Media VC

It's Already Started at Yahoo!

I had no foreknowledge of this but yesterday I argued that letting Groupon slip away was a fatal mistake for Yahoo!.  Today we read that Yahoo’s M&A Head Andrew Siegel Is Departing the Company.  When a skilled high-profile executive like that leaves after about a year, it's time for anyone else with talent to start thinking of heading for the exits too.

Now, the best investment the Yahoo! board can make is in a giant mirror to take a hard look at themselves.  Too many missed opportunities will push even the most loyal employees out the door, and the mirror's reflection will show that plenty of them have been leaving Yahoo! of late.  They'll also see a me-too business run without a compelling vision of the future.  Given the transformative impact a deal could have had on the company, letting Groupon go is the canary in the coal mine for Yahoo!, and today's news is the proof.

Advice to Andrew at Groupon: Don't Do It

Following up on yesterday's post, the rumored immanent Groupon acquisition by Google is a mistake for the seller.  Notwithstanding the breakneck growth rate, Groupon still has much, much further to grow.  The company could easily be a $15 billion business and would be infinitely more valuable to a broader range of buyers once its already strong position in the local market gets stronger.

Consider just one example:  the credit card companies.  The Holly Grail for them is to dominate local businesses with an array of services including credit, payment processing, marketing, cash management, etc.  There would be no better Trojan Horse into small businesses than by owning Groupon.  By waiting just 18 months, the bidding war that would be unleashed between Citi, Chase, and Amex alone would double the $6 billion price that's being considered now.  By thinking of the company strictly as a web play, however, Groupon is selling itself short and selling itself too soon.

I'm sure Groupon management is getting plenty of pressure from their investors.  NEA alone stands to walk away with an estimated $2 billion in cash proceeds.  Even by Internet standards that's a big payday.  But if they're smart, they'll choose the path of Amazon, EBay, Google itself, and others who, at various critical junctures, chose to re-bet the company and keep going.  Instead of walking away, my hope is that the investors recognize they don't just have another really nice web business on their hands, but something that can stand on its own in the global marketplace.  If they play their cards right, they'll own a piece of a one-of-a-kind asset.  So Andrew, say "no" to the deal and "yes" to the future.

Is a Groupon Deal Transformative for Google?

For nearly a month now, my VC friends have been sending me emails confirming that a Groupon deal is "Done!".  Because of our investment in ideeli, a daily deal site in the fashion space, they recognize I have more than a passing interest in the outcome, particularly in the multiple of revenue the ultimate buyer is willing to pay.  First the buyer was Yahoo! coming in at $2.5 billion.  Then $3 billion.  "Any day now the press release is coming out," they said. 

My first reaction to the rumors was, "wow, big number."  But, given Groupon's growth rate and Yahoo!'s flailing efforts to change the trajectory of their business, it actually seemed like a small price to pay.  It's obvious to anyone other than the Yahoo! board that the company has consistently proven their inability to innovate their way to a more expansive future, and so the deal seemed logical and necessary.  There was simply no price too high to transform their business.

Wrong.

Now it seems that Google will be the ultimate winner here, with widely reported rumors of an all-in transaction value of $6 billion.  And so the question must be asked:  Is this a transformative deal for Google?  Answer:  Not really, and here's why:

• It doesn't materially change their business model.  Selling ads is great, and selling more of them is even better.  But if you look where Groupon is headed, with self-service offerings for merchants and a more automated sales process, Google gains nothing in the way of an enhanced and balanced business model.  It's more of the same.
• It isn't something they couldn't have done themselves with their own resources, albeit with focused attention.  Jeff Bezos is famous for saying that the only surefire way to get out of problems is to innovate your way.  In business, there is no more fundamental problem than not knowing where your next big opportunity is going to come from.  In no way do I minimize what Groupon has accomplished by suggesting that Google could have replicated their success--indeed Google is one of the few companies that could have executed as well.  But the fact that they didn't innovate their way to this place and are paying "retail" prices to get into a business they were capable of creating at "wholesale" internally says more about their current ability to transform than it does about their technical skills.  The talents are there; they were not put to use.
• It doesn't support their stated core value to users:  organizing the world's information.  Instead, it's the opposite.  If there's one deal that ends the pretense that Google is anything other than a media company that delivers ads to buyers this is it.  It's over, guys.  You're a media business officially.  Nothing more, nothing less.
• It's strategic in hindsight.  I'd bet dollars to donuts that at any of the last several Google strategic planning sessions there was not a single person who said "You know, we really need own the leadership position in the daily deal space because it's core to who are and where we're going."  They will say that now, of course.  But the truth is, this is just a fast growing profitable company that they'd like to own.  

