Apple thoughts

Yesterday, at its World Wide Developer Conference, Apple presented a series of product-line extensions ranging from an updated operating system, to a streaming music service, and a series of hardware tweaks. By the end of the day, the press was somewhat disappointed and  the stock market was mixed to down.

I think it's important to revisit the DNA of Apple's staggeringly great run over the past decade. In fact, you can point to a similarity over the Company's lifetime. Apple tends to invent, what in hindsight were obvious solutions, which are so self-evident in their presentation as to be accepted immediately by tens of millions of people. As the solutions tend to 'invent' markets, they begin with near 100% share, which the force of gravity and well capitalized competitors continually erode. PC's are in the single digits and the phones have about a 1/3 share. The tablet, being relatively newer, still has share over 60%, but it's declining too.  Revenues are going up, as the markets are growing, but share is declining.

The company is far better at inventing new markets than protecting their position in existing ones. It's not that they are disinterested in doing so, but unlike what Microsoft pulled off 20 years ago, the key candidates for customer 'lock-in' are applications which are now browser, rather than operating system based.  Presenting a family of solutions such as iOS, Airplay, iCloud, iTunes etc helps to influence people to stay in the family; it's necessary, but not sufficient for lock-in. This is good for consumers, and I believe good for Apple. They have to keep innovating to not only stay ahead, but to support a premium position.

Market defining opportunities do not present themselves every year, let alone the time it takes to properly engineer the right solution, at an acceptable price. As a consequence, the company will have up and down performance, and will continue to lose customers in some segments, while gaining share in others. That's just a fact, and again, it's better for them to accept this than to bring out products before their time. After all, it took three CEO's and five years to recover from the Newton debacle.

An original thinker...Scott Belsky

Behance is a community of creative folk founded by Scott Belsky. He recently sold the company to Adobe and now leads their community efforts. He is an original thinker whose passionate about his product and his constituency. Recently, I met with him, and saw his presentation at NJTech Meet-up. Fortunately, here's a version of it given at Internet Week in NY.

Here's some snippets to whet your appetite:

• Meritocracy, innovation and access are not natural to the web
• The problem is the web is verticalizing. This limits creativity and inspiration. Behance leveraged that 95% of creatives follow other fields and would appreciate broad exposure
• Creative meritocracy is about credible mass vs critical mass. Not a crowd sourcing fan. Good to hear a dissenting voice
• I try to hire great people and view my role as to be the wind at their backs

Scott Belsky at NY Internet Week

Random Tumblr thoughts

The Tumblr user metrics were spectacular with:

• 108mm blogs and 50+ billion posts
• 76mm posts were created EVERY day
• In April of 2013, just before the acquisition, the website had more than 13B page views. 

The company was launched in 2006, so the exit in 2013, fits the timeline seen between start-up and exit. Of course, great success, or quick failure accelerates the exit timeframes.

New York has now seen two great exits in the last 12 months, Buddy Media and now Tumblr, Once 'lucky' and twice a trend. Capital flows to where it's 'appreciated'; NY has now generated the type of spectacular returns that investors will accelerate their moves here.

Kudos to Union Square and Spark. They first invested in an untried CEO, in an under performing technology City, and in an arena "social", which was not yet taken seriously. Viva the product guys and the investors who had a great deal of patience. As Chris Douvous said, moves like this are either career threatening, or career making.

Marissa Mayer is changing the culture at Yahoo. In the past year, she has now made 10 acquisitions and is bringing back an entrepreneurial spark to the engineering and product teams for this once proud franchise.
Tumblr absolutely fits her first acquisition screen, she wants Yahoo to be a part of your everyday online routine. You may scratch your head on the price, but this transaction is dead on strategy.

Carol Bartz, was the right CEO for a time at Yahoo, as she cleaned up the run away anarchy, held people accountable, and had a no nonsense approach. Though she was unable to, or was not given the time to articulate and execute on a grow the company plan, she did set a foundation for Marissa Mayer to do her thing.

For the success of the transaction, it's dangerous for the buyer and seller to highlight that Tumblr will be autonomous. Sure they should be protected from all the people who want to 'help', but it is essential that a MERGED singular entity put their best foot forward. Tumblr, now as part of a public company is no longer a science project, there's an obligation to earn revenues and profits. This can best be achieved with some help from the other parts of the company which are collectively earning quarterly revenues in excess of $1B.

Patent litigation; Now the cost of doing business?

