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Who controls a startup? January 30, 2007

Posted by jeremyliew in Venture Capital, startups.
3 comments

Ask the VC points to a good post by Matt Macall at his blog VC Confidential about why startup entrepreneurs should not get too focused on the issue of control and of owning more than 51%.

In a nutshell, he says that “control” is a bit of an illusionary concept, and that in reality having everyone aligned around a startup’s strategy is far more important than either company management or investors being able to “force” their point of view on the other side. We completely agree.

Pitching a VC: Focus on these FOUR things January 25, 2007

Posted by John Vrionis in Consumer internet, Digital Media, Ecommerce, Infrastructure, Security, Venture Capital, WiMax, startups, web 2.0.
6 comments

The best part of being a ‘VC’ is meeting passionate entrepreneurs and listening to pitches about how their idea is going to change the world. Since I joined Lightspeed, I’ve found myself meeting amazing people and debating revolutionary ideas on a daily basis.

I’ve had the opportunity to listen to hundreds of pitches and as a former entrepreneur I did my share of pitching. I firmly believe that all great plans highlight the four key areas that are at the heart of every good VCs decision process.

1. Demonstrate you are addressing a Billion dollar plus market. This is the most important thing. If you can’t convince the VC you’re solving a problem in a huge market, you’re dead in the water. Big markets make big companies. Big markets can also hide mistakes. Do the bottoms up analysis. Talk to your assumptions.

2. What is your unfair advantage? Describe this in 30 words or less. Repeat it as many times as you can in the presentation.

3. Does the team have a visionary? VC’s are NOT visionaries. The team has to have someone on it that sees where the opportunity is going to be and can pick the right products to take advantage of that market.

4. What are the capital requirements for the major milestones? VCs want to back capital efficient businesses. They want to understand what the major risks are in the busines, when they can be mitigated and how much money it takes to do it. A simple timeline with milestones compared to cash needs is one of the best slides an entrepreneur can provide.

My final comment. Have fun. Remember — your job is to inspire and compel!

As always, all comments are welcome. Or send email direct to jvrionis@lightspeedvp.com

Failure IS an option January 24, 2007

Posted by jeremyliew in Consumer internet, Digital Media, Search, Venture Capital, browsers, startups, video, web 2.0, widgets.
47 comments

There have been a lot of posts on startups laying people off, losing founders or closing down in the last couple of months, part of the natural cycle in the valley. But what has disturbed me has been some of the mean spirited things that have been left in the comments to some of those postings. Often anonymously. It really bothers me. People can (and do!) reasonably disagree about a company’s business plan and prospects, but some of this stuff is just over the top.

The great thing about Silicon Valley has been the entrepreneurial culture, and the acceptance that working for a failed startup is not necessarily a judgement on your character or your ability. But recently there seems to have been a change in attitudes at least amongst some people (trolls?) who are taking joy in the misfortune of others. When a startup closes down, founder’s dreams die. Employees find themselves looking for work, and at least for a period, worrying about paying their bills and supporting their families. This should never be a cause for celebration.

I don’t personally know the teams at Backfence or Peerflix or FilmLoop, or Bitpass, or Findory, or Browster or many of the other companies that have recently entered Techcrunch’s deadpool recently, but I think that they are to be applauded for their willingness to take a chance on starting a company, not condemned because that particular company wasn’t successful.

Companies die, founders and employees learn from the experience and move on, and hopefully start more companies. I for one would love to see the second acts from the teams that are newly freed up.

Update: Hot or Not founder James Hong has a good related post.

Having the best product; neither necessary nor sufficient January 23, 2007

Posted by jeremyliew in Consumer internet, Digital Media, startups, video, viral, viral marketing, web 2.0, widgets.
11 comments

I’ve been thinking a bit more about how consumers adopt “new” products online recently, in part because of a couple of recent posts I wrote in reaction to rumors of a Safari browser for Windows and questions on the value of widgets. What struck me is that very often, the “best” products don’t win majority market share. Many claim that Firefox is a “better browser” than IE, and I’ve lost count of the number of times I saw a pitch from a video sharing site last year that claimed to be “feature for feature, far superior to Youtube“. Yet IE and Youtube dominate their markets. And the same is true in so many categories.

Cynics might attribute this to bad luck or my favorite, user stupidity (because its always good to have contempt for your customers), but often there is a pattern at work. In a new consumer market, the winners win on distribution.

In a new consumer technology market, users don’t yet recognize that the category exists. They don’t recognize that they have a problem, so they are not going out looking for a solution. They’re not issuing RFPs, they aren’t even compiling shortlists of possible vendors. They are stumbling on solutions by accident. And that is why distribution is key in a new market.

