MattMaroon.com

I have to say that after being an app developer on Facebook for a while, I’m gaining an appreciation for them as a company. While I still don’t see them as “the next Google” as everyone loves to call them, I admire their boldness.

Reading this article about Google’s Visual Design lead, who is moving on to Twitter, and the ensuing conversation about it over on Hacker News, made me realize how fearful many successful businesses are of shaking things up. One commenter on HN said:

When I started at Google Nov. ’06 Doug had created some awesome Gmail mockups that really took the design and functionality above and beyond and — having heard about how ground up Goog worked — I was thinking those designs would be acted upon and built in the coming months and I was excited about using that Gmail.

When I left end of last year, the mockups were still being iterated on, and the only thing that had been built based on those mockups were the buttons. Gmail’s just too big, as are search and ads, and UX is too disorganized and outnumbered to have any say.

I think a lot of people fall into this trap. I know I have. When you have a lot of customers (and we’ve got a fraction of a percent of the number Facebook does) you realize quickly that any change you make is going to be met with a lot of complaints, and the bigger the change, the more vocal they’ll be. It creates a serious form inertia and scares you into leaving well enough alone.

The problem is the conflict between what a business would define as an improvement and what its customers would. While all business share the same scoreboard, money, customers don’t really care about that. They want a site that fits certain needs, and once they find one, changes are often unwelcome. Changes that give your site a broader appeal often make it less appealing to the early adopters. Even if they will come to like it in time, their aversion to change in a service they already love can often cause a near-term firestorm.

Given all that, I think relative to a lot of other companies, Facebook has been pretty ballsy. Not just in their famously spurning large acquisition offers, but also in their willingness to push improvements that they feel will benefit them in the long run but that cause them a lot of grief in the short term.

As with any form of gambling, sometimes one doesn’t work out. Beacon was a pretty spectacular example of that. I’m still not sure how they thought that one would work. My 11 year old cousin would have realized that idea was idiotic. But they at least dealt with that well and it’s now largely forgotten.

And while there have been a few misfires, there’ve been a few successes as well. When they introduced the mini-feed and some other forms of public information, lots of current customers were pissed and there was a very big backlash. They liked the site how it was just fine, and we’re a little nervous about the changes. But Facebook did a pretty good job of allowing people to set privacy settings, and of configuring the default ones, and then of explaining it to customers (something they should have done right off the bat) and in time people grew to love it. Now that sort of stuff is now what people visit the site for, it’s the prime reason for the tremendous engagement they see. Without those features they’d be just another Myspace wannabe.

The new home page (and the new Facebook in general) are examples of big gambles too, and while the smoke hasn’t entirely cleared yet, I think they’re going to be long-term successes. While as an app developer I absolutely despise the new home page (which removes them from the right side, and seems to have caused an overall traffic dip for games on the platform) and the new Facebook (which has had an even more deleterious effect on apps in general) as a Facebook user I vastly prefer both.

But whether or not they work out in the end, I’m impressed that they even tried it. It’s hard making bold changes to an application that has 150 million users and is gaining hundreds of thousands of new ones each day. It’s hard to not roll it back immediately when the complaints start flooding in. But in the long run, it’s that sort of gamble that separates the Facebooks from the Orkuts. It’s easy for a new service like Gmail to boldly go where no web-based email has gone before, it’s hard for the Gmail that’s been around for 5 years and is the third or fourth largest service (and possibly the fastest growing) to make sweeping changes.

And I have to say that on the whole, I’m inspired by it. It’s something I think we need to do more of at Blue Frog Gaming. We often find ourselves, when evaluating a change, saying things like “we’re going to get flooded with complaints over that one” or “the customers who bought hundreds of dollars worth of commissioner points are going to be pissed”. But we can’t let that stop us from improving. We have to do what is best for our games in the long term, and if that means some unhappy customers in the short run, well, that’s what economists call creative destruction.

A lot of people mistook my last post to mean nothing on the internet will ever be free anymore. Despite the “High volume, ad-supported web businesses will always exist, because in certain areas (search for instance) they just make sense” disclaimer at the end, I think I did a poor job setting the tone. My assertion wasn’t that they are or will soon be dead, just that they’re going to be a lot less common.

Paul Graham said:

There are some startups where you want to charge users, and some that you want to be free and just go for growth, and which strategy you use depends on the nature of the startup, not the state of the economy.
Thinking that every startup has to start charging its users now because the economy is bad is just as mistaken as thinking a few years ago that no startup had to charge its users because the economy was good.

