Is the VC model broken?

I came across a blog post today that really spoke to me. It was by Mike Masnick of Techdirt, one of the most underrated bloggers out there, for one of the most underrated tech blogs. In his blog post entitled, Venture Capitalists: Buying High, Selling Low, Mike questions whether the current strategy of venture capitalists make any sense. In his post, he states that:

• VCs should be investing for the long-haul, the five to seven year time frame
• What the market is doing today is meaningless
• Investing in a downturn is a good strategy
• Fewer institutions funding companies = Lower valuations
• Shying away from investing today is effectively waiting until the deals are more expensive

Seeing the questionable strategies of some VC firms reminds me of the scenario outlined by Paul Graham in his post, Could VC be a Casualty of the Recession? For internet startups, it isn’t as crucial anymore to have millions on millions of dollars. It’s easier than ever to start up a company, and you can test out the validity of your concept on very little money. But there are significant problems and inefficiencies in our day-to-day lives, and their are plenty of industries that need disruption. In many ways, it can only be done through the enabling force of technology, with an opportunity to have a long-term horizon to grow and iterate. But, the fuel of innovation and disruption has all but evaporated. Some VC firms are worried about the ability of their limited partners to respond to capital calls, others are seeing their portfolio companies implode, and other cash rich VC firms are withdrawing all near-term investment  in seed stage companies. Would it kill a VC firm to invest 250k in several seed stage companies at great valuations, expecting the funding to give them some runway and proof of concept? Charles River Ventures has a convertible debt program of this kind, and I’m surprised more VC firms haven’t adopted this model.

I think this is a tragedy. In my previous post, I believe that this is still the best time to start a company. I wonder if anyone will ever look back and see the vast opportunities there are today to invest in early stage companies.  With a little capital, and by getting a great valuation, the VCs could make a killing. I guess it’s easy for me to say because I’m highly biased, and on the other side of the table, but today, you can attract quality talent, pay lower wages, get cheap office space, flexible financing opportunities for equipment (to those with cash), while not worrying about the abundance of capital and competition flowing into your space. I know it depends on the cycle and stage of the fund, but we went from a place six to eight months ago where everyone said their was too much liquidity in the market, to a place where everyone is saying that VCs are strapped for cash.

I’d love to see a case study of the VC firms that took advantage of this down time, to do what the other lemmings didn’t do, invest in a down economy. Some of the most prominent Internet companies were built during the aftermath of the first dot bomb period, and although we love stories of the emergence of internet phenomenons such as YouTube, it has taken five to seven years for a majority of our favorite sites of today to hit critical mass. Maybe it’s not a fair comparison because the rules of the game have changed because of the ecosystem supporting Internet start-ups, but at the same time, I have to believe that a great deal of value was created when others saw no reason to invest.

Who were the VC firms that raked in dough because they invested during the post-dot com bust time horizon? Does the graph below illustrate buying too high, selling too low, and investing in a super hot market, where 20% of the VC firms account for 80% of the exits?

Twitter, you are who we thought you were

A couple days ago, I ran across some interesting news about Twitter. Dell informed Internet News that they generated over a million dollars because of marketing and promotions via Twitter. Dell would simply offer sales alerts, and their followers would click over, and purchase the items.  Some may argue that a million bucks to a multi-national corporation is pennies, but what is missed in this analysis is the fact that they are engaging an audience, providing value, and doing something big companies have a problem doing, grass-roots marketing. Seth Godin, a highly respected pundit on Internet marketing, misses the point in his blog post where he minimizes the significance of this Dell feat, by saying that:

Did the phone company make Dell a billion dollars? Just because people used the phone to order their Dell doesn’t mean that the phone was a marketing medium. It was a connecting medium. Big difference.

Twitter is becoming an indespensible marketing tool to engage a defined community and offer them products and services to keep them involved in the brand. Brands are utilizing the social networking tool for customer service, promotions, discounts, and general news and information. It’s the perfect opt-in scenario, but with the added benefits of buildling a community, something that’s less likely to occur with your typical text message/e-mail campaign. Because you can view it on the web, it’s less intrusive then getting ordinary text message alerts and you can directly act on marketing message and coupons, something that had always been difficult to do with ordinary text message campaigns, which has never taken off despite all the hype.

