Author: mark

  • The relative non-risk of startups

    Based on recent events I suspect an investment axiom might exist that says: The further an investor is abstracted away from the underlying asset they’re investing in, the greater the risk.

    This has been shown recently to be true with Mortgage backed securities, credit default swaps, the black box that is the hedge fund industry and even sovereign debt may qualify.

    When you are shielded from your investment by layers of structure, marketing, repackaging and sales teams, you are too far away to hear the alarm bells when they’re ringing.

    That got me thinking about the relative risk of being an angel investor in young companies. Angel investors meet with the founders, use the product and in many cases craft the investment terms themselves. Spending a few weeks negotiating a deal with an entrepreneur is itself a revealing process. The investor is exposed to a mountain of data on the underlying asset they’re investing in.

    The recent excellent Bloomberg article on the under performance of commodity ETF’s brought this difference home for me. Suited and booted bankers sell commodity ETF’s daily with a prospectus that tells you you’re investing in gold or oil or copper. The impression created is that you’re investing in the underlying asset when in fact you’re investing in a fund that is trading monthly futures contracts for the commodity. Two years later you’re left wondering why your investment has lost 20% while the underlying commodity has gained.

    The complexity of financial products and the distance between the average investor and the underlying assets they’re investing in has, I believe, peaked. As the financial crisis that was started in 2008 continues to play out, during next decade I strongly suspect there will be a return to less complexity and a desire to know, touch and meet with the assets that underlie each investment.

    While the likelihood of failure in young businesses is high, as an angel investor you know exactly what you’re getting and you have the ability to influence the performance of your asset. Try finding that on Wall Street.

  • Are you building an R&D lab or a business

    Take Twitter in a parallel universe. The team builds a great useful and viral product. They start growing like crazy and hit their first million members. The growth machine keeps pumping and everyone is watching the hot Alexa and Compete graphs cranking away.

    They start getting their first acquisition offers. But the smart folks know the second differential of their graphs is still wildly positive (it’s curving up). They decide to hold off on a sale because they figure that even though they have to raise another round to buy infrastructure, their equity will still be worth more net net.

    They keep growing and that second differential gets a little smaller as the curve starts flattening out into a line. Then right before the line turns into the other half of an S they hire Allen and Company, line up all the acquirors and sell for $3Bn to Google.

    What just happened is a kick ass group of product guys teamed up with a kick ass group of financiers to create an R&D lab. The lab came up with a hit product and was acquired. Make no mistake, this is a very very good thing! In this parallel universe the amazing product that is Twitter is combined with a company with the business infrastructure and knowledge to turn it into a money printing machine. That creates jobs, brings foreign currency back into the US through exported services and of course the wealth creation event for the founders has a trickle-down effect if you’re a fan of supply side economics.

    Now lets step back into our Universe (capital U because I don’t really believe in this parallel universe stuff). Another group of kick-ass product guys called Larry and Sergei teamed up with a group of kick-ass financiers called Sequoia in 1999. A guy called Eric Schmidt who is a battle hardened CEO from a profit making company that got their ass handed to them by Microsoft joins the party.

    In 2000 Google launched AdWords and the rest is business model history. A history that you will never hear because once the company started printing money they went dark. There are tales of Bill Gross having invented AdWords, legal action, a possible out of court settlement – but no one will ever know the full details of these early days and we have almost zero visibility into the later story of how Google turned that product into a money printing business.

    The stories of successful transitions from product to business are never told. Even if they were they would bore most of us  because they are not fun garage-to-zillionare stories. They are stories where the star actors are cash-flow plans, old guys with experience and teams of suit-wearing sales people.

    The thing that attracts most geeks (also called Product Guys) to startups is the garage to zillionare story through an exit. And that’s OK provided you get your head screwed on straight and understand that you are an R&D lab who’s goal is to get acquired. So go and make yourself a credible threat. Make yourself strategically interesting. Go and build the kinds of relationships that demonstrate your worth to potential acquirors, get them addicted to your data and result in an exit.

    [Quick aside: I spent the day skiing a while back with a great guy who heads up a certain lab at Stanford. They came up with an amazing product that you now use every day. They teamed up with an A list VC with the specific intent of selling to Google. That’s exactly what they did and it has improved our lives and Google’s business model. So again, the R&D lab approach is very very OK.]

