Five Years Too Late

April 25, 2009

Venture Beta

Filed under: venture capital — Tags: , , — fiveyearstoolate @ 4:53 pm
Stuart Ellman

Stuart Ellman

Eric Wiesen

Eric Wiesen

The Q1 numbers on Venture Capital investing were released last week. As is often the case with VC numbers, especially when they’re bad, there was no shortage of press and blog attention to the drop in both venture investing (in terms of capital deployed) and venture liquidity. And the general narrative that initially emerged was largely one of panic and, schadenfreude.

Shortly thereafter, however, people started to dig into the data a little bit further. We want to give big kudos to our NYC brethren, Fred Wilson, for his blog post on this topic. Two interesting analytical slices have emerged from this further examination. First, there was a meaningful disparity amongst geographies, with Silicon Valley seeing a much larger drop (even as a percentage of capital) than sectors in the Northeast like New York or Boston. The second was that certain sectors (like CleanTech) saw a far larger decline than other sectors (like health care).

And in looking at these second-order narratives that have emerged from this major change in venture behavior on both sides of the equation, it starts to become clear that there may be a sort of “beta” attached to different sectors within venture capital, much like there are differing levels of beta within sectors of the public market.

Beta, for those who aren’t familiar with the term, means that while most securities move in the same direction as the overall market, some tend to move more than the market while some tend to move less. A stock with a beta of 2.0 will generally increase by a percentage twice that of the overall market when the market is up, and correspondingly will decline twice as much as the market when the market is down. A stock with a beta of 0.5, by contrast, will only be up (or down) half the amount of the overall market. High-beta stocks are great in a go-go market and really bad in a down market. Low-beta stocks are generally less exciting when things are good, but hurt much less when things turn south.

The data emerging out of the down numbers for venture capital start to suggest that perhaps certain sectors (like health care, thought by some to be a safe source of “singles and doubles”) will generally act lower-beta than others (like CleanTech or the consumer web, which enjoyed massive momentum in the years prior to the downturn). Similarly, areas like New York and Boston start to look generally lower-beta than Silicon Valley. There have been fewer massive high-priced companies in New York, but the fall has been far less precipitous. We can only assume that the beta may be directly correlative with the supply of capital in those regions. In NYC, where there are fewer venture firms, there tends to be less upward (and obviously downward) pricing jumps because there are fewer firms to both jump in and jump out of the markets when sentiment changes. In the NY venture market, we have seen pretty rational pricing over the past few years, while other regions were seeing significantly higher pricing as the funding markets picked up steam. Since our region’s pricing never got too high, it has not fallen nearly as dramatically either. It is reassuring to see Fred’s analysis back this up.

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April 22, 2009

Parsing Hulu

Filed under: Uncategorized — fiveyearstoolate @ 7:35 pm
Eric Wiesen

Eric Wiesen

I am in San Francisco at the ad:tech conference today, and got up early (easy given the time change) to go hear Jason Kilar, CEO of Hulu, give his keynote address this morning. And while I enjoyed the address, I walked away feeling like we didn’t really hear a totally true story about why Hulu is enjoying so much success.

Let me state at the outset, lest the comments to follow read as “bashing” Hulu – I like Hulu as a user and am genuinely impressed with both the product and the business accomplishments Jason and his team have achieved. A lot of people looked at Hulu as a pathetic, old-media response to online video, and doomed it to failure before they even got started. Jason and his people proved the doubters wrong, and for that they are to be lauded.

Where I take issue is the narrative that he wrapped around Hulu’s success. His keynote was primarily devoted to a discussion of Hulu’s corporate culture and devotion to mission statement-like focus around some company core values. The story of how even before computers, Hulu purchased white-board wallpaper so they could continuously put ideas up on the wall to discuss, got a solid 5 minutes of treatment.

Here’s the thing – all of the above stuff is absolutely critical. You’ve got to have a great company culture. You DO have to be utterly devoted to your users. Having an information-rich, collaborative environment is great. And so from that perspective I’d encourage all entrepreneurs to follow the lessons that Jason was trying to teach. In fact, I suspect that if you heard stories from the early days of Google, Yahoo, Apple, etc… you’d hear similar stories. But where I take issue, in this case with Jason and Hulu, is that these company traits, while important and admirable, aren’t why Hulu is successful. Not really.

