Posts Tagged: venture

Thoughts — 8 Comments
9
Nov 06

Blogs and the Web 2.0 Bubble

I’ve recently become convinced that the Web 2.0 bubble, long thought nonexistent, is now upon us. However, it wasn’t the recent rash of implausibly extravagant fundings or the wonderfully humorous “Top Ten Lies of Web 2.0” piece that turned me; rather, it was some old-fashioned thinking about how information flows through markets.

Recently, the Wall Street Journal ran a much-blogged ode to Michael Arrington, founder of the Techcrunch blog. The piece was filled with the requisite kingmaker fluff (“Like a latter-day Henry Blodget”), but what really got me thinking was the following passage:

Start-up iVentster Inc.’s gaming site, XuQa.com, got a positive review in September on TechCrunch. Afterward, two Japanese investors showed up at iVentster’s San Francisco office, saying they had learned about the company on TechCrunch. “We were definitely surprised,” says iVentster co-founder Ali Moiz. “If somebody travels that far and comes to see you because they saw you on a blog, it makes you think about how many people read that blog.”

In a nutshell, venture capitalists saw an Arrington recommendation, and acted upon it. In the client-starved VC market, this isn’t so surprising or shocking, is it? Perhaps these were just junior VC’s trying to drum up some leads – something that is a requisite even in an industry as vaunted and elite as venture capital.

Web 2.0 is unique. Because of low barriers to entry, more market entrants are producing more ideas. How much funding does it take to create a Web 2.0 company? Joshua Schachter spun up del.icio.us in his spare time. The founders of Meebo financed the company on their credit cards.

However, venture capitalists have long relied on barriers to entry to produce a feeder network – one that would screen and lithimus test ideas. For a company to get an audience with a VC, the founders had to have a track record, and possibly some angel funding – they had to carry some validation. To get this validation required knowing people, making deals, securing funds to develop technology – y’know, business stuff. However, in Web 2.0, the “business stuff” isn’t a barrier to entry – skill is the only barrier. College students can create immensely popular websites from their dorm room. A small regional project can become an huge sensation without a bloated staff. There are many more examples like this.

If the feeder isn’t relevant anymore, how do the sellers of finance begin to make decisions about who to fund? As it turns out, they’re using the same networks we are – blogs. If you look at a random venture capital blog, you’ll (generally) see the same blogs in the blogroll. VC’s love to read and link to the A-list, and therein lies the problem.

In the real world, businesses rely on third party information to make important decisions. Reuters, for example, is a company that derives 85% of its revenue from selling information to corporations. Many, many firms sell specialized intelligence on market sectors (investment firms, research firms, etc). There is an enormous industry built around the selling of trustworthy information. This industry doesn’t exist for Web 2.0.

In the absence of this industry we have come to rely upon the blogosphere, and particularly the A-list blogs, to serve as our information filter. Not a day goes by where Techcrunch doesn’t review a company – creating kings and dashing dreams along the way. However, when we stop to think about the quality of the information coming through the filter, it really leaves a lot to be desired. It was the Facebook feeds fiasco that revealed this to me – to a one (except for Mashable), the A-listers lined up to sing the praises of feeds. As we know, they couldn’t have got it more wrong.

How much can we really expect from these bloggers? How many Web 2.o sites can one person master? Look at how many sites Techcrunch or Mashable review – how in-depth can the understanding of the reviewed sites possibly be? These people are only human – and to expect complete understanding of all things Web 2.0 is too much to ask from even these proclaimed gurus. They are going to get stuff wrong, and quite likely, they are going to get stuff wrong frequently.

The dynamics of the A-list now serve the filtering purpose formerly relegated to the financial barriers to entry companies used to face. To get that audience with a VC, one needs the stamp of approval from the A-list. But can we trust the A-list? Do we really expect Michael Arrington to understand the mindset of an 18 year old college student? These A-listers are probably giving it their best shot, but they fall short of the mark in providing the type of information that financial decisions should be based upon.

