This Week in Venture Capital – Episode 2

Posted on Apr 14, 2010 | 85 comments


I was on This Week in Venture Capital (TWiVC) again this week with Jason Calacanis.  He’s considering making me the permanent co-host so if you enjoy any of this episode or want to see me on the show on a more regular basis please Tweet @jason and let him know (he asked for direct feedback).  I’m loving doing the show and I think that Jason and I have pretty good banter and rapport.  You can watch this week’s TWiVC episode by clicking on the link and my summary notes are below. {if you missed Episode 1 it is here}

High Profile Deal of the Week:

1. TweetUp

This is “Adsense for Twitter.”  In fact, it is Overture 2.0.  Bill Gross is the man responsible for the overwhelming amount of monetization on the web.  Why?  Because GoTo.com was his idea.  It was the first company to do “paid search” back when Larry & Sergey were saying they would never do it.  Overture sold for $1.6 billion to Yahoo! (plus a large settlement on patent disputes paid from Google) so Bill did well on it.  But bill is a BIG idea guy.  He’s behind IdeaLab and has created many interesting companies including innovating in solar energy (eSolar) and electric cars (Aptera).

My take: Never bet against Bill Gross.  Especially when he’s surrounded by Danny Rimer (who funded Skype, MySQL, Last.FM and many, many more) plus Howard Morgan.  I respect everybody involved in this project.  That said I worry that V1 of the strategy isn’t a home run.  In some ways I see it as Overture V2 as in the weakest sense of the comparison.  Overture never built the destination site to monetize from.  In fact, their affiliate partners dissuaded them from doing so.  Google had huge destination traffic.  Google monetized this with AdWords (ads on their home page).  So when Google started pushing AdSense (ads for affiliate or 3rd party sites) they had a HUGE cost advantage.  They were able to “buy” the affiliate business because they had the Google.com cash cow.  They could take a long term view.

Enter TweetUp.  They want to monetize the Twitter stream via contextual search matching.  Um … that’s what Twitter just announced!  I know, I know, it’s different.  But Twitter.com (which will likely improve dramatically on UI, I’m guessing) will be the main event for Twitter search.  So when they fight for affiliate deals (Seesmic, TweetDeck, etc., etc.) it seems that Twitter should have the same Google-like cost advantage.  So my guess is that Tweetup needs to go “multi-stream” (as in Facebook, MySpace, etc.).

There is also another inherent weakness.  I don’t believe that search is the ONLY answer in 2010 as it was in 2000.  Now you follow people (publish & subscribe) and you click on the links they share.  Sure, you might search on Twitter.com but how many of you search in Tweetie or UberTwitter often?  Not me.  I think the best solution for the social networking era is “in-stream” advertising.  I won’t belabor this – I have an investment in this space (ad.ly) so I’m biased.  But I made it for a reason.  We pass links and that’s powerful.  Maybe even as powerful as search?

It’s true that Twitter has announced an enormous number of search queries (19 billion / month – astounding, huh?) and a number of these come from Seesmic and TweetDeck as Evan points out.  Some thoughts: 1) if it really is that substantial it validates my theory that Twitter will push to own the clients or at least where Tweets are consumed 2) it means that if Tweetup can assert itself in the Seesmic/TweetDeck sphere there really might be a high enough volume of queries to make money and 3) it’s not exactly all “true” search in the “discovery of new information” or “intent based advertising opportunity” sense.  Why?  Because I’m guessing at lot of it comes from queries to the API from saved searches people set up in Seesmic and TweetDeck.  Just a guess.  But if so this search traffic is less monetizable.

Finally, I HATE the name.  Golden rule of branding for me: 1) name your company or product your URL and 2) don’t paint yourself into a corner.  “Tweet” = corner.  My bet: within 18 months they will change the name and go multi-stream.  Plus, a TweetUp already means a meet up in a city organized through Twitter.  Sounds like somebody didn’t do their homework on this name.  BUT.  I would never count Bill out.  He’ll pivot.  He’ll discover the value.  He’ll get deals done.

