Now Blogging on Medium

October 7th, 2015 No comments

As I return to venture investing, it looks like the Medium platform is a better place to be posting my venture analyses and thoughts.

You can check them out over at

A few of the more interesting posts:

Do Angel Investors in California Outperform the Rest of the World? (Hint: Yes. By a lot.)

Venture Haves and Have Nots

How does Venture Money Change with the Market?

“VC Bubble” a Reflection of Public Markets


Early Stage Venture Investing — A New Kind of Philanthropy?

November 9th, 2012 1 comment

I’ve been busy with a project outside of the mobile/startup world for the past couple of years, but I’ve seen something surprising in the venture industry reports that I find very interesting.  So, I thought I’d post this note to crystallize those observations.

The good folks at Wilson Sonsini just published their Q3 2012 Entrepreneurs Report.  WSGR obviously sees a good fraction of all the venture financings that happen, and are in an ideal position to produce longitudinal data on valuations, amounts raised, and other terms.  Looking at this data over the last eleven quarters, we see some pronounced and significant trends in the data.  These trends seem to reflect a fundamentally new and different early stage venture environment — one with negative expected financial returns for investors.

From the WSGR data, one can calculate Post-Money Series A cost (to the venture investors) per percent of ownership, and see that it has gone up almost two-fold over the eleven quarters of this data series.

From WSGR data, Median Series A post-money valuation per percentage point of ownership now costs investors almost twice what it cost a few years ago.

This would be OK for early stage investors if they were getting rewarded for these increased prices that they are paying.  If they were seeing a commensurate increase in Series B Pre-Money valuations, or there was an increased level of early-ish stage M&A activity.  But, the data seem to indicate that neither of these things are really happening.

From data in the WSGR Entrepreneurs Report, we can construct the chart below, which shows that the Pre-Money Series B value per percent of ownership has come up a few tens of percent, but nowhere near the almost two-fold increase we see in the Series A Pre-Money chart above.

From WSGR, Median Series B pre-money valuation per percentage point of ownership is up a bit over the last few years, but not much.

And, from the NVCA, we get a consistently reported quarterly data set on total venture-backed M&A exit activity.  If there were really an increase in early stage exits, we would expect this number to really be shooting up.  But, it’s not.

NVCA data on total number of (Venture-backed) M&A deals per quarter. There has been no recent increase in transaction pace.

Yes, I understand capital efficiency in modern startups.  It really should take less capital to prove market demand for a new offering.  I truly believe in that.  But, if that was the primary effect driving early stage venture economics, the Series B Pre-Money valuations should’ve come up by now.  Instead, what this data suggests is that there is an increased supply of of Seed/Series A money coming from an increased number of small pools of capital, driving prices up.

My entrepreneur friends may be thinking something like “hooray! the negotiation power has swung toward us; it’s great those venture folks are getting their comeuppance.”  Maybe.  The problem is that early stage venture returns to the LPs (who invest in those venture funds) is already so unattractive that any additional pressure will cause venture investors to deliver negative returns, and drive them out of business.  So, be careful what you cheer for.

Indeed, Cambridge Associates reports early stage returns (as seen by the investors into venture funds) have only been 3.9% per year over the last ten years.  If you subtract out inflation, you’re talking about real returns of about 2.5% per year.  And, those numbers don’t yet reflect the reality captured in the first two plots above.  Barring unforeseen goodness breaking out, one would have to expect significantly negative returns to the LPs for the Median Series A investment done in any of the last four quarters.

For non-professional investors (ie, those that don’t have to answer to anyone but themselves), it may be OK to accept negative expected returns.  For these investors, the non-pecuniary benefit of helping see new ideas get off the ground may justify accepting a negative expected return.  Of course, they should be undertaking these investments fully aware of this philanthropic aspect.

The bottom line is that industry data seems consistent with a new era of early stage venture investing, where philanthropic considerations, and other ego-gratification considerations, have a material impact on the prevailing economics in the industry.


Postscript: Average does not equal Median

Others have noted the likely impact of the Instagram acquisition on early stage investor enthusiasm.  For sure, the few grand-slam home-run outlier cases make up a significant part of the expected return for an early stage venture investment.  They also add something of a lottery ticket like thrill for the non-professional investor.  The fact that many startups “could be the next Instragram” may well be driving valuation thinking for entrepreneurs and investors alike, but I think there are two import facts we have to keep in mind.

  1. It has always been true that the few positive outliers have had a big impact on Average venture returns of early stage venture investing.  But, this is the reality that is baked into those 2.5% per year returns that LPs see.  This is nothing new.
  2. Those big positive outlier outcomes are not evenly distributed among early stage investors.  The top handful of early stage firms have always seen a disproportionately large fraction of the big positive outlier outcomes. If you are an investor who is not sitting at one of those top handful of firms, history suggests that “the next Instagram” is unlikely to happen to you.

