Archive for April, 2008

How To Get Your Own Fanboys

Posted in Uncategorized on April 30, 2008 by themaroon

The last post sparked a wave of insults in my direction. The ratio of comments to readers was ridiculously high. I stumbled across a fanboy hive apparently, and like a bear digging for honey I got swarmed. Thankfully I have thick fur.

It makes me wonder though, what is it Apple does to cultivate that kneejerk response? Some people would argue that they make consistently great products. I personally would say they make consistently good products, and very few great products, and are great at marketing. They belong in the pantheon with Budweiser in that regard. But even if you call their products great, that doesn’t explain it. There are other brands that do this, but almost none achieve fanboyism to any real extent.

Toyota is a good example. Their cars are the best (by every objective measure and most subjective ones) in just about every class they’re in. And their luxury brand, Lexus, makes works of art on wheels. Go read a Lexus forum or just talk to random owners (which is a less self-selecting group) and you’ll see what I mean. They all love their cars. They all will go right back to the dealership when it’s time for the next one.

But even there, you won’t find the almost slavish devotion you do with Apple fanboys. If you make fun of an ES350 on an auto blog, they’ll shrug it off and smile, thinking to themselves “remember that while your Bimmer is in the shop, because it’s going to be there a lot.” They won’t hunt you down on your website and accuse you of wanting to dislike a Lexus before you even bought one. The number 1 item in every “top 10 ways to get your article on the front page of Digg” blog post isn’t “praise Lexus”.

So what does Apple do differently? Their products, to some significant percentage of their user base, aren’t just computers or phones, they’re a lifestyle. Insult the operating system and you insult the owner. The only other two examples I can think of this are sports and religion. That’s how big Apple has become in the minds of many of their users. Not all, and probably not even a majority, especially if you count people who only own an iPod. But enough that you can’t write a blog post that says anything negative about Apple without being accused of trolling. Surely nobody could prefer Windows to OSX and then write about it for any other reason than to gain comments and readership on a personal blog with no advertisements.

Apple has created a club, and the people in it genuinely look down on others for not being a member. Anyone who uses Windows, they believe, is just too dumb or tasteless to know what they’re missing. It couldn’t possibly be that different tools are better for different uses, and that Windows is actually just better for what most people want to do. It’s that they’re inferior, sheep blindly following the flock, and if they’re lucky maybe one day they’ll graduate into paying double for their computers.

I honestly don’t know how they’ve pulled it off. One friend said “design and an unwarranted sense of self importance.” That’s definitely got something to do with it. I think it also has something to do with the audience as well. I’m guessing they appeal to people who don’t generally care for either sports or religion, and maybe everyone just needs something. If you’re not too concerned about the whole Jesus thing, and you don’t really care about the Packers, then Apple’s got a Macbook Pro for you.

But most important, I think, is the club. You have to convince your users that they are superior to your competitors’ for no other reason than the fact that they use your product. The only company other than Apple that I know of that has a significant number of fanboys is Facebook, and they do this as well. Just as one commenter egotistically said that high school students will one day graduate from Myspace to Facebook, your company should position itself as the more mature, distinguished choice.

Facilitate a sense of community within the club too. Convince them that if they buy your Macbook, they’ll be in a small, select group of people for having done so, and that maybe when they walk into a Starbucks and use it to check their email they’ll sit right next to a good looking woman who is also in the club. It’s not as blatant as saying “drink Keystone and hot chicks will want to sleep with you”, but it’s the same principle, and it’s incredibly effective.

It’s worth exploring, because if you have a brand, that vein is clearly worth tapping into. I don’t think it’s anything they’ve accomplished intentionally and I don’t think it is possible to willfully replicate what Apple has done. As Greg McAdoo would say, great surfers don’t create waves, they just ride them. But Apple seems to have genuinely created one. (I guess in the surfer analogy, Apple would be the moon’s gravitational pull.) And you can’t do that purposefully, but it is probably possible to surf the wave. And maybe, if you play your cards right and get incredibly lucky, you’ll make your own.

On the other hand, there is the fact that both companies that do this are in second place. Facebook is catching up (globally at least, not in the market that matters) but Apple is not, and it is perhaps telling that Apple has a much larger number of fanboys. Perhaps the entire strategy falls apart when you are the leader, and Facebook will rely less and less on it as they approach that position. Perhaps Apple will as well if they ever pull it off. It makes sense really. How can you argue that you are above the hoi polloi when you are the common man’s product of choice?

I wonder if Microsoft missed a golden opportunity to turn the tables on them with the Zune. In the mp3 player market, Apple is the 800 lb gorilla. Microsoft dove into the market with the same “products for the masses” attitude that they dive into everything else with. Maybe they could have, instead, positioned themselves as the distinguished product.

