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Failure IS an option January 24, 2007

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

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.

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.

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!

The new “must see tv”… January 12, 2007

Posted by pchiang in Consumer internet, Digital Media, Search, startups, Venture Capital, video.

On Wednesday, Yahoo! and Akimbo announced a new partnership to bring the most popular selections of Yahoo! Video to the Akimbo video-on-demand service. This announcement comes on the heels of the launch of Apple TV, a set top box that wirelessly transfers digital media from user’s computers to their TVs. Both announcements highlight, the increasing convergence of video platforms. As Jeremy points out in his “2007 Consumer Internet Predictions”, time spent consuming videos both online and on the TV are increasing. Not only are people watching more videos than before but they are also watching videos in many more ways. Television/video viewer behavior is in the middle of an evolution.

A number of factors are driving this change:

1) There is the increasing adoption of TV/video technologies such as digital video recorders, video on demand and video downloads/streaming, not to mention Apple TV and iTunes/iPods. According to Forrestor, “DVRs have entered the hypergrowth phase, reaching more than 13 million households, including 17% of digital cable subscribers and 19% of satellite subscribers. DVRs will surpass 50% of homes within four years.” DVRs and the other technologies are enabling the “time shifting” of programs, the skipping of commercials and the ability to consume videos in smaller chunks and in different locations.

2) Decreasing costs of bandwidth and storage are removing the economic and practical barriers of having and distributing videos for both content owners and consumers. Broadband is dramatically improving the user experience of watching streamed videos. Peer-to-peer networks only increase the ease of distribution and access.

3) As everyone knows, alternative video platforms such as YouTube and other streaming videos sites (NBC Rewind, CBS Innertube, ABC.com, Fox On Demand…) are proliferating. The major studios saw what happened to the music industry and are trying to find ways in which they may embrace these changes without losing control over their assets. They are making more and more content available on their online destination sites and iTunes. For the consumer, this equates to more types of content and in more places.

These fundamental changes in the way people can watch videos are shifting mindsets to an “on demand” mentality. People are becoming the programmers of their own personal television network, dictating what they want to watch and when they want to watch it.

In recognizing this shift, two areas of opportunity come to mind.

1) Search/navigation/discovery of content. With so much content coming from so many different sources, the networks and cable channels are no longer the ones telling you what you “must see TV” is. Interesting content can now come from anywhere. However, more video options mean more videos to sort through to find something of interest. Some companies such as Blinkx and CastTV address the problem through improved video search relevancy. While others, such as CozmoTV and StumbleVideo, focus on video discovery through the votes of the community of users. Convergence of platforms and media types only promises more complication.

2) New advertising models that will capitalize on these shifts. As many people have predicted, TV advertisers will to continue to see their 15 and 30 second commercials go increasingly unwatched. Brand advertisers, who spend the $60B a year on television advertising, will still need to find a way to reach their target consumers. Advertisers still don’t seem comfortable associated their brands with the unpredictability of user generated content. While I agree with Jeremy’s assessment that the shift will take time, this advertising budget will go to new ad models that reach consumers in a more targeted and relevant way. One such model is that of broadband television networks, such as Revision3, which produces serialized content targeted towards specific interest groups at a fraction of the cost of mainstream television programs. Brand sponsorships are embedded into the programming itself and can be targeted toward the specific demographic of the show. Revision3 makes their content distribution platform neutral, allowing users to choose how and where they watch each episode.

These are only a few of the many new models bubbling up. I believe there will many opportunities for entrepreneurs who understand the evolution in user behavior and recognize the power of the different players in the value chain.

Whither widgets? January 7, 2007

Posted by jeremyliew in Consumer internet, Digital Media, social media, social networks, startups, widgets.

A couple of posts on Techcrunch, one on Filmloop entering the Deadpool, and another on a rumor that Slide took $20m in funding have sparked some lively debate in comments about the business models for widgets. I don’t pretend to have the answer to this, although I did note in my earlier post on 2007 Consumer Internet predictions that this would be the year that social networks would find a business model.

