VCinJerusalem

Saying No

 

My natural tendency is get to yes, to close the deal, move forward, having all parties excited to forge ahead together knowing that we are in a win-win relationship.

Saying no is not easy for me. Some of my biggest mistakes, financial and otherwise, have resulted from not saying no. Of course, my saying “yes” has brought me a blessed life, with a beautiful wife (inside and out), seven incredible children, and many good friends.

The other day, after two months of roller coaster negotiations with a potential new partner, I finally had to say NO. It came to the point where I felt my comfort lines had been crossed, and even though I could still list the many reasons it made sense to say yes, I realized that in this case the answer was no.

In saying no I put myself through the wringer – why was I not able to navigate the relationship to a place where both sides would be comfortable? Recognizing my limitations is part of getting older, an  ongoing maturation process (may it never stop, and may I continue to feel young).

So much of the business literature is about bringing the deal to fruition, closing the sale, getting to yes. Not enough attention is paid, I feel, to stopping unhealthy business deals from happening.

Much of modern life is reactive, from health care to business ethics. In relationships we also spend a lot more time on the failure than on the creation (just imagine if people like my wife, Rabbi Dr. Haviva Ner-David, who counsels couples contemplating life together, were just as busy and well-paid as divorce lawyers).

In choosing a business partner all the same pros and cons exist as when choosing a life partner – most important in both choices is can you imagine building a healthy, productive relationship together.

Too often money, external beauty, or convenience are swaying factors in taking on business partners and/or life partners. The decision I had to make last week had all of those factors – a potential business partner with deep pockets, committing significant sums, with business “beauty” (potential strategic value). And in saying yes, I would shield myself (for some time) from needing to possibly hear no from other investors – very convenient.

But when looking more deeply, I realized that while I could be friends with the person in question, and possibly do business together on specific spelled out deals, we did not have the ingredients for a healthy partnership. 

 

Broken Business Models in "Non-Profit" Start-ups; Case Study: Jdub

Last week I had a packed Wednesday, starting off the day leading a Wexner Heritage Leadership  group focused on the New Economy of Israel. OK, so the new economy is not so new, been around for almost 20 years, but what can I tell you, Americans are slow to pick up on these things. Anyway, talked to them for hours about entrepreneurship in Israel, start-ups, wealth creation, and more. To kick off the day I asked my friend Jon Medved to join us, who is featured prominently in Saul Singer's book, Start-Up Nation. 

And then I walked down the street to meet with the PresenTense 2011 Global Summer Institute fellows, to talk about business models in the non-profit world, where most of the fellows are planning to make their mark in the near term. 

I told them that from my perspective, there is a false distinction drawn between "for-profit" start-ups and "non-profit" start-ups. The only real difference is that in a for-profit the goal of the founders/investors is take money out of the business in some fashion at some point in time (either by dividends, IPO, trade sale). In a non-profit, the founders/investors are happy to let it ride, i.e. not to take any money out, except for salaries for paid staff members. Otherwise, all start-ups should be run in the same manner. Now, that doesn't mean that there aren't trade-offs all the time between generating usage/traction/influence and financial stability/sustainability. Twitter for many years did not think at all about generating revenues, let alone profits. Same for Facebook. And so many others. In the Venture Capital world right now people go ga-ga over Groupon which is generating massive losses, because they are showing "growth." Sustainable? Probably not, but the founders/early investors of Groupon have already cashed out in a big way. And current investors believe that with enough growth a profitable business model will be developed.

But lets look at non-profits. How should they pay the bills in a sustainable manner? Well, like their peers on the for-profit side, at first need to find investors (which could and should include the founders themselves). Very quickly comes the question: what is more important, short term financial stability or growth? Usually growth wins out, but there is no secondary market for shares of "non-profit.com" -- which means there is no liquidity event, nor will there ever be -- but on the other hand, there does need to be financial sustainability. Well, after many years Facebook turned on the revenue generation, and now they bring in (profitably) billions of dollars a year. Twitter slowly making their way there, and so on. 

The time has come for non-profits to realize they need a business model, more than "let me try to raise a lot of money to pay my staff." The same metrics that VC use to decide whether to keep pouring money into start-ups that aim to one day provide liquidity for their investors should apply to "social ventures," whose goal is making the world a better place. (I am one of the few that believe we can make the world a better place and provide liquidity with the same venture, but that's a different conversation). Relying on passive donors for the bulk of the budget is a recipe for financial meltdown at some point. And it does not reflect any "buy-in" from those actually benefiting from the venture itself. 