It might not have been that hard. The Zune has Wi-Fi and at the time, the iPod didn’t. They could have made it able to receive internet radio stations. They could have tried to integrate Sirius or XM that way too, I think both broadcast through the net, or maybe set up deals with other great content providers like CNN or NPR or The New York Times.

And most importantly they could have attacked the iPod at its weakest point: DRM. The iPod is a fantastic device as long as the following two things are not true:

1. Your media collection is not larger than the iPod’s storage, at which point choosing which songs to put on the device is a nightmare. That one’s not a problem for many people, so there’s not a ton of room to attack it there.

2. You start running into DRM headaches when buying new iPods or computers, or reinstalling OSes. Or you want to do anything with your music other than put it on an iPod or listen to it in iTunes. This is inevitable.

Microsoft should have made their Zune store entirely DRM free. In fact, they should do this now, while it’s still a selling point, and not allow any form of DRM on their devices. This is the one gripe that you find most frequently if you search for “iPod sucks”. Microsoft could have said something to the effect of “You’re not a kid. You don’t need anyone telling you what to do with your music.”

Microsoft is so used to being the “common man” company, the Miller Genuine Draft, and being assaulted by the Apples of the world that they just assume that role even when they have a chance to be Sam Adams. They do the same thing with the Xbox 360, touting how much cheaper it is than the PS3. One of their higher ups even said you could buy a Wii and an Xbox for less than a Playstation. Why not, instead, tell people that the Xbox is actually the better product?

So I think how to generate that fanboy reflex is worth thinking about, especially when you’re not the market leader. It’s something that I haven’t given enough thought to lately, and probably should.

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My Mac Mini

Posted in Computers on April 28, 2008 by themaroon

A few months back I broke down and bought a Mac Mini. My cofounders all use TextMate (Mac only, unfortunately) for coding in, and after watching them it became apparent that if I want to mess around with Rails, OSX is pretty much the only way to go. I’ve also been curious for a while about OSX, though I was a little hesitant about Jaguar, which had just dropped at the time, given that even Apple fanboys were complaining about it incessantly. This is a group of people who would normally shrug it off if Steve Jobs poked them eye with a rusty fork and just say something bad about Microsoft like “well, Outlook 2007 uses the Word HTML rendering engine.” So I figured if they were complaining, there must really be something wrong.

But I was told I could easily downgrade if necessary (in fact, the mini came with the previous release installed and a Leopard CD for upgrading) so I headed on down to the Apple store. That experience was almost enough to make me turn away. A girl with some sort of mullethawk and a tattoo creeping up her neck asked me if I needed help and I almost said “no, but you do.”

After telling them what I was there to purchase, I was directed to the Genius Bar. No joke, they really have something there called the Genius Bar. Luckily for me I hadn’t eaten recently. I don’t think I can endure that much pretentiousness on a full stomach without losing my lunch.

I wasn’t really sure what I’d find there. I figured maybe some physicists sipping martinis and working on their doctoral thesis on string theory. Or maybe Dawkins having a Tom Collins and writing his next treatise on intelligent design. Instead what I found was some douchey twenty-somethings who get paid $9 an hour to help people pick out iPods. Genius Bar? Yeah, you’re fucking Einsteins. “Excuse me Mr. Heisenberg, does this mp3 player have a replaceable battery?”

The “genius” at said “bar” then proceeded to try to sell me so many warranties and miscellaneous accessories with such a high pressure sales pitch that I started to wonder if I hadn’t just accidentally purchased a Ford Focus. I sat there scratching my head, waiting for the manager to come over and negotiate the price with me, and debated whether or not I was willing to go more than 5 percent over invoice or walk out and test drive a Gateway instead.

So I left the Apple store hoping the user experience for the computer would be better. Setting it up definitely was. The Mini is so small and unobtrusive that it’s easy to find room for it on any desk. The power brick is huge, which I found odd since the brick for a Macbook Pro is much smaller, though it seems as if it must use more power. But you can stash it on the floor, so who really cares? Best of all, it’s dead silent, except when there’s a CD or DVD in the drive, and even then it’s not too bad.

It was easy enough to get it started and set up. I played around happily with some of the included apps like iPhoto and iChat, which are much nicer than the crap Windows OEMs typically bloat their installations with, until I ran into my first snag.

Installing programs on OSX is extremely counterintuitive and labor intensive. The whole process is very poorly designed. First you download a dmg file which, when clicked, creates a virtual drive. On the virtual drive is the program, which you then have to drag into your Applications folder. Then you have to unmount the virtual drive and delete the dmg file from your desktop. It sounds laborious here, but it’s far worse when you have no idea what’s going on and are used to Windows, where you simply click the file you downloaded and then click yes or no to answer a question or two.

There’s no way that anyone could guess this procedure, and nobody reads manuals. I thought I had installed Firefox but found out the next day that I had only ran it from its virtual drive. Different installers seem to do different amounts of this work for you (some pop up an easy little window for dragging) but none seem to do the job completely. It’s always far more work/confusion than installing any Windows program has been since 1992. For all everyone hypes up the intuitiveness and ease of use of the Mac OS, it seems that one of the most basic and perhaps important operations one performs is extremely and unnecessarily complex.

