broadstuff

Facebook IPO - has anything changed since 2001?

nospam@example.com (Alan Patrick) — 2012-05-23T22:57:00Z

With this IPO, even an an old cynic like me eventually thinks "nah, now that could never happen, surely" - it does. SEC enquiries, Class action law suits....Reuters:

Facebook Inc and lead underwriter Morgan Stanley were sued by shareholders who claimed they hid the social networking company's weakened growth forecasts ahead of its $16 billion initial public offering.

......

The lawsuit claimed that the defendants, including Facebook Chief Executive Mark Zuckerberg, Goldman Sachs Group Inc and JPMorgan Chase & Co, concealed "a severe and pronounced reduction" in revenue growth forecasts resulting from greater use of Facebook's app or website through mobile devices.

It also accused Facebook of telling its bank underwriters to "materially lower" their forecasts for the company. The lawsuit said the underwriters disclosed the lowered forecasts to "preferred" investors only, instead of all investors.

......

On Tuesday, law firm Glancy Binkow & Goldberg said it filed its own Facebook lawsuit in California state court on behalf of an investor.

Nasdaq OMX Group Inc was also sued on Tuesday by an investor who claimed the exchange operator was negligent in handling orders for Facebook shares. Morgan Stanley said it is reviewing Facebook trades and would adjust prices for some retail customers who overpaid.

........

Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and Massachusetts Secretary of the Commonwealth William Galvin are looking into how the IPO was handled. The U.S. Senate Banking Committee is also reviewing the matter.

........

Citing people with direct knowledge of the matter, Reuters this week reported that Facebook during its IPO road show advised analysts for its underwriters to reduce their profit and revenue forecasts.

It also said underwriters Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America Corp cut their forecasts after the May 9 prospectus was filed but that these cuts were not publicly revealed before the IPO.

"If Facebook faced a known and particularly salient risk, boilerplate language would be insufficient," said Elizabeth Nowicki, an associate professor at Tulane University Law School and a former SEC lawyer. "If Facebook told underwriters to lower their forecasts, it would certainly be material."

Bank of America and Barclays Plc are also defendants in the New York case, as are Facebook Chief Financial Officer David Ebersman and several Facebook directors.

My reaction to this was twofold:

Firstly, that there was a lot of very good independent comment out there saying the same thing, so investors who lost their shirts have only themselves to blame.

Secondly, reflecting on my time in the DotCom era, to wonder what - despite all the supposed "improvements" in banking systems in the last decade - has actually changed. Same drivers, same behaviours, same activities, same old same old.

And now there are even people saying the "NASDAQ Glitch" may have been engineered. Right now, I can believe anything.....

Update - US Congressional Committee tolook at IPO - Reuters:

The U.S. House and Senate committees that oversee financial sector matters are planning to look into the issues surrounding Facebook Inc's initial public offering, aides to both committees said on Wednesday.

Sean Oblack, a spokesman to the Senate Banking Committee, said the review will focus on "issues raised in the news" and that staff will be conducting briefings with "Facebook, regulators and other stakeholders."

Facebook down 18%, Fingers pointing and clutching at straws

nospam@example.com (Alan Patrick) — 2012-05-22T20:17:50Z

Watching the stock fall, and the fall out from the Facebook IPO Fiasco has been very entertaining, in that never have I seen so many vested (or would that be invested) interests hoisted on such sky high petards:

1. The "IPO was wonderful" lobby were shut up after Monday morning trading. If it looks like a Turkey.... (In fact now we are seeing the opposite, as everyone lines up to say they knew it was all way overpriced all along. Did they hell, we felt positively alone saying that before the last few days )

2.The Investment Banks told their favoured customers that they were cutting the forward forecast after the latest data - besides being unheard of, these people had 7 days to act, so they really have no excuses.

3. Those IB clients who were not told are apparently Very Upset - but methinks they protest toomuch - for such supposedly smart and in the groove people, it beggars belief they were unable to do the maths themselves when the news of the changes toshares and price was made public - even reading a few knowledgeable blogs (like this one ) and newspapers would have told them that there was a bad moon on the rise.

4. No, I suspect they still thought they could still flip their shares to the Greater Fools out there, but the NASDAQ glitches meant they couldnt - so for once the dumb money was saved from its own stupidity. Hooray for NASDAQ , for once our pensions have not been sucker punched.

5. And now there is a desperate scramble to get NASDAQ to make up their losses, and it would appear the under-writing banks can't even short the stock to wash their faces

And now the Regulator is getting interested in that selective disclosure....:

Reuters reported that Morgan Stanley selectively disclosed the change in Facebook estimates, which drew the attention of the main regulator of U.S. brokerages.

"That's a matter of regulatory concern to us and I'm sure to the SEC," said Richard Ketchum, the Financial Industry Regulatory Authority's chairman and chief executive. "And without saying whether it's us or the SEC, we will collectively be focusing on it.

I think times are about to get interesting... this is just the end of the beginning.

