An interesting thought from Keith Rabois on Quora:

To be truly successful on the Internet, you need to build something that becomes one of seven sites that a large swath of users will regularly use

I think this is a great way to evaluate companies one is thinking of joining, building or investing in.

Initially I wasn’t sure on the significance of seven, so I did some googling. Turns out that seven (plus or minus two) is a “magical number” in psychology initially cited in a paper by George Miller of Princeton University. Sometimes known as Miller’s Law, it argues that the number of objects an average human can hold in working memory is 7 ± 2.

While I haven’t used Rescue Time in a while, I’d be curious to look at its data set to see how regularly individuals’ top seven sites change and what are the key prompts: changes in lifestyle? Fads? New technologies? Job related? I imagine for most people there are 2-3 websites that will rarely change (ex: your preferred search engine, likely Google), but as you move to sites 5-7 I’d be interested to know more about turnover.

Today was the first time I’ve had a chance to hear Peter Thiel talk live and he did not disappoint!

I spent Saturday and Sunday at the 2009 Singularity Summit, held for the first time in New York. Michael Vassar, Singularity Institute’s president, did an exceptional job of assembling an all-star cast of speakers. Talks covered a variety of subjects ranging from quantum computing to radical life extension to venture capital. For those unfamiliar with singularity, a brief description is here. Also, WebMetricsGuru has great coverage of day one here.

The following is a brief synopsis of Peter’s talk (side note: I understand all videos will be available on the SI website soon).

—

Peter starts by taking an audience survey, asking which of seven doomsday scenarios people are most frightened by.

The audience sees two clear winners: a) runaway biotech, e.g. mutated diseases wipe out civilization and b) that the singularity takes too long to happen (title of the talk).

Peter suggests that the recent credit/financial crisis actually has to do with singularity. Our society is on shaky ground: millions of people have money invested in pension funds (and the like) which they expect to produce returns of ~8% per annum, even despite various period of volatility. What people forget is that the past returns we’ve come to expect have been generated during periods of compounding innovation; cutting-edge tech has bolstered all other lines of business that rely on technological gains to increase productivity, etc. Innovation is a necessary component of a healthy, upward market. Innovation has stalled.

Peter recently talked to an LP (endowment) who was thinking of re-allocating its portfolio to hold less than 5% in venture capital as its recent returns had not matched expectations. Peter told the LP that they’re thinking is flawed: if their 5% allocated to vc eventually does not return a mega profit, the remaining 95% allocation is going to be worthless anyway. “Investing in technology as a VC is like Pascal’s bet: if that isn’t going to work, nothing will.”

Peter then asks: has recent technological progress really been slower than it should be? He cites as support the fact that a) wages have not increased in terms of real dollars since 1973 b) that California (the most innovate place in the world) can barely pay its bills and c) that VC’s haven’t seen good returns in 11 years.

The credit crisis was really a technology crisis. Credit really is a ‘claim on the future’ and credit only works with a background of growth. Peter then suggests that the credit crisis was really an offshoot of the dotcom crash. The dotcom crash in his opinion, occurred because the ˜innovation story’ was not happening as quickly as people expected. People panicked and bailed. When stocks (i.e. those necessary 8% returns) tanked, housing and leverage swooped in to make-up the difference.

Peter states clearly: ‘the boom-bust cycle is over’. There will now either be a long period of malaise, or we’ll see a great boom (he’s obviously betting on the former).

Peter slams the NASDAQ explaining that most listed companies are actually not technology companies, rather, they are zero-sum bets against technology (ex: investing in Google is feeding a monopoly on search, Microsoft doing well means linux suffers, etc). NASDAQ companies are more like banks than they are true innovators (Sun may be an exception).

The Madoff scandal occurred because people assumed that even despite a drought of innovation, an 8% annual return with no risk was still safe. This is crazy. People need to dramatically adjust their return expectations; only great risk will produce great returns.

Peter talks a bit about his fund and where he sees opportunities. Suggests that an under-invested area is optimizing the division of labour between human and computers: it doesn’t need to be all or nothing. He provides an example of how PayPal only managed to save the company from fraud by dividing up the fraud protection process using a combination of humans and computers.

Society currently suffers from a free-rider problem relating to science and technology. Everyone expects great innovation to manifest, but someone else will do it. Large companies have disincentive to think with a long time horizon; they need to make quarterly numbers. If China is to surpass the US (Thiel seems to think this may eventually) it will be due to this time dimension.

