Does Fidelity Matter?

Eric Wiesen

Those who have been over to my place know I’m a pretty big Audio/Video geek. While the constraints of living in a NYC apartment necessarily constrain my ability to assemble a really over the top audio setup, we have a 1080p projector mounted to the ceiling, surrounds all over the place and a blu-ray player.

Yes, blu-ray. In fact, some of my more future-thinking friends from the tech community have questioned the decision to invest in a player (although let’s be clear – you can get one for $200 and we needed a new DVD player anyway) and the discs because, as everyone clearly knows, physical media is a dead-end and it’s all going to be on-demand streaming and/or downloads, whether that comes from the cable provider, a service like Netflix, iTunes or a broader set of web services.

The reason I bought a blu-ray player and a handful of blu-ray discs (mostly those that really benefit from the format’s capabilities – films like Kill Bill, the restored Godfather discs and of course, Wall-E) is pretty simple: it’s the absolute best in-home movie experience by a wide margin. Video and audio are demonstrably better than DVD or even the “HD” offerings from download services or on demand. And it makes sense that it is such – blu-ray is a 25 or 50Gb format depending on the disc’s properties. It’s far less compressed and, frankly, crappy than my alternatives.

For the same reason, I sometimes still buy CDs (although I admit less and less often) rather than buy compressed music on the web. Why? Because if you have decent equipment it sounds much much better. Granted, the majority of my music listening takes place via my iPod or computer at work, so I’m decreasingly likely to benefit from these advantages, but they are nonetheless true. CDs are uncompressed digital music and MP3s (or other formats you’re likely to use) are compressed as much as 12 to 1. It’s unsurprising that when you put a CD next to an MP3 of the same music at the same volume over good equipment, one sounds dramatically better than the other.

And yet all of this is preamble to the question being posed today – does anyone really care? The “hi-fi” community has a reputation for being a bunch of geeky, mostly older men closing their eyes while they try to hear subtle differences between two different interconnect cables. And while that stereotype is probably unfair, it highlights the fact that most consumers of music just don’t care that MP3s sound like garbage. Younger consumers grew up listening to music primarily on iPods with lousy earbuds (and often so loud they can’t hear anyway, but that’s a separate issue). Convenience, not fidelity, is what has been winning in the audio market for 25 years, ever since people gave up the sound of LPs for cassette tapes, the lowest-fidelity medium of all.

And so I agree with those who say we’re likely to see the same trend in video. On my setup, at 106” of 1080p projection, I really enjoy the difference between a DVD or 720p download and a blu-ray disc. But I suspect I’m in the small minority. I don’t agree with the bears on this issue that blu-ray will fail spectacularly, and I think it will continue to exist as a format that serves a segment of the market interested in high-quality video. It’s neither Betamax nor DVD in its future prospects, but somewhere in between.

Where the question gets really interesting, though, is whether the consumer’s preference for convenience over fidelity extends beyond the A/V context. I think that this merits its own post, and so I’ll do that later, but the question posed there is whether or not we’re trading away fidelity in our informational content in favor of convenience, much as we’ve done with our music and movies.

The Perfect Storm

Stuart Ellman

Will Porteous (my partner and co-professor at Columbia Business School) and I return today from a week in Europe. We came here to teach a graduate seminar in venture capital for the CDTM (Center for Digital Technology and Management) in Munich. CDTM is a joint program of Ludwig-Maximilians University and Technical University, both of Munich. As a point of note, we are extremely impressed with both the quality of students and the effort put in by many of the leading German venture capitalists who participated in the program.

While we were in Europe, we decided to visit a number of our existing Limited Partners and some prospective new LPs. In addition, we just had our annual LP meeting for RRE last week. From this confluence of events, we have gained some timely views on how many leading LP’s are thinking about venture capital, both as an industry and an investing segment.

Obviously, the pitch to these prospective LPs is the RRE story over the past few funds, particularly our two latest funds, RRE III and RRE IV. Without getting into too much detail, we feel good about the choices we’ve made over the past eight years, both because we have chosen some very good companies and because we have made some strategic investing decisions that kept us away from some areas that have performed poorly. As we went out and told our story, we heard three entirely different responses.

First are the LPs who are committed to venture capital. These firms, by and large, are thrilled. Those firms that have a long term approach to venture capital realize the importance of getting into the best performing funds in each segment (the alpha) and staying with them throughout the venture capital cycle. They do not simply seek out venture “exposure” (the beta); they focus intently on how their managers create value over the long term. We hear from them that they are very happy with the choices we have made and look forward to a long term relationship.

The second category of LPs believe in venture capital but do not know if they will have the capital to continue to play in these markets. That will continue to be part of the fallout from the market crash.

The third category are those LPs who are constantly debating where they should allocate money within private equity, whether it should be in LBO’s, growth capital, distressed, or venture capital. These people, for the most part, are skeptical and believe that the venture model is broken. Here is why: they have been the victims of a “perfect storm”.