$3.5 mm in Series A;  IdealLab (Bill Gross), Index Ventures (Danny Rimer), Revolution LLC (Steve Case), First Round CapitalBetaWorksJason Calcanis

 

M&A Discussion

 

2. Atebits dba Tweetie (acquired by Twitter).  I think everybody heard about this acquisition.  Twitter bough their most used iPhone client.  No big surprise.  I talked about the platform moves of Twitter and why it should be expected.  Atebits had one person if I understand correctly.  They bought distribution and engineering talent.  If I were a betting man I’d say they paid sub $5 million.  Good deal for all.  Twitter also built a BlackBerry app making things difficult for TwitterBerry and UberTwitter.  Message of the week (from Fred Wilson) – “don’t fill cracks” but innovate in new ways with the platform.  I agree.

PLUS RELATED FUNDING

3. TweetPhoto - Real-time photo sharing platform.  I think this classifies as a “crack filler” and I’m not sure I would have done the investment for that reason.  That said, Photobucket was a “crack filler” that exited for $250 million to MySpace.  YouTube was a “crack filler” that could have been created by then dominant MySpace but wasn’t.  It kicked Google Video’s ass.  So they bought it for a cool $1.65 billion.  I know you could argue that YouTube was much broader but it was really popularized in the social networks.  So if TweetPhoto (bad name, again.  uh, hello!  is it not obvious to people to not name your company on somebody else’s product) can diversify and innovate maybe there’s room for growth.  But I’d say it’s a bigger risk than not that Twitter just does this (well) themselves.  It’s core platform stuff.

$2.6mm in Series ACanaanAnthem

Other Deals

4. Groupon - Hyper local same-day offers.  Wow.  WOW.  People are talking a rumored $1.2 billion valuation.  Shazaam.  They only recently raised $30 million at around a $300 million valuation and THAT raised eyebrows.  The investor isn’t disclosed (or I haven’t seen it) but it’s rumored to be DST, the Russian investors who invested in Zynga and Facebook (at a $10 billion valuation).  We had a big discussion about DST and why these investments.  On the founder’s side it’s about taking money off of the table and / or having strategic reserves for big acquisitions.  On DST’s side – they’ll either be seen as geniuses or fools.  In the former case many people scoffed at paying up for Google at IPO.  Genius.  Many other people over paid for Chemdex, VerticalNet, Pets.com, etc.  Fools.  Time will tell.  So far it seems the former.

$TBD mm in Series C; $1.2 billion pre-money.  Rumored: Digital Sky Technologies

5. Stitcher - San Francisco-based service that lets users customize talk radio programming on their mobile devices.  This follows on from a lot of interest in radio.  I especially like Jelli, which is user power radio.  You go onto the Internet and can control what people hear on terrestrial radio.  It’s sort of Jack FM meets Total Request Live meets UCG/Social Gaming (at least in the future).  There is a lot of interest in radio these days and another high profile deal in this sector is TargetSpot funded by USV.  It offers Internet radio targeted advertising and is growing really well.

$6mm in Series BBenchmark Capital (Bob Kagle); with participation from insiders New Atlantic Ventures and angels Ron Conway and Ed Scott

6. Tiny Speck Online gaming start-up.  I found this investment strange since normally VC’s hate to bet on gaming companies.  Maybe gaming platforms but not MMOG’s (massive multiplayer online games, as in World of Warcraft).  The reason is that like Hollywood these seem to require large up-front investments and seem to be hit driven.  That said, the founder is Stewart Butterfield, who co-founded Flickr.  The investors are some of the best in the Valley.  I’m guessing this is a bit on the “horse” but clearly they’ve also seen something in his vision.  In my mind, not a typical VC investment. But I look forward to seeing what they produce

$5mm in Series AAccel and Andreessen Horowitz

7. EdgeCast (competes with Akamai and Limelight).  This is a CDN (Content Delivery Network).  They help speed up the network by pushing the highly viewed and large media files to the “edge” of the network (e.g. closer to your house or work rather than at a centralized server).  I like EdgeCast and spent time with the management team.  I also really like the investors (I know and respect Steamboat).  I see this whole industry collapsing (in a good way) into the big telcos so I expect all three of these players to eventually be acquired.  The question will be “at what price?”  And for investors, “at what valuation did they get in?”

