VCinJerusalem

Fail, Fail, and Fail Again. But Always Believe You Can Succeed

Living as an early stage VC in Jerusalem, it's easy to get burnt out on so many different levels.  All of our companies need to raise more money (the difficult part),  close  business deals (the easy part),  and keep their teams incentivized, excited, and with a feeling of positive momentum. Not easy.  And all of this while living in Israel where the very existence and future of the state is questioned on a daily basis.

I saw the following video on Brad Feld's blog, reminded me how true visionaries are the ones who know how to deal with failure (but not "give up"):

Facebook Fallout: Nobody Wins, Especially VCs and Start-Ups

You have heard me go on before about why I thought the valuation Microsoft gave Facebook for its "strategic investment" was way out of line (nice way of saying absolutely ridiculous). Below please find analysis by Daniel Primack (of PEHub fame), which I think is spot on, so simply reposting in...bottom line, Dan thinks that "Microsoft’s initial investment may be one of the worst venture capital deals of all time."

Not only do I agree, but want to add that in addition to being terrible deal for MSFT, also sent shock waves through the entrepreneurial ecosystem, even here in Israel, which made entrepreneurs (and some VCs and Angels) silly for several months. All of a sudden every idea for a new social network was deemed to be worth $5 million pre-money...which is one of the reasons Jerusalem Capital did make any new investments since September 2007.

We already see that people have come back to reality, a bit. Anyway, here's Dan:

                                                                

	Dan Primack | 1191 articles posted | contributor since 11/2006         read my column ...
Facebook’s Valuation Problem
Topics: VC Deals,  PE-Backed M&A,  PE Exits		This entry was posted on 05-09-2008

 

The WSJ recently reported that Microsoft is sniffing around Facebook, less than seven months after investing $240 million in the social network at a $15 billion valuation. It was largely discounted as the hopeful fumblings of Steve Ballmer, in his search for a rebound acquisition after being dumped by Yahoo. But it got me to thinking: Microsoft’s initial investment may be one of the worst venture capital deals of all time.

Longtime readers know that the current title-holder is Hummer Winblad, for its Napster investment in the midst of that company’s legal morass. And it will remain that way, as Microsoft’s Facebook deal presents neither the legal difficulties nor the likelihood of a total write-down. In fact, it’s probably been a good strategic deal for Microsoft, which doesn’t need to sweat the small stuff (i.e., cash). The only caveat to that last part is that Microsoft is now expected to overpay for all its other acquisitions, which has led to a trickle-down throughout the Web 2.0 market. For example, macro valuation inflation helped scuttle the Internet roll-up envisioned by Ross Levensohn and Jon Miller — as their targets upped their respective asking prices.

Anyway, back to my thesis. The reason this might be one of the worst VC deals is that all of its negatives fall on its supposed beneficiary: Facebook.

This isn’t a dilution argument, but rather one of public perception. Social networks partially work because of functionality, and partially because of bandwagon popularity. You don’t necessarily join and use Facebook because it works well, but perhaps because your friends have joined and use it. And, as has been proven with MySpace-Facebook-Beebo, that usage can be fickle and prone to migration.

Public perception is very important, and I think the Microsoft investment has set Facebook up for a giant egg pie in the face. For example, imagine the endgame is to go public. If so, there is no way a company with such low revenue could possibly get near a $15 billion valuation (this isn’t 1999, and Facebook isn’t Google circa 2004).

So let’s generously imagine it could get $5 billion. Know what the headline will be? How about: “Facebook Files for IPO.” Looks good, but check the subhead: “Social networking company worth just one-third of 2007 valuation.”

Ditto for an acquisition, as no company in its right mind would pay close to $15 billion for Facebook. Yes, that includes Microsoft.

What this means is that Facebook is going to lose heat upon liquidity, and a loss of heat can lead to a loss of cachet. Remember all the buzz when Facebook got the $15 billion? Now imagine it again, but with a negative spin (particularly outside the TechMeme bubble, where most of Facebook’s users actually live).