On the other hand, I believe losing this deal is truly transformative for Yahoo!, but unfortunately it's to the negative.  For all of the reasons mentioned above why this isn't transformative to Google, it could have been for Yahoo!.  Yahoo! needs a more balanced revenue model including local ads; it's culture and skills wouldn't have allowed to incubate a business like this internally; it does support their core value to users, but at a bigger scale and scope; and it would be strategic and forward looking as a way to engage and monetize an entirely new audience.  They blew it, plain and simple.

For Yahoo! this will be the deal that got away, the one they talk about as the official beginning of the end.  For Google, assuming the deal goes through I have no doubt it will be a successful financial decision.  The economics make sense and the global opportunity is enormous. But unlike the YouTube acquisition, which is now viewed as one of the most prescient, strategic and relatively inexpensive acquisitions in the company's history, Groupon will be just another daily deal:  valuable only for the moment.

 

Built for Change is Finally Out: Shameless Self-Promotion Begins!

Okay, the book's finally out. Now I can officially start the shameless self-promotion that accompanies modern publishing these days.  If I happen to see you and you greet me with something provocative like "Hello," or "What's up," chances are I'll reply "Oh yes, thank you.  You were asking about the book?  Well, the book IS out and is available for purchase on Amazon.  There's even a Kindle addition.  Can I send you a link?  Don't forget to write a great review!"

This is how I greet my children in the morning and how I start every conversation with my wife.  My poor suffering portfolio companies don't know what hit them.  Friends cross the street when they see me coming.

My own sense of proportion is eroding.  I have a new writer-friend named Kevin Daum.  He became so obsessed with selling books that he tattooed "New York Times Bestseller" backwards on his chest so he would see it every morning when he got dressed in front of the mirror.  When I first heard that it sounded a tad excessive.  Now it seems perfectly normal, perhaps even a little subtle since you can't look at it all day.  Better to have inked everything he could see, starting at the shoulders and going all the way down to the backs of his hands.

There have been some good parts, other than the necessary promoter personality transplant.  I've gotten to keynote conferences, met some terrific people at book signings, and my friends held a spectacular book party for me, the first of several.  That part is fun.

It's also been really fun saying thank you to all of the amazing entrepreneurs who contributed to the book. I've sent copies to many of them and have seen the thrill it gives them for others to have an inside peek at what made their businesses so successful.

Soon I'll be writing more about the process of writing, publishing and selling Built for Change, including what it was like to open the first box of books from the publisher.  For now, please remember the holidays are just around the corner and nothing makes a better stocking stuffer or cures the holiday blues than a tight book about entrepreneurialism!

 

Purple Cows and Publishing Blues

Last week the Wall Street Journal reported that best selling author Seth Godin has decided to punt his publisher, Portfolio.  In a post titled "Moving On,"  the author of such iconic marketing books as Purple Cow stated that:

"The thing is--now I know who my readers are. Adding layers or faux scarcity doesn't help me or you. As the medium changes, publishers are on the defensive.... I honestly can't think of a single traditional book publisher who has led the development of a successful marketplace/marketing innovation in the last decade."

The Journal further stated that the time it takes to publish a book weighed on Mr. Godin's decision.  Often, it can take up to a year to edit, fact check, produce and distribute a new title.  While the end result is often a high quality product with no mistakes, an appealing layout, corrected grammar and no typo's, the tradeoff in "currency" of the information is an unwelcome challenge.  This conundrum has weighed heavily on me as I've anticipated the publishing of my first book, Built for Change ( http://www.amazon.com/Built-Change-Essential-Transformative-Companies/dp/0313381429).

Since submitting the manuscript to my publisher, Praeger, the business world, and particularly the technology part of it, has changed dramatically.  The first draft was turned in on March 30th, and since then the iPad has established the previously impossible market for tablet computers, Facebook has blasted through 500 million members, Disney has gobbled up its second gaming platform, and social retailing companies have affirmed the case for the disintermediation of retail.

