Thinking About Thinking

The U.S. Company That Knows More About China Than China Does

Posted in Technology by larrycheng on July 30, 2010

What if there was a U.S. company that knew more about commerce and money flow in China, than China itself does?  Firstly, China would not be happy about that.  And, they’re not.  Secondly, this company would own an incredibly valuable asset, which they do.

This company has 300 million Chinese users using its payment platform to process payments.  This company also had the largest online retailer in China with 200 million Chinese shoppers.  This company also owns the largest B2B trading platform in China with 50 million suppliers on it giving it a granular view into China’s trading industry.  Between all of these properties – this U.S. company would be collecting invaluable data daily about how Chinese consumers shop, how Chinese businesses are transacting, and how money flows within and outside of China.  What if this were the case?

This is the case, and the company might surprise you.  The company is Yahoo.  Yahoo put itself in an incredibly compelling position in China through its $1B+ investment in Alibaba in 2005.  They are now the largest shareholder of Alibaba.  Since 2005, the three primary properties underneath the Alibaba Holding Company have all grown to become landmark properties in China.  These properties are Alibaba (largest B2B marketplace), Alipay (Chinese Paypal), and Tao Bao (Chinese eBay).  The growth and leadership position of these properties in China have put Yahoo in the position of having as much or more visibility into Chinese online commerce and money flows, than perhaps any other company in the world.  And, for that reason, China is not happy about it.

Something has to give in the middle of this conundrum as “China’s Alibaba” is now trying to buy back Yahoo’s stake.  But, why would Yahoo sell its stake in a holding company that is arguably worth more than Yahoo itself?  Something has to give as it is untenable that the Chinese government would let a U.S. company sit in such a strategic position in the Chinese economy.  It’s one of the more interesting dramas to watch over the next several months on the global technology landscape.

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The Google Shift In Enterprise IT

Posted in Technology by larrycheng on March 9, 2010

Through our portfolio companies, we have a view into how Google is perceived for both large enterprise and small/medium enterprise computing needs.  In some board meetings, I find myself exhorting management teams not to underestimate the impact of Google.  In other board meetings, I find myself cautioning management teams not to overestimate Google.  This dynamic is best portrayed in a recent Goldman Sachs IT Spending Survey.

When IT execs are asked about their top 3 strategic IT vendors today, the top three are:

  1. Microsoft
  2. Cisco
  3. HP

Google ranks 13th out of 18 large IT vendors.  This lends credence to the “don’t overestimate Google” refrain.  Arguably, Google’s lone successful product is still search.  For example, Chrome, Google Apps, Mobile Phones, and Gmail are not close to being market share leaders in any of their respective segments. 

But when IT execs are asked about their top 3 strategic IT vendors in 3 years, the top three are:

  1. VMWare
  2. Google
  3. EMC

Surprisingly enough, HP and Microsoft go from the top 3 to the bottom two.  This lends credence to the “don’t underestimate Google” refrain.  Infinite resources, sheer determination, and a business model that turns industries upside down is the type of competitor not to underestimate. 

I’m not sure it matters if Google succeeds in winning certain product categories.  Through the process of trying to win, Google will upset traditional business and delivery models which will in and of itself have a material impact on enterprise computing.  Even if Google “loses”, their impact will be far-reaching.  That’s the reality enterprise IT companies have to prepare for. 

Let The European Browser Wars Begin

Posted in Technology by larrycheng on March 1, 2010

Starting this week, about 190 million Windows PC users in the EU will be offered the chance to change browsers as part of the Microsoft settlement.  The process should take about 3 months.  The browsers being offered were selected based on market share in the EU.  Here are the 12 browsers being offered:

  1. Avant
  2. Flock
  3. Google Chrome
  4. GreenBrowser
  5. K-Meleon
  6. Maxthon
  7. Mozilla Firefox
  8. Opera
  9. Safari
  10. Sleipnir
  11. Slimbrowser
  12. Windows Internet Explorer

The browser selection pane is a non-standard horizontal scrolling pane where the top 5 browsers by market share show up first, and will randomly ordered.  The remaining 7 browsers show up when you scroll to the right, and those will be randomly ordered as well.  It should be interesting to see, if the results ever get published, what the mix will be once all is said and done. 

