broadstuff

Matthew Ingram asks an interesting question about startiup funding, based on seeing a post on Twitter from the ex Jobster CEO trying to raise funding for his new startup:

“socialmedian is raising some more angel investment now. $25k-$100/investor, up to $500k. Interested parties can contact me directly.”

But raising money in this way is illegal - talkin' about raising funding on TechCrunch:

Great way to get investors, right? Exactly not - the whole purpose of the Securities Act of 1933 is to prohibit public offerings like these unless accompanied by a registration statement and a valid prospectus approved by the Securities and Exchange Commission (the fun stuff is in Section 5). The Twitter also violates various state laws.

However, as Matthew notes:

Why couldn’t someone “crowd-source” a financing for a startup? Why not amend the Securities Act to allow posts like Goldberg’s? The SEC has said that blogs can be used for Regulation FD disclosure — why not allow blogs and social networks to play a part in the raising of money?

There are some interesting precedents - a startup sold itself on eBay a while ago, and others have followed suit. There is a rise in various web based microfinance initiatives, and videoblogging service Phreadz developer Kosso has a voluntary "Phreadz Phund" on the website (please give generously, its rather good).

As TechCrunch notes, its is theoretically possible to do this legally - however, the current restrictions were brought in for good reason:

Most venture financings are excluded from Securities Act registration via a private offering exemption. But the key to these exemptions are that they aren’t disclosed publicly and the investors must all be high net worth individuals.

In other words, this is exactly the kind of offering the law is designed to stop in order to protect individuals

Though as Matthew notes:

It’s not as though millions of people haven’t been just as impoverished by “qualified” investments and prospectuses as they could ever be by investing in a Twitter financing. Why do we need the government protecting us from ourselves?

Having been around this block with Angel investments, I know the the basic argument is that the "high net worth" stricture means only people who can afford it are eligible to be taken to the cleaners in this form of gambling, and its based on painful experience of many a bubble (look at the dotcom bust for example).

However, the proposed approach reduces transaction costs in this space hugely, as it connects startups with investors in as direct a way as possible, and entire tranche of middlemen disappears - so that's where the economic pull will be from. Similar forces acted in share trading after all.

Nonetheless, its a fascinating idea - and take it one step further - its then possible to create an online bourse where people who invest in startups can then trade their investments - and it would function as a prediction market at the same time. The issue would of course be the same that plague larger markets - (i) getting the company to tell the truth about itself, and (ii) to stop the system being gamed by hucksters.

Perhaps this could be partially mitigated by another thing I've had in mind for awhile - setting up an Investment Social Net, where there was some form of pre-qualification, and basic reporting requirements for the startup. A Social Network for Social Net Worth

Hmmm...and maybe we could fund the running costs of Broadstuff this way too

Caught this on Steve Hodson's grumpyblog - have no idea if its true, but it makes you think

I heard from an employee close to the deal that the Mormon church’s genealogy business made an unsolicited bid to acquire Facebook.

The Mormon Church maintains the largest genealogical database in the United States and apparently has the cash reserves necessary to make an offer of the magnitude necessary to acquire Facebook.

The latest update to the story is as of 2:04AM

UPDATE (2:04 am): My inquiry a couple of hours ago to an old college friend who works for one of the interested parties has indicated that there is more at play here than meets the eye, and definitely more than just a kernel of truth to this rumor.

Its a more off-the-wall example than usual of the Offset Economics that underpin the "FreeConomics" of Web 2.0 (ie someone has to pay for the free lunches if the users won't), but given that the whole FreeConomic model requires people with money in other pockets to fund it, I suspect we will see more of these more "interesting" deals. The combination of social network and genealogical database gives rise to all sorts of fascinating Sci-Fi plots as well.

Of course, there would also have to be a small restructuring of the way the social graph treated family groups........

Today eBay announced that it is de-emphasizing the auction part of its site, as users are - well, not using it. Says the New York Times:

The move is intended to help eBay compete more effectively with Amazon .com and other big online retailers.

The announcement, timed to increase sales during the holiday shopping season, is just one of the changes eBay has made in the last few months aimed at reducing its dependence on its auction business, which is growing more slowly than fixed-price sales.

There are various thought as to why:

“Buying online has changed,” said Scot Wingo, chief executive of the market research firm ChannelAdvisor. “Retail sites no longer make customers choose between convenience and price.”