As a case study let's look at Jdub, which I have known since their very first baby steps. As some of you know, Jdub announced yesterday they are shutting down, and founder/CEO Aaron Bisman sent out the following letter:

Dear Friends, Fans, and Supporters,

I have to share some unfortunate news.  After almost 9 years in operation, JDub's Board of Directors has decided to wind down the organization.

The decision to close was entirely financial, as the challenges facing our business model are too great to overcome.   We were never a normal record label, nor were we ever just a record company.  We always knew that in order to discover, curate, and promote unique, proud Jewish voices and role models in the mainstream we would need to rely, at least in part, on philanthropic support.   In addition to buying our albums, sharing the music with your friends, and attending our concerts and events, so many of you supported us as donors, talent scouts, and stream teamers.  Thank you, thank you, thank you. 

JDub would never have grown into the organization that it was without you.

JDub earned half of its annual budget from mission-related revenue, including album sales, concert tickets, and consulting fees, and the other half from foundations and individual donors. The collapse of the music business in the decade that JDub has existed, combined with recessionary effects and aging out of the cohort of Jewish "start ups," made securing the necessary operating support an insurmountable challenge.

We have shared some incredible memories - bringing 3,500 people together for The Unity Sessions at Celebrate Brooklyn; watching Balkan Beat Box play to sold out crowds of Gypsy bikers in Portland; jumping into a spontaneous hora at The Independent in San Francisco while a half naked Golem played frenetically onstage; putting many of you onstage at the Bowery Ballroom for an American Shmidol karaoke battle; being told "I've never felt Jewish until tonight." 

We'd love to hear your memories and reflections as well.  Please post them on Facebook, or tweet them to @jdubrecords.

Just as JDub modeled what a new Jewish organization could look like and achieve, we will also model how one appropriately winds down.  We plan to share as much information as possible, and seek appropriate homes for our successful programs and assets.  We hope that our albums will continue to be available on iTunes, Amazon, and record store shelves long into the future. 

We are extremely grateful to all of our fans, funders and supporters, the creative and inspiring artists with whom we've had the pleasure to work, their devoted fans, and our innovative and energetic team. We close with heavy hearts, but incredible pride in our collective accomplishments and impact.

We hope you will join us for the last official JDub event this Sunday night on the Roof of the 14th St Y in NYC, where Deleon will play songs from their new album, Casata, which you'll get, along with free beer, when you attend.

Thank you again for supporting us in all our endeavors.  It has been a true honor.

Sincerely,

Aaron Bisman

Co-Founder & CEO, JDub

OK, so what is wrong with the above letter?

1. Well, for one, not enough transperancy. It's not clear if the half of his budget that came from "mission related revenue" was profitable. If it was, why shut down? Why not cut back and live off revenues? If you are going to tell us you are shutting for financial reasons, tell us more -- you are a public entity (a non-profit). 

2. Aaron talks about the success they enjoyed, but he doesn't show us on a graph if they plateaued at some point, or if the growth continued. If they reached their maximum somewhere over the past decade, that is the point at which they need to say: "this is how big we will be, how do we make this work." If they did keep growing, why couldn't they find additional investors (donors)??

3. The statistics fall far short of showing me whether this really was a successful venture. That 3500 people came to a concert is not a massive accomplishment. Discovering Matisyahu was -- and not clear why that and other achievements didn't generate enough revenue to support a modest music operation. Aaron in a postscript to his farewell letter sums up 9 years of work as follows:

A final JDub snapshot:

- 150,000 event participants in 472 cities

- 35 album releases

- 3 Gold Records

- 3,500 attendees at The Unity Sessions, the largest Israeli/Palestinian concert in the history of the United States

- 52 songs placed in major films, TV shows, or ads

- 800+ mainstream press stories including The New York Times, The New Yorker, The Wall Street Journal, MTV, CNN, NPR, David Letterman, Conan O'Brien, Rolling Stone, SPIN, Billboard, and Pitchfork

- 26 foundation and Federation funders

- 630 individual donors

- 2.7 million unique visitors to Jewcy.com since JDub's adoption

It is very difficult to analyze the above without understanding development of the venture along a timeline, together with a business plan. 