Also the fonts are much different than windows, and frankly I don’t care for them. I may get used to them at some point. I doubt it though. The blurriness is disconcerting. My understanding of why they are that way is that Windows, which I’m used to, forces the fonts to conform to pixels on the monitor, making them less pretty but never blurry. Mac remains as true to the font as possible.

Having done the vast majority of my reading over the last 10 years on a computer rather than a magazine or book, I prefer Windows fonts. I really don’t give a flying fuck about what the letters would look like if they were in a newspaper, I only care what they look like on my screen. It’s 2008 and I think we can safely say it’s time to eradicate all fonts that weren’t designed specifically for monitors. Using fonts designed for printing presses on a monitor is like saying “yeah those tires on your car really have no traction and burst every 2,000 miles, but if you put them on a Conestoga wagon, wow would you be impressed.”

Another major gripe I have is window maximizing. When I click that button on any program on Windows, it takes up the whole screen. This is invaluable for people like me who use dual monitors (which, by the way, you shouldn’t even bother attempting on a Mac. My cofounder has to close the lid when he hooks his MBP up to a monitor). On a Mac you click the maximize button and anything can happen. From what I understand, OSX leaves it to the application developer to decide, which means that sometimes it maximizes vertically, sometimes horizontally, and sometimes it rotates 90 degrees to the left and sings La Cucaracha. It’s a gamble, but it almost never does what you’d want or expect it to.

Other than those things though, I like the OS. There are a lot of nice little things. Icons are easily resizable which is nice when you’re using a big monitor at a high resolution. Uninstalling programs is as easy as installing is hard. You just delete it from your Applications folder. No registry or dll concerns, which saves you from having to reinstall your OS as frequently as you might with Windows.

Driver support isn’t Windows, of course, but it is better than I thought it would be. Apple seems to have made their own driver for my Logitech DiNovo Edge, which is awesome. Inability to use it probably would have meant me returning the Mac or selling it on eBay.

There are some pretty sweet third party apps as well. Adium is a pretty awesome chat client. I use Miranda on Windows, and after a few plugins and hours of configuration I probably still prefer it, but Adium is almost as good right out of the box. The included office productivity programs are atrocious, especially compared to Word/Outlook 2007, so I won’t be using them, but Microsoft does make Mac products which I hear, with the exception of Entourage (email) are almost as good as the real thing. I wasn’t planning on doing more than coding and maybe web surfing on that PC anyway. Safari seems nice enough (certainly far better than IE6 or 7) but I prefer browsers that crash every 15 minutes, so I installed Firefox.

I’ve had the machine crash a couple times, so I can’t say much for its touted stability. It doesn’t seem as reliable as Windows is these days, but at least Apple replaced the dreaded blue screen with something much more pleasant. I didn’t even know it was crashing until my cofounder told me, and that has to be worth something.

There’s lots of little stuff that I can see why programmers love. My cofounders liken it to “Linux but with a good user interface”. Hotkeys seem to be more consistent from one application to another, and I probably generally prefer doing stuff with the Apple key to the Ctrl key. And TextMate is pretty awesome, as is Quicksilver and a few more geek tools I played around with.

But for the most part, I just don’t see it being as user friendly as Windows for Joe Sixpack. Basic operations like program installation and window maximizing (and what the hell is a keychain?) are all so convoluted and counter-intuitive that it just isn’t worth it. So my final verdict is pretty much that if you know what a command line is and what to do with one, buy a Mac. Otherwise, you’ll be much happier with Windows.

33 Comments »

Tech World, I Am Your Master

Posted in Startup on April 24, 2008 by themaroon

Wow. Apparently the folks at Twitter read this blog. (Who doesn’t, right? I’m like GigaOm, but with copy editing.) Within hours of my last post, Twitter got rid of the miserable excuse for a Chief Architect, Blaine Cook, who was to blame for all of their problems. (Well, at least according to TechCrunch.)

I had no idea that I had such a tremendous amount of influence in the web community. Scores of people complain every day about Twitter’s abysmal performance in blogs or on Facebook (or even on Twitter) and presumably many times more do so via emails to support. They all go ignored. I post “What is that site, 20 lines of code? Fix it already,” and almost instantaneously the wheels start turning.

What should I use my God-like powers of blogging manipulation for next? I’m thinking of maybe convincing Yahoo to just sell themselves to MSFT for $8.25 a share so my RSS feeds will be reduced by 10 per day.

Any suggestions? Power like this must be wielded carefully.

