Monthly Archive

Second Life is interesting to me - I truly respect the service, but I don’t love it.  That is, I have a lot of intellectual respect for the way they’ve run their business - they’ve been bold, innovative, and relentlessly experimental.  But the service doesn’t grab me emotionally.   I also think that their high technical barriers to participation and the fact that SL is a closed standards system ultimately deters them from reaching mass market adoption.  Yes, they get a lot of publicity and their logins are growing at a fast clip - but I suspect there is a significant amount of churn. I spend a lot of time in the area of virtual worlds - because I think we’re just at the tip of the iceberg here.   

One day, there will be an open standards based platform that makes virtual asset/world creation as easy as choosing templates and widgets for your MySpace page.  In fact, today’s social networking services like MySpace and Flickr already incorporate some smart game design principles, such as levelling up, collecting virtual objects, and homesteading in the form of customization. I expect that virtual items will one day become a far more legitimate asset class and that there will be much improved liquidity for these assets in the future.  It sounds absurd, but there are some basic economic reasons why this concept of real money trade (RMT) makes sense, despite all of the negativity that RMT receives from the core gaming community:
1) Virtual goods can confer real economic utility,
2) It can be much cheaper to buy virtual goods than procuring them via more traditional methods - such as actually spending the requisite time necessary in-game or in-world,
3) Virtual goods can generate attractive investment returns.The folks who are already making their living in Second Life know this and they are the pioneers for what is to come. What the Electric Sheep Company and Edelman PR is doing with this business plan competition is exciting and I’m happy to be a small part of it.   For the record, CRV is not investing in any of these virtual Second Life businesses - I’m merely a judge.    I’m interested to see how these real entrepreneurs adapt to problems that aren’t idiosyncratic to virtual worlds (the stability of the currency) and ones that are idiosyncratic (how the recent CopyBot problem may mean that only services centric businesses can thrive in Second Life.)   Also for the record, I don’t believe that the current patterns of real estate values in virtual worlds will hold - for reasons that I’ll get into in a later post.

The Second Life business plan contest launch event was fun.  Here’s a snapshot from the event - we panelists are facing the audience: 

We were asked, “What are you looking for in a Second Life business plan?”

My answer is that I’m looking for the same things that matter in every other type of business.  None of this is novel - far wiser and more articulate folks have made the same points in the past. 

1. The team, and its authenticity and empathy for the user experience.  What I mean by this is that I’m looking for founders who come from the community that they aim to serve.  Do they speak the language of their customers? Do they empathize with their customers’ pain?  Do they feel passion for their users? Mitch Ratcliffe wrote in a great blog post today, “Social networks need some soul, not just a business school pedigree.”  For example, I would be a horrible Second Life entrepreneur.  I don’t use Second Life nearly enough to understand the relationship dynamics between its citizens and its service.  My starting a business in Second Life would be presumptuous and arrogant, because I’d be coming in as an outsider. 

That old Hairclub for Men line of “I’m not just the President, I’m a customer!” is comical but rings true.  We are looking for founders who deeply understand the customer problems they are trying to solve.  Don’t despair - even if you’ve never experienced hair loss, you could still build a believable Hairclub for Men business.  Do first hand research.  Go into the field.  Live amongst your subjects.  Take notes. Observe.  Listen.  If you observe and listen well, you’ll learn the local language and customs, internalize your tribe’s aspirations and fears, and your customers will soon begin to accept you as one of their own.

2. Unfair advantage.  This is the elusive secret sauce that sets you apart from all of your competition.  What about your business and your approach can’t be done by anybody else? Focus on that, and outsource/open source the rest.   That din you hear at your door? That’s [Google|guy in a garage] waiting to crush you.  Your unfair advantage is what keeps them at bay.  Unfair advantage can manifest itself as proprietary and differentiated technology, a superior business model, an incredible team iterating on past success solving similar customer pain, or a network of relationships that drives down customer acquisition costs. 