The Web 2.0 bubble exists because information access is controlled by a few. The wisdom of crowds has promoted the A-list to the top – but as Terrell Russell states “Our wisdom of crowds sometimes presents itself as the yelling of the loudest.” Arrington and Malik aren’t yelling – they don’t need to – but they are unfortunately getting to speak for market segments outside their expertise. That this information is relied upon by investors has fueled the bubble that will only continue to get worse.

So what is the solution? Do we need a Reuters for Web 2.0? O’Reilly has recently stepped up to provide such a service, selling the Web 2.0 report for $375. This is a small step, and it is likely we’ll see more like it in the future. The true challenge for venture firms will be broadening their scope of information seeking. As long as Web 2.0 is geographically dispersed, and college students in a dorm room are sitting on billion dollar ideas, it will be very useful for firms to spend a significant amount of effort collecting better data. Using the A-list as a filter is being lazy – and the bubbly investments you get from it will be your punishment.

Thoughts — 5 Comments
22
Sep 06

Facebook: A Long-Term Investment

Earlier this spring, when the first Facebook acquisition rumors were going around, I wrote a post examining the real value of Facebook – the fact that it is the data archive of a generation. In an article by Rachel Rosmarin, I’m quoted to this extent. To share some background – I still feel my analysis is very relevant, here’s the gist of Facebook’s value proposition:

The web is generational. Every few years a new generation matures, each taking a set of skills forward that they acquired during their social maturity. Simply put, we acquire our social-technological skills when required, and the course of our life-interaction with technology is charted by these acquisitions. When I was an undergrad, we communicated with email, IM, and cell phones. My friends, to this date, remain proficient at email, IM and cell phone use. Today’s undergrads communicate with email, IM, social networks, game communication channels, blog comments, text messages, photo messages, cell phones, and a host of others I can’t even think of. Social trends drove adoption, and now these students will have lifelong experience and comfort using these technological channels. (Of course, some of my friends today are comfortable with the tools undergrads use today, but I’m talking broadly, and I keep close to very net-conscious folks. I think you get the point, though).

I’ve gone down this tangent to explain the value of the data Facebook owns. Put simply, Facebook owns the data, use patterns, preferences, communications and adoption trends of the entire next web generation. Whatsmore, the data is incredibly clean, trustworthy, and segmented as a marketer could only dream. But don’t get completely trapped by the marketing aspects, there’s something much greater in Facebook’s data. Facebook owns the data of the first generation to live their entire lives online, a generation that we will spend our lives studying and trying to understand. These young people are out of our frame of reference, and they will completely drive the next 30 years of the social web. Does anyone doubt me on that?

It takes broad thinking, broad ability to operationalize, and a very long view to take on such a project, meaning there are only a few companies that could do it. An investment of 1BN into a corpus of data like the Facebook’s would be a key strategic acquisition, one that frankly makes sense for a company creatively thinking about the next 30 years.

Of course, now we’re now talking about Yahoo instead of Google, and 1 Billion instead of 2 Billion, but the issue is fundamentally the same. A company like Yahoo or Google could actually leverage the data and subscriber base in a way that would befit their very long term strategies. If we’re going to be marketing products towards the net natives for the next 30 years, is an investment of 1BN to get a very clean snapshot of the market at its point of maturity valuable? Operationalized correctly, this could be the business equivalent of Peter Minuit’s purchase of Manhattan.

Rosmarin’s article is also interesting because it speculates on how a transition to Yahoo makes sense:

A clear favorite as of Thursday, Yahoo! has been looking at Facebook for months, though talks reportedly broke down at the end of the summer. Meanwhile Yahoo!, which spooked investors earlier in the week when it said that ad sales were slowing, has been making overtures toward the youth market; recent deals include a tie-in with Al Gore’s CurrentTV video network. Yahoo! has experience integrating trendy Internet companies like Flickr, Del.icio.us and Upcoming.org into the fold. And so far it’s generally left them alone.

