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.

If You Build It…

Stuart Ellman

Eric Wiesen

“Should I build my company to be a profitable, standalone business or should I be aiming to fit into the long-term plans of my likely acquirers to facilitate an M&A exit?”

This is a question that entrepreneurs ask themselves every day. If you asked a hundred venture capitalists this question, I suspect the overwhelming majority of us would give you the canonical answer – build for long-term profitability and a standalone business, because the tides of M&A can come and go. In the previous era, many VCs liked to see every investment as an IPO candidate. And that made sense in an era when a pre-revenue web company burning cash could actually go public. But in today’s market, when even nine-figure companies with positive EBITDA can’t go public, it is worth asking this question again.

The argument for the traditional answer is simple and compelling – when you go to start your company, you don’t know what Google or Cisco or Dell will be buying in 3-5 years when you achieve sufficient scale to be interesting to them. As a result, if you build toward M&A, you’re likely to build toward whatever they’re buying when you start, and that will likely change significantly over the build period of your company.

There is also a huge issue of stage and valuation. Acquisitions tend to happen in two lumps. First is the “cheaper and quicker” route. This means that Dell can buy something for $10 to $25mm because it is cheaper and quicker than building it themselves. The second is “they already have scale” route. Obviously, a company like Dell can pay a great deal more for a company that sufficient scale that cannot be reliably replicated simply by recreating the technology. A good example of that would be the acquisition of Pure Digital Technologies (creator of the Flip video camera) by Cisco. Could Cisco build its own version? Sure. But they paid almost $600mm because Flip already had brand and scale . (BTW, kudos to Jonathan Kaplan, CEO of Pure Digital and a former RRE CEO). If you are selling in the “cheaper and quicker” category, it better be at a single-digit valuation. Nothing past a Series A.

The emerging counterargument is that the IT landscape has so significantly consolidated that the it’s become easier to project the tectonic movements of the “continental” companies like Microsoft, Google, Cisco and Dell. But is this true? Can you forecast what these companies are going to do? We sold MessageOne to Dell because it wanted to make a big move in hosted services. Could we have forecasted this in 2001 when we funded the company? Again to the Pure Digital example, how could you have guessed that Cisco would be going after the consumer market in 2002 when Jonathan was raising his first round.

We think this question is being answered in real-time. The standard advice to build for the long term is still good advice, but if all the exits are going to be via M&A for the foreseeable future, we’ll be thinking pretty hard here at RRE about what the big guys are really looking for. We still want to fund great entrepreneurs solving big problems in growing markets. But we also want to know what acquirers are looking for. Time to get smart in this area.

Thinking about Google’s New Platforms

In the last month we’ve seen the release of both Google’s new browser, Chrome and the first handset based on Google’s mobile operating system, Android, the G1 from T-Mobile. In both cases, the knee-jerk popular response arc seems to be the same, “Hey new product from Google this is great… hey wait a minute, it’s not that great… ah forget it”.

With Chrome, people got excited because a) it was a new browser, b) it was from Google and c) it was (is) fast. But then people realized their firefox plugins wouldn’t work, and some web applications (like … Microsoft Office Live) don’t work, and it didn’t change their browser experience THAT much. And so while some people are using it every day, the tech cultural zeitgeist essentially moved on, at least for now.

With Android and the new T-Mobile G1 phone, the large majority of the conversation I’ve seen has focused largely on feature-by-feature comparisons with iPhone. The conclusion seems to be that this phone isn’t as cool as the iPhone and kind of looks like a Sidekick. Oh, and it’s not open enough because you can’t use VOIP instead of T-Mobile’s minutes. And because you can’t buy it from T-Mobile, and then ditch T-Mobile for another carrier (“Sim-locked”). So people conclude that Android’s openness is a sham and that the project is a failure.

Let’s step back from both of these sets of immediate concerns and think about what Google is actually trying to do with both Chrome and Android. For a number of years now many people (myself included) have wondered what comes next for Google. The company has thousands and thousands of employees working on all manner of things, but essentially only two of the products (Search and Ads) contribute to the top line in any meaningful way. And so the question arises, what is going to be Google’s next great business?