Furthermore, you need to demonstrate that this unfair advantage is sustainable.  Sustainable, unfair advantage is directly correlated to your ability to consistently receive better economic returns than your competitors.  Software as a service has a sustainable advantage over traditionally delivered enterprise software because it’s simply a far more efficient alignment of capital allocation and customer needs.  That being said, SaaS by itself is no longer a sustainable competitive advantage of its own - not in a market where every emerging software company employs a service strategy.  [I've written about the economic advantages of SaaS and open source on another blog.]

 3. Attractive market.  Let’s imagine that I’m the most cynical financier possible and the one and only thing that matters to me is delivering economic returns to my investors.  I’d be looking for businesses that served the entire world population and whose customers were completely price insensitive.   [Oil.] [Drinking water, in unregulated markets.]  Businesses with high customer switching costs.  [Cigarettes.] An attractive market doesn’t necessarily have to be sizeable - though size and [willingness to pay | average revenue per user] are on the same axis.  However, I’m happy to say I’m not a completely cynical financier.  Ideally, I’d love to back businesses that deliver sound economic returns and also do good for society.  [eBay. Google, maybe.]

That all being said, there are some tangible differences between building a Second Life startup and building a more traditional startup.  Though it may seem like the traditional startup business resembles the Wild West, the Second Life frontier is far hairier.  The risks inherent in Second Life startups reminds me a bit of investing in China - there’s a mostly benign dictator (Linden Labs, in this case) who wields enormous regulatory power over the landscape.   Audience members at our session had a lot of questions about currency and economic stability in Second Life.  Just as we trust the Federal Reserve of the United States to keep our dollar stable and valuable, so too must entrepreneurs have faith in Linden Labs to maintain the stability of the Second Life economy.   The Linden dollar has only as much value as you have faith in Linden Labs.

[sidebar:
friend (12:12:09 AM): What are you up to?
me (12:12:18 AM): I'm writing a blog post about unfair advantage and how it's critical to startups
friend (12:12:29 AM): What's your unfair advantage in writing about it?
....
me (12:15:23 AM): my sparkling personality?
]

So…very timely to our launch tomorrow of the Second Life Business Plan contest is the Copybot scandal that’s threatening to undermine the entire SL virtual economy.   

CopyBot captures the data being streamed to a local SL client and allows the user to clone that data in a way that creates an identical copy. Furthermore, this copy is not linked to the original in any meaningful way on the server-side and thus can’t be identified as a direct copy.  Needless to say, this disrupts SL’s entire economy because it’s now easy to create millions of perfect knock-offs of the virtual Hermes boots it took me 15 craftsmen and 2 months to painstakingly build. 

(Not Hermes Boots by Sol Columbia available for sale at the SL Boutique)

My friend Raph Koster wrote an awesome post yesterday analogizing the situation to the heated debates about DRM in the music and video markets: DRM is good when it works to protect your economic interests, evil when it prevents us from enjoying the data we want.  Raph says, “CopyBot is a mirror, and what we see reflected in it is the unsavory fact that we all want DRM, if it favors us.” 

A lot of controversy has erupted within the SL community over what to do about this issue, with many content creators vocally attacking SL’s developer, Linden Lab, for allowing the situation to occur.  Interestingly, CopyBot grew out of an open source library that was developed by third-party OSS developers but is unofficially endorsed and supported by Linden Labs.  Once CopyBot fell into the hands of end users for the purposes what amounts to basically SL piracy, the libsecondlife developers removed the CopyBot source code from their servers at the request of Linden Labs.  But of course, once something like this has been unleashed, it is essentially impossible to contain it.  In fact the press surrounding the scandal only amplifies the tool’s popularity amongst the folks who are most likely to abuse it.

The interesting question that arises is how do you close Pandora’s box?  What can Linden Labs do now?

The simple answer in most cases is that you can’t close Pandora’s box, at least not completely.  Linden Labs has begun to take a hardline stance on this issue by threatening people caught using the CopyBot with world banning, based on Terms of Services violations.  I suspect they will also go down the obfuscation road in future patches of the SL software.

Data and code obfuscation is something that software developers have been dealing with for a while now.  As computer languages (such as Java and C#) emerged with rich metadata that allowed developers to use programming concepts such as reflection, the amount of descriptive data in the executable that runs the program has grown to the point where it is often trivial for a decompiler to reverse engineer the program back into usable source code.