Actually, I rather admire Facebook in a perverse way - they used others' predictable greed to rake every penny that anyone was ever going to put on the table into their own trousers, into the biggest war chest ever. They won't need to tap the markets again for ages - probably just as well, the banks won't be laughing.

Still, if you look at the whole Facebook Story of their culture and ethos from Day One, why would one be surprised

Facebook IPO and a Tale of Two Cities - Part 2

nospam@example.com (Alan Patrick) — 2012-05-19T12:13:45Z

The Facebook IPO really has also been a Tale of 2 Cities - or rather, one city and the Rest Of World. Lets face it, an IPO of this level of hype that sputters, which still forces the under-writers to step in and buy the shares to keep it at the out-the -gate share price, is a Fail. Yet I see many of the Valleyblogs are still faithfully drinking the Kool Aid, while most everyone else is more sanguine - Techmeme records the roster of Kool Aid drinkers and Uh-Oh sayers:

Everything is Rosy through the Kool Aid Lens

John Paczkowski / AllThingsD: - The Price Is Right: Facebook Closes Near Opening Price
Dan Primack / Fortune: 38 Special: Facebook bankers got it right
Erin Griffith / PandoDaily: No Pop Equals a Flop? Welcome to the Irrational World of Public Markets, Facebook
Don Dodge: - Facebook did a great job with the IPO. 500M shares traded and it closed at $38, where it opened. Fairly priced, optimized proceeds to FB.
Lizette Chapman / Venture Capital Dispatch: Greylock's David Sze: Facebook Has Three Things Great Companies Need
Amit Chowdhry / Pulse2 Technology and Social Media News: Mark Zuckberg: “Our Mission Isn't To Be a Public Company”

Uh Oh

Larry Dignan / CNET: - How Facebook's bankers saved an IPO, kept shares above $38
Kim-Mai Cutler / TechCrunch: - Bankers Got Too Aggressive With Pricing Facebook As They Struggled To Keep Shares Above $38
Wall Street Journal: - Facebook's IPO Sputters
Business Insider - Facebook holds the IPO price after war of $38
Michael Hiltzik / Los Angeles Times: Facebook's epic fail
Los Angeles Times: Facebook IPO falls short of the hype
Reuters: Overhyped? Facebook shares stumble on debut

As you can see (with the interesting exceptions of Forbes & TechCrunch), you can define who says what pretty much by closeness to the Facebook epicentre

Incidentally, quite a few of the stories say "observers expected the shares to rise" - I want to know who those observers were, and what they had been drinking over the last few days! They were clearly not reading the newspapers, blogs or financial magazines outside the Kool Aid bubble! (see Tale of 2 Cities - Part 1)

Longer term, pricng it this high really puts the future Facebook under pressure. I think Brent Hoberman's piece in the Guardian said it best - Facebook was "priced for perfection" - meaning they would have to execute perfectly from now on:

The night we went public and raised £120m, Martha and I were very subdued. It felt as if we had the weight of the world, and our employees, on our shoulders, and that the company was priced for perfection. That was massive pressure. However, now I look at Zuckerberg and see someone who really does have the weight of the world on his shoulders, is only 28, and doesn't have a proper business partner.

I had hoped Facebook would resist the temptation that we also felt, to raise the price too much. In our case I'm not sure the added pressure was worth it, and in theirs they really don't need the extra money. I suspect Zuckerberg will feel that pressure, that his world is surreal. But he will be happy that he has been given this chance to continue to change the world – and follow his passion. And that his creation's future is assured for some time to come.

Update - another SV Pangloss-over on TC on Sunday, my favourite line:

According to the pundits, what really matters is that the stock price didn’t increase in value–or “pop”–post IPO and is being propped up by banks.

Actually, what the (indpendent and knowledgeable) pundits were really noting that what mattered was the underwriting banks were having to come in big time to support the price. Monday should be very interesting....

The Facebook IPO Equation

nospam@example.com (Alan Patrick) — 2012-05-18T06:25:38Z

The Facebook Hype-PO Equation

Well, its all over bar the shouting....they went out at top of range. Facebook overhyped, plus the Punters Overoptimistic had led to an oversubscribed IPO. The Funders have taken their money, its over and out for them - which just leaves facebook under pressure to perform well enogh to step into that $100bn+ valuation.

Still, with $14bn+ in the bank, no one will be worried about cashflow for a while.....

Update - talking about Under Pressure, the stock ended Day One at the nearly same price it set off at, with the under-writing bankers jhaving to do a lot of buying to keep it there - WSJ:

Facebook's underwriters battled to keep the stock from slipping below its offering price of $38 a share. Such a stumble would have been a significant embarrassment, particularly for a prominent new issue like Facebook, the most heavily traded IPO of all time.

Next week should be interesting....

Facebook IPO and a Tale of Two Cities

nospam@example.com (Alan Patrick) — 2012-05-17T15:41:30Z

Bloomberg survey - 79% think Facebook is overvalued - so who is over-buying all this stock?