All of this is exacerbated by the fact that Facebook never really needed to take the Microsoft money (could have gotten it elsewhere), and certainly didn’t need to confirm the valuation in a press release.

The only out I see for Facebook is to take another big strategic investment at the $15 billion figure. It could provide liquidity for Facebook’s early VCs like Accel (whose LPs would really like some payoff) and other employees looking to turn their paper green. And, yes, that probably means Microsoft again. If not, that original investment will hurt Facebook far more than it will help it.

Note: Much of the above argument was first made (to my ears) by venture capitalist Stewart Alsop, at this year’s VC in the Rockies conference. It took my a while to come around, but I’m now there. Hope he doesn’t mind the pilfering.

If a "Tweet" Falls in the Forest....Does a VC hear?

If you have not yet heard of Twitter you are part of the blessed 99% of the population of the Western world that are not "early adapters." For professional reasons and general curiosity of the 1% (I consider myself to be a bemused observer of the early adapters) I signed up for Twitter back in January, although Twitter has been around as a public service since October 2006 (see here for more on history).

OK, so what is Twitter? Its is a messaging service limited to 140 characters...wait, all of you semi-Geeks ask, isn't that the same as SMS? Well, yes. And aren't there dozens of companies that allow you to message blast from/to mobile phones, PCs, etc.? Yes. So what is new about Twitter? Well, nothing and everything. Nothing technically new, that's for sure.

So what is/was new about Twitter? Well, they picked a funky name, that's always important (think Yahoo!, Google, Ebay...). And they specifically marketed their service to US semi-geeks (think self-important VCs and well-known bloggers). And timing was right, when [finally] the 1% crowd in the US felt comfortable messaging from their mobile devices. And of course after the first blogging wave, which already prepared us to be interested in complete nonsense(;-)).

One of the "features" that Twitter added (this feature exists in many blogging platforms) is to sign up to receive the tweets of a certain Twitter. Basically, to get their micro-blog feed. The 1% crowd loves this, all zapping messages to one other all day long.

As I said, I signed up, literally to just see what the sign-up process was like, see how it worked. Sent a few twits to test web/sms interfaces. haven't twitted in quite some time. But slowly slowly people have found me on Twitter and have signed up to "follow" me. So far only 18, but half of those people I don't even recognize their names! And there is nothing to follow.

To understand better how Twitter is being used by the 1% crowd, I popped over to Brad Feld's Twitter home page, and see that he has 1,383 people "followers" and that he is "following" 132 people. Very believable, and reasonable, given that Brad is one of the best living VCs, and prolific blogger. Persusing through his "tweets," I recommend he stick to blogging, and stop tweeting, but whatever makes you happy.

And then I looked at super-uber-blogger Robert Scoble's Twitter page, and see that he is sending tweets every few minutes (while awake, and sometimes while sleeping). He claims to be following 21,209, and to have 22,545 followers. Meaning every time he sends a tweet, goes out to 22,545 people. That's a lot of virtual ink. Does this make sense? Could he really be keeping up with 21,209 people? Doubt it, but maybe he has outsourced himself...

Bottom line: with all this tweeting, does Twitter make any money (you knew I was going to ask)????

Answer: a few weeks ago, on their Japanese version, started running some ads. Other than that, nada. no revenues.

The aptly named Peter Kafka wrote the other day on Twitter's current fundraising round, see here (asking the age old question, but this time for Twitter, How Much Is Twitter Worth?):

The bigger question: How do you put a value on Twitter, anyway? The company has only just started seeing a trickle of revenue, via advertising on its Japan version. But beyond that there's no money coming in, and it's not clear what the model will be.

While Twitter itself has great buzz, we hear the majority of the site's traffic comes from outside the site, via other apps like Twhirl, mobile access, etc. So traditional online advertising--a difficult prospect to begin with for a communications service (see the struggles of various IM, email platforms) may be even harder.

That said, based on Twitter's growth and brand dominance, $75 million post-money seems plausible. There must be a pony in there somewhere.