Lets take an example; online travel. The early market share winner was Travelocity/Preview Travel. They won that early market share on the back of distribution deals with Yahoo! and AOL. In the late 90s, most internet users didn’t even realize that they could book travel online. But they were actively using portals, and through the “travel channel” on the big portals, they stumbled across the online travel agencies and started booking online.

Google is another example. It was a “better search” product when it launched in 1998, acknowledged among the Digerati. But it wasn’t until it struck its distribution deals with Yahoo! in 2000 and then AOL in 2002 that it really started to get used widely. Before users were exposed to Google through their portals, they didn’t know that better search existed.

Product is of course important. Your product can’t be actively bad. If Travelocity’s booking engine didn’t work, or if Google’s PageRank didn’t produce more relevant results at that time, then users would not have come back. But they needed distribution to be found in the first place.

Updating to 2007, the same principles apply. But whereas portals were the only path to distribution in Web 1.0, today social networks offer another way to reach internet users. But now the “discovery” process is a little different. Take embedded online video. A year ago, users didn’t understand that this was a category, they didn’t realize that they wanted to embed videos in their profile pages. But when they saw an embedded video on a friends profile, they could say “Hmm, I want one of those”, click through and get one for themselves. Now the category is established in users’ minds, and brands have been established. But earlier, “distribution” was what drove growth.

Social networks offer a different challenge than portals. Whereas you could get distribution by doing a single business development deal with a portal, on social networks, you need to convince each individual user that you’re worthy enough to keep. But as you get more penetrated into the community, a new user is more likely to run into you and try you. So scale matters and it is a virtuous circle – the more share you get the more likely a new user is to stumble on you as a provider. Going up against an “incumbent”, even with a “better” product, can get very hard. Distribution and adoption end up meaning almost the same thing. This is why Rockyou and Slide are the number one and number two fastest growing widget makers in social networks, and why VCs pay so much attention to “traction” and so little to the fact that its easy to replicate the features of these widgets.

The other web 2.0 distribution mechanism is virality. Users inviting users is the other way that a user can get exposed to a new product – solving a problem that they didn’t even know that they had. Ravi has posted on this a couple of times so I won’t go into it again.

So the next time you build an absolute killer product in a new consumer category, don’t stop there. Unless you’ve got a plan to get new users exposed to your new product, your efforts may be for naught.

The 53,651 strike back January 19, 2007

Posted by jeremyliew in Consumer internet, startups, widgets.
4 comments

Todays’ NY Times article on Widgets and the blogosphere reaction brought to mind Josh Kopelman’s post last May on the 53,651.

Josh made the point that too many companies are targeting an audience of 53,651 (Techcrunch’s audience at the time) rather than the “real world”. Before joining Lightspeed last year, I’d spent the last 10 years working for large internet companies whose audiences mirror the internet user at large (CitySearch, IAC, AOL and the “old” Netscape). I wholeheartedly agree with Josh’s thoughts that the Valley can be an echochamber where opinions can radically differ from those of the general public.

The NY Times’ piece focused on widgets as “digital bling” and gives equal weight to several different types of widgets; (i) self expression widgets, (ii) widgets offering some utility to blog readers, (iii) revenue generating widgets and (iv) widets offering some utility to blog publishers. It mentions MySpace in passing, but is very focused on widgets in blogs.

Wow. What a disconnect from the reality of how widgets are actually used. If you did a straight up count of all widgets embedded everywhere on the web, I suspect that you’d find that the VAST majority of widgets are on social network profile pages, not on blogs. And they are ALL about self expression. My SWAG is that classes (ii)-(iv) would probably represent less than 10% of all embedded widgets.

Blogosphere commentary like this from Deep Jive Interests:

Quite frankly, I think that all of the pub that widgets have gotten and continue to get (2007 the year of the widget? Playa, please!) distract from bloggers creating great blog content in the first place. The emphasis on bling detracts from bloggers focusing on what matters most: creating fresh, interesting, passionate content which is the REAL reason why people come to read any blog.

or like this from the admittedly deliberately controversial Valleywag

A violation of blog principles. Google’s focus on the search box was a refreshing antidote to confusing portal pages such as Yahoo’s. Similarly, the blog represented a pared-down way of reading news: the most recent item at the top; scan down the page; stop when an old headline appears. Widget clutter is not simply distracting to readers; it compromises the original appeal of the blog format.