Although I have been extremely critical of Twitter in the past, I have been amazed how quickly their team has shored up its shortcomings, something that’s difficult to do, especially with their traffic levels. To me, there is one central business model that they need to utilize: analytics/brand management. Yes, they can put in advertising, but how fun would that be? Online ads aren’t exactly doing well these days, and who wants intrusive messages, when the rise to prominence for brands is through the opt-in nature of the platform? Give me statistics so I can see how my brand is dissimenated around the Twitter community. Let me know how many times my links have been clicked, and let me see how many has translated to sales. I want to know how my brand compares to other in my vertical. I want to get text alerts whenever my brand is commented on, so that I can directly comment on it through my tweets, connecting Twitter Search/Summize to my Twitter feed.  Like Bob Ryan states in my favorite show, Entourage, “Is that something you might be interested in?”

If you want to learn more about Twitter, please buy the Twitter Survival Guide here. 

Grab the Twitter Survival Guide Today

My good friend and business partner, Kristen Nicole, has recently launched an E-Book entitled, Twitter Survival Guide: How to use Twitter to make friends, get a job, sell your brand and have fun. For those who may not know, Twitter is the latest social networking site that has been increasingly relevant in personal and corporate branding, communication, and social media. Barack Obama’s campaign used Twitter during the campaigning, and people from Shaquille O’Neal to ordinary people like myself use Twitter to broadcast their activities, much like a Facebook Status Update. Traffic and usage of Twitter spiked during the political campaign season, including being featured on 60minutes.

The whole idea with Twitter is informing everyone what you’re currently doing, whether you are an enterprise or an individiual. The site has moved from a site where you get short updates to receiving coupons, customer service, tips, and effectively becoming a mini-blog that’s easy to follow and share content.

Special interviews in the book from Pat Foley, Guy Kawasaki, Marshall Kirkpatrick, Rafe Needleman, Jeremiah Owyang, Darren Rowse, and Gary Vanderchuck

Please grab the book and subscribe to the site. Great for all of those looking for the next wave of personal and professional branding on the Internet. Plus, she allegedly mentioned me in the dedication, so that’s even more reason to grab the book : )

Kristen’s twitter account is here and multisocialmedia’s twitter account is here.

To learn about Kristen, and why she is an authority on Twitter, click here.

Great Depression 2.0 Resurrection: A Viable Business Model

In today’s Internet economy, there has been a monumental, seismic shift in everything called Web 2.0. As with any other sector, there has been tremendous layoffs, companies going under, and it being virtually impossible to raise significant VC funding without proof of revenue. As I wrote in my previous post, despite the waterfall of bad news that permeates the publications we read, I still believe that starting a business in this environment can be a good idea.

Why?

It seems counter-intuitive, for Web 2.0 vets, but this is the first time in three years where you are expected to charge for your services! Long gone (for the near future) are the days where you have infinite competitors, driving down the price of your offering to zero, while forcing you to up the ante with features and functionality, hoping to break even by slapping on some Google ads. The bigger the pockets, the more you can hold out on developing a viable business model. I feel like any new company today that says they will be ad-supported will immediately get laughed at, and saying that you’ll figure it out after you get critical mass, is now unacceptable Web2.0-speak. You have to generate revenue immediately, otherwise you will not be here tomorrow. Very few folks have disposable money lying around, eager to jump into entrepreneurship to compete with you!

Long gone are the days where everyone at their job is waiting to start their own Web 2.0 start-up. Long gone are the days where you can legitimately say to people that you have no idea how you’re going to make money. Outside of the LeWeb Conference going on right now, I don’t remember the last time I’ve read about a significant Web 2.0 conference. Even the Crunchies awards and the Open Web Awards have had materially less buzz than last year.

I can’t remember the last time that I’ve heard about ten new, intriguing start-ups in a given week, reading all the blogs like Techcrunch, Mashable, or ReadWriteWeb. I check my feeds once or twice a day, where in the past, I was checking every hour, learning about tons and tons of new ideas. Web 2.0 isn’t sexy anymore. There won’t be any major acquisitions anytime soon, because the Yahoos, Googles, and Apples of the world are not buying anyone for the foreseeable future. They are weathering the financial and economic storms, and it’s really reflective in their stock prices.

I prefer things this way. I don’t have the deepest pockets by any stretch of my imagination, and I see competitors going out of business left and right. They were structured for a different environment, and with things slowing down, I feel like I have a chance. I have a long, long way to go, before I get out of this Alpha state, but  I am happy that I don’t have to worry about ten new companies starting up this week to compete with me. I think those that are the most passionate about the problems they are solving will prevail in this environment. The goal at this point in time is to be alive two years from now, when everyone is anticipating a stable and increasing economy.

We’ve learned a great deal since starting this journey, and over the next couple of months, we will reveal why we got in this business in the first place. We’re excited, encourage, and with some major partnerships that we have in the pipeline, we will do the previously unthinkable, generate revenue.