 

4. Donors are simply investors called by a different name, and need to be treated as such. They need to be shown how their investment is generating results -- and results means more than paying the overhead (or half the overhead) of an organization. Again, results could mean many things, ranging from user traction to revenue growth to public awareness, but it needs to measured and proven. 

 

Bottom line: if a venture is delivering bang for a buck (or a shekel), it will be sustainable. It's up to us entrepreneurs to figure out how. 

 

Ambient Still Going Strong, 16 years Later. Never Say Never.

In 1995 I co-founded a company called Ambient. The original idea was to commercialize technology being developed by a group of Israeli-Russian scientists who had immigrated to Israel in the early 90s.

We raised some start-up capital, and then had an opportunity to do a very early stage IPO, what some term public venture capital. We raised a few million dollars, and poof we were a public company (still trading today, ABTG.OB). Soon after the IPO I realized I did not want to continue to manage the company (I was the CEO), and turned over the reigns to my then CTO Dr. Yehuda Cern. Yehuda, together with some of the original investors in the company, continued to push it forward. My last major contribution to the company, just before I resigned, was to help Yehuda pivot the technology from it's first purpose, contactless smart cards, to very different market, which is the data over power line industry, otherwise known as Smart Grid. 

Flash foward 16 years--the company is not only still around but is thriving. In 2010 Ambient corporation generated over $20 million in revenue and a gross profit of $8 million. Still losing money, due to continued investment in R&D. But not bad...

Ambient proves the adage Never Say Never. Had I been pressed to predict in 1995 whether Ambient would survive the first tech bubble bursting, financial meltdown, and more, I probably would have said no way. But thanks to perseverance of Dr. Cern and others on the team -- Ambient is a thriving company today. I have been diluted down to nothing, so my stake is completely sentimental, and I doubt if beyond a footnote in some annual report anyone at Ambient knows of my historical connection. Still feels good to see something that you willed into existence still moving forward. 

May we all be privelaged to see the fruits of our labor flourish in our times. And if Ambient would like to invite it's founder and first CEO out to dinner (or more), happy to accept...

 

 

 

The Color of Money

What could inspire me to blog after such a long "rest?" (a deserved rest, I might add, what with new daughter, 6 other children to parent, marathon to run, companies to start, etc.)

Well, the color of money. No, not the funky colors of Israeli monopoly money, but the good old greenbacks of US of A, a land where anything is possible, including raising $41 million dollars for a start-up that had NOT EVEN LAUNCHED A PRODUCT. And they are proud, check the press release here. And proud they should be -- showing off the heights of lunacy in America today.

Yes, I am talking about the recent news item that the legendary VC firm Sequoia Capital led a $41 million round for the company known as Color. What does Color do? I am not quite sure, but thanks to my new friend Tal Givoly I was alerted to this review. Check it out for a laugh, in a sentence I will take this in a more serious direction...

In searching through the web for clues as to how this insanity happened, I stumbled across an interview Color founder Bill Nguyen gave to Business Insider. You should read it in its' entirety (here), but let me just dwell on a few choice lines. Before I do, let me expose something about my relationship to Bill -- we don't know each other, but have bounced around similar circles. When I co-founded Delta Three, he founded OneBox, both playing in VoIP space. When I was focused on mobile email/apps in founding NomadIQ, Omnisky, 2bAnywhere, he was doing Seven. And so on. Bill has made a LOT more money than I have at this start-up game, but like me still loves it. So he is somewhat of a kindred spirit. OK, now back to our regularly scheduled programming. 

In the interview, Bill is asked many questions. But what astonished me was not all the nothing he had to say (after all, there is no traction, no growth, no rave reviews, just a lot of money sunk in). What astonished me are the following:

"There's not much we can do about the money we raised, I'm not giving any of it back."

Wow. 

And then when asked for the "business model" behind Color, he said:

BN: Advertising through the app. We're going to build a intelligent system that allows businesses to participate with their customers. So when you walk into a restaurant and you use Color, and they're also customers through a self-service Web interface -- or actually a self-service iPad interface -- every time you walk into the restaurant, your [first] name will show up with your picture. The maitre d' or receptionist will know who you are, they'll be able to welcome you, they'll know the last time you were here, they'll be able to see pictures if you took them here. They'll be able to provide you better service than they've ever before, that's going to drive up their revenue by increasing repeat business because we always want to go back where we feel welcome.

BI: They would pay you for that capability?