I am sorry, Mr. Kafka. A company that has no real technology, a usage base of uber-geeks, and no significant revenue should not be valued at $75 million. It's bad for the business of creating businesses.

VC as Motiviating Coach: GO FOR IT! Vyond a Finalist for Start-Up of the Year

One of the most important characteristics of a successful start-up CEO is the ability to inspire his team, much like the team captain in many sports. But who motivates the motivator? The coach. A successful coach can empower the CEO, inspiring her to be a better captain. A good coach  does not try to replace the team captain, but helps keep her spirits up, pushing her to reach deep down and lead the team as best she can--and sometimes to go beyond what she thinks possible, "winning against the odds."

In my short career as VC, I have found that  my best moments are when I inspire (OK, sometimes more like nudge....) my CEOs to be the best they can be, and more.

To jump into start-up life is not easy--and to be the CEO of an early stage start-up is probably the most stressful position in business life.  VCs, I believe, need to provide  a good  support system,  that sometimes reminds the CEO how much  she should believe in herself -- to  Go For It!

I experience this almost every day, but one pleasant example: TheMarker, Israel's leading business publication, together with Microsoft, are running the annual Most Promising Internet Start-Up (in Israel)competition. With the deadline approaching, I coached/nudged Adi Ashkenazy, CEO of our portfolio company Vyond to enter the competition. Adi, like all start-up CEOs, is juggling many things, under all kinds of pressure...and did not at all think Vyond would win...I coached him through it, reminded him just how cool our product is, and he got the application in. I am proud to say Vyond is one of the three finalists (chosen from hundreds of start-ups), with the overall winner to be chosen/announced at TheMarker annual conference on Sunday. I will be there, very proud of Vyond whether we come in first or not.

Are VCs To Blame For "Free?" And Is Free Model One Size Fits All?

Excellent posting by Hank Williams today on Silicon Alley Insider, which is one of my favorite sources. See full text of his original post below, and definitely check out the discussion that erupted within minutes on SAI...back and forth brings out the angst that many of us have been dealing with over the past few years.

With the success of Google, who weave billions of dollars of profit from millions of "keywords", convincing the world that a "click" has inherent value, there has been a run on the bank. Literally. Everything is now supposed to be supported by "advertising." But remember, as I have often said, in the end someone needs to buy something. That's how advertising works. Otherwise its a massive ponzi scheme.

Traditional media companies have always had (and will have) advertising as a dominant (and sometimes sole) source of revenues. But advertising was never 100% of the revenues, think of movies, video games, even most daily newspapers. There is a price. It is not free.

And now think of services that are not media companies -- there is no historical justification for free. Salesforce.com, a pioneer of using Web X.0, charges. And many gladly pay. Is Gmail free? For now. I doubt it will last, and if it does will mean a re-shuffling, but not complete revolution.

Advertising has its place, but I for one am tired of very smart entrepreneurs acting like deer in the headlights, who have been brainwashed by VCs with too much money that usage/users  are all that's important. We will be facing a capital crunch in the days, months, and years ahead -- those who have developed real revenue generating businesses will survive.

I agree with Hank, that VCs are killing many businesses, but there will be a revival of the dead. Make sure you are prepared!

Free" is Killing Us--Blame The VCs

             

Hank Williams             April 4, 2008 9:20 AM        
                          I believe it should be possible to start a small business and to have a small number of profitable customers, and to earn a living. From there, it should be possible to work hard, and to grow your business into something substantial. Until recently, this was the American way, and it applied to technology as much as to any other business. But no more.

In today’s “free” world, in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it. This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business. If businesses were based on the idea that people paid for services then small companies could succeed at a small scale and grow. But it is very hard to charge when your competition is free.

The economic problem with advertising businesses is that advertising businesses do not work without really significant scale. In the past, a good product or service could address a niche and succeed without being a home run. Today, a home run is required because if you do not reach a massive scale, advertisers are uninterested. And even if advertisers could be attracted, CPMs are so low that the revenue would be inconsequential. Small Internet businesses don’t work.

So how did we get here? In a word, VC.

