All forms of online gambling, with the exception of horseracing, have been effectively treated as illegal in the US for the last decade or so. (Before that, they were essentially ignored).

The reasons for this effective illegality were somewhat murky.  After all, gambling is traditionally a state issue, where we leave states to decide what kind of regulation their citizens want.  Utah can ban it, Nevada can permit it, and everybody’s happy.  In 1961, however, Congress passed the Wire Act, in an attempt to control the spread of the mob, who at the time controlled the illegal betting industry.  The Wire act states:

Whoever ... Read More »]]> Thoughts below are my personal opinions as a VC looking to invest in internet startups, and do not reflect any views on Betfair or its strategies, intent, or prospects in regard to the US gambling market.

All forms of online gambling, with the exception of horseracing, have been effectively treated as illegal in the US for the last decade or so. (Before that, they were essentially ignored).

DoJ Rolls the Dice

The reasons for this effective illegality were somewhat murky.  After all, gambling is traditionally a state issue, where we leave states to decide what kind of regulation their citizens want.  Utah can ban it, Nevada can permit it, and everybody’s happy.  In 1961, however, Congress passed the Wire Act, in an attempt to control the spread of the mob, who at the time controlled the illegal betting industry.  The Wire act states:

Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.

Now, a layman (read: reasonable person) reading this text would think that the act was forbidding sports bets across state lines.  One might quibble as to whether an act written in 1961 should apply to the internet (is the internet “wire communication?”). The DoJ has maintained, however, that the act applies not just to interstate sports bets, but in fact to all sorts of gambling, and if even if conducted intra-state.  Is poker a sporting event or contest?  Is blackjack?  Lottery?

However, the ominous threat of federal prison has meant that few have been willing to take the risk, and those who have, have generally been intimidated into settlement, or convicted of some other related offense.  Online gambling in the US has remained, largely, an activity conducted in the dark.

Now, it looks like someone has taken a flashlight to it.  Two states asked the DoJ to rule as to whether intrastate lottery ticket sales online would run afoul of the act, and the DoJ have seemingly reversed their stance and indicated a much narrower interpretation of the Wire Act, to where it really just applies to sports betting.  According to the lawyers who have commented on it, it’s a pretty clear opening for states to offer intra-state poker, casino, and lottery, and possible agree to pool liquidity in those businesses between their states should they agree.

While I think this is great news, many key questions remain:

• Which states will look to legalize,which games will they legalize, and on what timeframe?
• Who will they grant licenses to, and by what process?
• Will taxes be structured intelligently?

When I started Flutter (now Betfair), I failed to fully appreciate the headwind that regulatory oversight places on creating a valuable new business.  Being subject to the slow and sometimes arbitrary restrictions of the government is diametrically opposed to the ideas of iteration, experimentation, and innovation.  As an investor, I’d be reluctant to invest in a regulated business — I’d still do it, but the idea would have to be amazing.  Especially amazing, not just the ordinary amazing that serves as my bar to get over.  Luckily for us, the Betfair business was amazing and worked, but if you look at the legal gambling jurisdictions, the combined market cap of all the new businesses created over the last decade is not very impressive.

Taxation is one are where this regulatory burden rears its head.  The clear impetus behind state interest in legalizing gambling is to further pursue the foundations of liberty and an individual’s right to freedom except where absolutely not in the public interest.  Oh, sorry, that was a typo — I meant to say tax it to generate revenue.  Inconsistent approaches to taxation have been a challenge for online gaming businesses in Europe.  If the tax rate is set extraordinarily high, you can’t build a rational business, and consumers will sneak back to the illegal (untaxed) alternatives.

Entrepreneurs with stars in their eyes at this opportunity are likely to face a sobering reality check when the states actually go to legalize gambling.  The actual mechanics will be voted on by a state legislature.  In many cases, these bodies are made up of part-time employees.  Even if full-time, they have no experience with online gambling, and many probably still have their secretaries print out their emails for them.  Call me cynical, but there is a real risk that the details of the legislation will be drafted by those with the most money to spend to protect their vested interest in the states, and in few cases will that be the entrepreneurs!

