Last week I was a panelist at the EBAN Congress panel titled, “How to Find and Grow a Yandex”. Since the event wass in Moscow, I figured there would be someone on the panel who actually had a finger in finding and growing Yandex, but alas, we were all mere spectators. However, each of us on the panel have been fortunate enough to be involved in the building of great companies.
Thinking about what it takes, especially in emerging markets, to create exceptional companies, I was not surprised that I arrived at my usual conclusion: that it starts and ends with the Team. This is even more important in the case of the most ambitious of the startups I witness, as there a few additional complexities.
First, for the homeruns, you need excellence on all fronts. It’s not enough that a team has a brilliant technical founder, or that the CMO is a marketing genius. You need full performance from the entire team, a balance of operational excellence AND the drive to conquer the world. It’s rare that you get all of this in the initial founder mix, so a key to growing a homerun is supporting the company in its talent needs. I always think that a VC is, before all, a human-resources professional, both in trying to spot talent, supporting them constructively and helping to fill the gaps in the team.
Let’s assume that you have a fantastic team, and that the gaps are being filled effectively. Now comes the challenge that I think is particularly critical in our geographies: aligning the interest of the founders with the investors. Billion dollar exits are rare by definition. You have a smart team, so they can do the math that when the business starts to show traction, let’s say hitting metrics that would value the company in the $10-20m range. Typically, the founder team at that juncture will recognize that a significant portion of the wealth is now in their company’s stock. Assuming they are not independently wealthy, or they have had previous exits, the natural reflex at this point would be to switch to a defensive, preservationist stance. And this would typically coincide with the point where the early traction would allow them to accelerate their growth via new growth capital.
One solution at this point is to align the founder team’s interests with those of the investors by allowing some shares to be sold by the founders as a part of the round. Some investors are allergic to this, thinking it may kill the hunger and drive complacency, but I have seen many examples where the model worked effectively. I think it is an important step in the creation of a great company.
As hinted in the point above, one needs to make sure that they are not funding a “back-door exit” for founders who have decided that they are OK with a discount having lost their faith in their business, but that problem, I think, can be averted by spending a lot of time with the team. In any case, I think full alignment is usually worth the risk.
It's time for MWC, the annual global mobile event that takes place in Barcelona, and we are seeing the usual flow of coverage that praises the innovations around how enhanced mobility is changing our lives.
I am not in Barcelona, but in Berlin, attending a different event. And the only thing related to mobile that I am reminded of while I am traveling is that I am paying EUR 20 per day for my WiFi connection at the hotel. If I don't pay for this, then Turkcell, my mobile provider charges me (link in Turkish) roughly EUR 1 per minute for voice and EUR 4 for 10MB of data.
This is obviously at least an order of magnitude larger than any German customer's price for mobile usage. So it's not cost driven, and is purely a type of extortion to which carrier monopolies have managed to hold on.
As my smartphone becomes a more integral part of my life, the pain caused by this artifical friction increases. Which tells me this is an area primed for large disruption.
Quintura blog reports today that the Russian online ad market size has reached almost $1.4b in 2011. This represents a 56% jump YoY. These are fantastic numbers for the market. No wonder the country has produced two massive internet companies Yandex and Mail.ru, that have primarily ad-based revenues.
In comparison, the online ad market in Turkey is estimated to be around $400m in 2011 (The IAB figures for 2010 were 271m Euros). Furthermore, my personal estimate is that at least $250 of this is Google, which leaves a paltry $150m for any local company that is going after ad dollars.
This is a problem that impacts the ultimate quality of original Turkish content, which is monetized at lower rates than other geographies. It certainly explains the dearth of online content businesses that have reached any significant scale (the Nokta sites, Eksi Sozluk, Mackolik and SporX are the exceptions here). And finally, it points to a huge opportunity as one would expect this gap to close.
As one of our investment themes, we will be watching solutions that enable more effective monetization of content, beyond ad networks, and lean producers of high-quality content that can attract online ad dollars.