I don’t disagree with that at all. I just think that for a long time most startups that should have been charging at least some of their users were afraid to. They’ve been erring on the side of free in very large numbers. They’ve been erring in that direction because it worked, and it worked because of a good economy, or at least it will cease to work for a time because of a bad one.

And just as it maybe was too far to one extreme in a good economy, it will probably shift too far to the other in the bad one. It will be mistaken in many cases perhaps, but on the balance it will be closer to correct because most startups now don’t charge anyone for anything, when in reality most startups (but not all) probably should.

Moreover, at least based on my own experience, founders choose their startup from a pool of ideas. I realize that probably not everyone is as creative as me, but I come up with at least one new product idea every day. I consign most of them to the scrapheap immediately because I just don’t think many people would use them. Some I think would be popular but well outside of our startup’s purview (hell, a couple were restaurants and one was a snow plowing business) and those I file away in case I need startup ideas years from now. Some I think would work and fit well with what we’re doing but my team doesn’t for whatever reason. And once in a blue moon one of those ideas makes it through all the filters and becomes a new Blue Frog Gaming product, like Football Tycoon.

I think most startup founders are at least somewhat similar in that they have a lot of ideas from which they choose one. They don’t just see one thing somewhere that needs improving and go for it. They see lots of things everywhere that need improving and they choose the one that passes through their filters.

мебели стара загораAnd for the last 5 or so years, startup founders haven’t really used “is this monetizeable?” as one of those filters. Why would they? Acquirers didn’t, so nobody on down the chain did. I think that’s going to change with the new economy, perhaps even more so than it really should.

David Oscarmeyer Hansson had a good post on the 37signals blog today about the end of the traditional Web 2.0 business model, i.e. get a bunch of users by not charging and hope to make money off of advertising. I’ve never been a fan of that model myself. I’ve started two internet companies now, with a total of four different products. One of them (the most successful at the moment) uses what is known as the “freemium” business model, letting customers use the product for free and then selling them some other things optionally. The other three all charge everyone (though in all three, the fee is hidden as part of another transaction, similar to a poker room, which is still my favorite business model). All three are still around, in various degrees of repair, and two of them are rather old by internet standards.

As one shrewd angel once told me, only 100 companies can get into the Alexa Top 100. A lot of people say things like “no company that gets enough users goes out of business” which is true if you set the bar high enough, but largely only because VC funding and acquisitions have propped them up. Without Google’s bucks (or those of another similarly large acquirer) I’m highly skeptical YouTube would exist in its current form, even discounting the settlements and litigation fees.

So the question people ask is “if that’s so, why don’t those companies go under?” There are two answers. One is that they do. Where’s broadcast.com now? It got bought and later shut down. They had a pretty tremendous share of traffic back in their day. Lots of dotcoms that didn’t charge (and plenty that did too) got a ton of customers and failed to make money. Anyone who was paying attention 8 years ago could rattle off a dozen.

The other answer is that the internet has only really been in business for 10-15 years, and it’s spent all but a few of them buoyed up by irrational exuberance. Even if you assumed it to be true that at some point we’d discover that making something people want wasn’t the only thing you have to do, you wouldn’t expect to have done so yet. It’s too early, and when people first started saying repeating that mantra it was way too early.

DHH says the days of giving things away are numbered, and I tend to agree. There’s a simple cause and effect chain that led to a lot of free websites, and it’s pretty easy to see how it will unravel.

1. Founders adopt that business model because it’s attractive to investors and helps them raise funds. Everyone wants to own a chunk of the next Google, and Google is free. In fact the vast majority of the Alexa Top 100 is free.

2. VCs and angels are attracted to the ad-supported model because a high percentage of the companies that get acquired for the big bucks (like YouTube or MySpace) or even some that IPO (Google, Yahoo) use it. The reverse is not true though, as there are probably 1000 startups that set out to make the top 100 for every one that succeeds, but it’s a very common logical fallacy to assume that it is.

3. While IPOs are pretty much dead, big companies acquire startups for two reasons. One is that the founders have a lot of talent, in which case it really doesn’t matter what their business model is. Google doesn’t need a business model, it needs great employees (or at least it did). These are generally small purchases that investors often dislike because they don’t get much return.

Another is that it has a lot of users that the acquirer feels it could monetize. YouTube fits into that category. The acquisitions of these types of companies will stop when acquirers start having to shut down startups they paid millions or billions for and couldn’t manage to turn a profit on. Some will be forced to out of economic necessity, and even the Googles of the world that could afford to subsidize a lot of crappy products indefinitely won’t. And every time they’re forced shut down some crap like Broadcast.com, they’ll think even harder about the next Skype.