Indeed, from the time I scribbled the first paragraph, social retailer Groupon went from its founding to a $1 billion valuation, to operations in 60 US cities, to operations on 3 continents and the spawning of hundreds of competitors.  I had to change the price of the Kindle in the book's text from $499 to $199 hours before final deadline just so readers wouldn't scoff out how out of date the book was, even though only 8 months had passed since the manuscript fell into the publisher's hands.

Godin indicated that he intended to use his blog, podcasts, eReaders, and even simple technologies like PDFs to reach his audience.  And the product will probably be as good or better.  Given all of the dislocation in the publishing space, the truth is, the talent required to copy edit, fact check and typeset a book for publication is now available on a freelance basis.  I very much appreciate the amazing skills of those who helped with Built for Change, the book is much improved for their efforts.  But, the sacrifices in speed to market, cost to prepare the manuscript, and lack of creative control are acute. For successful authors like Seth Godin, the costs are no longer worth it.  No doubt others will conclude likewise.

In Support of Spite

Yesterday afternoon in Washington FundingPost held an early stage VC event at the offices of sponsor Bingham McCutchen.  In addition to a smaller group participating in a morning boot camp, about 100 entrepreneurs attended an afternoon panel where 7 early and expansion stage VCs (including me) offered their views on the state of the venture market.  I know 7 VCs on one panel sounds like overkill, but I suspect conference organizer Joe Rubin expected some of us not to post.  Not sure if we were all trying to avoid the sweltering DC heat or we're all returning to a normal mode of outreach, visibility and deal activity, but everyone showed and so we had an overflowing podium.

In reading the news headlines, you might have expected a somewhat gloomy discussion, with lamentations about deficits, regulation, taxes and credit casting a dour mood over the proceedings.  Indeed, earlier I myself contributed a blog post into this unsettling zeitgeist.  Barron's most recent offering is here.

But I saw none of that yesterday; not one iota. Everyone in that room was ready to build something amazing, right now.  Ask each attendee about any of the issues listed above and I'd bet they'd say "Not relevant."  In spite of the punditry, the politics, the paucity of credit, and the pallid outlook for the equity markets, all had the entrepreneurial effervescence needed to persevere and thrive in this environment. It's times like these that I'm especially grateful to participate in the entrepreneurial sector of the economy.

And so, I'm becoming an even bigger believer in the power of spite. In October, Praeger will publish my first book, Built for Change, Essential Traits of Transformative Companies.  In it I describe 8 traits that differentiate extraordinarily successful companies, those that I call transformative.  The second trait in the list is Fearlessness, a synonym for the Spite I'm referring to.  This is not fearlessness in the traditional, and sometimes reckless sense. Rather, it's the entrepreneurial fearlessness derived from the unwavering confidence born of an unparalleled degree of domain knowledge paired with an acute sense of customer needs.

In writing the Fearlessness chapter I had the pleasure of interviewing a number of remarkable entrepreneurs, including Michael Chasen of Blackboard and Alan Klapmeier of Cirrus Aircraft, both of whom revolutionized markets that the most sagacious of investors were certain would never innovate.  Klapmeier closed our discussion with the mantra his father--also an entrepreneur--used to offer whenever he was considering a new venture:  "You have to be dumb enough to start and smart enough to finish."  In other words, you need to carry on in spite of what you know or discover along the way.  Similarly, in describing how he mustered the courage to start Blackboard, Chasen simply told me, "It was so obvious to  us, we couldn't not do it."  Perfect spite.

I don't know if anyone yesterday is buildingthe next transformative company...another Google, Apple, or Starbucks.  But there was plenty of spite in that room; and that gives me great encouragement for the future.

The "Fog of Uncertainty"

Update:  Not sure if this is a good thing, but Charles Krauthammer completely agrees with me:

:"We are having a capital strike"

 

Imagine that tomorrow your doctor informs you that you have a debilitating disease. Imagine further she tells you that this malady might mildly improve if you immediately underwent dramatic and invasive surgery. It also might get worse. Alternatively, your doctor tells you that your health will invariably recover--perhaps significantly--if you wait. She just can't say when. The disease isn't fatal, physically. But psychologically it causes frustration, elegiac anxiety, self-doubt and a profound sense of lost opportunity. Your choice is take radical steps in the hopes of a potential recovery today or let the passage of time improve your odds of success.

