excess capital creates a “weedy ecosystem”, which makes it harder for everyone.  Even if you’re the best idea in that ecosystem, the bar is raised by those around you.

I Have A Few Questions

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A quick note to folks that email me unsolicited investment decks and business plans, asking for meetings.  I love to meet as many people as I can, but (unfortunately) I do not have the VC-firm army of associates to screen things that are the best fit.

Please don’t be offended if you email me to meet, and I reply with a bunch of questions first.  I won’t waste your time; I’ll think about what you’re working on and ask the key, probing questions (e.g. they don’t come from a canned list).

And then, if it makes sense to meet, we’re already that much further ahead in the discussion!

(And an interesting side comment:  you’d be surprised how many times someone sends me a cold email, I send questions back, then I never hear from them again.  Not even, “Good questions!  Let us do some work and get back to you.”)

Stock Market- Startup Investing: “Growth” vs “Value”

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Individual stock investing can be divided into “growth” & “value” strategies.  Growth investors as well as every stock picking service find companies that will grow at an above-average rate.  Value investors try to find deals:  companies that are trading below their intrinsic value.

I’ve found venture investors can be categorized among similar lines.

“Growth” investors focus on the idea:  the team, market, and product.  They want investments that can be run-away successes.  In contrast, value investors focus on the “deal”:  investor rights & protections, aggressive preferred stock elements, etc.  They want the biggest slice of the outcome, for the smallest investment amount.

In practice, it’s not really this black and white.  As Warren Buffet has pointed out, growth and value strategies are not mutually exclusive, and successful investors use a combination of both.

As an entrepreneur, I love working with growth-focused investors.   The value or “deal”-focused VCs are a drag.  I respect investors wanting fair terms, but getting overly clever or aggressive just complicates things for follow-on capital, disincents management, and most importantly, time spent negotiating those terms is time NOT spent on making the company valuable. Check this Investors Underground Review to learn more about stock market investment options.

My message to VCs:  you’ll make your LPs happy by finding the right projects and doing everything to make them successful, not by cranking your average ownership & deal terms across your portfolio.  Keep your eye on the right ball.

The SparkFun Story

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A few weeks ago, I heard Nathan Seidle talk at MIT about founding and growing SparkFun Electronics (an on-line supplier of microcontollers and related electronics prototyping and hacking items).

He was smart, funny and engaging, and it was very inspiring.

Interesting bits:

  • He started in 2003 to provide a better on-line ordering experience for certain parts (moral:  good UI + UX can win)
  • They had 65 employees and did $10m in 2009, will be close to doubling revenues this year.
  • They’ve been very scrappy, opting (for example) for developing their own solder-mask and reflow techniques, instead of buying expensive machines.
  • They don’t compete on selection (with Digikey, Mouser, Jameco, etc.)  Instead, they research the “best of X” and sell that one product.  Their customers are usually building small quantities (like one).

It was a reminder that you can build an interesting and meaningful company (a) doing what you love, and (b) without venture capital (he started with about $6-7,000).

Venture Capitalists are Making Me Fat

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Well, not really, but with the stream of breakfast meetings, it sure feels that way!

I think I’m spending too much time with venture guys.

As I’ve written before, the venture business is struggling.  There’s still too much money, funds are too big, there are too many professionals, etc.   Big, name-brand funds have a hard time participating in the smaller, more capital-efficient projects (which is where the action is, at least in software).  Things are getting a little better, but long-term nature of venture funds will cause the correction to happen in slow-motion.

I’m realizing I’m spending a lot of time talking to venture friends about projects that they (a) can put a lot of capital into (that may not necessarily need it), (b) incubator/hatchery/Y-Combinator type programs, (c) new seed-stage funds, etc.  Some ideas are interesting, but I’m realizing these discussions are more about solving their problems.

Now, I’m not anti-VC at all.  For the right project, venture definitely has a place.  But I need to take my own advice:  less time with venture folks, more time being entrepreneurial.

Off the Beaten Transaction Path

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For Internet and mobile applications, the transaction path is like the West Wing floor plan around the Oval Office – power is measured by proximity.   The valuable apps are those closest to influencing a transaction decision.  Google is the strongest example:  many purchase events start in the search box, making AdWords an extremely important point of influence.

As you move away from the transaction path, value drops off exponentially, as demonstrated by the very low effective CPMs for many apps and properties (esp. when factoring in un-sold inventory).   This leads to a frustrating realization for many projects:  it’s possible to have significant user volume & activity, while generating very little value.  For examples, consider the challenges IM apps, Twitter, and even Facebook (to some extent) have had builting profitable businesses.

Bottom line:  it’s difficult to build valuable stand-alone businesses with ad-centric revenue models, if the app usage is not near the transaction path.