Five Years Too Late

February 23, 2010

RRE Winter Office Hours

Filed under: Uncategorized — fiveyearstoolate @ 8:55 am

Eric Wiesen

We met with a couple dozen great entrepreneurs late last year when we held our first ever RRE Office Hours. We enjoyed the discussions and hope that we were helpful, so we’ll be back for more office hours on Friday, March 12th, here at RRE HQ.

Generally speaking there aren’t a lot of rules for office hours. We’re happy to talk about whatever you like. The slots are 15 minutes and you’ll get two of us (myself, Stuart, Jim and Will). The only point I’ll make is that we are tech investors, so if you are a health car, pharma, biotech or other life sciences entrepreneur we are not likely to be as helpful as we’d like, since we just don’t make investments in those areas.

We look forward to meeting with another great crop of entrepreneurs. Please fill out our signup form to let us know you’d like to come by.

Office Hours are currently full. Check back to see if more slots open up.

February 20, 2010

A Trip to Silicon Valley

Filed under: Uncategorized — fiveyearstoolate @ 2:56 pm

Stuart Ellman

I started in venture capital in 1994, when I co-founded RRE. We began our investing lives by making frequent trips out to Silicon Valley to do deals. Why? How did Willie Sutton answer when asked why he robbed banks? Because that is where the money was. We came out to the valley because that’s where the deals were. In those early years I spent two weeks each month in the valley and made investments in a bunch of great companies. Eventually, RRE rented a modest apartment because it was cheaper than all the hotel rooms for all the partners and I had an extra set of everything out there.

I had a whole Silicon Valley life in those days – lots of great friends, favorite restaurants, movie theaters, and places to run. This lasted until the late 1990’s for me, and although many of my partners continued to do deals and spend significant time in the valley (and continue to today), I started to spend less and less time out here. Over time, I focused more on New York City. Two weeks per month slowly became one week, then once per quarter. About two years ago, I stepped off the board of my last valley company, Proofpoint, because it was performing very well and, as a growth-stage company with a great board, it didn’t need me to fly three thousand miles to see it.

More importantly, over the last ten years New York has really come into its own as a place where great companies are being formed and where I felt I could add a lot of value as an early-stage investor. One thing I’ve learned about myself over these last fifteen years is that I’m a guy who invests in people and that I can be the most helpful to my companies if I spend quality time with them. Unless I wanted to go back to two weeks a month on an airplane, I could accomplish that best by investing largely in companies that are here. In a way, this is a throwback to the way Silicon Valley investors thought about companies back in the 1990s – most of them were (and some still are) really focused on their local geography. If you were an interesting company in Chicago, Florida or yes, even New York, many of my Sand Hill Road peers would tell you that they were interested, but only if you moved to Palo Alto. I generally don’t tell companies they have to move to New York, but much of the same logic applies here. Today, in 2010, many investors are starting to see NYC as the new great place for entrepreneurship and where many of the new generation of great companies are being built. I couldn’t agree more. RRE has done fifteen deals here over the past three years, so this current recognition wasn’t really the final bell of recognition for me.

And yet here I am, here in the Valley again for the first time in quite a while. A few months ago I was contacted by that I ranked highly in their list of venture capitalists. Would I come out to the conference they were having in February and maybe accept some kind of acknowledgment. I realized that I had not been out to the valley in well over a year. It was a shock to me that it had been so long, so I accepted. Also, I had not gotten a trophy since little league and thought maybe this was my big chance. So even though a snow storm in NYC could have given me a reason to cancel the trip, my flight made it out on time. I landed in SF.

Over the couple of days I’ve been here, I’ve realized just how much this place has changed since i used to live here half-time and I’ve realized just what a New York VC I’ve become. Whether it’s the different restaurants and shops in the airport, the new Octavia Freeway that wasn’t here back when I knew my way around this city well enough to instruct SF’s generally inadequate taxi drivers how to best get around, to the diet cokes in our apartment fridge that expired in 2007 (hey, I said it was modest!), I realized that originally in my venture career I “went native” here, mostly because to be a good VC in the 1990s you simply had to. But now I’m not – I’m a visitor here, and as I thought about this while trying to sync our old Gateway PC with Exchange to get my email (it didn’t work, of course), I realize that given where things are for New York and for me, I’m ok with this. I have six investments in our current fund and four of them are in New York (RecycleBank,, Payfone and Betaworks).

Don’t get me wrong. The valley is still a great place. It is the epicenter of venture capital and technology and much money will be made here going forward. But as for me? I will wear my Rangers hat with pride and be a New York guy. It is nice to see that the world is noticing how great our city has become.

