Silicon Valley Himalayan Expedition

Carnival of the Mobilists #71

A pleasure to be hosting the 71st Carnival, which must mean it has been at least a year since I hosted last.  Congratulations to the great people who have been making this happen week over week.  For me hosting represents my best chance to dive into a world of divergent perspectives, new ideas and amazing analysis within the industry.

For me, the best post of the week was Ricky Cadden's Why I Won't Use a Music Phone (Yet) posted at Symbian-Guru.com.  I think it's such an important topic in the upcoming release of the iPhone as operators are nervous about taking on Apple heads on with music related devices.  Ricky's first bullet point nails it in my view though: ease of transfer.  iTunes, the music store and the consumer integration experience that goes with them is Apple's competitive edge.

Mark Logan presents Mobile Marketing Principles posted at bemomobi.  While Mark humbly points out that it's not rocket science, he is starting to put a framework together that clients can actually understand and reference.  If you are at all working within mobile advertising, I'd join in on the discussion with Mark.

On the same topic of mobile marketing, Troy Norcross writes about Mobile Measurement – The right end of the stick? posted at Mobile Marketing & SPAM.  This is an insightful piece reminding advertisers to really understand their campaigns, and not just run them.  A useful point - don't worry about it too much, just do it in some way!

Tim Trent presents SMS - Text Message - Marketing is scary for permissions posted at Marketing by Permission.  As someone involved in SMS marketing, this is a good reminder post.  Do you know what a director of mobile marketing told me at a major record label before signing our contract:  "You are the first mobile company where I joined an sms list and did not receive spam."  Wow.

This post titled Global Wireless Data Market Update 2006 by Chetan Sharma at Always On Real-Time Access almost made my favorite for the week, only because I love data so much (and for some reason when it's free I love it even more).   If you're into data to help run your mobile business, go see what Chetan and his smart team is reporting on what is going on.

Leaping over to the application side, Zach presents TalkinSilent by Silent Communication posted at Nokia S60 3rd Edition Applications Review.  This app is pretty wild - I'm a huge believer in multi-modal use cases (I'm dying to try out one of the voice to sms voice mail service for example).  I don't know if it can be done as successfully in real-time as these guys are trying but fun to learn about it.

At the end of the post, Zach talks about the difficulty in buying the app, which is what Little Springs Design's post titled on-selling applications is all about at the Little Springs Design blog.  They've put down some specific ideas to help bolster the methods for better selling and point out that if application junkies don't get excited, then how are ordinary consumers supposed to!

We know many operators think they already do ok at this, so you have to appreciate Tarek Esber in his post Operators, Internet Telephony & The N95  on the tarek speaks mobile blog.  He's trying to strike the balance between his passion for and commitment to an open carrier phone network (where operators don't mess with phones and apps) and the realities of an industry.

You can bet that Tarek hasn't seen anything yet if Google releases its own phone, which is a nice lead into Jimmy Atkinson's Five Things I Want Google Phone to Offer that iPhone Won't posted at VoIP Now.  I guess I am not the only one who looks to Google to solve all of the worlds needs.   I like his open platform point - I think you're going to see an operator embrace a hacker phone in a big way, but I'm guessing Google's to mature at this point to offer it.

Ajit at Open Gardens really covered these points and a whole lot more when he moderated a panel with carriers (an assignment he could not refuse) and wrote about it in the post How should Operators integrate third parties into their network.   Here's his view: in an IP world, as the Mobile Internet mirrors the Internet, the Operator should focus on the core of the network and leave the edge of the network to third parties.

I can't help but think of a similar post I wrote when I read Ajit's comment, and also Erik Starck's The Mobile OS of the future is... posted at The Mobile Web Tablet.  Not to kill the drama of the title, but he thinks it's the web.  Here's a challenge remaining with the promise of the mobile web - this morning I dropped by for the opening remarks of a conference at Stanford that turned out to be tomorrow.  When I got there I was confused so to learn why no one else was there, I decided to phone my friend vs. looking it up on the mobile web (Verizon Edge).  So if basic information collection isn't a slam dunk yet, how long until mobile web apps are?  Or would that just be a North American behaviour?  (Or worse, the CEO of a Palo Alto mobile company - yikes).

A quick aside on mobile content (surprisingly the only post in this area this week) before getting more technical...  Jason at Skydeck makes the bold call that content will be free.  Given the statistics he kicks off the post with, it's hard to see it happening all too rapidly without the full arrival of an open mobile web supported by the carriers. 