Chrome and Android aren’t designed to make money for Google. They are designed to advance Google’s unifying position as a company that produces applications that run on networked devices (and sells ads on the inventory generated by those applications). To date, Google has developed primarily for PCs running Internet Explorer and to a lesser extent Firefox, Safari and (back in the day) Netscape. But moving forward, the great trend (both on the consumer side and on the business side) is toward applications that run out of the browser (web services if you like, or Software as a Service). In fact this is the vision that drove the first “browser war” between Microsoft and Netscape back in the 1990s. Even then it was clear that enormous volumes of activity and time would be spent on browser-initiated interaction, rather than on client-side applications.

So with Chrome, Google is looking to build out a big piece of browser real estate that is built in ways that will optimize the operation of Google’s (and presumably others’) web applications. Some of the architectural features – each browser tab runs as a separate process, there is a task manager for the browser, etc… indicate that Chrome is an attempt to take web applications seriously. And of course if Google controls the underlying browser’s technology, it can assure optimal operation of its applications both offensively (in terms of designing the apps and the browser to work well together) and defensively (against the possibility that IE/ActiveX might unduly benefit Microsoft’s own emerging web application ecosystem).

With Android, Google looks further into the future. Developing for mobile devices is a complete disaster today. Mobile software companies who want to develop applications for various dominant platforms today (iPhone, Blackberry, Windows Mobile, Symbian and a host of others) have to employ teams of engineers, manage multiple codebases and learn the ins and outs of various handset hardware and OS restrictions. The idea behind Android isn’t that as a developer you will be able to be free from all carrier restriction (Google doesn’t have that power, neither does Apple). The carriers are still a very powerful and very challenging force here in the US. I think that Google’s notion is that developers should have a superior environment in which to build applications that can access capabilities of the handsets on which they reside. I think that looking forward, Google sees the mobile web as pervasive on handsets as the consumer web is on desktops today. The current universe of mobile devices renders this vision nearly impossible to realize.

Ultimately, the handset released by T-Mobile yesterday has almost nothing to do with the long-term possibilities Android represents. Sure, it’s a first-generation device that’s less sexy than the iPhone. But the real battle isn’t going to be between these two physical devices. In some sense it hearkens back to the original Apple vs. Microsoft battles of the 1980s. Apple built a beautiful, closed system while Microsoft let any PC manufacturer install DOS. Again, Apple curates the App Store while Google gives Android away to handset manufacturers and application developers as an open-source product.

We’re still in the early days of this, but both of these products indicate significant forward thought by Google. It will be fascinating to watch both of them advance (or not) the company’s agenda.

Barnacle Companies

From time to time we see a company come in to pitch RRE that pitches us on a business that is fundamentally dependent on another (typically larger) business. An example of this would be Xobni, the (very useful) inbox extension for Microsoft Outlook. But it’s not always a big company (think Summize, the search company recently acquired by Twitter). We sometimes call these companies “barnacles” because of the way these companies latch onto a larger host and add incremental value to users of the host company’s products. This is becoming more and more common as companies either actively promote an application infrastructure built on top of the core platform (Salesforce.com, iPhone App Store, Facebook Platform) or as companies simply open up API access to allow other applications to take advantage of functionality or data.

There are pluses and minuses to these types of businesses, and like everything we see, the ultimate decision of whether or not it’s a business we’ll want to fund comes down to the strength of the people and how big a problem their product purports to solve. But barnacle businesses have some specific characteristics to them that are distinctive.

GOOD: Barnacle companies don’t have to build an ecosystem of interest to support their products.  Xobni, to continue our example (and note that we are not investors in Xobni) doesn’t have to convince millions of users to use Outlook – Microsoft has already done that. They just need to convince existing Outlook users to install their product to enhance productivity. Now that’s not the easiest sell in the world, especially given the IT attitudes present in many large Microsoft environments, but it’s a lot easier than trying to build the ecosystem from scratch.

BAD: The flip side to the above, of course, is the vulnerability barnacle companies have to host companies. When your business is entirely dependent on another company, that company has substantial power over you. That can come in the form of a decision to duplicate your functionality, at which point you rely on any IP you might have or the stickiness of your product, or to modify their product (or API) to block you. If the host company decides to prohibit one of these products from attachment, the startup can find itself adrift at sea.

GOOD: There is no more obvious acquirer for a barnacle company than the host.

BAD: There may be no other acquirer for a barnacle company than the host, so be very careful to establish a good relationship.

In an era where a greater and greater number of ecosystems are being built (Microsoft, Facebook, Salesforce, etc…) it is becoming increasingly feasible to build a business that is a barnacle, but these come with an unusual set of challenges, and require some careful maneuvering, particularly around fundraising and exit.