This situation--acute investor paralysis--is what's facing investors and entrepreneurs today, particularly those located in the US.  The first option to deal with this malady is to jump in with both feet and invest aggressively into an environment notable solely for its unpredictability and the second is to horde cash and wait for a clear horizon, because, essentially no one can seriously lay claim to a credible theory of tomorrow's investment environment. 

On July 9th, The Wall Street Journal highlighted this ambivalence as these sentiments were conveyed at the recent Allen & Company media mogul conclave in Sun Valley. In discussing the troubling European economy and expiring US tax cuts, the Journal noted WPP CEO Martin Sorrells remarks, "People feel that things are uncertain," and Liberty Media Chairman John Malone echoed the feeling, telling a group of reporters Thursday morning that he believes the high levels of debt held by the U.S. and other governments could hamper growth for years to come."

From my small vantage point at the headwaters of innovation investing, what I see is both investors and entrepreneurs staring into an entrepreneurial miasma characterized by a shifting tax environment; tectonic transfers among the rights of creditors and equity holders; wrenching international deficits
faced by sovereign governments too fractured to act and to continue their US investment programs; all of which is overshadowed by a global financial services industry in disrepute, virtually panicking at the proposed new set of rules it needs to adjust to and unwilling to extend credit under practically any
terms.

Others are starting to notice the same thing.  In a recent article, Bloomberg  columnist Amity Shlaes defines the uncertainty and lays the blame squarely at President Obama's feet. She writes at length in a recent Washington Post article:

    "But change that is too arbitrary and too frequent petrifies firms,
    especially before their rules have been tested in the courts. As
    Verizon Communications chief executive Ivan Seidenberg
    noted recently in a Business Roundtable speech: "By reaching into virtually
    every sector of economic life, government is injecting uncertainty into the
    marketplace and making it harder to raise capital and create new
    businesses." 

    This analysis echoes those of Depression-era entrepreneurs. In 1938 Lammot
    du Pont, head of the eponymous chemical concern, spoke of a "fog of
    uncertainty" slowing business and noted in the company's annual report that
    arbitrary government always slowed business down: "by land and sea the
    universal practice under conditions of fog is to slacken speed."

So investors all along the value chain are doing the only rational thing:  they are languidly stepping into wet concrete and letting it harden around their ankles. The numbers in the venture sector tell the tale in microcosm what the macrocosm is experiencing. According to the most recent data from the NVCA, venture fundraising dropped 31% in Q1 2010 to a total dollar figure of $3.6 billion. More ominously, the number of LPs (i.e., investors in funds) plummeted by 44% during the same period. Investments in follow-on funds exceeded first time funds by a wide margin, favoring larger and more established groups who tend to avoid early stage risk. Only safe bets, please.

Unsurprisingly, direct investors are less willing to part with their cash.  During the first quarter of 2010, venture investment was an anemic $4.7 billion. It's worse than the numbers show, however, because masquerading behind the data were two outlier growth sectors: biotech and cleantech.  Regarding the latter, this is a sector with inextinguishable hype despite no evidence of providing a venture return. The biotech sector remains vibrant strictly because there are exit opportunities: large players have effectively outsourced their R&D function to the startup community, which reduces their risk but increases the price they pay for proven technology companies. It's an ecosystem that works for both predator and prey. All the other sectors were flat to down.

Recently released fundraising numbers for the first half of the year also provide a picture clear as mud. According to Dow Jones LP Source, for the first six months of the year, $7.5 billion was raised by 72 private institutional investment funds, a 13% improvement over the same period last year. But dig deeper into the numbers and you'll notice that one fund, Sequoia, represented $1.0 billion of that total, or 12%. Moreover, that fund was targeted exclusively at opportunities in China.

The consequence for US entrepreneurs is that for now and the foreseeable future they will be faced with an ever-shrinking pool of risk capital to tap for startups. It's not just fewer VC's (which few people decry), but less money to invest for everyone. Darwin on steroids.

But so what? Wasn't there too much money sloshing around already? The vaunted capital "overhang" is naturally correcting itself, right? It's also a fair question to ask: will a shrinking capital base really lead to less
innovation? Won't the scrappiest entrepreneurs still find some way to get financed?

The fact is nobody knows the answers to these questions; we've never had such a dramatic and broad based capital contraction in the post innovation-economy era, where existing funding sources are declining and new ones are dispersed across the globe.  In the US it's an age of entrepreneurial uncertainty.