The recession is the straw that has broken the camel’s back. The third domino is already falling, and it might take a short while for the other two to be knocked over in turn, but it will happen. High volume, ad-supported web businesses will always exist, because in certain areas (search for instance) they just make sense, but they’ll cease to be the sole aspiration for the vast majority of internet startups.

Here are some of the Crunchies categories with results and my thoughts. I meant to give these before hand, but it was a really busy week. Today’s a me-day though.

Best Application Or Service

Get Satisfaction
Google Reader (winner)
Minted
Meebo
MySpace Music (runner-up)
Yelp

They nailed that one, though I think there’s a strong argument for Yelp as runner-up. Using Meebo is about as enjoyable as a root canal. Minted I’ve never heard of, though it actually looks cool. This is the Crunchies though, leave your business model at the door.

Who I would have nominated: I think Xbox Live has to come in here. It’s had a killer year, especially with Arcade and now Netflix integration. It’s kind of like the iPhone platform but with 2x the units in circulation, attached to everyone’s living room television, and focused around treating developers well and allowing them, even encouraging them, to actually make money.

Best Technology Innovation/Achievement

Facebook Connect (runner-up)
Google Friend Connect
Google Chrome
Windows Live Mesh (winner)
Swype
Yahoo BOSS

I like BOSS here. A hundred times I’ve had some idea as to how search could be improved, but every one of them requires tremendous effort. Indexing the web is a massive undertaking. Now with BOSS, I could actually get them done.

Mesh, by the way, is awesome even in it’s infancy. In my travelling days I used dyndns and port forwarding to allow me to remote desktop into to one of my home PCs. It worked to some extent, but given the hotel connection and the other moving parts it was problematic to say the least. With Mesh it’s trivial to log in and snag a file.

Connect is cool too, I’m waiting to see if/how that one shakes out. Chrome is neat but like 95% of what Google launches/acquires, it won’t amount to anything. Swype looks interesting from the website, but as I can’t find any products it’s actually on, I may never know.

Best Design

Animoto (runner-up)
Cooliris (winner)
Friendfeed
Infectious
Lala
Sliderocket

I still hate Cooliris because a previous product of theirs, that showed you previews of any link you hover over, caused me to accidentally drop a table in PHPMyAdmin. I like FriendFeed, but they don’t belong here. There’s a difference between minimalism and good design.

My nominee: Mint.com. Kongregate.com is pretty fresh too.

Best Bootstrapped Startup

BackType
GitHub (winner)
Socialcast
StatSheet
12seconds.tv (runner-up)

2008 was the year of GitHub, everyone else was playing for second place. BackType is pretty neat, and would be my second pick. I had no idea they were bootstrapped. Actually, I’ve never read anything at all about their founding team.

Statsheet might turn out awesome once it gets any sports anyone cares about. The others seem kinda like me-too Web 2.0 fluff, especially the runner up.

Most Likely To Make The World A Better Place

Akoha
Causes
CO2Stats
GoodGuide (winner)
Kiva (runner-up)
Better Place

I probably would have reversed those. Kiva’s pretty awesome, and based on the same concept that Muhammad Yunus won the Nobel Peace Prize for. I guess TechCrunch readers didn’t find that as appealing as “Yelp for the stuff in the really smelly section of Whole Foods”.

My nomination: Ride Share.

Best Enterprise Startup

Amazon Web Services (winner)
Force.com
Google App Engine (runner-up)
Yammer
Zoho

Has anyone used Google App Engine yet? At all? Ever? That product seems to be a bigger dud than Lively. AWS is undisputed king here probably, but I’d go with Force.com for the silver.

My nominee: Microsoft. They’re no less a startup than Amazon or Google, and they make way more money off of enterprise than anyone. 

Best International Startup

eBuddy (winner)
Fotonauts
OpenX
Vente-privee
Wuala (runner-up)

I’ll abstain since the only one I know of is OpenX, and wow is their UI awful.

Best Clean Tech Startup

Better Place (runner-up)
Boston Power
ElectraDrive
Laurus Energy
Project Frog (winner)

Nothing useful to say here, except I like frogs. So I agree.

Best New Gadget/Device

Android G1 (runner-up)
Ausus EEE 1000 Series
Flip MinoHD
iPhone 3G (winner)
SlingCatcher

Hard to argue with iPhone 3G’s sales numbers. I don’t own any of these. MinoHD looks sweet though.

My nomination for cool-looking gadget I haven’t used: Dash GPS.