BN: Exactly

Double wow. He actually said his business model is....someone seeing your picture on an iPad when you walk into a retaurant. And someone paying for that. Heck, I would pay for that not to happen. 

I am not going to enter the debate as to whether we are in a bubble or not...for another time, maybe after it bursts (oops, gave myself away there). But regardless this story is fascinating. 

On the one hand, I love the fact that serial entrepreneurs can command massive investment on the basis of....whatever Color is, or will be. On the other hand, the VC community has forgotten that they are supposed to be professional investors. How much is Bill himself investing? That's what I want to know. After all, he has a shekel or two. If the answer is zero, than something is very wrong with this situation. Here we have a very wealthy tech guy, being given more money that 40 standard start-ups combined to develop...a photo sharing app that claims it is something else?

This sounds to me like some serious laziness on the part of Seqouia, and their tag along co-investor Bain Capital. At least they should give Bill a slap on the wrist for the line about not giving the money back -- or perhaps this is Bill's twisted way to improve the Palo Alto economy, by robbing from the rich and giving to the...rich?

Anyway, if anyone out there is listening, please help me understand the Color of Money. 

 

 

Read more: http://www.businessinsider.com/exclusive-bill-nguyen-qa-2011-3?page=3#ixzz1HqCRSqGH

Red Herring hosted a conference....And no one came....Who is to blame?

In general I am against paying for conferences, whether for myself or for one of our portfolio companies. I think there is enough sponsorship money out there to cover costs plus a profit for organizers. Especially if they think creatively like my friend Jeff Pulver, the folks at TedxTelAviv, and the producers of DLD. 

But when the annual announcement came out calling for companies to apply for the "Red Herring 100" award, I encouraged AttracTV to apply. And lo and behold they were accepted...and were informed they had the right to showcase the company at the Red Herring conference in Paris being held today and tomorrow. And the catch...to claim that right need to pay 1500 euro. But still I encouraged to move forward, because the company needs exposure to more VCs, and I [mistakenly] thought would be a good venue. 

We arrived yesterday for the pre-event cocktail party and already there were bad vibes. A room set up for hundreds held many twenty people. OK, I said, most Europeans can simply come in the morning for the official conference. but this morning was no better. In a salon in a very fancy shmancy hotel in Paris, that could easily hold 500 people, there were maybe 50-75 people. In an opening speech, Alex Vieux, longtime producer of ETRE and RedHerring online magazine and conferences, spoke about the gloom and doom of venture ecosystem in Europe. He went on and on for 20 minutes about how terrible things are, how no deals are getting done, and everything is grinding to a halt. 

Now, Zeev Holtzman, founder of Giza Ventures in Israel, has recently said the same thing about the reality of the Israeli venture scene. But of course there are contrary opinions. 

My questions today are more for conference organizers...if you pressure start-ups to pay high fees to present, but then do not deliver a quality and quantity of audience, should you refund money? What responsibility should conference organizer bear? Is there not an implied contract?

I for one believe that Mr. Vieux should refund registration fees to all the start-ups who came. Not to compensate them for their travel, lodging, time, but at least what is directly in his control. After all, he told us several times this morning how wealthy he is...giving back 100K euro would not kill him. And he certainly does not deserve to profit from such a awful turn-out. Most of the start-ups today presented to other start-ups, which is always fun but does not have to take place in a five star hotel in Paris. 

Oh, and there wasn't even breakfast this morning!!!

Back to Business: Facebook on path to $1 BILLION Annual Revenues (I was wrong)

Just before we start to shut down for the holiday season (here in Israel we started "early," as Hanukka started last week...) want to admit where I was wrong--looks like Facebook is well on the road to becoming a serious cash machine, like it's cousin Google.

According to recent reports, besides passing 350 million active users, Facebook is on a run rate to hit $1 billion in annual revenues. In 2009 it is reported they already will exceed $500 million. While we [at present] do not have info on how much Facebook is spending, should be safe to assume less that their revenues, and they are starting to not only be profitable but generating some serious cash reserves.

I need to admit that I was wrong. I did not think Zuckerberg and team had it together to translate massive usage into business, but I guess the usage was just to massive to get it completely wrong...slowly but surely they are monetizing that user base (again, little visibility into numbers, but seems to be from display ads, virtual goods, and very focused ad campaigns).