Hulu is successful because they have a giant, whopping competitive advantage over every other purveyor of online video – they have exclusive access to a huge volume of the absolute highest-value digital content on the web. One of the numbers Jason put up on the screen was that Hulu actually has better brand recognition post-view than TV or cable providers. But is that really so surprising? If I watch The Office on TV, maybe I remember what network I’m watching, but there are hundreds of channels on my cable system. If I watch The Office on Hulu, I’m pretty likely to remember that it was there, because it’s the only place I can go on the web to watch not just The Office, but ANY content that remotely resembles the office.

I often reference my professor Bruce Greenwald when I talk about companies and their strategy. Bruce taught me to be hyper-attentive to competitive advantages and the barriers to entry that accompany them. In Hulu’s case, the ownership structure with NBC and FOX grants them an unbelievably powerful barrier to entry – they have the content that hundreds of millions of people want to watch, and they’re the only ones who can show it on the web.

Was it a foregone conclusion that this competitive advantage would make Hulu a runaway success? No, not by a long shot. But make no mistake that Hulu had a far, far better chance of success than startups that don’t have such a massive built-in head start. There are lots of entrepreneurs out there buying white board wallpaper or having a high-integrity focus on core values. But if they have an asset protected by mile-high barriers to entry, they’re a much better bet.

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April 18, 2009

Buy High, Sell… wait, what?

Filed under: Uncategorized — fiveyearstoolate @ 6:06 pm
Eric Wiesen

Eric Wiesen

I just read an article on Venturebeat entitled, “VCs are turning the screws with financing terms” (link here).

The piece talks about how the down economy means lower valuations, more due diligence and more downside protection for investors (in the form of larger liquidation preferences or stricter anti-dilution provisions). It’s a reasonably descriptive (if sensationally titled) piece that contains some good advice for entrepreneurs about how to negotiate effectively in an environment like this one, but upon reading it I’m essentially left asking, “Yeah, so?” as my primary response.

To wit, I searched and searched and couldn’t find the article from 2005 entitled, “Web 2.0 companies fleecing Series C investors with high valuation despite zero revenue“, or the one from 2007 – “Cleantech company raises $250M despite likely need for at least $500M more“. And that makes sense – in a high-flying market, companies get high valuations and don’t have to give investors much in the way of downside protection or other terms. In a go-go market, investors are often “takers of terms”, in that the demand (by the investment community) for a particular type of investment outstrips the supply of such companies. Think about the 2005-2007 financings done by Facebook, LinkedIn or Ning. Investors took whatever terms they could get to get into certain companies. As Econ 101 would tell you, the equilibrium price moves up under those conditions, and in the venture capital world, the equilibrium price also includes a number of associated deal characteristics besides valuation.

But it stands to near-obvious reason that in a down market, the opposite is true. The demand for many types of startups in this capital-constrained world is lower than the supply of such companies. And as a result, prices go down. This should surprise no one. Much has been written about the difficulties VC have had over the past year or two not only finding liquidity but raising funds. So as we’ve commented in the past, the velocity of capital has decreased and the number of transactions has gone down as well. This has fairly predictable and rational impact on the price and terms of those financings that take place in a climate like this.

Ultimately, you don’t see articles about greedy buyers of public company stocks “turning the screws” on the sellers of those stocks even though in many cases they are paying pennies on the dollar relative to where these companies traded in the Dow-14,000 days. Everyone understands that when the market is up, it’s up and when it’s down, it’s down. We don’t get angry when buyers of houses try to get the lowest price today, knowing that for the past 5 or 6 years they’ve had to really pay up. It’s the nature of markets to go through such cycles.

Now, all that being said, it is incumbent upon investors to avoid being rapacious, and it would miss an important nuance of the points above if I didn’t point this out. We at RRE have a very particular viewpoint about doing right by the companies in which we invest, and so we won’t ask for certain terms or structures even if the allocation of negotiating leverage might permit them. This is a long-term, reputation-based business, and investors build their reputation with every investment we make.