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Oblivious to Obvious (Corp)

Posted in Startup on April 23, 2008 by themaroon

One thing that always cracks me up is the disconnect between the tech world and the other 99.9% of the country. My favorite example of this is Twitter. All you hear inside the black box is how great Twitter is. People in The Valley actually consider it a source of news. If you consider “OMG, Charlton Heston just died!” or “Going to the gym.” news, then yeah, it’s the new CNN. But to anyone who doesn’t generally breathe through their mouth it’s just a bunch of Facebook status updates.

Also, that’s ignoring the fact that any time something newsworthy does happen, Twitter just stops working. I’m mystified as to what the folks over there do all day. I’ve been using that site for almost a year now, and if they’ve launched one new feature in that time, I couldn’t tell you what it is. And yet it still goes down whenever Barack Obama sneezes.

What is that site, 20 lines of code? Fix it already.

Mike Arrington finds Twitter indispensable, and I can see that given his job. But the mainstream is still oblivious, and it’s going to stay that way. If you want to know why, try explaining Twitter to your dad. Hell, try explaining it to your wife or girlfriend. Oh wait, I forgot, you’re in the tech industry.

8 Comments »

The Anti-Social Graph

Posted in Me Thinking So You Don't Have To on April 22, 2008 by themaroon

Interesting post on Facebook by Paul Buchheit. I have to say though, I disagree with most of it.

It’s very fashionable to declare that Facebook is an over-hyped fad and will never make any real money, certainly not enough to justify it’s insane $15 billion dollar valuation.

That’s true, but it’s even more fashionable (at least in tech circles) to say that Facebook is the next Google, or that Facebook is building the social graph which is worth a lot for some unknown reason and they’ll monetize it later. In fact, Facebook is so talked about that the only unfashionable position I can think of is that it’s actually run by extra-terrestrials who are using the social graph to infiltrate our society with their humanoid robots, of which Zuckerbot3000 was the prototype. Come to think of it, that’s my new official stance on the matter.

I get a lot of messages on Facebook, but unlike email, I have yet to receive any spam. That’s pretty remarkable.

Really? Because ever since they launched their platform, and then their groups, I’ve gotten at least 5 pieces of what I consider spam a day. And everyone I know who uses the site has the same complaint. They aren’t messages in my inbox I suppose, but they’re still spam. And I get more of it from Facebook than from email that gets through my filters (about one a day, on average) which is even more impressive given that I have three addresses written publicly on the web for any spambot to harvest.

Worse yet, I greatly prefer the email spam. I see a subject line of “HAVE tHE MORE ENERGIZES FOR YOU PEN1S!!!” and I click one button and it’s gone. I don’t have to think about it, other than maybe to wonder how the hell that got through a filter. But I see “this guy you met one time and who is a friend of your friend (or worse yet, is dating them) wants to be your friend” and I have to think about it. “I don’t want to friend this guy, but we have close mutual friends, and I might run into him somewhere. That could get awkward. Maybe I better just limited profile him, then go turn down the dial so I don’t have to see his updates.”

Or maybe you have that one friend who is a really nice person, maybe a friend of whoever you’re dating/married to, who keeps sending you drinks and fish and hugs and everything else. You don’t want to be mean to her, but you damn sure don’t want to install every variant of the poke ever made. Will she be offended if you ignore it? That certainly happens.

Or what about the friend who asks you to join some group for the business he owns/is promoting? You want to help him, but is being one more fan on a list really going to do anything for his chances of success? Are you just going to get spammed all to hell with group messages when you do? Will he be pissed at you if you don’t?

I use email all day every day, and log into Facebook maybe 2 times a week. Yet I’d say Facebook spam annoys me at least 10x as much as email in total, and it does so because I know the people sending it. It’s the fact that I can verify their identity that makes it such a pain. I greatly prefer random strangers from the Third World trying to sell me Viagra and almost always ending up in my junk folder to worrying over who I will offend if I don’t become a vampire.

Perhaps a people directory doesn’t seem terribly valuable, but if you can’t imagine how to make money from knowing everyone’s identity and trust networks, then you aren’t being very imaginative.

Really? Then I guess I’m not very imaginative, nor are the tens of thousands of app developers, because I don’t see anything taking significant advantage of this. All I see are things that are dopey and maybe fun (pokes, games, etc.) depending on your perspective, or things that just aren’t very useful (like classifieds/ auctions) relative to the open market and don’t seem to gain much traction because of it.

The guys at Facebook apparently aren’t very imaginative either, because all I see are ads for t-shirts and dating. I’m seeing social networks attempt to find some great ways to monetize (music for instance might work) but none that really involve the social graph.

One of the best examples of this problem on the internet is eBay… With reliable identity information, most of these fraud schemes would become impractical, which would obviously be a real advantage for an eBay competitor.

I’m lost as to how Facebook provides reliable identity information. I’ve seen impostors on there plenty of times. I was a friend of a friend of a fake Steve Wozniak for months. Might still be.