Think tank Vision Mobile Forum on its blog delivers an excellent outline of issues facing the SIM industry in a post titled Prague or Berlin.   Andreas Constantinou covers two recent conferences and offers his own insights in this must read for anybody trying to figure out where SIM is headed.

Malcolm Lithgow discusses the "Command Line Interface" (aka CLI) and presents A bit more on the CLI posted at Smart Dreaming: smartphone industry commentary.  There is a lot of discussion happening about CLI  happening in the industry (and particularly SMS in the US).  CLI and graphical user interfaces are the most successful whenever the user reward:user input ratio is highest, so that ratio can be put to the test in the head to head debate.

And close to finally, young Tarek El Ghazali in Egypt at Symbiano Tek provides a short and useful definition for what is S60. 

In the horribly conflicted category, Justin Oberman at Mopocket writes about an amazing comedy group called the Late Night Players and points to the production of a Spiderman text your adventure that uses keywords from my company Mozes.  Go text your chosen fate for Spidey.

I believe Steve Litchfield is next week's host.  Should be interesting given the title of his blog:  rants and raves.  I can think of at least one I'll try to submit.  Hope you enjoyed this week's Carnival!

"If you can't run a business without advertising..."

Russell Buckley had a great post about a year ago called "Who gave Google permission to be the judge and jury of mobile content".   If you haven't read it, you should, but I'll summarize: Google alters users' mobile experience by repurposing content if you get to the page via Google mobile search or, as I learned in the scenario below, via Gmail on the phone's browser.  You may not have time to read the 55 comments that Russell's post generated, but there are some good  ones, including my favorite from a defender of Google.  In response to the possibility that Google might strip out ads, he wrote: "I don't want to see your ads.... If you can’t run a business without advertising, I don’t think you should bother."  Right on brother!

I stumbled into the issue Friday when our intern from last summer wrote on my wall in Facebook.  It was the first such post (feel free to go wild) and I was excited to get the message in my gmail while waiting for a flight at LAX.  When I clicked through to read it, I was required to login to Facebook but encountered a slight problem:  the entry forms were disabled so I couldn't enter a user id or password.   The fix exists: you just have to switch to regular html which Google allows you to do way down at the bottom, after of course it gives you the chance to bail out from this "broken" Facebook site back to Google home.

Google's biggest defenders like the one above who cite Google's obsessive history of improving the user experience probably can acknowledge a slip up now and then.  Yet it is easy to take issue with Google's general approach to the user and mobile when almost any mobile search you do on Google reveals exactly one ad and zero search results on the screen.  I'm not sure what kind of success Cellfire has in offering a free video on the mobile device, but you've got to appreciate the prime spot they get in results for an LA Restaurant.  Perhaps a more absurd example is the search for driving directions, where the first and only click on the screen is actually an ad for Mapquest called "Driving Directions".  Don't blame me for thinking that's actually a relevant search result!  It reminds me of that old saying they had at Google in the early years: "If you can't run a business without advertising..."

Core competence

One of the things that always stood out for me at business school was the importance of core competence. So just yesterday I was telling someone that it should be a a coffee shop's core competence to ensure that the tables don't jiggle.  You basically have to get a couple of things really right to have a good coffee shop, and making sure the tables don't jiggle should be one of them.  Here I am again this morning with a beautiful Coupa Cafe latte, but I had to bend down on my hands and knees to stuff paper under the table leg to prevent the jiggling.  I don't mind this reminder, as it probably helps me look at the issue more regularly with Mozes.  Note: core competence probably involves something that competitors can't easily copy, but based on my more widespread experience with this issue, I'm willing to say that the one coffee shop that figures it out will have developed a great core competence.

There is a bored investment banker!

I rarely go through my referral logs anymore, but I did this morning and I found out that this blog has the top google result for "bored investment banker" for this Apple-Nokia post here.  I get a kick out of the fact that either an investment banker searched google for "bored investment banker" or someone was looking for one. 

Negotiating the Option Pool

The latest Cooley Godward venture capital report spells out that a common Series A financing these days is a split of 40/40/20, where 40% is for the founding team, 40% for the investors and 20% for the option pool.

