Red Herring seems to always go out on a limb on its articles. (I guess if only a few hundred people read it, its not so bad if you look foolish) This time, its talking about some Manhattan based PE shops partnering up with either Silver Lake /Francisco/TPG to take on the some mega tech companies . . .

“Size is not an issue. If the public markets are not going to value these companies, then private equity will,” said the source, who spoke on the condition of anonymity.

Private equity investors are increasingly attracted to maturing tech companies because they have stable earnings, strong cash flow, and little or no debt—meaning they can afford to take on debt in a buyout.

The most interesting (if not outlandish one) is the Yahoo rumor:

Yahoo is another ailing giant that has attracted private equity attention, despite its $38-billion market cap. While still the most popular Internet destination, the company’s media strategy has floundered and its search technology has fallen behind that of rival Google, which can provide more relevant results and charge higher advertising rates as a result. Yahoo shares have fallen 36 percent from their 52-week high this year, but private equity groups remain wary of taking on a company they are not sure they can turn around.

Especially given the “Peanut Butter Manifesto“, this idea is actually not so remote. First of all, I think the probability of this happening is less than 5%. But its interesting exercise none the less to think about how to get this done. Putting on my banker/buy out hat on for a sec. I would not even try to “restructure” Yahoo in the operational sense . . . re-orgs that focuses on people creates too much uncertainty and financial types don’t really have the appetite for that kind of risks. Instead bankers like to fall back to sum of parts type of analysis . . . that’s right . . . break up the peanut butter empire into yummy little pieces. Yahoo is nothing but a badly managed conglomerate (think Tyco) this is what I would do (given 10 sec to think about this and not a lot of insight on financial performance or operational issues of each division)

1. Split the company into 4 broad groups - portal, media, applications, and search/advertising

2. “Yahoo the portal” should go back to its roots as an aggregator of best of breed applications, news, and information . . . it should act as an attention aggregator (like Google) but instead of search, focus on its ability to editorialize and filter out crap. As the grand daddy traffic switch on the internet it can extract placement fees (not dis-similar to adwords) to be listed or integrated. At the current incarnation, Yahoo has just way too much conflict of interest between its homepage group and its vertical groups - all fighting for a piece of traffic that Yahoo.com gets (why do you think Brad is such a central figure at yahoo? he owns the homepage). MyYahoo is an already successful implementation of this.

3. The media group should focus on content rather than distribution. . learn from lonelygirl15, G4 media, and focus on creating this generation of independent films -> half interactive TV, half character focused vignette, half commercial, half SNL, and half . . . porn

4. Search is the seed that supports an ad network with quality traffic and thus attracts advertisers (adsense + adword). Thus I would not separate the search and the advertising business (as Yahoo does today). By leaving the mother ship, the search team will be given free reign to expand on its syndication strategy even more so.

5. The application group will probably need to be split up more, but that’s a divestiture issue for these shops to juice immediate ROI (plus making Yahoo pay it “management fees”) . . . this group includes marketplaces (yahoo shopping), fantasy sports, IM , and all that good stuff that Brad considered “spread too thing” . . . these wonderful apps deserves to have more resources - people/money - to compete with singularly focused startup competitors. Even more important, they need to be freed from the handcuff that keeps them from going bare knuckle with sister properties - nothing like selective self-restraint to induce general paralysis.

6. Lastly, to keep the transition into independent groups from destroying short-term value. I would strike medium term non-exclusive deals (3 - 5 year) for traffic, advertising, and cross property integrations between all three groups so that survival is not an issue. Given the rise of web API’s - integration (which used to be a major value of having everyone under one roof) is no longer a hurdle that requires extensive technical coordination and platform synergies of being the same company.

Freed from the matrixed to the tilt structure of an overly managed organization, I think Yahoo as the magic bullet will have a chance to thrive once again.

Remember the lessens that Adam Smith tried to impart . . . let the invisible hand of market economics drive the ebbs and flows of interactions between companies and people. As complexities rise in any organization (or country) a centrally managed economy (isn’t that Yahoo with all its value transfer between groups?) is destined to fail.

———

update. . . looks like Fred Wilson voices similar thoughts . . . that the “all under one roof” strategy needs some re-thinking. . . The De-Portalization of the Internet (aka What I Would Do If I Were Running Yahoo!)

The majority of mobile subscribers in Europe has a prepaid mobile account - as opposed to mostly underbanked customers having prepaid accounts here in the U.S. As much as it is a coincidence or prescient segmentation, the majority of first general MVNO (or just sub-brands like Boost) here in the US are prepaid focused giving the MVNO market an apparent high growth trajectory where it was really “prepaid” that was driving growth in the US. (confounding variable)

As a result, most of the second generation MVNO did not fare too well given that the prepaid market is beginning to saturate like the post paid (Disney, ESPN, AMP’d, Helio and a dozen more). Some are still hanging on through technical innovation and blanket mass marketing (AMP’d + Helio) . . . but steadfastly refusing to release sub #’s.

