Ad networks should be scared, very scared. Before they know it, they will be reduced to just being affiliated sales forces for the ad exchanges they “partnered” with. Hell, even today, I cant really tell the difference between some ad networks and ad rep firms. In such a case, maybe some of them deserves to have it revealed that the emperor is really naked. . . just bunch of guys in a suit, peddling snake oil and turning around and passing orders to another ad network while pretending to have some “behavioral targeting” technology. (retargeting based on cookies is so trite)

These days, ad exchanges are dangling 0% commissions to get smaller ad networks to participate. The larger ad networks like Platform A are smart enough to realize they must build optimization and inventory yield management features into their ad network to keep their advertisers AND publishers happy. . . RATHER than relying on an ad exchange to optimize those inventory. Furthermore, ad exchanges are now absorbing more and more of the ad network functionalities like targeting, profiling, segmentation, cookie management and settlement into their core offering. If the “special sauce” for generating ROI for either the advertiser or publishers resides in the exchange rather than the network . . . its only a matter of time before ad network margins come under pressure . .. or worse dis-intermediation.

5 years from now, I look forward to Ad Uber-Exchanges that’s gonna try to aggregate the first generation ad exchanges

Seems kinda weird at first glance . . . no? middle of a major down recessions, with swanky restaurants in major metro areas closing left and right (anyone remember how dead SoMa was in 2002?) and off goes Open Table to the public markets. Techcrunch actually asks some good questions . . .

The valuation of the company is probably no more than $300M (give trailing 2008 rev is probably around 60M with a 5x rev multiple) . So why go public?

1. At that valuation, a mezz round from hedge funds or crossover funds makes a lot more sense . . . but I’m guessing no private investors showed any interested given they are still trying to clean up the mess in their portfolio - so an IPO became the only way to raise more money. Since Allen & Co. is part of the IPO underwriting team and they typically do private placement deals, it supports the thesis that Allen was out trying to raise a private round for Open Table but was not able to - so they brought in Merrill to provide trading support & retail distribution for the IPO. Allen & Co doesn’t have the trading operations or retail distribution capabilities to support an IPO so you rarely see them on an IPO underwriting team. In this case, their inclusion in the IPO prospectus probably reflects the fact they did all the positioning/marketing work for Open Table (and is on a retainer already) for the private placement before Merrill came into the picture (otherwise, they don’t really offer that much value for an ipo). (side note, I wonder if goldman or morgan stanley passed on the deal)

2. Typical life of a venture fund is about 10 years, so Benchmark and other VC’s firms that invested in Open Table back almost 10 years ago need to cash out of this investment and return money to their LP’s

3. Despite the fact that the revenue ramp had been slow for Open Table, it actually has been pretty steady - no down year in the past 5 years. I’ll buy the argument that given the restaurant acquisition life cycle & barrier to entry in this space, the current ramp rate is actually not a bad thing. However, 2009 WILL NO DOUBT be a down year revenue wise compared to 2008. And remember, for any IPO, the most important story to build, is to project a “growth” story around the company - in order to get as high multiple on its revenue / EBITDA as possible. It is possible to do so with the historical financials for Open Table given its steady growth (TODAY), but if 2009 is a down year, Open Table will have to wait until they capture their old growth trajectory before going public - 2010 at the earlier. And of course, I don’t think anyone in the company or on the board have the appetite to ride out TWO downturns.

So will I buy into this deal? Yes. . .but I’ll wait till these guys announce their first earnings after going public (and probably miss) to buy the stock. I believe in the long term story(I’m a loyal user/ fan boy) I just believe I can eventual buy into the company at a cheaper price than the $300M I expect it to price at.

Bought a new laptop for the new year. It came pre-installed with Windows Vista. I transferred bunch of files and programs over from my old laptop with XP installed. Now the whole thing is barely usable.

1. every other second it wants to to give permission to access a file or run a program . . . (man my index finger is tired from clicking “ok”)

2. half of the programs and files I transferred over I was “denied access to”

apparently microsoft is so paranoid about all the virus and spyware attacking its OS that it decided to lock down every fricken file or folder the moment its installed and prevent even admins from touching it if the damn thing is not sure who created the file in the first place . . .

ok enough bitching, back to trying to hack into the system registry to fix this problem . . . already 12 hours into the installation process . . .

1. The Hype Cycle

2. The J-Curve (For J-Curve for Venture Startups)

Exit Point 1 -> Circa 2006. $5M-$20M exits. Acquired for technology, promise, users, eyeballs.

Chasm -> Circa 2008 or 2002. Cram down financing. Sky’s falling. Can’t pay me to take it off your hand. Men separated from boys.

