Felicis Ventures Blog

Congrats to Aardvark and Foodzie teams (2009 Businessweek Best Young Tech Entrepreneurs)

Congrats to Max Ventilla from Aardvark along with Nik Bauman, Emily Olson and Rob LaFave from Foodzie for being among Businessweek's 2009 Best Young Tech Entrepreneurs. I'm delighted to be an angel investor in those two companies.

Both of them are going after important market segments in their own right. Aardvark offers a great solution for searches or questions that are best answered by real people, preferably among your circle of friends via their proprietary routing technologies using instant messaging. Foodzie is out to demonstrate that food category has huge marketplace appeal on the internet given the strong trends towards local, organic and artisan food items. It also happens that the food segment has the lowest penetration (1% according to Morgan Stanley) in e-commerce which significantly increases its growth potential.

Want to Fix the Economy ? Think Immigrant Entrepreneurs

There is a plethora of ideas on how to revive the economy. To me it boils down to one simple strategy: Support the entrepreneurs, especially the immigrant ones. The stimulus grants the government is handing out to different industries remains a band-aid solution and basically just re-allocates existing resources. Supporting the entrepreneurs, on the other hand, is likely to result in new jobs, create *new* capital (ie new resources). Google is a phenomenal example with nearly $100 Billion in market capitalization created in about 7 years along with 20,000 employees. According to Economist,US is the only country in the world, where start-ups generated net employment gains after 2/4/7 years from their foundation. Again, the same report highlights that 10-35% of all US companies were founded by immigrant entrepreneurs.

Immigrant founded companies in the US created $500 Billion in market capitalization while companies started by foreign-born entrepreneurs generated nearly $ 17 Billion in sales and employ 220 thousand people in the US. That's just the immigrant entrepreneurs.

There's increasing sentiment in our community that supporting entrepreneurship is a much more preferable way to reviving the economy than bailing out large dinosaurs like GM which need to go into bankruptcy to reorganize so they can become viable companies again. Thomas Friedman certainly defends this perspective in this post - arguing for funds to be directed to venture capital. Don Dodge, goes a step further, and posits that just spending $1B in incubators like Y Combinator or TechStars would yield not only immediate employment but probably even more potential upside in terms of wealth to be created. He also lists several government programs like R&D or seed capital tax credits that, if applied with less strings attached and more uniformly across states, could turn into great solutions.

There's no doubt in my mind that the writing is on the wall and the numbers tell a story. This is a country built by entrepreneurs, in fact, mostly immigrant ones. There's no doubt that the same group is key to reviving our economy.

Angel Investing Basics - Insights from Y Combinator's Angel Conf

It's very hard to distill insights gained on angel investing over a period of 3 years into a talk of just 7 minutes. So I thought it would help to re-summarize those lessons in writing. Here's a pretty comprehensive list (though not exhaustive) of what I think is key to be a good angel investor:

• Pick a Goal - Picking a goal as an angel investor is important: decide if this activity is a hobby, philanthropy or the next professional step in your career. Maybe it's one or all of those, but it affects the outcome and your investment style.
• Pick a Focus - Everything else being equal, investing in an area of expertise, based on a field of experience or knowledge is key in reducing the risk while increasing the chances of success. It also allows you to know your segment and your companies better than others.
• Be Social - Woody Allen once said that "90% of success is showing up"; the best foundation of angel investing is a solid personal network, which is ideally built one connection at a time. It's also important to always be nice & helpful to the entrepreneurs as well as your co-investors, referrals produce often the best investments
• Be Transparent - It's OK to pass on deals, in fact, it's necessary to decline a lot more investments than proceeding with them. But doing so in a transparent, timely, helpful and polite way is very important.
• Be Different / Build a Brand - There is no shortage of capital, even in this economically challenged times we're in. Putting in the extra effort and paying attention to details will pay off big over time. Building a strong personal brand is key to attract the best entrepreneurs and have them choose to work with you. It's also key to creating a "proprietary deal-flow" which is the most important success factor in angel investing
• Understand and Pay Attention to Terms - At times this could be the difference between losing your investment and generating a positive outcome. While lawyers can help here, so can being part of a reputable, professional and good investment syndicate
• Use numbers to your advantage - having a portfolio of a reasonable size (larger than 10) is pretty essential in several ways:
  • it helps spread the risk
  • if you are helpful to your portfolio companies, their teams become your champions. The more companies and people speak positively on your behalf, the higher are your chances of discovering extraordinary founders and start-ups
• Have fun - Enjoying what you're doing will reflect positively in your attitude. Working with founders you like on ideas that make a difference and seeing those companies grow can be extremely rewarding. Enthusiasm is contagious.
• Know that it's not a picnic - A great portion (1/3 according to Ron Conway) of the companies in your portfolio is likely to fail; in fact it's expected. Remember this is about making bold bets, and with those come often losses, and the pain of seeing companies close their doors. Tolerance for losses is a necessity not an option.
• Pattern recognition / Supply and Demand - Seeing a very high number of deals and having a portfolio is key in training your pattern recognition. Angel investing is not an exact science, it's an art. The best way to perfect that art is exposure to as many data points as possible. Equally important is understanding that with most early stage investments, data is scarce and information is opaque. So valuation is often determined by the supply and demand. However, popularity of a deal is rarely correlated if an outcome is positive or not.
• Structure - If you're doing angel investments professionally, structure might be important. Make sure to look into decent legal help regarding forming a legal entity to make the investments through (for liability reasons), or putting the investments in a retirement plan for future tax benefits. These details might not be obvious at the onset, but might become critical later on.

Entering 2009, the Year of the Ox on a Cautiously Bullish Note

 2008's year of the rat will remain a memorable one for many reasons including the surprising and disturbing changes in the markets and economies around the world. As for Felicis Ventures, it was the best year so far in its brief three year history: 2008 brought no less than 3 exits: Powerset (sold to Microsoft), Social.im (sold to iSkoot) and Sendori (sold to IAC) which was just recently announced.

2008 was also a year where the firm’s investment pace remained strong with about a dozen deals and major milestones including following highlights:

• Mint.com was selected as the "2009 Technology Pioneer" by the World Economic Forum
• Tapulous' Tap Tap Revenge exceeded 250K downloads in less than 4 days and 5M downloads in just 6 months (it then went on to win a Crunchie in early 2009)
• Social Gaming Network reached over 50M installed users and 1M daily players
• Mochi Media's MochiAds now reach more than 70 million unique users a month through Web-based Flash games that use Mochi Media's ad-serving technology
• Disqus was able to grow its reach more than 15-fold to around 1.7M unique users
• Following the launch of its interface in many languages, Justin.tv experienced a more than 9-fold increase in monthly visits to the site
• Venturebeat was syndicated by New York Times
• Meraki went "green" with its first solar powered Wi-Fi gear and
• Weebly reached 1M users and profitability

Some of Felicis Venture's most recent investments like Posterous have more than doubled users in December of 2008 and closed a seed financing round despite one of the worst downturns.

Rapidly deteriorating venture investment and exit numbers point to tough times ahead: according two recent reports by NVCA (on VC fundraising and Exits), Venture Investment fell 60% in Q4 of 2008 from the previous quarter, while proceeds from disclosed M&A transactions fell by 55% and IPO proceeds fell about 95% (!) in 2008 compared to the previous year. In my opinion, the trend is likely to continue in 2009 where the surplus of venture capital raised in the last 5 years is still sustaining a lag in valuations (and valuation expectations) while potential corporate acquirers are likely to stand by in the sidelines – at least for larger deals, in anticipation of even lower valuations towards the end of the year.

Given the current climate, I feel extremely proud of being a part of the Felicis portfolio companies' tremendous success in 2008.  I look forward to strongly support the founders I work with in their quest to make the best of these turbulent times, to turn the year of the ox into a bullish one.