Facebook might even remain “A Mark Zuckerberg Production,” as the credits on the site read now. Yahoo! would get the privilege of pointing ad-rich revenue-generating products like search, mail and a music store in Facebook users’ direction.

I’m in agreement with Rosmarin. A hands-off Yahoo transition may actually not roil the Facebook user base. Yahoo has learned important lessons about keeping hands-off and not meddling too much – but the scale of this merger may through the previous lessons out the window. One billion is a lot more than the pittance Yahoo paid for the beautiful applications Del.icio.us and Flickr.

I’m keeping my eyes on this one.

Thoughts — 14 Comments
25
Apr 06

Transience in Social Networks, or How to Beat MySpace and Facebook

Palopia, if nothing else, has done promotion right, earning a mention by Steve Rubel. Of the 100 or so Social Networking sites in existence, and the 1000 or so currently being incubated, the market is about to explode with a number of sites attempting to duplicate the success of MySpace and Facebook. To that extent, its a sexy proposition – the notion of being the next MySpace or Facebook – and the good news is, its certainly possible. Looking at Palopia, the strategy seems to be throwing features at the user; in my opinion, that’s not the winning strategy (primarily because its the strategy shared by 90% of the emerging social networks competition). So you wanna beat MySpace or Facebook? Here’s how you do it.

  1. Give up on the idea that you’re going to steal the eyeballs of MySpace’s audience with flash, professionalism, or better social networking. 98 percent of the people who use MySpace don’t realize they are using a social networking community. They are simply using a website that their friends are on – they are using it for the same reasons they use email or IM. The social networking aspects are practically moot – they are interested in the content (friends profiles) and goofing off. The SNC parts are completely secondary.
  2. A top-down play will only wash you out in the competition space. If you want to develop a social network, find a niche and exploit it. They key is you’ve got to find a niche that is situationally relevant. There are lots of people who want to explore social networks – people who have moved to new towns or neighborhoods, parents at schools, church patrons – they just don’t know it yet. And the key is to keep thinking about point 1 – people don’t really care about the SNC aspects, they just want a fun site where they can find their peer group.
  3. Be geolocal. Did you know there are a bunch of other Facebooks out there? And that in certain parts of the country, they are more popular than Facebook? Xuqa.com and Sconex each found relevant geolocals and created value (Sconex was purchased at the incredibly undervalued price of 6M). Sure, its not as sexy a proposition as being a national social network, but social networks aren’t national. They are local.
  4. Investing in better technology, sexier UI’s, more professional templates, etc. is not enough. Look at MySpace, which is one of the clunkiest experiences on the net. People will tolerate clunky user interfaces because they are used to them. Those 68 million people don’t care about Web 2.0, AJAX and XHTML. They are used to clunky webforms, slow connections and poorly designed HTML. MySpace wins by not shooting over their heads. Facebook, on the other hand, is simple, clean and understated. And the best part is it’s fast, and people love Facebook for that. Your sysadmin should be the highest paid person on your technical staff.
  5. Exploit a content area. Basically, find some content that people love and wrap a social network around it. This is a little tricky because it flips the notion of social networking on its head, however, this might be one of the easiest successes to pull off. There are lots of content areas on the net that are served poorly by old websites. Think about any community of practice, the endless forums and listservs on the net. A lot of these people could be better served by websites designed with their interest in mind. You build a website they like, wrap a lightweight social network around it, and you might have a winning proposition.

The emerging social networking sites will not succeed by chance; the notion of build it and they’ll come will fail miserably. The new social network winners will win because they have done their research, completely understand the market, and they’ve made a relevant play. MySpace and Facebook are closely researching the failings of past social networks, and investing heavily in the gut instincts that made their products winners. Waiting on them to stumble is not a business proposition.

It is key to remember that a horde of young people now understand the social network model of websites. This is why I scoff when people say that social network websites are a fad. Sure, people might become uncomfortable with information disclosure, but the young audience is now native with the underlying model. It isn’t going to go away. However, social networking will be commoditized as more and more sites integrate aspects. There may be a few more big social networks waiting to emerge, but I think these will be few and far between. Facebook started out with a niche, and they grew nationally.