I still do not think Facebook is any kind of new operating system, and if a better FB comes along they could be left in the dust. While my 11 year old is a FB addict, my almost 9 year old doesn't use it at all [yet]. If a better FB comes along to capture her attention, FB is threatened. They have no intellectual property, no defensible technology advantage. "Just" massive momentum, which may make them too big too fall. But then again, where is Myspace today? My 11 year has never even tried it.

Bringing this back to our home court, the venture community in Israel, we need to think more about what it means to scale up, and monetizing success. Facebook, I still maintain, is the exception to the rule. Now lets see if Twitter can start to generate Google-like revenues....

Fred, You got it right. Things will pick up again. Question is when...

Fred Wilson gets it head on in his posting (see below) on the coming revival of the IPO market for "venture backed companies," which for me is a euphemism for young companies starting to show promise but not controlled by a single investor (who could simply live off profits/dividends).  The exit path for investors, option holders, etc. has traditionally been IPO, and M&A (if acquired for cash or by a public company with liquid shares).

I completely agree with Fred's analysis, but like many messianic prophecies, the question is not if, but when. On behalf of all of us in the start-up sector, may it be soon!

The End Of The IPO Drought Is Coming

Fred Wilson|May. 5, 2009, 8:01 AM|3

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Tags: Online, Big Tech

I've said it a few times on this blog recently as offhand comments, but I feel compelled to say it a bit more loudly. I think we will see the end of the IPO drought for venture backed companies within the next year, possibly by the end of this year. I don't know if this market rally we've been having is a headfake or the end of the bear market. My gut says we'll see at least one more pronounced down move before we see bottom.

But either way, at some point investors are going to want to own stocks again, and when they do, I think the old fashioned VC-backed IPO will have quite a bit of appeal. Here's five reasons I think this is going to happen:

1) VCs have been in the penalty box for almost a decade since we committed the cardinal sin of foisting crap into the public markets. Somehow the investment bankers who helped us do it got out a lot earlier than we did. But we've done our time and others have replaced VCs as enemy number one of public market investors.

2) There are a lot of really solid companies sitting in venture portfolios waiting for the right moment to go public. Stuart Ellman of RRE wrote last fall that:

RRE has a number of companies that had zero revenues when we invested and which are now doing $100 million or more in revenues and growing very quickly.  These companies have achieved what they needed to achieve, become market leaders, yet they cannot go public or exit under the assumptions that employees or founders assumed when they began.

So what do you do?  Sit tight, be patient, and continue to grow the company.

3) Many of these companies are subscription-based or annuity type business models that make for great public companies. Sarah Lacy touched on this on her post about Open Table's IPO:

OpenTable is hardly an Internet homerun. It’s frequently described as a consumer Internet company, when really it’s a software-as-a-service company. The good news –for this moment in time—is that that means Open Table doesn’t have an ad model. It actually has paying customers in the form of restaurants using its reservation software and paying it monthly subscription fees.

4) When investors decide they want to own stocks again, they are going to look for simple businesses, products they can understand, balance sheets with cash and not much else, and growth without leverage. Guess what? That's what the venture capital industry produces.

5) Sarbox is now well understood by the accounting industry and by the finance teams inside of our companies. There are providers of Sarbox compliance tools and services that have now brought the cost of Sarbox compliance down to reasonable levels. I'm not saying that Sarbox is good or that it doesn't need to be reworked (it does), but it's a devil we know at this point and it will not impede the IPO boom when it comes.

Last week the NVCA put out a four point plan to "restore liquidity in the venture capital industry" at its annual meeting last week in Boston. It involves getting more investment banks engaged in taking our companies public, spurring the development of secondary market exchages and related pre-IPO liquidity activities, continued lobbying for lower taxes on VCs and entrepreneurs, and reform of Sarbox.

Regular readers know that I am a huge fan of the secondary market idea and I welcome the NVCA's attention and energy on that issue. On the other three, I think they are wasting their time. It's like the government suing Microsoft while Linux was growing in popularity right under their noses. I believe the market will take care of this problem as soon as we get a market that wants to purchase equities.

And my gut says that time will come sooner than most think.

Fred Wilson is a partner at Union Square Ventures. He writes the influential A VC, where this post was originally published.

Twitter for $1 Billion: Good for the Jews?

Ok, you ask, what possibly could be the connection between the suggestion of Henry Blodgett that Google purchase Twitter for $1 billion and the Jews?[see Henry's full posting below] Well, besides the fact that there are a nice number of members of the tribe at both companies, I really am using the "Good for the Jews?" question as a way of asking two parts:
-Is this good for the world in general?
-Is this good for Israeli start-up scene?