The existing state lottery companies, existing casino providers, native american tribes: all these parties generate a ton of tax revenue for the states already, have longstanding relationships with the decision-makers in the state congresses, and are frequently some of the largest supporters of the cost of getting re-elected.  When new opportunity is doled out by the government, be it US private military contracts in Iraq, or the dissolution of asset ownership in the former USSR, it tends to be pretty easy to predict who will get the spoils.

As an entrepreneur, or investor, you want to get started in chasing this opportunity, but it’s hard to invest your time or money, just to find out that they don’t decide to license your game, or they do but only to the existing vested interests, or they do but there’s a 20% tax on wagers that effectively cripples your market.

All cynicism aside, I’m excited for the opportunities this new change will create, by allowing entrepreneurs into the mix. Maybe not in every state, maybe not in every game, but US entrepreneurs will find the opportunity.

One of my great disappointments with online gaming, where it is legal, is how un-innovative it is.  Sure, Betfair turned betting upside down with an exchange-style market, and led the market to support in-running (mid-game) betting.  But everything else — poker, blackjack, roulette – looks just like it does in the casino.  It’s idiotic actually:  roulette is a game, based around a wheel with 37-38 slots — that wheel exists as an invention to randomly choose a number, and the 37-38 slots exist because that was the practical size for a wheel and a ball.  So now, with all the power of computers and innovation since, we have… a pixel perfect rendition of a spinning wheel, whose number was pre-chosen by a random number generator, designed to look like a 100 year old number generator?  Why does the wheel not have 1,000 numbers?  You could choose Red for a 2:1 bet, or you could chose 1-333 for a 3:1 bet, or you could choose the number 434 to for a 1000:1 bet?

Then imagine the games on Facebook, on Zynga, on your iPhone.  Social, team.  If your office pools to buy 50 lottery tickets each week, imagine doing something more social with a team chance of winning?  In the short-run, there’s no doubt the classic games will dominate: customer acquisition and trust are easier, because people know what they are getting into. And the early entrants will just be picking the low hanging fruit of customers already pre-disposed to play, waiting for the opportunity.  Europe has largely been stuck there, for various reasons from a less innovative culture of product development, to regulatory issues and small individual markets.  Hopefully the US, with the best product development and internet talent in the world, can do even better!

Full Text of DoJ interpretation

Image courtesy Alan Cleaver via Flickr CC.

I remain surprised at how surprised everyone seems to be at the unraveling of the poker ecosystem.  You needed no expertise at all to realize that the legal framework in which PokerStars and FullTilt were operating in was, at the very best, dark gray, and likely explicitly illegal.  Now, you might think, so are speeding and jaywalking, and despite being illegal (or nearly so), you might choose to do it anyway.  Fair enough.

But people were trusting these guys with a lot of money.  McManus reports having close to $20K in PokerStars when assets were frozen, and many people had much, much, more.  People seemed to trust that the operators were ringfencing the client deposits from the operating expenses ... Read More »]]> James McManus recently wrote an excellent summary of unfortunate unraveling of online poker in the US this year.

I remain surprised at how surprised everyone seems to be at the unraveling of the poker ecosystem.  You needed no expertise at all to realize that the legal framework in which PokerStars and FullTilt were operating in was, at the very best, dark gray, and likely explicitly illegal.  Now, you might think, so are speeding and jaywalking, and despite being illegal (or nearly so), you might choose to do it anyway.  Fair enough.

But people were trusting these guys with a lot of money.  McManus reports having close to $20K in PokerStars when assets were frozen, and many people had much, much, more.  People seemed to trust that the operators were ringfencing the client deposits from the operating expenses of the site (and, even worse, the profit distributions of the owners.)  Alas, it turned out not to be true, and a lot of money has gone up in smoke.  I feel for the people who lost it, and there’s no justification for the fraud that FullTilt appears to have committed, but I’m hardly surprised.