Internet Predictions from 1995

Filed under: Uncategorized — fiveyearstoolate @ 7:55 am

Eric Wiesen

I’m up too early on a Saturday and morning and came across this article from Newsweek Magazine in 1995 entitled, “The internet? Bah!” floating around on Hacker News. And I read it expecting to have the same reaction that I imagine most are having – oh that clueless old media reporter, his skepticism was so quaint!

But as I actually read the article, my reaction was quite different. There’s still a surprising amount of unfulfilled promise attached to the internet and our digital lives. If we look at the article, written by Clifford Stoll (who wrote Silicon Snake Oil, which I actually read back in 1996), he gets a few things dramatically wrong and let’s dispense with those.

First off, he wasn’t able to predict Google and the extent to which search would improve.

Logged onto the World Wide Web, I hunt for the date of the Battle of Trafalgar. Hundreds of files show up, and it takes 15 minutes to unravel them–one’s a biography written by an eighth grader, the second is a computer game that doesn’t work and the third is an image of a London monument. None answers my question, and my search is periodically interrupted by messages like, “Too many connections, try again later.”

Ok, so he missed that. Badly. Both the rise of Google and the increasing richness of the data available on the web has made web search the most effective and time efficient way to gather information the world has ever seen. Stoll’s concerns on this front seem myopic and silly in retrospect (which is, of course, why the article is circulating around on HN).

What else? He also missed ecommerce.

Then there’s cyberbusiness. We’re promised instant catalog shopping–just point and click for great deals. We’ll order airline tickets over the network, make restaurant reservations and negotiate sales contracts. Stores will become obselete. So how come my local mall does more business in an afternoon than the entire Internet handles in a month? Even if there were a trustworthy way to send money over the Internet–which there isn’t–the network is missing a most essential ingredient of capitalism: salespeople.

The line about the mall is almost exactly what you hope to hear if you’re pursuing an Innovator’s Dilemma-type strategy. The Internet as a whole pursued one throughout the early and mid 90s. As Chris Dixon would say – the old economy (and its media) thought the Internet was a toy. Flash forward fifteen years and the Internet does all the things Stoll highlights. Instant catalog shopping? Amazon is orders of magnitude bigger than any catalog. Airline tickets? I’m pretty sure we can do that now. Restaurant reservations? Yeah, that’s manageable. Negotiate sales contracts? Yes, although most people don’t negotiate sales contracts in the offline world either. Stores haven’t become obsolete, but I don’t think that was ever the prediction (or the goal) for the Internet. Today ecommerce is about 6% of all US shopping, which is an enormous number in the tens of billions of dollars.

So why did I think this article was valid, at least in part? Because Stoll led with this:

Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic.

He’s right, Internet visionaries promised all of those things. And to my eye none of those things have really happened.

  • Telecommuting? It happens and is happening, but the notion of digital freedom accompanying high-speed communications is still largely an idea. And we’ve learned that while remote labor makes sense in a lot of cases (disclosure: one of RRE’s portfolio companies is solving problems around exactly this area), we’ve also learned that in many other cases being physically proximate is still very important.
  • Interactive libraries and multimedia classrooms? My wife teaches in the Bronx and while they make some use of technology, I think that at their school and at US schools in general, “Internet Visionaries” circa 1995 would be deeply disappointed at how little technology has truly changed our schools. School-age children mostly play games and post pictures of themselves using all the technology we’ve built over the last twenty years.
  • And interactive government. This is perhaps the greatest disappointment and the element to which I reacted the most strongly. While Obama has been more interested in using the Internet than any of his predecessors, how many can actually say with a straight face that the operation of our government is meaningfully better because of technology? Governance is done the same way as always, and that’s to say poorly, with low transparency and general unawareness by the population.

What does all this mean? Well, some like to say that thirty minutes is a lifetime in “Internet Time” and if that’s true then the fifteen years since, “The Internet? Bah!” is an age. And in that age I think the internet has fulfilled all its commercial promise and comparatively little of its social promise. Search, ecommerce, financial services, marketing – all of these are dramatically improved since 1995. But education and government? Comparatively little.

Where I’m hopeful is that the rise of the social web generates real solutions to a lot of these problems. As recently as three or four years ago the Web was essentially a one-to-one or one-to-many medium. But the rise of the social web – social nets like Facebook, messaging platforms like Twitter and new approaches to conversation like Hot Potato – offers the promise of genuine collective action online. These services might actually enable the type of real structural evolution to our citizenship that the original Internet generation foretold. But I think a tremendous amount still has to happen.

Ultimately, it was a fun read and got me thinking a lot about how things are so much better than they were in 1995, and also how they haven’t changed as much as we hoped. Not bad for 6:00 AM on a Saturday.

February 19, 2010

Why I Despise Gift Cards

Filed under: Uncategorized — fiveyearstoolate @ 7:43 am

Eric Wiesen

This topic is essentially unrelated to the range of things I usually discuss on this blog. But I recently had a conversation with one of my colleagues that touched on a particular sore spot of mine.

