Archive for the ‘Big Picture’ Category

Just Add Balls

March 11, 2009

Yesterday the Xconomy blog shared an email interview they conducted with Paul Graham.  The prominent early-stage investor posits that Silicon Valley is a more nurturing environment for startups than Boston because startups put the Valley on the map.  Paul also states that he thinks entrepreneurs and investors should spend more time trying to understand why the Valley is a better place for startups.  That got me thinking about the U.S. as a whole being better than most other countries at fostering a startup culture.

In order for a startup culture to be successful there needs to be a whole ecosystem in place to support it, and the U.S. is founded on such an ecosystem.  In my opinion, the five main components of a startup-friendly environment are: 1) access to knowlege, 2) ease of incorporation, 3) funding sources, 4) viable execution, and 5) exit opportunities.

Spawning entrepreneurial activity requires access to knowledge.  Whether it be via a formal education or information resources such as publications, lectures and the internet, entrepreneurs need to know as much as possible about the space they intend to enter.  This is obvious.  And the U.S. is wrought with educational opportunities.  Of American adults over the age of 25, more than 85% have completed high-school and 27% have a college degree.  The U.S. government encourages advanced education via its numerous financial aid programs and tax deductions for interest on education loans.  Even without a formal education, though, entrepreneurs can tap into books, magazines, conferences and contacts with domain expertise.

Nobody would want to start a company if it was a nightmare process to get incorporated.  The U.S. makes the incorporation process incredibly easy.  In Delaware this can be done by filing one simple form and paying $89.  To illustrate the system in other countries, a potential entrepreneur in Mexico must file 8 forms in different government offices, and the process takes about one month.  The U.S. also offers a variety of incorporation types, such as C-corp, S-corp, LLC and Partnership.

A huge reason for the existence of a startup culture in the U.S. is access to moderately cheap capital and established bankruptcy proceedings.  Other than the turbulent economic times we are in today, the historically stable U.S. economy has limited systemic risk to both debt financing and equity financing. Our economy has also not been characterized by highly volatile inflation rates (again, present circumstances excluded). This stability, when combined with the aforementioned limited systemic risk lead to low interest rates levied on debt and moderate returns demanded from equity.  These forces have engendered entire industries of venture financing such as venture funds, seed funds and SBA loans.  Most startups in the US first get seeded by individuals with enough net worth to afford an angel investment. Due to the more even distribution of wealth in the U.S. relative to other countries, angel investors can be found in every corner of America.

Bankruptcy workouts are also more efficient in the U.S. than other countries. For example, in much of Latin America, secured creditors typically do not have priority to their collateral, and the judicial system that governs bankruptcy proceedings is weak and slow. On the contrary, the U.S. has an established Bankruptcy Code that determines the pecking order of different classes of creditors. This introduces additional confidence in financing a startup. Consideration must also be given to the standards of corporate governance that govern a Board of Directors. In the U.S. these principles have arisen from decades of legal precedence and shareholder activism. Most countries in the world do not benefit from a rich history of legal precedence and government involvement.

A critical success factor of any enterprise is a strong team to execute the company’s vision. Even in the U.S., where there is a large universe of talent, finding the right people to fill key positions is one of the biggest challenges for any entrepreneur. This challenge is magnified tremendously in foreign countries where there is only a small pool of highly-educated workers, and where many of the most qualified workers seek opportunities elsewhere, leading to a “brain drain” in local economies. Attracting strong team members in the early days of a venture is usually accomplished with stock options that are only worth something in the presence of healthy exit markets, which leads to the final point.

Just about the entire value harvested from a startup’s efforts lies in the amount of money generated in a liquidity event (or “exit”). The two main exit opportunities for a company are public offering and acquisition. Market conditions are paramount to reaping the greatest possible value from an exit, even if the company has impressive performance and growth potential. An IPO will mainly only be considered when the public markets are stable in order to minimize the risk of an offering trading at or below its issue bid, which would in turn lead to the perception of an undesirable offering and further selling. Acquisitions are also dependent on market forces such as high equity prices and cheap sources of debt financing.  Both of these exit markets have been robust for most of recent history in the U.S.  Though they are not palpable at the moment, they too shall rise again.

So there it is.  The recipe for creating a startup culture.  We should feel blessed to live in a country that fosters capitalism and an entrepreneurial spirit.  The foundation is there.  Now for the most important ingredient of all:  balls!