Best Time Sink Site/Application

Mob Wars
iBowl
Tap Tap Range (winner)
Zivity
Texas Hold Em (runner-up)

If you’re looking at it from the most-enjoyable angle, they got it right. From the business angle it’s a little different.

Mob Wars and its clones make more profit in one month than every private company in these all of the above categories combined will make in their entire existence. (Granted, that would be true of a company that broke even, but you get what I mean.) It’s not even close. Texas Hold’em (I’m assuming the mean the Zynga game) probably makes more money than any one Mob Wars version alone, so it’s a good runner-up from that angle too.

Zivity, despite having pictures of naked women, gets barely more traffic than my blog. How is that possible? I could probably throw some soft core in every post here and do better than them, and I wouldn’t need to raise $8 million to do it. Some VC is going to be fired over that one.

Best Mobile Startup

ChaCha (runner-up)
Evernote (winner)
Posterous
Qik
Skyfire
Truphone

Evernote had to win, they’ve been en fuego, though Qik is too. I would have pegged them for second. Chacha looks cool. Skyfire is cool, it makes web-browsing a little less painful for those of us not on an iPhone. Is Posterous a mobile startup? I wouldn’t have put them in this category.

My nominee: SGN. They keep pumping out one popular mobile app after another. Still a weak category though.

Best Mobile Application

Google Mobile Application (runner-up)
imeem mobile (winner)
Pandora Radio
rolando
ShopSavvy
Ocarina

I don’t use any, but I’ve messed with Ocarina and it’s pretty damn cool. Then again, my dog is named Link, so I’m biased. I did download Pandora for Windows Mobile, but then I realized that I never want to listen to music on my phone. I wish my car had A2DP in its Bluetooth options.

My nominee: Shazam. Wow is that cool, both from a “how the hell did they do that” perspective, and from the practicality one. Also, I like Urban Spoon, but only because the name is hilarious. It sounds like an app that finds black people for you to snuggle with.

Best Startup Founder

Linda Avery and Anne Wojcicki (23andMe)
Michael Birch and Xochi Birch (Bebo)
Robert Kalin (Etsy)
Evan Williams, Jack Dorsey, Biz Stone (Twitter ) (winner)
Paul Buchheit, Jim Norris, Sanjeev Singh, Bret Taylor (FriendFeed ) (runner-up)

Is this a joke? Even most of the people who love Twitter admit that they’ve botched the execution in almost every way imaginable from the very moment they started. I’d give the
m worst startup founders if that were a category. They took a great idea, built a shoddy implementation, and have since done everything they could to make the people who love it stop using it.

FriendFeed has been “the Twitter that actually works” since they launched, so they have to do better. But if I rephrase this category as Founder Whose Startup I’d Most Like To Own 10% Of In My 401k If They Were Publicly Traded, Etsy’s the runaway favorite, with Anne Wojcicicicicicicicicki and company at 23andMe at a distant #2.

Best Startup CEO

Tony Hsieh (Zappos)
Jason Kilar (Hulu) (runner-up)
Elon Musk (SpaceX)
Andy Rubin (Android)
Mark Zuckerberg (Facebook) (winner)

Yeah, I’m not buying it at all. They’ve got traffic, but Hulu will mint money, Zappos already does, and the verdict is out on whether or not Facebook will ever really be worth anything. Zappos has copycats from both Amazon and Gap Inc, Facebook is a copycat.

Again, going by the 401k theory, Zappos is far and away the winner. I’d rather own them than Facebook by a very, very wide margin. After that I’d choose SpaceX, assuming they get some rockets to not explode during liftoff. That’s sort of a big deal for a company that makes passenger spacecraft, though I guess if they can’t improve they can at least repurpose them as weapons and sell them to Hamas.

Android hasn’t been a startup since Google acquired them in 2005, so again, totally ridiculous categorization. They might as well just add Linux or Ruby on Rails to this category while they’re at it.

Best New Startup Of 2008

Dropbox (runner-up)
FriendFeed (winner)
GoodGuide
Tapulous
Topspin Media
Yammer

Tough category. FriendFeed’s pretty neat. I use Dropbox, it’s pretty awesome, and I can think of ways for it to actually achieve revenue. I like what I’m seeing from Tapulous a lot too. They’re the one company that seems to have a shot at both competing in the app-store, where free apps are overweighted, yet still making money. The rest of the category is a dud.

My nominee: Github deserves at least a nomination here too. They’re popular among the early adopters, and growing. They have a business model. I don’t know if they’re profitable, but it would shock me if they weren’t.