This is another way of saying the (anemic) Average returns for early stage venture investing are much higher than its Median returns, and that investors who are not who are not at the top handful of firms should be expecting Median returns, not Average returns.


What Choice did Nokia Have?

February 20th, 2011 4 comments

Let’s face it, Nokia had to do something, and quick.  Their Symbian/MeeGo/Maemo approach hasn’t been, and wasn’t likely to start, working with high-end devices.  Kudos to Stephen Elop for at least facing this reality — I guess that’s why the Nokia Board brought him in.  There certainly wasn’t time available to develop their own high-end mobile OS — the time to begin that action was five years ago.  There were really only three choices available to Nokia.

  1. iOS.  This would have been best for both Nokia and Apple, but Apple would never have gone for it.  Nokia obviously would have benefited from getting access the most user-friendly mobile OS.  But, Apple would have had a legitimate path for avoiding the same second-fiddle role that plagued them in the computer industry in the 1990’s.  When I talk with Apple people, I am struck by the unwillingness to to learn from these painful lessons of history.  From 1988 to 2000 Apple was being kept on life-support at Microsoft’s pleasure, just so that Microsoft to keep the regulators at bay.  OK, that’s a bit of an over-statement, but not wildly so.  The point is that there is a natural monopoly here, and Apple is pursuing again pursuing a strategy that cannot make them a market share leader, opening the door for Android to run the table.  So, while an Apple-Nokia partnership would have been ideal for both companies, that wasn’t going to be entertained by Apple, so that wasn’t a legitimate option for Nokia.
  2. Android.  The obvious choice.  Last quarter, Android represented 53% of US SmartPhone shipments vs 19% for Apple iOS, and 6% for Windows Mobile + Windows Phone (according to NPD), so Android clearly has something that the market likes.  Nokia wouldn’t have been able to take full advantage of their Navteq asset, but that’s a sunk cost.  Nokia certainly feared the prospect of competing head-to-head with the likes of HTC (usually stated as “avoiding commoditization”), but Nokia has this with Windows Phone too.  After all, HTC has been working with Microsoft OS’s for over a decade now.
  3. Windows Phone.  The dark horse.  I don’t know what sort of concessions Nokia got out of Microsoft as they played Google and Microsoft off against each other, but this seems like an incredibly short-sighted decision.  Who knows, maybe they can pull it off, but the odds seem very long.  Microsoft has been struggling in the mobile industry for a long time.  What Nokia brings to Microsoft does not seem to address the root cause of Microsoft’s struggles (see post from Feb of last year: Microsoft Doubling Down on Failing Mobile Strategy?).  Nokia’s tremendous handset prowess has fallen dramatically in the last couple of years due to the change in the basis of competition caused by iPhone and Android (see, for example, Apps are for Creating iPhone Evangelists).  The early results from the market voting with their wallets is that Windows Phone 7 doesn’t address this changed basis of competition.  Certainly, Nokia should be able to bring some distribution volume to Windows Phone, but that first phone is many quarters down the road, and by then, Android would seem to be unassailable.

Stephen Elop claims that Nokia and Microsoft creates a viable 3rd horse in the SmartPhone race.   Maybe, but why take such a huge gamble, when Android is already the leading horse, and one could argue that Nokia’s ability to make money per handset is at least as good with Android?  It seems that Nokia is now on an almost-impossible-to-win path.


Wallet Coming to iPhone 5, as Predicted

January 25th, 2011 No comments

It seems pretty well established that the next iPhone will include an NFC-enabled wallet capability (eg, see today’s Bloomberg article).  In an unabashed moment of tooting my own horn, let me just say I called this before the iPhone 4 was even released, in “Mobile Payments for Next New iPhone?

There have been a number of other NFC announcements, and lots of conjecture on the potential uptake of these services.  When it comes to assessing the key components of potential widespread adoption, I stand by the analysis in the above post.


A Word of Advice for Stephen Elop: “Android”

September 10th, 2010 10 comments

…seriously!  I know it is antithetical to the Nokia corporate ethos, but a complete commitment to Android seems like the only viable strategic path left for Nokia’s handset efforts, and as the new CEO, you don’t need to maintain any foolish consistency with the decisions taken by your predecessor.

Why?  The most important observation is that the basis of competition in the handset industry has changed.  Don’t be like the old General fighting the last war.  This war is about the Apps and Services that people can use on their phones.  The customers don’t give a hoot about making phone calls.  Lord knows the popularity of the iPhone in places like San Francisco and Manhattan (where the mean time to losing a call/connection has to be less than a couple of minutes) demonstrates that the customers don’t care about many of the things that we in the telecom world think the customers should care about.