Exit Point 2 -> book value = equity value. $10M - $50M exits. The long road back.

Exit Point 3 -> IPO Baby!

Question . . . how long does it take to go from founding to point 3 usually? 7-10 years?

Question . . . whats the annualized ROI? or IRR of the various exit points?

Question . . . given time required and effort invested AND risk adjusted for likelihood of failure in each step . . . where should most investors/entrepreneurs focus their exit strategy?

EDIT: Answers to above questions from Nemo

Answer… 8.5~9yrs (median time from initial equity to IPO is 8.3 yrs. Source: DJ VentureSource Q3 08 survey)

Answer…
Exit #1: 2~4x, 50~150% IRR (assuming 1.5~2yr hold, 1~2 rounds)
Exit #2: 2~4x, 30~70% IRR (assuming 3~5yr hold, 2~3 rounds)
Exit #3: 10~100x, 30~70% IRR

Answer… Exit #1. can you say cetacean celebrity?

Math, finance, and statistics has always been a hobby of mine . . . unfortunately I was never brilliant enough to make a career out of it. One of the most popular bastardization of statistics is the concept of “long-tail” . . . by now, everytime someone mentions the “long tail” most people’s eye starts to roll . . .

Some people have already heard of Nassim Taleb and his Black Swan theory especially in the quant finance circle. In fact, it was on the NYT best seller list back in April. The recent melt down of the financial ecosystem, helped bring Taleb back into the spot light. Turns out, funds that were advised by Taleb returned over 50% this year.

Taleb’s book argues that history is littered with high- impact rare events known in quantitative finance as “fat tails.'’ As the founder of New York-based Empirica LLC, a hedge- fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to bullet-proof investors from market blowups while profiting from big rallies.

When most statisticians build models, the outliers that produces spikes in the data are often considered “outliers” and ignored. (doesnt help that most elegant mathematical equations produces relatively smooth curves). So what you get is some sort of smooth model like the common bell curve / normal distribution, Poisson distribution, Pareto distribution (80/20 and/or long tail). Taleb; however, believes that these outlier events has such high impact even though its frequency is low, and as a result they cannot be ignored. In fact they should be EXPECTED. (Fat tail = high “impact” but low frequency). Taleb actually believes most statistics is useless because of its inability to model/predict/take into consideration black swan events.

(Possible) Examples (as I interpret it):

- Mutations which advances evolution
- Certain Wars (start of WWI)
- Natural disasters (Katrina)
- Terrorist actions (9/11)
- Meteor that killed the dinosaur

So what does all of this have to to with anything. Well, its interesting for one. For another, it make me wonder all the things we do as product marketers/managers do to try to load the deck in our favor such as user behavior modeling, customer research, competitive analysis etc etc are really not that “value additive” in the grand scheme of things. That all our attempts to rationalize not just the users, but our customers and the business value chain we are in, into neat frameworks and theories (like what statisticians do with numbers) are really useless when it comes to truly creating a stepwise advancement in our business or user adoption.

Ok, I’ve lost you.

How about this.

The iPhone, Pagerank, TCP/IP, the automobile.

These game changing innovation which created tremendous amount of value to society AND wealth to many many individuals. Are they the result of careful measurement, analysis, modeling, and design (aka White Swan) or are they random & rare stroke of genius and insight by a small group of people (aka the Black Swan)?

Not sure. Not that adding value a step at a time is such a bad thing but it does keep my mind churning at the end of the work day.

Can’t help myself and chime in on this web 2.0 is dead thing. (joining the illustrious rank of Conway, Wilson, Sequoia, Patricof, and Benchmark.) Here is the deal, it sucks for us all - from one end of the spectrum to the other -> being laid off or pushing out our horizon on getting super rich. But in the end, its a good thing.

I was getting bored rather quickly the last 6 month and thus blogging less and less. But this recession thing is rather stimulating. I was tired of all the in-breeding that’s being going on for the last 18th month of so. But looks like its gonna stop soon . . .

In-breeding of ideas -> behavior targeted social ad network for in-MMOG rich media advertising (company name shall remain anonymous)

In-breeding of culture -> started with yelp parties, raised to the next level with digg mixers, and eventually jumped the shark with pownce launch orgies (oh and that cyprus video thing)

In-breeding of merit -> startup within a startup within a startup winning awards run by a wanna-be-celebrities judged be used-to-be-celebrities invested both by angels turned VC’s

In-breeding of entreprenuer -> serial entrepreneurship turned into parallel entrepreneurship turned into A.D.D. entrepreneurship

Burn it all down, the great ideas, strategies, and tactics will either continue to flourish, or someone will re-discover it a bit later. Its an acceptable loss. We all need a break to re-evaluate, re-charge, re-think . . . to really clear our head and come up with something original and valuable once again without the destructive group-think of the echo chamber.