According to Forbes, patent trolls now account for the majoity of  patent lawsuits in the US. It's clearly been a growth industry as the percentage of troll induced suits grew from 45 to 62% in the last year; more than ten new troll suits evey day. Of great concern to me is that 55% of troll defendants earn less than $10mm in revenue (per Collen Chien, Santa Clara University Law School). My experience is that these firms already have enough roadblocks to success and IP suits, no matter how far fetched, have huge potential to disrupt progress, if not the sustainability of young companies. I am confident that, given the uncertainty of ligitation, and the huge exposure in real dollars, many a financing or potential exit needs to have these matters settled before a buyer proceeds with the transaction. Regardless of the settlement, the cost of litigation, in the many hundreds of thousands of dollars, plus the management distraction are huge issues for all of us.

Below is a chart (credit RPX) showing the marketshare growth of the trolls. This only happens when a business, no matter how nefarious is profitable. In fact, per the PWC report cited below, the annual median damage award was $5.3mm. It's significant that when these cases are heard by juries, the rewards to non-practicing entities tend to be many multiples of those awarded by judges. Therefore, there is a peverse incentive for NPE's to not settle, but to push an average of 2.5 years, for a jury trial. Based on performance, the odds are stacked against the defendants


*non- PAE are non practicing entities, usually corporate shells whose only assets are patents


The present administration is trying to help with the reintroduction of the SHIELD Act and hearings are being held by the House Judiciary committee on the topic. The key provision in the Act is for losers in these suits to bear the costs of both parties, akin to the British system of torts. I am not sure this is a good solution as it always favors the 'deep pockets', but something has to be done.

For more information, here's an excellent PWC report on the topic from 2012.

I applaud the efforts of one of our industry associations, the SIIA  (links to their relevant activities) to help. It would be great if they were joined by the NVCA and others too.

When to Sell Your Company

In the past few months I have been busy helping with the sale of one investment, am navigating the sale of a second, are comtemplating a public offering of a third, and saw a  fourth receive an expansion funding round.  Funding and exit events are never far from the center of conversations for venture backed companies. As such,  it caught my eye when a recent acquaintence kindly sent me this really insightful post from EV Williams, co-founder of Twitter.  

Enjoy

When to Sell Your Company

On October 30, 2008, I wrote an email to Twitter’s board of directors, which started:

It seems to me, there are three reasons to sell a company. Any of them will suffice:

This email was in reply to a thread in which we were briefly discussing an overture we’d received from a much larger company. Of course, in 2008 Twitter was much, much smaller than it is today. We were fewer than fifty employees, had raised “only” $20 million or so, and probably had fewer than ten million users. We were still having a lot of technical issues. And while growth had been good in general, it wasn’t yet consistent. (The ridiculous growth curve started in 2009.) Who knew what the future held? Acquisition wasn’t an obviously dumb idea.

After thinking about it a bit, I offered to the board these “three reasons to sell”:

1. The offer captures the upside

Every business has natural growth limits. If someone offered you $10 million for your coffee shop that does $250,000 a year in sales, it’s pretty clear you should sell—from a purely financial perspective. Finances are only one perspective, but if you have many shareholders, it’s one you are obligated to take seriously.

In 2002, Google reportedly turned down a $3 billion offer from Yahoo!. That looks like a no-brainer in retrospect, because Google is such a behemoth. And it was probably clear to Larry and Sergey at the time that if they were successful, the company is worth many, many times more than that.

However, not every company is chasing a Google-sized opportunity. At the time, I cited Photobucket selling for $300 million to MySpace, which seemed like a huge win for that service. Had I been given an offer like that for Blogger a few years earlier, I would have logically said yes.

At the time, the offer we had on the table for Twitter—though a heck of a lot of money and a huge win for investors and anyone else involved—didn’t seem like it captured the upside. Even though we weren’t huge, and there were still a lot of doubters, I believed our potential was unbounded.

But there are other reasons to sell…

2. Imminent threat

There’s potential, and then there’s risk. And there’s always risk, even in the best situations. But there are cases in which your chances of reaching your potential are slimmer than normal and maybe even totally out of your control.

Consider YouTube’s legal issues or PayPal’s fraud challenges. Both companies had huge outcomes, but seeking a corporate parent at the times they did had safety, as well as financial, benefits. Perhaps they would have held out for much longer and grown to be strong public companies of their own otherwise. They were certainly in big enough businesses.

Sometimes the threat is internal—an inability to execute on one’s opportunity. Friendster might be an example. When they turned down $30 million in pre-IPO Google stock, it was not a dumb move from a “capturing the upside” perspective if you consider they were the first big social network, and they had no real competition. It’s not clear how obvious the internal threat was, though.

