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 thefunded.com 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, drop.io, 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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January 31, 2010

My Friend Who Hates Tech

Filed under: Uncategorized — fiveyearstoolate @ 12:05 pm

Eric Wiesen

Last week I was at party held by my wife’s coworker. The coworker’s husband is a friend of mine who I usually see at these types of events. He runs a hedge fund and is always worth an hour of interesting conversation. Among the wide variety of topics we discussed was why he “hates tech” and why he thinks the lack of an IPO market is the tech industry’s own fault. We’ll call him John.

I should be clear – John doesn’t hate technology. He has tons of it. He doesn’t hate the people in technology. What he hates is the governance he’s observed as a public company investor that he views as commonplace among tech companies. His specific gripe? Tech companies never pay out their earnings as dividends. His view is that there is no way to be a truly long-term investor in tech companies because management never allows companies to transition from growth companies to mature, income-oriented ones. The only way to win is to get in and trade out when you think the cycle is peaking.

I’m not sure John is wrong. The nature of technology is such that for most (not all) companies there is a period of extraordinary value creation followed by a period where the market moves on, at least partially. The rational thing to do at that point is to alter the strategic objectives of the company from rapid growth to efficiency and profit-maximization, but this almost never happens in tech. To use John’s examples, look at Wang, Yahoo and Palm. Each had an extraordinary story at one point and generated significant cash flow. And each in turn reinvested that cash flow into unprofitable businesses rather than pay it out to investors.

Why did they do this? You can take it from one of several directions. The canonical argument is that tech companies always need to be reinvesting, that if they pay cash out they will be left behind. And yet … these companies got left behind anyway. Wouldn’t their investors (in whose interest management supposedly runs the company) be better off with dividends than the outcomes they’ve received in these companies? The alternative argument is that management would rather empire-build than reward shareholders.

Perhaps the best example is Microsoft. Microsoft is a mature tech company and has been operating for about 30 years. It is profitable ($4.5B in operating profit in the most recently-reported quarter). It has been profitable for years. Yet Microsoft, as of today, pays just 1.8% dividend yield and holds $52B in current assets. Why does a business with relatively low CapEx have so much cash? Because it can. And what are they doing with that cash? Mostly they are (in my view) “investing” it in an unprofitable attempt to be an internet company, which they aren’t and never have been. They are buying share for Bing but it’s negative-NPV growth.

I would argue that Microsoft is the perfect example here because it utterly dominated the best businesses to be in from 1980 to 2000 – desktop software and operating systems. For that 20-year period Microsoft was the most profitable company in technology. Now, however, these businesses are flat or in decline. If I’m an investor, do I want Microsoft spending all those retained earnings trying to beat Google or Apple in areas where Microsoft has no advantage? No. I want those retained earnings paid to me, and if I want exposure to the web I’ll go buy Google or Apple stock (or any other company who I think is poised to dominate an important area).

This is a classic agency problem. It is extremely unappealing to Microsoft’s management to acknowledge that the company’s dominance is waning and that the shareholder-maximizing course of action is to run the company efficiently, decrease investment in the web and run a desktop software business as profitably as it can for as long as it can while paying out as much cash to shareholders as possible. How much fun would that be? “Killing Google” is much more fun. Except it doesn’t really work.

Ultimately, I had a hard time disagreeing with John that tech companies fundamentally break the implicit agreement with their shareholders. I’m not at all sure I agree that this is the reason for the weak IPO market (in fact I think it’s a small component at best) but his points were thought-provoking. Tech companies almost never acknowledge that they are dividend stories even though it’s frequently appropriate.

January 29, 2010

iPhone vs. Android vs. Mac vs. PC

Filed under: Uncategorized — fiveyearstoolate @ 10:58 am

Eric Wiesen

This post has been rattling around in my head for a while, but Chris Dixon’s always excellent blog inspired me to put this down and get my thoughts organized. Chris talks about whether or not the “open vs. closed” question about app store environments is as simple as it seems. I’ve been thinking about two things in this general vein over the past few weeks (really ever since the Nexus One came out).

