THE DREAM IN ACTION

In 2001 the pop of the bubble in Silicon Valley brought Wall St. tumbling down. Will This pop on Wall St return the favor to Silicon Valley? The super investment savvy in NYC and beyond probably have a pretty good take on what the hell is going on with the financial crisis. What’s most interesting to many of us is how will it affect VCs and start-ups? There are a wide range of opinions even amongst the top dogs of the industry, some think it won’t be bad, some think it will be a “startup depression”.

Here are my summaries and thoughts on many of the opinions I’ve followed over the past few weeks. I’ve tried something new and color coded the first few words to get a scorecard on how things are/will be fore startups & VC.

-Big banks will/have disappeared and small banks who are more willing to work on a small scale projects to find quality investments will fund VCs and startups

-The IPO space is already crawling or stopped. Now as large firms lose capital the M&A space will join the IPO space at a stand still.

-Web and technology markets are probably 2 of the only bright spots in today’s global economy. This is what will bring us out of such a mess. Transparency into these markets will only exist with improvements in technology.

-If the IPO drought continues, eventually LPs will realize the VC model/system is not working properly and it will be much tougher for VCs to get that money. This will make funds smaller and thus less startups will be funded.

-In the “slumping market” VC will become introspective focusing on current portfolio much more than finding new investments.

-Funds that have already been raised by VCs can no longer be counted on. As the LPs are losing money elsewhere in the markets one of the first investments they will renig on are those that are promised but not paid, VC firms.
-this will hurt small funds first
-this will hurt LPs relationships with VCs so the big ones will be safer

-Startups who have VC backing already should be fine but will have to prove themselves to stay on the fun. Startups without VC funding will have to learn the (some what lost) art of bootstrapping. ALL STARTUPS will have to get lean, focus, find PROFIT$ now.

-Strong startups will continue to get funded. The cream of the crop will rise to the top because VC are being more careful. Survive and Thrive!

*influences of thought from @fredwilson, @infoarbitrage, @howardlindzon, Mark Cuban, @JasonCalacanis, @ericolson

“93 percent of Americans believe a company should have a presence in social media, while an overwhelming 85 percent believe a company should not only be present, but also interact with its consumers via social media.”

Comcast, the case study business for using social media, has done a wonderful job of creating a online presence by using Twitter to interact and answer questions from their customers. Social media today provides huge opportunities to win over customers by giving a company a personality and a presence by just being available. People don’t want to just buy a product and be done, people want service. People spend huge money on extended service plans and warranties for that continued contact after purchase.

The notion that the customer is always right now goes one step further: The customer must be the highest priority of any business and social media allows businesses to truly take advantage of that customer expectation. As web 1.0 or non-web companies begin to realized this and as the non-techy spends more and more of their time online the value of being available online will increase exponentially. This is a wake-up call to any slow adapting companies to react to this movement or be left in the dust  of more innovative competitors.

The quote above is from an article in the Boston Globe.

In an article from PE Week, that many VC’s have discussed recently, the argument was made that the bubble of 01 prepared VC firms to be ready for this type of financial crisis. VC firms don’t seem to be largely affected by the recent financial crisis and many are confused why. A few of the arguments of why VC’s were not affected (which I’ll go into detail on each in a future post) are that VC’s are long term investors so short term credit doesn’t affect them, or that LPs are huge and diversified so there is still money to be invested with VC firms, among others. Here are 4 strong arguments about how and why VC’s were prepared for the 08 financial crisis by the tech bubble of 01:

1. Better Money Management: Milestones matter to VCs. Ask any entrepreneur, and you’ll find it’s likely he or she are getting money in tranches based on deliverables. Most tranches go through, even when milestones aren’t met, but the process allows VCs a better way of keeping track of the progress of their portfolio companies. VCs are less likely to write mega checks in the early stages, many have raised the bar of proof points needed to get a big round. Money is also more likely to go to things that directly drive valuation increases as a smaller percentage of any round is going to PCs, servers and bandwidth.

2. New Sales Models: It used to be about “Big Game Hunting” and multimillion dollar site licenses. It’s a model that was great for vendors: get all the money up front, then worry about delivering the product. But Software as a Service permanently transformed the way IT was sold. Now new installations are cheaper and can be scaled slowly. It’s a model that’s been adopted by IT appliance and PC companies as well. So when Datamonitor finds that IT budgets aren’t going to rise in 2009 Datamonitor Survey , there’s less reason to freak out. Most IT buyers have already planned their spend out: it’ll be re-upping on the services they’re already subscribed to.

3. Decreased Addiction to Advertising: The banner ad was a big part of any dotcom business model. When advertising budgets fell, hundreds of online businesses shriveled on the vine. Now, online businesses look less to online advertising for real revenue. Google Adwords had a big hand in that. Suddenly it was a lot easier to install advertising on your site, but it was also less lucrative. Nobody ever got rich putting up Google Ads, but at least using the service saves companies from having to hire expensive advertising sales people. The addiction to advertising has been broken and many companies are looking for other ways to make real value online.