In Twitter’s case, one could argue we’d had an internal threat similar to that of Friendster’s at one time. There was a while where our technical issues made us quite vulnerable. But by the time of this email, we felt we had moved past that. (We hadn’t quite, but this was eventually true.) We had competitors who were larger and paying increasing amounts of attention to us, but it didn’t feel like we were in real trouble.

But there might be another reason…

3. Personal choice

Sometimes the founders or other key people may just be done. This is actually quite common and drives a lot of small acquisitions. It doesn’t apply as much as companies get larger, because everyone is (eventually) replaceable—especially if the company is doing well.

Back in 2003, I struggled a lot about the decision to sell Blogger to Google. The financial win wasn’t clear (it was for a small amount of private stock—again, before their IPO). We had tons of room to grow and didn’t have any real threats. And I even had a term sheet for more funding on the table. But I was compelled ultimately because I felt like Google was the best home for this thing I’d built to reach its potential. I also knew I wanted to start another company and thought I’d come out of a couple years at Google smarter and better. I also knew the team was going to be happy to join Silicon Valley’s most esteemed company.

In the Twitter case, we had no desire to sell. I had actually just become CEO and was raring to go—as was the team. Additionally, the company we were having the discussion with didn’t seem like one in which we’d fit particularly well or the team would be stoked about.

---

That email put the discussion amongst the Twitter board to bed—pretty much forever. Since then, I’ve walked through this framework with friends when they faced the acquisition question to help create clarity. If you’re faced with one of the biggest questions you can be posed as an entrepreneur, hopefully this will be helpful to you, as well.

Minimal Viable Product MVP (ugh)

I have been informally advising an entrepreneur who I have a great deal of respect for. He's a second time founder, one who had a great exit in the 'enterprise' world, and is now building an innovative mobile application. Surprisingly, I found us having a debate over his intent to create a minimally viable product for his first release. He's a really smart guy, and his intent is to use the initial few thousand users as live market research. He hopes the 'good enough' feature-set will help prioritize future releases and validate the market potential. I hope he's right. Yet, I was troubled by the approach and thought I would share some background.

The combination of costs steadily declining for designing and launching products, coupled with a social embrace of entrepreneurs has led to a bevvy of start-ups creating things which are only limited by your imagination. Despite declining development costs, many, if not most of these thousands of new ventures are capital challenged. So much so that it's now common to hear an entrepreneur explain that his team is building a 'minimally viable product' with the objective of gaining enough market traction (happy users) to then raise subsequent expansion capital. Heads seem to nod that this is a prudent course of action. I'm not one of them.

Limited capital, though painful, can be harnessed to be a great asset for young companies as it forces the team to make the hard decisions about what is 'really critical' vs 'only important'. It's really essential to do the really critical and to do it well. Often the 'only important' turns out to be not so important after all. My concern with the MVP state of mind is that companies are creating cultures, and producing products, where mediocre user experiences are acceptable as a result of hard product decisions not being made. It's a responsibility cop-out to produce bad product, and it's irresponsible to the stakeholders to think that the market opportunity is so great that bad/mediocre product will instantly gain sufficient momentum to attract capital to support the next phase of growth.

If you don't have enough capital to do the job, or are not in a position to use your team's 'sweat' as a substitute for money, then it just might not be the right time to start this company.

New York, New York, it's a Hell of a town

Over the past 5 years, I have been continually testing my thesis that the best way to make money investing in technology companies is to invest in companies which have the potential to be market leaders; in a market worth caring about. Around ten years ago the folk at Morgan Stanley (at least that's where I recall they were from) did a great piece of research showing that the overwhelming majority of any market segment's capitalization rests with a scant few, mostly public firms. The message was compelling, if you are not in the top three market share spots, an investors risk/reward ratio goes so sky high that you would be better off playing the lottery (the risk increases, while the reward simultaneously decreases). 

Though you may make the right call to invest early in a burgeoning market, unless you execute towards a leadership position, it's going to be a problematic investment. Choosing the right market is a necessary, though not sufficient ingredient for success. It's essential that the management team, supported by investors with sufficient capital and drive have a common objective. 

To paint with a broad brush (exceptions abound) I think it's fair to say that there is a distinct difference between East coast and West coast investors and management teams. I believe that West coast investors and teams have been far more market share driven than their right coast sibling and believe that the preponderance of technology  market share leaders being in the Valley is a direct result of this culture.

The Boston to NY corridor does have its share of companies which are showing great signs of success. Some look really great and have the potential to be market leaders, such as Tumblr, Payoneer, Etsy or 10Gen. But it's also fair to say that since the heyday of Doubleclick and AOL, we may not have a critical mass of companies which are hell bent on being market leaders, in markets which matter.