Tipping Points

Cautious optimism: Up Rounds Increase But Down Rounds Still Prevail

Green Shoots In Company Financings?.

• Pre-money valuations up from Q1, especially at Series D level
• Up rounds 25% vs. Down/Flat rounds at 56%
• Liquidation preferences are 1x or greater
• 60% of deals done with fully participating preferreds
• 67% of deals have drag along provisions
• 71% of deals have anti-dilution provisions; 50% have full anti-dilution
• Redemption and accruing dividends are widely used outside northern California
• Pay-to-play provision are not typical at Series A, but are not uncommonly used in later stages

Friedman: Let's Turn The Government In To A VC Firm

Friedman: Let's Turn The Government Into A VC Firm.  While entrepreneurs everywhere starving for funding would welcome any source of funds, I essentially agree with Fred Wilson's response to Tom Friedman:

The top venture firms don't want, don't need, and are never going to take government money. The same is true of the top entrepreneurs.

The worst firms, on the other hand, will gladly accept government money. And that is what is going to happen with all of these government efforts to pour more money into the "innovation sector". That money will go to bad investors and weak entrepreneurs and management teams for the most part. It's a problem of adverse selection.

VC fund LP interests trading at 47.6% of NAV

PeHub: Buyout Values Drop Below Venture.

"...As of the end of January, the firm reported, the median bid for venture fund stakes on the secondary market stood at 47.6% of net asset value (NAV). The median buyout fund bid was lower, coming in at 44.3% of NAV for buyout funds...both asset classes have taken a beating in the past year. In January, 2008, venture and buyouts stakes on the secondary market were fetching median bids of 78.6% and 80.8%, respectively."

VC fund LP interests trading at 47.6% of NAV

PeHub: Buyout Values Drop Below Venture.

"...As of the end of January, the firm reported, the median bid for venture fund stakes on the secondary market stood at 47.6% of net asset value (NAV). The median buyout fund bid was lower, coming in at 44.3% of NAV for buyout funds...both asset classes have taken a beating in the past year. In January, 2008, venture and buyouts stakes on the secondary market were fetching median bids of 78.6% and 80.8%, respectively."

Talking Business - Hoping a Hail Mary Pass Connects

Finally, an single piece that provides perspective on the financial crisis that I can begin to understand: Talking Business - Hoping a Hail Mary Pass Connects.

"Why to Not Not Start a Startup" and other gems

One of my favorite questions to ask first-time entrepreneurs is "What are you reading?"  It always surprises me when the answer is a puzzled look, then a mental reach for CNN.com, or the New York Times. 

About a year ago, my friend Chris Muscarella encouraged me to start reading Paul Graham's blog.  I had never heard of Paul or his investment vehicle, Y Combinator.  But Chris was so passionate about it that I took the time to find Paul's blog and haven't stopped reading since.

Among my favorite essays are Why to Not Not Start a Startup for doubtful entrepreneurs and Hackers Guide to Investors for techies thinking about raising capital. 

Now when asked, "What are you reading?", you can now say "I'm reading Paul Graham."

The Decline of Music Sales - A Q1'07 Stat Summary

Yesterday, the Wall Street Journal did a huge service to us stat geeks with its front-page article "Sales of Music, Long in Decline, Plunge Sharply."  Let's  just dive into the numbers:

• 20% decline in weekly sales of CDs from Q1'06 to Q1'07, from to 97.8 to 81.5 million units. 
• 54% increase in digital sales from Q1'06 to Q1'07, from to 112.6 to 173.4 million tracks. 
• Combined, sales of all music - digital and physical - are down 10% this year
• Other sales - ringtones, subscriptions, etc. - comprise an additional 1% of sales
• On P2P networks, 1 billion songs a month are traded
• In 2006, 800 music stores closed, including 500 Sam Goodys and 89 Tower Records
• Megaretailers such as Wal-Mart and Best Buy represent 65% of the retail market, up from 20% in 1996, but are reducing floor space dedicated to music
• In 2006, about 100 million iPods were sold
• In 2007, two lowest-selling No. 1 albums since Nielsen's Soundscan was launched in 1991 - Chris Daughtry (65,000) and Dreamgirls (60,000).  In 2005, these albums wouldn't have cracked the Top 30.  No. 1 albums often sold 500,000 to 600,000 copies per week. 

A couple months ago, The Big Picture paraphrased the following 2006 statistics from the AP:

Year-end sales figures released Thursday by Nielsen SoundScan said 588.2 million albums were sold in 2006 -- a 4.9 percent decline from 2005. But digital track sales increased by 65 percent over the previous year, with 582 million tracks sold, and digital album sales more than doubled, with nearly 33 million sold last year.

Consumers made nearly 1.2 billion music purchases in 2006, up 19.4 percent from just over 1 billion in 2006, according to the company's data, which is based on point-of-sales tracking. That increase comes even as sales have dropped 4.9 percent of albums, whether by digital download or on CD and other formats that you can actually hold in your hands. Overall, the industry sold 588.2 million albums in 2006.

KCRW and Internet Radio Royalties

Dear KCRW,

In my opinion, KCRW is the best radio station in the U.S., terrestrial or online.  Only the BBC online competes for my online radio listening hours.  Recently, the Copyright Royalty Board affirmed royalty payments for webcasters, retroactive to 2006.  Some webcasters, notably Pandora, have flatly stated that they will go out of business unless the royalty rate is reduced or revoked.  KCRW is encouraging its audience to protest the fact that the royalty does not differentiate between for-profit and non-profit webcasters.   