4. Moderate Exit Expectations: If you’re not looking to flip a startup to the public market, what do you care that Wall Street’s investment banks are falling like dominos? Had this same crisis had happened 10 years ago, you can bet VCs would be pulling their hair out. But when there are already no IPOs, it’s hard for the public market to get worse. When exit expectations are more reasonable, it’s easier to keep cash burn in check. Startups are less likely to build out sales teams, for example, planning perhaps to later plug in to an existing sales organization via aquisition.

This weekend I had a friend who works at JP Morgan explain his take on the bailout and why he thinks its a good idea. I thought his explanation was the best I’d heard so I’ll try and replicate his description here.

The major financial institutions in the US have bad assets on their balance sheets. These bad assets were absorbing many of the good assets on their balance sheets and thus negating any potential profits. These institutions would have been fine (wouldn’t have gotten caught) and could have survived if people and the markets weren’t involved, but thankfully they are! As the markets realized the affect of these bad assets on the financial institutions they lost all confidence, got scared and wanted their money back. As the markets began to panic, due to lack of confidence, the cash was yanked (bank run) from the banks and thus many of them failed.

Then the US Government decided that it needed to act to prevent a complete collapse. Enter $700B from the government in the form a bailout. Basically, what will happen is that the government will take the bad assets off of the balance sheets of the financial institutions and consolidate them on one balance sheet, the governments. As these bad assets are consolidated and quarantined the confidence in the banks will “hopefully” return and people will lend money to banks again, then hopefully back to business as usual.

So the bailout should not be looked at as a handout. It is more of a transfer of assets (loans that “should be” paid off) from banks to government. Luckily, it looks as though the bailout plan as proposed today will stagger the investments in these bad assets. This will hopefully work similar to a venture investment in the sense that they are tip-toeing into the water and not diving in. If they do this they will slowly vs. abruptly expose themselves to the risk that will come along with these bad assets.

At this point most people I’ve talked to would say that the bailout is needed and inevitable but the process by which it occurs is critical to its success. It is also generally accepted that the bailout alone will not be enough. It will take a significant effort from congress to look at the regulations that go into how money is lent in the future. Mark Cuban wrote on his blog that, “It should immediately become illegal for anyone or any company to advertise the sale of individual assets sold to non qualified investors.” That should give you an idea of how severe the regulatory changes need to be in order to protect us from future credit crisis.

You’ll notice that in the right sidebar I’ve added one ad. I’ve decided that although I definitely don’t blog for revenue it would be nice to cover the costs, and if I can do that and still keep this blog clean that I would.  After reading Fred Wilson’s post on how he monetizes his blog AVC.com I decided that it would be foolish not to take advantage of the value that I’ve attempted to create. I’m definitely open to any thoughts on why I should or should not keep the ad so please share your thoughts in the comments.

The degree of which somebody exposes their personal life on the web is becoming more and more a differentiating factor. Some who are striving for a strong personal brand (i.e. Gary Vaynerchuck) put almost everything out there where others only speak and contribute professionally to the internet. Neither approach is wrong or right but it is a decision you need to make based on how comfortable you are with this personal exposure.

Personally, I’ve chosen to be fairly exposed relative to most. I share personal pictures and often times personal videos but at the same time I choose to avoid Tweets like “Eating soup” or “feeding Fido”. I understand that in order to build a strong personal brand you have to keep people semi-interested in the content that you post. Lucky for me I spend quite a bit of time on the topics of startups, venture capital, economics, and other web related topics, so most of my thoughts usually revolve around these topics.

This graph below shows how many different web 2.0 tools fit into the scale of personal exposure on the web. I’ve found that this scale goes from strictly ‘Consume Data’ to the extreme of ‘Live Interaction’. Along the way are levels such as ‘Sharing data’ to ‘Sharing thoughts’ to ‘Sharing yourself’.

Where does your comfort level sit? If you haven’t thought of this before, you may be able to tell how comfortable you are by looking to see which of these services you use.

For those who think that social media doesn’t affect the real world or that nothing tangible ever comes from the internet, I encourage you to watched the conversations on all 4 presidential candidates on election.twitter.com

This is an intelligent and powerful community that excels in both creating hype and encouraging conversation. For those of you who are unfamiliar, both are needed in a successful political campaign.

Anyone into web technology, web 2.0, or the startups that support this social web movement knows that not everyone “gets” it. Whether you’re constantly browsing on your iPhone, or sipping tea and plugging away at your MacBook in a hipster coffee shop, the constantly connected, “plugged-in” life style, is becoming more and more common. However, not everyone is as dependent on an internet connection as others and there is huge value in the companies that find ways to pull in the non-techies into their online communities.The number one thing that will increase the use of the internet to the non-techies is good hardware (i.e. the iPhone). If people have devices that they don’t associate with a computer, but they can still get on the internet, it will grow…and fast. Devices like the iPhone or Google’s Android powered G1 have and will continue this effort.

That’s great and all but what about the web? What about those sites that want to reach users in other ways? There is still huge opportunities for companies to figure out ways to bring their online value to offline communities. I’m going to write a series called Taking Web 2.0 Offline where I suggest different opportunities for web based startups to tap into offline customers. First up, Yelp.