On both counts, answer I come up with is NO!!

Regarding the world in general, or more specifically the start-up world, wacky prices paid to one-off "success" stories are never a good thing.  I am not going to start arguiing right now if Twitter has or has not brought about a real paradigm shift (as I believe Google did, not so much with search technology itself but how it was applied). (I do not believe Twitter has yet accomplished that). But paradigm shifts do not a business make (sometimes they could, a la Google).

Twitter has yet to show any clear business direction, and until they do their value is somewhere between zero and the amount of money invested in building the product and attaining the user base.

For the Israeli start-up scene, we need to be building businesses. The more entreprenaurs are fooled by Twitter-like companies that building a no-revenue company is a good idea we will sink deeper into a real depression of the tech sector here in Israel. We do not have the capital allocation in Israel that allows for silly investments (just think how many companies will get funded to be the next Twitter...if Google buys them for $1 billion).

Google Should Offer To Buy Twitter For $1 Billion (GOOG)

Henry Blodget|Apr. 3, 2009, 9:37 AM|54

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Tags: Online, Twitter, Google

GOOG Apr 6 2009, 09:41 AM EDT

367.49	Change	% Change
	-2.29	-0.62%

If Google isn't in talks to buy Twitter, it should be.

Specifically, it should offer the company $1 billion, cash. 

Why?

Five reasons:

Google needs a huge new growth engine and Twitter might just fit the bill.  The current search product cycle is coming to an end.  Google needs an "Office" to go with its "Windows."  It hasn't found one yet.  Twitter--and real-time search--could end up being a monster.  If Google waits around to see whether it really WILL be a monster, Twitter will be a hell of a lot more expensive.  Remember when Yahoo's Terry Semel whiffed on buying Google?

Twitter is a hell of a lot more relevant to Google's business than other big Google ideas, such as YouTube or Larry Page's plan to have Google solve the world's energy crisis (see his crazy talk of two years ago).  Twitter is also about communications, which is the one part of the content-communications-and-commerce Internet tripod that Google is still weak in.

$1 billion is couch change for Google.  Google generates $1 billion of cash every two months.  If Twitter ends up being worth $0, as some people persist in thinking, Google can just say "oops" and take a minor write-off.  If Twitter ends up being worth a lot more than $1 billion, however, as we and others think is likely, Google will make money.  If it ends up being a monster, Google will make a lot of money.

Twitter could conceivably threaten Google's cash cow--search.  This "real-time search" meme is actually a compelling story-line. If you want to know what people are talking about right now, you go to Twitter, not Google.  Twitter hasn't figured out how to make bank off that yet, but it may well do so.  Remember how much ridicule was heaped on Google's worthless "search engine" in the early days?

Like Google, Twitter is already a verb.  What company do you know of that owns two verbs?

Would $1 billion be enough to get the Twitter boys to part with their baby?  It might, actually.  $1 billion is still a lot of money, especially for a company with no revenue.  And Google's global distribution and technology infrastructure would be a help to Twitter.  So they'd be silly not to take the offer seriousy.

Twitter: Making Fools of All of Us

Yes, I continue to be stalked in Twitter land. I have not "twitted" (or is it "tweeted") in over a year, yet almost daily get messages that someone new has signed up to follow me on Twitter. Must be boring to follow me, as I have been standing in place in Twitter land. Yet the guys at Twitter continue to "succeed," by certain metrics. The media love them, elites all over the US have adopted it as a platform of "communication" (how much can you really say in 140 characters, perfect for the ultimate soundbite). And they continue to raise money from "serious" VCs.

Keep in mind, while they do theoretically have 6 million users (how many are like me?), as of today they have generated ZERO revenues. Nada. Nothing.

Now I think Twitter is inane enough that even as a non-profit it should be shut down -- I posit that their value proposition is negative. But that's another discussion. Now I want to limit myself to the question of value creation...why is Twitter worth anything in this environment, shouldn't the VCs wait to invest more until after some business model emerges (and has traction)? How much does it cost to run Twitter after all??

Twitter is succeeding at making fools of all of us that are calling for sanity in start-up culture, and has a negative influence on entrepreneurs (everyone wants to be Twitter).