One thing is certain, however: the entrepreneurial sector better get moving or US workers are in for a tough ride. During the first quarter, venture backed companies hired or sought to hire 13,314 people in the US according to the NVCA, a 16% increase from Q4 2009. This represents approximately 5% of all non-government job growth on an average monthly basis in Q1, with higher levels expected in Q2. Historically, the percentage of new job creation by the venture sector has ranged from 5% up to 15%.  With 8 million jobs to replace in order to return to historical unemployment levels, somebody better raise some money, start innovating and increase hiring soon or it will easily take another five years or more before we reach historical employment levels.

And where will entrepreneurs get the fuel to accelerate this growth? The truth is I don't know of a single
rational institutional investor who is confidently looking to deploy capital in this environment. I know plenty of investors staring at the end of their investment periods and facing the prospect of returning commitments to limited partners. Which means managing less money and earning smaller fee income. This "use it or lose it" scenario is driving fiercely aggressive deal tactics and outright irrationality when investors find a reasonable opportunity at an acceptable price. Indeed, this is such a rarity nowadays, that entrepreneurs have figured out the game and are wisely auctioning any good opportunity, driving up prices, and setting the stage for even lower returns down the road.

Despite these factors, there remains tremendous pent up demand to start investing again.  For entrepreneurs and the investors who support them, the natural state is to run rather than rest, but the wisest stance for now s to crouch. We can stay crouched for a while, but eventually our knees ache and start to cramp.  When things turn around, will we have the energy to dash again?

There Are No Called Strikes in Venture Capital

The Wall Street Journal On line has an article today siting the 10 Richest Venture Backed Companies of All Time.  Of the finalists, we had opportunities to invest in four of them during their winding path through the capital markets.  Of those four, we invested in one--a relative bust--and passed on three.  Of the three, one is clearly on a path to success, but i won't mention it because of course VC's don't call strikes on themselves, at least not publicly. 

However, each of us has passed on something that turned out to be great, in some cases really great. If you're an entrepreneur pitching a VC, the next time you're alone with her/him (after they've bloviated about the best deal they ever done) ask them to tell you about the best deal they ever passed on.  It'll tell you what they're looking for in your deal that they missed on the one that got away.

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• Clearwire leads list of the top venture capital deals of all time(techflash.com)

Just wondering, If Google--Don't be Evil--owned Twitter, would reknowned media suppressor Hugo Chavez be allowed to keep his new account?

The Elephants Not In the Room

Before the holiday break I attended a State of Venture Capital Market panel at the Ritz Carlton in Tyson's Corner.  Comprising the panel were leaders of some of DC's leading firms, including Columbia Capital, Valhalla, New Atlantic, and Calvert.  Notwithstanding the presence of all the things that make an event like this successful-acceptable food, thoughtful commentary, a well-prepared moderator, and probing questions-I was distracted by the absence of something significant in the ballroom.

I noticed as I looked around that scattered among the 10-person rounds were several open seats, about 20% of the total or so.  Looking more closely, I realized that the missing group among the attendees were venture capitalists.

Of course, there were several familiar faces, deal attorneys, accountants, insurance brokers and many fresh-faced entrepreneurs.  But, other than those at the podium and a few others, the usual cadre of established and emerging VC's were absent.  Without naming names, there are certain VC's that attend every event, and have for the past 20 years.  I half expect them to have taken an apartment at the Ritz.  Vapor this time.

Moreover, there's normally  a cohort of younger, aggressive associate and principal types networking furiously and passing out business cards like water on a hot day.  You've seen them, hair cropped appropriately, firm handshake, blue Faconable shirt from Nordstroms, shoulder-surfing while they're talking to you to find the next connection.  Despite the frequently off-putting zeal, the fact is these are the people on the first mile of their venture careers and are often the ones looking and working the hardest to find the next Google.

But I didn't see any of them this time, and haven't at several recent events. Ironically, the panel members each intoned about the coming contraction in the venture industry, opining on the oft-quoted 50% statistic:  50% fewer firms and 50% less dollars.  Attrition is sited most frequently as the expected exit path, with veteran VC's transitioning elsewhere.  However, if what I saw in Tyson's is any indication of a larger trend, the contraction will be more stealthy and come by not attracting the next generation of investors rather than chasing out the old guard.  While I doubt there will be many tears shed over fewer VC's, as an entrepreneur this trend is hardly worth cheering.  You never know who's going to "see" your idea and fund it.