The easiest path would be to just copy the Samsung approach — they knew they were coming late to the Android market, so they invested very heavily in the engineering, distribution (eg, pricing to the carriers), and promotion of their flagship Galaxy S.  It may well work for Samsung, but even if you committed to the Android path on your first day Stephen, it will still be 2012 before the first Nokia Android phones could ship, so you’ll be coming from much further behind than Samsung.  That might auger for doing a bit more than this straight up the middle approach — but, this straight up the middle approach is not a bad place to start.

You could try something like the Motorola approach of “adding value” to the Android UI with Motoblur.  I personally find it difficult to see much value add here, but maybe there is a segment of the market that really likes this sort of stuff.  If they are seeing commercial success, the next question is how is this a sustainable source of competitive advantage?  OK, my biases are showing through — I wouldn’t recommend the “copy Moto” strategy for Nokia.

What I do think would be a potentially fruitful approach for Nokia in their take on the Android strategy is to focus on the Browser.  For all the things that Google has done well in their Android implementation, you’d think that the Browser would really kick butt.  But it doesn’t.  Google still doesn’t seem to understand the fundamentally different sort of Browsing one does when mobile than when sitting in front of a PC that has a reliable high-speed Internet connection.  There are times when I still want Opera Mini-like functionality.  HTML 5 is a great step in the right direction, but if Nokia took a more pragmatic approach to the mobile Browser, it could be awesome.

Other relevant posts on this Meme, Stephen:

Mobile Browsers vs Mobile Apps, Fragmentation

Apps as Basis of Competition in Mobile


iPhone Antenna Woes

July 13th, 2010 No comments

Proposed iPhone 5 Design.

That is just plain funny.

Seriously, Apple could use a bit of media training in how to handle a crisis.  The sequence of responses from Apple around their defective antenna design are less than ideal:

First, Steve Jobs sends one of his famous terse email saying “don’t hold it like that”.  You do have to give kudos to a CEO who chooses to respond to any customer emails, but that isn’t the best way to address a verified problem.

Then, Apple says the “formula we use to calculate how many bars of signal strength to display is totally wrong“, not that there is any actual signal attenuation.  Apple gets points for apparent candor in their willingness to ‘fess up.  But, their assertion that it is just an issue with how many bars are shown is inconsistent with the published reports showing that the bandwidth delivered to the phone is affected dramatically by how is it held (see Speed Test image below).

Now, even the staid Consumer Reports is slamming the iPhone 4 over the antenna attenuation issues.  And Apple’s response is to start deleting threads on their tech-support forums referencing the Consumer Reports’ negative review.

Perhaps, this is a time for Apple to recognize their changed role in the world.  As the most valuable tech company in the world, they are held to a higher standard than others.  That may not be fair, but it is reality.

Declining connection bandwidth for iPhone 4 depending on how it is held. Left to right: not being held; held in leather case; held bare-handed.


Entrepreneurs Now Can Build What Customers Want (Rather than What VCs Want)

June 21st, 2010 2 comments

With Capital Efficiency, Entrepreneurs can focus on building what customers want, rather than what VCs want to fund.

In addition to Democratizing the Startup Process, Capital Efficiency drives another important improvement in the startup model: Entrepreneurs are largely freed from the tyranny of building what the VCs want to fund.

In the traditional startup model, step one is for the entrepreneur to raise venture money.  Pragmatic Entrepreneurs want to know what the VCs want to fund, because it is much easier to sell a VC on an idea/category/business model that they have already decided they like.   This is a significant contributing causal factor for all the reporting and cocktail party chatter around what VCs are interested in/funding now.  This echo chamber effect causes some big problems, systemically reducing the chances of startup success through two mechanisms:

(1)  The world ends up with multiple copycat companies pursuing essentially the same business idea.  These companies engage in infant fratricide, wasting money, time, and market opportunity, in the process.

(2)  In an effort to “anoint a winner”, some VC funds will put much more money into the number two or three player in a space on the hopes that they can leapfrog into the number one spot.  Most of this “extra” money is spent inefficiently at best; poured down the drain at worst.

But, Capital Efficiency changes this.  Since Entrepreneurs don’t need to seek VC money as step one in the process (step one is put product into the market, since it’s so cheap to do), they don’t need to try to read the VC groupthink tea leaves regarding what is hot today.  Instead, they can follow their own market knowledge/intuition to build something the world really wants.  I humbly submit that we’ll all be much better off with this approach.


Mobile Payments for Next New iPhone?

