Tech Market Analysis


Yesterday I wrote Part 1 of the series on the changes to the software industry over the past decade that has led to changes in the venture capital industry itself.

If you don’t want to read that post, the summary is:

Open source computing drove computing costs down 90%, which spurred innovation in technology
Open cloud led by Amazon with their AWS services drove total operating costs down by 90%. This led to an explosion in startups.
Amazon in turn led to the formation of an earlier stage of venture capital now led by what I call “micro VCs” who typically invest $250-500k in companies rather than the $5-7 million that VCs used to invest.

These trends have put pressure on traditional VCs. Some have done earlier-stage deals and done well. Others have chased earlier-stage but lack the skills or relationships to do this effectively. Some have moved into later stage investments in an effort to “put logos on their websites.”

People are moving into everybody else’s space.

Everybody seems to want what everybody else has. You know the old saying from Harry Met Sally, “I’ll have what she’s having!”   This will continue while we’re in a tech bull market and I predict will wane when we’re not.

The Blurring of Investment Lines
With new micro VC entrants into to early-stage investing plus increased competition from angels, incubators and the like – traditional VCs have taken notice. So VCs spent a couple of years experimenting with earlier-stage investing, which is OK.

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The Venture Capital industry has changed over the past 5 years that I would argue are a direct result of changes in the software industry, not the other way around. Specifically, Amazon has changed our entire industry in profound ways often not attributed strongly enough to them.

I believe the changes to the industry will be lasting rather than temporal change. Venture capital is in the process of its own creative destruction with new market entrants and new models of innovation at the precise moment that our industry itself is contracting.

I will argue that when the dust settles, although we will have fewer firms, each type well end up more focused on traditional stage segments that cater to the core competencies of that firm. The trend of funding anything from the first $25k to funding $50 million at a billion+ valuation is unlikely to last as the skills and style to be effective at all stages are diverse enough to warrant focus.

I will argue that LPs who invest in VC funds will also need to adjust a bit as well.

Rewind
When I built my first company starting in 1999 it cost $2.5 million in infrastructure just to get started and another $2.

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This post originally ran on TechCrunch.

I recently spoke at the Founder Showcase at the request of Adeo Ressi.  I asked what the audience most needed to hear.

He said, “They need an unbiased view of the fund raising environment because there is too much misinformation and everything seems to be changing fast.”

This was an audience of mostly first-time entrepreneurs. They have seen one side of a market where many of us have seen the ebb and flow multiple times. Still, market amnesia by ordinarily rational actors always surprises me.

I spoke about a lot of things during the keynote. If you are interested the Vimeo is here.

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An edited version of this post originally ran on TechCrunch. This version has some additional details on a portfolio company I’ve invested in, which are disclosed below.

WWDC. The annual Apple event where no real hints about what products they plan to release are floated in the public domain in advance.

No private head nods are given to small startup companies to help them prepare. We’re in a market where 800-pound gorillas throw their weight around and the rest of the market races to react and survive.

Any company who develops products reliant on iOS spends weeks crapping their pants before WWDC. No vacation schedules allowed for weeks before or weeks after. The announcements come out in one day and then even if you survive the annual release announcements you often still have to scramble to make sure your product is ready to work on time.

It’s madness.

This happens with Google, too.

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Twitter is an ephemeral service. It’s what I love about Twitter. When I’m in the mood to consume what my world is telling me right now I can “tune in” to Twitter and digest the rapid stream. I don’t really worry about missing stuff. If somebody wanted me to see something they’d @ message me, which I always read. And as I’ve written about in the past, I truly believe that Twitter networks are significantly different from other social networks.

The downside to this rapid stream is that at times you come across super interesting articles that you want to read but for which you don’t currently have the time. How do you deal with this scenario? For me, when I use Twitter on my Blackberry I email the Tweet to my gmail account and I read them later. I auto filter these in Gmail so I essentially get a reading list of future articles. I think a lot of people do this if their mobile Twitter client supports it.

The way that I used to deal with it on Twitter.

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This article originally appeared on TechCrunch.

Banner Ads. They first started in 1994 and are therefore almost as old as the Web itself. They were very effective back then, with the original ad garnering a 78% click-through rate (CTR)!  I guess from there we had nowhere to go but down.

Nowadays banner ads get on average 0.2% CTR meaning for every 1,000 ads that are served up only 2 people click on them. And as Jon Steinberg of Buzzfeed points out, the CTRs for social media banner ads are just 0.08%.

Holy

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