Category Archives: Venture Files

DC Needs a Fred. Any Takers?

Posted on by

FredWilson cropped.pngProfiled in Sunday’s New York Times, Union Square Ventures‘ Fred Wilson is a legend of contemporary venture capital — a title previously reserved for West Coast luminaries like Moritz and Doerr, and maybe a couple others. At Web 2.0 Expo in New York last week, Wilson was greeted with cheers usually reserved for celebrities. . . or rock musicians.

We don’t need a celebrity here in DC. But it would be great to have a venture capitalist with a fraction of Wilson’s passion, commitment, and drive. It’s not so much that he’s an investing legend. . . what’s amazing is his sheer devotion to his companies, his followers, and everything Web 2.0.

By his own admission, Wilson’s had his share of bad calls. But most of that goes back to The Bubble, when he was at Flatiron Partners. I was at a startup (liveprint.com) pitching Flatiron in 1998. I met Wilson briefly back then, as well as the firm’s the most vocal partner, Jerry Colonna; the partner who ended up leading our investment was Bob Greene.

Flatiron’s highest-profile investment was probably deliver-to-your-door service Kozmo.com. I remember getting a Kozmo.com hat. Kozmo raised $100M, before its legendary implosion. I left liveprint.com after the first Flatiron (~$3M) round, before an additional ~$40M bought all those Aeron chairs, and the chairs were acquired (along with the rest of the company) by Kinko’s in a transaction so complicated that no one knew what they had until a check arrived in the mail.

According the NYT profile, Flatiron wrote off a third of its investments.

But Wilson returned, humbler and smarter. To me, he’s the quintessential early-stage VC. Why? Because he’s so focused on his space, and passionate about his companies. True, he’s been accused of shilling for them . . . but from an entrepreneur’s standpoint, the benefits of having such a high-leverage, high-profile investor on your team is literally worth millions (not to mention what you’ll save on not needing a PR firm.)

Just watch Wilson work. He uses nearly every one of his portfolio company’s products — twitter (6,571 follow him @fredwilson), disqus, tumblr. Add these to his blog (A VC), and he’s one of the most prolific posters on the planet.

DC needs a Fred.

Or maybe a Josh. Josh Kopelman, though less vocal than Wilson, has put his money where his mouth is, on behalf of the venture fund he founded just outside Philadelphia, First Round Capital. In fact, First Round has made no fewer than 57 early-stage investments, nearly triple USV’s portfolio.

Or maybe a Bijan. Or a Brad.

And this isn’t just about attitude. There are clear metrics here. Several mid-Atlantic firms talk about their ‘seed’programs. But the litmus test is: name the ones routinely doing investments in the $250k – $1M range. For most firms, the funds are just too large for the math to work — invest a $250M fund $500k at a time, and you end up with 500 startups in your portfolio. That’s a helluva lot of board meetings.

Which is why First Round usually doesn’t take a board seat. (Most VC firms have a six-seats-per partner limit.) This is about volume (or more accurately, statistics). Quicken the cycle of investment, trim the due diligence, invest more with the gut . . . and let the odds work in your favor over a larger statistical sample. Though time will tell, based on initial exits, it seems these guys are doing pretty well.

So while it’s good to see them on the East Coast (Silicon Valley has sufficient players that none is noteworthy) — and Baltimore, DC, and Northern Virginia are certainly within their flying radius — it’s just not the same as having our own local VC hero. I mean, how sad is it that a local meetup was organized for DC Fans of Fred? (Full disclosure: I was there, and met some great, like-minded entrepreneurs.)

And perhaps more than anything else, these guys get Web 2.0. Unlike most VC firms, USV is not only not afraid to invest in pre-revenue companies, they will invest before a revenue model is even figured out (twitter, tumblr, disqus). So who out there will claim this mantle? Anyone? Anyone?

What's a Social App Developer to do?