I watched parts of Super Bowl LXVI in a lounge at LAX, on my way to the Bay Area. Not being in an ideal setting, quite distant to the screen, my natural instinct was to tap into my second screen to enhance the experience, so I fired up Twitter on my iPhone, and came face to face with the new social media reality for essentially the first time.
Now I am reading that it was a Twitter record with 12K tweets per second during the game. While TV viewership is flat, the real time web was alight with interaction, commentary and sharing, demonstrating what is now possible in the connected world.
I really think it's a combination of a few separate curves that is defining the new real time web experience. On one hand, the community is getting more fluid in its expression. Conventions are being established and the new vocabulary and interaction modes are now better understood by all. Some of the early clumsiness has now diappeared.
Secondly, the commercial voices are better integrated. So when Madonna or Shazam or Foursquare are interacting with their audiences, that is also more fluid.
And most importantly, the online communities are extremely comfortable integrating the living room experience to their online conversations. For me, Twitter was an enhancing addition to my TV yesterday.
All of this tells me that we are still in the very early stages of media and entertainment disruption we are seeing enabled through the connected economy. It also tells me there will be many more great businesses that will be created in this realm. What excitement to feel on the month of the Facebook filing.
I have previously shared my frustration with artificial scarcity around geography restrictions on content (regions), specifically DVDs and video games. It drives me nuts that I can not watch a DVD I PAID FOR in NYC in Istanbul. I have two DVD players at home for this problem. It's idiotic and it sucks.
Today I found myself thinking about another type of artificial scarcity propogated by Hollywood - the movie release windows. It's a model for premium video content that I suspect is around because "it's always been that way". However, my suspicion is that Hollywood is missing sales opportunities. The reason I seldom go to see movies in the theater is that it's expensive in time, not dollar, cost. If I have a chance to watch - legally - the current popular releases at home instead of the theater, I suspect I would. Once they become available on VoD streaming, etc, a lot of the time, the buzz around that release has evaporated and it's not current and hot anymore.
I can not say I have looked any research on the topic, but my hunch is that this is just another example how content owners don't get the connected economy. Ripe for disruption.
I just saw the movie "Moneyball" on my flight to NY. I'd read the Michael Lewis book (please read the Wikipedia link if you have not read or seen Moneyball, for this post to make sense) and really liked it and was looking forward to the film. I enjoyed the film as well.
In the film, there's a dialog between Billy Beane and his old-school scout Grady Fuson:
Billy Beane: We are the last dog at the ball. You've seen what happens to the runt of the litter? He dies!
Grady Fuson: Billy, that's a very touching story and everything, but I think we're all very much aware of what we're facing here. You have a lot of experience and wisdom in this room, now you need to have a little bit of faith and let us do the job of replacing Giambi.
Billy Beane: Is there another first base player like Giambi?
John Poloni: No, not really.
Billy Beane: And if there was, could we afford him?
Grady Fuson: No.
Billy Beane: Then what the fuck are you talkin' about, man? If we try to play like the Yankees in here, we will lose to the Yankees out there.
Grady Fuson: Boy, that sounds like fortune cookie wisdom to me, Billy.
Billy Beane: No, that's just logic.
I think the point here is very relevant to startups who are challenging large incumbents with far more resources. You have to play a different game. If you attack your larger competitor replicating what they have, they always have a better chance of out-performing you. You have to find your edge and make sure you are playing your game, not theirs.
I was just browsing Google Zeitgeist 2011, and noticed that 7 out of top 10 movie searches in Turkey were sequels. I thought, "ah, shame on the Turks, for not rewarding originality". Then I made my way to the list top grossing movies globally, and immediately apologized from my fellow Turks: All but two of the global list are sequels. In fact, the top seven are all sequels!
Thinking of this phenomenon reminded to a popular topic in internet ventures. In our industry, adaptation of successful, proven business models, in new markets or verticals is often scorned. Entrepreneurs are chastised for their lack of originality and innovation.