Lower upfront fees will enable sellers to offer a bigger selection, helping eBay better compete with fixed-price retailers, Mr. Wingo said. “The current system puts eBay at a disadvantage.”

But they will still keep auctions going for some areas:

Yet even as it shifts away from the model that made it unique in the first place, the company insists the auction model is still viable, and that it intends to offer sellers and buyers a choice of formats. Auctions are often a better approach for sellers when items are in high demand, the company says, or when the seller is uncertain of an item’s value.

eBay started off as a way to shift second hand and odd goods, but has been heavily colonised by standard retailers - who find that most (ie Western) customers largely prefer the lower transaction cost of the fixed price model. However, there are questions as to how they will be distinct enough now from say Amazon.

The most interesting thing about eBay though is watching the development of the arms race between buyers and sellers, and the behavioural economics and game theory that emerges - its like a real life laboratory. Issues such as timing, splitting or grouping items, delivery options have all been gamed.

But this pales behind the signalling of trust and quality - how Akerlof's Law is enacted - using the star rating system. Akerlof's law shows that if there is low trust, average prices fall and bad goods chase out good. The latest iteration is to stop sellers automatically "black marking" a buyer who black marks them. Sellers protested the move, but from a signalling perspective, to increase trust it was critical. (In fact sellers seem to continually be upset with eBay, but they seem not to understand that sliding the game their way will reduce prices overerall)

On the auction side there has also been heavy gaming of the auction process (especially in the last few seconds), the way items are displayed for auction - now typically sold in time delayed, smaller lots - higher margin for seller, less utility for buyer. I wonder if the reduced interest in Auctions is due to decreasing utility of signalling and an allowance of too "power-user" and seller-centric gaming, putting off the majority of occasional users (quite a lot of people tell me they don't like the auctions because of that)?

(The "Silicon Soukh" was a term used in the mid 1990's for the concept of electronic markets - thus predicting an eBay before it emerged)

Many industries try to move from a "one - off" structure to a more mass produced model, usually driven by a desire of one of the players to to reduce costs and thus increase penetration and volume (the argument is of course circular - to increase penetration costs, must be reduced, and with reduced costs volume must be increased to make money). Mass production tends to work very well with commodity items, but is generally less successful when tried with more complex products, and much more difficult to do well when dealing with services - hence the reason we all love our utilities' customer service systems.

Thus it was with some interest I note there is increasing evidence that this move to mass production is being applied to technology startups - this post by Fred Wilson caught my eye:

We’ve been attending a lot of “demo days” in the past month and I am attending one more this week, TechStars in Boulder tomorrow. These startup accelerator programs, inspired by the success of Y Combinator, are launching something like 100 new web startups a year, possibly more. And the founding teams of all of these startups are young and inexperienced, mostly by design.

That youth and inexperience is an asset to many of these startups. We’ve been through why that is before. The founders have low personal burn rates so $25,000 can take them six months. They are largely developers/hackers who know how to build stuff quickly and inexpensively. They create lean, mean, capital efficient companies. They grew up with the web so they have a “native” feel for how web apps and services should work. And of course, they don’t know why they are going to fail so they “just do it”.

Once upon a time a startup was something that was initiated by an entrepreneur seeing a gap in the market, and crafting a business to address that gap, and seeking friends and funding - a "one - off" industry structure. This structure implies startup mass production. The question is whether startups are actually natural commodity goods. In other words, do we believe this process will:

(a) accelerate the formation of great new companies that bring exciting new products to market

or

(b) throw me-too sh*t at the wall to see what will stick

In the dying days of Web 1.0 (aka the dotcom era), a large number of "Incubators" sprang up. The reason too often was that there was just too much dumb money being left on the table, as there were just not enough dotcom startups to sponge it all up. Enter incubator plus stable of startups, exit money from table - and then exit the whole panjandrum when the industry collapsed. In other words, incubation was a manifestation of bubblenomics.

Having been peripherally involved with these incubators at the time, I would like to say that they followed the Type (a) scenario above - quality of the startups were high as they were carefully picked - both as people and ideas - for great potential. And I think in the early days they were. The issue was, that as more of them arose, the temptation was to build stuff that had "buzz" - ie was fundable by dumb money - rather than had intrinsic value. And - in my view - quality of teams also declined as volumes went up.