Readers of this blog may know that we are a tad sceptical of the IPO valuation price (We wrote this in February):

So, what do we have to believe to believe that Facebook is worth the $100bn?

Firstly, you need to believe that the numbers are even achievable. A valuation of $100bn on a user base of 845m implies a valuation of c $118 per user, within a reasonable timeframe. In financial modelling that is usually taken as 5 years. There are about 2 billion people online today, most estimates think it will be about 3-3.5 billion in 5 years or so time, a reasonable estimate of the the maximum Facebook user base is probably in the region of about 1.5 bn, ie roughly double today, so let us assume the endgame is the valuation of $100bn over 1.5m people, ie about $70 per person in 5 years time. A simple approximation therefore is that Facebook needs to go from c $70/5 = c $15 ARPU, from the c $4 today. Incidentally, Google's ARPU is about $18 today. So it comes to this - do you believe that Facebook can eventually make the same sort of ARPU as Google does, and keep its current market share? Bear in mind that the next 800m people Facebook adds will have much less disposable income than the current 800,000, so the ARPU growth in ratio terms is far higher than Google had to do, as it grew from a smaller base into a wealthier market.

Secondly, long term, ultimately valuation is based on profit. Facebook has a higher profitability than Google at IPO, at c 25%. Google's IPO was c half of that and it only hit the c 25% sort of ratios c 2 years after IPO, and has more or less stayed at around that level. Google now has a c $150bn valuation on c $40bn revenues and c $10bn profit, so for Facebook to justify $100bn longer term you have to believe it can hit c $6-7bn profits, ie revenues of c $24-28bn in about 5 years, and maintaining profis at about 25%. So the question is do you believe there is a sustainable 6-7x growth in profits?

Thirdly, to believe the above two things, we pretty much have to believe that Facebook has as easy or easier a time in the next 5 years than Google has had, ie you have to believe competition and regulatory interference (little surprise the Facebook is beefing up its lobbying arm) will be at worst the same, preferably better and that it makes better use of its cash in funding its growth.

Now this is not a "proper" analysis, but it does bracket the relative IPOs and trajectories for comparison. What it boils down to is that Facebook has set a significantly higher value per dollar earned and user gained than Google, and you have to believe Facebook gets a fairer wind for the next 5 years than Google had over its first 5 years post IPO to justify the $100bn valuation. In other words, you heve to believe it is a (2x) better company than Google.

At that time we wrote that, it seemed Facebook could do no wrong (There Is No Bubble!), and we seemed to be our usual lone contrarian voice. Lets be clear - they have done some amazing things (and some less amzing, like their approach to privacy), and are run and funded by some very smart people - but nothing we have seen in the last few weeks make us change our mind, in fact as valuations go up yet business numbers go static, you have to believe even more things will go very very right right for a very long time.

But what has been interesting to watch is in the run up to IPO, an interesting split in attitude is opening up between US West and East Coast thinking, between San Fran and New York states of mind, if you like. Yes, the New Yorkers are becoming more sceptical (whats thay you say - New Yorkers are always sceptical). 79% of Bloomberg readers think its overvalued (see graphic above), Madison Avenue, the Wall Street et al are a tad sceptical aboutthe valuation into question now:

NYT on Madison Avenue:

On Tuesday, General Motors, the third-largest advertiser in the country, shut down its Facebook budget, about $10 million, saying that those ads were simply not doing enough to sell automobiles. For Facebook, the loss of $10 million is not a big deal. The company generated $3.7 billion of revenue last year, 85 percent from advertising. But the loss underlines the company’s need to convince a skeptical Madison Avenue that Facebook pages are the perfect vehicle for marketers and to convince eager investors that it can increase its advertising revenue, and quickly.

“It’s one of the most powerful branding mechanisms in the world, but it’s not an advertising mechanism,” said Martin Sorrell, chief executive of WPP, the giant advertising agency.

WSJ on Wall Street

The smart money is flying out of Facebook as the dumb money piles in. A week ago, Facebook was targeting a valuation of $77 billion to $96 billion in its IPO and early investors were already looking to book plenty of profits by selling their own shares to the public. Venture capitalists Peter Thiel and Accel Partners were planning to sell up to 20% and 22% of their stakes respectively in the offering. Fast forward to this week. Facebook has raised its target price range to as much as $104 billion. Now, some early investors want to sell a lot more.

Accel Partners plans to sell up to 28% of its shares.
Peter Thiel plans to sell as much as 50% of his stake.
Goldman Sachs will also sell as much as 50%, up from 23% previously.
DST Global and Mail.ru will dump up to 40% of their shares, up from 23% previously.
Tiger Global will sell up to 50% of its stake. Previously it planned to sell 7%.

Company insiders aren’t increasing planned share sales. CEO Mark Zuckerberg still plans to sell 6% of his stake. Other Facebook executives like COO Sheryl Sandberg and CFO David Ebersman aren’t selling any shares at all.