For this entry I nearly set up a Paul Graham Facebook account and friended everyone in YC just to see what would happen. I didn’t because he might not like that and I didn’t want to risk upsetting him, but I’d be willing to bet I could have gotten to over 50 friends in a day. And I realize he is a special case, but I think the principle applies to anyone.

If you set up a fake account and just start friending people at random, surprisingly many will accept. I know, I’ve done it. And then you’re a friend of a friend to anyone on their buddy list. Is that any harder to abuse than eBay, where one must somehow fake their identity by using a stolen credit card or PayPal account? It seems much easier to me.

Also, even if it were a perfect form of identity verification, eBay works solely because of its lack thereof. Everybody who wants to buy something from an online auction shops there because everybody who wants to sell something in an online auction sells there. It functions because of its enormity, and its size dictates that not everyone can be accounted for through personal relationships.

And fraud really doesn’t matter much at all. They have a reputation system that is certainly not perfect, but is quite helpful. And while scams do occur on eBay, they’re not that high a percentage of total transactions, and even when they do, you can generally just get your money bank from your credit card issuer or PayPal. I’ve been using that site for a very long time and have been burned twice, but I just got my money back anyway. I went on shopping as before.

But imagine an eBay that consists only of people you know. What would be the point? Even if you know 200 or 300 people, good luck buying that Wii for Christmas. eBay works because total strangers can buy or sell to or from each other. It’s a market, and a giant one, so though I may not know how much I’ll have to pay for it, I know I’m going to be able to get that Nintendo there.

If you’re an average person, who has, let’s say, 100 friends, and they each have 100 friends, that’s still only slightly more than 10k people in your extended network. How many of them could possibly be selling Wiis? And we can’t go any further degrees of separation without ruining the whole identity verification thing that the social graph is predicated upon. Contrast 10k people that to the millions of buyers/sellers on eBay and it’s still a no-brainer as to where you’ll find what you want at a fair market price.

What could work is actual, direct, human involvement by the users. In fact, it’s already helping in a very limited form — Wikipedia pages are written and edited by random people on the internet and they frequently occupy the top spots on Google (and I always click on them).

I’m trying to imagine a Wikipedia edited only by my friends. It would have very detailed entries on a lot of tech startups and every form of gambling known to man. But search for Louis XIV and it would come up blank. Or try to find the episode list for Family Guy. (Hilariously, since I download the few TV shows that I watch, that is probably my most common use for Wikipedia. It’s the best TV Guide ever made.)

Just today I was reading fantastic articles on Operation Downfall and the Pacific Theatre of WWII. How good would those articles be if the editors consisted only of people whose identity I could verify? Would they even exist? Seems unlikely.

And I think that most of the applications people hypothesize will be built around the social graph just aren’t that valuable for the same reason. What makes Wikipedia, eBay, and the rest of the internet so wonderful is that hundreds of millions of very different people that you don’t know use it. The people you know who use Facebook and are your friend there are too few and too similar to you to be of much value, and always will be.

It comes down to a saying I’ve heard a lot lately, which I’ll bend to fit here. “More data beats better algorithms.” Getting your restaurant reviews from trusted friends might be a better algorithm than getting them from random web surfers. But I have a few hundred friends, and there are a few hundred million random web surfers, so there are many orders of magnitude more data on Yelp than will ever be on my Facebook friend list.

And that’s why I don’t believe in the social graph. It will rarely be of any use when compared to the good old internet. I’ll stick with the anti-social graph, the hundreds of millions of randomly scattered data points on which search engines, eBay, Wikipedia, and just about everything else we’ve come to know and love in the Web 2.0 era are based.

10 Comments »

Startup School 2008

Posted in Startup on April 21, 2008 by themaroon

Startup School ’08 was a blast. I had been out a little late the night before at the Y Combinator party in Mountain View and hadn’t slept properly due to flying in, so I missed the first few speakers. I arrived just in time to catch Greg McAdoo. His speech was fairly interesting, and familiar if you’ve seen him speak at Y C events before. He sure does love surfing analogies, but they are apt, and it was great to get Sequoia’s perspective on what makes a big success. I was taken aback by their statistics. He said they’ve funded 700+ companies over the years with 150+ acquisitions and 150+ IPOs. That’s a hell of a success rate, and surprised me coming from even them.

One of his slides mentioned things Sequoia likes to invest in, and browntech was on the list. None of us knew what that was. I suggested maybe it meant tech in India. Either way, it became the running joke of the day. I even asked Mike Arrington what it was, and he didn’t seem to know. If he doesn’t, who would? (My actual guess was water purification, and some people said oil/chemical cleanup. A cursory Google didn’t answer it, so maybe I’ll email McAdoo and find out.)

David Heinemeier Hansson‘s speech might have been the best, and was certainly the most fun. He took a few jabs at the entire Silicon Valley mindset. Also, he sounded like Kermit the Frog. During the Q&A I wanted to ask him to sing It’s Not Easy Being Green. “Hi Mr. Hanson. Loved your talk. Do you think it could be nicer being red, or yellow, or gold?”