I think there's a key difference between sequels and internet clones. Film is a creative industry. Formulaic churning of unoriginal content in a creative industry may very well be a strategic business choice by content companies, and while it may make business sense, it certainly erodes value from the "creative" industry.
In my opinion, internet businesses have no obligation to be creative. Their objective is value creation: preferably, defensible, sustainable, "thick" value. There may be a thousand eBay clones around the world, but if each marketplace is reducing commercial friction among buyers and sellers, then each of the one thousand clones is creating value.
Anyway, food for thought...
Here's the sappy Google Zeitgeist clip:
The internets are abuzz with the reverb from the presentation by Forrester's George Colony at Le Web, with his three thunderstorms proclamation, one of which is that the apps universe has a lot more momentum than the network dependent internet/cloud model, primarily because processing and storage capacity growth outpaces network growth.
I agree with the premise, but really find the "internet's dead, long live the app" hype a bit exaggerated. The app's are not a new phenomenon. In fact, the PC paradigm was based on the app model: executable code processing real time locally. The apps of today are getting all the attention mainly thanks to Apple's phenomenal innovations on mobile computing interfaces: namely the iPhone and the iPad. Apple's led the way to take the advantage of i/o and design innovations, and other tech co's are just following suit.
And what makes the apps more than just updated desktop applications, is the seamless way they interact with the cloud and the data on other devices and the cloud. In fact, I think the current app paradigm, which keeps data in tubes (i.e. not easily accessible like HTLM), has an achilles heel.
What has made the web the most powerful computing advent to date is its openness and neutrality. The apps either have to find a way to make themselves permeable, or go the way of the dodo. The apps have unfortunately broken the internet, while bringing us fantastic user experience. Now disrupters need to find ways to open them up. Whether Apple likes it or not.
Going back to Colony's death of internet meme, I found it to be a bit short-sighted, with smart analysis of a very short period of trends and data. I plan to write a bit more about his two other points soon: social saturation and enterprise.
By the way, there are quite a few people who thing that HTML5 will bridge the app usability and internet network effects. I have not got my arms around HTML5 enough to opine on this, but quite excited to see the innovations on that front.
For those interested, there's a good debate in the comments on Fred Wilson's A VC.
UPDATE: I just got sent a link to a good post by Dave Winer on the same topic.
Here's Colony's presentation from Le Web:
I am sensing a tipping point in the usage of LinkedIn among Turkish professionals. My invitation volume from Turks has increased by at least an order of magnitude since the beginning of the year. While I have historically been very promiscuous with my LinkedIn connection acceptances, I am now changing my behavior and have modified my privacy settings to make it more difficult to friend me.
I have been watching the ratio of Facebook and LinkedIn users closely. Today Facebook stands at 800m users and Linkedin at 116m. That ratio suggests that with ~30m Turkish users on Facebook, Linkedin should enjoy a crowd of 4m. I don't know what that number is but Google AdPlanner suggests traffic numbers at less than 1% of global traffic. That tells me the traffic and attention upside on LinkedIn for Turkey remains enormous.
Combine that with the facts that LinkedIn is enjoying the recent growth I mentioned (albeit anecdotally) in the first paragraph and it is already ranked 61 on Alexa Turkey, and one would expect LinkedIn to break into the top 25 properties by Turkish traffic fairly soon. Game over. LinkedIn has won.
Cember.net was the first company to try to capture the Turkish professional networking opportunity. After the Xing acquisition, the mindshare that it enjoys has all but disappeared. That was followed with a few attempts to provide similar utility to Turkish professionals, but no one was able to reach critical mass. Now LinkedIn has arrived and the window of opportunity has been shut.
This should be a lesson to ventures in areas with significant global network effect. In local markets, there will exist a window of opportunity to build a marketplace and get to critical mass, at which point you can exit the local venture before the global players prioritize your market. If you are too slow, you will not be able to realize value before the global network effect kicks in.