McManus and others are indignant about the blatantly irrational attitudes that drive regulation of internet gambling in the US, and I wholeheartedly agree.  US gambling law is a mess.  If you want to understand what get licensed, just look where the money flows and the interests of those parties.  Activities like sports wagering or poker playing are weekly rituals of the same legislators, judges and executives that ban them and enforce those bans.  It doesn’t make any sense.  And yet, I am not outraged like most — since when did any lawmaking and enforcement make any sense in this country?  The fact that the process seems driven by special interests and a general sense of arbitrariness is completely in character with everything else our government is doing.

Progress is slow but hopefully will continue.  Betfair will launch the first sports betting exchange in the US in 2012, in California.  Baby steps.  Hopefully for all my fellow players, poker will follow soon after.

The Leaf has a practical range of 80-85 miles, which means a Bay Area commuter like myself must occasionally rely on charging outside the home.  Luckily for me, 120V wall sockets are plentiful at the Matrix West Coast HQ, so I can top it up during the day at work for an anxiety-free ride home.

But what of public charging?  I’d have to guess that the Bay Area is tops in the country, but still locations are precious few.  Palo Alto City Hall has a couple of spots just a block from our office, and I’ve enjoyed a publicly subsidized top off at Oakland ... Read More »]]> I’m now a all-electric two timers:  bought (and sold) Tesla Roadster #48 a few years back, and now the proud owner of a Nissan Leaf.  Each with their own merits, though the Leaf has found more “product-market fit”.

The Leaf has a practical range of 80-85 miles, which means a Bay Area commuter like myself must occasionally rely on charging outside the home.  Luckily for me, 120V wall sockets are plentiful at the Matrix West Coast HQ, so I can top it up during the day at work for an anxiety-free ride home.

But what of public charging?  I’d have to guess that the Bay Area is tops in the country, but still locations are precious few.  Palo Alto City Hall has a couple of spots just a block from our office, and I’ve enjoyed a publicly subsidized top off at Oakland Airport, and today at SFO.  I’ve tried in SF parking garages — 5th and Mission, theoretically, and one in Union Square that’s even more theoretical (parked in with work trucks when I could finally locate it).

The key problem with public charging in my view is its unscalability:  the United Airlines parking area at SFO has two spaces, both of which were filled (one Tesla, one Leaf).  If our charging capacity can be full at this young stage of EVs, with only a handful on the roads, imagine the chaos at scale.  Those guys are likely parked there for hours, maybe days.  And if you can’t rely on a charge when you are on the road, then it’s useless for extending your range.

Sure, range-extended EVs like the coming Prius and existing Volt are safe at the cost of lugging around a ICE generator, but what of the pure electrics — how can our charging infrastructure scale a bit?

One popular proposal, which I think is good, is octopus-style charging units — one charger with numerous plugs.  The fact that a fast charging station costs thousands of dollars means that garages can hardly put them at every spot.  But if one charger could handle 6-8 cars, it gets better.  Power could be allocated in some fair fashion: everybody gets a fast charge for the first 30 minutes, then on some balanced or rotational basis.

I had another idea today that I haven’t seen advocated and is somewhat counterintuitive:  stop putting the charging stations right up front.

Sure, I know you’re trying to throw a bone to EV drivers: thanks for cutting your carbon, here’s a close spot.  Don’t think I’m not grateful, here’s me literally outside the door to Oakland Airport.  PA City Hall spots are front and center on the first level, just near the Mayor’s personal spot.

Front row at OAK!

I’d advocate, however, that we start allocating spaces furthest from the door to EV charging.  As it stands now, anyone with an EV will always have an incentive to pull up, plug in and charge.  Note when I was charging in the picture here, I arrived at Oakland Airport with a 90% charge and was heading straight home on my return.  The charge was completely optional, and yet, I took the spot and plugged in.  Who can refuse that sweet perfect spot?