(disclosure: we are investors in Flock)

Global Venture Capital (VC) Blog Directory – Ranked By Monthly Uniques

Posted in Technology, Venture Capital by larrycheng on January 13, 2010

It’s exciting times these days after we launched Volition Capital on Monday (01/11/10).  Commensurate with that launch, we also launched the Ask Volition blog – which is a Q&A blog that is authored by various folks at Volition.  The first post on the blog is: Why did you choose the name Volition Capital? 

Despite all that’s going on, I decided to publish the 3rd version of the Global VC Blog Directory (v1: May 2009, v2: Sept 2009).  The past two versions have been based on Google Reader subscribers.  Some requests came in to do a ranking via monthly uniques to better show current readership – so this edition is ranked by monthly uniques according to Compete.  The specific number is the average monthly uniques in Q409 [(Oct+Nov+Dec)/3].  While Compete does have data for well trafficked subdomains (e.g. blogname.wordpress.com), approximately 50% of the lesser trafficked blogs on subdomains did not register unfortunately.  I also couldn’t isolate traffic statistics for blogs embedded into a broader site (e.g. www.firmname.com/blog).  Blogs without traffic stats are on a separate list below.  Apologies to those I couldn’t get data for.  Interestingly, lesser trafficked blogs with their own distinct domains did seem to get picked up more reliably.  Give me feedback on whether you prefer the ranking on subscribers or monthly uniques – I’m not fully committed to either yet.  Expect version 4 of this directory in April 2010 based on Q110 data.  As always, if I’m missing any new or existing VC/PE blogs, please leave it in the comment field.   

Links to subscribe to the Global VC Blog Directory in bulk via Google Reader (RSS/OPML) – will be updated, but still based on v2: Sept 2009:

 

The Global VC Blog Directory (Avg. Monthly Uniques – Q409)