And there are other early investors that aren’t increasing their share sales. T. Rowe Price for instance is holding on to what it has. Another interesting wrinkle is the comparison with previous tech IPOs. At Groupon, insiders and early investors didn’t sell any of their stake in its IPO. LinkedIn’s IPO similarly saw very little selling. At Zynga, insiders and early investors sold just 7% of their stakes on average. Early investors know Facebook as intimately as anyone. That they are selling so much of their stakes should discourage public investors from chasing the stock when it opens.

One can argue that Olde New York Establishment is a bit fuddy duddy whn it comes to the New New Things, but principals bailing out of their own company shares at IPO time is not a good sign in any market. The MIT Review (Boston) is even more to the point:

Farhad Manjoo has pointed out that for Facebook to maintain its share price, it needs to figure out how to increase its revenue by a factor of ten. Going from $5 per user per year in advertising revenue to $50 per user per year is about as likely as Facebook going from 1 billion users to 10 billion, which I suppose is the other way the company could increase revenue proportionally, even if it requires an alternate Earth's worth of additional human beings.

So! Either this IPO is, as the Wall Street Journal has suggested, the biggest shell game in the history of stock offerings, pushed along by those who want to cash out their shares in the company at the expense of unsophisticated investors who are piling on, or Facebook has a plan.

The MIT review thinks facebook doesn't have a plan, but their only way out of such an Overvaluation Impasse is to become a bank:

Forget Square, the credit card processing dongle for mobile devices produced by a company headed by Twitter alum Jack Dorsey. What the payments industry needs is a fast follower with serious reach and the desire to vanquish every other player in this space.

Or, as Dan Hon, interactive creative director at Wieden and Kennedy recently told me, "It would be really interesting if Facebook launched a credit card. In fact, it would be terrifying."

Hmmm..they could almost be honorary Londoners .

And then you go over to the West Coast, where excitement is palpable. If New York is going "hang on", San Fran is going "Paaaarty" This is what its all about, the biggest IPO since Google, a megaboost for the Great Startup Dream. A quick visit to Techmeme shows all the usual crowd are like totally boosting up, ready for blast off - TechCrunch is waxing lyrical about overnight sleepathon hackathons, and how they are Big in Brazil and Bangkok, that Eduardo is a bad lad, and how the Big Bad Government is a fly in the future ointment. Nary an economic analysis in sight. GigaOm is hopefully pointing to where the Missing Ad Billions may come from, others say there will never be another deal again like Facebook for the small investor,

Venturebeat is singing the praises:

This week, Facebook’s IPO will be the largest venture-backed IPO of all time, and not in the subjective Kanye West sense. If, as expected, the company’s valuation creeps toward $104 billion, it would be four times larger than Google’s 2004 IPO.

Facebook will also have earned the distinction of raising the most venture capital of any venture-backed company in the U.S. — a grand total of $2.2 billion from some of the biggest names in venture capital around the world. This is almost double the amount raised by the second-place company in this category, Clearwire, a wireless broadband service provider that raised $1.2 billion. It’s also exactly double the amount Twitter has raised to date, $1.1 billion.

Also, Facebook breaks the record for most companies acquired pre-IPO. To date, Facebook has bought 13 other startups, only two more than Twitter, which is the second-most acquisitive company that is still privately held.

I guess what you think of it all depends on where you are sitting. My concern is more "who is over-buying", given that the smart money is either very sceptical or bailing out. My cynical side (yes, dear reader, it exists) suspects its the dumb money in the main (that's your and my pension funds, by the way....)

But for the Bubble-Watching Analyst in me, it is a fascinating tale.

Patent Trawling

nospam@example.com (Alan Patrick) — 2012-05-16T08:36:30Z

The first patent Trading Exchange - Economist:

On May 7th the first round of a three-part fight between Oracle and Google over patent and copyright claims relating to the Java programming language ended in a decision that denied outright victory to either firm. Apple, Samsung and others are fighting over smartphone patents. Facebook and Yahoo! are at loggerheads over internet patents. Accusations abound that innovation is taking a back seat to litigation. Only the lawyers are smiling.

All of which makes this a good time to launch a new approach to trading intellectual property, says Gerard Pannekoek, the boss of IPXI, a new financial exchange that lets companies buy, sell and hedge patent rights, just like any other asset. The idea is to offer a patent or group of patents as “unit licence rights” (ULRs), which can be bought and sold like shares. A ULR grants a one-time right to use a particular technology in a single product: a new type of airbag sensor in a car, say. If a company wants to use the technology in 100,000 cars, it buys 100,000 ULRs at the market price. ULRs are also expected to be traded on secondary markets.

This is simpler, faster and cheaper than the lawyer-intensive process of negotiating bilateral licences for intellectual property, the high cost of which discriminates against small companies, leaves patents unused on the shelf and hampers innovation.

As our Patent expert, Paul Lancefield predicted quite a few years ago, this would be a natural evolution - it reduces the transaction costs of trading in a valuable yet fungible good which up to now has been traded more like a medieval princess's chastity. Lets hope that this shows a way out of the game theory impasse that is the current patent morass - more trawling than trolling.

