Master of 500 Hats

Graphing Social Patterns: done. Dave: dog tired.

Graphing Social Patterns conference on facebook & social networking platforms went pretty well -- overall, seemed like most people had a good time :)  now i'm going to rest for a bit & recharge the batteries.

apologies if i don't respond right away to recent/future pings... at the moment, my inbox is hopeless.  gonna spend next few days catching up on some email, bills, sleep, & maybe even a little ultimate frisbee. 

don't expect much from my fried little brain until after the weekend.

Why Facebook Works For Me: A Video Essay by Matt Monahan (for the Stanford Facebook class)

I've been pretty busy getting ready for Graphing Social Patterns; haven't had much time yet to blog about the class i'm teaching this fall at Stanford with Prof BJ Fogg, on Building Facebook Apps.

How is the class going?  (everyone asks).  and i say...""

In short: it's a blast :)

One thing we've asked our students to do as a weekly exercise is to create Facebook Notes, Photos, or Videos describing their experiences with Facebook in class & lab, and then people-tag us in the content so we're notified to take a look. the interesting side-effect of this is that now we have ~100 people tagging content about us, and we appear to be Feed Spamming all of our friends (in a good way ;)

In any case, i wanted to highlight a very cool video below by one of our students, Matt Monahan:

Matt is also a co-founder of The CoMotion Group.

The Facebook Application Platform, an O'Reilly Radar Report

The Facebook Application Platform,
an O'Reilly Radar Report 

Tim O'Reilly's new Facebook Application Platform report just came out on O'Reilly Radar.  (fyi, i was a contributing author on a few articles in the report).

An excerpt is available for download, and Tim will be debuting the report at Graphing Social Patterns, a conference on Facebook & social networking, Tue 10/9 in San Jose.

A Thousand Startup Flowers, in Continuous Bloom = The Destruction of Venture Capital

Paul Graham has an interesting new essay on The Future of Web Startups he just posted for his talk at FOWA 2007.  Paul doesn't provide a toc, but i've outlined his essay here:

1. Lots of Startups
2. Standardization
3. New Attitude to Acquisition
4. Riskier Strategies are Possible
5. Younger, Nerdier Founders
6. Startup Hubs Will Persist
7. Better Judgement Needed
8. College Will Change
9. Lots of Competitors
10. Faster Advances
X. A Series of Tubes

Paul can be long-winded at times (me too) but he's usually well worth the read (me not).  In the above essay, he suggests that the increasing trend towards more startups is likely to continue, as well as a new trend toward smaller, more frequent acquisitions.  He also suggests that startup founders are getting ever younger, and that the value of university education is decreasing, except to the extent that you get to meet other interesting new startup founders.  All of these points result in system acceleration, and in particular will begin to force changes in the education ecosystem.

I don't disagree with these points.  And i also am fairly pessimistic about the value of most education systems (side note: altho i barely graduated from college, i never graduated from high school... and in hindsight i don't think i miss the diploma much).  If you read Paul's most excellent book Hackers & Painters, in it he's fairly negative about the entire education process -- he equates most schools to jails that we sentence our children to, mainly because we're too lazy / cheap to give them a real education, and because we don't trust them to enter the workforce until they're much older.

However, i think Paul's essay misses the real target of destruction for startup system acceleration... it's not the Education System, but rather the Venture Capital industry which is about to be Destroyed.

Let me explain.

While i won't delve into a long historical description of the VC business (read The Venture Capital Cycle by Gompers & Lerner), suffice it to say that Venture Capital exists because of several private equity market inefficiencies surrounding the market for funding startups:

• liquidity is limited (exits are relatively infrequent)
• transparency is poor (private company valuation is difficult)
• debt capital doesn't exist / is minimal (new, unprofitable startups can't get loans)
• transaction efficiency is horrible (deals take months to execute, not very standardized)

Now i'm not saying venture capital is evil or bad here... i'm just saying they exist because the market is not very efficient.  And because it's not efficient, capital is VERY VERY expensive.  And because VCs  get hits on average WAY worse than baseball players, VCs are VERY VERY risk averse.

Wait, WTF you say?  McClure's got his head up his ass!  Who is he kidding?  This is the BEST of times for entrepreneurs.  VCs are overflowing with money, there are LOTS of deals happening, and it's EASY to get funded, right?  Furthermore, how can he say VCs are risk averse?  Aren't they in the BUSINESS of making risky bets on unknown startups and markets?

Wrong, wrong, and wrong.