  1. Fred Wilson, Union Square Ventures, A VC (100,279)
  2. Guy Kawasaki, Garage Technology Ventures, How To Change The World (82,838)
  3. Paul Graham, YCombinator, Essays (71,924)
  4. Brad Feld, Foundry Group, Feld Thoughts (45,633)
  5. Mark Suster, GRP Partners, Both Sides of the Table (39,389)
  6. Bill Gurley, Benchmark Capital, Above The Crowd (23,084)
  7. Dave McClure, Founders Fund, Master of 500 Hats (21,462)
  8. Josh Kopelman, First Round Capital, Redeye VC (12,972)
  9. Bijan Sabet, Spark Capital, Bijan Sabet (12,451)
  10. Jeremy Liew, Lightspeed Ventures Partners, LSVP (12,097)
  11. Mark Peter Davis, DFJ Gotham Ventures, Venture Made Transparent (12,010)
  12. Larry Cheng, Volition Capital, Thinking About Thinking (11,851)
  13. Eric Friedman, Union Square Ventures, Marketing.fm (11,520)
  14. Multiple Authors, Union Square Ventures, Union Square Ventures Blog (11,408)
  15. Albert Wenger, Union Square Ventures, Continuations (9,729)
  16. Christine Herron, First Round Capital, Christine.net (9,561)
  17. Mendelson/Feld, Foundry Group, Ask The VC (9,270)
  18. Seth Levine, Foundry Group, VC Adventure (8,206)
  19. Nic Brisbourne, Esprit Capital Partners, The Equity Kicker (8,052)
  20. Fred Destin, Atlas Venture, Fred Destin’s Blog (7,928)
  21. Ryan Spoon, Polaris Venture Partners, ryanspoon.com (7,904)
  22. Jason Mendelson, Foundry Group, Mendelson’s Musings (7,763)
  23. Jon Steinberg, Polaris Venture Partners, Jon Steinberg (7,595)
  24. Marc Andreesen, TBD, Blog.pmarca.com (6,982)
  25. David Cowan, Bessemer Venture Partners, Who Has Time For This? (6,744)
  26. Roger Ehrenberg, IC Capital Ventures, Information Arbitrage (6,396)
  27. Dan Rua, Inflexion Partners, Florida Venture Blog (6,278)
  28. David Hornik, August Capital, VentureBlog (5,920)
  29. Stewart Alsop, Alsop-Louie Partners, Alsop-Louie Partners (5,346)
  30. Ted Rogers, PPI Ventures, Venture Capital Brazil (5,146)
  31. Ed Sim, Dawntreader Ventures, Beyond VC (3,973)
  32. Jeff Bussgang, Flybridge Capital Partners, Seeing Both Sides (3,224)
  33. Ouriel Ohayon, Lightspeed Gemini Internet Lab, MYBLOG by Ouriel (3,102)
  34. Rick Segal, JLA Ventures, The Post Money Value (2,723)
  35. David Lerner, Totius Group, Columbia Venture Lab, David B. Lerner (2,627)
  36. Rob Hayes, First Round Capital, Permanent Record (2,596)
  37. Rich Tong, Ignition Partners, Tongfamily (2,589)
  38. Mike Speiser, SutterHill Ventures, Laserlike (2,324)
  39. Will Price, Hummer Winblad, Will Price (2,066)
  40. Peter Rip, Crosslink Capital, EarlyStageVC (1,926)
  41. Rob Go, Spark Capital, robgo.org (1,908)
  42. Chris Fralic, First Round Capital, Nothing To Say (1,826)
  43. Matt Winn, Chrysalis Ventures, Punctuative! (1,757)
  44. Satya Patel, Battery Ventures, Venture Generated Content (1,744)
  45. Multiple Authors, Highway 12 Ventures, Highway 12 Ventures Group (1,700)
  46. David Beisel, Venrock Associates, GenuineVC (1,590)
  47. John Ludwig, Ignition Partners, A Little Ludwig Goes A Long Way (1,562)
  48. Sarah Tavel, Bessemer Venture Partners, Adventurista (1,518)
  49. Mike Hirshland, Polaris Venture Partners, VC Mike’s Blog (1,492)
  50. Martin Tobias, Ignition Partners, Deep Green Crystals (1,426)
  51. Christopher Allen, Alacrity Ventures, Life With Alacrity (1,283)
  52. Mo Koyfman, Spark Capital, Mo Koyfman (1,128)
  53. Derek Pilling, Meritage Funds, Non-Linear VC (1,090)
  54. Kent Goldman, First Round Capital, The Cornice (1,084)
  55. Greg Foster, Noro-Moseley Ventures, SouthernVC (1,082)
  56. David Aronoff, Flybridge Capital Partners, Diary of a Geek VC (847)
  57. Matt McCall, DFJ Portage Venture Partners, VC Confidential (844)
  58. Lee Hower, Point Judith Capital, Venturesome (802)
  59. Allan Veeck, Pittsburgh Ventures, Pittsburgh Ventures (789)
  60. Paul Fisher, Advent Venture Partners, The Coffee Shops of Mayfair (777) 
  61. Rob Finn, Edison Venture, Ventureblogalist (734)
  62. Jason Caplain, Southern Capitol Ventures, Southeast VC (723)
  63. Baris Karadogan, Com Ventures, From Istanbul to Sand Hill Road (712)
  64. David Feinleib, Mohr Davidow Ventures, Tech, Startups, Capital, Ideas. (709)
  65. Ryan McIntyre, Foundry Group, McInblog (675)
  66. Marc Averitt, Okapi Venture Capital, OC VC (654)
  67. James Chen, CXO Ventures, PureVC (551)
  68. David Pakman, Venrock Associates, A Venture Forth (646)
  69. Rachel Strate, EPIC Ventures, Wasatch Girl (528)
  70. Jeff Joseph, Prescient Capital Partners, Venture Populist (446)
  71. Max Niederhofer, Atlas Venture, Life In The J Curve, baby (445)
  72. Jason Ball, Qualcomm Ventures Europe, TechBytes (413)
  73. Pascal Levensohn, Levensohn Venture Partners, pascalsview (397)
  74. Saul Klein, Index Ventures, LocalGlo.be (102)

Additional VC Blogs (No Traffic Data)