Posted on by

To Mike Lazerow, CEO of new-age ad agency BuddyMedia, Facebook is the future. Big brands trying to reach the world’s 500,000,000 social network members are ringing his phone off the hook, because his firm has the skills to create branded apps — what he calls ‘the new ad unit.’But what might they bode for us ‘pureplay’app developers?

For most, not good. First of all, BuddyMedia, Context Optional, and a few others are blazing this trail because traditional ads — display and links — don’t work, which is why (as we all know) there’s beaucoup excess inventory and CPMs are in the crapper. Second, consider this: branded apps are all about engaging users, and those 250,000 active users playing Rundezvous (the game BuddyMedia built on behalf of New Balance) are, uh, not on your app.

Third, what they’re doing contributes more to the overall signal-to-noise problem than you might expect. Not so much that they’re adding to the 32,000+ Facebook apps anywhere near what 400,000+ registered developers are piling on each day, but because each branded app media program includes buying engagement — Lazerow averages $1/user to get them to show up. (Oh, you hadn’t planned on spending $100k to seed your app?)

Finally, it stands to reason that these guys will get better at what they do. Since Rundezvous players earn ‘AceBucks’redeemable for actual (not virtual) running shoes, a whopping 57% of users came back at least nine times. BuddyMedia developed a Facebook version of InStyle magazine’s Hollywood Hair Makeover — an app that lets you swap your face with a celebrity’s, so you can see how you’d look in their hairstyle — which had negligible traffic on InStyle’s website.

Hollywood hair.png

At O’Reilly’s Web 2.0 Expo in New York this week, Lazerow provided Makeover’s latest Facebook stats:

➢ 185,000 installs in 6 weeks

➢ average time on app: almost 7 minutes

➢ 47% of total user base has returned to the app more than 25 times

➢ the average user tried 3 hairstyles

Some pretty decent numbers. And, unlike traditional ad campaigns, this one hints at something that just could be perennial. (Women were even printing out the results and taking them to their hairdressers.) Dang, if there were a second-order viral component to it (more than than just telling your friends), it could kill.

So what’s a social app developer to do?

Well, it still starts with building a great app with true viral attributes, getting it up, testing, tweaking — nothing’s changed there. But if it’s revenue you’re after (duh), time for some new creative thinking. We’re working several angles for our startup, CHALLENJ, a social gaming utility (under construction). Here are two — maybe one fits what you’ve got.

1. Can’t beat ‘em, join ‘em. If you’ve got a themed game, why not pull a BuddyMedia? Get your own advertiser, and turn it into a branded app. (Try to think of it as a sponsorship . . . rather than selling out.) This, of course, would be easier if you’ve already launched and are putting up some respectable numbers.

2. Market your engine. Less applicable to most maybe, but what we’re working on is something has some underlying functionality that’s not only useful for us, but would be useful to BuddyMedia and their ilk. Without going into detail, it’s analogous to, say, a polling app, or better yet, the functionality of social-debate platform CreateDebate.

Where there’s a will, there’s a way. At the Social Gaming Summit in San Francisco this past June, Acclaim Games‘ Chief Creative Officer Dave Perry cited 29 business models for games.

There is still success to be had — and money to be made — if you’re creative. Time is not on our side, however. With apps that enable non-programmers to build apps now emerging — lolapps recently raised $4.5M to do just that — it’s only going to get noisier out there.

Lessons Learned — Scaling Social Systems

Posted on by

My charter with Venture Files is to contribute to and promote entrepreneurship and the startup scene around DC in general. Now, as I’ve warned, my posts may reveal my bias towards the Web 2.0 world. (It’s what my startup is about.) But heck — I’m at the Web 2.0 Expo in NYC, so . . .

A session today of great interest was Joshua Schachter’s ‘Lessons Learned in Scaing and Building Social Systems.’ For many of us, Schachter lived the great American Web 2.0 dream:

Step 1. Build an app (del.icio.us) in your spare time, and operate it from your apartment (server ‘farm’below);

Step 2. Sell it to Yahoo! (rumored to be in the neighborhood of $20M . . . nice neighborhood);

Step 3. Retire (he now devotes his time to playing XBox).