Best Overall Startup In 2008

Amazon Web Services
Facebook (winner)
Android
hulu
Twitter (runner-up)

Who the hell is categorizing here? One of these is a partnership between publicly traded corporations, one is a product of a publicly traded corporation, one of them is an open-source software project managed by division of a publicly traded corporation. If AWS is eligible, then Xbox Live Arcade should be too.

I’d choose to own the 2 that are actually startups in the following order:

1. Facebook
2. Twitter

So technically I guess TechCrunch got it right. Facebook wins almost by default, because unlike Twitter it actually works more often than not and has some tiny, almost imperceptible glimmer of a business model. Then again, I still subscribe to the outdated notion that businesses exist to make money, rather than to waste private equity, and I can think of at least 100 startups I’d put ahead of either.

My nominee for this category: Zynga. Those guys are monetizing at an alarming rate. By the 401k theory they might be my top pick right now. In fact, while I’m at it, throw their founders in the Best Founders category and they’re at least runner up there too, probably the same in CEO.

I have to say, I’m drinking the Palm Pre
koolaid. This device is going to go far. I might even buy some Palm Shares.

The reasons I’ve never bought an iPhone are that I care about the following features in descending order of importance:

1. Call Quality

2. Email/SMS

3. Network

4. Web Surfing

5. Tethering

6. Amusement

7. Camera/Video Camera

That’s not uncommon, in fact, it’s pretty typical in the business world, which is still where most smartphones are sold. The iPhone’s call quality is notoriously abysmal, and though they made up a little ground on number 2 when they got Active Sync, they’re still Class B there due to lack of a dedicated keypad. While the iPhone pretty much blows away the competition in terms of #4 and #6, and it’s good enough for #2 for most people I’m sure, it blows on #3 and #7, and doesn’t even step up to the plate on #5. (Supposedly it will soon, but its utility will be greatly limited by AT&T’s atrocious network).

Moreover, I would say that most people place #3 further up the list than I do. People choose the network and then the phone, and Apple hasn’t changed that noticeably. Networks spend a lot of money in advertising and promotional bucks, and they have lots of extra features that encourage loyalty. For instance, they use the network effect with family plans and by making all calls or SMSes to other customers of the same network free. My wife is on Verizon, and she alone is probably 50% of my phone calls, so for a device to get me to switch it would have to be that much more appealing. And then there’s just plain laziness, as switching is more work than not.

So Palm, like Android, has a chance. Apple’s strategy has worked well, but it has major holes, and this Palm unit looks like it exploits them, perhaps even more efficiently than Android at this juncture.

And the best part of all is they’ve got a solid shot of beating them on one of the fronts they own: the app platform. The iPhone is far and away the leader in this area. It has seen a tremendous amount of development, and with good reason. It has a sizeable user base, which is a key component in any platform. And sure, there are bigger platforms, but (until recently anyway) not on phones that have Wi-Fi, GPS, touch screens, etc.

Through iTunes it also has pioneered the powerful centralized store that offers serious revenue or distribution to top apps. That, of course, has its own problems, but it creates the sort of a lottery that attracts independent developers.

But the iPhone platform is also, in many ways, problematic. Programming native apps in Objective C is really hard work (or so the friends who’ve done it tell me). Palm greatly reduces the barriers to entry by making app development html/css/javascript-based, meaning any web developer (maybe even me) could get started.

For Palm to really compete in the app department, they need to do the following:

1. Open the phone to multiple carriers. Check. The Pre is starting out on Sprint, but will hit others after a few months. If your phone is on multiple carriers that collectively serve four times as many customers, it only needs to be some amount greater than 25% as appealing to get the same market share. I’m not sure how much greater (depends how strongly people really are attached to their network) but it’s not much.

2. Put the same OS on multiple form factors. Check. They’ve indicated this will be coming down the pipeline. Believe it or not, a lot of people just don’t want a smartphone. I tend to view them like wine, in that anyone who doesn’t like them just hasn’t found the right one yet. But just like wine, a lot of people never will care for whatever reason. Give them a free-with-contract clamshell that can still run many of the games and other apps, and you’ve expanded your user base significantly.

3. Make the app store more conducive to paid apps. This will return higher profits for Palm from app sales, which can be plowed back into marketing. And most importantly, it will return higher profits to developers, who will of course blog about it, thus encouraging more development. No word on this yet from Palm.

There have been more blog entries than I can count about what’s wrong with the app store’s apparent policy of ranking them by volume, which heavily favors free apps, and every one of them contains a suggestion as to how to fix it. For instance, showing the two separately, or sorting by revenue, etc. I’m not entirely sure the best way to run a store, but I’m convinced it isn’t the way iTunes does it.