  1. iPhone vs. Android” is not really like Mac vs. PC
  2. Why Mac vs. PC played out the way it did is badly misunderstood.

I’m actually going to take them in reverse order, because the second sets up the first.

Everyone knows that for most of the lifecycle of personal computing (let’s just call it 1980 to 2010) Apple and its Macintosh platform got its ass kicked by a collection of offerings known as “the PC”. The PC was an assembly of interoperable parts with an Intel CPU (and compatible system chipset) running a Microsoft OS. Apple’s market share typically fluctuated from bad to worse and generally declined the first two thirds of this period.

These days most people talk about how Apple lost because it was “closed”, while PCs were “open”. I think that’s simplistic. There are a bunch of reasons why Apple lost for most of this period.

1. The “PC” had several important applications in the 80s and 90s. They were used in homes, in schools, in government and in business. One of these markets (business) was dramatically larger than the others. Which company had a vendor relationship with essentially every company in the US who bought technology? IBM. Which company was the original vendor of Wintel PCs? IBM. In the early 1980s when the “PC Wars” began IBM was the largest technology company in the world and Apple was a startup. The PC won the early rounds because their distribution into business accounts wasn’t just better, it was several orders of magnitude better.

2. Apple arguably gave up its best weapon in 1985 when Steve Jobs was fired. Chris notes this by looking at Apple’s market cap in 1985 and then in 1997 when Steve returned and finally today and illustrates just how little value was created at Apple without Jobs. Apple was phenomenally innovative in the early days, then released a decade’s worth of boring products (with a few exceptions, like the original PowerBooks) and then started innovating again in the late 90s (the original iMac, the iPod, iTunes, etc…). Apple lost in the middle rounds b/c it was poorly run.

3. When people consider the Mac vs. PC question today it’s largely a question of a premium product versus an ordinary product. You can get better specs for less money on the PC side, but most people agree at this point that Macs run better, are more secure and are more enjoyable to use. A point that gets (badly) forgotten is that for a long stretch of time (let’s say 1990 to 2000 just to use round numbers) Macs were awful. They were 2x the price of equivalently powerful PCs, ran buggy operating systems and had essentially no software available unless you were in the graphic arts business. Apple lost because the product sucked.

4. And yes, Apple lost because they had implemented a proprietary set of choices. Apple had their own bus for cards. They used SCSI hard drives instead of IDE. They rolled out Firewire while others were rolling out USB. Their peripherals all used Apple Desktop Bus instead of commodity PS2 ports. And this meant that Apple’s hardware was more expensive. True. I list this 4th out of 4 because I think this only hurt them so badly for the other reasons listed here. Apple was a company that produced products that were simply priced as premium products but didn’t perform. If NuBus, Apple’s proprietary (not really, but no one else used it) 32-bit bus really was better than PC’s ISA cards (it was for a variety of reasons) users would have been fine with it. And they were, for a while. But then Apple stopped innovating and all of sudden PCs had PCI which was just as good. So the price difference wasn’t justifiable anymore. SCSI hard drives actually were much better than IDE for a long while, until they weren’t. The PC “organ bank” followed exactly the Christiansen-like progression that Chris alludes to: it undershot customer use cases, then improved faster than their needs. Today the collection of standards that make up the PC are fine for virtually all needs. And it should be noted that for the last several generations of this, Apple has also recognized the reality of it and no longer uses many differentiated hardware standards. Note also that it took Steve Jobs’ return to effect this change.

Looked at today, Apple isn’t losing the “Mac vs. PC” war anymore. Apple has been gaining market share for years and does so with greater profitability than any PC vendor. Last time I checked, Apple was around 9% of new PC shipments. That’s a great market share for a premium products company (compare to Mercedes-Benz. Or Gray Goose. Or All-Clad.) Its market cap dwarfs most PC companies and is on the same plane as Intel and Microsoft, both of whom are in what should be inherently more profitable businesses.