Delicious server.png

I can certainly relate to that!

Schachter’s talk on scaling wasn’t technical — he was referring to scaling the features, the very functionality of his social bookmarking site del.icio.us (now delicious.com).

Interestingly, Schachter built the application to solve a problem he had — he had a Word file with thousands of lines of links for all the web pages he bookmarked. Thus, the application’s initial value was utility. And that’s what Schachter would provide the world — a useful site for keeping track of favorite sites . . . and making your friends aware of them.

And for a couple of years, that’s what it did. But when the number of users got substantial, features surrounding the network effect eclipsed the site’s original value. Achieving a critical mass of users (file this under ‘high-class problem’) suddenly transformed the site’s functionality from a utility to a social application, giving Schachter a whole new set of issues to deal with — customer service, spam, kiddie porn. (“You see it all, when you get to scale.”)

Ultimately (for all of us), the focus of scaling shifts to revenue. Being ad-driven, for del.icio.us, that meant getting to more and more users and pageviews. Subtleties start to really matter, such as encouraging sharing among del.icio.us users (he saw, for example, that a disproportionate number were checking the ‘keep private’box; it dropped dramatically when the label was changed to ‘do not share’— as in, ‘what, you don’t want to share your toys, Johnny?’). Bingo.

“The problem, however, is that these features impact one another. Optimizing revenue often comes at the expense of user satisfaction — think of ad-splattered sites, or Evites that force you to visit the site, rather than providing details of the invitation in the email.”

Here are a few other nuggets:

Make your product self-marketing Provide as much functionality as you possibly can before asking people to register.

Want harmony on your site? Avoid conversations Schachter really disliked the flame wars that comments generate, so unlike digg, delicious.com to this day has none.

Listen to your users We’ve heard it a hundred times, but the best founders (Flickr, 37 Signals, WineLibraryTV) all really do it — Schachter read and answered every customer email up until a year ago, when the volume got so great, five people at a Yahoo! customer-support center had to be dedicated to it.

Learn your ‘drivers of infection’ The two most dramatic traffic-builders for del.icio.us were the Firefox plug-in and the RSS feed.

Great lessons for all of us.

Working the Workshops

Posted on by


Web 2.0 Expo New York 2008

There are tons of informative sessions at Web 2.0 Expo. I especially like the Day 1 workshops. Maybe it’s the no-break, three-hour block . . . the fewer tracks . . . or the reduced traffic, since a good many folks opt out of Day 1 to save money. Shame.

If you’re a coder, there are solid technical workshops. But even though I’ve started up several companies, today I made a beeline for the startup and financing workshops. Why? Mainly because the scene/climate is constantly changing. But also because, just as with a pitch meeting, you always come away with some useful nuggets.

At the Web 2.0 Expo in San Francisco in April, it was ‘Starting Up: Strategies for Financing & Growing Your Web 2.0 Startup,’put on by Rob Hayes of First Round Capital and Jeff Clavier of Softtech VC. Today, it was ‘Casing the Startup Joint: Real Life Examples of Startup Opportunities, Issues, and Strategic Decision Making,’presented by Albert Wenger of Union Square Ventures, along with Charlie O’Donnell of Path 101 (Charlie was formerly an analyst with USV).

[Fellow East Coast startups take note: Both USV (New York) and First Round (just outside Philadelphia) are early-early stage VCs. Both are on my radar for CHALLENJ -- but despite what First Round says about investing on Powerpoints, I don't plan to approach either until our app is built; USV makes it clear they want something working.]

Here are a few random nuggets from today:

- Shift from hard-coded documents to live ones Although crafting a clear (if not pretty) business plan is still advised (if for nothing else, it gets everyone in the company on the same page, so to speak), VCs would rather see your competitive analysis in a wiki. “It also tells us that you have an ongoing process for tracking competitors,” according to USV’s Wenger. And if your .ppt deck doesn’t change nearly every time you deliver it, by definition it’s stale.