These are only the BEST of times for entrepreneurs compared to the dot-com bust when there was NO capital to be had, or compared to a decade or two ago when the # of startup deals was a fraction of today's market.  And exits took 5 rounds of funding and 5 years.  Now that some companies are taking 2 rounds of funding and getting acquired in 18-24 months, it seems like a walk in the park. 

VCs take big chunks of equity from startups in exchange for very little capital, and in general for very little expertise, because they are CRAPPY at investing in startups, and they need to juice their crappy performance at the plate with steroid-level ownership stakes in order to get anything close to a decent return.  What do i mean by crappy?  I mean if a VC firm is getting decent wins 1 out of 5-7 times, they're probably doing pretty good. 

But if they only get a win 15-20% of the time, then they need 10x performance or better just to get a decent return.  This creates misalignment of interest with entrepreneurs, who might very well look at a sale of the company for just 1.5x-3x as a good deal... but for VCs, that's not such a great deal, because they know how BAD they suck at the plate.  They HAVE to swing for the fences every time, because they're just terrible bunters & baserunners, because they so rarely get on base.

Furthermore, most VC funds FAIL TO BEAT THE MARKET.  One quarter of them make a killing -- largely because they have huge chunks of equity in companies to which they contribute precious little except capital.  but outside the top quartile, they probably don't beat the overall market, and they certainly don't justify the risk. 

So how can we justify such terrible plate performance from VCs?

Simple: because there ain't no other fucking alternative.  Banks don't lend money to unprofitable startups.  Neither does your uncle, if he's smart.  And the government doesn't have an equity-equivalent program to the SBA (debt, not equity).  Well, they do... they're called SBICs, and unfortunately the capital is not really available to most startups.  basically these are government-subsidized venture capital / private equity companies, and it's *their* job to find, filter, and invest in startups.

but here's the thing.  the market is changing.

ten years ago, technology startups were capital-intensive businesses.  they required years of development & financing, lots of expensive sales people to generate revenue, and exits tended to be larger and much less frequent.

these days, the world is quite different.

servers are cheap or hosted.  software is often free.  pipes are fatter, more audience is online.  so technology startups can easily get going for less than $2M, often less than 250K -- hell some startups began as weekend coding projects. 

and acquisitions are happening more quickly.

not exactly sure i understand why this trend is happening, except that there are now easily 5-10 large internet platform companies (Google, Yahoo, Microsoft, eBay, Amazon, Newscorp/MySpace, IAC, AOL, etc) all of whom have millions of users and are generating billions in cashflow.  and they need to buy new products to throw at their customers, but they can't innovate internally due to bureaucracy, so.... they buy startups.  WAHOO!

but this isn't even the most interesting part.

imagine: if you could measure startup performance more accurately, and if you could do company valuation more accurately, and there was a liquid market for quick, efficient transactions based on standardized metrics & standardized online transactions documents... what would happen?

well, if you had such market conditions... why, you could sell out at any time.

huh?  why would i do that?!?  I'M AN ENTREPRENEUR GOD DAMMIT.

well, ok... an entrepreneur with bills and a car payment.  and two kids.  so bear with me... supposed you could sell out at any time, at a reasonable market price.  So what?

so if you could accurately value the business at any time, and you can get an exit at any time, and transaction cost efficiency goes down... then you don't have to go to a VC for capital.  once you start having a liquid, transparent, efficent market, the cost of capital becomes very cheap.  and you could just start BORROWING money instead of SELLING equity to raise capital.   and when you wanted to sell, you wouldn't need any expensive VCs or investment bankers, you'd just sell to Mr. Market at whatever rate he's willing to pay.  lenders could accurately value businesses, bet on a rate of success/return, and quickly undercut the cost of capital for VCs. 

ok, right.  like that's gonna happen next week?  dream on, mcclure.

well i sure as hell hope so. 

and whether Facebook or Google or someone else figures out how to provide such a metrics infrastructure tomorrow or 5 years from now, the resulting market should hopefully be a much bigger fishpond for us all to play in.

ok, i'm tired... haven't explained this as well as i might, but i gotta get some rest.

i'll fill in the gaps and provide some pretty pictures & charts later.