June 18th, 2010 No comments

It makes sense for the next new iPhone to support NFC mobile payments.

I know we haven’t even held the fourth generation iPhone in our hot little hands yet, but I was thinking about what Apple should put in the next new iPhone, and it seemed obvious that adding NFC to enable mobile payments for real world purchases made perfect sense.  Then, when I saw today’s announcement regarding the acquisition of Innovision by Broadcom, that solidified my belief that this must be coming down the pike.

Mobile payments are a wonderful idea — pay for modestly priced items in the real world by just putting your phone up to a reader.  It’s gotten some traction in Japan, but it’s failed to see widespread adoption, because it is so darn hard to get the multiple players in disparate ecosystems to act in concert.  You need:

(1) The handset vendors to put the NFC chips, and supporting software, into a critical mass of phones.

(2) The mobile operators, who generally subsidize the phones, to enable the payment mechanism (or, in an unsubsidized ecosystem, you need a banking partner to enable the payment mechanism).

(3) A critical mass of merchants to install point of sale systems to use the same NFC system as the phones have.

(4) A critical mass of users to actually use the system to pay for things.  Making the use of mobile payments be “easier than cash” is a necessary, but not sufficient condition.

Getting all four of those to move in concert has proven to be an insurmountable barrier to date.  BUT, Apple is in the perfect position to pull it off!  Let’s take the each of the items above in turn.  Apple doesn’t have to convince anyone other than themselves that they should put the NFC chips, and supporting software, into the phones.  Apple already has iTunes as a payment mechanism for the majority of iPhone users.  If anyone can leverage their brand to convince merchants to do something, it has to be Apple.  And, with the rabid Apple enthusiast fan base, they will get a lot of early adopter end users to give the system a try.

Apple is likely the only company on the planet (outside of Japan) that has the ability to pull this off.

I can only think of one reason why Apple might choose NOT to do it.  The only way that Apple can recruit a critical mass of merchants to install the NFC point of sale systems is to go (quasi) public with the effort long before the launch, and Apple hates to go public with anything before a launch.  Of course, given the impressive pre-order rate for the fourth generation iPhone — despite the phone getting leaked a couple of months ago — maybe they should rethink that stance (heck, maybe they should be cutting some affiliate marketing checks to Gizmodo for creating so much demand).


Google Fragmentation Denial

June 2nd, 2010 No comments

Denying Fragmentation is an issue for Android isn't going to help address that real and growing issue.

Dan Morrill, Open Source & Compatibility Program Manager at Google posted a couple of days ago On Android Compatibility saying, essentially that Fragmentation is a non-issue on Android, and it has been trumped up into being an issue by bloggers/pundits looking to drive traffic.

While I am a big fan of Android, I have to respectfully disagree with Dan.  “Fragmentation” is a real issue if (1) it takes noticeably more development resources to support the multiple instantiations, and/or (2) end-users have to become hardware platform aware in knowing whether or not a particular piece of software will work on their device.

Re (1).  I don’t know which developers Dan is talking with, but the small (less than 10 developers) companies I talk with complain vociferously about the extra resources it takes to develop, test, and debug for the various Android handsets out there.  Often, it is a problem of simply getting access to the handsets before they go into the market.  Of course, one has to expect some overhead associated with supporting multiple devices, but the current level is legitimately concerning to developers–especially as they look at all the new Android devices coming to market in the foreseeable future.

Re (2).  If you want to know whether or not Fragmentation is an issue from the end-users perspective, just spend some time reading the user reviews of anything other than the top apps.  It has become fairly common practice for end users to list what handset they are using the app on, because it is widely recognized as being a key determinant as to whether or not a particular app will work.   (Dan uses the example of an app using the camera not working on a device without a camera, which is sort of a customer-intelligence-insulting example.)

I’m not saying that the Android team isn’t going to heroic lengths to attempt to avoid Fragmentation, but Denial is generally not a good approach to dealing with a real problem.  Let’s not have a repeat of the Java fragmentation tagline: “Run Once, Debug Everywhere.”


Android Catching iPhone, April 2010

May 26th, 2010 2 comments

AdMob released their April 2010 Mobile Metrics Report today.  The Android Catching iPhone trend continues, and seems likely to accelerate over the next couple of months, as folks wait for the next gen iPhone.  In the Android-iPhone universe, Android now represents 37% of worldwide AdMob ad requests.  Earlier this month, NPD reported what we were all expecting: Android handsets outsold iPhone in the US in Q1, 2010.

In April, Android represented 37% of AdMob ad requests from Android and iPhone.

Interestingly, Symbian has seen some noticeable increase in ad requests over the last couple of months.  If anyone has some insight into that, please do let me know (or post a comment here).