Yelp, if you don’t know, is “the ultimate city guide that taps into the community’s voice and reveals honest and current insights on local businesses and services”.

Every six months or so, without fail and without request, a Yellow Book shows up on your door step. The Yellow Book seeks to provide people with the most complete source of local buying information in print and online, but without the social contribution aspects of Yelp it will never have the best local buying information.

If I were Yelp I would sell my data to Yellow Book. Keeping the Yelp name on the reviews, Yellow Book could print the book to include, “local customer reviews by Yelp”.  This partnership adds value for Yellow Book by differentiating themselves from other publications in their space. Yellow Book now would claim the “most local” of any other business directory. This partnership is incredibly valuable for the readers because they get a non-bias opinion of each local business establishment (something that offline they aren’t used to). This partnership would benefit Yelp by reaching the enormous and valuable offline community without ever having to absorb the costs of reaching out to this offline market; they essentially use Yellow Book as there growth vehicle at a negative cost.

It is this type of offline focus that will eventually pull new user to the web and to internet based social software. Most people don’t use these tools because they are unaware they exist. Bleeding edge technologies are fun and receive VC funding, but companies with sustainable growth, consistent cashflow, and large customer basis will last. It’s all part of taking web 2.0 offline.

The days of simple Google are over now that they have a consumer product. Here is what could be the first main stream Google TV ad.

No need to post why I think everyone should watch these interviews…

I started thinking about how the Financial Crisis has got everyone freaking out, often times for good reason. Many have lost significant portions of their net wealth and other have lost college savings funds, etc. But, I have been raised to find the positive in all things, so I did that. In my mind there had to be opportunity in this crisis for early stage technology startups, and there is…

As large IT companies are strapped for cash because of significant decreases in corporate IT budgets they will be forced to go into cost cutting mode. Anyone who’s been through a business cycle knows that often times those extra projects, the ones that seem innovative but unnecessary, are the first to be cut…

—-> enter startups to fill the innovation gap, pick up the innovation efforts, and thrive!

Today IntenseDebate commenting platform announced that it was acquired by Automattic the force behind Wordpress. This piece of news catalyzed this blog post from the DISQUS team. (view full post here)

This was my comment response…

DISQUS folks,
As I read the IntenseDebate/Automattic news I couldn’t stop thinking about how this would affect you guys. The competition between 3rd party commenting services is a great thing. It means that all parties have to work their asses off to innovate, fix bugs, and LISTEN to the community. All three of which you guys are doing a great job of.

It will be important for all of these services to continually find ways to reach new audiences. Gary Vaynerchuck talked about building a personal brand at Web2.0expo in NYC and he said, “don’t decide which services to use, use ALL of them”. That is exactly the attitude I think you guys need to have. You have email down, I love how easy it is to contribute to a comment thread via email but what about if I want to use Friendfeed or FB or [ other service here ]? And that is just limiting the scope to text responses.

The Seesmic integration early was an awesome innovation. Now what about Jott? If I don’t have access to my laptop but want to contribute to a text conversation how do I do it? What if I could vocally call in my comment or response? The web is increasingly MOBILE and increasingly LIVE. Keep those themes in mind and you’ll be headed in the right direction.

Keep it up!

Reading Howard Lindzon’s blog today I learned about a new company called StockTwits. StockTwits (founded by Soren MacBeth and Howard Lindzon) is essentially a twitter bot that goes a bit further. Any time a user on Twitter tags a stock ticker with ‘$’ like $GOOG or $GS, StockTwits recognizes that tweet and indexes it for analysis on StockTwits.com.

If there was one thing that I learned from my boss/mentor during my time working at UBS it is that the crowd is the best indicator of what is going to happen. Not necessarily that you should always trade with or always against the crowd but listening to the crowd is extremely powerful. Listening to Twitter conversations is also extremely powerful especially when applied to stock trading/investing, the problem is that Twitter Search is so archaic. There really aren’t that many good ways to view the data or the conversations on Twitter. StockTwits provides multiple options for how to display the information that it gathers. You can view by tag cloud to see the most talked about stocks…

You can view a stream of the stock charts that people have most recently tweeted. Or, you can view graphs of different pieces of data. Things that might be most powerful are highest number of tweets per stock (which would be a great indicator of potential trading volume increases) see below…

If you’re more interested in who to follow on Twitter or who is leading the discussion on certain stocks StockTwits also can graph the most popular Twitterers of stock info.

The point I made before is the most important, “Listening to Twitter conversations is also extremely powerful …the problem is that Twitter Search is so archaic. There really aren’t that many good ways to view the data or the conversations on Twitter.” As powerful and as useful as stock information is, the potential that I see in StockTwits is not in stock information at all! I see incredible potential in StockTwits because of their ability to digest and regurgitate Twitter conversation information in a usable, comprehendable, and actionable manor. Think how many companies would love to see which product people are talking about most, or which headline is getting more attention. All the things that great companies like Compete.com and Alexa are doing for web traffic measurement StockTwits or the platform beneath can (and may) do for Twitter data/conversations.

I’m really looking forward to see how Soren and Howard develop this idea into something powerful!