Apple lost the first 10 or 11 rounds of the PC Wars because they had an inferior starting position, were poorly run and produced mediocre products for most of the war. Once they fixed management and started producing great products again they immediately began gaining share and making a lot of money. And yes, they also began to use commodity hardware, so there is an “open vs. closed” coda to this story, but I don’t think anyone really argues that the resurgence of the Mac is primarily the result of using Intel processors or SATA disks.

The second big piece of what is turning out to be a very long post is the question of whether iPhone vs. Android is going to follow the same playbook. I’ve said at the outset that I don’t think it does, and the rationale maps pretty closely to the reasoning above. I don’t think the same set of conditions are at all present here. Apple isn’t starting from a weak position. They aren’t poorly managed and they are producing excellent (although certainly not perfect) products in the iPhone, iTunes, the App Store and now the iPad (about which I’m generally unenthusiastic, but that’s not the purpose of this piece). So the dynamic that remains is – will they lose because they are “closed”?

There are two ways one can make this argument. The first is that Apple will lose because the App Store itself is “closed” insofar as Apple approves their apps. I think this is a relatively poor argument. Good apps will get approved. Is it a pain in the ass? Yes, definitely. Do consumers look at the iPhone and say, “I’m not sure I want to buy that because developers have to go through an annoying approval process”? No. Definitely not. Are developers going to refused to develop for the iPhone/iPad platform with it’s fifty million and growing users because the approval process is obnoxious? I seriously doubt it. On the flip side – are there going to be a bunch of crappy apps and security problems on Android because no one is curating which apps get in and which don’t? I’ll bet there will be.

The second piece of this is that Apple will lose because the iPhoneOS itself only runs on Apple hardware rather than on an ever-growing range of Android devices. I think this is the far stronger argument. Android is going to have a lot of different form factors and markets as different hardware vendors integrate it. And so from that perspective I do think there’s a pretty good chance that it winds up in all kinds of interesting places that Apple won’t ever go, like cars or CE devices or other single-purpose personal gadgets. What I also think is that each of these will have little “quirks” as each Android environment is a little bit different and as people find different ways to expose it. And so some apps will work well on some devices or poorly on others. And generally speaking users will have lots of choices but it will also be work and will require research and customer service involvement. In fact it will look a lot like … a PC.

What I think iPhone vs. Android really looks like is Mac vs. PC TODAY rather than ten years ago. Today Apple produces high-functioning tightly-integrated products that people really like. But you are limited to those devices Apple chooses to produce. If you want a netbook, you can’t buy one from Apple. You want a phone with a physical Keyboard? Apple isn’t going to help you. And if I’m Apple, I’m perfectly fine with this. I’m perfectly fine if I sell 30 million iPhones a year and tons of 30% margin media and apps. Who cares if Google is giving away Android on 100 million cars? Apple can be a big profitable company by releasing terrific products for those who care to have the simplicity, style and curation Apple brings to the table. I’d argue that’s what they’re doing now and it’s working pretty well.

I think ten years from now there are more Android devices than iPhoneOS devices. Probably a lot more. But I don’t think that means that Apple will have “lost”.

January 16, 2010

Point solutions or general-purpose ones?

Filed under: Uncategorized — fiveyearstoolate @ 7:56 pm

Eric Wiesen

My friend Jon Steinberg had an interesting post this morning on Yelp’s decision to include “check-in” functionality in the new version of their iPhone app (his post here). In the comments section Jon, Fred Wilson and I got into a discussion about whether or not single-purposes products or services (like Fred’s investment Foursquare or Gowalla) tend to win over more general-purpose products (in this case Yelp, which is not a single-use application for checking into places but is rather an extension of their broader offering, including reviews, proximate choices, compliments to other users, etc…).

Fred wrote:

we’ve also noticed that point solutions often beat more full featured ones.

And Jon responded:

Yes, point solutions (focus) do seem to often rule the day. Especially, when I am free to knit them together on a platform (my device).