I led Lightspeed’s investment in Rockyou early last year (Sequoia was our co-investor). Rockyou is a competitor to both Slide and Filmloop – they help people to customize their online representations (on social network pages, blogs etc) by embedding widgets, including photo slideshows, glittertext, image text and other widgets. As has been noted in the comments to the Techcrunch posts, the technology involved here is not terribly complicated (although the challenges of scale are meaningful). We invested for a couple of reasons: (i) Rockyou had achieved very real adoption from users and (ii) we really liked the two founders, Lance Tokuda and Jia Shen. Lance and Jia have a great sense for their users needs. Here in the valley we can get a little insular, but Lance and Jia have developed a fantastic sense of what their user, the Myspace/Bebo/Friendster user, is looking for.

We have been very happy with our investment in Rockyou. It has only continued to grow since we invested – it now serves well over 100 million widget views every DAY, and it has diversified well beyond a dependence on Myspace (a majority of its visits do not come from Myspace anymore). Having too much of a dependence for new users on a single source is a scary thing for any company. When Myspace launched its photo slideshow widget a few months ago, we waited with baited breath to see the impact on our growth. If Myspace blocked Rockyou (or Slide or any other widget company) it would have a meaningful impact on the business. However, Myspace has grown in large part by being open. It briefly blocked YouTube in December of 2005 (eventually attributed to a misunderstanding) but reversed that shortly afterwards, perhaps due to complaints from its users. Its hard to read the FIM/Myspace tealeaves, but they have had plenty of opportunity to block successful widget companies in the last year and have not chosen to do so so far, even while they have launched competing services internally.

That being said, like most startups just past their one year anniversary, Rockyou is not yet profitable. As I mentioned in my prior post, Youtube is really the only company that has suceeded in turning widgets into a destination website that can be monetized directly. Photobucket drives enough traffic from users uploading and editing photos to be able to generate significant revenue from advertising as well. Its fair to say that none of the other widget companies, Rockyou included, have achieved the same level of success in creating a destination browsing experience to the same degree.

Its not yet clear what the business model for such widgets will be. One possibility is sponsorship. Rockyou partnered with Sony to offer “Casino Royale” themes and with Nettwerk Records to offer “Matt Wertz” and Leigh Nash” themes that users could apply to their slideshows. All three have been successful, with large numbers of users choosing these themes resulting in 10s -100s of millions of widget views. This could well be a path to monetization. Another is freemium models. Although the base products will always be free, users may be willing to pay for certain premium customizations. Rockyou allows users to customize a “pin” to replace the rockyou watermark on their slideshows for a small fee. Its early days, and we don’t yet have a clear picture of exactly what the monetization model will be, but these are both highly promising options. Venture investing, and starting companies, always carries elements of risk after all!

2007 Enterprise Technology Predictions January 5, 2007

Posted by John Vrionis in Digital Media, Infrastructure, Security, startups, Storage, Venture Capital, WiMax.
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First – Happy New Year! The Lightspeed Team is very excited about the prospects for 2007. We’re just getting rolling with our blog here and hopeful it can be a positive resource to let you know how and why we approach things the way we do.

I wanted to follow up on Jeremy’s post earlier this week 2007 Consumer Internet Predictions and share some of my thoughts regarding areas we’ll be watching closely this year. Full disclosure – I didn’t fully realize how hard blogging is. I’m really nervous! I have a lot more respect for all of you who routinely put yourself out there for the world to read about. But I do think there needs to be a lot more transparency from the VC community, so here goes…

1. Where are the NEW IDEAS in security? Despite the venture community pouring hundreds of millions into best-of-breed, segmented security solutions, it turns out customers want to buy and manage one complete, layered suite. The problem is that with 200,000 pieces of malicious code officially logged (100,000 of those appearing in the past 18 months according to McAfee’s AVERT Labs), the model for traditional anit-virus programs looks less and less exciting. The good news is that most experts finally agree that ridding software of vulnerabilities at the code level is the best defense. It would seem to me that companies such as Fortify Software and Mu Security are on the right track. So what’s next then? Mobile security is a relatively untapped (huge) opportunity. Two of the of the fastest growing things I can think of – social networking websites (Facebook and MySpace) and the proliferation of intelligent mobile devices serve as great mediums to spread malicious code – even if enterprises are well prepared!