In the mean time, I can always try to figure out how much longer I have to push out my retirement given the state of my 401K.

Entrepreneurs are the golden goose in the valley. Every one else is just living off the success and the failure of the entrepreneur - lawyers, bankers, consultants, VCs, employees, land lords . . . etc . . . Unfortunately, over 80% of these people are just parasites with nice dress shirts and expensive jeans. Below is a guest post on the “silicon valley entourage” phenomenon from an entrepreneur buddy who prefers to remain anonymous for obvious reasons.

Will and I were talking the other day about our experiences in entrepreneurial ventures and I went off on a rant (as I often do) about what I called “Silicon Valley Entourages.” I think Will was a little amused at my tirade so I told him I would write up what I was talking about and send it over. Most of this was composed while sitting at the In-N-Out in Kettleman City.

The reality of the situation is that although we would like to believe that there is some huge gap (no..not the central valley) between Northern and Southern California, these two parts of California actually have a lot in common from a business perspective. I have spent time working in Hollywood (at one of the studios) as well as some pretty well known technology startups in the Bay Area. With me in the Bay Area and Will in LA, I really have to ask the question, “Do LA folk or Silicon Valley folk have bigger entourages?”

We all have a perspective of the appearances of LA entourages so I won’t even bore you with what you have already seen on HBO – but what are the business implications of the LA entourage? From a financial point of view, the LA entourage is more than just the “talent’s drinking buddies.” The support structure for the talent starts with the agents, managers, assistants, assistant’s assistants, drivers, etc. These are the easy targets. The harder to see targets is all of the other SG&A – unfortunately some of that actually drives value, a lot of it is just there.

Have you ever wondered how it is possible for a film to make $500M at the box office and there isn’t anything left at the bottom line? We all know that the studio heads make a good chunk of change, but that is only a handful of folks. At the end of the day, there isn’t one big hole in the bottom of the Studio’s bucket…there is a bunch of little holes which leaves the shareholders scratching their head wondering where all the money went and an entire half of California driving around in BMW’s and eating Sushi. It is all of those people in the studios who control one little piece of information and the studio would rather pay them a modest salary than actually figure out what they are doing…basically the Milton Waddums’s of Hollywood (without the red staplers).

Yeah, so all of the smug Northern Californians are are probably thinking, “that is sooo LA…I don’t see characters like that wandering Sand Hill Road” – or do you?
I have spent the last couple of years helping to push a startup along. At the risk of sounding way more important that I actually am, the Bay Area equivalent of “talent” is all of the starving entrepreneurs sweating it out with the hopes of starting the next Google or Yahoo! (currently more so G than Y!). Really, the only difference is that rather than waiting tables at Chin Chin’s and walking around with a script to sell, the entrepreneurs are writing code at eBay and walking around with a business plan to try to get funded.

In the time that I have been sweating equity I have been amazed at the number of people that the business has attracted who have been interested in “helping out”. I know that one might say, “that’s a great problem to have…you know, entrepreneurs helping entrepreneurs build value,” but the truth is the scene actually looks something more like this:

27. INT. STARBUCKS – MORNING

A normal Starbucks coffee shop in Palo Alto.

A WOULD-BE-ENTOURAGER

I really like your idea. I know a bunch of VC’s that will fund this on the spot. This is absolutely going to be the next big thing…it is a no-brainer. This is the next killer ap poised to cross the chasm and disrupt everything. I am really excited and think we should team up in order to take this to the next level. I know exactly how I can add value

ENTREPRENEUR

(with a smile)
Great! So this is what needs to be done…

WOULD-BE-ENTOURAGER

(while checking his Blackberry)
Ummm, wait a second. I don’t think you understand my business model for what I do. Basically I need for you to show to me your commitment for this project and the incredible value that I am bringing to the project. Did I tell you that I once sat at the table next to Reid Hoffman at Buck’s? Anyway, before we get into the details of whatever it is that you want me to do…and of course I don’t know what you want me to do, but I know that I can do it better than anyone else, my standard hourly rate is $300/hour and I need to take 15% of the company. I also expect a finder’s fee for any introductions that I make to all of my buddies in the venture community. Did I tell you I am best friends with Reid?