—Another point brought up in the QA is around whether competition is a good thing in terms of schooling and career choice? Why are so many brilliant people studying string theory? Due to competition the best and brightest tend to go into the same fields of study. Much bigger contributions can be made by attacking disciplines where little progress has been made, the stuff on the edges like AI.

• The investor syndicate received 65% ownership in Skype for about $1.9 billion in cash and $125 million in debt
• New venture fund, Andreessen Horowitz invested $50 million, or 1/6^th of its  fund a stake of ~2%
• This deal valued Skype with a valuation of ~$2.75B
• Skype has 405 million users, meaning the buyers paid about $5 per registered user
• Registered Skype users increased by 47% in 2008 over 2007 and Skype continues to attract hundreds of thousands of new users each week
• According to Peter Falvey of Revolution Partners Skype is likely to do revenues of between $600 million and $650 million this year
• Based on these numbers, the deal valued Skype at about 4.5x revenues
• During eBay’s ownership period, the investment produced a negative 6% IRR, however, it still beats the S&P 500′s negative 10% IRR during the same period with
• eBay posted $8.54 billion in revenue in 2008 with Skype contributing a paltry $550 million, or ~$1.35 per user
• eBay’s value as a whole has declined by ~25% per year since acquiring Skype

Yesterday I gave a talk with Kam Khare at the Johns Hopkins University/Carey Business School Entrepreneurship Conference; we called it “Business Plans 2.0.”

Kam presentated on the traditional business plan: what it means to be an entrepreneur, to think through a business model and then put structure around those ideas. Kam also spoke about specifics around business plan competitions.

My half of the presentation (slides 10-17) focused on what I call “securing investment.” The way I see it, the landscape for entreprenerus and investors has changed dramatically in the last 15, 10, even 5 years. Venture Capitalists and Angels Investors don’t care about business plans in the traditional sense. Instead they care about “validation” for both you and your idea. During the talk I describe the three steps I see as necessary for securing funding/gaining validation. Also, apologies for having to dash out a bit early, but if you attended yesterday, feel free to follow-up by email with any additional questions, feedback, etc.

I have embedded the presentation below using SlideShare:

I’m getting excited to attend the upcoming Web 2.0 Expo in San Francisco hosted by O’Reilly Media and TechWeb.

While there are many great sessions in the works, two standout as particularity relevant to readers this blog and speak directly to the changes taking place in the world of early-stage funding.

First Alastair Michell is doing a session titled, S Factor – Why Sales Shouldn’t Be a Dirty Word in Web 2.0. Second, Eric Ries from Kleiner Perkins will be talking about The Lean Startups.

Alastair’s session is spot on: I continue to hear about company after company re-tooling their viral growth strategies to instead focus on producing revenue. Not that the two approaches (viral vs. revenue) are conflicting in all cases, but many times, one is sacrificed for the other due to limited resources. Many startups fail to understand the amount of resources required to actively make sales and support customers, especially early on during the alpha or beta phase.

A direct consequence of a focus on revenue production is the need for a critical evaluation of value propositions, especially from the perspective of potential paying customers.

Revenue generation has recently been viewed as more the exception, than the rule. This is where Eric’s approach (i.e. customer discovery) proves invaluable. Often when a startup pursues a hyper-adoption business model (think Twitter), the marketing efforts are focused on pushing a free version of the product and capturing eyeballs.  However, unless there is specific value resulting from the network effects of the product, revenue is generally expected to be derived from specific functionality (often ‘premium features’) sold to a subset of users who will ‘theoretically’ pay for. It then becomes a modeling game of conversion rates, instead of a focus on “process” around determining whether a customer would actually pay for the service(s) provided. In an economy where wallets are tight (both for customers and venture funds) the need to 1) focus on revenues and 2) identify where true, scalable value exists is absolutely imperative.

Free Ticket Giveaway.

In the spirit of “small being the new big,” I am opening up my blog for posts on hacks, insights and anecdotes about doing more with less.

What can you share or suggest with fellow entrepreneurs to help navigate these turbulent waters? I will post all submissions and pick two authors to receive free admission, courtesy of the great folks at Web 2.0!

Over the last few months I have stumbled upon several new(ish) blogs that are highly worth checking out:

Laserlike: Authored by Mike Speiser, Managing Director at Sutter Hill Ventures
Sample Great Post: Ontologies for Everything Else

Lessons Learned: Authored by Eric Ries, a ‘Venture Advisor’ at Kleiner Perkins
Sample Great Post: Engagement Loops: Beyond Viral

Altgate: Authored by Furqan Nazeeri, President & CEO of Viridus and formerly an EIR at Softbank Capital
Sample Great Post: How Much is a Free Customer Worth?