We believe strongly that building companies is a joint endeavor, with the large majority of the value created by the teams in whom we invest. Only by doing right by those teams can we productively deploy capital in a long-term, collaborative way. But the reality today cannot be ignored – this is a down cycle, the largest one most of us have seen. And just like people on our side of the table dealt with prices that often felt much too high when the cycle was at its zenith, founders and management teams have to navigate the nadir of the cycle in a way that’s dispassionate and acknowledges the rational nature of today’s dealmaking climate.

April 15, 2009


Filed under: Uncategorized — fiveyearstoolate @ 9:15 am

Eric Wiesen
Eric Wiesen

Today we’re pleased to announce RRE’s investment in Pontiflex, an innovative New York City company whose technology changes the landscape for Cost-per Lead (CPL) performance advertising. Pontiflex announced today the close of their Series B round, a $6.25M round in which RRE was the lead investor.

Over the past year we’ve been thinking a lot about how the Internet is going to get monetized more effectively. The challenges in online advertising are well known today, but truthfully there are have always been issues for marketers who want to spend money online. Impression-based advertising has always been difficult to effectively place, track and optimize, although there are a dozens of interesting technology companies trying to do so. The great revolution was, of course, Google’s cost-per-click search model, but even that is developing problems for a range of advertisers.

Today, I see three primary reasons why advertisers spend money online. Two of these are relatively well served by existing advertising modalities and the third was not, prior to Pontiflex.

  1. Branding. Impression-based display advertising (CPM) is likely to continue be an important part of the mix for brand advertisers, as it fits the traditional approach of putting creative in front of an audience in a transaction-agnostic way.
  2. Transactional. Much of online advertising is related to specific transactions, and CPC search marketing is a powerful mechanism for this, as the targeting funnel catches customers right as they are looking to make a purchase.
  3. Customer acquisition. This third bucket has been poorly-served by the online advertising world thus far. I can think of very few advertisers who don’t want to bring customers into their business, yet today they are forced to use diffuse methods to acquire customers online, hoping that impressions or clicks will flow into a relationship with an interested customer.

It is this third category that Pontiflex serves via its CPL model. Pontiflex is a company we’ve been following for quite some time. Zephrin, Roshan and Geoff are industry veterans who built Pontiflex from the ground up to be a technology company that solves problems they saw in a lucrative but problematic segment of the online ad world – lead generation. From my point of view, they have made two critical insights that result in an important company going forward:

First, they recognized that while lead generation was an important method of customer acquisition, it wasn’t practicable for mainstream advertisers without a major rethinking of the lead-gen paradigm. Prior to Pontiflex, the majority of lead generation was what the company calls “sales leads” – high-value leads in particular areas where multiple advertisers would be willing to buy the same lead (e.g. mortgages). If I filled out a form on a financial website to see mortgage rates near me, my information was sold to multiple mortgage lenders who would then try to convert me. I hadn’t opted into a particular lender’s message – I just indicated that I was in the market.

The Pontiflex insight was that advertiser-specific opt-in leads (“marketing leads”) could make sense if (and only if) a real technology platform was built to automate and clear the entire process. Few leads are priced as highly as a mortgage lead, and as a result the majority of the lead-gen market was built in a way that couldn’t collect mainstream opt-in leads in a cost-effective way. Pontiflex’ flagship product, AdLeads, changes all that. No longer does each ad placement require a specific technical integration and gone is the opacity that has overlaid this market. The Pontiflex platform is purpose built to enable large, scalable campaigns with minimal setup or technical resources required.

The second critical insight was that CPL advertising represents a blend of branding and direct response characteristics, and that it can expand the playing field dramatically relative to the current state of lead generation. Many of Pontiflex’ customers use CPL ad units (which are themselves performance-based) as a way to build brand engagement and brand loyalty. These ads are often invititations to consumers to engage with a company’s brand via an email newsletter, online community or other modes of outreach. Every customer an advertiser gets from Pontiflex is one who has voluntarily opted into that advertiser’s brand or product. It is both brand-building and hyper-targeted, giving brand advertisers a powerful, scalable new way to engage with their customers online.