Flickr Bickr

nospam@example.com (Alan Patrick) — 2012-05-15T22:07:27Z

Gizmodo on Yahoo's long and lingering strangulation of Flickr, as a case study of what happens when you get Bought by a Behemoth - from:

three years ago, of course Flickr was the best photo sharing service in the world. Nothing else could touch it. If you cared about digital photography, or wanted to share photos with friends, you were on Flickr.

To...

The site that once had the best social tools, the most vibrant userbase, and toppest-notch storage is rapidly passing into the irrelevance of abandonment. Its once bustling community now feels like an exurban neighborhood rocked by a housing crisis. Yards gone to seed. Rusting bikes in the front yard. Tattered flags. At address, after address, after address, no one is home.

How? I found this quite interesting as I've done this role from both sides. Gizmodo argues there were 3 main mechanisms:

Firstly - the Incoming Conditions set the scene

When a big company gobbles up a smaller one, often only a fraction of the money is handed over up front. The rest comes later, based on the acquisition hitting a series of deliverables down the road. It's similar to how incentives are built into the contracts of professional athletes, except with engineering benchmarks instead of home runs. Corp dev sets these milestones. They reflect the reason for the acquisition, and how the company—in Flickr's case, Yahoo—can leverage them.

Secondly, Integration takes precedence over new features

An acquisition integration team begins working immediately to make sure they are met. Typically, they're very engineering-based, designed to integrate the smaller company's product into the enormous corporate machine. And because payment schedules are based on achieving those CorpDev terms, it means both companies have a vested (pun intended) interest in putting those milestones ahead of new features.

Thirdly, Big Companies don't feed the small growing businesses - its not in their DNA

"The money goes to the cash cows, not the cash calf," explains one former Flickr team member. If Flickr couldn't make bucks, it wouldn't get bucks (or talent, or resources)

Gizmodo argues that as a result of being resource-starved, "Flickr missed boats - on local, on real time, on mobile, and even ultimately on social—the field it pioneered. And so, it never became the Flickr of video; YouTube snagged that ring. It never became the Flickr of people, which was of course Facebook. It remained the Flickr of photos. At least, until Instagram came along. The Flickr team was forced to focus on integration, not innovation".

Same Old Same Old Tale. Google and Jaiku (remember that - Twitter's competitor once), Facebook and Instagram?

And yet, and yet. I knew some of the Corp Dev people, at Yahoo at that time, I'd even worked with a few before - they knew their stuff, they knew how to structure deals that didn't strangle the growth businesses they bought. And strategically the company was on board big time - as the article admits, in 2005 Yahoo made a number of innovative acquisitions, not just Flickr:

It's hard to remember, but back in 2005, Yahoo seemed like it had its game on. After losing out on search dominance to Google, it snapped up a bunch of small-but-cool socially oriented companies like Flickr (social photos), Delicious (social bookmarking), and Upcoming (social calendaring). There was a real sense that Yahoo was doing the right thing. It was, to some extent, out in front of what would come to be widely known as Web 2.0: the participatory Internet.

And looking back at Flickr stories on Broadstuff at the time, Flickr was patenting "Interestingness" algorithms in 2006, and soon after it limited the number of friends one could have, and tags per picture. These did not go down well at the time, we reported, so blaming errors on Yahoo Management only may be a bit simplistic.

Anyway the article then argues that Flickr failed in two ways:

Firstly, they didn't understand Community:

"By the time we were looking at Flickr, Yahoo was getting the shit kicked out of it by Google. The race was on to find other areas of search where we could build a commanding lead," says one high ranking Yahoo executive familiar with the deal. Flickr offered a way to do that. Because Flickr photos were tagged and labeled and categorized so efficiently by users, they were highly searchable.

"That is the reason we bought Flickr—not the community. We didn't give a shit about that. The theory behind buying Flickr was not to increase social connections, it was to monetize the image index. It was totally not about social communities or social networking. It was certainly nothing to do with the users."

I don't fully believe that fully, I saw some of the business cases soon after purchase, and spoke to some of the people. The Yahoo guys in Corp Dev understood all about Community. I am prepared to believe that - as in any large Corp - that not everyone else did. The question is how influential were they - bear in mind at the time Yahoo had the biggest existing "Web 1.0" social network, Yahoo Groups.

The other problem, says Gizmodo, was when Yahoo moved Flickr to a single sign on - the idea was that signing onto Yahoo got access to all Yahoo's services plus all the other new sites thay had bought, and levearged Yahoos existing multi country sign on acpability, something that Flicktr would otherwise have had to build. But this upset the Flickr uber-users:

Although Flickr grew tremendously with the huge influx of Yahoo users, the existing community of highly influential early adopters was infuriated. It was an inelegant transition, and seemed to ignore what the community wanted (namely, a way to log in without having to sign up for a Yahoo account). This was the opposite of what people had come to expect from Flickr. It was anti-social. And it very much delivered a message, to both users and to the team at Flickr: You're part of Yahoo now.