4. Be developer friendly. With the exception of Loopt, Apple has treated their developers like parasites. They finally got rid of the NDA, which was absurd, but they still rule the approval process in a capricious and arbitrary manner that discourages serious investment in the platform. The worst part is, they’re only hurting themselves. There’s no reason whatsoever to worry about someone competing with your apps on your hardware platform. So a third party builds something that has some of the same functionality that iTunes should have but doesn’t, such as automatically downloading podcasts. What do you care? It just makes them love your iPhone more. You weren’t charging for iTunes anyway, but you did charge for the phone they were running it on.

It makes no sense. No app on an iPhone competes with Apple. Blackberry, WinMo, Android and Palm compete with Apple. Motorola, RIM, HTC, and the other Palm compete with Apple. iPhone developers are mercenaries fighting on Apple’s side.

Palm has stated that they won’t deny developers in that fashion, they better live up to it. They’ve got a real shot here. Their stock is up almost 100%, but I think people are still underestimating. That reminds me, I have to invest my year’s contribution to my IRA…

Thanks everyone who told me how much you enjoyed the Whiner Jerkins PowerPoint. It was a lot of fun to make. I think everyone needed a laugh for a moment.

Some people seemed to think I was trying to deliberately insult Sequoia or VCs in general. Not so. I think Sequoia’s advice is pretty logical, in fact, it’s largely the stuff you hear at Y Combinator. It’s all stuff my startup is doing anyway, and would be even if I took VC funding.

I have always viewed the "get popular now and worry about making money later" ethic with trepidation. There’s this pervasive belief that any company that gets loads of traffic will be able to become profitable at some point, and I’m just not sure that’s true. Maybe if you make the Alexa Top 100 or something, but that’s so hard to do as to be nearly impossible. There are hundreds or maybe even thousands of startups launched each year, and when you count the big corporations that aren’t going anywhere (Google, Yahoo, MSN, Myspace, Facebook, YouTube, Amazon, eBay, etc.) and the porn sites (with which you cannot compete) you have a lot of dogs fighting for very few scraps. Take a look, you’ll note there are very few recent non-porn startups there. I looked briefly and counted 3

On the other hand, build something like Draftmix or TicketStumbler and you can make a fortune from only 100,000 unique visitors a month which, as far as I can estimate, won’t even put you in the Alexa top 50,000.

It did get me thinking a bit about the typical VC-backed ethic though. If a VC’s advice is normally to be more aggressive in terms of growth in good markets, why is that? Just because money is cheaper doesn’t necessarily mean you should go for a land grab. There are very, very few businesses where that seems necessary. So why would that be their normal M.O.?

The reason is that venture capitalists profit more by investing in higher variance startups (all other things being equal) due to the simple fact that they can only lose the amount they put into your company, but they can make a theoretically unlimited amount. To put that another way, their downside is limited, but their upside is not. It’s the same reason people always warn against shorting stocks or selling calls.

Let’s suppose a VC invests $10 million in your company. Let’s further suppose the VCs mean return to be 3x, so in your case, $30 million. Let’s assume a standard deviation of $25 million as well, to allow for a small but realistic chance of an investment returning 10x ($100m). Here’s the graph of possible VC outcomes.

Now let’s assume we double the standard deviation to $50 million. Here’s the same graph:

(Sorry about the goofy stretching, but the graphing xls file I found didn’t allow me to alter the axis properly. The curve looks proper though.)

Put those together and we get:

Which curve looks better to you? (Of course, I’m not sure results follow a normal distribution, but I can’t guess what else they would look like.)

Founders, on the other hand, have the competing interest of reducing variation. They’d generally be happy to make a $30m mean return with zero variance. In fact, they’d often be happy with a much lower return and a much lower variance. Just something to be aware of when you take money, and it might explain why the typical advice isn’t frugality.

Also, a lot of people pointed out that VCs like Sequoia are now telling you that you’re going to have to take lower valuations going forward. And who is paying those lower valuations? VCs like Sequoia.

That doesn’t make them evil hypocrites, as many have suggested. In fact, they share interests with some of the companies they’ve funded who will be getting funding from elsewhere in the future. It’s just supply and demand. The supply of capital from limited partners is going to drop, and VC firms are going to go through a drought just like founders are in the upcoming year or two, which puts the ones that survive in a better bargaining position. If anything, they’re fairly kind for exposing their hand. That sort of openness is a lot of why they remain at the top.

Angels will go through a drought of their own. Wealthy individuals don’t generally leave many millions sitting in checking accounts. Many of them are diversified, so while the Dow dropping didn’t bankrupt them, in a lot of cases it probably knocked out a sizeable chunk of their net worth.