Venture capital has totally distorted the market. VCs are investing billions of dollars in companies with instructions to get big fast and to worry about advertising revenue later. As a result the competition is for users and not for paying customers.

Unfortunately, to fix this, many more companies need to die.

With less “free” floating around, a more regular supply and demand dynamic can take hold, customers will have to pay for the things that are important to them and non-quantized growth dynamics can return. In the meantime, why should consumers pay for products and services that VCs and their pension fund investors are willing to give away for free?

The good news is at some point VCs will indeed realize how dumb all of this is and stop giving away everything of value on the Internet. This will all stop when the average VC can’t get any of his/her companies to scale because there is just too much VC sponsored free stuff out there. Then and only then will this crazy eyeballs business model redux finally be put to bed.

I cant wait.

SAI Contributor Hank Williams is a New York-based entrepreneur. He recently launched a new blog: Why Does Everything Suck? Exploring the tech marketplace from 10,000 feet.

    

   

When Everything Goes Wrong...VC, CEO, Board Be Prepared

Today I spent a few hours dealing with one of the "downs" in start-up life. Biggest deal portfolio company X was working on came to a screaming halt. Not important for this posting as to why the deal got pulled -- important is how the company deals with it. As we are still too close to this situation, will not speak to how CEO of company X and us, his board, are working through this issue (but trust us, we are, and will not only survive but thrive).

But do want to point out that CEOs and boards of early stage start-ups need to constantly be ready for "When Everything Goes Wrong." Because inevitably it will! If start-ups do not operate in that mode, i.e. always being ready for the worst case scenario, then they are not being responsible start-upists. VCs who want to play in "seed" stage start-ups either need to be really deep pocketed or really smart (that would be us ....;-)). Being really smart means planning for the worst, and working for the best.

Is that an almost impossible tension to live with on daily basis? Sure, but "buyer beware," "enter at your own risk" to start-up land. If you want to have a guaranteed salary and multi-year job security, well, then get tenure at the nearest university.  Yes, Big Company could theoretically provide that job security, but only in theory, because here today and Bear Sterns gone tomorrow...

Back to our main issue, planning for worst scenario, for when everything goes wrong.

Number one, what is your back-up plan? If you need to think about it under fire, you will not be able to think straight. So make sure when everything is going right that you have that plan, constantly updated, just in case.

Number Two, look at your cash. When things "go wrong," will make it obviously much more difficult to raise more money -- and you will need to survive in order to thrive. For most entrepreneurs, going without salary,or reduced salary for some period of time, is acceptable. For staff of start-up, usually more of a stretch. But a charismatic  CEO sometimes can stretch it...to a point. People do need to put food on the table.

Number Three, look at your cap table. Know it by heart at all times. You will need to be prepared for intense pressure on cap table both from bringing in new cash (if necessary) and providing incentives to staff.

And finally, just remember that just as things can go all wrong, they can all go all right -- and pray you have just gone through the worst!

Trust and Ethics: Do they Exist in VC Culture?

Two stories below that we recently experienced, when I related them to a friend (an ex-VC), he said, "Jacob, come on, VCs have no ethics -- trust them only when the definitive agreement is signed and money in the bank."

Story One: A portfolio company of ours went out for next round financing, getting too-close for comfort to the first major launch of their service, and their cash reserves. Well known venture fund XYZ (unlike in the "The Funded" I don't think names are necessary here) became interested in the company, met with management many times, and began serious due diligence (I never have seen such intensive due diligence for early stage investment). After 2 months, XYZ says to us, we want to the deal, you will receive a term sheet from us in the coming days. I sat with one of XYZ's managing partners and explained that the company will soon run out of cash, and that we had a competing investment offer, at better terms, but we wanted to work with them--so, I asked him, please tell me if this is 100% done deal. He said yes, unless something comes up in "technical due diligence (checking IP, etc). Great, I said, looking forward to being partners. Sure enough, we got term sheet, signed it, and of course told other potential investor group no thanks. Two weeks later, XYZ calls management in for meetings, and starts asking questions like it was a first meeting. A few days after that, we receive an email from XYZ releasing the company from the "no-shop."  Explanation: none really given, but hear whispers (from one of the partners, quite embarrassed) that they realized they didn't really understand the market our company is in....this occurred over six weeks ago, XYZ has not bothered to call us. Thankfully for the company, a new investor did come to the rescue, who we really like -- but the company (and we) were put through many difficult weeks.