So - simplify the product experience, integrate it with many other services, massively increase the user base - a Good Result, surely? No, this is Not a Success because you have pissed off your small cadre of original users.

But in reality, all products have to go through that phase when they cross their Chasms (remember Digg?). I know it could have been done more sensitively (and was done in fact for other Yahoo acquistions), but I think the real problem is noted further down in the article - Social 1.0 got blindsided by Social 2.0

By mid-2008, a year after the RegID debacle, it was clear to most everyone that Facebook was the big up-and-coming social network. What had been a plaything for college kids and high schoolers was suddenly the network your mom, your dad, your gym coach, and everyone else you'd ever met was sending you friend requests from. Microsoft was pumping money into it, and it was fast approaching 100 million users.

Inside Yahoo, which itself had a massive user base and multiple social products, some were already warning that it was going to be bypassed in social just as it had been bypassed in search.

Now, remember Yahoo tried to buy Facebook at about this time, so again its clear they knew how the land lay. They knew what was coming. But the Flickr community (and staff) were 1.0 hippies, and as Flickr had it had already had its Liquidity Event, it was no longer the place to go for the hottest talent:

"Flickr wasn't a startup anymore," explains [a Yahoo] engineer, "people didn't really want to work that hard to turn the entire product around. Even if they had, Flickr [was] very techie hipster, many didn't use or like Facebook and considered it bland, boring, evil, poorly designed, etc., and were certainly not ready to fast follow it. Emphasis was put more on how things looked, and felt, rather than on metrics and on what worked.

But what finally killed their market leadership was not following the Great Mobile switch:

"Flickr was not empowered to build its own iOS app—or any other mobile app for that matter," laments one former Flickr executive. "You had this external team with strong opinions as to what the app should do."

And so, after a bit more score settling in the article, Gizmodo concludes:

Flickr's mobile and social failures are ultimately both symptoms of the same problem: a big company trying to reinvent itself by gobbling up smaller ones, and then wasting what it has. The story of Flickr is not that dissimilar to the story of Google's buyout of Dodgeball, or Aol's purchase of Brizzly. Beloved Internet services with dedicated communities, dashed upon the rocks of unwieldy companies overrun with vice presidents.

As a result, Flickr today is a very different site than it was five years ago. It's an Internet backwater. It's not socially appealing

I don't buy this, in this case I think its uber user grumps distorting the reality-field. I reckon there was actually a different story going on:

1. In 2005 Yahoo knew what Social was all about, and went out of their way to buy leading "Web 2.0 v.1" companies.

2. They tried to integrate all their assets to simplify the UE and impact. It worked, but pissed off the early power users, and that whinging tends to cloud the issue and generates a lot of "Evil Yahoo" negative press even today.

3. The reality is that Flickr was a Web 2.0 v1 creation and got outmanouvred by the v 2.0 startups built on their shoulders, in the darwinian stew of any developing technology. Yahoo actually could see this judging by their actions.

4. Most of the v 1.0 companies haven't made it through the cut, not just Flickr (in fact thay have done a darn sight better than most - or even all!) so it is arguable they would not have made the cut if they were still independent. And virtually no pre-smartphone dotcom/web 2.0/m-commerce business has survived the New Mobile 2.0 game. Just ask Nokia. It was hit with a classic generational shift in developing technologies, like the move from propellor to jet in aircraft.

5. Yahoo by then had far bigger problems, meaning management turmoil at the highest level, which - I know from my own experience - means decisions don't get made and Things Grind To a Halt (the Peanut Butter conspiracy).

6. Yet, despite all this, Flickr is still going strong, rumours of its death are somewhat exaggerrated. Its just no longer the 95% giant in a tiny grovy market, its just a major player in a far huger mass market.

A comeback doesn't seem likely, says Gizmodo, unless its spun out.

Flickr is still very valuable. It has a massive database of geotagged, Creative Commons- and Getty-licensed, subject-tagged photos. But sadly, Yahoo's steady march of incompetence doesn't bode well for making use of these valuable properties. If the Internet really were a series of tubes, Yahoo would be the leaking sewage pipe, covering everything it comes in contact with in watered-down shit.

Flickr's last best hope is that Yahoo realizes its value and decides to spin it off for a few bucks before both drop down into a final death spiral. But even if that happens, Flickr has a long road ahead of it to relevance. People don't tend to come back to homes they've already abandoned.

Now I really don't buy this one. Facebook's IPO is going to create a Social Frenzy, and anyone with the assets Flickr has, is going to be valued pretty highly. Perish the thought that those who want Yahoo to sell it off for "a few bucks" know it full well too, and want to do a Del.icio.us flip-play

Facebook as a predictor of trends?

nospam@example.com (Alan Patrick) — 2012-05-14T12:29:51Z

Interesting article in the NYT "Bits" section about Facebook having an inside track on emerging trends:

When the company saw a staggering spike of Instagram photos flowing into Facebook, it knew it had to act quickly. It bought the photo service for $1 billion before Twitter or Google could make a move.