$10 million in Series B Menlo VenturesSteamboat

8. Quirky - Platform facilitating collaborative design of consumer products through an online community.  My take was that this follows three trends: a) customer involvement in product design, b) mass customization [e.g. Zazzle] and c) artisan products [etsy, foodzie].  On the first point – think of Steven Blank’s customer development but for physical products.  This deal mostly caught my eye because of the super smart people behind it.  Jim Robinson of RRE is a super smart guy and has made a lot of really insightful investments.  And Chris Sacca is also in the deal.

$6mm in Series ARRE Ventures (James Robinson, IV), Village VenturesContour Venture Partners, and Lowercase Capital

9. OTHER STUFF

In the interview we also covered:

- How are VC funds structured: closed-funds vs. evergreen funds?

- From whom do VC’s raise money and do those investors ever default on their commitments?

- How do founder get “liquidity” (e.g. money off the table) given the dearth of IPO’s and M&A over the past few years?

- Why did I found LaunchPad LA (versus just to TechStars LA or YCombinator LA)?

  • Jamal W

    Mark:
    Guy who worked in Pasadena at 130 Union Street here. I *think* you might have some arguments around your claim that Bill Gross invented PPC in your TweetUp post. You *might* want to ask Scott Banister how he feels about it. Just keeping it real here….

  • http://bothsidesofthetable.com msuster

    OK, Michael, but then when you write stuff this hostile / inflammatory at least disclose that you a) consult people in social media and b) are starting a company that aims to help people do social media advertising.

    I disagree with your premise. I don't feel the need to defend it all again. People prefer TV with no ads. But they prefer mostly free TV. They want a free Internet but companies need to make money. They want to be knowledgeable about new brands but don't want to “feel” marketed to. They want to know what their favorite celebrities wear and use but in polls don't like the idea of celebrity endorsements. They are “against” product placements in TV but product recall goes through the roof. There is a careful balance, Michael. I understand that. But as a very young guy without a long history in advertising just be careful before making assertions for which you don't have real experience.

  • http://bothsidesofthetable.com msuster

    OK, Michael, but then when you write stuff this hostile / inflammatory at least disclose that you a) consult people in social media and b) are starting a company that aims to help people do social media advertising.

    I disagree with your premise. I don't feel the need to defend it all again. People prefer TV with no ads. But they prefer mostly free TV. They want a free Internet but companies need to make money. They want to be knowledgeable about new brands but don't want to “feel” marketed to. They want to know what their favorite celebrities wear and use but in polls don't like the idea of celebrity endorsements. They are “against” product placements in TV but product recall goes through the roof. There is a careful balance, Michael. I understand that. But as a very young guy without a long history in advertising just be careful before making assertions for which you don't have real experience.

  • shafqat

    Thanks for trying…. I the find the original files. Tried going through iTunes as well, doens't work (you can see I really want to listen to it!).

    Jason will probably have to sort it out… he was on my tweet, but perhaps you could drop him a line?

  • shafqat

    Thanks for trying…. I think the player can't find the original files. Tried going through iTunes as well, doens't work (you can see I really want to listen to it!).

    Jason will probably have to sort it out… he was on my tweet, but perhaps you could drop him a line?

  • http://bothsidesofthetable.com msuster

    Thank you for the input. Honestly, I don't know the original history so I appreciate the education. If you have any links I'd love to read them and I'm sure other readers would, too. If somebody else “invented” it I'm happy to give them props. Bill certainly popularized the idea and built it into a big business.

  • http://bothsidesofthetable.com msuster

    Thank you for the input. Honestly, I don't know the original history so I appreciate the education. If you have any links I'd love to read them and I'm sure other readers would, too. If somebody else “invented” it I'm happy to give them props. Bill certainly popularized the idea and built it into a big business.

  • http://bothsidesofthetable.com msuster

    I will. Maybe a different browser? I'm in Chrome.

  • http://bothsidesofthetable.com msuster

    I will. Maybe a different browser? I'm in Chrome.

  • http://www.victusspiritus.com/ Mark Essel

    Wow, much of this list was news to me. I need a faster information network if (when) I become a betting man. Quirky's my favorite, could be the name but mostly what they'll make possible and how their work will be mimicked and change multiple industries from corporate design->manufacture->distribute to a user driven model. Heck Apple's doing it now with “developer apps”, that they grab a 30% slice of. It's like uncle sam's tax hit all over ;).

