Ashok's Blog

I think therefore I blog.

Why The Microhoo deal is good for startups

 

I wasn’t sure I wanted to get caught up in the hype surrounding Microsoft and Yahoo, because to be honest, I don’t think the DOJ will let the deal go through.  That being said, there is one issue that needs to be addressed.  And that’s why the Microhoo deal will ultimately be better for the startup market, better for startup hubs and better for budding entrepreneurs.

The issue that’s been raised is the sudden drop of one huge player in the acquisition market.  This is true.  With Yahoo gone, and Microsoft making the same number of acquisitions in a year, that’s quite a few companies that go un-bought that would have otherwise cashed in.   But there’s a few misnomers with this assumption.  One is that, relative to Microsoft and Google, Yahoo just doesn’t buy that many small startups.  They’ve made a few big purchases including Blue Lithium and Zimbra, but very few sub $50M deals.  So the relative decrease in acquisitions for small startups really goes unchanged.

As Marc Andreessen pointed out, qualifying a “drop” in acquisitions because one big player is gone is also moderately incorrect because the same argument uses Microsoft, Yahoo and Google as the players.  But there are over 20 big companies that have made legitimate acquisitions in the internet startup game recently.  Marc’s list includes:

  • Akamai
  • Amazon
  • American Greetings
  • AOL
  • CBS
  • Cisco
  • CNet
  • Comcast
  • Digital River
  • Disney
  • eBay
  • Expedia
  • HP
  • IAC
  • Jupiter Media
  • Liberty Media
  • Marchex
  • MercadoLibre
  • Monster
  • Motricity
  • NBC Universal
  • New York Times
  • News Corp
  • Omniture
  • Priceline
  • Publicis
  • Real
  • Sabre
  • Scripps
  • Shutterfly
  • Sony
  • Valueclick
  • Viacom
  • WPP

If we look at this consolidation from an advertising revenue standpoint, there’s no doubt in most people’s minds that ultimately Microsoft and Yahoo should outsource it’s advertising to Google.  Google delivers the best results, has the best metrics and simply has a hold on the market.  Why not outsource it and avoid all costs?  And in turn, startups will reap the benefit as the ad market scales.  As I mentioned in my post regarding the advertising recession, this will only accelerate online CPC advertising.  As long as online advertising stays in effect, you can bet your money that startups will continue to make money.

But my biggest reason as to why this will be have a net positive effect on the startup market, is because, ultimately, whether I’m right or wrong about the actual number of acquisitions not mattering, the perception will probably be there for most entrepreneurs.  But that’s a good thing.  Yes, you need an exit strategy.  But ask any real entreprenuer, they’re not looking to exit.  They’re looking to build a good company.  They’re looking to build a real company.  Flipping is an art that no one has yet mastered, and if you go into a project looking to flip it, you’re gonna come out broke anyways.  I’m confident that this perception of less acquisitions will streamline the entreprenuer and startup market to positive projects and truly innovative people.  I don’t see much wrong in that.

Drinking the Kool-Aid

No, I don’t mean to reference to LSD (although I hear that’s pretty fun), but instead to getting ahead of yourself.  As an entreprenuer, it’s important to be passionate about your idea.  99% of people will doubt you and the only motivator you’ll have is yourself.  That being said, it’s extremely important to be dynamic and to be agile.  And time and time again you hear about entrepreneurs who are so obsessed with their vision that they turn a blind eye to any constructive criticism.  Typically, what you start with as an idea is not what you end up with as a product.  Things change, markets change, customers change.

I’ve personally been in this spot many times.  It can go the other way too, where I get a call from an investor and think I’ve already got funding!  Or I get so ahead of myself to think that my project will cure the world and I’ll be the next Bill Gates.  It’s great to dream.  It’s important to dream.  Fortunately, I have a partner who keeps my feet on the ground so I don’t get stuck in the clouds.  But you need to be realistic, but passionate.  Ambitious, but not myopic.  But, and this may seem counter to my whole post, do what really feels right to you.  Make sure you listen to others, but in the end, follow your gut.

How much equity to give partners or investors?

 

I hear this question pretty often from fellow entrepreneurs.  “How much equity should I give my partner?  He’s asking for too much I think.  I don’t know what to do”.  Well the simple explanation is that the amount of equity you give should directly equal the amount of value that person contributes.  In fact, it should actually be a bit less, so you make a better deal than the company you partner with, or the employee you hire.  Paul Graham calculates it the following way:

 1/(1-n)

Obviously “n” here is the % you give away.  So, for example, if a company wants 50% of your equity, you have to assume that they’re going to double your value as a company. (1/(1-.5) = 2).  But to be truly ahead in the game, you need to give away either

a) less than 50% if you’re assuming they company will only double your value or

b) hope that the company will more than double your value.