2. Intelligent storage solutions. Talking with CIO’s from Lightspeed’s CIO Forum, I get a lot of great feedback about what the priorities are for 2007. One consistent message (complaint) I hear is regarding the explosive growth in unstructured data and the associated storage costs. Despite the continued decline in disk costs, overall storage costs as a result of needed capacity and performance, not to mention space and power, continues to be a major concern for CIOs. I’m hopeful 2007 is a year where we see more exciting new ideas about how to manage data intelligently over pure performance or blind capacity.

3. WiMax – Why not? I’m really excited about WiMax. As mentioned in a recent post by Katie on GigaOM, the mutiplayer chess match is just starting to heat up as massive players such as Sprint and Clearwire manage the infrastructure buildouts and work with the likes of Nokia and Motorola. I have this grand vision where some day there will be super cheap WiMax (only) enabled devices that are perfect for SMS, IM, sharing pictures and video, and VoIP calls. They’ll be available in vending machines and a quick password entry (or biometric signature) will instantly customize the device for your personal use (as all your information will inevitably be in the cloud). Ok – I know it’s a bit out there and I don’t think that happens in 2007 (probably not in 2008 either) but as I said, I’m excited about the possibilities that come with ubiquitous, ultra-high bandwidth.

4. Innovation for international markets. Is 2007 a watershed year in the sense US based companies start thinking about developing technologies primarily for international markets? The $100 laptop? Clearly there has complete acceptance of the idea of leveraging international talent and labor to build products for the US market (first), it will be interesting to see how global market demands influence innovation here in the US.

As always, I look forward to hearing from you. Feel free to drop me a note anytime (john@lightspeedvp.com)

2007 Consumer Internet Predictions January 1, 2007

Posted by jeremyliew in Consumer internet, Digital Media, Ecommerce, Lead gen, startups, web 2.0, widgets.

Happy New Year everyone.

It seems to be the season for consumer internet predictions, so here are mine:

1. Ecommerce 2.0 arrives. Google‘s search revenues continue to grow at 70-80% growth rates. Yet the public ecommerce companiesrevenues are growing at “only” 25-30% at best. But almost every Google click is going to an online transaction somewhere – people still aren’t using search advertising for branding purposes. So what is filling the gap? Some of it is the multichannel retailers coming on strong, Walmart, OfficeMax, etc. But a lot of it is from the next generation of ecommerce companies, still private but doing revenues in the $10s and sometimes $100s of millions that have quietly been growing at 50-100% per year through the last few dark years. Companies like Zappos, Art.com, Mercantila [a Lightspeed portfolio company], Netshops, CSN Stores, Backcountry, Bodybuilding.com, Toolking, US Auto Parts and dozens more have grown up, mostly away from Silicon Valley, and many without the need for venture capital. Those that have taken investments have often been at scale and profitable when they do. Watch this space as the next generation of ecommerce sites ride people’s growing willingness to buy online, use search to acquire new customers and focus on verticals rather than trying to be an all encompassing department store.

2. Social Network widgets find a business model. Pete Cashmore and many others have proclaimed the rise of the widget economy, but there hasn’t been too much money floating around this economy to date. Widgets have been primarily a marketing tool, used to drive traffic to a destination site, with Youtube being the most obviously successful at doing this. Once there, monetizing traffic on your own site is uncontroversial. But few others have been able to build a browsing destination on the back of widgets, which begs the question as to how widgets can be directly monetized where they are embedded, and what sort of revenue splits will be struck between the three relevant parties; widget owner, social networking site, and user. I don’t know the answer to this, but have some ideas (syndicated advertising, sponsorship, micropayments for bling, freemium models etc). I think we’ll see more clarity emerge in ’07.