Five Years too Late: Authored by RRE Ventures, a New York Based VC firm.
Sample Great Post: Why You Might Want a Lower Valuation for Your Startup

Mine That Data: Authored by Kevin Hillstrom, CEO of Minethatdata.
Sample Great Post: Cost Per New Customer

I also wanted to point people to the Kissmetrics’ Blog and Twitter feed. Kiss has been sharing great links on Twitter and I’m looking forward to the launch

While full data for 2008 investments are not yet in, the picture from the latest Angel Group Confidence Report is that total angel group investments in North America are estimated to decrease by at least ten percent from 2007. Angel groups appear to be focusing more on a few potential winners. The top reason for the decrease was uncertainty in the market, followed closely by a loss in member wealth. Despite the downturn, three-quarters of those surveyed expect the number of investing opportunities to increase in the coming year and roughly half are still optimistic that overall investments will increase. So how do they plan to adjust to the current economic climate? Forty seven percent plan to increase their co-investment activities with other angel groups and 33 percent will increase co-investment activities with other equity investors such as early-stage venture capital firms or individual angels.

-Source (National Dialogue on Entrepreneurship)

…This means that entreprenerus really need to allow as much time as possible to raise funds in 2009. Maybe this is obvious, but syndicating a round always takes longer to organize and close with multiple parties. It also leads me to belive that finding the *right* angel with 1) a track record and 2) the right social leverage will be more important than ever in order to attract a syndicate most expediently.

I have been doing a bunch of traveling lately but hope to make more substantial posts soon…

In the interim, I thought these facts on angel investing from Entrepreneurship Professor Scott Shane were enlightening:

Prof. Shane notes that only 21% of angels meet the Securities and Exchange Commission’s requirements for being an “accredited investorâ€� – or an individual making $250,000 annually or more, or a couple making $350,000 or more (or net worth of more than $1 million). What’s more, the majority of angels don’t end up making money on their investments, and only 2% of businesses they invest in eventually become IPOs. And only 15% of angels do “extensiveâ€� research on the sectors of the businesses they fund.

The median angel investment is around $10,000, Prof. Shane finds.

-Via the Wall Street Journal

I saw this job offering here in NYC and thought it might be perfect for someone who enjoys this blog. Dow Jones and Co. is hiring a new reporter for Venture Wire (its venture capital arm). I’ve never been a journalist but I’m sure covering startups is a great way to learn the industry, build a rolodex and attended lots of cool conferences for free.

The reporter will cover technology start-ups in the broadly defined area of “the enterprise” companies in the enterprise software, storage and security space competing against the big guns like Adobe Systems, EMC, Microsoft, Oracle and Symantec.

I always feel guilty quoting others because I want to be my own thinker. That said…

[Something] I see starting to get standardized is acquisitions. As the volume of startups increases, big companies will start to develop standardized procedures that make acquisitions little more work than hiring someone.

Google is the leader here, as in so many areas of technology…One problem they’ve solved is how to think about acquisitions. For most companies, acquisitions still carry some stigma of inadequacy. Companies do them because they have to, but there’s usually some feeling they shouldn’t have to—that their own programmers should be able to build everything they need. Google’s example should cure the rest of the world of this idea.

One reason Google doesn’t have a problem with acquisitions is that they know first-hand the quality of the people they can get that way. Larry and Sergey only started Google after making the rounds of the search engines trying to sell their idea and finding no takers. They’ve been the guys coming in to visit the big company, so they know who might be sitting across that conference table from them.

Acquirers will also have to get better at picking winners. They generally do better than investors, because they pick later, when there’s more performance to measure. But even at the most advanced acquirers, identifying companies to buy is extremely ad hoc, and completing the acquisition often involves a great deal of unneccessary friction.

I think acquirers may eventually have chief acquisition officers who will both identify good acquisitions and make the deals happen….Maybe in the future big companies will have both a VP of Engineering responsible for technology developed in-house, and a CAO responsible for bringing technology in from outside.

At the moment, there is no one within big companies who gets in trouble when they buy a startup for $200 million that they could have bought earlier for $20 million. There should start to be someone who gets in trouble for that. – Paul Graham at Future of Web Apps Conference

Update: Here is the link to the audio file

Subscribe to this blog via RSS