Beating MySpace or Facebook is a tough proposition. They’ve got a head start, they have great employees, and they’ve managed growth successfully so far (three absolutely key business facets). What’s more, they have extremely passionate userbases, and they seem to understand their users. Beating them is not like beating Google, but as each day passes that gets a little bit closer to a reality. Will there be a bubble in social networks? Of course – because hundreds of extremely similar ideas will be funded, and the market can’t support this. Without question, though, social networks are here to stay; it will just take some genuinely creative thought to create value in the space.

Thoughts — 3 Comments
30
Mar 06

Facebook’s Value Proposition

The leaks to Businessweek keep coming, and this time Google is the purported 2 Billion dollar suitor. The scary thing is this actually makes sense to me. Google’s motives are not much different from any intelligence gathering organization; they are particularly interested in the life-bits of the new web generation. Taking a step back, let’s explore how this makes sense.

Design and implementation of technologies that capture mindshare require a number of elements: a problem, a granular understanding of that problem, a granular understanding of how that problem is to be solved, a sense of how users approach the problem, and a sense of how users will approach the designed solution. The user equation, or how the user fits into the picture, is an ongoing area of study, particularly in IS departments.

The web is generational. Every few years a new generation matures, each taking a set of skills forward that they acquired during their social maturity. Simply put, we acquire our social-technological skills when required, and the course of our life-interaction with technology is charted by these acquisitions. When I was an undergrad, we communicated with email, IM, and cell phones. My friends, to this date, remain proficient at email, IM and cell phone use. Today’s undergrads communicate with email, IM, social networks, game communication channels, blog comments, text messages, photo messages, cell phones, and a host of others I can’t even think of. Social trends drove adoption, and now these students will have lifelong experience and comfort using these technological channels. (Of course, some of my friends today are comfortable with the tools undergrads use today, but I’m talking broadly, and I keep close to very net-conscious folks. I think you get the point, though).

I’ve gone down this tangent to explain the value of the data Facebook owns. Put simply, Facebook owns the data, use patterns, preferences, communications and adoption trends of the entire next web generation. Whatsmore, the data is incredibly clean, trustworthy, and segmented as a marketer could only dream. But don’t get completely trapped by the marketing aspects, there’s something much greater in Facebook’s data. Facebook owns the data of the first generation to live their entire lives online, a generation that we will spend our lives studying and trying to understand. These young people are out of our frame of reference, and they will completely drive the next 30 years of the social web. Does anyone doubt me on that?

It takes broad thinking, broad ability to operationalize, and a very long view to take on such a project, meaning there are only a few companies that could do it. Boiling it down more, there’s really only one company that I can think of that would actually take a project like this on. It is Google. Google, for all its faults, wishes to deeply understand its users, and it wishes to be part all aspects of our web interaction in the future. An investment of 2BN into a corpus of data like the Facebook’s would be a key strategic acquisition, one that frankly makes sense for a company creatively thinking about the next 30 years.

Don’t get me wrong, though. I have no idea who will buy the Facebook, and I’m not trying to win any speculation prizes with this blog post. The eventual owners of Facebook could easily be a media company, a multinational products company, or a government contractor like Raytheon, Lockheed Martin or Boeing. Any of those could easily put Facebook’s data to work, for anything from trend research to homeland security. That said, I do feel the Facebook is worth 2 Billion to only one company, and for that one company, Facebook’s real value is a whole lot more than 2 Billion dollars.

Postscript: If you’re interested in seeing results of studies regarding Facebook use on a college campus, you can check out An Evaluation of Identity-Sharing Behavior in Social Network Communities (pdf), in which a randomized study design found that 90% of undergraduates used the Facebook (data from Summer 2005). Additionally, you can check out Student Life on The Facebook, a blog post that I’ll be turning into a journal article this summer. Using a whole-network design, this study found that over 94% of freshmen at UNC had a Facebook account.