3. Lead generation breaks into new categories. You rarely see ads for mortgages, online education, new autos, credit cards and other financial services products anymore that don’t lead you to a form to fill out to get free quotes. CPC and CPM banners for these products, as well as search engine ads and optimization, all drive you quickly through a form-fill process so that you can be sold as a lead to vendors of these products. Vendors prefer to pay for leads as it makes their marketing costs much more accountable. I think we’ll see similar principles applied into other categories that also have high customer value, can sustain a sales persons costs, are infrequent purchases by consumers and have complexity in the decision making process. Possibilities include wedding photography, plastic surgery, LASIK, cosmetic dentistry, eldercare, even business purchases.

4. Social Networking finally becomes a feature. I think it will be hard for new broad based social networks to emerge; the existing networks are strong and good and are serving their users reasonably well. But social networking, like message boards, is now getting baked into vertical content sites as a mechanism to help drive user generated content. Yelp uses a core of social networking to incent its Yelp Elite and other core users to write local reviews which then benefit any user of the site. Youtube absolutely uses social networking to reward video contributors. Tripadvisor reviewers get compliments and get told how useful their reviews are, as do Amazon book reviewers. Flickr has always had a core of social networking and profiles for regular photo contributors. Others are doing this in other verticals, including Flixster [a Lightspeed portfolio company] in movies, Kongregate in flash games, and many more. These are not social networking sites per se – they are city guide sites, or video sites, or travel sites, or book sites, or photosites. You can enjoy the specific content without ever joining the network, or even being aware of it, but the social network reward mechanisms are incenting the power users to contribute the content that we all benefit from. Watch this space.

5. News of TV’s death is greatly exaggerated. There is no question that people are watching more video online then before. But a Media Life report from earlier this year suggests that people are acutally watching more TV, not less. It is radio, magazines and newspapers that are suffering the most from increased internet usage. Even if TV usage does decline, don’t expect the massive TV ad budgets to wash into online video right away. Looking back a few decades, you can see how long the lag was between viewers switching from broadcast to cable, and ad dollars following them. Broadcast still commands a premium CPM to cable during prime time in most instances. Look for technologies to emerge that help TV increase their CPMs as viewers start to defect. Spotrunner is a fine example.

6. Software as a Service gets customer facing. When you think SaaS you typically think enterprise applications used by employees. Salesforce.com is the classic example. But increasingly we are seeing websites use customer facing functionality delivered on a SaaS basis. A few lines of javascript on a page gets you behavioural marketing, user reviews, live customer service, or collaborative filtering. Typically, these companies charge the website owner/enterprise a variable usage based fee for their services. Furthermore, the demands on your development staff are relatively low, especially compared to building this functionality yourself. Having run a business, I know that although your wishlist of features is two pages long, you’ll only ever get the first half of the first page done in any given year. SaaS allows you to get some of the lower priority features added quickly and easily without impacting your key focus areas. This will really help level the playing field for smaller publishers and e-tailers who can now add the same functionality that their top tier competitors have been able to build in house. It turns features into companies.

Update: My colleague John Vrionis has added his 2007 Enterprise Technology predictions here

Update II: In response to comments and other events, I’ve posted more on predictions #3 (Lead gen) and #4 (widget business models)

Rhythm NewMedia Closes $18M Series B Financing October 30, 2006

Posted by lsvp in Digital Media.
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Mountain View, CA, October 30, 2006 — Rhythm NewMedia, a pioneer in mobile advertising, announced that it has closed $18 million in Series B financing. Carlyle Venture Partners, the US venture and growth arm of The Carlyle Group, a global private equity firm with over $44 billion under management, led this up round, joined by all existing institutional investors. Allan Thygesen, a Carlyle Managing Director, has joined the Rhythm NewMedia board of directors, joining existing investors Gary Little from Morgenthaler Ventures and Chris Schaepe from Lightspeed Venture Partners.

Rhythm was seed funded by Rembrandt Venture Partners. Lightspeed and Morgenthaler co-led the Series A in July 2005.

See the full press release here.