Anyway, I think Jon Stewart best sums up my personal frustration on the service and its contribution to the world...see here:

The Daily Show With Jon StewartM - Th 11p / 10c

Twitter Frenzy

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Joke of the Day

Investing for the Long Term: Sounds Nice, But Who Pays the Bills Meanwhile?

As a fan of the musings of Brad Feld I often read his blog posts and then stop to think for a minute or two how I incorporate his thoughts into my own outlook and daily work.

Below is the full text a recent posting of Brad's, but bottom line he is coming to remind us of the difference between speculation and investment. The work of a Venture Capitalist is to invest, not to speculate.

I wholeheartedly agree with Brad, but my question is while we are patiently tending to our investment[s], who pays the bills? The answer is obviously our LPs (Limited Partners) who pay us not only a success fee (usually 20% of the profits) but also a management fee (standard is 2% of total committed capital of the fund). From this fee the VC is expected to pay their overhead and take something home everything month, i.e. to draw a salary.

When the cycles are short, 2-3 years, and new funds get raised every 2 years, these fees are almost ignored. But do they add up, and VCs managing multiple overlapping funds can sometimes be double or triple dipping. What happens when the cycles are more like 5-10 years? When exits take longer to happen (assuming they do), the VCs can get stretched in etrms of remaining committed to the investment process (rather the much easier speculating). For the VC to remain focus in a stretched out cycle truly demands a dedication over and above the assumptions that based the original fund formation.

What to do? First, to communicate with your LPs. Let them know what the effect of a stretched out cycle is on the VC, and what the potential implications will be (extending the investment period, for example). Plan for the long haul -- redo the assumptions based on the [lack of] visablity that currently exists. This all needs to "trickle down" to the assets themselves, the portfolio companies, who need to be in step regarding the VCs assumptions and forecasts.

I believe if everybody can be kept on the same page, value will continue to be generated, with minimal friction. When one player in the ecosystem  is out of step, however, you have an implosion.

For us at Jerusalem Capital, we are planning for the long term, which has affected our investment philosophy and process. Like Brad, I remain optomistic, but we will need to stay focused and on message.

Now here is Brad's original posting:

Feld Thoughts

 

Investment vs. Speculation Posted: 02 Mar 2009 05:41 AM PST As I read the Berkshire Hathaway 2008 Annual Report, a thought kept popping into my mind that had also come up over and over again while reading Bogle’s Enough: True Measures of Money, Business, and Life.  “Be an investor, not a speculator.” As a venture capital investor, I have a long term time horizon on my investments.  Since I’m investing very early in the life of a company, I’m usually an investor for five or more years.  Sometimes I’m an investor for over ten years.  I’m rarely an investor for less than a year, although it happens occasionally. I don’t invest directly in the public markets and I haven’t for a long time.  Periodically I end up with a public company stock as the result of the sale of a company I’m an investor in to a public company, or via that mythical thing called an “IPO”.  In these cases, I have a very specific strategy for exiting my position in the public company over time.  I do have public market exposure, primarily through a combination of index funds (and equivalents) and some hedge fund investments with friends.  However, I pay zero attention to this on a daily, weekly, or monthly basis.  When I look at the aggregate performance over any meaningful period of time, it is irrelevant when compared to my performance as a VC and angel investor. When I reflect on this, I realize that I spend 99.9% of my time as an investor and 0.01% of my time as a speculator.  Whenever I realize that I’m in a speculative thought process (such as noticing the Dow on CNN on the ubiquitous airport TVs), I immediately try to stop.  My goal is to spend 100% of my time as an investor. Not surprisingly, there’s a huge amount of noise going around the system about speculation that is masquerading as investment.  Worst, the two get conflated on a regular basis in the context of what the government should be doing (e.g. incenting “investment” when they are merely either "incenting speculation” or “encouraging speculation”).  Of course, the endless stream of talking heads in the media don’t help this distinction. When I read Buffett or Bogle, the distinction between investment and speculation is painfully clear to me.  I believe that much of the pain the global financial markets are feeling right now is a direct result of speculation.  As a result, I’m trying to come up with some simple parables for “investment vs. speculation.”  For example, “if you don’t understand what you are investing in, it’s speculation.”  Or, “if your time horizon is less than two years, it’s speculation.” One of values I’ve always adhered to is that “I’m an investor, not a speculator.”  Now that the government is deeply in the mix, I think we need to spend a lot more “system time” thinking about how to incent and motivate investment, and how to avoid speculation.