  1. Multiple Authors, Volition Capital, Ask Volition (n/a)
  2. Tim Oren, Pacifica Fund, Due Diligence (n/a)
  3. Jeff Clavier, SoftTech VC, Software Only (n/a)
  4. Stu Phillips, Ridgelift Ventures, Soaring on Ridgelift (n/a)
  5. Scott Maxwell, Openview Venture Partners, Now What? (n/a)
  6. Raj Kapoor, Mayfield Fund, The VC In Me (n/a)
  7. Howard Morgan, First Round Capital, Way Too Early (n/a)
  8. Rob Day, @Ventures, Cleantech Investing (n/a)
  9. Steve Jurvetson, DFJ, The J-Curve (n/a)
  10. Philippe Botteri, Bessemer Venture Partners, Cracking the Code (n/a)
  11. Andrew Parker, Union Square Ventures, The Gong Show (n/a)
  12. Marc Goldberg, Occam Capital, Occam’s Razor (n/a)
  13. Allen Morgan, Mayfield Fund, Allen’s Blog (n/a)
  14. Daniel Cohen, Gemini Israel Funds, Israel Venture Capital 2.0 (n/a)
  15. Max Bleyleben, Kennet Partners, Technofile Europe (n/a)
  16. Jeremy Levine, Bessemer Venture Partners, Nothing Venture, Nothing Gained (n/a)
  17. Michael Eisenberg, Benchmark Capital, Six Kids and a Full Time Job (n/a)
  18. Sagi Rubin, Virgin Green Fund, The Grass is Greener (n/a)
  19. Vineet Buch, BlueRun Ventures, Venture Explorer (n/a)
  20. Richard Dale, Sigma Partners, Venture Cyclist (n/a)
  21. Steve Brotman, Silicon Alley Venture Partners, VC Ball (n/a)
  22. Ho Name, Altos Ventures, Altos Ventures Musings (n/a)
  23. George Zachary, Charles River Ventures, Sense and Cents (n/a)
  24. Jacob Ner-David, Jerusalem Capital, VC In Jerusalem (n/a)
  25. Ed Mlavsky, Gemini Israel Funds, GOLB: Is This Israel? (n/a)
  26. Michael Greeley, Flybridge Capital Partners, On The Flying Bridge (n/a)
  27. Sid Mohasseb, Tech Coast Angels, Sid Mohasseb (n/a)
  28. Peter Lee, Baroda Ventures, Seeing Eye To Eye (n/a)
  29. Ted Driscoll, Claremont Creek Ventures, Evolving VC (n/a)
  30. Justin Label, Bessemer Venture Partners, Venture Again (n/a)
  31. Adam Fisher, Bessemer Venture Partners, Savants in the Levant (n/a)
  32. Gregoire Aladjidi, Techfund Europe, Investing In What’s Next (n/a)
  33. Todd Dagres, Spark Capital, Todd Dagres Tumblelog (n/a)
  34. Santo Politi, Spark Capital, This and That (n/a)
  35. Robert Goldberg, Ridgelift Ventures, Tahoe VC (n/a)
  36. John Abraham, Arrowpoint Ventures, JMA’s Views On Everything (n/a)
  37. David Dufresne, Desjardins Venture Capital, Dav-Generated Content (n/a)
  38. Brad Burnham, Union Square Ventures, Unfinished Work (n/a)
  39. Brian Hirsch, Greenhill SAVP, New York VC (n/a)
  40. Multiple Authors, Foundry Group, Foundry Group (n/a)
  41. Charles Curran, Valhalla Partners, VC Blog (n/a)
  42. Multiple Authors, Brightspark Ventures, Let the Sparks Fly! (n/a)
  43. Jon Seeber, Updata Partners, Jon’s Ventures (n/a)
  44. Todd Klein, Legend Ventures, Media VC (n/a)
  45. Multiple Authors, True Ventures, Early Stage Capital (n/a)
  46. Adi Pundak-Mintz, Gemini Israel Funds, Adisababa’s Weblog (n/a)
  47. Don Rainey, Grotech Ventures, VC in DC (n/a)
  48. Art Marks, Valhalla Partners, Entrepreneurial Quest (n/a)
  49. Rob Schultz, IllinoisVENTURES, Go Big or Go Home (n/a)
  50. Tony Tjan, CueBall Capital, Anthony Tjan (n/a)
  51. Cem Sertoglu, Golden Horn Ventures, SortiPreneur (n/a)
  52. Larry Marcus, Walden Venture Capital, Walden Venture Capital (n/a)
  53. Anupendra Sharma, Siemens Venture Capital, So Little Time, So Much… (n/a)
  54. Steve Jurvetson, DFJ, Uploads from Jurvetson (n/a)
  55. Gil Debner, Genesis Partners, TechTLV (n/a)
  56. Multiple Authors, Tech Capital Partners, Tech Capital Partners Blog (n/a)
  57. Simon Olson, FIR Capital Partners, Venture Capital Thoughts and Reflections (n/a)
  58. Josh Sookman, RBC Ventures, Startup Life (n/a)
  59. Vishy Venugopalan, Longworth Venture Partners, Longworth Venture Partners Blog (n/a)
  60. Chip Hazard, Flybridge Capital Partners, Hazard Lights (n/a)
  61. Ed French, Enterprise Ventures, TechGain.net (n/a)
  62. David Stern, Clearstone Venture Partners, The Raging Insterno (n/a)
  63. Jonathan Tower, Citron Capital, Adventure Capitalist (n/a)
  64. Dan Parkman, Venrock, Disruption (n/a)
  65. Charlie Kemper, Steelpoint Capital Partners, Opine Online (n/a)
  66. Eric Ver Ploeg, Metric Ventures, Pocket Watch (n/a)
  67. Jeff Bocan, Beringea LLC, Jeff Bocan (n/a)
  68. Boris Wertz, w media ventures, w media ventures (n/a)
  69. Charlie Federman, Crossbar Capital, CosmicVC (n/a)
  70. Multiple Authors, Golden Horn Ventures, Golden Horn Ventures (n/a)