Gift cards. I hate them. And hate is strong word, but in a way gift cards almost offend my sense of order, partially because others seem to like them so much and I find that irrational.

These cards are inferior to cash in every conceivable way. Let’s consider a $50 gift card to The Gap (no reason to pick on them, but I know they sell a lot of these things). You receive this card as a birthday present from a well-meaning friend. Oh good, now I can buy myself something at The Gap, you think. So let’s consider all possible scenarios involving you and this gift card.

Scenario #1 – You go to The Gap (or their website) and you pick out some things. You know you have a gift card so you’re probably not as judicious as you otherwise might be. You wind up with $80 worth of items (which is really $90 with taxes and the 99 centses you probably forgot to mentally add). You happily hand over your gift card for the first $50 and your credit card for the remaining $40. How did everyone do?

The Gap: Sold you $90 worth of stuff. You probably wouldn’t have gone in at all, and if you had you probably would have spent less. On the other hand, they had to pay margin to the gift card issuing platform/company. MAJOR WIN

You: Spent the $50 you were given plus $40 of your own money. You wound up with $90 worth of clothes from The Gap, some of which (possibly all of which) you would not have bought had you not been given the gift card. The argument (discussed below) that this gift card enabled you to “treat yourself” failed in this instance, because you didn’t get a free treat – you are out $40 in cash. MINOR LOSS

The third-party gift card company: There is usually a gift card-issuing platform behind all but the largest merchants’ cards (those guys run their own internally). This company took a nice fat margin on the gift your friend gave you. This came from the merchant’s side of the equation. MAJOR WIN

Scenario #2 – You go to The Gap and you pick out some things. In this scenario you really don’t want to end up paying cash, you just want something for free. So you do your best to pick out something that comes in under the gift card – $42 worth of merchandise. How did everyone do?

The Gap: Gap has a $50 liability in the form of your gift card. $42 of it has now been used up, leaving you with an $8 gift card that, realistically, we all know you won’t ever use. (This is called “breakage” and it’s why merchants love gift cards and want you to give them as gifts). So the Gap sold you $42 of merchandise, paid margin on the $50 gift card, but also got $8 in breakage. That’s 20% free margin to them. MAJOR WIN

You: You got $42 of merchandise from The Gap. Maybe it was what you’d have bought if you had cash, maybe not. You would up with less than the amount that was given you to. MINOR LOSS

The third-party gift card company: They took their margin on the sale of the card. MAJOR WIN

Scenario #3 – You go to The Gap and are very particular. You manage to pick out something that costs the exact amount of your card. How did everyone do?

The Gap: They sold you $50 of merchandise, nothing additional, no breakage, and paid their margin on the gift card. MAJOR LOSS

You: You got exactly the amount of merchandise you were supposed to get without paying anything extra or losing a portion of the value of your card. NEUTRAL (as opposed to having $50 in cash)

The third-party gift card company: As always, they took their margin on the card. MAJOR WIN

Scenario #4 – You put the gift card in a drawer and forget about it. Maybe a year or more later you pull it out and think about using at. At this point, the terms and conditions have probably caused its value to decay on monthly basis (most cards start charging you fees after a while that decrease the balance). How does everyone do?

The Gap: They got $50 less the gift card issuer’s margin, booked a liability, but that liability never had to be paid because you forgot about the card. 100% breakage for them. MASSIVE WIN

You: You never got anything from your friend’s gift. MASSIVE LOSS

The third-party gift card company: See a pattern here? They got paid. MAJOR WIN

From my personal, anecdotal experience, the most common outcomes are:

  • Scenario #1 (spend more than the card), followed by
  • Scenario #4 (put it in a drawer)
  • Scenario #2 (spend less than the card and have a useless stub)
  • And last is Scenario #3 (exact use of the card).

And consider your own outcomes in each of these scenarios. At BEST, you are neutral relative to cash in scenario #3. You are a loser in every other scenario, a small one in #1 and #2 and a big one in #4. Had you received cash, you would be better off in all cases. Game theorists call this a “dominant strategy”.

So why do people give these wretched things? Well, they given them because they believe they’re being thoughtful. In this country a lot of people think that giving cash is “tacky”, so they’ll give you a Best Buy gift card, or Sephora, or Amazon (this last makes me laugh), under the theory that, “if I just gave you cash, you’d use it to buy groceries, but this way you can TREAT YOURSELF”. Personally, if my first, best use for money coming in on my birthday is to buy groceries, I likely need that more than something at Sephora. But essentially gift cards are all the restriction of a giver-chosen gift with none of the creativity (and a big bundle of hassle attached, because now I need to take my gift card and go out and BUY MY OWN GIFT). And the reality is, the “I’m going to treat myself” is sort of a weak psychological crutch. If you get $50 in cash as a gift and what you want is something from Best Buy, go to Best Buy and get it. Gift cards merely introduce very significant interference into the purchase process, b/c the gift-giver had to divine what store you might want to go to (but without exercising their own judgment about what you might actually WANT).