Story Two

We have a small investment in a company that has raised a lot of money, this was opportunistic for us, not strategic (we are not involved at all in the company). The next round of the company was done at a nice uptick, and we were approached by outside party to buy us out, at a healthy profit. We felt ethically that first we should turn to existing shareholders to sell to them. They [the existing shareholders] agreed to buy us out, and we drew up paperwork. Turns out there was an Israeli tax issue, permits needed to be obtained, the closing of the deal dragged out. Meanwhile we reported our holding as a a sale in progress. The final paperrwork was not completed for almost a year. And then...we were told that our fellow shareholders, well known large VC funds, who had repeatedly confirmed sale was happening, "would rather not complete the transaction just now." Legally, we could sue for performance -- and perhaps we will. Again, I was shocked at the lack of ethics and breach of trust.

What do I take away from these stories? That we have a lot of work ahead of us in restoring a sense of ethics and values to the VC community. How will entrepreneurs trust us if we cannot trust each other?

And Putting Aside Facebook Itself, What ABout All Those Apps?

For a few months the average VC got used to asking, "and can you do that as a Facebook app?" When the average VC starts asking the question, you know it's too late (average VCs usually lose money....). We all know the history of Facebook itself, and the debate will remain open for some time whether Marc Z and friends will figure out how to make a business out of it. But what of all the people riding on their wave? From vampire bites to voluptuous kisses, there is a Facebook App for everyone. And many of those app companies have raised money.

Is anyone making any money from those "millions" of vampire bites?

See this posting  from Mashable...

How Much Money Are Facebook Apps Making?  Not Much Apparently

January 28, 2008 — 11:09 AM PST — by Adam Ostrow — 

VideoEgg has announced that its ad network for Facebook applications – eggnetwork – has pulled in around $1.5 million in ad revenue over the past five months. 

While the company is touting the news as a “million-dollar pay day” for developers, it actually seems like a fairly paltry figure when you consider the companies on eggnetwork’s client list, which include some of Facebook’s most popular apps like Scrabulous, Flixster, and Vampies. Overall, the company claims more than 150 applications are part of its ad network.

I’ve emailed the company to see if I can get some numbers on how many impressions were served, which would give us some idea as to the CPMs that Facebook application developers can expect. However, given the millions of combined installs that the apps on Videoegg’s network account for, I’m guessing this number is going to come in fairly low – I may even have to revise my estimated value of a Facebook application user downward from $1.40 each.

However, all hope is not lost.  Now that Facebook applications will reportedly be able to run on third-party sites, developers may have better opportunities for monetization by being able to sell their Facebook ad inventory at the same CPMs as their website inventory. Additionally, running the apps on a Web page instead of within the Facebook interface will presumably enable developers to incorporate more traditional ad formats.

The bottom line is that $1.5 million in revenue over 5 months for some of Facebook’s top applications simply does not seem like much, especially when you consider that MySpace is estimated to pull in $800 million of revenue this year. 

ShareThis

Link to This Post:

Like this post? Subscribe to Mashable's RSS feed!

