Apple TV

September 16th, 2011

When I heard that Apple might be trying to change television viewing experience in fundamental ways, I struggled to imagine what that might look like.  So, I was struck by the following comments in BusinessWeek:

“What about 3D? In 2010, Apple won a patent for a revolutionary new 3D screen system that would not require glasses and could be viewed by multiple people at the same time. The patent went so far as to slam current 3D systems, noting that most people dislike goggles and dismissing current non-glasses systems as essentially unworkable for projecting a 3D image … to an entire audience.

What solution did Apple propose? An “unobstructed 3D viewing device” that would give each viewer a different line of sight for both left and right eye, perfecting a stereoscopic image for a group of viewers watching one giant screen.”

Meshed Networks

August 27th, 2011

In their most recent quarters, Pandora and LinkedIn generated revenue $67 million and $121 million in revenue respectively.  Both companies were operating at about break even.  Pandora grew at a 117% year-over-year rate, and LinkedIn grew at 120%.

Both companies have their opportunities and challenges.  In particular, Pandora needs to show that it can maintain healthy CPMs as it expands into mobile devices and/or run the risk of damaging users’ experience by introducing more audio ads.  LinkedIn needs to demonstrate that it is capable of monetizing its base beyond job postings in order to justify its valuation, in my opinion.  Nevertheless, both are exciting young growth companies.

Despite having similar revenue growth rates and operating at break-even net income levels, Pandora trades at about 7.8x revenue and LinkedIn trades at 15x revenue.  One could give many reasons for the disconnect:  market inefficiency (emotions), LinkedIn’s higher gross margins, broader revenue stream possibilities for LinkedIn, greater awareness of the LinkedIn brand, etc.  I believe, however, the valuation difference is in large part a reminder that meshed networks like LinkedIn tend to be more dynamic and cost-efficiently scalable than hub-and-spoke networks like Pandora.  Great businesses can be built through both meshed and hub-and-spoke networks, but meshed networks deserve a premium for their unusually explosive capabilities.

 

Investors’ Circle

July 11th, 2011

SJF Ventures’ allied organization, SJF Institute, has merged with Investors’ Circle.  This is an exciting opportunity for SJF to enhance impact investing through a relationship with a 19-year-old investor network.  See news story here.

LinkedIn and Valuation

May 20th, 2011

There has been some healthy differences of opinion in the past 24 hours about the implications of LinkedIn’s IPO.  The splash has brought out another wave of individuals’ asking whether we are seeing another Internet bubble.  The question has been swirling for some months now.  In fact, worries of a bubble have occurred for many years.  People cried bubble after Netscape’s IPO in 1995, Yahoo’s IPO in 1996, extreme valuations in 1999 (when we really did have a bubble), when Web 2.0 began to get buzz in 2005, and when facebook raised money at a $50 billion valuation in January 2011.

What bothers me is when the valuation analysis of LinkedIn stops at a comment on the shares’ price-to-current-sales ratio, i.e. “LinkedIn is trading at 24 times 2011 revenue.  That’s ridiculous.”  After Yahoo’s first day of trading in 2006, the company had a market cap of $848 million on projected annual sales of $1.3 million.  Would buying the shares at 652 times sales in 2006 have been ridiculous?  From the perspective of how things turned out, the answer is no.  Yahoo’s shares now trade more than 10x higher, compared to a roughly 1x increase for the S&P 500.  From the perspective that Yahoo’s results are an anomaly and it was simply imprudent to purchase shares of a stock like Yahoo’s in 1996, the answer is maybe.

But I think the right way to look at things is whether investors are assessing the future prospects for LinkedIn when determining a valuation.  The ideal valuation methodology of a company is to assess the anticipated future cash flows and adjust for risk.  Some venture investors tend to anchor their analyses around multiple of current year revenue.  Some investors in publicly traded stocks tend to anchor their analyses around multiple of  earnings based on current year or next year’s earnings.  I think that these anchors are established in part because the future is hard to predict.  So, one turns to what a company is able to generate now.  I believe the anchors are also driven in part out of a lack of willingness to look deeply at a company in order to assess its future prospects.

I do not have enough information about LinkedIn to say whether I think it is overvalued.  But I can offer my two cents on whether we are in a bubble.  My sense is that markets are generally efficient in discounting future expectations.  Market efficiency can break down when (A) the assumptions underlying future expectations are off (often the case given that market participants lack perfect information), (B) market diversity deteriorates and investors’ decision rules become too uniform, or (C) investors are swayed because of emotional issues.  It’s this last consideration that has received a lot of attention lately.

In the bubble in the late 1990s, there were a number of emotional drivers.  First, there was the lottery effect, whereby many investors were willing to put a small amount of money in Internet stocks knowing that the probability-adjusted returns were not favorable (like the lottery), but were willing to risk a small amount of cash for the possibility of spectacular returns.    Second, bears became discredited by 1998 or 1999.  Those naysayers who decided to not buy stocks like AOL in 1997 or advised their clients to not buy stocks like AOL in 1997 were feeling an incredible amount of pain by 1999 and were at risk of losing their jobs.  By the time the bubble burst, bears were fearful of speaking (leading to both a break down of market diversity and emotional influences).  And additional emotional issues were at play.

So, what emotional issues might be going on now?  Are investors simply too exuberant?  Maybe.  But one could argue that short sellers theoretically should be driving down LinkedIn’s stock if it were clearly overvalued – though smart short sellers should know to short Internet stocks on momentum, not valuation.   Are we seeing the lottery effect again?  Perhaps… maybe some investors look at social media companies like facebook and Twitter gaining value rapidly and see LinkedIn as one of the few publicly traded opportunities to roll the dice with a social media company.  When LinkedIn’s stock was first priced, however, I imagine that institutions drove the pricing of the stock.  And institutional investors would be less likely to be influenced by the lottery effect.