If you know of any other VC/PE blogs, please put the URL in the comment field.  It will be included no later than the next update.   

Burn Rate Norms

Posted in Technology, Venture Capital by larrycheng on December 16, 2009

When investors and entrepreneurs talk about “burn rate”, they’re generally referring to the amount of cash a company consumes through its normal operations every month.  For many venture-backed companies, they have a negative burn rate meaning that they are expending more cash than they are collecting.  The obvious rationale to burn cash is that by spending more now, your company will be able to grow revenue faster, acquire market share and separate from the competition. 

Investors will talk about “high burn rate” companies, “capital efficient” companies, companies that are “burning too much”, etc.  But, how does this translate to hard numbers?  Here’s my rule of thumb:

  • Cash Flow Positive:  If the company is growing and cash flow positive – congratulations.  The model has been proven, you never have to raise capital again. 
  • $0–$250k burn rate:  This is still a “capital efficient” company – a $10M round could last 3–4 years which is an eternity.
  • $250k-$500k burn rate:  This is average.  Many young venture-backed companies are in this zone.  A $10M round lasts 1.5–2.0 years. 
  • $500k-$750k burn rate:  This is on the high side.  You could be accused of “burning too much”.  A $10M round lasts a 1.0–1.5 years.  That’s a tight timeframe to create value.
  • $750k-$1M burn rate:  This is a “high burn rate” company.  A $10M round doesn’t even last a year.  There’s no room for error.
  • $1M-$2M burn rate: Many investors won’t touch a company burning this much.  The exception is if the spend is due to aggressive marketing against a known acquisition model that is profitable against the lifetime value of a customer. 
  • $2M+ burn rate: Most investors will run like the wind. 

While some sectors such as biotech, cleantech and communications services don’t follow these norms – it’s a pretty good benchmark for most emerging technology companies.

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The Single Playbook Executive – What Venture-Backed Executives Can Learn From NFL Coaches

Posted in Technology, Venture Capital by larrycheng on November 22, 2009

There used to be a single playbook in the NFL built around a simple philosophy – running and defense wins championships.  The entire operating approach of teams was centered on this singular belief.  The prototypical example of this was the 1986 Chicago Bears – think Buddy Ryan-coached defense with Mike Singletary and William “The Refrigerator” Perry.  Think about a running game led by none other than Walter Payton.  That was a dominant team with the right playbook for that era.