(Please be aware that the use of the term “balls” is a colloquial reference to taking big risks and in no way suggests a bias towards gender)

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Blogs are like ATMs

March 9, 2009

Before the days of ATMs, if I wanted cash I had to get it from my bank. It wasn’t particularly convenient because I was at the mercy of the bank’s schedule and limited reach. Furthermore, if I consumed all of the cash the bank gave me, I would have to wait until the next day to get more cash. With the advent of ATMs, the tide switched in my favor. You see, I don’t really care that much about where I get cash from. I just want the ability to get it whenever I want regardless of where I am. While I would prefer that the ATM be associated with my bank because I trust my bank, I ultimately just care about convenience and thus will get cash from the most readily available ATM that has a minimum level of trustworthiness. Banks do offer more value than just dispensing cash, but the vast majority of the time cash is all I want. That is the reason ATMs are here to stay and the old way of getting cash seems absurd.

In the above paragraph, simply replacing the word “ATM” with “blog”, “cash” with “news” and “bank” with “newspaper” yields the following result:

Before the days of blogs, if I wanted news I had to get it from my newspaper. It wasn’t particularly convenient because I was at the mercy of the newspaper’s schedule and limited reach. Furthermore, if I consumed all of the news the newspaper gave me, I would have to wait until the next day to get more news. With the advent of blogs, the tide switched in my favor. You see, I don’t really care that much about where I get news from. I just want the ability to get it whenever I want regardless of where I am. While I would prefer that the blog be associated with my newspaper because I trust my newspaper, I ultimately just care about convenience and thus will get news from the most readily available blog that has a minimum level of trustworthiness. Newspapers do offer more value than just dispensing news, but the vast majority of the time news is all I want. That is the reason blogs are here to stay and the old way of getting news seems absurd.

I find that to be rather interesting!  Now newspapers just need to learn to embrace the tidal shift and monetize it.

Everyone back off Tom Friedman

February 24, 2009

This weekend Tom Friedman wrote an op-ed piece in the NY Times postulating that the $20 billion of government money that GM and Chrysler are asking for would be better utilized by the top 20 venture capital firms in the U.S. because they fund companies that drive innovation and create jobs.  Tom gave a strong endorsement to the venture capital model.  Yet VCs all across the country took offense and backlashed at the suggestion.  Below I will list some of the reasons the VC community gave for their pushback, along with my humble two cents on each.

1)  The venture capital industry does not need a bailout, especially the top 20 firms.

  • True.  But Friedman’s post is not about bailing out VCs.  It’s about the wisest allocation of $20 billion.  The only statement he makes that could potentially be misinterpreted as a suggestion the VC industry needs a bailout is regarding LPs having trouble keeping their funding commitments.  This is a well-known fact and does not suggest the VC industry needs a bailout.

2)  The top 20 firms don’t need help raising money.

  • Usually true.  But that doesn’t matter.  I don’t need help opening a door but I do appreciate when someone holds a door open for me.

3)  There is already a glut of capital in the VC system.

  • Perhaps true over the entire industry, but not necessarily at the top.  Several prominent firms are raising annex funds or are concerned about their levels of dry powder.  Kleiner, Bain Capital, Onset and Battery are just a few of the firms that fit this description (though it is a seed fund, First Round is also raising an annex fund).  Admittedly, the $20 billion Friedman writes about is a large amount for the VC world, given the average amount raised annually by the industry over the past four years is $30 billion.  However, Friedman used this number because that is the latest amount under consideration for GM and Chrysler.

4)  Government money would lead to reckless investing.

  • This is ridiculous.  The best VC firms enjoy that reputation because they invest judiciously in companies that exhibit strong upside potential.  These VC firms then nurture these companies with industry connections and a Board presence.  I cannot imagine Sequoia making imprudent investments just because it received a large injection of investable capital.  These firms aren’t the nouveau riche types.  They’re not like hip-hop stars who blow all their money on cars and yachts the first chance they get.

5)  Government money would have lots of strings attached.

  • Possibly.  Given the restrictions placed on banks receiving TARP money, this is a safe assumption.  Yet it is not certain.  Besides, LPs invest in a VC fund under the premise that the partners will invest that money within parameters defined in the fund’s charter.  These parameters can be broad or specific, and there are always exceptions, but general partners are accustomed to considering the charter before making an investment.  Furthermore, from an administrative perspective, it is much easier to have a small number of LPs in a fund.  Having the government as a fund’s sole LP would be far easier to manage than a roster of hundreds of LPs ranging from institutions to wealthy individuals.

So everyone should back off Tom Friedman a bit.  He made a statement that speaks highly of the venture capital model and the role venture capitalists play in driving the country forward.  As a taxpayer I would be delighted to be an LP in the country’s best venture capital funds.