And there are additional emotional considerations.  All of this is to say that I believe one should consider possible emotional issues influencing LinkedIn’s shares, but one should also have a good handle on LinkedIn’s future prospects before dismissing the valuation as absurd.  I think it is healthy to ask if we are seeing bubble-like influences, but I ask that individuals provide some deep analysis before claiming that a bubble is here — analysis that is deeper than simply pointing to the headline of LinkedIn’s 24-times-sales stock price.

The Really Smart Phone

April 25th, 2011

The Wall Street Journal adds a great piece to the mix of articles that have been written recently on behavioral tracking.  This article focuses on data being collected from mobile phones.  A few excerpts:

As a tool for field research, the cellphone is unique. Unlike a conventional land-line telephone, a mobile phone usually is used by only one person, and it stays with that person everywhere, throughout the day. Phone companies routinely track a handset’s location (in part to connect it to the nearest cellphone tower) along with the timing and duration of phone calls and the user’s billing address….

Advances in statistics, psychology and the science of social networks are giving researchers the tools to find patterns of human dynamics too subtle to detect by other means. At Northeastern University in Boston, network physicists discovered just how predictable people could be by studying the travel routines of 100,000 European mobile-phone users…  After analyzing more than 16 million records of call date, time and position, the researchers determined that, taken together, people’s movements appeared to follow a mathematical pattern. The scientists said that, with enough information about past movements, they could forecast someone’s future whereabouts with 93.6% accuracy… The pattern held true whether people stayed close to home or traveled widely, and wasn’t affected by the phone user’s age or gender….

“We can quantify human movement on a scale that wasn’t possible before,” said Nathan Eagle, a research fellow at the Santa Fe Institute in New Mexico who works with 220 mobile-phone companies in 80 countries. “I don’t think anyone has a handle on all the ramifications.” His largest single research data set encompasses 500 million people in Latin America, Africa and Europe.  Among other things, Mr. Eagle has used the data to determine how slums can be a catalyst for a city’s economic vitality. In short, slums provide more opportunities for entrepreneurial activity than previously thought. Slums “are economic springboards,” he said…

Dr. Bollen and his colleagues, for example, found that the millions of Twitter messages sent via mobile phones and computers every day captured swings in national mood that presaged changes in the Dow Jones index up to six days in advance with 87.6% accuracy. The researchers analyzed the emotional content of words used in 9.7 million of the terse 140-character text messages posted by 2.7 million tweeters between March and December 2008. As Twitter goes, so goes the stock market, the scientists found.

Clever MediaMath Advertisement

April 4th, 2011

I love this new advertisement by SJF portfolio company MediaMath.  The team looks quite a bit like the characters on the highly successful show Mad Men.

http://www.madmentomathmen.com/

MedPage and Everyday Health

December 15th, 2010

Congratulations to Bob Stern and all of the other team members at MedPage Today.  The company has been acquired by Everyday Health, Inc., resulting in a successful outcome for all shareholders, including Bob, the investors, and a good number of employees.

MedPage gathers information from conferences, medical journals and others sources.  It then quickly converts that content into news that is written with a medical sophisticated and brevity that is appreciated by busy doctors.  News is distributed by the company’s website, mobile apps and emails.   The MedPage organization draws on a unique combination of deep medical knowledge and news-room-like production capabilities.  We think the staff are some of the best reporters and writers in the medical world, and that belief is supported by a number of industry awards that MedPage has received.

The MedPage story has many interesting elements, but let me highlight just a couple.

First, while MedPage is a sophisticated digital media company, some of its primary competitive advantage reminds me more of a bricks-and-mortar company than an Internet company.  MedPage has put together a talented team and developed a well-oiled news machine that would be difficult for even well capitalized competitors to emulate.  While many investors including me tend to focus on network effects, data assets, and other competitive advantages that are digitally oriented, MedPage built something defensible through superior processes and talented people.  MedPage is a great reminder that competitive advantages for Internet company can be derived in a number of different ways.

Second, MedPage is a fantastic example of a capital-efficient company.  MedPage required only $2.1 million of capital to become profitable and generate a very successful outcome for its founders and investors.  The company’s decision a few years ago to not pursue more capital has paid off very well for its shareholders.

We wish Bob and the rest of the MedPage team well in this next chapter.

@facebook – Ambitious Plans

November 15th, 2010

I just went to eBay to try to buy an early invite to facebook’s new messaging service, referred to as @facebook.com.  There is only one invite being sold, and the current bid is $300.  It will be interesting to see the market for early invitations.

Anyway, I think the most interesting aspect of @facebook is that emails from other email systems would initially go to the “other” box, along with bulk emails, etc.  This seems to be an ambitious plan by facebook to drive everyone to use its messaging system, because the subtext is “If you are not using the facebook platform to message someone’s facebook account, then you might get lost in “other.”

Online-to-Offline Commerce

October 30th, 2010

There’s a tremendous amount of momentum for solutions that drive online-to-offline purchases.   While entrepreneurs have been trying to tap this huge market for years, my sense is that the tipping point for a full-court press was crossed at some point in the last year or two as the buzz around mobile skyrocketed.  It will be interesting to see the solutions that arise.  Here is one good article that came from TechCrunch.

MediaMath Mention

October 26th, 2010

Congratulations to Joe Zawadzki of MediaMath for being cited as one of the most exciting technology executives in New York.