[I cringe as I write this, awaiting the inevitable snarky response]

seem a little blogger centric. But that is the nature of the 53,651. Slamming widgets because they distract from the content when put in blogs is like slamming TVs because they distract from driving when put in cars. But TVs belong in the home. And widgets belong in social networks.

At least Om gets that:

The real excitement of widgets in on personalized pages, mobiles and the desktops.

Now there have been legitimate questions raised about the busines model for widgets which I’ve addressed in a previous post.

But writing off the whole category as hype because glitter text or picture slideshows detract from your deeply meaningful blog posting seems a bit of an overreaction. At least judging from an average Bebo users page or an average Myspace users page the general public quite likes to express itself through these widgets. Looks like we, the 53,651, are in the minority on this one.

Viral Marketing; Art AND Science January 18, 2007

Posted by ravimhatre in Consumer internet, Ecommerce, viral, viral marketing, web 2.0.
2 comments

Just a short addition to my previous post. There’s been some interesting commentary on the need for both “art” and “science” to induce viral growth. The science component is comprised of a website’s ability to systematically measure all aspects of user response to viral campaigns and iteratively refine features and experience to boost propogation rates. The “art” component relates to the fact that without first creating approximate viral memes that are (a) logically consistent a site’s primary value proposition and (b) resonate with something fundamental in the audience’s psyche, its virtually impossible to jumpstart a viral growth cycle. So how does one overcome the immaculate conception problem to predictably create “good” initial viral memes? There are no hard rules as each meme must be tailored to a particular situation. However, Seth Godin’s general rules for “What makes an idea viral” presents a good starting point for basic viral meme construction. Have fun creating!

Why VCs don’t sign NDAs January 17, 2007

Posted by jeremyliew in Venture Capital, startups.
3 comments

Two good posts today on why VC’s don’t sign NDAs, one from Brad Feld at Ask the VC and the other from Rick Segal at The Post Money Value.

When I was VP of Strategic Planning at IAC and SVP of Corporate Development at AOL we didn’t like signing NDAs, but we did it reasonably frequently. In those cases though, we were looking at buying companies and we were getting pretty deep into the financial and operational details of a company very quickly.

Now that I’m on the Venture side, we hardly ever sign an NDA. As both Brad and Rick point out, there shouldn’t be a need to disclose confidential information at a first meeting to determine whether or not there is interest in moving forward.

Viral Marketing = Free Customers January 16, 2007

Posted by ravimhatre in Consumer internet, Lead gen, viral, viral marketing, web 2.0.
25 comments

For websites with social networking or community features “going viral” or acheiving a viral coefficient greater than 1.0 represents the holy grail of traffic acquisition. What’s behind this? Going viral means that new user acquisition costs have essentially been driven to ZERO. This is a significant departure from the current state-of-the-art.

The friction of the “real world” means traditional businesses need to invest in sales and marketing to acquire and retain customers. Whether selling to enterprises or consumers and whether the sales process is direct, “high touch” or indirect via telesales, direct mail, etc, the process of bringing in customers requires money proportional to the number of new users. Internet 1.0 businesses have fared slightly better through expanded online reach but still need to invest in keyword marketing, affiliate revenue sharing and other acquisition and distribution vehicles to acquire incremental customers.

Viral marketing has emerged as a mainstream Web 2.0 phenomena whereby existing users do the work and bear the time and expense of delivering additional new users. While not univerasally applicable (yet), we think the power of viral marketing as a zero or exceptionally low cost agent for acquiring customers will expand to be applied across lots of new categories. To date we’ve observed several early variants on the model:

1) Peer to Peer Communication and Messaging: Applications like Skype or Hotmail where inherent use of the application requires a user to forward the application to other users and have them register in order to particiapte. CPM (Yahoo!Mail) and contextual (gmail) advertising and pre-paid subscription (Skype) business models have all been used to monetize these viral ecosystems.

2) Online Self Expression and Social Networking: Sites like MySpace , Flickr, and YouTube and new distributed social self expression sites or widgets like RockYou (LSVP portfolio company), Widgetbox and others enable users to invite friends to view personalized digital content. These new viewers are required to become registrants on the social networking site or can make the decision to adopt a widget in order to broadcast their own content inducing a viral growth cycle as these new users then invite additional viewers into the system. Thus far, monetization has occured primarly through online advertising although early experiments with the sale of digital goods (HotorNot) foreshadow a more transaction-based monetization model.

3) Viral email marketing: This usually takes place by way of online offers which are proposed to an initial set of consumers. Embedded in the offer is an earnable incentive or reward for successfully forwarding the identical offer to additional consumers. Campaigns can yield large numbers of responses even for offers sent to a small initial set of customers.