Own the Channel

February 21, 2009

Having control of distribution is one of the most powerful cards a business can hold in its proverbial hand of poker.  It allows you to greatly influence the rules of the game and determine how draconian or democratic they will be.  Either way, this power pays off in spades.  According to quantcast, gets over 14 million unique visitors per month to its site (Compete puts this number at a little over 6 million).  Splitting the difference, we can estimate that 10 million people visit that homepage at least once per month.  10 million???  Are you kidding me?  And why do 10 million people visit that useless site?  Because it is the default start page for Comcast’s 14.9 million internet subscribers.  The only way this stops being a Comcast subscriber’s browser homepage is if he or she actively changes it, which clearly is not a frequent occurrence.  So let’s say that of the 10 million montly uniques, 8 million of those are internet subscribers who probably open their browsers 20 times per month, and the other 2 million uniques just land on the site once in that month.  That’s 162 million visits to each month.  At a $10 CPM, with 2 ads on the page, that’s $3.2 million per month and almost $40 million per year.  Owning the channel sure has its privileges!

Liquor distributors control the distribution of alcohol in most states and thus benefit from huge margins.

Twitter owns the channel and thus can control who gets access to the real-time conversation and how often.

Facebook owns its respective channel.  Though they have taken quite a bit of heat for trying to control users’ data, it is hard to deny that Facebook has the ultimate say up until users revolt by closing accounts.  Microsoft and Google both acknowledged the power of owning this channel, but Microsoft won with an expensive ownership stake in the social network.

Hulu owns the channel.  Yes, content providers strong-armed the company and demanded they discontinue streaming videos through Boxee, but very soon we will see that Hulu will win the battle.  It’s just too obvious.  Hulu can ultimately do whatever it wants because it has incredible distribution and the content providers will have to bend to the company’s wishes.  It’s just that right now young Hulu is still figuring out how to play in the tug-of-war between supplier and consumer.  Boxee will eventually own the computer-to-TV channel.

Apple owns music distribution through its iTunes application, which locks consumers into using an iPod.  The company makes no money on the music and doesn’t really care whether you buy music through the iTunes store or other sources, but they make plenty of money on the player (i.e. counter to many other business models, they make most of the money from the razor and not the blades).

Newspapers used to own the channel.  Their prowess depended on it.  Once they lost control of distribution, they became rudderless ships at sea.

Owning the channel is why Amazon created the Kindle.

Owning a channel is not synonymous with being a monopoly, though the associated power is similar.  Owning a channel is about providing access.  OpenTable owns the channel of access to diners.  Sysco owns the channel of access to restaurants.  ZocDoc will one day own the channel for doctor appointments. will one day own the channel for local news.  If you find a potential channel you can control, get in there fast.  And if you can’t own the channel, at least try to move upstream.  Otherwise you have to hope that you won’t get crushed when dancing with the elephants.

Keeping Perspective

January 5, 2009

My name is Andres Moran and I have finally chosen to start a blog after much resistance.  I made fun of bloggers years ago for thinking that anybody actually cared about what they had to say.  Now that I spend most of my time on the web reading blogs and valuing the information they contain, I figured I would jump on the bandwagon.  It is my hope that I can impart a fresh perspective to a few readers out there.

The tech world is something easy to get overwhelmed with.  With new applications and services being launched daily, the learning curve is steep and long.  People take great pride in knowing what the latest release is, and obsess over how many followers they have on Twitter.  I admit to falling victim to the fomer, but not the latter.

I have not built an internet company.  I am not considered a person of influence in the NY tech community.  I do not know how to write code and I certainly don’t speak that language.  At the moment I only have 43 followers on Twitter.  I’m sure no more than 5 people will read this blog in the next month or so.  But none of this matters!  What does matter is that I come home to an amazing girl who I can’t wait to marry.  I have a family that always loves and supports me.  My friends would do anything for me.  I have friends all over the world that I have met in different stages of my life.  I have visited distant countries people have only seen in movies.  And I have my health and positive spirit.

This is what Keeping Perspective is all about:  a thoughtful discussion of business and the internet, all with the undertone that there are more important things in life.  Hence all posts should be taken with some thread of levity.  Yes I am infatuated by business and I love the startup mentality.  Yes I obsess over new business models and strategies for making huge profits.  Yes I try to learn as much as I can about new technologies.  However, I try to keep it all in perspective of the bigger picture of life, because none of those things will pick me up when I’m in a funk.  They won’t laugh with me and give me the joy that comes from genuine relationships.

Come keep perspective with me.