  • http://www.victusspiritus.com/ Mark Essel

    Wow, much of this list was news to me. I need a faster information network if (when) I become a betting man. Quirky's my favorite, could be the name but mostly what they'll make possible and how their work will be mimicked and change multiple industries from corporate design->manufacture->distribute to a user driven model. Heck Apple's doing it now with “developer apps”, that they grab a 30% slice of. It's like uncle sam's tax hit all over ;).

  • Michael Abehsera

    Mark,
    First of all I dont think its fair to respond to me based on “I am young and dont know” that has lowered your credibility, respond based on what I say not based on my age, race etc.
    I with guys like Seth Godin and many great social media folks are screaming very loud about the pure ignorance of people not seeing the true power of social media and where its heading. Its sad that you think there is no way to market to people without them WANTING it or listening, why do you think google became the worlds biggest ad platform? because they invented something that I want, when I search for something and find relevent ads I want that, i asked for it. A social media ad revulution will happen the same way as google did in search will happen in SM, it will be something that I want, something that gives value, and I am not talking about a dream here this is happening on a daily basis (just not scalable yet).
    About your comment on People prefer TV with no ads etc. Consumers are sick and tired of ads that are not asked for, we became immune to them, the magic of TV ads is dead a long time ago, as a kid I used to watch cereal commercials and want to buy the product right away, it was a magical time why? because that was the only form of media to consume I had no other options but to watch that, today I have a billion options, the consumer now is asking for something new like you said above “people prefer TV with no ads” if the consumer is asking for it why not give it to them? google figured it out and look at their valuation, remarkable and a true innovation is what we need not another form of spam.
    I hope you read the articles of Seth Godin and the other ones I listed above, btw Seth is not a kid he is older so I guess you can listen to him.

  • Michael Abehsera

    Mark,
    First of all I dont think its fair to respond to me based on “I am young and dont know” that has lowered your credibility, respond based on what I say not based on my age, race etc.
    I with guys like Seth Godin and many great social media folks are screaming very loud about the pure ignorance of people not seeing the true power of social media and where its heading. Its sad that you think there is no way to market to people without them WANTING it or listening, why do you think google became the worlds biggest ad platform? because they invented something that I want, when I search for something and find relevent ads I want that, i asked for it. A social media ad revulution will happen the same way as google did in search will happen in SM, it will be something that I want, something that gives value, and I am not talking about a dream here this is happening on a daily basis (just not scalable yet).
    About your comment on People prefer TV with no ads etc. Consumers are sick and tired of ads that are not asked for, we became immune to them, the magic of TV ads is dead a long time ago, as a kid I used to watch cereal commercials and want to buy the product right away, it was a magical time why? because that was the only form of media to consume I had no other options but to watch that, today I have a billion options, the consumer now is asking for something new like you said above “people prefer TV with no ads” if the consumer is asking for it why not give it to them? google figured it out and look at their valuation, remarkable and a true innovation is what we need not another form of spam.
    I hope you read the articles of Seth Godin and the other ones I listed above, btw Seth is not a kid he is older so I guess you can listen to him.

  • http://bothsidesofthetable.com msuster

    Let's just agree to disagree. I don't feel that need to have a debate with you here. It's a shame you felt the need to go hostile over something so silly, Michael. Really a shame. Not sure what your objective was.

  • http://bothsidesofthetable.com msuster

    Let's just agree to disagree. I don't feel that need to have a debate with you here. It's a shame you felt the need to go hostile over something so silly, Michael. Really a shame. Not sure what your objective was.

  • http://bothsidesofthetable.com msuster

    Either that or just watch / listen to TWiVC!

  • http://bothsidesofthetable.com msuster

    Either that or just watch / listen to TWiVC!

  • http://www.victusspiritus.com/ Mark Essel

    So far loving the show/insights, thanks Mark. Haven't listened to you speak before.