4) Vertical community sites. Like more horizontal social networking sites, these portals enable like-minded consumers with a particular interest to invite new users to participate in a shared affinity group. The more people who are part of the community, the faster the rate of the communities viral growth due to exponential increases in the richness of content and number of invitations sent out to new members. Viral community sites enable sharing of interests across topics ranging from finding sales leads (Jigsaw) or finding a new career (LinkedIn) to finding the trendiest new clothing styles (Stylehive – LSVP portfolio company) or getting the latest tips on new movies (Flixster – LSVP portfolio company). Today much of the monetization occurs through impression based advertising although future monetization could emerge via subscriptions, lead generation, and transactional commerce services aimed at vendors interested in accessing highly targetted channels of distribution.

We think the principals of viral marketing and viral user acquisition will be applied well beyond current initial use cases as Web 2.0 continues to evolve. It should yield some exciting new investment opportunities which we’re looking forward to hearing about and getting involved in.

Interesting insights from SVP of Corporate Development at Yahoo January 15, 2007

Posted by jeremyliew in Consumer internet, Digital Media, Ecommerce, startups.
1 comment so far

Toby Coppel recently posted on the Y! corporate blog with his thoughts on interesting startups. He calls out some companies he finds interesting (one of which Y! has since acquired!), talks about how this wave of startups is different from the late 90s, and talks about how many of Y!’s acquisitions were about attracting visionary talent. It’s well worth reading

The Venice Project – both easier and harder than people think January 14, 2007

Posted by jeremyliew in Consumer internet, Digital Media, startups, video, web 2.0.
1 comment so far

Patrick wrote a post on “The New Must See TV” on Friday and I know that he wanted to include some information on The Venice Project but was unable to say much because of the NDA that we signed. However, it looks like Om was not under the same constraints as his excellent and informative NewTeeVee post goes into a lot of detail about the company. Both Om and Mike Arrington at Techcrunch comment that they see two key hurdles for TVP which I think are surmountable, but I believe that a third hurdle exists that will limit TVP’s eventual scale.

1. TVP lacks compelling content

I haven’t seen the NDA material so my thoughts here may be way off base, but I don’t think that a lack of compelling content today is likely to be a long term hurdle.

Much has been written about the long tail of video content, all of which is legitimate. However, its no accident that Youtube is now pursuing licensing agreements from the major TV networks, music labels and movie studios. Long tail notwithstanding, as even Chris Anderson says, “Hits aren’t dead”.
 Furthermore, the major studios and networks seem to have turned a corner on their willingness to license their content. When startups like Guba, Wurld Media and Bit Torrent can get licensing deals done with major studios, its pretty clear that the policy rubicon has been crossed, and now the only haggling to be done is on price. As soon as TVP is willing to pay the prices asked, it can get content.

2. TVP requires a download

Requiring a download is certainly a hurdle, but not an insurmountable one, as the founders of TVP have demonstrated twice before, with both Skype and Kazaa. However, both Skype and Kazaa are clients that benefit from obvious network effects, as do many other successful consumer clients such as AIM, ICQ, Y! Messenger, Bittorrent, Limewire, Morpheus etc. Other successful downloads that do not benefit from the network effect have mostly been focused on security concerns, including the Firefox browser and the many anti Adware/Spyware products. One of TVP’s challenges will be how to balance making its network effects obvious with the likely desire of content owners to keep some level of control over their content. The social aspects that they’ve built into the product are certainly a good start. I haven’t peered behind the NDA curtain on this issue so don’t have any further PoV on the matter.

3. High quality video is too bandwidth intensive

The issue that I think may be underestimated is that of bandwidth. Om alludes to this issue in his post and seems to give the benefit of the doubt to TVP, although he points out that TVP would require 250MB/hour which is enough to violate many ISP’s terms of service. Video is an incredibly bandwidth intensive application, especially at higher quality levels. At high levels of penetration, even p2p solutions are not sufficient to support high quliaty video streaming because of asymmetries in the upload/download bandwidth for most consumer’s broadband connections. If TVP is successful to Skype like levels, then there simply isn’t enough upstream bandwidth from peers to fulfil the downstream bandwidth demand from users who are trying to watch high quality video. Most upstream bandwidth pipes are only 1/5 to 1/10 the size of downstream bandwith.

Now this only becomes a problem at real scale, but it may put a cap on how big TVP can become before video quality becomes degraded or expensive server farms need to go into place to supplement peer delivery. Jeremy Riemer makes a similar point at ArsTechnica.

None the less, althought there is likely no VC investment opportunity here, this will be an interesting company to watch!