So, what makes us think that This Time Is Truly Different, that we have learned our lessons? Has anything else changed this time round. Are there any factors that will change the game?

Firstly, it is true that it is probably an order of magnitude less costly to get the technology built now, at least to a "beta" stage. This allows a startup to start to capture customers early. However, because of this low setup cost, in any sector there are typically a larger number of competitors (which incubation will only exacerbate). Thus they all have to use FreeConomic business models where the product is given away (if one does, all must) so they are not self sustaining until there has been a shakeout. Most of the "Incubators 2.0" want to sell the startup to deeper pockets long before that, of course.

Secondly, it is possibly true that this generation of young 'Net natives are sharper, cannier and more plugged in to their social media so that good ideas travel faster and poor stuff dies quicker. Possibly.

Thirdly, one could argue that funders' are more experienced this time round and are better able to predict where real niches are rather than follow the buzz and the herd. On the other hand, word on the street is that there are still shifting fashions in the funding community so there is clearly a residual of the old me-too behaviour.

Fred also makes the point that many of the teams are young and inexperienced, by design. Why by design, I hear you ask? Well, the Good Side of this is, as Fred notes, that these people are 'Net natives, and don't know they will fail. There is however - if Web 1.0 lessons are anything to go by - a Bad Side:

Firstly, many (most?) Incubators' business models had a few "interesting" characteristics around contract formation - by and large they were strongly structured in favour of the incubator, a bit like the model for signing new bands. This is a far easier sell to young, inexperienced people than those who have been around the block a bit.

Secondly, young people are both idealistic and cheap - an ideal combination for exploitation. You can make them work ludicrous hours, sleep in a garret, and pay a pittance on the promise of an eventual (and extremely unlikely, statistically) Liquidity Event. And they know nothing of the Founders Discount

In other words it may be more a funders' economics thing than anything else. The other thing I must note about the "youth" thing is this - Fred writes that:

When do the advantages of youth and inexperience give way to the advantages of maturity and experience? And what are the tell tale signs that the young founders are maxing out on what they can give the company? And what does it take to get them to willingly hand over the keys to the car to someone else? Does it happen without VC investors forcing the issue?

A wry smile at this point and a bit of disclosure here - we too are a tech startup, but we are not in the first flush of youth. It would appear that many of these programs are actually closed to people like us, despite (a) knowing our stuff technically and (b) having actually been senior managers, walked the talk etc. (Update - an (old codger) friend has noted that this youth focus is rational, as given the high attrition rate at this stage, throwing lots of cheap bodies at the wall is optimal for an incubation model)

We did go on a startup program last year, but one that was funded by the LDA, NESTA etc - we beat 700 applicants to get to the last 10 - but it was one of the few programs that did not actively discriminate on founder's age. Most of the other entrepreneurs on that program were also experienced. By the way, one of the elements of that experience is a deep interest in funding terms and contractual obligations to funders

Now it would be interesting to see how much better or worse the dotcom incubators' success rates were than the overall funded startup population. Sadly I don't have that data, but my hypothesis would be the fared no better, in fact my empirical observation was worse overall as by and large they were more prone to being in late, with me too stuff, and below average calibre teams. I do recall a McKinsey study soon after the crash showing that pretty much every VC in the dotcom game after 1998 lost money.

So I would make a few predictions here on the Next Generation of Incubators 2.0 (I'll call them hothouses as its more part of the zeitgeist):

(i) There will be little difference in average outcome between hothoused startups and organic ones, but later hothouses will underperform on average, as.....

(ii) There will be a higher propensity for the hothouses to follow fashion, as following the crowd is an easier sell to funders. This will make them more costly than organic plays which will by and large be earlier in.

(iii) There will be little advantage gained from using youth and inexperience early up, apart from low cost of the initial "throw at wall" phase - if anything sticks, age and guile will be required, and as it has less stake, it will e at premium pricing - or the founders have to give up a large slug of equity.

(iv) The "Next Web" will not be built in the hothouses, as innovation is not really their business model - fast following is.

Fundamentally, this is not a type of industry that lends itself to mass production as it stands, and treating it as such is probably the wrong approach. But I'm sure everybody told Henry Ford that too.....

Funnily enough, I think the Boy-band model alluded to above is closer to optimum - if the infrastructure can be standardised (knowing where to find funders, advisers, facilities etc) and contracts standardised then there would be no need to aggregate in hothouses. Perhaps this is what Silicon Valley is closest to in reality ?

