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Archive for June 12th, 2007

The Best Blog Posts on Venture Capital

Sorry, but I couldn’t help providing these pointers.

I’ve been thinking for a while about writing some posts explaining venture capital. While I have a lot of friends who are serial entrepreneurs and venture capitalists, one of the my realizations in the brief time I spent in the industry was how poorly understood it is by 99% of people.

Well, it looks like Marc Andreesen beat me to it.  His posts contain roughly 90% of what I was going to say.

He has three of them:

Marc describes his experience with venture capital as follows:

My experience with venture capital includes: being the cofounder of two VC-backed startups that later went public (Kleiner Perkins-backed Netscape and Benchmark-backed Opsware); cofounder of a third startup that hasn’t raised professional venture capital (Ning); participant as angel investor or board member or friend to dozens of entrepreneurs who have raised venture capital; and an investor (limited partner) in a significant number of venture funds, ranging from some of the best performing funds ever (1995 vintage) to some of the worst performing funds ever (1999). And all of this over a time period ranging from the recovery of the early 90′s bust to the late 90′s boom to the early 00′s bust to the late 00′s whatever you want to call it.

Normally, I’d be skeptical, but as I read his posts further, I found myself really appreciating the perceptiveness of his comments.

For example, here is a brief passage from the first post:

Within that structure, they generally operate according to the baseball model (quoting some guy):

“Out of ten swings at the bat, you get maybe seven strikeouts, two base hits, and if you are lucky, one home run. The base hits and the home runs pay for all the strikeouts.”

They don’t get seven strikeouts because they’re stupid; they get seven strikeouts because most startups fail, most startups have always failed, and most startups will always fail.

So logically their investment selection strategy has to be, and is, to require a credible potential of a 10x gain within 4 to 6 years on any individual investment — so that the winners will pay for the losers and in the timeframe that their investors expect.

All early stage venture capitalists will repeat the above analogy to you, but personally I found that in 2001-2002, very few venture capitalists internalized what that analogy really means. What it means is that you need to take a certain number of “swings” every year, just to make sure your odds of connecting with a winner pan out. In 2001-2002, too many venture capitalists sat on the sidelines, debating whether $4M should buy them 50% or 60% of a Series A company, instead of making sure that they kept investing. After all, any contrarian investor will tell you, you force yourself to put money in when times look grim.

I also really appreciated this quote from Marc’s second article:

Why we should be thankful that we live in a world in which VCs exist, even if they yell at us during board meetings, assuming they’ll fund our companies at all:

Imagine living in a world in which professional venture capital didn’t exist.

There’s no question that fewer new high-potential companies would be funded, fewer new technologies would be brought to market, and fewer medical cures would be invented.

We should not only be thankful that we live in a world in which VCs exist, we should hope that VCs succeed and flourish for decades and centuries to come, because the companies they fund can do so much good in the world — and as we have seen, a lot of the financial gains that result flow into the coffers of nonprofit institutions that themselves do huge good in the world.

Remember, professional venture capital has only existed in its modern form for about the last 40 years. In that time the world has seen its most amazing flowering of technological and medical progress, ever. That is not a coincidence.

This is what made me passionate about venture capital when I was in the industry, and it’s why I will likely return to it in some form again. There is an extremely important role to play for venture capitalists to play in getting money from large, conservative institutions effectively into the hands of risky entrepreneurs who are building the new technologies and businesses of tomorrow. You won’t get there with government funding or small business loans.

My favorite part of Marc’s series, however, is in his third article, when he discusses the current paradox of venture capital, one that has surprised me personally. The question is this:

If venture capital in the past 7-8 years has had such horrible risk-adjusted returns compared to the public markets, why hasn’t the amount invested in venture capital funds decreased dramatically?

The answer is asset allocation.

I remember my Private Equity class at Harvard, where Dave Swensen, of Yale Endowment fame, came to speak. Venture capital has become an asset class that every multi-billion-dollar institution feels like it needs in its portfolio. This is because after 25 years of modern venture capital, it because a proven fact in the 1990s that over the long term, venture capital has returned almost 2x the public market return, with low correlation to the public stock market. That may not sound like much to you, but that’s music to a money-manager’s ears.

This predictably led a significant number of institutions to shift massively into alternative investments and venture capital in the late 90′s, just in time to get hammered by the crash of 2000-2002.

Here’s the interesting part: that hammering — by people who, say, only started investing in venture funds in 1999 — has not resulted in a significant pullback on the part of institutional investors from venture capital.

Instead, venture capital has become an apparently permanent asset class of many large institutional investors — and increasingly, smaller institutional investors.

One element that I do believe Marc missed here is the behavioral finance aspect of why institutions still put billions into venture capital. You see, on average, venture capital has done poorly the last 7-8 years. But there have been some great funds that have performed spectacularly (Google, anyone?) Like hedge funds, many institutions have money managers that believe that the venture capital funds that they have picked will be the few that outperform. (Of course, most of the best venture funds turn away money regularly, but that’s another story.)  Thus, everyone believes that they will be “above average”, even though that’s not possible.