The last point I’ll make is to observe a phenomenon that I’ve started to see in the last few years that’s almost unbelievable to me – gift cards that are stored-value credit cards issued by payment networks – Visa/MasterCard etc… rather than actual stores. What on earth is the point of these? So now instead of a crisp c-note I have to carry a separate, branded stored-value Visa card? One where the balance is not easy to find out, that’s hard to use online and where I’m almost guaranteed to have breakage? This strikes me as one of the most consumer-unfriendly products I’ve ever seen, and yet I’ve received them and I as I’ve talked to friends about this question, others have too, so clearly gift-givers are buying these. These are inferior to cash in every respect and don’t even have the “you can treat yourself!” sheen on them, because you can spend them anywhere.

Either pick out something that reflects your thoughtfulness or give cash. Please. The best I can say about giving that gift card to The Gap is that you’re making yourself feel better about not picking out a gift. And it’s not about making the gift giver feel better, it’s about getting someone something they actually want. If you can pick something out for them, great, but if not, let them actually pick out something themselves. And to do that, they’re much better off with cash.

End rant.

February 3, 2010

iPad One Week Later

Filed under: Uncategorized — fiveyearstoolate @ 10:36 am

Eric Wiesen

I was really busy the day the iPad came out, so I didn’t watch in real time or obsessively read the early reviews and feedback. The amount of discussion both running up to Apple’s announcement and in the aftermath of its announcement was of  a scale that only Apple can generate. I caught up that night and came away with the following zeitgeist from the circle of people I normally read and follow:

  • It’s a big iPod Touch
  • It doesn’t have a camera
  • It’s on AT&T
  • It’s bad for open computing
  • I wanted it to change the world and it didn’t.
  • It’s for reading books.
  • The form factor is awkward.

Asked the following day what I thought, I agreed I was somewhat underwhelmed, but hadn’t made up my mind yet. The one really negative thing I reacted to was the book-reader use case. I’m a happy Kindle owner, not because I have some partisanship interest with Amazon over Apple (quite the opposite, as we’re iPhone and Mac standardized at home), but because the Kindle is easy to read and the battery lasts forever. The iPad is backlit and the battery will last … who knows, but it’ll definitely be shorter than the Kindle. So the one thing I was sure of was that the iPad isn’t a “Kindle-killer”.

But honestly … that’s kind of a narrow-minded way to look at this device. It’s a giant iPod Touch. Yes … and that’s kind of awesome. Think about the interactivity improvements developers have already managed to create using the iPhone/iTouch form factor. Now imagine what developers can do with capacitative multi-touch interfaces at 1024×768 and a 9.7″ screen. My guess is that what we’re thinking of now is a pale shadow of what will be available on the iPad six months from now.

The other point I’d make is that people (as always) have short memories. The first-generation iPhone itself was missing a lot of really important stuff. It didn’t have 3G for crying out loud. Trying to get it to talk to Microsoft Exchange was a disaster (as trivial as some people think that is, it’s hugely important to many). The battery lasted about an hour. There were no third-party apps – “Stocks” was what you got and you liked it. And yet … the device was utterly revolutionary and people loved it. Why? Because it did a few things REALLY well. It browsed the web better than any other phone. It had visual voicemail (seems commodity now, but those who don’t have it remember how crappy old-style VM is). The interface was dramatically better for manipulation of content than anything we’d seen before. And so it bought Apple a growth curve that enabled them to eventually solve most of these problems by the third generation (which, of course, is what I bought).

Chances are a lot of people are going to buy this thing. Some will use it as an e-reader. Some will use it as a “couch commander” that sits on the coffee table. A bunch will use it for games. And while those groups are buying it, developers will be working on ways to dramatically improve the experiences available on today’s much smaller form-factors. Simultaneously Apple will be working on the next-generation product. So someone will figure out the best way to type on this, whether that’s an external keyboard, a stand, or just a novel way to hold it. A future version probably has a camera for video chat and better I/O options. But ultimately I think the product as is will appeal to a lot of people.

The question of whether it’s good or bad for “open computing” – well, I don’t know. But the reality is Apple is a consumer products company. Most consumers don’t really care about that question. Most techies, developers and VCs do care about it, and so it’s probably worthy of its own post, but it’s a totally separate question. My instinct is that the iPad represents a final nail in the mainstreaming of computing generally. Most regular people actually hate all the things missing from the iPad – lots of ports, apps getting in each other’s way and crashing, etc… That doesn’t mean that there aren’t important questions to be asked about the way this industry is moving, but I don’t think Apple is (or should be) spending a lot of time on them.

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