Maximizing Options in a Downturn

It's hard to stay focused on the task on hand these days amidst the turbulence, the uncertainty and looming decisions that might be hardly palatable. There is no lack of advice or dire warnings from VCs and experts alike. Most pragmatic advice I heard so far was summed up at a recent Venturebeat panel by John Doerr from Kleiner Perkins. Biggest take-aways from his perspective was: act now, focus, cut costs, [re-]negotiate everything, preserve cash, switch compensation to equity (if possible) and other battle-proven ideas.

I was at Google during the last downturn. Our prudent financing strategy in '99 ahead of the tech bust, and the conservative approach to managing expenses (which was relatively rare those days) certainly helped us.  The company kept its razor sharp focus on being relevant to the users and on the core mission "to organize the world's information and make it universally accessible and useful". We were very slow in growing our headcount and kept to one of the strictest standards in expanding the team even when the workload seemed barely manageable. We were able to say no more often than not, and realized success is better achieved through doing one thing well rather than spreading resources by chasing too many deliverables.

However, that does not mean limiting options when it comes to key decisions that may determine the future of the company. When it comes to tough choices, my personal philosophy is to maximize options where possible. Worst negotiation position is not having alternatives which could potentially force an undesirable outcome. That means, pursuing multiple leads when raising money, looking for a potential exit in parallel (if that's feasible), aggressively pursuing patents as I feel those are one of the few tangible assets a startup can literally bank on.

Every smart founder is already focusing on those for the most part. But the other thing that's missing from the equation as far as I'm concerned is urgency and realism. Google and Apple lost about half their value in mere months, 40% of world's market value is gone according to Doerr. None of the old assumptions hold any more; it's irrelevant what valuations were set under what terms only months ago, no matter what anybody says, things are changing drastically by the day - unfortunately not for the better for the time being.

Top Global Internet Ad Markets in 2008

Myspace CEO Chris DeWolfe was quoted in TechCrunch 50 as saying that "95% of their ad revenues come from 9 countries". Based on online ad market estimates* between mid 2007 to mid 2008, the following chart depicts the top global internet ad markets as follows:

* all estimates based on eMarketer [2007-2008], except:

- South Korea (estimate from Asia Media News Daily, Feb 2007)

- Australia (IAB Australia 2007 estimate on Feb 2008)
- Brazil (Projecto Inter-Meios Mar 2008)
- Italy & Spain (BIPE Sep 2007)
- Russia (Group M July 2007)

 
Please note that these estimates were derived on different dates, and sometimes across different sources, so this is not exactly a perfect comparison. But it nevertheless paints a clear picture that might help with prioritizing international ad markets:

• US is by far the largest online ad market with an estimated size of nearly $25 billion
• US online ad market is larger than all the other international online ad markets combined ($24.9 billion versus $24.2 billion)
• UK and Japan are the next biggest markets with $6.4  and 4.5 billion respectively
• The main European online ad markets are about 80% bigger than the leaders of the Asian market
• China, Canada, France, Germany, South Korea and Australia each have online ad markets which exceed $1 billion
• Russia and Brazil online ad markets are now estimated to be large enough to compare with Italy and Spain respectively

In terms of aggregate size, the European markets throw their weight right behind the US. Japan is a clear leader in Asia with the Australian, Korean and the faster growing Chinese market trailing it. After these global leaders, the other ad markets are expected to be much smaller in comparison. So outside of the US, the above 12 countries are the most significant when it comes to actual monetization potential. As for prioritization, the numbers are clearly telling the story.

VCtips: Tweets Worth a Thousand Experiences...

My friend Bryce Roberts from OATV started VCtips on Twitter to leverage the collective wisdom of some great investors to help founders. The initial group consists of early stage VCs and angels, many whom I feel fortunate to count as friends: Josh Kopelman, Chris Sacca, Rob Hayes, David Hornik, Andy Weissman, Bijan Sabet, Albert Wenger and yours truly.