There is no real bullet-proof way to avoid this situation without losing all the benefits that the meta-data provides and so the primary way of dealing with the issue is to obfuscate the code before shipping it out to users.  Basically, this involves running an executable which reads your executable, and using many of the same meta-data constructs that allow for de-compilation, it does a lot of renaming of identifiers, so that every method or public variable in your program will be named a, aa, aaa, aaaa, etc. instead of the real names that are in the original source code.  The end result is an executable that can still be decompiled, but when decompiled is so confusing to a human reader that it is pretty much useless.

This exact type of obfuscation isn’t directly applicable to 3D data as used in Second Life but I can easily see Linden Labs employing the same basic strategy of complicating the 3D mesh format they used for the sake of being harder to reverse engineer.  This doesn’t stop things like CopyBot from being written (in fact, there are already graphical capture software programs that work at the OpenGL or DirectX driver layer that could have done what CopyBot is doing a long time ago) but it does make them a lot more difficult.  And in the end pretty much the best you can hope for when it comes to digital data duplication is to make it so difficult to do that it is just much easier for the user to acquire it legally than it is to steal a copy.  Which gets us back to the DRM debate. 

And with regards to the Second Life business plan contest - I’m interested to see whether or not it dampens the entrepreneurial spirit within SL or whether new folks will see all of the fear and concern as an opportunity from which to build new businesses.

I am excited that my friend Giff Constable, of the Electric Sheep Company, invited me to participate in a business plan contest that focuses on fostering entrepreneurship within Second Life.  This event is being jointly produced by the Electric Sheep Company and Edelman, the PR firm. 

 I invite you to join us this Friday, November 17th at 1:00 PM Second Life time (Pacific Time,) as we kick off the event with a live panel.  Speakers will be me, Rick Murray (head of Edelman’s me2revolution practice,) and Sibley Verbeck, CEO of the Electric Sheep Company.

More details about the event and the business plan contest can be found here. 

Paul Kedrosky and Jason Calacanis have both written posts today about how the real story behind Web 2.0 is the spectacular growth in online advertising revenue.

If you look at the stats that Paul’s linked to, it’s clear that online advertising is still a baby, nascent market.  Despite its torrid growth, the money spent on online advertising is only a fraction (about 11%) of the money spent on advertising in newspapers.  And I’ve had numerous discussions with one of our EIRs who was the former president of Knight Ridder Digital, Tom Mohr, about the state of the newspaper industry.   It’s clear to me that the newspaper industry is going the way of the dinosaur unless newspaper companies can figure out how to regain their relevance to end customers and reinterpret their role in providing the glue tying together regional communities.  So I firmly believe that online advertising is still in infant stages.  If online advertising were an infant, I’d say it’s crawling and can sit unsupported, but it’s not yet opening doors on its own or coloring in a coloring book.

While the online advertising story is an exciting one, it’s not the real, real story behind Web 2.0.  Online advertising is the derivative story.  The first and foremost function we should be paying attention to? The increasingly blurry line between our online, virtual selves and our real world, physical selves.  In the Web 1.0 era, folks used the Internet as an adjunct to their normal routines.  Now, in the Web 2.0 era, the line between their offline and online lives are blurring such that the Web, the communities we participate in, and the tools we use to communicate are an integral part of our quotidian existence.  There’s so much to monetize on the advertising side because as Jason rightly points out with video and audio ad stats, folks are moving their lives online. 

This is interesting to me, because it puts evolutionary pressure on our assumptions about identity, relationships, commerce, and culture.

The Web 3.0 story is NOT about AI, as John Markoff would have you believe.  It’s about continuing down this path of improving the user experience of living and socializing online.  This story is about human context, social proximity, and a sense of place. 

I had a lot of fun last week cohosting the “How to pitch to VCs” session at StartupCamp with Nasser Manesh of Frucall.  This is a particularly salient topic for me as I’ve been going through many business plans recently as a result of our newly launched QuickStart program.   There’s been quite a bit written about the topic of presenting and pitching, including the wonderful “How to get a standing ovation” from the inimitable Guy Kawasaki.  Martin Tobias from Ignition also has some good suggestions for how to create a super crisp, logical pitch.

