The coffee shops of Mayfair

The Ebay Skype write down is bad news for venture capital

Since ebay admitted that, really, they messed up with Skype, there is an amusing opportunity for the vcs who passed on investing into Skype 3 years ago due its lack of revenue model to say "I told you so".  It would not be the first time that the vc community thinks its a lot smarter than the listed markets.

But why does the Skype write down worry me? Surely, I hear people say, the vcs shouldn't care. They got in and out and made some good money.

This is quite wrong.

The point is that we will all need to sell a number companies into listed web companies.

We want their acquisitions to make them money so they come back to us for more.

The FT does a good job of comparing the terrible Skype acquisition with the wonderful myspace acquisition which has made lots of money from Newscorp.

A pity they can't all be like Newscorp.

I also think Nic is missing the point.  it's not what you can auction them up to in the short term, it what value these businesses create over the longer term.

I REALLY REALLY hope that CBS eventually turns a terrific profit line from Last.FM .  And I really hope, not that Facebook sells for $10bn but that Facebook creates real value. Real revenues and real profits for an acquiror or for retail investors at IPO.  Without real value being created, over the longer term VCs will be on shaky ground.

Why you probably don’t need venture capital

VCs are looking for freaks.  Wierdos.  We long to see mutants: companies that are not normal.

VCs are looking for category definers.  Companies that return five or ten times their investment.  This is weird. It is not normal to build a company that will grow from zero to $1bn in four years.  Yet, it can happen and this is the potential that most investors look for.

Saul Klein has been saying some excellent stuff recently from about how it IS possible to build billion dollar companies in Europe.  The presentation  he gave at Nextweb was a great motivational rallying call to us all.

European entrepreneurs should be going after the massive opportunities. 

But I want to remind entrepreneurs that its also OK to not raise VC.  There are loads and load and loads of great businesses that shouldn’t touch the VC world.  These companies can still make the founders rich.  Just probably not as rich as the founders of Skype.  Nor have the rewards of Last.fm at such a young age.

What are the reasons not to raise VC.  Why not?
·    VC is the most expensive money you can get.  This is a fact.  The cost of debt is lower than the cost of equity and venture carries the highest risk premium of all.  This means that you have to give up BIG CHUNKS of your company. (Nic has recently written on how important it is to get right the amount you raise at the first round.  My point is, however you do it, it's expensive). 
·    You can’t get big enough. Remember that VCs need 5 – 10 times their investment.  Ask yourself; can your web app really be worth $500mn? 

Ryan Carson is a great guy to talk to or read blog post on this.  Some time back, he analysed his DropSend business and realised that he could make a great business out of it.  It would make him money year on year.  Just it wasn’t going to take over the world.  He wouldn't need to riase external finace. Consequently his focus on building a brilliant web app and profitable business has made him very successful.

I chatted to him about this recently and he said his personal metric was 100 million dollars.  Unless he has a business that can sell for more than a yard of US, there’s no way to justify the dilution.

He also pointed out it’s a personality thing.  From some entrepreneurs there is great pride in keeping it small. It’s also a question of risk.  If you have the risk profile to keep betting the farm on three cherries you are right for VC (explanation).

So you should only really be looking to raise VC if
·    You need the brand, network and advice of a marquee investor
·    The market opportunity is massive.  Ridiculous. Whitespace.
·    You can’t do it off cashflow or debt.

For these companies, VC is a wonderful option because rather than having to re-mortgage the house and invest, what Fred Wilson calls “divorce equity, lack of sleep equity, gaining 15 lbs equity”  you can take someone else’s cash and risk that.  VCs can also offer loads of additional help in terms of sage advice (what not to do!) introductions and network.  Lots of our portfolio businesses also enjoy the additional credibility of having a marquee investor to show off about: it helps to gain credibility with certain partners.

If you still think you raise VC that’s great.  Drop me a line.

Last.fm and Index Ventures finally announced

Glad the news is finally out there.  If nothing else it'll mean I don’t have to keep politely replying to emails asking me who did the deal.

Delighted to read Martin Stiksel’s comments that the company wasn’t “actively looking” for VC. 
I often tell entrepreneur’s that the best time to run an investment round (at least from the perspective of negotiating the right deal) is when you don’t actually need the money....

Anyway, now the hard-work really starts for Last.fm, and I’m looking forward to seeing how they roll it out.

Fotenote:  I am now back in the land of living as we announced  the sale of venture backed software company AIM Group to Computer Software Group plc .  I’m now back and busy meeting lots of great British Entrepreneurs  and I’m looking forward to writing up a few thoughts that have been germinating over the last month or two…

Why is last.fm so exciting?

The VC interest in last.fm continues unabated.  I have been asked by a few VCs whether this is just a feeding frenzy created by Yahoo and Google’s current shopping spree OR if it’s a sustainable business on its own.

I think it's very sustainable and here’s why.

last.fm is valuable because it provides a compelling mechanism for consumers to find tunes that they like and therefore more likely to buy.

True, but more importantly

Last.fm is valuable because, by using its collaborative filtering mechanism, it has grabbed an early dominance as the platform for intermediating between what consumers and the music they want.  Clay Shirky tells us why this could be so valuable:

"The (music label) industry harvests the aggregate taste of music lovers and sells it back to us as popularity, without offering anyone the chance to be heard without their approval… The industry's judgment, not ours, still determines the entire domain in which any collaborative filtering will subsequently operate. A working 'publish, then filter' system that used our collective judgment to sort new music before it gets played on the radio or sold at the record store would be a revolution." 

True, but also (and potentially of most significance)

last.fm is valuable because it could be a mechanism for consumers to find the stuff that’s most valuable to them (not just music). Which means it could be the next generation of search (and I'm not going to bang on why that is valuable).

Let me take a few more paragraphs to explain this point about "next generation search" (clue: it isn't about people searching for stuff but about people finding stuff).

Because media production is cheaper and more atomised, attention from consumers is scarcer and consequently more valuable.  This means that there is greater value ascribed to not only low cost production and distribution but also search (explained in phenomenal detail by Umair Haque).

I use “search” here as a very loose term: it refers to something more than just Google.  It is about the way that consumers are fed (or discover) media most efficiently which is uber-relevant to them.  This is about a number of things: tagging (del.icio.us),  multimedia analysis (Riya. Omniperception, Blinkx), aggregation etc etc.

There is enormous value in delivering what the consumer wants without them asking for it.

With this type of smart aggregation,  predicition is the key (this is composed of user profiling, collaborative filters, community recommendations, similarity & difference filters).  last.fm has all of these.

So I believe last.fm does have stand-alone value.

It has the opportunity to win short term advantage. And in the longer term it can win big.