But the rules of the NFL have changed – literally.  The rules have slowly been re-engineered in the league to preferentially protect wide receivers and quarterbacks.  Hit a quarterback the wrong way, and you’ll get a penalty.  Touch a wide receiver after 5 yards, and you’ll get a penalty.  Literally, the rules have changed, to support a more exciting brand of football that revolves around the passing game.  It’s no wonder that four of the best teams in the league – Indianapolis Colts, New Orleans Saints, New England Patriots and San Diego Chargers are pass first teams led by quarterbacks Peyton Manning, Drew Brees, Tom Brady, and Philip Rivers, respectively. 

Over the last several years, some NFL teams have learned a new playbook because the rules of the game have changed.  Others have not adapted.  I have always thought that this was a great analogy for the technology landscape and the executives that operate in this world.  I’d argue that in the world of venture-backed technology companies, the rules of the game change dramatically faster than in the NFL.  That puts a burden on executives living in this world to adapt. 

Beware of the “single playbook” executive.  They have one blueprint and they apply that blueprint for any situation they’re in.  They use that blueprint because they’ve had success with it – maybe great success with it.  They bring in the same people that were succesful with that blueprint.  But, it’s dangerous to be a single playbook executive if the rules of the game are changing all around you.  Therein lies the lesson I think that executives in venture-backed companies can learn from NFL coaches– your playbook has to take into account the changing rules of the game. 

Now, don’t get me wrong.  I, like many VCs, love to back successful executives who have a proven and successful playbook.  But, there is a reason that many new entrepreneurs are finding great success without a proven historical playbook– it’s because their playbooks are being built for the rules of the game as it stands today.  Successful venture-backed executives have to adapt their playbook or they should beware of the up and coming executives who don’t care how things were done before and only care about how to win today. 

Succeeding With A Potential Single Point Of Failure

Posted in Technology, Venture Capital by larrycheng on November 21, 2009

I’ve had the opportunity to invest in two companies that I’d describe as having a “potential single point of failure”.  I chose to invest in one – Verid.  And decided, unfortunately, to pass on another – Mint.  Verid was ultimately sold to EMC/RSA less than two years after our investment for several multiples of our capital.  And Mint was recently acquired by Intuit.  I thought it was interesting how they were both sold for similar exit values given that both had the uncommon distinction of having a point of single dependency.  Here are their stories and a couple thoughts:

Verid provides knowledge-based authentication services.  You’ve probably run into the service if you’ve ever tried to open an account online and been prompted to answer questions about yourself to prove that you are who you say you are.  Verid’s potential single point of failure?  Their entire authentication service was built leveraging a single data aggregator on the back-end.  If that data provider decided not to work with them one day, there would be no questions and no answers in this authentication service.  Verid’s entire service depended on a single data contract. 

Mint provides an online financial management service for consumers.  They help you manage and identify ways to save money through one online console that sees across all of your financial accounts.  Mint’s potential single point of failure?  They rely on Yodlee as the account aggregator to bring together all of the data from the different financial accounts for a consumer.  Absent Yodlee, there would be no data in Mint’s service, which means there would be no service at all.  Mint’s entire service depended on a single technology relationship.

While I don’t know Mint’s situation, I suspect both companies mitigated this risk by signing long-term deals with their respective partners.  I imagine both were among the largest customers for their respective partners and felt like they had some leverage in the other direction.  Nonetheless, I suspect both companies wanted to hedge their bets by cultivating other partners, but ultimately were growing too fast to seriously contemplate using another platform.  I also imagine that both sold to their respective acquirers with one eye looking at an attractive valuation and the other eye looking at a substantial unknown after the terminal year of their partner contracts. 

Verid and Mint both deliver superb products and ended up being great investments for their investors.  Both probably could not have been huge companies without mitigating that potential single point of failure.  But, both showed that despite that issue, with astute management, you can still have a very successful outcome. 