Though we covered a good many topics, as you can sort of tell from all of the scribbling on the whiteboards behind me, it can all be boiled down into a couple of takeaways:

1. Though the process may seem labyrinthine and intimidating, we VCs are just human beings. 
2. Your customers are all human beings.  Even if you are building super high tech widgets[1], your customers are still human beings.

Yes, I know, you’re wondering why this is insightful.  Let me try to explain.  This post just skims the surface of what will be many topics on this theme.

- Human beings are prone to making errors.  Entrepreneurs, I urge you to guide us and help us frame our thinking.  How I parse language is different than how you parse it, because each of us is anchoring meaning to our own localized, contextual data store (our memories and experiences.) Only through socialization and trial & error do we come to understand the filters that others use to translate what we say.  Unfortunately, the entrepreneur only gets anywhere from 1 to 60 minutes in front of a VC, which is not enough time to develop any of the appropriate filters.  Within your brains are wondrous visions of your business and product in 64 bpp color, though I can see none of this save for what you communicate to me. And believe me, I want to see it.

Use descriptive language and analogies.  What constitutes “community centric collaboration tools” may mean blogs to you, wikis to me, and email to someone else.  Reduce the probability of misinterpretation by using visuals, showing demos, and telling stories about customer use cases. 

- Help us empathize with the customer pain you are trying to solve.  We consume so much creative media in the form of novels, movies and video games because they do a good job of putting us in some protagonist’s shoes, transporting us momentarily into someone else’s existence.  Tell a story about how you make our lives easier, more efficient, more enjoyable, more fulfilling.  In order to do this, you need to understand what your business is really about.  Understanding how a customer relates to your product or service emotionally also helps illuminate how they might value it economically.  I like to ask people the question “how did you come up with this idea?”  This is your chance to transport me into your world and to help me feel the pain of the problem you’re solving. 

[1] A photo of a super high tech widget making process from Tim Burton’s Charlie and the Chocolate Factory:

Last night, I had the pleasure of hanging out in person with my guildmates from World of Warcraft. I’m a total noob - a mere level 30 Druid - so it was fun to be able to spend time with other folks from the We (K)no(w) guild and look over Joi’s shoulder as he showed me Molten Core.   I’m grateful that they included me, because I had nothing to add to the hardcore WoW conversation. Like a recovering addict, I feel conscious about tempering my WoW exposure, as I’ve lost spent years of my life on other games in the past (4 years to MUDs, 2 years to Quake/Quake2, 1.5 years to Asheron’s Call, 1 year to Planetside, .5 years to Kingdom of Loathing.  Not to mention all the time spent on Knights of the Old Republic.)  But as I listened to Michelle (Kazpah) & Don talk about gaming prices for Epics in the auction house, I couldn’t help but feel a twinge of longing… Hanging out with the guildies made me feel warm and fuzzy about being in such a great guild. 

 Eric Haller posted this photo of all of us gathered at Michelle’s house in Dolores Park.  We’re all -really- laughing because of some funny audio that came up on Joi’s laptop just as the photo was being taken.

Btw, yes, I’m working on blinging up my blog. I know it’s ugly. 

My friend Sanjay pointed me to Microsoft’s announcement yesterday about the new HD Video on Demand service for the XBox 360.

This new service allows XBox360 owners to download TV and movies on demand, via the Xbox Live service - further pushing the boundaries of online console services and further establishing the Xbox360 as the ultimate trojan horse platform. 

They haven’t yet released pricing details, but I’m assuming their pricing will be in line with what Apple charges for iTunes video downloads. 

The ability to download TV and movies directly to a device that is built to interface with TVs is a great selling point. While it doesn’t offer the portability benefits of an iPod video solution, I think it offers something even more compelling for many non-techie people by being a direct download to the display device, with no PC interfacing required. Of course, I say that as someone who thinks portable video is overrated and who owns a video capable iPod but rarely uses it for anything other than playing music.