Also, despite my angel funding slide being meant mainly for humor, very much of the angel investment cash floating around The Valley these days comes from Google. Founders who sold their company to them, employees who got in earlier and have considerable stock vesting over time. A lot of them have lost a lot of money as the stock price has cratered. Hopefully many of them hedged by buying puts back when the share price was north of $600, but for some reason I doubt it.

I feel like if anything, we’re seeing the VC mindset and the founder mindset merge into one due to the rough times forecasted for the near future. That’s probably a good thing. Valuations were a little absurd there for awhile anyway.

As for Seesmic specifically, which some people asked me about, despite what I think of their product, I can’t understand why they had 20ish employees. Not to trivialize what it is they’re building, but Justin TV has built a product in the video market that’s probably more complex and has a lot more traffic, and they’ve done it with a fraction of the employees and what I’m guessing was also probably a fraction of the funding. That’s why I used them as my example.

Loic Le Meur is clearly a one-man PR department, so they’ll probably get through it alright. But it’s clear that, rational or not, things are changing, and a lot of startups won’t, and that’s going to be both good and bad. You’ve got to pull the weeds if you want a beautiful garden.

One of the main gripes with the iPhone has always been the lack of tactile feedback when typing. In an effort to simulate that, we’re seeing some new phones and the like where the touch screen has some springiness to it. This is coming out both in a new BlackBerry model, and in the touchpad for the new Macbook Pro.

I think both designers are missing the point. The most important tactile feedback of a button is not the spring of depression but rather the shape of the button itself. It allows you to constantly reset your bearings. When you’re typing on a keypad, for example, you feel whether your finger is hitting the button square in the middle, or slightly to the left or right and adjust accordingly. Your brain is able to check its position and modify it on the mental map in your head multiple times per second, like an ICBM homing in on an Iranian nuclear facility.

You can look at the screen and type because of that, in fact, you’re supposed to. Hell, you can probably type whole paragraphs with your eyes shut without erring. It might take a little Zen mastery, since as soon as you think about it consciously you’ll start making mistakes, but when you look at the screen and don’t think about it, you do it nearly flawlessly.

Without the feel of physical buttons, you’ll inevitably drift in one direction or the other. That’s why BlackBerry typing is really so much better than the iPhone. When you have both in broad daylight and are staring at the buttons as you type, the difference isn’t as noticeable, so when defenders say “I can type just as well on my iPhone” they’re telling the truth, or at least close. But on a Berry, you can text one-handed while driving (though I don’t recommend it) while on an iPhone you’d slip up pretty fast. Or, more importantly, you can look at the screen exclusively as you type, as you would on a computer.

That’s what makes some keyboards and keypads so much better than others. The buttons are designed in such a way as to let you know exactly where you are upon contact. Don’t get me wrong, the resistance when pushing a button is useful too, as it allows you to adjust along the third axis. The other two are simply more important though.

I’m not sure if it’s very relevant in the case of the Macbook Pro, since it’s a one mouse button we’re talking about. It might be fine, especially since you can presumably feel the bottom edge of the pad, and the whole thing isn’t large enough for even one finger to get very lost on. But on the BlackBerry, I think it will not make typing much better than on the iPhone, if at all.

I remember once reading about such a pad that sends tiny electric shocks as you pass over the virtual buttons that simulate the feel. That would go much further toward matching the BlackBerry experience on a perfectly flat touchpad than a spring.

Recently the VCs at Whiner Jerkins held a meeting for all of us startup CEOs in their portfolio. I thought I’d share the PowerPoint presentation with you.

Whiner Jerkins All Hands 10/13/08

You’ll probably want to full screen it.

So I’ve been following this “story” about the “Team Cyprus Video” (if I have to keep using quotes this much, people are going to start thinking I’ve got Ron Conway ghostwriting for me) with umm, what’s the opposite of earnest? Is there a word for that? If so, that’s what I’ve been following it with. Apathy maybe? Yeah, that sounds right. I’ve been following it with apathy.

Anyway, for those lucky enough to have never heard of this yet, here’s the basic gist of it. 20 or so younger Silicon Valley types went to Cyprus and rented a house together. Employees of Google, Facebook, some startups nobody outside of California has ever heard of, etc. Sounds like fun actually, and I’m a little pissed I wasn’t invited. Only a little because I’m pretty sure I’ve never met any of them. Still, total strangers email me every day about buying Viagara, expatriating money from the estate of dead Somalian royalty, or watching them fornicate with various equine mammals (including, but not limited to, a zebra) so you’d think I could at least get a heads-up on a Turkish vacation.