Also I wanted to ask him in which universe 500 x $40 = $125,000 (as one of his slides said, and he repeated aloud) because I want to move there. Apparently all startup revenues are multiplied by 6.

Jeff Bezos’s speech was the one I had anticipated the most, but was probably the least interesting. The buzz has been disappointment all around. It was basically a commercial for AWS, which everyone in attendance either used or knew about and had decided not to use due to whatever limitation. It reminded me of back when I was a kid and we’d order WrestleMania on pay per view an hour before it started, and the whole time before it began all they played was one commercial after another for WrestleMania. You’ve already sold us, give us something more.

It was also humorous how many handlers the guy had. There must have been 10 of them. I’m pretty sure Bill Clinton was less well-guarded when I saw him speak. I wonder if all of those people have some important function, or if it’s just a very nerdy version of Entourage. I guess the guy who had to answer the AWS questions Bezos couldn’t must be his Turtle.

He did have one analogy I appreciated very much though. He pointed out that a century or two ago, if you wanted to run a factory on electricity you had to generate it yourself. Nowadays making your own electricity would be ludicrous. He likened cloud computing to that, which I felt was pretty apropos. Developers don’t want to be sysadmins. They want to make websites and let someone else worry about generating the “electricity”. That’s the best non-technical way I’ve ever heard to explain what cloud computing is and why it is so obviously the future.

Mike Arrington’s presentation was better than I expected. He basically talked about the startup industry from the media’s perspective, and gave a few tips on how to interact with them. I actually found that helpful. Now I just have to figure out how to spin a story such that DeadSpin would care about it.

Marc Andreesen’s segment definitely had some gems in it too. He gave one piece of advice from one of my favorite recent reads, Born Standing Up, which is to focus on being so good that people can’t ignore you. Accomplish that and all else will fall in line. Words to live by.

He also spoke about a lot of the things that make his blog so enjoyable. How people are so often fooled by randomness, especially in financial endeavors like startups or investing. Or how economic forecasters basically don’t know anything. Marc clearly understands probability and seems genuinely humble about his success because of that. I suppose it would be hard to be anything but when you truly understand the way those things work.

Between the Y Combinator event the night before and the after-party at Paul Graham’s house in the hills, I met lots of Hacker News guys and a lot of people who read this here blog occasionally. And it was nice to run into so many alumni again too. The list is now around 200, so it’s getting harder and harder to keep them all straight. I’m anxious to see how much the list grows by this summer as well.

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Why VCs Aren't More Brave

Posted in Startup on April 16, 2008 by themaroon

There’s been a lot of discussion about Paul Graham’s latest essay, Why There Aren’t More Googles. I’ve been thinking a lot about something similar to what he said lately on the investing front, but I’ll save that for its own post. I’ll toss in my random two cents on a couple other topics though.

As for the titular question, it’s hard to disagree with anything he said. But I think it is often left out that Google is a company with, even now, a $140 billion market cap (previously over $225b at the peak) and companies of that size come about rather infrequently. Even the top company on the Fortune 500 (which I believe goes by revenue rather than market cap), Wal-Mart, is only at $225b. To put it in perspective, a couple weeks ago when their market cap was $127b, they were the 24th largest company in the world.

So part of the reason there hasn’t been a next Google is just the fact that companies, for a million economic reasons, rarely get that big. So asking why there hasn’t been another Google is like asking why there hasn’t been another Wal-Mart. It just doesn’t happen frequently. Especially on the web, which is still only responsible for a small fraction of overall commerce.

PG also mentions that VCs are not bold anymore. I think that’s certainly true in general (and I wish I had read that article before seeking funding) but it’s worth noting that there are a few specific areas where VC’s are surprisingly courageous, generally because they’ve succeeded there before. Take, for example, copyright infringement. VCs seem to love nothing better than a startup that infringes copyrights. Their attitude is “do it, make it popular, deal with the recording industry later”. I think this stems from YouTube, though probably began earlier than that. They seem to recognize that helping people give away intellectual property for free, generally illegally, is one of the easiest ways to grow traffic. And the recording industry is just so beaten down that it seems to not be too difficult to manage them later.

The most interesting part to me was when PG asked “Why are VCs so conservative?” The proper answer to any question as to why people behave in a certain manner is almost always “because they are incented to”. It’s not that they are stupid or irrational, or even just missing something. It’s that the rules of the game make them. So look at a VC’s incentives and you’ll see why they behave the way they do.

VCs get generally get paid in two ways. One is a percentage of the profits their funds generate. This is called a carry, and a typical amount might be 20%. They also get a percentage of assets under management each year as a fee, much like a mutual or hedge fund. 2% might be a typical number for that.