I'm prepared to be outraged, but first let's do a little analysis.  At $0.0008 per play, and an average of 4 mins per song, this would amount to 15 songs or $0.012 per hour.  If I left KCRW on during the 10 hours I work each day, it comes out to $0.12 per day.  Since I don't listen all the time and am not in the office all the time, assume 10 workdays a month, it's $1.20 per month, or $14.40 per year. 

Sign me up!  I already contribute more than $100 per year to you, far more than it will cost to stream music to me!   Obviously, not all listeners contribute.  So why don't you offer your contributors something extra - like a higher-quality stream or priority queuing at peak demand times?  I believe that the excellence of your programming, coupled with webcasting, has significantly increased your contributor base.  So it's time to pay for that, whether the rate is $0.0008 or $0.0002 per user-play.

I will continue to support KCRW and could probably be convinced to fork over a little more, I think so highly of your service. It's actually especially beautiful combined with the full-length audio streams offered by my own company,  Haystack.com. 

But it's time to think about some other approach to driving contributions since I believe the royalty is not going away.  And, by the way,  I think you believe that, too, since you're not giving me or any other supporter any concrete steps to take to help your cause. 

Your loyal fan,

Art

"Defiance of the Venture Capital Model" or "Money Is Not The Most Important Thing"

I previously wrote about Markus Frind and his free online dating service, Plentyoffish.com.  This is the third and probably last in the series on Markus.  I borrowed the first half of this post's title from Guy Kawasaki's blog post of the same title that features a must-see video of Markus  and other social network founders at the CommunityNext conference.  As Guy points out, one other founder on the panel, Drew Curtis of Fark, also runs a one-person company. 

Aiden Henry writes about Markus on his blog, Mappingtheweb,

Who’s the king of the net? You can argue for any number of individuals from Tim Berners-Lee to Michael Arrington to Sergey Brin and Larry Page, but let’s get down to the facts. Who runs the single most successful website (in terms of page views) on the Internet as a one-man operation? Markus Frind.

Markus Frind is a one-man wrecking machine. He has single-handedly disrupted the world of online dating with a super-easy-to-use, free dating site - PlentyOfFish.

In the old dot-com model, disruptive technologies/companies required multiple tens of millions of dollars of venture capital to realize their potential.   Because of the scale of the spend, carefully choreographed business plans were de rigueur.  In the new dot-com world, the  kingpins are doing the following:

• just starting, for fun, curiosity, or a reaction to boredom
• trying stuff out, stumbling into solutions for unmet needs
• striving for good 'nuff
• postponing adoption of a business model
• minimizing or eliminating business planning
• reacting to opportunities or user feedback - or explicitly rejecting them
• using data analysis to prioritize
• automating and tuning instead of adding people
• avoiding venture capital
• becoming profitable
• charting their own destiny

"Everything good that's happened has happened by accident," says Sean Suhl of SuicideGirls. 

Technology has become cheaper, easier to use, and therefore more prevalent and faster.  With greater numbers of people creating a plethora of solutions at greater and greater speeds, the pace of innovation is increasing.

In this environment, venture capital is certainly not dead.  But there is a growing base of anecdotal evidence that venture capitalists are finding it difficult to take advantage of many of these new opportunities.  It's not for lack of scalability or the potential to exit.  The ethos of founders has changed to fit the reduced capital needs permitted by the technologies.  Not surprisingly, most of these new founders are also technologists.

VCs should be concerned because these new startups will take markets away from much better capitalized companies.  But the bigger the company, the harder it will fall.  The biggest danger is to large, capital- and people-intensive companies in traditional media. 

A New Era of Nuclear Productivity?

Forget disruption.  Think industry-wrecking.

I had the privilege of having Markus Frind on a panel I moderated at the Wharton Technology Conference.  I think I saw the future.  It's simply, well, nuclear in its potential.   Pure productivity increase, with the resulting potential for an unbounded economic payout. 

(If economics bore/terrify you, skip to [A] below.)

Years ago, as a first year MBA student, I took a marvelous Macroeconomics course from Charlie Himmelberg.  I learned from Charlie two important lessons.  First, you should figure out  the one thing you want to remember from each course, a memory that you would want to stick for the rest of your life.  The rest didn't matter (great relief to me but not to my grades).  Second, (all real economists, please forgive any errors in my rusty memory), this is the one thing he wanted us to remember from Macro:

GDP = f (A x N^0.7 x K^0.3 x G^?)

In plain English, GDP is a function of A (Productivity), N (Labor), K (Capital) and G (Government), where labor is less important than productivity, and capital is less important than labor.  If one takes the first derivative of this equation,  change in GDP is a result of the change in productivity, labor, capital and government, where changes in productivity, labor,  and capital have decreasing importance.

I have found this concept useful in thinking about all economic systems, ranging from large entities to small companies and even my individual economic existence.  Thanks, Charlie.

[A].  Pure productivity.  Imagine a system that requires no additional labor, no additional capital, is free from government assistance/regulation. 

Impossible, one might say.  Productivity doesn't exist in a vacuum. 

But nearly unbounded productivity can result from technologies inventively combined by one entrepreneur/programmer/marketer, who can be a one-person company, global in scale, with literally millions of customers and millions of dollars of revenues.  See Plentyoffish.c0m.