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Give Me A Dollar and I’ll Give You 90 Cents Back

Posted in Economy, Pop Culture, Technology by larrycheng on November 11, 2009

This is the purest business idea of all time – give me a dollar and I’ll give you 90 cents (or something less) back.  Ridiculous, right?  Yet, it happens in so many different forms that it’s somewhat surprising.  Why would anyone in their right mind give someone a dollar just to get less money back?  And, I’m not talking about you giving someone a dollar so that they give someone else 90 cents back.  That’s money movement.  I’m talking about a direct trade – you give someone money just for the privilege of getting less money back.  It happens a lot and we’ve all participated in it.   

Here are some ways this model exists in business – and I’ll rank order them by the models that give you the most money back to the ones that give you the least.  I’m going to spend a little extra time on the last business which I think is the most onerous of them all.  Here we go:

1.  ATMs.  The most obvious model – you give the bank a dollar, and they give you 98%-100% of it back every time you withdraw it from the ATM.  Their service: accessibility and interest. 

2.  Travelers Checks.  We all know that companies like American Express have made a great business in taking your money, and giving you 96%-99% of the value back in the form of a less liquid travelers check.  What’s the embedded service?  Insurance. 

3.  Check Cashing.  Companies like Western Union will take your check and give you cash worth about 95%-99% of the value.  Their value: liquidity, especially to the unbanked.

4.  Currency Exchange.  Companies like Travelex have made a great living taking your money, and giving you 90%-98% of the value back in the form of another currency.  The implied service:  local purchasing power.

5.  Coinstar.  These guys own the kiosks you see at the grocery store where you put in a bag of coins and they give you 90% of the value back in the form of cash.  It’s an amazing business to say the least.  What’s their underlying service?  Money portability.

And last but certainly not least:

6.  Gold Buyers.  These companies allow you to trade in your gold jewelry, and they give you cash for the gold.  Not a fair example you say?  I think it’s very fair – gold is a currency and so are the dollars you’re getting in return.  Their true service: liquidity.

Here’s why I think the gold buying services are truly the worst economic deal of them all.  There are two compounding issues.  First, these companies are not giving you anywhere close to value of your gold, dollar for dollar.  While the above businesses give you 90%+ of the value of your dollar, some people who have used these gold buying services have calculated that they have received 17%-18% of the value of their gold.  That’s an 80%+ tax right there.  (UPDATE: This CNN report that came out today says gold buyers pay between 18%-60% of face.)  But, let’s not stop with that.  There’s a second compounding issue that can be material.  Gold is an appreciating asset.  The US Dollar is a declining asset. 

Here’s the historical price of gold:

GDM

Here’s the strength of the US Dollar over the same time period:

USM

[UPDATE: Just a note – past performance is not indicative of future returns.  Either currency could go up or down from here.  It’s unlikely that any currency fluctuation up or down would make up for the initial 80% tax though.]

Here are the real economics:  let’s just say you sold your gold jewelry in 2003 where the actual gold value is $100.  Let’s say you got $18 for that $100 of gold.  And then let’s just say you held that cash until now.  The purchasing power of that $18 has declined to ~$14 since 2003.  Meanwhile, if you just held the $100 of gold in the form of the jewelry, it would now be worth over $350.  I’m not exactly sure how to properly index two bifurcating currencies, but in a nominal sense, you traded something worth $350 for $14.  You got paid 4 cents for your dollar.  Instead of saying “We Pay Top Dollar” – these companies should say we pay you cents on the dollar. 

[UPDATE: This is what happens when you whip together a blog post late at night.  Since the gold is priced in dollars, the depreciation of the dollar is embedded in the gold price.  So, I didn’t need the second chart so I double counted the impact of the dollar depreciation.]

Now to be fair – most gold sellers probably don’t hold their cash so the separation from gold’s appreciation and the dollar’s depreciation may not actually have time to play out.  The seller gets the value of instant liquidity and they probably use it.  In addition, the gold buyers do need to have infrastructure to appraise, melt, and monetize gold if they do it themselves.  Nonetheless, the tax these companies charge to give you your money back is pretty onerous no matter how you cut it.  But, it just goes to show, there’s always ways to get people to give you money in exchange for less money back. 

