Monthly Archives: November 2010

Bubble or bust? Nobody knows anything

“Nobody knows anything” – screenwriter William Goldman, on the film industry

Sequoia Capital is widely (and, in my opinion, correctly) considered to be the best venture capital firm on the planet.  Their list of hits include Apple, Oracle, Cisco, Atari, EA, Google, Yahoo, and Paypal (and that’s just counting the investments of two of their partners – Don Valentine and Mike Moritz).

In October 2008, Sequoia released their now famous “slideshow of doom“:
While acknowledging that the economy always goes in boom-bust cycles (to which VC investments are especially susceptible): 
Sequoia said this downturn would be different:
They didn’t include numbers on the X axis but since average recessions take about 2 years from which to recover, the implication was this recovery would take much longer:
And that the tech sector in particular would suffer:
Their advice for VC-backed firms was to cut spending quickly and assume that VC markets will be effectively closed for a long time:

Flash forward to 2010, Sequioa just led a rumored $25M-$30M funding round in Tumblr at a valuation of approximately $150M.  Tumblr has great user growth but reportedly little or no revenues.  Very smart people like Fred Wilson seem to think a VC bubble is looming.  The good times appear to be back.

I say this not to criticize Sequoia – they are the smartest investors around – but just to point out that even the smartest investors have no idea what lies ahead. The only way I know to function in a world of so much uncertainty is to focus on fundamentals – great people and long term trends.


The anti-bubble of 2001-2004

Us old timers remember 2001-2004 when anything related to the internet was ridiculed as a ponzi scheme.  The conventional wisdom was no internet company would ever make money and all the ideas of the dot-com boom were stupid.  Turns out 2001-2004 was one of the best times to invest in internet companies.

An artifact of that era is a board game called Burn Rate:


fittingly, this game came out at the trough of the web downturn, 2002:


central to the game are “bad ideas” that players try to get rid of.  

one bad idea is name your price auctions:


Today the leading name your price auction is Priceline, which has a $20B market cap and made $750M in profit in 2009.

The next bad idea is an online computer store “eggbrain computers.”


The leading online computer store is NewEgg, which is profitable and had $2B in sales in 2009.


Internet money sounds a lot like Paypal, which was sold to eBay for $1.5B and has since been eBay’s fastest growing profit center.


The leading online ad server was DoubleClick, bought by Google in 2007 for $3.1B.


Finally, we have the perennial punching bag “group discount auctions,” – basically Groupon, which is reportedly getting offers now for more than $3B and is generating over $50M a month in revenues.

Lesson: When the mocking gets the loudest, double down on your investments.



games and luck

"I have plenty of clever generals but just give me a lucky one" – Napoleon

I've been somewhat addicted lately to the iPhone/iPad version of Carcassonne (the asynchronous internet implementation is extremely well done – if you want to play invite me in-game at cdixon at gmail).  Carcassonne is fascinating because it provides the perfect mixture of strategy, game theory and luck.  It is also well suited to asynchronous gaming because it is "state switching friendly" – you can step away for hours and then come back and focus on your next move without missing a beat.

One friend of mine who is a hardcore strategy gamer dismisses Carcassonne as involving too much luck. I'd argue that luck is both an important element to games and also often misunderstood. 

Luck is important because first because it allows less skilled gamers to win occasionally, keeping them involved as they improve. But, more importantly, luck adds a level of addictiveness even for experienced players because when you lose you feel like had you gotten a bit luckier you could have won, making you want to play again.  

Most importantly, a lot of what is called luck in games is really about creating optionality to position yourself to capitalize on luck when it comes along (what some people call maximizing serendipity). In this way, games with the right amount of luck are much more like real life (or business, or battle) than games that don't involved luck like chess (which I also love, but for different reasons).

starting your first company

Things you should do when you are just starting up:

– make sure you have the right team.  if you are doing a consumer web startup, you *need* someone on the team who is native web product person.  if you are doing real tech, you need someone who is true native techie.

– hire a good startup law firm (i like gunderson) and get standardized incorporation, vesting etc docs.  it's worth it.  (but try to only pay $5K or so with promise to pay more later when you get funding etc).

– talk to everyone you can about your idea.  collect feedback, criticism, maybe garner some allies along the way (even advisors which can help build your credibility).

– if you don't already, read all tech blogs everyday.  Techcrunch, gigaom, business insider, mashable, rww, etc.  read vc blogs like fred wilson, mark suster, and eric reis.  go back and read back articles too.

– start blogging & tweeting if you don't already.  don't over think this.  your blog posts don't need to be shakespeare – just do minimal viable blogging.  document your startup adventures, thoughts on tech, respond to others blogging/tweeting – whatever.  just get out there and write.  

– go to all good startup events and talk to everyone

– how googleable are you?  if you aren't winning the first page of google when you type in your name, that means you aren't doing a good job building your web presence.

– try to work out of an office with other early stage startups.  good energy.

– apply to ycombinator, techstars etc.  no brainer to at least apply.

– if you don't code, don't try to teach yourself and code for your startup.  partner with someone who is great at it.  programming is an art & science and takes years to get good at.

– if you really want to do a startup, be ready to spend the next 5 years of your life doing it.  if you aren't ready for that level of commitment, don't do it.

finance & carcassone

Yes, this is a post about the board game Carcassonne – not a metaphor for something else so if you aren't interested in this game stop reading here. 🙂

Carcassonne has some very interesting financial elements (although not as interesting as the all time greatest finance board game – Modern Art).

I think of the best way to think of Carcassonne is by breaking features down by liquidity, risk & reward:

short term liquidity – roads 
medium term liquidity – castles 
long term liquidity – cloisters
illiquid – fields

low risk/reward – roads
med risk/reward – cloisters
med risk, high reward – fields
high risk/reward – castles

Next step would be calculating liquidity premium to see if there are systematic advantages to different features.

I've only played it about 10 times so comments from veteran players welcome.