Here’s an explanation from a blog I found:

“Let’s walk through a simple example.  Let’s say there’s a $150 million fund and the VCs are getting 2% in annual fees and 20% in carried interest.  Then, the firm takes in $3.0 million in annual revenue.  If the fund returns 2x the capital, or $300 million, over the 10-year life of the fund, then $150 million is considered capital gains and the VCs get 20% of that amount, or $30 million, to be divided up between the partners according to who has how much of the carried interest.”

So what we see is that this hypothetic fund, which raised $150 million (not a large amount for a VC fund either) made $30 million from the carry and $30 million from the management fee. And that’s assuming they return 2x capital, which is just over 7% annually and way above average for a VC fund. Supposedly the majority of VC funds lose money, meaning that over half the time, they earn the annual fees alone.

So I can’t say for sure what percentage of total VC firm profits come from the annual fees versus the carry, but it’s big. And as that ratio grows, so does the firm’s incentive to raise (and therefore deploy) large amounts of money. And that means they have to sell themselves.

We entrepreneurs look at our end of the dance and view ourselves as the salesman and VCs as the prospective customers we’re pitching to. But VCs, of course, have to turn right back around and sell themselves to their investors. They raise hundreds of millions of dollars themselves every time they start a new fund.

I suspect that’s why the established firms, the 25% that are doing well, are variance averse. They know that in a few years they’ll be back selling again. And telling the guys who run the pension funds and endowments they rely on “yeah, we tried this new way of doing things and that’s why our last fund tanked” might be fatal. They’re not comfortable taking the increased variance that comes from funding companies earlier and doing less due diligence, because it threatens their ability to keep raising funds in the future.

(Interestingly enough, if it weren’t for the sales aspect, their best long term strategy would be to pursue a higher risk, higher reward course of action. This is not only because of the general increase in EV, but also because they make the same if a fund loses 1% as they do if it loses 100%. They make the annual fee and nothing more. But they make more if the fund returns 100% than if it returns 1%. So a higher standard deviation benefits them because they gain more when their fund over-performs, but are penalized less when it underperforms.)

Also, a VC firm isn’t a spreadsheet. It’s an organization of human partners who all benefit directly from their firm’s profit. The carry and annual fees go into their pockets. It’s been shown over and over that in what are essentially gambling situations, people will take the route with less risk, even though the expectation is lower, especially when large sums are on the line. Most people would take a guaranteed $1 million over a coin flip that gave them a 50% shot at $3 million and a 50% shot at $0, even though the coin flip has a 50% higher expectation. And they’d be correct to, because the difference between having $0 and $1 million in the bank makes a great impact on their lives, whereas the difference between $1 million and $1.5 is rather slim.

So the lower-tier VC firms (which are the majority of them) make little or no money from the carry, meaning their incentive is to raise and deploy large amounts of money and collect as much as they can in management fees. One would assume they use tricks similar to those employed by the mutual fund industry to keep investors coming back even though the average grossly underperforms the market. And the Sequoias of the world, that actually do return a good rate, have a relatively low risk method that’s making the partners millions, and therefore have no incentive to rock the boat.

My guess is that PG should try selling his approach to mid-tier VC firms rather than Sequoia. Ones that aren’t on the gravy train, but are still in the black and have more incentive to try to increase the carry. I don’t really even know if such firms exist, as I don’t have much data. Perhaps for various reasons (collusion might be one) fund results don’t follow a normal curve and all VCs either generate a large return or a negative one.

The only way I can think to fix it would be to move to an all carry profit model. That, I assume, is what Y Combinator and most angels effectively use, since it is their own money on the line. They are therefore incented to be more brave. Perhaps in the early days, before the top tier firms had investors lining up to hand them money, VCs were more brave themselves, hoping to hit a few big payouts to make selling much easier in the future.

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Phase 3: Profit

Posted in tech on April 11, 2008 by themaroon

It’s occurred to me since the last post that the smartest thing Facebook has ever done is popularize the term “social graph”. Not because I like the term (I don’t) but because it alone is the reason they have a $15 billion valuation.

Before that, social networks were just entertainment, and no entertainment site could be worth that massive an amount. YouTube sold for about 1/10th of Facebook’s current valuation, and had better traffic (still does in the US) and the ability to sell video adds, which most people thought (and many still do) would be more valuable. Unlike Facebook, YouTube was also the clear leader in its space, rather than a somewhat distant second. And MySpace, which still has over twice the traffic that Facebook has here (though only a slight lead globally) sold for only a fraction of what YouTube did.

For Facebook to get a vertigo-inducing valuation, they had to convince people that they were a lot more than just entertainment. They had to convince them that they were serious business, “the next Google” even, a utility that people would be unable to live without. So instead of being just another aggregator of tools people already have, they became holders of the “social graph”. No longer are they just flickr+email+evite rolled into one, they’re keepers of the connections that bind humans together.