Facebook can also use its superpower to experiment with who wins and who loses online. This was evident on April 24 when Facebook started highlighting a number of apps, including Socialcam and Viddy, both new video-sharing services that had been growing modestly. Each had a few million users. Just one week after Facebook began highlighting these apps, Viddy and Socialcam had close to 20 million active users.

Now this looks partly like an "honest, it isn't a bubbletime thing" justification of the Instagram purchase, but it is true that Facebook will see emerging trends on its ecosystem first, and to an extent can drive success:

Facebook has so much power online that they have the ability to buy something at a low price and then make it go high by directing traffic accordingly,” said Jonathan Zittrain, a professor at Harvard Law School and a co-founder of the Berkman Center for Internet and Society. “Sociologically, this is called the Matthew effect, where the rich get richer and the poor get poorer.” (He notes that the term comes from a line in the Gospel of Matthew.) In other words, Facebook can create its future.

But that is true of Google search as well, so no doubt we will soon have an army of white and black (and other colour) hatted Facebook Engine Optimisers. But, as Google found, with great power comes great legislative probing:

Facebook may need to worry that competitors don’t see evidence that it uses its power unfairly. Eric Talley, a law professor at the University of California, Berkeley, said that although Facebook could be accused of market manipulation or anticompetitive practices, the company could defend itself by saying that others monitored the same data and that Facebook simply did the job better.

He said that Facebook might also have to worry that if it highlights content from companies it owns, it could face antitrust claims with the Doctrine of Tying.

Also, I think there is something that the article didn't cover - by definition, Facebook sees the world through a Facebook coloured lens. And just as a google coloured lens didn't (and still can't) clearly see social networking, a Facebook coloured lens won't see the New new things that do not use a Facebook style ecosystem.

Crowdsourcing Strategy

nospam@example.com (Alan Patrick) — 2012-05-10T16:53:19Z

McKinsey Quarterly article on Crowdsourcing strategy, quoting a few case studies:

One example was HCL, who opened up the Business Planning cycle from a 300 managers to about 8000 employees - results were:

One HCL executive we spoke with credited the new process with a fivefold increase in sales to an important client over two years. The key, the executive explained, was the detailed comments—from more than 25 colleagues, ranging from junior finance professionals to software engineers— that together highlighted the need to reframe the business plan away from an emphasis on commoditized application support and toward a handful of new services where HCL had the edge over larger competitors. The employees provided more than good ideas: several even helped assemble the materials the executive needed to deliver the successful proposal.

The high degree of transparency increased the quality of insights, not just their volume. As Nayar notes, “Because the managers knew that the plans would be reviewed by a large number of people, including their own teams, the depth of their business analysis and the quality of their planned strategy improved. They were more honest in their assessment of current challenges and opportunities. They talked less about what they hoped to accomplish and more about the actions they intended to take to achieve specific results.”

The detailed comments point is interesting, as it suggests the process means the "voice of the customer" or at least the front line - was not moderated by the "In the Shit - to - All is Rosy" command chain

Red Hat similarly opened up the process to more employees, and apperntly:

This effort has reshaped the way Red Hat conducts strategic planning. Instead of refreshing strategy yearly on a fixed calendar, the company now updates and evaluates strategy on an ongoing basis. Initiative leaders use customized mailing lists and other tools to receive input continuously from employees and communicate back to them via town hall–style meetings, Internet chat sessions, and frequent blog posts. The company maintains its annual budget process, which is informed by the evolving funding needs of the initiatives.

The fresh perspectives generated by the new planning process have been instrumental in spurring value-creating shifts in the company’s direction. For example, a respected Red Hat engineer used the new process to make the case for a significant change in the way the company offers virtualization services for enterprise data centers and desktop computer applications. The changes led to the acquisition of an external technology provider—a move that would have been unlikely in the days when the company used its old, less inclusive planning process.

Red Hat’s vice president of strategy and corporate marketing, Jackie Yeaney, cites three key benefits of the company’s new approach:
- First, the process generated “more creativity, accountability, and commitment.”
- Second, “By not bubbling every decision up to the senior-executive level, we avoided the typical 50,000-foot oversimplification” of issues.
- Third, “We improved the flexibility and adaptability of the strategy.”

See point 2 - that "Voice Of The Customer" thing again

McKinsey's analysis is that:

"we’ve found that the actions companies can take that are most helpful in aligning individuals with the organization’s direction are moves like “making the vision meaningful to employees at a personal level” and “soliciting employee involvement in setting the company’s direction.” If that’s right, it suggests that making more employees part of the strategy process should be a powerful means of aligning them more closely with the company’s overall direction."

I think this is misreading the lesson a bit - what is happening in the Case Studies is that the organisation is re-aligning its overall direction to what the employees are telling them about the customer base reality. I'd bet that meant some Uncomfortable Truths had to be faced in the thick carpet suite. As they note, this has big implications on who is in charge, and what Senior management looks like:

Taking these principles to their logical conclusion suggests a shift in the strategic-leadership role of the CEO and other members of the C-suite: from “all-knowing decision makers,” who are expected to know everything and tell others what to do, to “social architects,” who spend a lot of time thinking about how to create the processes and incentives that unearth the best thinking and unleash the full potential of all who work at a company.