Anyway, they had the audacity to go on a holiday they almost certainly planned months ago even though the economy was tanking. And, on top of it all, they had fun! What’s wrong with these people? Don’t they know that any time anything bad happens, you’re supposed to sit home and feel bad for everyone? Or at least, if you must spend a week chugging raki, have the decency to act like it sucked when you get back?

Then, as if having fun on vacation wasn’t rude enough, they topped it off by making a video that nobody who wasn’t in it could possibly ever give a shit about of everyone lip syncing to a Don’t Stop Believing.

Arrington says:

Team Cyprus: Alcohol + Bad Judgement + Really Poor Timing

Well, I’ll give him the alcohol. And hell, it was a Journey song, so I’ll give him bad judgment too. But poor timing? What were they supposed to do, go all McCain Campaign and wait a week? How’d that work out for old Johnny Boy?

I think we all really need to step back and ask ourselves “what’s news about this?” The only thing I can see that might pass as noteworthy is that there appears to have been a couple cute chicks hanging out with a bunch of geeks. Hard to say for sure, because it looks like cell-phone camera quality, but there’s a chance and I’ve been to enough Web 2.0 parties to know that’s headline material.

As I said yesterday, fair or not the video video will always be associated with the end of Web 2.0.

Umm, no it won’t. That “video video” (as opposed to an audio video I suppose) will always be associated with some Googlers having awful taste in music. It will always be associated with TechCrunch finally completing a long descent into Valleywagville, and their RSS subscriber count dropping by 10 as all remaining readers with a three digit IQ blow their brains out in disgust.

But Web 2.0 can’t end because it never really started. It was stillborn. It’s a concept that nobody outside of a 50 mile radius around Palo Alto has ever given a single thought to. It translates loosely into “take your site and add Geocities to it.”

And that video is nothing but some people having fun on their vacation to a really, really awful soundtrack. People are calling it “fiddling while Rome burned” which would make sense if any of them were the Emperor and could do anything at all about the stock market crashing. If they were George Bush, it would be pretty bad (and it would be called “Hurricane Katrina”). Really though, it’s just a few peasants who had a little too much ouzo and a really cheap video camera.

Also, what’s with all the girls wearing the same outfit? It’s like Satan dug up Robert Palmer, reanimated him, and said “You know what? The world hasn’t gone entirely to hell yet, which means you must not have unleashed enough shitty music videos during your first lifetime. I thought for sure when you came out with Addicted to Love, chaos would reign and I’d be able to release the Four Horsemen of the Apocalypse. But it didn’t happen. So I’m gonna bring you back for one more. Make me proud.”

And he did.

Had an interesting argument on HN the other day. People were giving anecdotal evidence about Macbook failure rates, and other people were saying they were insignificant samples. I shared mine about having frinds who had 4 Macbook Pros total (one actually bought a backup because his first turned into such a brick, an experience I’m begging him to blog) and of course the discussion devolved from there into how it was an irrelevant sample size.

Now let’s say 3 of these had to visit the Apple Store for repairs. A sample of 4, at first, seems too small to conclude anything from. However, I remembered just enough from my personal studies of probability to suspect that 3 out of 4 failures was actually quite meaningful. So I did a little digging.

I talked to my friend Matt Matros, who is my go-to guy when I have math problems since he has a degree in it from Yale, and he pointed me at Baye’s Theorem, which is the correct way to solve it. It turns out the odds of observing 3 or more failures in a sample of 4 laptops, if you assumed the laptops failed only 10% of the time, would be on the order of 0.037%.

What that means, in plain English, is that if you see 3 out of 4 Macbooks fail, then they almost certainly have a much higher failure rate than 10%. In fact, if you had a 50% failure rate, you would still expect to see 3 or more fail only 31.25% of the time.

This isn’t entirely meaningful. Those four laptops were purchased in either 3 or 4 different states (I’m not certain) so it can’t be attributed to shipping errors. If they were all the same model, it could have been just one bad Apple (har har) or even just one bad production run.

Also, all problems are not equal, which has long been a problem with the JD Power IQS, which is often used as a metric for automobile dependability. All of the aforementioned problems required at least 1 trip to the Apple store though. And I think they may have all required at least 2, but that speaks only to the poor quality of the Genius Bar.

Just out of curiosity (and my own mathematical ineptitude) I wrote a quick PHP Monte Carlo simulator to goof around with the numbers, and it pretty much just confirmed Baye’s Theorem exactly. You can snag the source for it here.

And yes, I’m aware I’m an awful programmer.