Related Entries:

• LinkedIn Outlines Strategy for Upcoming Platform
• Are Facebook Application Users Worth $1.40 a Piece?
• Monetize Facebook Apps with Chitika eMiniMalls
• Userplane Splits Revenue With Facebook App Developers
• Facebook JavaScript Now Live
• Facebook Adds Profile Icons for your Apps
• Facebook Apps Contribute 37% of Recent Growth

« Previous Post

Next Post »

Trackbacks

  How Much Money Are Facebook Apps Making? Not Much Apparently — Instant Web Meetings.COM - Video Conference, Collaboration, E Learning, Unified Communications

2008-01-28 22:23:29

 

 

How Much Money Are Facebook Apps Making? Not Much Apparently | Venture Chronicles

2008-01-28 23:00:39

 

 

How Much Money Are Facebook Apps Making? Not Much Apparently | Adam Ostrow | Voices | AllThingsD

2008-01-29 00:45:46

 

 

FaceReviews: Facebook News and Facebook Applications

2008-01-29 00:49:17

 

 

Facebook: Top-Applikationen und Kundenkontakte ||| Handelskraft |||

2008-01-29 03:20:28

 

 

Case Study: How Sony Leveraged A Popular “Vampire” Facebook Widget To Reach It’s Community

2008-01-29 04:42:46

 

 

Facebook apps can make money « Continuous Beta by Pete Spande

2008-01-29 06:19:42

 

 

Weekly Digest of the Social Networking Space: Jan 30, 2008

2008-01-30 00:50:20

 

The Model Works: Mazel Tov Fraud Sciences Founders, BRM, Redpoint

Often we hear murmurings in the venture industry about the "model being broken." I wholeheartedly disagree. The model works, just needs tweaking from time to time. In addition, I am always on the lookout for proofs to my "New Israel" pitch regarding the state of the tech industry here in the Holy Land, and today we had good news that relates to all of the above.

Mazel Tov to  my  friends at   BRM Capital and to their colleagues at Redpoint Ventures , and most of all to the founders of Fraud Sciences, Saar Wilf and Shvat Shaked. Saar and Shvat are serial entrepreneurs, a new breed in Israel in general, and certainly in the internet technology services space. Formerly with Trivnet, Saar and Shvat founded a company playing into a market they knew (payments systems), with a real need (fraud detection). They brought the company to revenue generation, and sold out to the industry leader (Paypal/Ebay). The reported sale price is $169 million in cash. Even with a weak dollar, that's a nice exit for a company less than six years old, and everyone walked away with a nice payday (Globes reports this was a twelve fold exit for BRM, clearing $65 million profit on an investment of $5 million). Total capital invested in the company is rumored to be less than $10 million.

Now I don't know that many ways to make a 12X return...and as BRM's total fund was $150 million, and they have had other profitable exists, this either puts them over the top or greatly increases their profits.

The venture model worked in this case for everyone involved, the founders, the "local VC," and the "US VC." I am sure it did not hurt the company's sale to Paypal having seasoned Silicon Valley venture fund partners involved!

Without knowing any gory details, from the outside Fraud Sciences seems like a "poster child" for the ongoing health of the Israeli venture industry.  Right down to the fact that Fraud Sciences remained a "Ltd." company, meaning registered in Israel. None of that  Delaware shell game.

The Internet, thank God, has become a real business, and Israeli start-ups (and venture funds) are staking their places of expertise and excellence.

May we all go from strength to strength, as my Bubbe used to say.

Fred Wilson is at $5-7 Billion...How Much Would You Pay (to acquire) Facebook?

Hate to stay on the Facebook subject, and I promise I will not return to it for some time (say, until Facebook is profitable....) but just saw this short interview with Fred Wilson in Business Week (here)  and caught him saying he thinks acquisition price for Facebook   just now is at around $5-7 Billion. Now if that is the acquisition price, the private round investment should be at much lower valuation...but Microsoft is not really a rational player, I guess. I still think even Fred is over the top, but I guess I he is factoring in all the momentary hype value.

We are going through a round right now for one of our portfolio companies, which we believe is a path  breaking company  in an area where real money is being made right now. There is no hype value, because the company is not consumer facing--which means it actually has to build a real business case before it will have major jumps in value. Thank goodness for us and our investors, we will get a nice bump up in value terms from when invested (little over a year ago)--but nothing like what Facebook investors have seen. But we are still thrilled with our success, and happy for them!

Valuations are a dark art,and acquisition prices of pre-profit companies even more so.

So ask yourself, would you buy Facebook right now for $7 Billion (assuming you had the cash to spare...)??