Unfortunately, it’s hard to get too excited over Microsoft’s new service when the Xbox 360’s hard drive is only 20gb (of which only about 75% is usable for user downloads) and HD movies take up 4-5gb each. I already find myself constantly running low on harddrive space on my 360 just from Xbox Live Arcade downloads. Trying to juggle space to fit large videos in to the mix seems like more trouble that its worth at this point.

Hopefully Microsoft will offer a new, larger harddrive upgrade option in the near future, though it could be difficult for them to do this in a way that doesn’t piss off the customers who already bought the 20 gigabyte harddrive as part of the premium system or as an upgrade. An even better solution would involve them allowing any standard USB disk or flash media to be used as storage for Live content, though that seems unlikely for DRM/content protection reasons.   Given the space limitations, I’m not sure if this service will be as great as it could be, but it’s an interesting start.  Glad to see they included one of my favorite shows, the Ultimate Fighting Championship, as one of the content options.

Just about everyone who lived through the dot-com fiasco should remember the hullabaloo many companies made about digital media convergence. The idea was that you’d have a central set-top box device of some sort that would enable you to watch movies on demand, listen to your music collection, view pictures of your family reunion and surf the Internet all from the comfort of your living room couch. This basic idea gave birth to a number of high profile products, many of which failed outright, many of which (WebTV) sold for millions and then faded into oblivion, and some of which morphed into something unrecognizable from their initial form. Sun’s Java originally began as language for these types of digital convergence set-top boxes. True media convergence seemed to be one of those things that are perpetually six years away, like rocket cars, sentient AI or the end of the Iraq war.

While convergence was definitely an idea ahead of its time, the level of everyday technology has managed to sneak up on us to the point where what was once a dream is now reality and increasingly being utilized by the masses. I believe that there are three major technology areas that have contributed to this; broadband Internet, cheap hard drives, and nearly ubiquitous acceptance of wi-fi have laid the groundwork for these systems to thrive.

However, it’s interesting that it took a quasi-legal community project (XBMC) to really offer a model of how all of this should function. (Before the TiVo diehards get on my case, let me say that TiVo clearly deserves a lot of credit for introducing people to the level of media control they now (or soon) will enjoy with a more general purpose set-top media solution, though the system, while fantastic for what it is, is a bit too focused to qualify as an all-around digital media convergence solution).

Anyway, back to XBMC. To those unfamiliar with the system, it turns an ordinary Xbox videogame system into a device that can play DVDs, watch video files stored in dozens of different video codecs, play mp3 and other music files, view photographs, show you current weather conditions and other net/RSS related feeds and more, all on your standard television set. It supports network file shares so you can store all of this data on a file server on your home LAN and coupled with an 802.11g wireless adapter for the Xbox, you can do all of this file sharing wirelessly. The system is incredibly slick and professional in both looks and usability and supports virtually all standard PC video formats (which allows me to subject guests to all of my boring home videos) as well as DVD image files which I rip to a home file server to act as a virtual stand-in for a 50 DVD disc changer.

Unfortunately it requires one to modify their Xbox which requires a high level of technical sophistication, voids your warranty and is guaranteed to upset Microsoft. Given these limitations, it is unlikely XBMC itself will ever become mainstream, but even if it does not it will have served its purpose if it can merely show other device designers how such a system should work if they want it to be friendly to users.

XBMC’s limited but rabid fan base may have contributed to convincing other manufacturers that the time is right for convergence because there is a clear resurgence in the idea, particularly among console makers. Microsoft’s new Xbox 360 console offers something quite similar to XBMC in the form of being a Windows Media Center Extender for video and having similar MP3 and picture file sharing capabilities. Their Zune media player will further this media convergence by allowing the media to be shared onto a portable device. Sony’s Playstation 3 will offer a similar setup, also supporting portable media via their Playstation Portable system. Apple also recently jumped into the fray with their highly anticipated iTV, which will no doubt seamlessly integrate with all of those iPods out there. Nintendo’s forthcoming Wii console will also support a subset of these media sharing features with an emphasis on photo sharing, plus it will also offer a version of the Opera web browser for use on the console.