Upon reading this – I paused to wonder if I agreed with them. There is an intuitive rightness to this. A chef’s knife is a much better tool than the knife on a leatherman or Swiss Army device. An old-school manual espresso machine is much better than the $4,000 self-cleaning Rube Goldberg job that supposedly makes any coffee drink you want without any effort, cleans itself and then transforms into a robot that saves the earth. So it resonated with me that yes – single point solutions are often superior at the (axiomatically) narrower set of functionality they perform than general-purpose devices.

But then I realized that even as an early-adopting technology purist, I use general-purpose devices and solutions all the time. The best example I can think of is the iPhone. The iPhone is a general-purpose media and computing device that occasionally serves as a phone. As I thought about it, I use my iPhone for eight basic operations:

  1. Email and text messaging;
  2. Listening to music;
  3. Talking on the phone;
  4. Browsing the web;
  5. Interacting with data via apps;
  6. Reading books via the Kindle app;
  7. Watching videos; and
  8. Taking pictures.

Then I realized that for only two of these things (browsing the web and interacting with apps) is the iPhone actually the best device available to me. If I really wanted the best option for each of these functions (all of which are quite important to me) I’d actually carry, in addition to the iPhone:

  1. A blackberry for email and messaging (for those who carry blackberries they are essentially point solutions around activities that require typing);
  2. A 160 Gb iPod classic if I cared most about capacity (even the 32Gb iPhone doesn’t hold all of my media – not that close actually, and that’s just counting music) or an iPod Nano if I cared most about portability;
  3. A Motorola RAZR (on Verizon) for talking on the phone;
  4. My Kindle;
  5. An Archos 5 or some other tablet for watching movies; and
  6. My DSLR for taking pictures (but even an inexpensive point-and-shoot camera takes dramatically better pictures than my iPhone).

And yet despite my view that this collection of devices accomplishes a bunch of stuff I care about better than the iPhone, with the exception of the Kindle (which I carry when I take my bag with me) I don’t own most of these devices (and only carry the DSLR on trips when I know I want to take pictures). Why not?

Because sometimes good enough is good enough. Is the iPhone the absolute best device for listening to music, taking pictures or sending text messages? Definitely not – but it’s good enough for what I need. For some of these things (particularly talking on the phone) good enough may actually not be good enough, and I may add a device, but generally speaking I’m very happy to throw just the one device in my pocket and know I can do everything I want to do throughout the day.

I think this applies to web companies as well. To again pull a very mainstream example – Facebook is a general purpose social website. It includes messaging (but email is much better than my Facebook inbox), status updates (but my gchat message is more persistent to my friends), photo sharing (flickr has a better interface and tools) and a bunch of other secondary features all of which are done better somewhere else. And yet Facebook has well over 300 million users, is still growing, and has become one of the most important companies on the internet. Why?

I think the answer is that for mainstream users, general-purpose solutions are almost always preferable unless they are really bad (I’m looking at you,Yahoo…). Mainstream users don’t want to carry four or five devices because they are better if there’s an 80-20 rule general device that does enough for them. They don’t want to go to a bunch of different websites if there’s one that will do the majority of what they need. Ultimately, most consumers aren’t actually that picky about anything except this: convenience. If something is more convenient for consumers, they will do it.

So while this isn’t really about Jon’s “Yelpsquare” post, I guess my point of view is – if consumers have a choice between a really good app that’s just for a check-ins, a really good app that’s just for reviews and a really good app that’s just for messages, or a general purpose app that does all three pretty well, they’re likely to choose the latter. Because it’s more convenient.

Does that mean Yelp becomes the way people check into venues by default? Not necessarily. Not at all really. Because ultimately Yelp itself is a pretty specific application – it lets you look up restaurants (and other stuff but most people I know use it for restaurants) and see what other people thought about it. Now it also lets you see which other people were there. I’d argue that this is a pretty adjacent feature for them and that they are still a relatively focused application. I’m agnostic on whether the check-in UI is as good as Foursquare’s (or Gowalla’s) or not. But I guess where I come down is – if that’s the only question there is, I’d lean toward the more general-purpose product being the preference of the majority of consumers.

January 12, 2010

More Platforms?