One of the trickier areas for an entrepreneur to get his/her head around about the deal can be the role of the option pool.  You will often hear a venture capitalist tell you that they are not interested in owning a majority of a company, and it's more than likely true.  It just turns out that sometimes it doesn't end up that way.   The purpose of this post is to walk through a typical scenario which might help the entrepreneur approach the option pool negotiation.  It builds upon a classic post by Brad Feld here and you might read that post first since it clearly explains some of the terms I use here.

As Brad mentions, the amount of the option pool is almost always determined on a post-investment basis ( i.e. the 20% above) but it is almost always the case that investors are successful in having those options issued before the price per share of the investment is determined.   The impact is significant since it means dilution is occuring solely to the founders, not to the investors.   The two charts below show two different cap tables both before and after an investment.

In Chart A, the investor is not asking to increase the size of the option pool.  You can see that the price per share is calculated by dividing the pre-money valuation of $3m by the fully diluted stock of 5 million shares, equating to a purchase price per share of $0.60.  Thus, if the investor puts in $2m, they will be entitled to 3,333,333 shares, or 40% of the company.  Since no additional options were created, there are just 11% of fully diluted shares that are left to be issued to new employees.  Most Series A investors will find that amount insufficient to allow for the proper incentives to be issued to future employees.

In the scenario where an investor asks that 20% of stock  be available for issuance as options after the financing, watch what happens.  Chart B shows that a total of 1,200,000 new options will have to be created before the financing in order to get the amount of available options after the financing to 20%. The dilution caused by the option creation causes the valuation of the company of $3m to be divided by a lot more shares, resulting in a lower price per share.  With the lower price per share and the same investment amount of $2m, an additional 800,000 shares end up going to the investor.

Since the parties are dealing with fully diluted percentages, the investor still gets 40%.  However, since a lot of options now remain unissued, the actual percentage ownership of the company is quite different.   Whereas in the Chart A scenario the investor did not own a majority of the outstanding stock (45%) , in the Chart B scenario the investor owns more than 50%.  Thus, it is not unlikely that an entrepreneur may end up selling control of a company despite the perception of having given up only 40%.  Now the company's attorney can advise the company on the types of protections that could be put in place to prevent the investor from being in a position of being able to take control.  However, sometimes the fixation on fully diluted share count may cause this situation to be overlooked.  Obviously issuing more options to employees will correct the situation over time.

The purpose of this post is not to warn you against  selling control of your company.  There are lots of reasons why founders willingly do so on their path to building a great and big business, and the reality is that many investors truly don't have interest in having control.   Rather, I wanted to illustrate the importance that the option pool can play in negotiating a venture investment and its impact on price per share and valuation.  So long as the founders can understand this impact (particularly before settling on a final valuation amount), the focus of the parties should actually turn to whether or not 20% is the right amount of options to be available for issuance.   

I'll end with just a few final points on that negotiation. Remember that investors are looking to build big companies, and for really early stage companies the investors are going to see a long road ahead to recruiting employees and new executives.  In an ideal world, no more options will have to be issued before they exit (although most investors will accurately tell you that this situation is itself very rare).  The founding team needs to be prepared to build out an option budget for new employees - at least a few years out - which they believe adequately represents how many new options will need to be issued to make a big company.  It is around the actual option budget that intelligent discussions can occur.

It also a good idea for the founding team to look at what has already been issued to itself and other employees.  When the founding team/employee group is strong and the stock is subject to vesting as is typical for a venture financing, then there are some compelling reasons to keep the option pool lower since fewer key hires are necessary.  If an investor makes the point that one of your team members could leave and may need to be replaced, you should point out that the unvested stock can be used for that replacement.   Likewise, particularly where the investor is genuine in a concern of having a sufficient option pool to attract employees, you could suggest having any unused options revert to the founding team in the case of a successful liquidity event.  After all, if those options were never needed to get the outcome the investor wanted, why shouldn't the founders who took the dilution in the first place benefit.

Negotiating the option pool will not always hinge on an intelligent budget or rationale arguments, however, so at least ensure that you understand the impact the option pool is actually having on valuation and price per share.

For security purposes, what is your favorite color?

Last week I called my financial institution to wire transfer some money and they asked me to verify my identity with a secret question:  what is your place of birth?  I responded with Williams Lake, followed by my classic joke; well, not actually in the lake, that's just the name of a town in British Columbia.

She didn't laugh, but she proceeded to let me know that they have since upped their security measures.  It seems they have learned that people can easily find out where their clients are born on the Internet.  Go figure.  She needed to have me create a new secret question so she asked:  what is your favorite color?