The entrepreneur ends up paying for the coffee, getting back into his Honda Civic for the drive back to his apartment where he continues to figure out how to make this thing work. The Would-be-Entourager goes to a networking event for Java Programmers and then later crash a Venture Capital roundtable.

The truth of the matter is that of all of the people that I have met while on this entrepreneurial journey, only about 20% are actually entrepreneurs that are trying to build a business of some sort. I have experienced the other 80% as people that are trying to hop on the backs of the other 20% and extract their living out of them. Whether it be the promises for Strategic Consulting, “Introductions to Venture Capital”, or Advisory Services there have been a lot of people out there ready to join the “Entrepreneur’s Entourages.”

While not drawing a salary for the startup that I am working on right now, I actually had an “incubator” tell me that they wanted an upfront fee before even looking at the business and deciding if they wanted to take a monthly retainer and equity position for “strategic consulting.” They told us that the upfront fee was so we could prove to them that we had “skin in the game.”

Again, I have to put in the caveat – not all of the people wandering the coffee shops in the Bay Area are bad. I am good friends with many professional advisors and consultants that really are worth it. This is what makes this environment so difficult – it is really hard to tell the good from the bad from the ugly.
So the big question, “How to tell the entrepreneurs from the entourages?” Although these are not foolproof ways to separate the wheat from the chaff, my thoughts are as follows:

1. The entourages will not do anything without having an agreement in place that covers their compensation. When someone tells you that they have some great advice or connection but they won’t pick up the phone and make a call without having an agreement in place, it is usually a sign that they don’t have much. This is a sign that this person is aware that they can’t add that much long-term value to they need to lock in their deal before the entrepreneur figures this out. Something as simple as a phone call or 30 minutes of thinking should be a diminutive part of their overall value and they should be wiling to offer it up for free.

2. The more that they feel the need to talk about who they know or their past accomplishments, the more likely it is that they really are not that much of a driver of value. These are people that have a hard time even justifying to themselves their own value so they have to use proxies to do it. The smartest people that I know are the people that are confident that the content of their thoughts drives the actual value.

3. “Patented” Frameworks or Methodologies are usually a sign that the person that you are talking to is giving you answers out of a book and not out of real experience.

4. Not really listening to what your business is. The true entrepreneurs have an intellectual curiosity about new ideas and new opportunities. If you meet one of these people and you don’t instantly hear an understanding of what you are doing and initial thoughts – be wary. If you get the sense that the person instantly tries to shoehorn whatever it is that you are doing into things that he has done – be really wary.

5. The more nebulous the description of what they actually do, the more likely it is that they don’t do much. An entourage wants be sure that they do un-measureable work so you can’t tell that they are not really adding value. Things such as “Strategic Consulting”, “Introductions”, and “Advisory Services” are often a sign of an entourage member. Their hope is for a monthly fee and founders stock in order to allow you to talk on the phone with them once a week (or less).

The saddest part of this whole story is I now have a better sense of why both the entertainment industry of Southern California and the venture community of Northern California are both so inefficient. I now understand why the Hollywood Stars and Bay Area Entrepreneurs can drive as much value as they do and actually come home with less reward than you might expect. It is because of the entourages that they each group must support in their goals to actually get something done. This can also be the reason why a lot of startups fail. This is not because the entourages provide bad advice (usually they provide very little advice) but rather for much more subtle reasons. These Silicon Valley entourages will instead suck equity and capital out of the venture that could either be used to hire value driving resources for the company or provide incentive for the existing members of the team to persevere.

Yes that’s me. Its the only freaking reason I *cling* to the Republican party. (you know, like guns and religion) . . . other than the religion of economics, I’m pretty much have nothing in common with the party of G.W. Its about now I’m ready to seek out Ron Paul and his Libertarian buddies (yes, I know he is actually in the Republican party, but I believe Paul is just doing some recon work before going back) but than again, the dude is way too much of social conservative for me anyways.

So this $1trillion bailout has me torn to pieces. Being against the bailout seems to be the most bi-partisan thing to happen during this election year. So there is Krugman on the left putting in his two cents. And bunch of really old white guys from red states I really don’t ever plan to visit conspiring to stage a revolt against GW.

Here is basically how I look at it (don’t scream at me, I know I’m super simplifying what is actually happening). The Republicans is gonna take my money (through a combination of taxes I already paid and mostly through general interest rate increases) and give it to irresponsible banks run by employees making (and made) 10x more than I do in exchange for bunch of over-valued assets. And then the Democrats is gonna turn around take my money too and use it to help pay off the monthly mortgage payments of bunch of dumbass flippers who never paid enough attention in college to learned how to calculate net present value.

I hate them both. My sense of justice can’t take this country any more.