Filed under: Uncategorized — fiveyearstoolate @ 1:52 pm

Eric Wiesen

I’ll be telling no one anything by noting that mobile is hot right now, particularly native mobile apps. And I would be remiss not to also note that I’m no skeptic of this trend – we are recent investors in Hot Potato and a number of our companies are finding meaningful extensions of their functionality, audience and other capabilities by releasing native applications on the iPhone or other platforms.

But as I see increasing numbers of pitches for companies whose core business is mobile applications of various sorts, I am repeatedly seeing the same strategy for the next 9-12 months. When asked what the next year holds, I keep hearing “Well, by this time next year we’ll be on Android, Blackberry, and possibly Windows Mobile and Symbian”. This horizontal platform expansion seems almost assumed by those in the mobile space today.

I am often concerned when I hear this strategy if it’s the central method the company is relying on for user expansion. Why? Frankly, because user behavior around applications hasn’t yet been proven out on any platform other than the iPhone. There are 55 million iPhones/iPod Touches out there. Android is much much smaller. Blackberry, WinMo and Symbian have big footprints, but nowhere near the level of application engagement that we see on the iPhone.

What’s the upshot? It’s worth stepping back and analyzing what the objectives are: More users, more engagement, more data, more revenue. So the question that emerges out of these objectives is – is a mobile developer better off spending their resources and time on a better iPhone experience or developing Android and other clients? Generally speaking, I tend to be in the former camp today, and advise our companies as such. Billions of apps are purchased in the iTunes store – how many in these others? I tend to think one is better off trying to increase presence and quality of experience on this platform, where users are hyper-engaged (even given the more competitive app environment) rather than try to be present on platforms where there are few users actively engaged with apps. In a nutshell:

  • Android is going to be huge, but it isn’t today. There aren’t very many users and it’s changing quickly. Chances are whatever you build today will have to be rebuilt before very many people use it.
  • Blackberry is a meaningful platform, but the current app experience kind of sucks, and most of the Blackberry users I talk to don’t use or care particularly about native apps. This will probably change, but for the time being the bang you get for your development and marketing buck isn’t great.
  • Windows Mobile – about as worthy of your development time as it is of my commentary.
  • Symbian – Unless you’re focused outside the US, wait.

Startups have limited resources. If you are care about your mobile app, build a great app that can and will be used by the people who use apps all the time. Today, those people are iPhone users. Unless your app is deeply specific to another platform (like Viigo, for instance), you are better off trying to really succeed in the low-hanging fruit garden that is the iPhone. The flip side of the oft-cited truth that development is much easier and more faster today than it ever has been is that you can afford to wait to start projects until the market needs them. For our companies making tough choices about how to spend their time, I am usually of the opinion that until other app stores have momentum, focus should be in the environment where the users are.

January 11, 2010

VC Expiration Date

Filed under: Uncategorized — fiveyearstoolate @ 12:26 pm

Stuart Ellman

Lately I have been thinking a lot about my age. I’m 43 years old and I have been in venture capital at RRE since I co-founded it in 1994 when I was still 27. At 27 I was always the youngest VC partner in the room. To say that the information technology business and the venture capital business have changed in this time period would be an understatement. Since I began, the industry has experienced the greatest bubble in its history and the greatest crash. The number of venture capitalists has tripled and then halved with perhaps more to come. These days I’m often the oldest person in the room. Two of my portfolio company CEO’s were pre-teens when I started at RRE.

What really got me thinking about age was something I experienced on vacation in Anguilla with my family. I met a restaurant owner who had spent his high school years in NYC. I asked how old he was, assuming he was in his mid 30’s. He told me he was 55. I was blown away. I told him how young he looked compared to me. He said, with all obviousness, that of course that would be true. He lives in a tropical paradise while I live in NYC and work in venture capital. It really got me wondering how long I can stay current in venture capital.

There are certainly venture capitalists who are older than myself but still current and active. My partner, Jim Robinson III and his contemporary, Alan Patricof, are testaments to vibrancy and enthusiasm past the age of 65. Fred Wilson, my friend who I consider one of the best VCs, has five years on me. But here are a few reasons that I wonder when I will be out of date.