I thought it was a joke, but it wasn't. And the sad thing is that it reminds me of every single Internet password picking experience I have these days.  First, it goes, pick a password - make it something that no one could ever guess and something that you are not familiar with.  It should involve a number or a letter or sometimes a special character (ugh).  You are reminded that no one should be able to guess your password.  Sounds secure enough, I think, but that's until I read the next part:  in case you forget your password, you should now pick a question with an answer that you know you can remember, like your pet's name or the place you were born (I wasn't actually born in a lake). 

I've never understood that one, and it is perpetuated on every site with no logic to me (someone please explain).  But not my financial institution.  They just pick one question - something that no one could ever find out on the Internet.

Google's product design can be scary good

Google does a lot of things differently from other software or Internet companies.  I just noticed this with the new payment scheme implemented by Google for Picasa - check out this screenshot and you'll notice one thing missing from ordinary purchase screens, which was actually quite disconcerting to me.  There is no cancel button.   It's similar to Google's approach to Adwords where I realized after the fact the first time I used it that "saving" a campaign was the equivalent of telling Google "Ok, now go ahead and start billing the heck out of me."   I got used to it quickly, and both examples show that one of Google's main design principles is to break down barriers to adoption.

They take the same approach to software.  For me (I am a PC user), Apple may be one of the most frustrating companies because of how much I rely on iTunes.  It seems that I am asked to download a new version of iTunes once a month, it takes about ten minutes and they try to sneak in other software too.  Adobe and Skype are similar.  Typically they have to remind me 6-8 times before I eventually do it but my level of annoyance with them goes up every time.   The alternative of course would be to give up privacy to these companies and let them manage my software for me.

And that's what Google does.  It's rare that I have to download anything ever again and a reading of the EULA would show that I do in fact give Google the right to manage my software for me.  Do a search for the phrases - "'automatic updates' and 'terms and conditions'" and the first two results you'll find are, first, a warning from the Electronic Frontier Foundation that end users should never agree to automatic updates and, second, a link to download Google Desktop software.

I do see why automatic updates make sense for me and most users.  The truth is that I'd rather have automatic updates for software I want to have, but of course the question is who gets to choose which software I want and which I don't.  If automatic updates become the standard, the definition of a software upgrade will almost certainly change over time.  Just like the definition of a friend may be changing too.  Google's new embedded chat in Gmail does something eerily similar to its software, by automatically updating your friend's list with people you've emailed.   There are at least 2 people in my list a day who I barely know, and now Google lets me find out when they're checking their email.  When I pointed it out to an office colleague, his response was "Yeah, I've actually found that useful a couple of times for quick questions on some of the conference stuff I'm working on."

In my opinion, none of the above shows that Google does evil.  Google illustrates best why our largest threat to privacy is convenience.

Should I do my MBA?

I received a note from a prospective student asking about whether he should attend the JD-MBA program at the University of Toronto.  He indicated he had strong leanings to be an Internet entrepreneur.  My basic advice was that if he knew he would one day start a company, he should go do it now.

To be clear, I confirmed that U of T was as good a university as any to attend for the program.  The law school has new great leadership and had the benefit of a great Dean for the last ten years, who is now the Provost of Penn.  I also believe the MBA program's leadership under Roger Martin has the potential to put the program among the top 10 of North American programs in the next five years.

I'm glad I did the JD-MBA program, but I also believe I might be better off if I had just started a company instead.  It would have saved a few jokes too.  Last week I was in a conversation in which a person made fun of lawyers, and then asked if I was a lawyer.  "Yes" I said.   That's never that funny, but when he later made fun of MBAs, I have to admit we all had a pretty good chuckle when he asked that too.

Both events got me thinking about internet companies and education.  I decided to take a quick look into the education of the leaders of the top ten internet properties.  Here's what I found:

Yahoo!:  Terry Semel holds a Bachelor of Science degree from Long Island University and an honorary doctor of humane letters degree from Emerson.

MSN-Microsoft:  Steve Berkowitz received a Bachelor of Arts degree from State University of New York at Albany.

Time Warner Network:  Jonathan Miller – I couldn't locate any education.  He either never went to school or is a graduate of a JD-MBA program.

Google - Eric Schmidt has a bachelor of science degree in electrical engineering from Princeton University, and a master's and Ph.D. in computer science from the University of California-Berkeley.

eBay - Meg Whitman received a Bachelor of Economics from Princeton University and a Master of Business Administration from Harvard Business School

Ask - Jim Lanzone received his BA from U.C.L.A. and isn't shy about acknolwedging his JD/MBA from Emory University.