Well . . . long story short. . . easyMobile, the MVNO of the Richard Bronson wanna be, Stelio (first name only, like Madonna), is about to fold after only acquiring 80K customers (another rule of thumb for me, you gotta have user # higher than the total people in any given superbowl to be considered “impressive” growth).

This is scary given the amount of runway left for mobile innovation is unlimited, but MVNO’s who can potentially push incumbents forward are fading like flies. As a result, the “walled garden” of the mobile platforms might persist much longer than the IBM monopoly on the PC BIOS (the last time the PC platform was “closed”).

It used to be that economies of scale in the mobile business comes in the capex (network buildout, spectrum acquisition); right now it looks like economies of scale in distribution & marketing is equally big too . . .

Only companies that has already achieved economies of scale in marketing and distribution can really leverage the MVNO model to some degrees of success . . . (read Apple). . . lets hope

SAN FRANCISCO - Milton Friedman, the Nobel Prize-winning economist who advocated an unfettered free market and had the ear of three U.S. presidents, died Thursday at age 94.

Friedman died in San Francisco, said Robert Fanger, a spokesman for the Milton and Rose D. Friedman Foundation in Indianapolis. He did not know the cause of death.

“Milton’s passion for freedom and liberty has influenced more lives than he ever could possibly know,” said Gordon St. Angelo, the foundation’s president and CEO, in a statement. “His writings and ideas have transformed the minds of U.S. presidents, world leaders, entrepreneurs and freshmen economic majors alike.”

From the AP press.

When I was an undergrad at Stanford, Milton Friedman came to speak on campus. Of all my 4 years there only Jesse Jackson (at the peak of his popularity) out drew Milton. At an ultra liberal (which college is not?) campus like Stanford, this is a feat in of itself.

To me, he is the progenitor of “market-based socialism” (I’ll get hanged by Friedman scholars for this) . . . and direct influencer of the current community driven web 2.0 vision. Essentially, he argued that personal choice (include greed) will drive toward a better society. That there is nothing in conflict between capitalism, self preservation and public good. . . (how 2.0!) Far from a Reagan apologist, he argued for those on the wrong end of the bell curve as much as he did for the middle class. He is the greatest economist of our times; if not, the most influential to the cause . . .

From Searchblog on Google A/B testing:

The ideal number of results on the first page was an area where self-reported user interests were at odds with their ultimate desires. Though they did want more results, they weren’t willing to pay the price for the trade, the extra time in receiving and reviewing the data. In experiments, each run for about 8 weeks, results pages with 30 (rather than 10) results lowered search traffic (and proportionally ad revenues) by 20 percent.

This is actually a major point of contention for designing webpages & managing conversion . . . the # of results per page . I would caution against applying this globally to all websites though. Users tend to get anchored to thier prior experience with that particular website, so the drop in conversion could simply be caused by the fact that its a different experience than before. In fact, I’ve seen opposite results before. Anyways, data like these should be shared more globally, kudos to Google for being open.

A few months ago, Dare Obasanjo ripped me a new one for praising Meebo in Meebo and the Coming Battle For the Software Long Tail

People don’t have enough imagination? At the end of the day, it is an AJAX version of Trillian. That’s probably one of the most unimaginative applications I could come up with.

Where are the competitors?

Lack of competitors usually shows a business is a bad idea. That’s the first lesson of starting a business. The reason it is a bad idea is the same reason building an AJAX site that shows you Google and Yahoo!’s search results is a bad idea. And if you can’t figure out why that’s a bad idea…I can’t help you there.

Apparently Dare has changed his mind. Not trying to pick fight (ok, maybe to gloat a little bit?)

I’m a loyal reader, in fact, I find his blog insightful and thought provoking. And in this case, I can see why he didnt really change his mind. It is MeeboMe that he found “fucking cool” not Meebo itself.

Meebo in its first incarnation is not that innovative of an idea . . . that I have to agree with. However, it is offering a sizable value proposition as proven by its near instaneous scale. As a result, Meebo was able to leverage that traction into new products such as MeeboMe that IS INNOVATIVE and ground breaking. . .AND popularly recieved.

As an optimist, I was focused on Meebo’s potentials (read multistep strategies) and opportunities while Dare focuse on its current product & execution. Nothing wrong with either approach really. And ofcourse, in the end, bloggers always reserve the right to change our mind . . . we write posts in matter of minutes; more often than not, a stream of conciousness post rather than a cogent essay . . . this is the beauty of the blogosphere, its a conversation rather than a publication . . . Next time, when I change my mind (almost every week) I hope someone goes easy on me

From today’s PE weekly . . .

Austin Ventures has sponsored a recapitalization of CreditCards.com, an online destination for consumers to search, compare, and apply for credit cards. No financial terms were disclosed. In related news, former Bankrate CEO Elisabeth DeMarse was named company CEO. American Capital Strategies and CreditCard.com founder Dan Smith also participated in the recap. www.creditcards.com

Wow . . . who knew anaffiliate spammer, keyword arbitrage, click arbitrage, traffic arbitrage, consumer information portal could get a top tier VC’s attention . . .