In both cases, you’re net ahead so you made a good deal.  Of course, there’s an immense amount of subjectivity involved in these kinds of deals, so it can’t come down to a simple formula, but ultimately, something like this probably works.  And it’s not as simple as a monetary value add.  If you get funding from one of the top firms, while they may only double your value from a monetary standpoint, the subjectivity value add is huge.  Like Graham says, simply saying you got funding from Sequoia will get you in the door in 99% of places.

Figuring out the employee value add is similar, but the formula is actually upside down:

n=(i-1)/i

In this case, i=the total company value after hiring that employee.  So, for example, if you think that by hiring a third partner or employee will increase the total company’s value (in the long run) by 10%, then i=1+.10=1.1:

n=(1.1-1)/1.1

Therefore, n=.091.  What this means is that if you give that employee 9.1% equity, you’re breaking even as a company.  You give away a certain percentage of your stock in exchange for the exact same value add.  So typically, you should give less than 9.1%.  Of course, similar subjectivity comes into play.  If you hire one of the best programmers in the valley when there’s a shortage of good people, you’re probably getting a good deal either way.

This is really just math attributed to a subjective decision.  Ultimately, it’s probably impossible to gauge how much value any one person will add, or how much value any investor will contribute.  But it’s probably not a bad guideline.

Hyperrealism

So I was browsing Deputy Dog and came by “9 artists that will blow your mind”. And seriously, they will. I mean, it’s mindboggling stuff. I actually had to look it up to make sure it was real. Here are a few I particularly enjoyed:

duane hanson [sculptor, 1925 – 1996]

ron mueck [sculptor, 1958 – present]

raphaella spence [painter, 1978 – present]

gottfried helnwein [painter, 1948 – present]

denis peterson [painter, 1944 – present]

Crazy stuff man. My head would probably explode trying to get the detail on these done.

Is Techcrunch down?

It looks as if Techcrunch is down. Stop wasting all the money on hookers and blow Mike. Go and pay your bills!

EDIT: It looks as if Mike paid his bills.

In case it wasn’t clear enough

 

In case you didn’t already realize that Facebook isn’t worth the equivalent of General Motors in terms of market cap, their recently leaked finances should put things into perspective:

2007 Revenue: $150 Million

2008 Revenue (projected): $300-$350 Million

2008 Capital Expenditures: $200 Million

2008 EBITDA: $50 Million

2008 Cash Flow (EBITDA- CapEx) = (-) $150 Million

Zuckerberg’s going for broke with this move. With a valuation of $15B, they’re working with a 300X EBITDA multiple, which they’ll never get.  The only he really could have cashed out is selling to the company, or going public, which doesn’t seem promising.  Wall street never was a fan of companies that was losing money.

When will the music industry just figure it out?

We want free DRM-less music. Now. If you don’t give it to us, we’re just gonna steal it.

I mean, I don’t understand these guys. They spend $1,000,000 on a launch marketing plan and a)don’t coordinate the deal with the execs at the labels and b)think that DRM’ed music will really sell. Music that won’t even play on an iPod, the largest selling mp3 player in history? Who the hell hired this guy for this job?

The economics of the matter is simple. A marginal cost of zero means that ultimately, the price will go to zero. Just like software did (Google Docs, ThinkFree, etc), so will music. Making a copy of an mp3 costs zero. Now that doesn’t mean that music has a lower intrinsic value to consumers. It just means that the distribution model is plain screwed up. The biggest musicians always made the most money from concerts anyways. Figure out a way to give music away and become a marketing machine. That’s all the labels are good for anyways. Bands like Radiohead have proven that they can give their music away at any price and still make money. The key to that? Already being famous. So put all the money and resources you have, begin marketing real musicians, give away their music, make money on the concerts and other forms of media, and stop coming at us with this crap. [/rant]

Why the Tech Sector doesn’t have to worry about a Recession

So the market is crashing, your house is worth nothing, your income is equivalent to the minimum wage in Canada, and you’re worried about what’s next. Well, don’t fear! Start a website!