(Update II - good note from Nic Brisbourne re differences between Incubation 1.0 and 2.0 in the comments section)

Update III - saw this on Forbes - pertinent somehow as to the Incubation Endgame I predict:

It's just the sort of improbable success that Silicon Valley adores. Two young entrepreneurs have, in a mere five years, turned an obscure Chicago venture capital firm into a presence visible from Sand Hill Road. This year Keith Daubenspeck and Dwight Badger's Advanced Equities Financial is on track to raise $1 billion for startups previously backed by industry Brahmins like Kleiner Perkins Caufield & Byers, Benchmark Capital, New Enterprise Associates and Vinod Khosla.

In the process, closely held AE earned operating income (Ebitda) of $26 million last year on $300 million in revenue. Daubenspeck is ranked 72nd on the 2008 FORBES Midas 100 list of top tech dealmakers. He hopes to take AE public within 18 months.

The problem with this picture is that in vaulting AE to its high perch in the VC world, Daubenspeck and Badger have left a wake of aggrieved customers, furious former employees, lawsuits and more than their share of busted startups. At least 18 former clients have filed arbitration complaints accusing the firm of wrongdoing. Separately, six brokers have alleged that AE stiffed them for millions of dollars.

Its an interesting read......

From PaidContent, who have counted all the deals from Q1 '07 to Q2 '08 - interesting factoids are:

VC Investments:

-- Total number of investments:160
-- Total number of disclosed investments: 137 valued at $1,925,830,000
-- Average investment size: $14,057,153
-- Best estimated value of overall investment in the space (disclosed and undisclosed): $2,126,620,000

Acquisitions:
-- Total number of acquisitions: 100
-- Total number of disclosed acquisitions: 46 valued at $17,535,320,000
-- Average acquisition size: $327,313,415
-- Best estimated value of overall transaction in the space (disclosed and undisclosed): $20,594,510,000

However, given a few very high profile ones ( Google "merger" with Doubleclick at $3.1 bn, Microsoft buys Acquantive for c $6 bn - thats over half the total), the average sizes here are probably a bit misleading. Median / Mean may be better measures?

A slow day on Techmeme (in that so much of the news wasn't really new today - leading to a short discussion on Twitter about where the Zeitgeist had gone), so here are some snippets from it that were more interesting:

In Bronze position - the Pew Internet Centre with the news that we are taking news from conventional and online sources. Actually, to be fair they've come up with some convenient "tribes", so its great for that page on the Powerpoint when it finds finds four distinct segments in today's news audience:

- Net-Newsers (13%), relatively young, who only use the 'net for news
- Integrators, who comprise 23% of the public; older, who integrate the 'net and traditional sources
- Traditionalists - the oldest (median age: 52) and largest news segment (46% of the public);
- Disengaged (14%), less educated and affluent, who stand out for their low levels of interest in the news and news consumption.

Not hard to predict from standard demographics and adoption curves, though - which is in itself interesting, as it means the outcome of the game is in itself fairly predictable. Full PDF is over here

Secondly, in Silver - Microsoft is trying to compete with Google by differentiating its search:

Specifically, the company believes examining a full sequence of user queries can lead to more useful results. Today, the company only keeps track of the immediately prior search, but often users use search engines to explore subject areas broadly, said Satya Nadella, senior vice president of Microsoft's search, portal and advertising platform group, at the Search Engine Strategies conference here

This story is actually part of a line that started running a few weeks ago (we covered it here) and using deeper context based search as a Google antidote is hardly news - but hopefully it shows real intent.

But lastly, and for Gold - from the Telegraph, comes the astounding news that we find attractive people of the opposite sex - er - more attractive!

"We found that shorter, slimmer females with long slender legs, a curvy figure and larger breasts are more attractive," said lead researcher Dr William Brown of Brunel University.

Conversely tall men with broad shoulders and relatively short legs in comparison to the length of their upper body are the most attractive to women, say the researchers.

Who would have thought......

Nick Brisbourne points to a post by Tim O'Reilly re the heinous practice of Self-Linking and notes that:

O’Reilly cites numerous examples, and Techcrunch is one of the guilty parties:

[Since] Techcrunch launched Crunchbase … rather than linking directly to companies covered in its stories, Techcrunch links to one of its own properties to provide additional information about them.