Actually, I’m just being facetious, I’m playing with internet marketing right now and do realize their value to advertisers and customers . . . In many way these are pretty legitimate businesses that provide value to the consumers much like an online equivalent of a distributor or retailer . . . providing breadth of SKU’s and enabling choice . . . its just interesting how the most important asset of the company is the URL . . . plus trying to understand what is Austin’s exit strategy . . . cause there are actually thousands of topic oriented sites with the same traffic like creditcards.com that Austin can build an entire practice around . . .

90% of the MBA’s will tell you that if there is one thing that we all learned at school is that “options have values” and that more volatile/riskier the outcome, the higher the value of said options . . . transposing that to the venture world, the option to own ~15% of a ultra risky startup must have lots and lots of value . . .

Charles River Ventures announced its QuickStart Seed Funding program yesterday (or is it the day before?) which institutionalize an open secret weapon of savy entrepneurs - the convertible debt.

A simple example: if CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333.33 worth of Series A stock. Given that seed funding amounts are typically very small compared to the amounts one might expect to raise in a Series A round, as the example illustrates, the aggregate discount amount, in this case $37K, is a tiny fraction of what is likely to be a multimillion dollar Series A financing.

To be academically correct, CRV is not just getting an option . . . they are getting 1) an option to invest 2) coupons(interest) 3) small amount of equity . . . but the option is what they really want . . .

Tom Evslin is right that this is a great deal . . . If you are single and under 30, I say jump on this right now . . . especially because there is no personal liability. . . if these guys were some 2nd rate vc firm I would have concerns about getting engaged at the birth (best analogy I can think of), but CRV is pretty reputable and I’ve heard nothing but good stuff about them . . . (no they are not Jessica Alba but at the very least the hottest girl in your dorm).

Taking a step back though, I would make sure entrepreneurs understand what they are getting into with or without the quick start program.

1. 250,000K will NOT pay enough salary and company expenses for the two founders (or more employees). It takes atleast a household income of $150K to live comfortably in the valley . .. be ready to tough it out with or without the 250K

2. Career wise, make sure you are ready to take this step. At this point, you are risking more than the VC’s. They have $250,00 at risk. You have a career at risk . . . millions of dollar of future earnings . . . the love and faith in your “idea” is so much more important now than ever. This 250K should not drive your decision to start the company. If you are going to start the company even if dont get Quick Start investment, go for it. If you are NOT going to start the company without the 250K, dont do it even if you do get it from CRV. . .

3. Lets say CRV puts away $10M for the program (reasonable) . .. at $250K a pop. . . the program will have a portfolio of 40 companies . . . again . . . serious asymmetry in committment & resources. No way CRV has enough people to invest their time in the entire portfolio (Fred Wilson alluded to this point) The model built into the program (not explicitly stated) is that if your company is a dog shortly after funding, dont expect CRV to lend a big hand. See it as money and thats it . . . CRV can only afford to invest time in the superstars in the portfolio.

In the end, for a fund of their size, this is a no brainer for them - the downside is limited, say if the entire program tanks, $10M is a bad series B investment in ONE company . For entrepreneurs, as always - nothing has really changed . . there is comparatively more to lose (and to be more lots more to gain as well) . . .

Who knew Knowledge@Wharton would have good articles these days? When it first started, it was kinda of a self-promotional spam-letter. But these days, its actually somethign I scan everytime it arrives in my inbox.

Michael Porter Asks, and Answers: Why Do Good Managers Set Bad Strategies?

Porter stressed that managers get into trouble when they attempt to compete head-on with other companies. No one wins that kind of struggle, he said. Instead, managers need to develop a clear strategy around their company’s unique place in the market.

Bad strategy often stems from the way managers think about competition, he noted. Many companies set out to be the best in their industry, and then the best in every aspect of business, from marketing to supply chain to product development. The problem with that way of thinking is there is no best company in any industry. “What is the best car?” he asked. “It depends on who is using it. It depends on what it’s being used for. It depends on the budget.”

In the Internet world, eitherthe “Pie” is still growing so fast that competitors often dont really compete directly OR the “Pie” is so small no amount of optimizing can help any company win. (How many times have you seen a “space” completely disappear along with every company in it. . . gorilla game with bunch of monkeys. . .) As a result it seems like being the BEST is the ONLY strategy that all these web startups can pursing. (as seen in the continuous feature-one-ups-manship).

It is possible that because the industry changes so fast that the competitive landscape is continually defined and consumer taste always shifting; and as a result, competition never reaches the point of saturation for segmentation to really matter. (atleast not until the company is worth a few billion dollars and public)

He went on to describe key principles of strategic positioning, including a unique value proposition, a tailored value chain, clear tradeoffs in choosing what not to do, and strategic continuation, or ongoing improvement. The underpinnings of strategy are “activities that fit together and reinvigorate each other.

In the end, it seems like the hard part is betting on the right horse (aka segment) which drives your strategic choices and align your operations. However, if the company picks a slower growing segment than its competitor . . . all is lost . . . perhaps than the hardest part of “strategy” as defined by Porter is “who you want to serve” . . .