The bull market of the late 1990’s and the extraordinary returns generated by the venture capital industry led to a wave of fundraising that brought many new Limited Partners into the market. The crashing of the dot-com bubble in 2001 was devastating to the returns of funds raised from 1998 to 2000. It was a once (or maybe twice) in a lifetime complete crash of a market segment. The tech market finally started to show some signs of life for VCs in 2006 and 2007. This led to some optimism and some high valuations being paid during this time period. Then the entire market crash of 2008 happened, taking the IPO and the tech market right down with it. The worst market crash since 1929, again, “once in a lifetime”. But, for VCs and fund investors that may have been in the category since 1999, devastating. As one LP told me, he has been investing in great venture firms for a decade and has not yet made any money. Therefore the model must be broken.

The model has been broken for the past decade because we had two separate once in a lifetime crashes happen during one fund cycle. This is like Sebastian Junger’s “perfect storm”. Most VCs (and by extension, LPs), have been tiptoeing in a minefield for the past decade. What are the odds of this “perfect storm” happening again? Statistically, not very high. Twenty year venture returns are still over 20% annualized. In the long term, risk equals reward. This will happen again in venture.

Here is what I believe: Fewer venture firms will get funded and those funds will be smaller. Supply of venture money will be less and prices will continue to be attractive. As my respected venture friend, Fred Wilson, points out, there are many reasons to believe that tech IPO markets will return. So, lower prices and a rebound in exits. I think we are going to have a great period of venture returns over the next decade. Patience and discipline are the words I am going to try to live by.

Of Tigers and Twitters

Eric Wiesen

I’ve been thinking lately about the tech industry’s occasional tendency to declare a world change prematurely. Originally I was sparked into this thinking by Paul Graham’s article on “How TV Lost”, which took it as a fait accompli that despite the nascence of IPTV, web video and entertainment convergence generally, TV (and its accompanying ecosystem) had already lost, it just didn’t know it. It was a provocative piece and got me thinking.

Whether I agree with the Paul’s conclusion or not (I don’t necessarily, although I agree with much of the underlying logic), it’s what this represents that really got me thinking. We as an industry are quick to see “up and to the right” and extrapolate ad infinitum. In other words, we see a trend with spectacular velocity and we are quick to connect the dots to a massive, game-changing shift. And it sometimes happens, but it usually doesn’t.

I’m reminded of the discourse that emerged after Tiger Woods won the Masters in 1997. Tiger came in as a 21-year-old phenom and utterly blew the field away. I’m not much of a golfer, but they tell me that when you win a major by 12 strokes (largest margin since 1870) and set the course record at a legendary course, it’s pretty good. (Thanks Wikipedia)

But what really struck me was some of the discussion I heard afterwards. “The sport is over” summed up what a lot of people thought after seeing Tiger’s performance. The world of golf had changed and no one else would stand a chance for the next 25 years. Tiger was so far and away superior to everyone else that if you’re going to watch, you mostly just watch to see what he’ll do.

So what actually happened? Tiger is arguably the greatest golfer of all time. He’s second all-time in majors and third in PGA event wins. Youngest ever to win the Grand Slam. Highest-paid athlete in the world last year. Currently ranked #1. Tiger is absolutely, incontrovertibly for real. And yet… he doesn’t win every tournament. He had a few years when he worked on his swing and wasn’t dominant. He got hurt. In other words, he’s a very very gifted, but nonetheless human, golfer. The sport goes on, more popular and arguably better for having such a fantastic athlete, but essentially the same game.

Which brings me to Twitter. Twitter is a little bit like Tiger. It burst onto the scene at SXSW in 2007 and for a while, it was all people could talk about. It faded somewhat and people talked about Facebook or something else for a while, and then around the election last year, Twitter “tipped” and now it’s really become ubiquitous, particularly amongst the media. Companies are wondering what “twitter strategy” they should have. Conferences are being organized about how to best “expose your brand in 140 characters”. People have talked about Twitter threatening Google or Microsoft.

I think Twitter, like Tiger, is for real. I’m active on it and I get a lot of value from it. I think its position as “social radio”, where I can tune in either to contemporaneous thoughts from a group of people I find interesting, or to a particular topic, is powerful. Twitter is a winner.

But that being said, I think we’re essentially doing what people did in 1997 with Tiger. People look at Twitter, extrapolate its buzz and growth into the future, and conclude that our lives will never be the same. I can’t tell you how many people in the last 90 days I’ve heard propose a twitter-centric solution to a problem. To contextualize where I think we are right now, I’d go back a couple of years to the months following the launch of Facebook Platform.

Facebook launched applications to great fanfare. The following week I was at a conference where a successful entrepreneur told the crowd, “If I were starting a company today, I’d build for Facebook first, the web second”. People were racing to see who could say, “Facebook is the social operating system of the web” first. People saw the buzz, the instant engagement, and simply pulled the trend forward ten years into a world where operating systems were gone and we all just booted straight into Facebook and led our online lives in Facebook applications. So far, it hasn’t turned out that way.

As a VC, part of what I try to do is see the world as it will be some day. It’s a tough task, and I think anyone that claims to get it right most of the time isn’t being honest. I don’t know if, in the future, Twitter will replace email, social networks and online advertising. I think it probably doesn’t, but I think it has an important role to play in communications going forward. But generally speaking, I think that if we want to forecast the future as best we can, assuming that what’s hot right now inevitably emerges into a paradigm-shifting change in all of our lives is not the best approach.