And it is somewhat surprising to me that Microsoft hasn’t gone and bundled a version of Internet Explorer for the Xbox 360, but I think they got so used to trying to convince everyone that the Xbox consoles aren’t just PCs in console form that they painted themselves into a bit of a corner, hopefully they find their way out and start offering some more general purpose Internet integration on the 360 with their Live Anywhere push, because I believe that HDTV adoption rates rising quickly enough that general purpose Internet use via these set-tops is another idea whose time is maybe, finally coming.

There’s been quite a bit of attention around our new QuickStart program - including this critical post from the O’Reilly Radar folks.   I posted the following comment to the thread because I thought that some of their  misinterpretation stems from the fact that O’Reilly & CRV haven’t had any personal, 1-on-1 discussions about the program - something I’m now trying to remedy. I can see why, from the vantage of an outsider reading the press that’s been written about the program, they might come to some of the conclusions they come to.

Also, check out the FAQ George Zachary posted to his blog.

Hi Tim & Bryce:

I read this post about our announcement with great interest and it struck me that you have certain impressions about us and our QuickStart program that may stem from the fact that the two of us (groups, firms) don’t know each other that well. So I wanted to take the opportunity to help clarify our position and try to illuminate where we’re coming from.

1. We aren’t abandoning our traditional early stage model.

-To characterize this as a ‘learning from Odeo’ is unfortunate and incomplete, because this program arose from genuine, organic interest from entrepreneurs we’ve been working with for awhile. People have been asking for seed stage convertible notes from us. 4 out of 5 of our most recent projects were seed stage convertible notes. 3 of these are in consumer services, the other is a semiconductor IP company. We formalized a program around activities we were already engaged in, so that these entrepreneurs would have a much more streamlined way to interact with us. Furthermore, we enjoy very early stage investing and want to spend time on these projects.

The thinking was, “Let’s not force all seed stage projects who fit a certain profile to go through a process that makes more sense for a traditional venture investment. Let’s put in a place a standard term sheet / deal structure so that we don’t have to reinvent the wheel every time we finance a project like this.”

-Ultimately, we are neutral as to whether or not we should do seed debt or equity. We feel that the final decision is up to the entrepreneur. We’ll gladly participate in a seed equity round if that’s what the entrepreneur deems best for his/her needs. We want to work with folks like OATV - I have a tremendous amount of respect for you guys. What we’re trying to do with this program is create some efficiency, transparency, and choices for the entrepreneur.

-Also, the fund we are currently investing out of is a $250 million fund. It’s a good size for doing both very early, seed stage projects as well as larger clean tech projects such as Celunol. It’s also a fund size that somewhat reduces our incentive to be solely focused on driving massive hits, although of course, we are happy to have hits. I don’t think being hits only focused is a good long term strategy in this business.

2. This doesn’t feel like a ’spray and pray’ approach to me - in terms of how I hear people internally speak about these seed projects. We’re doing these seed projects out of both coasts, averaging about 1-3 projects per year per investing professional. We’re still doing a decent amount of diligence and research into the seed projects we are investing in.

Btw, Bryce - yes, the west coast team is driving this program in terms of setting up the workflow, infrastructure, and processes, but our entire investing team is involved in making seed investments. Perhaps there was some confusion in messaging, but I assure you that nothing has changed internally. The last 4 seed investments we made were led by multiple people.

Having spent most of my life working hands on with developers in hardcore ‘alpha geek’ environments, I completely understand that most innovation doesn’t necessarily happen with ‘rockstar teams’ and ‘all-star angels’. In fact, most of my time is spent in the field, doing first hand research, hanging out with developers, going to user group meetings.

The reason why I’m excited about this new program is that I’m actively looking at virtual world, gaming, and next gen online socialization technologies. There’s some amount of title risk associated with these projects, because implicit in the design of the product are all of the creator’s assumptions about user behavior, emotional connection, and the sociological relationship between multiple users/groups. This investment size allows me to more palatably bear the risk of working with a couple of groups to develop a prototype and see how these assumptions manifest into the product/business. At the end of the day, I feel like I’ve personally failed if none of my seed investments flourish into viable Series A (B, etc) opportunities.

Thanks for reading my long post. I just wanted to share my perspective and try convince you that we are actually being a lot more thoughtful about this process than you seem to think we are.

Best,
Susan