And they have no idea how they’re going to monetize that. They’ve clearly been flailing around so far, trying to do so but failing miserably. In fact, just about every attempt they’ve made has merely angered customers. But that doesn’t matter, they just have to convince people they own the social graph. And it’s a graph, so it must be important right? If it were unimportant, it might be a social pie chart at best. And if they own something important, and they are smart, they’ll figure out a way to justify valuations roughly equal to Ford Motors on the following principle:

(note the tiny Zuckerberg gnome)

Unfortunately they’re having a very hard time with Phase 2. For one, lots of other people already have a better social graph than they do. My Gmail contacts and my Aim buddy list are both more accurate depictions of my true connections. My cell phone’s history might be the best of all. And more importantly, they’re all on open platforms rather than a spammy walled garden.

And the fact that the social graph exists in so many places, and will always be better there (nearly everyone has a cell phone, only 1/10th of people have a Facebook account) makes it hard for me to believe Facebook can ever do well enough to justify $15 billion.

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Facebook Is Not Really That Special

Posted in tech on April 10, 2008 by themaroon

Sometimes I think Silicon Valley believes its own hype just a bit too much. People with straight faces predict $2,000 shares of Google in the not too distant future, OSX overtaking Windows, and, most commonly, Facebook taking over the internet. “The next Google” is tossed about lightly in regard to them.

Maybe I’m crazy, but I just don’t see it, and here’s why. When I first used Google, I had this sort of aha moment. I saw a glimpse of the future. I saw a world with extremely large quantities of information available 24/7. And, for the first time, they were easy to find. Of course that was before blogs and Wikipedia and cell phones with half-decent browsers, so if anything, I think I underestimated the impact it would have. But I knew it would be huge. I knew Google was, in a way, similar to Yahoo (which everyone had been using up until then) but took one very critical step further. It was clearly a paradigm shift, the difference between a propeller and a jet engine.

I’m not alone in that. Everyone who used Google a couple times never went back. And I never would have guessed at some of the other game changing products they’d introduce (AdSense and Maps being two of the biggest). But, from the very first search I got a glimpse of the future, and it was good. I didn’t know whether someone else would deliver it better than Google, or if they’d be bought by Yahoo, and I certainly could have never seen coming the monster that is GOOG, but I saw information marching inexorably forward.

I’ve gotten that a few other times. Napster for instance. I used that back when only a few thousand people did, but immediately discovered that I could download any song I wanted for free in a couple minutes. It was immediately apparent that the music industry’s golden seal had been broken, and there would be no more holding it in, no matter how much the record companies shook their collective leg.

I can think of a few others. Using Wi-Fi at my college’s library. Surfing the web on my Treo 4 years ago. That mobile internet still hasn’t fully materialized, but nobody doubts that it’s coming. Movable Type (the software, not the centuries-old invention).

But when I look at Facebook or MySpace, I don’t see that. I see a nifty little utility that, at its best, makes it easier for me to keep in contact with people I know and like, but don’t really care about enough to just hang out with, IM, or call. Maybe I can play some games, or send someone a tropical fish for their tank. Or I could reconnect with someone I haven’t spoken to since high school, but then, as one such person told me, if I really cared, I wouldn’t have lost that connection to begin with. It’s not as if it were ever hard for people my age to do so.

And with social networking, that’s it. That’s all that’s there. It’s a glorified Classmates.com. For all the hype about the “social graph” that’s the most it will ever amount to because there’s nothing social about the internet. The internet is the most anti-social invention of all time.

Socializing is all about real world interaction. The internet is all about doing things at home in your boxers. Humans are hard wired a certain way, and social interaction just can’t be represented in bits and bytes. It’s analog. It’s visual and auditory, and has to be both to truly function. Even phone calls, which are still far more social than the internet, pale in comparison to real live interaction. If they were not, long distance relationships would have a better track record.

I do think the internet can serve to augment social relationships, and Facebook is very good at that. But that’s not a new paradigm. It’s just a slightly better version of the tools we already had. And it never will be anything more.

I think in all reality, and my distaste for hype aside, Facebook is pretty good at what it does. But what it does just isn’t important. What Google does is extremely important. Google is the biggest advance in information distribution since the printing press. Facebook is a convenient way for you and a friend to decide which bar to go to tonight.

And nobody has yet given me a single example of anything massively important Facebook might have in store. “Oh, they’ll have chat soon!” Hooray, now I have an 8th way to contact every single person in my buddy list there. Not to mention that anyone I would want to chat in real time with either has IM (and lists their screen name on their Facebook profile) or isn’t logged on to Facebook more than once in a blue moon anyway.

“Oh, they’ll have social search.” What the hell is that? It’s like Google I guess, but instead of searching everything put online by the 1 billion people who use the internet, it searches the status updates of your 50 Facebook friends. At best they’ll have some Yelp-like functionality, minus the wisdom of the crowds that makes Yelp useful.

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