Yes, I know that the worst thing that can happen is for the bailout to NOT get passed, in which case it will probably hit my pockets books even more. But I do have the RIGHT to be a little pissed off. Why can’t we just revoke the citizenship of these people that are not contributing positively to the GDP and send them off to Australia or something? (didnt the brits used to do that?). Let them try to flip worthless huts in the middle of the Great Victorian Desert instead (the bankers can spend their days “structuring” credit default swaps denominated in camel dungs)

Man I’m pissed. Gonna go short me some financials & treasuries just to have something to root against.

The social graph . . . the silver bullet for all things previously haven’t worked online. Seems like for the last 3 month, everyone has been recycling dot-bomb ideas, adding a “social graph” angle . . . and calling it the next great thing. Here is the deal. . social graph will ultimately be an important part of the formula for building the next great web application BUT its not a panacea for an idea that never worked in the first place. Understanding user behavior and context will still be the fundamental first step to creating the next killer app.

Buried in the various posts of the week, is this little gem on Venture Beat on eBay’s experiments with merging the social graph and e-commerce that anyone (entrepreneurs, pm’s etc) experimenting with the social graph need to take note.

One interesting exploration is whether and how social connections between friends (the so-called “social graph”) can enhance seller trust ratings and thus facilitate purchases on eBay. EBay’s first exploration — or the “first inning,” as Mancini described it — was playing with Facebook apps. It built one, called eBay Marketplace, which lets you see what your friends are buying on eBay. This is somewhat similar to Facebook’s own Beacon advertising program. Note, eBay was an early Beacon experimenter. The company concluded that people want to keep social and commerce activities separate.

What eBay has discovered. . . (and BTW Facebook learned the same thing too from Beacon) is that social recommendation does not spur an impulse purchase from another user. Extrapolating even more broadly, social recommendations do not cause a passive user to become an active user. One area where this data point could help predict success is in the display advertising targeting technology. Social graph based display advertising targeting companies (too many to mention) will not have the success that many think they will . . . display is still a passive medium . . . it will never be like search an active medium.

But is it true that “people want to keep social and commerce activities separate”? That is part I think eBay had it wrong. Its too broad of a hypothesis.

I believe where social graph will have the largest impact is when users are already taking an pro-active stance (for example, all kinds of “search” like activities) and the social graph based recommendations and applets can act as a catalyst to improve conversion. For example, Amazon’s recommendation system generates between 10-20% of its e-commerce revenue (based on common research analyst estimates) so in that context, when an user is already take a proactive action, recommendations can be very valuable. Social Graph applications is just another method for segmenting like-minded users . . . collaborative filtering gets to the same end just through a different mean (ie from actual purchase behavior) . . . so anything that improves the targeting and relevancy of recommendation would in theory improve conversion (and prove valuable) to the end user.

I, as a user, don’t necessarily need to know that Joe, my best friend, just bought a pair of Ted Bakers 2 seconds ago. What I do care about is when I eventually need to buy a pair of shoes, you remember to show me a couple pairs of Ted Bakers that I might like. Simple, certainly not ground breaking (. . . hell, collaborative filtering could already be far more relevant than social graph based recommendations . . . ) but doesn’t mean social graph could not be a small but important part of the inevitable march towards the next generation of web applications.

I’m with Jerry. Jerry can do no wrong.

Yes, that universally and recently controversial Jerry Yang. No, it has nothing to do with whether I want to see Yahoo sold to MSFT (yes I do) nor whether I wish Yahoo would put out but not get married to Google (no I don’t). It has to do with the fact that, Jerry is an Asian-American (Taiwanese American and/or Chinese American, depending on whom you ask) transcending the silent model minority stereotype that I (and he) had grew up with.

I rarely blog about the issue of race. I found it too polarizing and too nuanced to be communicated in a one way medium. But the imminent dawn of the first African-American President, ironically, has helped push the (non) issue of race finally out of America’s sub-conscious. We have learned to treat all issues related to race finally as a conversation rather than as a platform for evangelism. Don’t ask, don’t tell . . no longer.

I’m not that into politics, so Jerry is my Obama. He is someone that has transcended his race while embracing his identity. Jerry is doggedly passionate, smart, articulate and, most importantly, fallible. He goes toe to toe with Balmer . . . another equally smart, passionate, and fallible but un-hyphenated man. He fails publicly. He takes the pains and arrows of his failures just like everyone else. No punches pulled, no skirting around the issues. Jerry sucks not because of his race, not despite of his race. He sucks cause we all suck at one time or another.

I’m with Jerry. Jerry can do no wrong.