The Global Colors of Social Networking

A picture is worth a thousand words...I wanted to try out the new Google Insights for Search comparing the search volume/intensity around the world for: Facebook, MySpace, Hi5 and Friendster. The regionalities which existed before still continue and hold true

Facebook is tops in Turkey, Canada, UK and South Africa

Myspace is huge in the US, Puerto Rico, and Australia

Friendster rules in Philippines, Malaysia and Indonesia

Hi5 dominates Portugal and most of Central & South America including Peru, Dominican Republic

Now the more interesting ones - with respect to the local champions, they're still in the lead in their respective countries:

Vkontakte in Ukraine, Russia and Belarus

Mixi in Japan

But the most eye opening for me was the comparison between Xing and LinkedIn:

LinkedIn is strong in US and India but also in Europe (Denmark, Belgium & Netherlands)

Xing has a clear lead in Germany, Austria, in addition to *China* and Singapore

Why Combination of Social Networking & Mobile Platforms Will Be Big

  (image courtesy of InsideFacebook) eMarketer predicts that people accessing social networks on their mobile phones world-wide will grow ten-fold in the next five years, from 82 million in 2007 to over 800 million people in 2012. This major trend will have multiple implications. Usage of current popular social networks via mobile phones should grow rapidly. According to Brandon Lucas, head of mobile business development for MySpace, MySpace recorded 7 million unique registrations for MySpace Mobile within six months of launch. What's interesting is that these numbers are comparable to growth figures of mobile-only social networking players such as mig33, airG and Mocospace which also claim several millions users shortly after launch. If you thought abundance of available ad inventory on current social networks was an issue, the potential mobile ad inventory in the same segment will be much larger. The appeal of mobile social networking for carriers should be huge. Already large carriers like Vodafone are moving quickly to cut deals with leading social networks like Facebook and MySpace anticipating huge demand for mobile data access.

Results of a Forrester Research Study show that popular social networking activity of US Adult Mobile Internet Users (in Q2 of 2007) was uploading photos and videos at 44% and 38% respectively (60% of all phones in the US are estimated to be camera phones). Posting ratings of products/services at 42% was second only to uploading photos, followed by maintaining or updating a blog at 39%. It's surprising that we're not seeing many more leading websites launching mobile versions of their services with a design geared towards the mobile users. FriendFeed, despite being a relatively new service, understands the value of the mobile interface, as they launched a new iPhone interface recently.

As for monetization, at least 20% of US mobile users have seen SMS ads, while in Europe the number ranges from 31% in Germany to 73% in Spain, according to M:Metrics. Up to 10% of US mobile users and on average about 4% of European mobile users have purchased ringtones, while more than 9% of mobile users played downloaded games in Italy, Spain, UK and the US. Jupiter Research expects mobile entertainment revenues to grow from $20 billion in 2007 to over $64 billion in 2012 globally.

While there's a striking difference in usage patterns between iPhone users and other mobile phone users - for instance, 21% of iPhone users watched on demand video compared to 1.4% of total mobile phone users - the gap should narrow as RIM and HTC are expected to launch more compelling Blackberry and Windows Smartphone models respectively to compete with the iPhone.

In summary, the monetization and growth potential of mobile platforms shall remain extremely exciting on a global basis and this trend is unlikely to stay limited merely to the potential of iPhone.

Congratulations to Powerset on the Acquisition by Microsoft

It's official: Microsoft's acquiring Powerset. Powerset's semantic search technology had many interesting potential applications besides websearch such as enterprise search, vertical search, even ad targeting & mobile search (as listed by Microsoft's Don Dodge here) but it was seriously handicapped by the incredibly high indexing costs (up to 100x compared to other technologies). Combining Powerset's technology with Microsoft's abundant resources should unleash all its potential and enable Powerset to demonstrate what it can really do on a shorter timeline. Microsoft also announced that it plans to integrate Powerset's technology into its Live Search.

Plenty of other interesting perspectives on the deal can be found on Forbes, GigaOm, TechCrunch and Venturebeat. Congratulations to Barney and the rest of the Powerset team !