    The other smaller group of founders are business geeks. I’m friends with a handful of company founders and CEO’s in Seattle who absolutely personify this group. Everyone of them was a VP in a larger company. They all have MBA’s from top schools. And every one of them is focused on generating cash in their business. The road they’ve chosen is a longer, harder road with a lower chance of success but a much higher reward (think Michael Dell, Bill Gates, Larry Ellison) if they succeed.

    Both paths are morally and strategically OK. You just need to know which you’re on and make sure your investors and the rest of the team are using the same playbook.

    temet nosce (“thine own self thou must know”)

  • Bandwidth providers: Please follow Google's lead in helping startups, the environment and yourselves

    There’s a post on Hacker News today pointing to a few open source javascript libraries that Google is hosting on their content distribution network. ScriptSrc.net has a great UI that gives you an easy way to link to the libs from your web pages. Developers and companies can link to these scripts from their own websites and gain the following benefits:

    • Your visitor may have already cached the script on another website so your page will load faster
    • The script is hosted on a different domain which allows your browser to create more concurrent connections while fetching your content – another speed increase.
    • It saves you the bandwidth of having to serve that content up yourself which can result in massive cost savings if you’re a high traffic site.
    • Just like your visitor already cached the content, their workstation or local DNS server may also have the CDN’s IP address cached which further speeds load time.

    While providing a service like this does cost Google or the providing company more in hosting, it provides an overall efficiency gain. Less bandwidth and CPU is used on the Web as a whole by Google providing this service. That means less cooling is required in data centers, less networking hardware needs to be manufactured to support the traffic on the web and so on.

    The environment benefits as a whole by Google or another large provider hosting these frequently loaded scripts for us.

    The savings are passed on to lone developers and startups who are using the scripts. For smaller companies who are trying to minimize costs while dealing with massive growth this can result in a huge cost savings that helps them to continue to innovate.

    The savings are also passed on to bandwidth providers like NTT, AT&T, Comcast, Time Warner, Qwest and other bandwidth providers who’s customers consume less bandwidth as a result.

    So my suggestion is that Google and bandwidth providers collaborate to come up with a package of the most used open source components online and keep the list up to date. Then provide local mirrors of each of these packages with a fallback mechanism if the package isn’t available. Google should define an IP address similar to their easy to remember DNS ip address 8.8.8.8 that hosts these scripts. Participating ISP’s route traffic destined for that IP address to a local mirror using a system similar to IP Anycast. An alternative URL is provided via a query string. e.g.

    http://9.9.9.9/js/prototype.1.5.0.js?fallback=http://mysite.com/myjs/myprototype.1.5.0.js

    If the local ISP isn’t participating the request is simply routed to Google’s 9.9.9.9 server as per normal.

    If the local ISP (or Google) doesn’t have a copy of the script in their mirror it just returns a 302 redirect to the fallback URL which the webmaster has provided and which usually points to the webmaster’s own site. A mechanism for multiple fallbacks can easily be created e.g. fallback1, fallback2, etc.

    Common scripts, icon libraries and flash components can be hosted this way. There may even be scenarios where a company (like Google) is used by such a large percentage of the Net population that it makes sense to put them on the 9.9.9.9 mirror system so that local bandwidth providers can serve up commonly used components rather than have to fetch them from via their upstream providers. Google’s logo for example.

  • The Coming Social Advertising Revolution

    Facebook has over 400 million active users and members spend over 951 man-years on the site each month. Facebook is passing Google this year as the most visited site in the US and is going to earn somewhere between $710M and $1.1B in revenue this year.

    Google on the other hand have a $27B revenue run rate for 2010 [based on Q1 2010 earnings]. With similar on-site traffic they are doing 25 times Facebook’s revenue. Google have had a long time to learn about printing money efficiently, but even so that’s a blush-worthy statistic for the Facebook executive team. So why the difference in performance?

    Facebook has a crisis of intent. When a visitor signs in to Facebook their intent is to socialize. They don’t want to buy anything and they certainly don’t want to click on ads that lead them to buying something. Facebook has the best data on the web about the people using their service. But all that wonderful data is useless without intent.

    When a visitor hits Google their intent is to see something, learn something, do something etc and these can be cajoled into buying decisions. If Google guides the user to the right vendor, they make a vendor money and can share in some of the revenue. Google’s data on each visitor pales in comparison to Facebook. But Google catches each visitor at the moment they have intent. And that is the power of the search business.