I have joined Pontiflex’ board, where I’m excited to work with the founders, Scott Johnson from NAV and Brian Hirsch from Greenhill SAVP on what we all believe is an important, next-generation advertising technology company being built here in New York.

April 2, 2009

Some New Glue

Filed under: Uncategorized — fiveyearstoolate @ 1:32 pm
Eric Wiesen

Eric Wiesen

Our friends (and portfolio company) Adaptive Blue have announced a new and excitingly better version of their flagship product, Glue.

Since it launched, Glue has been helping people share and explore a variety of categories across the web, linking people on disparate sites through shared interest and commentary. The new release adds a critical piece of the feedback loop, allowing users to have conversations about books, music, movies, wine, stocks, etc… within the Glue experience.

The new version also starts to capitalize on the vision of social filtering, and allows a given user to see the different things their particular friend group likes and visits the most often. It’s essentially a snapshot of my social graph’s activity and engagement across the web.

Lastly, the new version of Glue includes a leader board of the most popular things the Glue community are interacting with and seeing as they browse the web. This enables a given user to easily see the current zeitgeist of the entire community.

Congrats to Alex and the whole team for an impressive new release. For those who aren’t yet Glue users, check it at at

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Filed under: Uncategorized — fiveyearstoolate @ 10:04 am
Eric Wiesen

Eric Wiesen

Yesterday Silicon Graphics, the venerable producer of workstations and servers targeted at the visualization function, declared bankruptcy and annnouced a sale for $25M. And while it’s easy (and right) to note that the evolution of markets involves (even requires) “creative destruction” to properly move forward, sometimes it’s worth at least a moment of pause for regret to those who fell.

The first startup with which I was ever involved was one that competed (in our small way) with SGI. We were among the first shops to recognize that the open “organ bank” of commodity computing could, with the then-recent additions of multi-processor computing and workstation-class graphics acceleration on the Windows platform, compete reasonably well on peformance (and extremely well on price/performance) with the likes of SGI’s workstations. While we were a tiny part of SGI’s ultimate demise, the broader trend of SGI’s users moving to more open platforms shrunk their addressable market dramatically.

But SGI, despite the anachronism it eventually became, advanced the industry through some of its most transformative periods. Both as a provider of technology and as an enabler of creative expression, their products were revolutionary at the time, and so for me personally, I’ll remember the company fondly. Even if all that’s left are those of us who remember that the Googleplex was SGI’s campus first.

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April 1, 2009

Liquidity Perspective

Filed under: downturn, venture capital — Tags: — fiveyearstoolate @ 10:17 am
Eric Wiesen

Eric Wiesen

Courtesy of this morning’s VentureWire, the numbers for venture liquidity in Q1 are out. And I’m sure you will all be shocked to hear that they aren’t very good. In fact, overall liquidity across the venture industry was just $3.2B, the lowest for any quarter since 2003.

Full stop. Lowest quarter since 2003. So in the midst of the worst financial contraction of the modern era, venture capital liquidity was bad, but better than it was in 2001 or 2002. I think that, while not to be a Pollyanna about where the industry is today, it’s important to note that during a quarter where the public markets had their worst Q1 in 70 years, the venture liquidity numbers are bad, but better than they were the last time things went badly.

Further, and also of interest, median hold times were down dramatically in Q1, from an average of almost 8 years in Q4 to about 4.7 years in Q1. Part of this is just a shifting “market mix” where more companies are getting taken out early. It will be interesting and important to see if this trend continues into Q2 and beyond.

Ultimately, this data is not dispositive about where venture capital is headed. When I was at the most recent Kauffman Fellows module in Palo Alto last month, we had a number of high-profile industry experts offer a range of perspectives on where the venture business is going, and some of them were powerfully pessimistic about returns, shrinkage within the industry and the amount of capital that will be deployed over the next few years. Here at RRE we continue to believe that there is a core need for this type of capital, and that while this cycle is worse than any we’ve seen, the fundamental business purpose behind the venture business remains vital.

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