- Reduce your risks before applying Be mindful of the four buckets of risk before you approach any investor: 1) Team, 2) Technology; 3) Market; and 4) Capital Requirements. Says Wenger: “We can handle one — maybe two — but that’s it. (I’m working on my team — any killer PHP coders out there?)

- Rejection by one VC firm has no reflection on your business Suck it up. Firms like USV do fewer than 20 investments a year (and some of them are later stage). If they pass — presuming you’ve been sufficiently persistent — move on. (The corollary to this of course is, if 40 firms pass on your deal . . . it’s time to retool.)

- State of angel investment The thin g to remember — and it’s good news — is that the number of angel investors is 10x the number of VCs. But you have to work a lot of venues to find them, since most don’t hang out a shingle with wings on it — uncles, friends of the family, doctors, they all count. The bad news? When Wall Street flails (as it’s doing right now), even the wealthy get skittish. As O’Donnell puts it, “The rich tend to write fewer checks when they feel less rich.”

Lastly, it’s always interesting to hear the war stories from other startup CEOs. To be honest, I’ve made enough mistakes that I don’t learn all that much in these ‘true-confession’sessions . . . but there’s something comforting in knowing that really smart people also did some dumb things.

Beg, Borrow, or Steal (Okay, Maybe not) Your Way into O'Reilly (Pt. 2)

Posted on by

The SF O’Reilly Web 2.0 Expo was a defining moment for me, and for my startup. True, I was just a noob there. I thought I knew what I was doing with my social networking app.

But from the workshop sessions on the first day — the serious, four-hour kind (I chose ‘Strategies for Financing,’which included startup CEOs telling their war stories) — to the evening ‘Launchpad’startup pitch competitions, to the interviews with the likes of Max Levchin (ex PayPal, now Slide) and Marc Andreessen (him you should know) — to the Booth Crawl (a sort of ‘Weed & Feed’where you walk around the exhibit floor sipping beers and margaritas) — it was positively giddy.

Now just so I don’t sound too much like a starry-eyed fanboy, the real stuff of O’Reilly is in the main sessions.

Pay attention. You will learn about viral acquisition (it’s about nuance, and testing — did you know that RockYou! (creators of Facebook’s SuperWall), with 100M monthly uniques across all its apps, sometimes does as many as 30 releases a day? That they A/B test samples for as few as five minutes? (Guess that makes sense, when you have 100M users.)

And you’ll learn about retention, cohort analysis, monetization. Those were just a few factoids, from a couple of sessions. Multiply that by four days, five sessions a day, and nine parallel tracks! (The worst part of it all: your inability to be in multiple places at once.) Sure, you can get the Cliff notes — a lot of the presentations are available — but seeing it, tasting it, discussing it at the parties (oh, yeah) . . . is indispensible.

There was much more than I can go into here. All I can say is, figure out which one makes the most sense, and find a way to get there.

And if you still can’t seem to justify it, maybe this will convince you . . .

End of the Booth Crawl, my last day at the conference, getting ready to board BART for the red-eye. Beers and blenders at every booth . . . but no one seemed to have any food. Until a nice young lady offered me an extra sandwich she had (I promise never again to refer to them as Booth Bunnies!). I sit down to eat it, and there’s all this commotion around a booth. Turns out, the Make people were doing free laser-etching of phones and laptops. (I’ve seen places charge upwards of $100 for it.) Two minutes before the show closed, thanks to a nice gentleman who offered me his place in line, I had annotated a little piece of history.

MacTat.jpg</

On BART, I drunk-twittered the world that I had marked my virgin O’Reilly experience with a ‘tattoo.’And it’s just as permanent — which means, for my startup, failure is not an option. I’m reminded of that every time I take out my MacBook Pro.