    I paid $2 bucks to Jason on Mahalo to ask about why TechCrunch50 charged so much of pitching entrepreneurs. He answered (as far as I know), and it was a solid rationale, very cool of him :D

  • http://www.victusspiritus.com/ Mark Essel

    So far loving the show/insights, thanks Mark. Haven't listened to you speak before.

    I paid $2 bucks to Jason on Mahalo to ask about why TechCrunch50 charged so much of pitching entrepreneurs. He answered (as far as I know), very cool of him :D

  • billbing

    A good source for info on deals that get funded is peHUB wire. Here's a link to subscribe to the daily e-mail: http://hosting.mansellgroup.net/enablemail/Thom

    I'm not affiliated, just someone who has been signed up for a couple of years and appreciates the info.

  • billbing

    A good source for info on deals that get funded is peHUB wire. Here's a link to subscribe to the daily e-mail: http://hosting.mansellgroup.net/enablemail/Thom

    I'm not affiliated, just someone who has been signed up for a couple of years and appreciates the info.

  • billbing

    Mark,

    I listened to/enjoyed both episodes of TWIVC, and have some feedback if you're interested. You and Jason have great rapport and efficiently cover a lot of ground on the show. IMHO it would be interesting to see a couple of other folks come on from time to time to get a different perspective, but that's no knock on you, and I think you'd still be great as the “regular” guy with occasional guest fill-ins.

    The one bit of gentle criticism I have is that it seems like a lot of your discussion around recent financings is (in this order):
    (a) who the investors are
    (b) does the entrepreneur have a distinguished track record, and then
    (c) what does the company do, what's the business model, etc.

    I know you've only done two shows, but it seems that there's a tendency to assume that any deal funded by brand name investor X must be good, or any company started by serial entrepreneur Y will work out one way or the other. I recognize that there's a lot of reality and lessons to be taken from the way you guys discuss deals, but from a listener perspective I'd be more interested to hear what you as a VC think about the strategies of these various companies rather than your thoughts on the investors, entrepreneurs, etc. Obviously it's a balance, but hopefully my point is clear.

    Anyway, thanks again to you and Jason for doing the show. It's a great, quick way to hear some thoughts on deals and new companies.

    -Bill

  • billbing

    Mark,

    I listened to/enjoyed both episodes of TWIVC, and have some feedback if you're interested. You and Jason have great rapport and efficiently cover a lot of ground on the show. IMHO it would be interesting to see a couple of other folks come on from time to time to get a different perspective, but that's no knock on you, and I think you'd still be great as the “regular” guy with occasional guest fill-ins.

    The one bit of gentle criticism I have is that it seems like a lot of your discussion around recent financings is (in this order):
    (a) who the investors are
    (b) does the entrepreneur have a distinguished track record, and then
    (c) what does the company do, what's the business model, etc.

    I know you've only done two shows, but it seems that there's a tendency to assume that any deal funded by brand name investor X must be good, or any company started by serial entrepreneur Y will work out one way or the other. I recognize that there's a lot of reality and lessons to be taken from the way you guys discuss deals, but from a listener perspective I'd be more interested to hear what you as a VC think about the strategies of these various companies rather than your thoughts on the investors, entrepreneurs, etc. Obviously it's a balance, but hopefully my point is clear.

    Anyway, thanks again to you and Jason for doing the show. It's a great, quick way to hear some thoughts on deals and new companies.

    -Bill

  • http://bothsidesofthetable.com msuster

    Thank you. Very useful feedback. I'll bear that in mind. I think we did a few deep dives on companies in each show but I'm hearing that you want a bit more of that. Appreciate it.

  • http://bothsidesofthetable.com msuster

    Thank you. Very useful feedback. I'll bear that in mind. I think we did a few deep dives on companies in each show but I'm hearing that you want a bit more of that. Appreciate it.

  • http://twitter.com/LadaRasochova Lada Rasochova

    I love the show/insights. Thanks for doing it!!!

  • http://twitter.com/LadaRasochova Lada Rasochova

    I love the show/insights. Thanks for doing it!!!

  • http://www.victusspiritus.com/ Mark Essel

    Thanks Bill, great tip.

  • http://www.victusspiritus.com/ Mark Essel

    Thanks Bill, great tip.