And of course, there is always Not Listening:

Another important element of social-strategy leadership is honestly assessing the readiness of the organization to open up and, in light of that, determining the best way to stimulate engagement. This sounds simple, but overlooking it can be costly. As part of a new strategy dialogue, the leaders of one mutual insurance company enthusiastically called upon its workforce to share reflections on an innovative, soon-to-be-launched life insurance product. Despite the leaders’ expectation that the open call would generate a torrent of endorsements, it was met with a deafening silence. Closer inspection revealed that people were acutely aware of the strategic importance that senior management attached to this innovation. And nobody wanted to wreck the party by openly sharing the prevailing doubts, which were widespread. The doubts proved well founded: within a few months of being launched, the new product was declared a failure and shelved.

The Sounds of Silence.....

The Future of Venture Capitalism

nospam@example.com (Alan Patrick) — 2012-05-09T14:32:18Z

Fred Wilson on the changing nature of Venture Capitalism - GigaOm:

Firstly, it doesn't make money any more:

Wilson said that since the mid-1990s institutional investors have poured $30 billion into the venture capitalist business every year, but venture capitalists have only been able to figure out how to generate good returns on half of it. (Actually, venture capitalists haven’t seen that much money flowing in since 2007, according to the National Venture Capital Association, which notes the recession dramatically lowered investment.)

“There’s two times as much capital in the venture capital business today than we, the professional investors who make up the venture business, can actually put to work intelligently,” he said. As an asset class, venture capital has not beat the public markets on a consistent basis since the mid-1990s, he added.

Secondly, new money is coming in from new sources (I suspect this may be the cause of the above problem):

In the past five years, the amount of angel investment has grown fivefold and more international funding is also entering the startup sector, particularly from Russia and the Middle East, Wilson said. The growth of crowdfunding (made possible by the recently-passed JOBS Act) will further flood the startup market with new capital. If every American family gave just one percent of their investable assets to crowdfunding, he said, $300 billion – or ten times the current amount invested in the sector – would come barreling into venture capital. (That seems to be a pretty big assumption but, regardless, the point is well taken: crowdfunding stands to dump a huge amount of new money into startups.)

Fred's view of where VC is going are:

(i) Given all the new pools of funding, he said, it doesn’t make sense for VCs to continue aggregating capital. And considering the industry’s inability to generate returns on more than half of the current investment in venture capital, he added that the allocation aspect is another area ripe for rethinking.

(ii) Still, he continued, VCs, can keep on adding value as board members, advisors and resources on exits and governance.

(iii) Going forward, VCs have a few options on the table, including becoming more selective, shrinking, halting investment of instutional capital or taking more equity for the governance and advisor services they provide, Wilson said.

(iv) But one of the more compelling ideas he floated was building a business on top of crowdfunding.

“If these crowdfunding markets really do develop into these vibrant markets… maybe the answer is to leverage that capital and do something interesting there as opposed to going out and raising money from the institutions,” he said....And, as a last resort? Quipped Wilson, “We can just retire.”

Only those that were in it before 2000 can retire comfortably by the looks of it though

In his own blog, Fred notes his talk was picked up wrongly as the "death of VC"

I can assure you I never said anything about the "death of the venture capital business" in my talk. The venture capital business is not dying.

My talk was a rumination on the forces at work on the venture capital business today and the changes that may be required to remain relevant and profitable in this new world. The talk was provocative and "out there" but it was not a eulogy.

Defitely not the death. More the circle of life....seems to me that rather than a paradigm shift in VC, another very plausible explanation is that too much new money is flooding in chasing too few opportunities - in other words what we are seeing is good old Bubble behaviour as people start to become irrationaly exuberant again. Then we will have a bubble, then a burst, then it will all flood out again.

That new startups do not need the same funding as the olde style ones is a truism - but all that has done in the last few years is increase the number of boot-strapping startups in the primordial soup. You can't seem to move these days without tripping over another newly set up incubator (more shades of 1997....).

Update - just saw this from Fred Destin on Kernel - Europe is playing out differently:

European venture capital is out of favour with LPs. Even the word seems toxic: I know of one fund who dropped “venture” entirely from its pitch, focusing its messaging on “growth capital for technology companies”. Struggling venture capitalists have to first convince hesitant investors that Europe is a good place to put their cash before they can talk about the relative merits of their particular fund. It’s tough when you have to evangelise your region before you can even get into your own story.

Ironically, the best new initiatives end up relying on public money. The wonderful Passion Capital initiative is one such example. The European Investment Fund (EIF) is seen as the great white hope anchor investor you need to get. (I used the word “ironically” because during the Great Internet Bubble the EIF stood behind a gazillion regional fund alternatives, most of which produced disastrous results.)

In this case it's governments rushing in while Angels fear to tread