    Facebook needs to solve their crisis of intent. Intent is the missing ingredient that stands between Facebook and $27 Billion in revenue multiplied by the social graph and profile data that Google doesn’t have.

    Changing Facebook.com to capture visitor attention when they have buying intent risks destroying a valuable asset. So instead Facebook have decided to take their data to the places where visitors have intent: The rest of the web.

    “If intent won’t come to Facebook, we’ll take Facebook to intent.” ~Mark Zuckerburg [may have said this]

    In the next 3 to 12 months Facebook are going to roll out their own ad network for publishers – a direct competitor to Google AdSense.

    If Facebook can use my interests, sex, age, location, who I’m friends with and their age, location, interests etc. to infer that when I’m searching for a ‘bobbin’ it’s probably because I want to tie steelhead flies with it, then it makes more sense for every publisher on the web to use Facebook’s ad network than Google or anyone else because they will simply make more money.

    Facebook’s Ad Network will make publishers more money and increase engagement.

    Facebook Connect was phase 1: “Lets see if a distributed Facebook gets traction and doesn’t raise privacy flags.” It was a resounding success.

    The Social Web and Open Graph is phase 2: “Lets see if we can share some user data using an opt-out model.” From the Facebook blog: “For example, now if you’re logged into Facebook and go to Pandora for the first time, it can immediately start playing songs from bands you’ve liked across the web.”

    There have been the usual privacy rumblings, but so far the Facebook community seems to be OK with an opt-out model of distributed data sharing.

    The significance of this is staggering: Facebook have positioned themselves for the perfect AdSense kill-shot. 6 to 12 months from now publishers will  be able to integrate Facebook’s applications and ad network on their blog or website and get:

    • Better revenue than Google AdSense or any other ad network due to better targeting
    • Increased user engagement through social features
    • Increased virality through recruiting other Facebook members
    • Increased data on each visitor from their very first pageview reducing bounce.

    Advertisers will get:

    • Less click fraud because you’re no longer just an IP address and a cookie.
    • Better targeting including the holy grail of demographics: Age, Sex, Location.
    • Ability to show your ad at the moment a user has buying intent on a search engine, a blog about visiting Egypt, etc.

    A significant portion of Google’s $27 Billion in revenue this year will come from their publisher ad network. Google knows what’s at stake. That is why they are willing to bet GMail on products like Google Buzz.

    Facebook is the most serious threat to Google’s business that they have faced. If Facebook plays this perfectly, they will kill the bear and 5 to 10 years from now will be the largest and most profitable ad network on Earth.

    Anyone who plans to compete with them will have to do better than textual ad targeting.

  • PlatformFu for Hackers and Startups

    Being over 35 has it’s advantages. Us old(ish) timers have lived through Microsoft using their platform to beat the hell out of Novell, Netscape, Real Player and others. Watched Eric Schmidt’s ascension from platform victim to platform player. And learned that platforms are honey traps that give good honey but you might get caught.

    Twitter Investor Fred Wilson wrote a much talked about post earlier this week that sparked a discussion about whether Twitter would implement critical apps themselves. Seesmic founder Loic issued a stark warning to Twitter developers today. Apple continues to bar Adobe’s Flash platform from Apple’s iPhone platform and Adobe evangelist Lee Brimelow pulls no punches in his “Apple slaps developers in the face” post today.

    Ten years ago a developer was faced with a much scarier platform landscape. You either build on Microsoft’s monopoly operating system and risk them implementing your app themselves, or stop being a desktop developer. Web Applications were really Web Sites, web platforms didn’t exist and mobile platforms were completely proprietary.

    These days playing with platforms is a little easier because you have a range of platforms and integration methods to choose from. You can build a Facebook app that runs inside Facebook or integrate via FB Connect. You can choose to build on Twitter instead. And if you like you can integrate both to hedge your bets and add social features of your own on a completely external website. If you’re building a mobile app you have Droid and the iPhone to choose from and if both suck, well both platforms have a web browser so a lightweight web interface is an option too. Even in the desktop OS arena if Microsoft rubs you the wrong way there’s always the smaller but more spendy Apple market to go after.