Erick Schonfeld at Techcrunch predicts that a drop in corporate spending will actually benefit Web 2.0 companies. Erick says

While a belt-tightening might not be good for the IBMs, Dells, and Oracles of the world, Web 2.0 companies should do fine—even thrive. All of those Enterprise 2.0 startups out there, or even Amazon trying to sell Web-based computing infrastructure, are actually at an advantage. Customers are more likely to try cheap cloud computing when they can no longer afford the alternatives.”

I think the technology sector should be relatively unharmed. The reason being that the majority of current companies that are web based, are generating their revenues from advertising. And advertising is actually a sustainable model. If you have a good product, you can go to any ad network, be that AdSense, Yahoo Publisher, Federated Media, etc, and generate revenue. Back in 1999, companies didn’t actually have real revenue models, and the bubble burst.

In the case of an economic slowdown, typically marketing and advertising are the two main areas in which spending will be curbed. But CPC (as opposed to print/CPM) advertising will be extremely popular. The reason being that it’s based on a conversion ratio, so the only time you pay to advertise is when the user is ultimately directed to your site. CPC ads have great analytics and can be tracked to the bottom dollar. In a recession, companies are required to do anything to improve sales, and there will be great interest in online CPC advertising. As long as advertising goes strong, so will the companies that are supported by it.

As far as the market is concerned, Microsoft reported record earnings last week and was up in a down market. It’ll be interesting to see how Google and Yahoo fair in this down market after reporting earnings later this week. Personally I think Apple was crushed by the shorts, and not be any other possible event. Their earnings are up, sales are up, image is good, and there’s no legitimate reason (other than being overbought) that the stock should be at $130. Time will tell.

Are you a Fundamentalist or are you Curious?

To preface, you need to watch Seth Godin’s quick interview on being curious.

Seth Godin – Curiousity (my embed isn’t working, sorry)

Now personally, I’d like to think I’m curious, primarily because I have no real faith system to look towards and so anything I’m told, I look to explore before I accept it. Also, this video isn’t anti faith or religion (actually, he mentions how he’s not equating religion and faith), so don’t take it the wrong way. That being said, it’s also interesting to note that he points out the fundamental flaw with the education system, in that it doesn’t allow for curiousity.

See, in traditional schooling, even higher schooling, questions are not encouraged. And the reason for this is because of the ideology that what’s taught to you is of higher value than any counter argument or question that’s posed. This is not only an inherent hindrance to learning, but also diminishes the actual education system! Sure, you will come across teaches and professors that stimulate questions and encourage natural thinking, but rarely does a systematic form of learning and a free formed thinking pattern go hand in hand. They’re typically mutually exclusive.

Also, this doesn’t mean that being a fundamentalist is necessarily a bad thing. I have a profound respect for those who are disciplined enough to simply do as they’re told. To accept what they’ve been given. And to walk the line. But it’s fun to question. It’s fun to think outside the box. It allows for innovation.

Then again you know what happened to the cat.

Why Wikipedia Rocks and Schools Need to Catch Up

So yeah, Wikipedia rocks. I don’t think there is a site I use to grab more information than Wikipedia. And I absolutely detest when people diminish it to an encyclopedia written by 12 year olds. The concept behind Wikipedia is that if there are 12 year olds writing content, there will be a 50 year old expert editing that content and locking it.

We’re not allowed to cite Wikipedia in school. If what you are after is information, I don’t think there is a more succinct and direct source than Wikipedia. Sure, you be concerned about credibility if you’re running for Mayor, but realistically, credibility in information is for the most part transparent online these days. The internet is democratic enough to filter out in-credible sources. The most interesting part is in the diminishing of objective information. So if one is writing a piece regarding the history of Rock and Roll, and cites Wikipedia, it won’t be recognized in academia today. Why? The excuse is the lack of credibility. The real reason? The lack of understanding of how objective information is inherently transparent and credible. Who would doubt that Led Zeppelin continue to be held in high regard for their artistic achievements, commercial success, and broad influence? Sure since it comes from Wikipedia, it must not be credible right? Well I guess the Rolling Stones must not be trusted either.

Information is the end result. Finding that information and how it’s found must not be questioned. Credibility these days is rather inherent in online information. Everything else is filtered out. As Seth Godin writes,

“Here’s what just about every exam ought to be: “Use Firefox to find the information you need to answer this question:” And as the internet gets smarter, the questions are going to have to get harder. Which is a good thing.”

The funniest part about the whole thing? I don’t know one student who doesn’t use Wikipedia to source information. We just forget to cite it.