Amazon - Jeff Bezos graduated summa cum laude, Phi Beta Kappa in electrical engineering and computer science from Princeton University in 1986.

Myspace - Chris DeWolfe has a B.A. degree in Finance from the University of Washington and an MBA from the University of Southern California, where he had dual concentrations in Marketing and Entrepreneurial studies.

New York Times Digital - Martin Nisenholtz received a bachelor's degree in psychology from the University of Pennsylvania and a master's degree from the University of Pennsylvania Annenberg School of Communication

Verizon Communications - Ivan Seidenberg earned a bachelor’s degree in mathematics from City University of New York and a master's degree in business administration and marketing from Pace

The conclusion is mixed then, but you get the strong feeling that the MBA isn't going to give any Internet entrepreneur much of an edge.

Get 'er done

Last week I overheard our office mate Marcus talking about getting things done.  He took charge to implement a really cool thing we did for our Cinco de Mayo party - the Mozes jukebox.  Anyone at the party (or anyone in the world for that matter) could pick the next song by sending an SMS to Mozes.  This thing could take on a bit of its own life when we write about it on the Mozes blog.

I also saw he or someone else had written "Get 'er done" on a whiteboard above one of our team member's desks. 

Procastination is the persistent enemy of every well-intentioned startup and every well-intentioned entrepreneur.  There are a lot of obstacles to building a company and many of them are out of your control.   But procastination is one of those very big obstacles that is fully within your control, and if you don't beat it down every time it rears its head, you are increasing your likelihood of failure by a multiple each time.

I know I am failing as an entreprenuer when there are steps I could take to advance the business and I don't take them.  I'm not talking about the times whenI am too busy or when I am placing priority on another item.  Prioritization is an art that sometimes I believe I have fully mastered (I haven't).  I am talking about those times - on average at least 5 hours or more per week - that any individual has, regardless of how busy he or she claims to be, to take action on an item that deserves action, and choosing not to take it.   Learning that bad choices come in the form of very bad excuses is a lesson that you won't understand until it is too late.

If you want to know the secret to having a shot at making a start-up successful, it is that the entrpreneur and the team get things done.  They take action on a piece of the product that they know needs fixing.  They watch numbers closely and take corrective action when they don't add up as planned.  They make 10 sales calls a day to close those really important first few deals.  They respond to follow up information requests from investors quickly.  In other words, they get 'er done.

Chickens and eggs

Mike Arrington at Techcrunch blogged about Mozes Friday, and raised the possibility that Mozes may be dealing with the classic chicken and egg problem.  The good news is that most entrepreneurs are used to dealing with the question regardless of the business. Whether it comes to raising capital, hiring employees, building product or finding customers, you learn pretty quickly not to care which comes first - you just go and get chickens and eggs all at the same time.  At a higher level however, when it comes to the business model, it's a critical question.

I spent the six years prior to Mozes in the b2b world, having started a company in March of 2000 specifically around b2b commerce.  You may remember Chemdex (can't link to it, but a great case study here) or any of the 2,000 or so companies like it back then.   Despite the promise of massive success if every buyer and supplier agreed to play together in a vertical market, merely assuming it would happen because it made sense if it did proved to be a pretty ugly assumption.  Like Chemdex and a few others at the time, we had to learn at our company that the best way to survive was to prove value in some small but important areas, and then be relentless in demonstrating and replicating that value across the targeted market.

I recently told an investor that I'm not a believer in businesses that can only be successful at massive scale.   It reminds me of the old Saturday Night Live commercial for the  company that made money by changing a dime into 2 nickels and a nickel into 5 pennies.  Massive scale will of course mean massive success, but a company must be successful at the most basic level before it can be massive.  One of the things I love about what we are doing is that we can enable smaller community activities - such as Maker Faire this weekend.

The point isn't that we are going to go after every upcoming cool county do-it-yourself science fair in the world (as cool as that would be).    In this particularly case, we are getting the chance literally to observe our product in action and learn from that experience to advance forward (plus, it's kind of cool having a Microsoft Mobile sign tell folks to text Mozes for more info).  The real target market we are pursuing is different, but our goals are built around demonstrating small-scale value that will translate across larger market opportunities.  Whether that's chickens or eggs first, I must admit I can't really say.