    When formulating your platform strategy it’s important to put yourself in the providers shoes and think about the following:

    1. Are they wildly profitable or is it possible they might go out of business or radically redefine their business?
    2. Have they figured out their business model yet or might your app become their model?
    3. Is their API locked down and unlikely to change or is it evolving as they figure out what business they’re in and how much of their revenue they want to give away via their API?
    4. Are they waging a strategic war with anyone that may affect your business and your app?
    5. Does any part of your own business compete with any part of their business? How about in future?

    Being first to market on a new platform has it’s advantages. My former colleagues at UrbanSpoon got their iPhone app in an Apple ad because they were early adopters of the platform. Smart move – and smarter given that they weren’t betting the farm on the platform. But early adopters of the Facebook platform saw revenues and traffic change as Facebook evolved the platform early on.

    So when building your app, first carefully assess the state of the platform and then decide how and at what level you want to engage it.

  • Perl: Kicking your language's ass since 1988

    The video below is Perl’s development history since Larry Wall and a small team started out in January 1988. It’s visualized using gource. Notice how dev activity has continued to increase all the way to 2010.

    Perl is a powerful language. It’s also fast and everything you need has already been implemented, debugged, refactored, reimplemented and made rock solid. If you ever have a problem, it’s already been solved by someone else. When I was in my 20’s I was a big fan of the new-new thing. Now, as a startup owner taking strategic risks and trying to reduce risks in other areas of the business, I love Perl because I know it will do right by me and I deploy code knowing I’m not betting on a language that might one day grow up to be what Perl already is.

    Watch the video in 720 hidef on full screen (Youtube link) to see all the labels. It’s awesome realizing how much work and evolution has gone into some of the core libs that I use.

  • A nuclear Google may be a very good thing

    Update: April fools courtesy of Arrington and I got taken in bigtime. Ugh! Leaving the original post up as an ode to my naivete.

    52 years ago in August 1958 the United States was so confident in our ability to provide clean nuclear energy that we put one hundred and sixteen men in a tin can called the USS Nautilus and sent them along with a nuclear reactor under the North Pole. Many of the crew from that voyage remain alive and well today.

    What puzzles me is why the USA isn’t the undisputed world leader in nuclear power. Perhaps the title of undisputed leader in nuclear weaponry and leader in nuclear power are mutually exclusive. So it’s France who produce most of their power from nuclear reactors.

    Google getting into the business of Nuclear power is the most exciting development in nuclear power in this country since the Nautilus. Google’s data centers are massive power consumers, but what also consumes a lot of resources is power transmission. It consumes land, steel, and a lot of power is lost during transmission.

    If you can put a nuclear reactor on a 320ft submarine 60 years ago, you can build a clean nuclear reactor in 2010 with enough power to supply a local data center and the local town it provides employment for. My hope is that this is Google’s nuclear vision.

  • Facebook.com overtakes Google.com as most visited USA domain.

    In a press release from HitWise published on CNN Money a few minutes ago, Facebook.com just overtook Google.com as the most visited domain in the USA. This is possibly the most significant milestone in Facebook’s history as a large company. Here’s why:

    Most of Google’s revenue comes from their Ad business. Half of it comes from their own properties and the other half from a distributed network of sites. (sounding familiar already I’m sure).

    There is a lot of noise around Google’s other apps and experiments, but from a business perspective that’s all it is. Noise. Google is a cash creation machine and the cash is created by the ad network both on and off-site. To give you some perspective, Gmail ranks a distant third among email providers with 37 million uniques vs Yahoo Mail’s 106 million uniques 5 months ago [Comsore].

    So Google’s business is relatively simple. It’s a the best search engine in the world and an ad network with themselves as their own biggest customer.

    Google built this business by first creating an incredibly hot property that gave it’s users an incentive to provide it with awesome targeting data. Then it built an ad network around the targeting data.

    The hardest part about building Google was to create the hot property (the search engine) that incentivises users to keep coming back and feeding it more targeting data. The next part of creating Google was a little easier because if they screwed it up the first time they get to try and try again until they succeed in building a money printing machine on the back of this hot-property-with-targeting-data that really does print money.

    Facebook have the hot property that keeps users coming back and feeding it targeting data. They really screwed up the Ad network the first time they had a crack at it with Beacon. But, predictably, their users forgave them and they’ll keep having another crack at it until their money printing machine is running at optimum efficiency.