"... the proof is left to the reader as an exercise.."

or just read alex iskold's post

7 Steps to Get your Facebook Post on the Front Page of Digg

  7 Steps to Getting on the Front Page of Digg 
  Originally uploaded by davemc500hats

pretty cool... front page of digg technology :) 

digg link is here; article on Techcrunch is here

(take that all u haterz in the commentz ;p)

DaveCrunch: 7 Steps to Facebook Strategy

screenshot of my guest post on TechCrunch this morning

  DaveCrunch: 7 Steps to Facebook Strategy

7 Steps to Graphing your Facebook Strategy

1. Set Up Your Graph: Profiles & Privacy
2. Make Connections: Networks, Groups & Events
3. The Need for Feed: Your [Shared] Social Activity Stream
4. Share Your Content: Share & People-Tag Your Stories & Media
5. App to the Future: The Facebook Platform, APIs, & Applications
6. Pay to Play: Ad Networks, Sponsored Stories, & Paid Distribution
7. Show Me The Bunny: Gifts, Points, & Virtual Currency

for more details & info, read the article and then come to my Graphing Social Patterns conference in San Jose next week, 10/7-9.  discount code for registration is here.

(guessing i just added at least $3-5M to Blodget's $100M valuation... hey mike where's my check? ;)

Fanboy to Facebook: I Don't Know How to Quit You.

Okay, i'll admit it:

I'm addicted to social networking.

and i have been for the past 6-8 years.

It all started with Ryze.

Way back in the summer of 2001, just before i joined PayPal to start their developer program and wait out the dot-com crash, i became a member of one of the earliest social networking sites called Ryze, founded by Adrian Scott.  In just a few weeks, i was hooked. I pimped out my profile page, i connected with all of my geeky friends, i competed with other folks like Sean Ness and Marc Canter to see who could acquire the most friends, i listed all my otaku hobbies & interests (ultimate frisbee, cartoons & animation, startups & economics), and i eagerly checked in every day... sometimes every hour!... to see if i got any new messages, and to see the new people who had joined.  I even started a group discussion board called 500 Citizens, that at one point was the largest / most active group on the site. Does this sound familiar?  If so, then you're probably a fellow SNS addict like me.  Keep coming back.

A Brief History of Social Networking

Over the next five years, i became first infatuated, engrossed, then fatigued with each new social networking site & service that came out -- after Ryze came LinkedIn (still a regular), Tribe (lots of Burning Man fans), and Friendster (fun, but i was already married); each of which i spent time using, abusing, then disabusing myself of.  After Friendster got so popular nobody went there anymore, Google rolled out Orkut, which was cool since it had self-service groups & discussion boards you could setup in seconds (did i mention i was an eGroups/YahooGroups fan since 1999?).  Not long after that i discovered Flickr (pictures! tags! tag-surfing!) and fell in love with digital cameras.  Then I bumped into MySpace (how many tabs can you have?!?), and realized there were profile pages that scared even me.  Along with LinkedIn, both Yelp (find good Ethiopian restaurants) and YouTube (catchup on Daily Show & Adult Swim) were started by fellow PayPal Mafia paisans, so of course i had to check them out.  And for awhile Yahoo had an eye for new SNS talent; after Flickr they grabbed Upcoming.org (what were my friends doing next week?), then MyBlogLog (who reads my blog, and what else do they read?), and Bix (who needs American Idol?  gimme a webcam and a mike).  And Ev launched Twitter (what are you doing?) so that i could tell everyone i just had a tasty ham sandwich.  And then Spock collected it all together in one big tag farm for me... how convenient :)

Along the way of this mad hatter SNS journey down the rabbit hole, i picked up an account in 2005 for this college networking site that seemed rather interesting.  Peter Thiel and Reid Hoffman had put money into it, and from my PayPal daysi knew  those were two guys with the Midas touch to keep your eyes on. But when i first started using the service, i found out i was ~15 years older than any other homie at my alma mater, THE Johns Hopkins University.  And while i admired the design & structure, i just didn't quite connect with all the college kids on Facebook.  Then in summer 2006 they rolled out something called News Feed which got some media attention, but altho i noticed i didn't think much about it at the time.  So i poked around a bit, but eventually went back to LinkedIn & Flickr & YouTube for my regular fix.

But then something really interesting happened.

In February of this year i was invited to a modest reception for Facebook employees, Stanford alumni, & a few Silicon Valley geeks. I just happened to bring along my camera, and they just happened to roll out some slides with a few previously unreported growth stats.  Click.  Growth stats which were mind-boggling.  Click.  Growth outside the traditional Facebook college demographic.  Click.  And then they just happened to mention in a few months they were planning to roll out a Platform for developers to build Apps on, which is a subject i happen to know a few things about from my days running the PayPal Developer Network.

• And then i realized: Platform + Apps... cool. Click.
• And then i remembered: Feed... oh yeah. Click.
• And then a thousands apps exploded in a thousand  directions at once: KABOOM.

now i can't stop thinking about Facebook, the Social Graph, Platform, Apps, & the Feed... 24x7x365.

Call me a Facebook Fanboy?

Not even close... i'm a Facebookaholic.