The Unofficial Cool Parent Test

Posted in Philosophy, Technology by larrycheng on October 5, 2009

Are you a cool parent?  It all depends on whether or not and under what circumstances your teen has “friended” you on Facebook.  The following ranking is principally based on real experiences of parents I know.  Here we go from the most cool (1) to the clearly not cool (10): 

  1. Your teen sought you out and invited you to be their friend on Facebook.  Kudos to you, you’re cool.  You’re in the top 10%. 
  2. You signed up with Facebook and invited your teen to friend you.  After 6–12 months, your invitation was accepted without any intervention from you.  Congratulations!  It took awhile, but look at it this way – after extensive diligence, you have passed the cool threshold.  Congrats. 
  3. You invited your teen to friend you on Facebook.  You have been accepted – but the content on the page looks thin.  You have been accepted with limited information access – real friends have full access.  Look at the bright side, at least your child doesn’t mind his/her friends knowing that you exist.  You’re not explicitly cool, but you’re not a total embarrassment either. 
  4. You have not been friended by your teen, but they have friended a close friend of yours.  They know that your friend will probably let you check in online every once in awhile through their account.  Your kid thinks you’re cool enough for some access, but he/she’s not ready to go public with that sentiment.  Ask your friend why he/she is cooler than you. 
  5. After the 6–12 month wait, you coerce your child through a mix of threats and gifts (like a car) to accept your invitation.  Your invitation gets accepted with your child under extreme domestic pressure.  Not cool – stop taking parenting tips from 24
  6. Your invitation to your teen to friend you on Facebook has been flat out declined.  It’s got to sting, but look at the bright side – at least he/she was honest with you. 
  7. You invited your teen to friend you.  You have heard no response.  You keep waiting.  No response.  6–12 months have passed – you’re afraid to bring it up. Your invitation may have been “ignored” by your teen – which is the polite way of saying “No Way!”.  Look at it this way, at least your kid cares about your feelings enough to not neg you outright. 
  8. You have no idea what Facebook is.  Not cool, but there could be worse. 
  9. Your teen friended you on Facebook, and the very same day you clicked to every friend they have, looked at every friend’s links, pictures, videos, etc.  Not cool – that is parental stalking.  You give parents a bad name.  Beware of the next one:
  10. You were friended by your teen, but you have been subsequently defriended.  Ouch, you screwed up somewhere along the way. 

“The Dullest Company At DEMO”

Posted in Technology, Venture Capital by larrycheng on September 24, 2009

For several months, Cortera has been working on the launch of the Cortera Credit Exchange where businesses can rate each other on how they pay their bills (my earlier blog post on why I’m so excited about it).  Waking up this past Tuesday morning when the DEMO embargoes cleared – I did a news search on Cortera and there was Rafe Needleman’s CNET article entitled “Tiny Cortera Swings For Dun & Bradstreet”.  Rafe’s article started with this ominous line, “I think I just found the dullest company at DEMOFall 09 to write about”.  Ouch.  But, the very next line points out how the boring blocking and tackling companies can find “huge success”.  Phew.  In a follow-up article, Rafe reaffirmed his dullness claim, but also called Cortera the “most disruptive business” at DEMO.  Yes!

While every other company wanted to be on the “coolest company” lists at DEMO, Jim Swift, Cortera’s CEO, decided to embrace their newfound fame as the dullest company at Demo.  Dull and proud of it!  Based on the great reception Cortera has gotten, it seems that in a sea of oh so cool, dull is in.

Cortera’s 6-minute demo at DEMO:

Cortera coverage:

  • CNET: Tiny Cortera Swings For Dun & Bradstreet
  • CNET & CBS: The Most Promising Launches of DEMOFall
  • Wall Street Journal: Are Mom & Pop Past Due?
  • Techcrunch: Cortera Measures Business Credit With Community Ratings
  • Boston Globe: Cortera, Kind of Like Yelp For Business Credit
  • ReadWriteWeb:  The Best of DEMOfall 09: Five Companies to Watch
  • eWeek (video): Helping Small Businesses Avoid Deadbeat Companies
  • eWeek: eWeek Picks the Best of DEMOfall 2009
  • Venturebeat: Cortera Helps You See If Small Businesses Are Credit-Worthy
  • Credit.com: Social Networking Meets Small Business Credit Ratings
  • Cortera: Official Press Release