  1. Age of startup entrepreneurs. I look at my work with my entrepreneurs in a very specific way. They are usually friends, either before I invest or through our work together. They are people who I can relate to. They are people that I respect. And they are people that I trust. For a guy like Martin Tobias, CEO of Kashless.org, or Gary Steele, CEO of Proofpoint, that is very easy. They are people that are about my age that I have grown up with in the industry. For a person like Sam Lessin, CEO of Drop.io, who is 26, it is a little harder. I trust Sam but it is helped by the fact that I have known him since he was 12. There has to be a huge amount of trust. I cannot help but wonder if this will continue to get harder as I get older but the entrepreneurs remain in their 20’s and 30’s.
  2. Age of business development relationships. Part of this industry is being able to do deals with Google, Cisco, Yahoo, Oracle, etc. It is being part of the ecosystem of people that you can call to do the deals for your portfolio companies. Most of the people in these roles are a few years out of business school. My friends had these jobs. They have moved on to bigger and better things. For example, my college friend, Jonathan Schwartz was just CEO of Sun. My former peer in the venture community, Brad Garlinghouse, is now President of AOL. But the guy I need to cut a deal with at Cisco. They change and remain about the same age as I get older. The ecosystem changes and I no longer have as many of my peers doing these jobs.
  3. Time commitment to be really involved in the NYC tech community. The NYC tech community is really vibrant. There is a ton of startup activity going on. Between the various tech meetups, Betaworks brown bags, the hatchery, startup alpha, entrepreneurs roundtable, and various conferences there is something going on every night. To be in the flow of everything going on, I would need to be in Manhattan and Brooklyn every night, drinking beer and eating tapas. But that gets a lot harder when you have little kids. People in their 40’s are married and have children. Do you ever want to see your kids? Do you want to watch them play sports or go to a dance recital? It just gets a lot harder to be as involved.
  4. Willingness to continuously reinvent. I and everybody who stays on top of their game in technology needs to continuously reinvent themselves. I have, at various times, been very up to speed on enterprise software, B to B exchanges, B to C commerce, e-commerce, payment systems, clean tech, consumer green tech, mobile hardware, mobile software, consulting, wireless safety, Location Based Services, Wifi, Zigbee, RFID, and everything else that has been relevant in the past 15 years. The only constant is that, what I need to be focused on will change about every year. This gets harder as a person gets older. People in their 40’s are supposed to use wisdom to make up for the lack of time or aggressiveness. But that doesn’t work as well when everything keeps changing.
  5. Willingness to stay cutting edge. Do you want to really know what is going on in technology? Then you have to constantly be on the bleeding edge. You had to get rid of your Blackberry the day that the iPhone came out. Why, because it was the future. But the future, back then, worked terribly with Microsoft exchange and many of the apps worked poorly with the available bandwidth. OK, now you have your iPhone 3gs humming. Now you have to get the Nexus One. Why, because you need to see what is going to happen there. But, I guarantee, there will be early adopter or 1.0 problems. Yet you need to go through the pain of doing it. Wouldn’t it be easier to keep the iPhone rather than spend 40 hours this week to get the Nexus working. Sure, but you will not see the second level consequences of the shift to the Nexus. That amount of time and annoyances are much harder the older a person gets. My partner, Jim Robinson IV, always spends the time and keeps way ahead of the curve. I believe he is both a genius and a saint for doing this.

In my heart, I know what the right answer is. I still love this business and am willing to sacrifice much to be very good at it. I have much wisdom about starting and growing companies that I use to help younger entrepreneurs. I will not neglect my family but will continue to find a balance between a very demanding job and being an involved father and husband. I need to make sure that my firm, RRE, has people that are younger and will go to every event that I cannot make. We need to see every interesting deal in NYC and make sure we choose the best ones. So, do not put a fork in me yet. I have at least another 10 years to go. But, we all know somebody in every industry that everyone else knows should have left a few years ago. I will not be that guy. Let’s discuss when I am 53.

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