In any case, definitely read Marc’s articles. Bookmark them. Read them and think about them the next time you read some press about venture capital. They are keepers.  I just wish I had written them first.

Is Safari for Windows Part of the iPhone Strategy?

Steve Jobs gave the keynote for WWDC (World Wide Developers Conference) 2007 today, and as usual it was packed with announcements.

There are so many Apple magazines, websites, and blogs, it feels like a waste for me to repeat the “10 Features of Leopard” that Steve walked through.

If you want that walkthrough, here is a good one.  Apple is also hosting the video of the keynote, in case you want to watch it live.

However, judging by the pure volume of headlines, the press have decided to highlight the last announcement in the keynote as the big shocker of the day:  Safari 3.0 for Windows.

It’s not an obvious move.  Now, it’s not that I don’t understand the problem.  Believe me, the relatively small market share for Safari is a real issue.  For most of the time I was at eBay, Safari was not on the official list of supported browsers for eBay, largely because of its unusual implementation of Javascript and DHTML, and because of its minuscule market share.  It wasn’t until 2006 that Safari 2.0 made the list, and that had more to do with the growth of Firefox and the need to target “all modern browsers”.

What non-developers may not realize is that supporting additional platforms always requires more initial thought and a higher level of developer skill.  Originally, when HTML was dirt-simple, there was no real issue with browser complexity.  However, the browser wars of the late 1990s gave birth to incredible complexity in web programming, and that has only gained steam in the past few years as developers struggle to add richer interfaces to their web applications.

As a result, supporting additional platforms and web browsers is a big deal.  Internet Explorer is Windows-only (a move I have long questioned strategically).  Safari is Mac-only (until now).  Thank goodness for Mozilla Firefox, the only real hope of building code once and having it run on a large number of platforms.

Depending on whose numbers you believe, IE has about 80% marketshare, Firefox has 15%, and Safari has 5%.  Different sites have different numbers, because some sites attract different types of audiences.

As a web developer, you could decide to target only IE.  That gets you 80% of the market.  That might work, but it’s not as easy a decision as it was in 2003 when they had 90+% of the market.

Developing for IE & Firefox seems like the right answer, because it gets you 95% of the market, and the nature of developing for Firefox usually means good, clean, standards-compliant code that will also work on Safari.

As a result, Mac users owe a real debt to the growth and success of Mozilla Firefox.  Once developers decide to go “multi-browser”, they usually include Safari for good measure.

So, why does Apple choose to promote “a third option”?  They have no chance of catalyzing the anti-Microsoft, open-source community… they are behind Mozilla (and for good reason).  They have no chance of taking significant share from IE… everyone who can download a separate browser has largely downloaded Firefox.  And if they should take market share from Mozilla, then they have likely hurt the case for non-IE development by fragmenting the market further.

When Apple launched Safari, Firefox was not nearly as robust or successful as it is now.  But I really wondered why Safari 2.0 wasn’t just a Firefox variant… an extension of the Mozilla codebase, hand-tailored for the Mac by Apple (like an official Camino build).

So here is my theory… based on no real information.  I have seen this theory in exactly zero of the articles on the topic I browsed today.

It’s about the iPhone.

It takes a few assumptions to get there, but just ponder the following, and let me know if you think I’m crazy:

  • Let’s say that developing a full-featured web browser for mobile that is differentiated and supported the unique Apple-designed gestures and interfaces for the iPhone required so much customization that you really needed to own the code base.
  • Or, let’s assume that Apple doesn’t want to reveal the source code of some of its browser innovations for the iPhone as a form of proprietary advantage in the mobile space.
  • Let’s also assume that Apple wants a rich set of applications for the iPhone, but wants to bypass the current models for installing applications on cell phones, and WAP-based models for web-application development.  Apple wants rich applications without the strings that come from service providers or the limitations of WAP.

Apple has a bit of a problem now… they need a custom browser, but they want active developer support to build these rich applications.  They need market share… but not PC market share.  They need mobile market share.

Could the answer be a Safari for Windows that runs on Windows Mobile?  Is it possible that Apple would license Safari for Windows Mobile to a broad set of carriers?  It wouldn’t be the iPhone, but it would be a larger audience for web developers to target, and it would be a “stepping stone” for buyers of non-Apple, integrated mobile devices to get a “taste” of the Apple iPhone experience.  Safari for Windows then provides Windows-based developers with an easy target platform for development & testing.

Might be a stretch.  But I wonder if Safari for Windows has more to do with Apple’s non-PC device strategy than some bizarre attempt to take on Microsoft and Mozilla.

Daring Fireball thinks it’s all about the revenue from the search bar… I see that as a perk, but not a major reason to take on this challenge.  $75M in revenue per year is just not a big deal at Apple’s current size… unless they see their growth slowing and are scraping for every dollar.

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