And he also sums up the dilemma nicely:

I understand the value of linking to other articles on your own site — everyone does it — but to do so exclusively is a small tear in the fabric of the web, a small tear that will grow much larger if it remains unchecked.

and

The web is a great example of a system that works because most sites create more value than they capture. Maybe the tragedy of the commons in its future can be averted.

I agree entirely. The web will be a much, much poorer place if sites only link to themselves.

Its an interesting one - we do self-link where appropriate (and we haven't gone blind yet) but clearly the big blogs are now trying to set up properties where they can permanently self link, because of the potential Ad revenue and user footprint data gained. The question is what would dtive these sites to stop - I don't see any force unless users found it a less pleasant experience than sites that do outlink.

For ourselves, I like Tim's thought that in any article, if 50% of the links are to yourself then that's (self) abusive.

Gadfly definition from Wikipedia:

"Gadfly" is a term for people who upset the status quo by posing upsetting or novel questions, or attempt to stimulate innovation by proving an irritant.

So it was with some amusement I read this morning, on my email digest of Friendfeed, that the social media set look like they are preparing to flutter off to a New new service - Rejaw. (Does the gadfly lay its young's eggs in the old host like some wasps do, one wonders )

You can hear the buzz from the wings as they start up..... I wonder if any Dig-Anthropologists are studying the Dance of the Gadfly when it discovers a New Shiny Thing ?

No doubt an irritant to the Friendfeed crew, who have been luxuriating in Gadfly pollination the last few months after Twitter was no longer the nectar of choice.

Article on TechCrunch about the 2008 Gartner Hype Curve, and where things lie on it.



See that one on mobile robotics - we've been tracking that awhile, I was fascinated to see that Chris "Long Tail" Andersen's other website is on Unmanned Aerial Vehicles - or Drones as they are also known. Ditto, we've been tracking behavioural economics and surface computing. There are a number I don't see - open source hardware, various deep algoritms based approaches etc.

I also suspect after this week that Cloud Computing has shortcircuited straight onto the slide into the Slough of Despond . To make matters worse, today the US Patent Office told Dell it couldn't patent the term. we're also dubious about Location services. Apart from that, its fine

The Hype curve's early rise is driven not just by PR and hyperbole pimping New New Things, but by irrational market projections. We can go back over the years and show how various forecasters often hugely over-egg the early day forecasts and recant later, and more quietly. Mobile and Advertising are very susceptible, Mobile Advertising especially so- though not usually as bad as e-Marketers for Web Video advertising this year:

In February, the Web prognosticator said YouTube et al would sell $1.4 billion in ads in the U.S. this year. Now its says it was overzealous: It has ratcheted its estimate back by 64%, to $505 million.

What's happened since then? eMarketer blamed "changes in methodology" at the Interactive Advertising Bureau to MediaWeek. But in his new report, analyst David Hallernan says advertisers remain tentative and still confused on what types of video to buy and where. In other words: You got us.

65% drop in 6 months - that is the best yet, we usually have a 33% drop over 1 year rule of thumb

Update - Speaking of hyping the Cloud, here is one of the more extreme examples - off RWW, strangely. The hyper it goes.....

From Silicon Alley Insider re our apparent love of watching web TV pre-roll:

...video ad network Tremor Media says we and everyone we know are in a small minority. It says only 20% of Web video watchers give up and leave when confronted with the pre-rolls it serves up. Or, as Tremor is putting it in a release later today, 80% watch the ads all the way through.

Tremor says its audience sticks around because it doesn't serve up crappy use-gen video, and that "audiences are willilng to accept pre-roll advertising in exchange for content they want, on demand." And Tremor also says that its stuff is so good (it measured 65 million ad impressions across 100 different ad campaigns) that the bail-out rate didn't change if the ads were 15 or 30 seconds long.

Not to be outdone, Break Media is claiming an even higher "completion rate" -- 87% -- for its pre-rolls, which includes a whole lot of user-generated video. Break's sample was a lot smaller than Tremor's -- 5.85 million impresssions.

Is this real, or just wish fulfiment from Planet Marketing to coax money out of corporate trousers? SAI are sceptical, and so are we - received wisdom is that most people don't like pre-roll - or rather, don't sit through them.

Anybody out there who watches pre-roll?