  • Michael Abehsera

    Mark I didnt go hostile I am from Israel when I debate it sounds hostile but its not, it was purely a debate.
    My objective was simple you said in the meeting you had to call our bullshit on something, so I had to do the same on Ad.ly and its competitors (mainly because u said above that its innovative), also social media is a pure passion of mine for years already (before the hype came) and I just feel that companies such as ad.ly is hurting our streams credibility. Mark we need to push the envelope in innovation and shoot for something that we all want, again the best example is permission marketing (adwords), hopefully we will see soon what the best SM biz model will be until now its not shown.

    Good night :)

  • Michael Abehsera

    Mark I didnt go hostile I am from Israel when I debate it sounds hostile but its not, it was purely a debate.
    My objective was simple you said in the meeting you had to call our bullshit on something, so I had to do the same on Ad.ly and its competitors (mainly because u said above that its innovative), also social media is a pure passion of mine for years already (before the hype came) and I just feel that companies such as ad.ly is hurting our streams credibility. Mark we need to push the envelope in innovation and shoot for something that we all want, again the best example is permission marketing (adwords), hopefully we will see soon what the best SM biz model will be until now its not shown.

    Good night :)

  • http://twitter.com/PhilipHotchkiss Philip Hotchkiss

    I agree with Mark's perspective here: his third point on TweetUp is particularly important:

    “3) it’s not exactly all “true” search in the “discovery of new information” or “intent based advertising opportunity” sense. Why? Because I’m guessing at lot of it comes from queries to the API from saved searches people set up in Seesmic and TweetDeck. Just a guess. But if so this search traffic is less monetizable.”

    Twitter has been putting out a lot of stats lately, but it's important to peel back the layers of the onion. Don't get me wrong, I love Twitter – but, when it comes to monetizing the ecosystem, making comparisons between Twitter search and Google Search aren't compelling to me at this stage in the game. The exciting part – is that it's still very early in the game.

    On biz models: I think you'll see a second opportunity generated by in-stream ads as they become more prevalent (I rarely see an in-stream ad in my curated Twitter world experienced via TweetDeck and Echofon). The opportunity? Twitter clients, (real-world example @echofon charging $20 for a key) and many others that will charge users a reasonable fee to remove ads from their stream. Mainstream users won't pay for this, but power-users certainly will.

    Can Twitter block such filters? Probably, if anyone knows or has thoughts on this particular point please share:)

  • http://twitter.com/PhilipHotchkiss Philip Hotchkiss

    I agree with Mark's perspective here: his third point on TweetUp is particularly important:

    “3) it’s not exactly all “true” search in the “discovery of new information” or “intent based advertising opportunity” sense. Why? Because I’m guessing at lot of it comes from queries to the API from saved searches people set up in Seesmic and TweetDeck. Just a guess. But if so this search traffic is less monetizable.”

    Twitter has been putting out a lot of stats lately, but it's important to peel back the layers of the onion. Don't get me wrong, I love Twitter – but, when it comes to monetizing the ecosystem, making comparisons between Twitter search and Google Search aren't compelling to me at this stage in the game. The exciting part – is that it's still very early in the game.

    On biz models: I think you'll see a second opportunity generated by in-stream ads as they become more prevalent (I rarely see an in-stream ad in my curated Twitter world experienced via TweetDeck and Echofon). The opportunity? Twitter clients, (real-world example @echofon charging $20 for a key) and many others that will charge users a reasonable fee to remove ads from their stream. Mainstream users won't pay for this, but power-users certainly will.

    Can Twitter block such filters? Probably, if anyone knows or has thoughts on this particular point please share:)

  • altlatin

    Venture Capital in Argentina

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    For Free Access to Full Content, visit:
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  • altlatin

    Venture Capital in Argentina

    Venture-capital Venture capital in Argentina, particularly at an early stage, requires an active participation in the running of portfolio companies. One can argue that VCs practically play the role of entrepreneurs. In other words, there is no room for “dumb money”. Venture capital, for various reasons outside the scope of this piece, has to be “smart” i.e. has to be complemented with experienced management and has to have a wide network of contacts.

    For Free Access to Full Content, visit:
    http://www.alternativelatininvestor.com/34/case