    There are a few reasons I believe Facebook may be a bigger success than Google long term:

    1. They have better data in the form of individual demographics, interests and data inferred from the social graph.
    2. They already have a distributed network of sites in the form of Facebook Connect which has deeper integration than AdSense. That means Facebook gets more data about visitors to those sites than Google AdSense.

    Possible risks:

    1. Their management team doesn’t have Eric Schmidt. Eric spent years getting schooled by Microsoft when he ran Novell. So he has the hunger, the scar-tissue and battlefield awareness that you need to compete with juggernauts.
    2. The hasbeen factor. Facebook has had a surprisingly good run and has proven to me it has legs because I’m still going back after a few years. But lets see if they can maintain that over the next decade.

  • How to limit website visitor bandwidth by country

    This technique is great if you have no customers from countryX but are being targeted by a DoS, unwanted crawlers, bots, scrapers and other baddies. Please don’t use this to discriminate against less profitable countries. The web should be open for all. Thanks.

    If you’re not already using Nginx, you should get it even if you already have a great web server. Put it in front and get it to act as a reverse proxy.

    First grab this perl script which you will use to convert Maxmind’s geo IP database into a format usable by Nginx.

    Then download Maxmind’s latest GeoLite country database in CSV format on this page.

    Then run:

    geo2nginx.pl < maxmind.csv > nginxGeo.txt

    Copy nginxGeo.txt into your nginx config directory.

    Then add the following text in the ‘http’ section of your nginx.conf file:

    geo $country {
    default no;
    include nginxGeo.txt;
    }

    Then add the following in the ‘server’ section of your nginx.conf file:

    if ($country ~ ^(?:US|CA|ES)$ ){
    set $limit_rate 10k;
    }
    if ($country ~ ^(?:BR|ZA)$ ){
    set $limit_rate 20k;
    }

    This limits anyone from the USA, Canada and Spain to a maximum of 10 kilobits per second of bandwidth. It gives anyone from Brazil and South Africa 20 Kbps of bandwidth. Every other country gets the maximum.

    You could use a exclamation character before the tilde (!~) to do the opposite. In other words, if you’re NOT from US, Canada or Spain, you get 10 Kbps, although I strongly advise against this policy.

    Remember that $limit_rate only limits per connection, so the amount of bandwidth each visitor has is $limit_rate X number_of_connections. See below to limit connections.

    Another interesting variable is limit_rate_after. The documentation on this is very very sparse, but from what I’ve gathered it is time based. So the first 1 minute of a connection will get full bandwidth, and then after that the limiting starts. Great for streaming sites I would think.

    There are two other great modules in Nginx but neither of them work inside ‘if’ directives which means you can’t use them to limit by country. They are the Limit Zone module which lets you limit the number of concurrent connections and the Limit Requests module which lets you limit the number of requests over a period of time. The Limit Requests module also has a burst variable which is very useful. Once again the documentation is sparse, but this comment from Igor (Nginx author) sheds some light on how bursting works.

    I’ve enabled all three features on our site. Bandwidth limiting by country, limiting concurrent connections and limiting requests over a time period. I serve around 20 to 40 million requests a day on a single nginx box and I haven’t noticed much performance degradation with the new config. It has quadrupled the size of each nginx process though to about 46M per process, but that’s still a lot smaller than most web server processes.

  • Great piece of writing from Rolling Stone

    Rolling Stone is running an article about the US pig farming industry. The opening paragraph is a beauty!

    Smithfield Foods, the largest and most profitable pork processor in the world, killed 27 million hogs last year. That’s a number worth considering. A slaughter-weight hog is fifty percent heavier than a person. The logistical challenge of processing that many pigs each year is roughly equivalent to butchering and boxing the entire human populations of New York, Los Angeles, Chicago, Houston, Philadelphia, Phoenix, San Antonio, San Diego, Dallas, San Jose, Detroit, Indianapolis, Jacksonville, San Francisco, Columbus, Austin, Memphis, Baltimore, Fort Worth, Charlotte, El Paso, Milwaukee, Seattle, Boston, Denver, Louisville, Washington, D.C., Nashville, Las Vegas, Portland, Oklahoma City and Tucson.

    The rest of the article is here.

    Smithfield’s response is here. If as they claim the article is false then I’m sure they’ll sue RS for libel. Somehow I don’t think we’re going to see that lawsuit though.

    Here’s a Google Maps satellite photo showing one of Smithfields ponds, via Hacker News.