The same was true at SFO today: the Tesla, with 200-mile range, probably didn’t need the charge to get back to Atherton.  Whereas I needed the charge, and luckily found a spot at the Virgin/AA terminal parking and walked across.  With Volts and plug-in Prius hitting next year, I’ll be seething as they occupy my needed charging spot despite their onboard generator (and possibly full batteries to begin with.)

However, if the row of chargers at Oakland were at the opposite end of the parking lot — a mere 5 minute walk from the terminal — you can be sure I’d only plug in if I needed it.

Sure, pricing can solve this to a degree, but it will be hard to balance fairness with incentives.  Also time limits (PA City Hall has a 3 hour limit), but they may be impractical in some locations where there isn’t already time enforcement.It’s going to be tough to scale public charging to a meaningful level — controlling needless occupancy is the low hanging fruit.

Here’s the challenge I have had:  if I want to move it from a bank in the UK to a bank in the USA, I have to go through a complicated process to initiate the movement – often requiring me to be in the country where the money is, which is rarely where I am.  So I am in the bank’s office in London, or on the phone with them at 3am, and go through an hour of bureacracy (ID checks, paperwork, waiting) until the money is ready to be wired.  Then, they call their exchange desks and ... Read More »]]> As a bunch of you asked for it, my recent discovery on moving large ($10K+)  chunks of money from British Pounds or Euros to Dollars (and back).  (For smaller amounts, I’m told PayPal works well but I haven’t tried it.)

Here’s the challenge I have had:  if I want to move it from a bank in the UK to a bank in the USA, I have to go through a complicated process to initiate the movement – often requiring me to be in the country where the money is, which is rarely where I am.  So I am in the bank’s office in London, or on the phone with them at 3am, and go through an hour of bureacracy (ID checks, paperwork, waiting) until the money is ready to be wired.  Then, they call their exchange desks and come back with a rate, and it sucks: if the spot rate is 1.65, they have offered me 1.58, which is terrible, I could do almost as well walking up to a stupid Thomas Cook booth for crying out loud.  But what am I to do – I have hours invested here, they have me hostage!  If I send the money into my US bank in a not USD format, again I’m hostage to whatever rate they give me.

I thought I would solve this problem by switching to HSBC, who had branches in both countries, but it didn’t work.  I can move it through their website, theoretically, but the rate is terrible there too.  So recently in London, I went into a branch to move money from my UK HSBC account to my US one.  That simple transaction took 90 minutes to arrange, at the end they called the spot desk, and you guessed it – offered me a horrible rate.  Once again, with 90 minutes invested already and needing to get the money moved, I took it – gee thanks, $3000 service fee for moving my money.

OK, thanks for listening, that was therapeutic.  Anyway.

Charles MacGregor pointed me to a website, FXCompared, which will compare rates for a class of companies I didn’t know existed – third party exchanges for this kind of big money move.  They apparently cropped up because so many Brits were buying property in Spain and needing to move the money.  (Sorry guys, that probably didn’t turn out so well.)  I got pointed to, and used, a service based in Los Angeles, CA called Venstar Exchange, which seems legit as far as I can tell and hasn’t stolen my money yet.

Here’s how it works: you file paperwork and open an account, and give them a credit card.

When you want to move money, you contact them with the recipient details and amount.  They will confirm and then email back a rate to you.  In this case, they charged me 1.4429 dollars for a euro, when the spot rate was 1.434, which amounts to $89 for each $10,000.  The rate my bank offered amounted to $613 for each $10,000.

How they solve the rate fixing dilemma is really cool.  Normally you can’t get a rate quoted unless the money is ready to move right now, so the bank has no exposure to fluctuation.  But it’s also why your bank can hold you hostage: they’re the only one with your money, so they’re the only one who can quote you a rate.  So they fund free checking off your exchange rate back.

If Venstar forced me to wire them the money before quoting me a rate, we’d be in the same spot.  But instead, after taking my transaction details, they email me a rate that’s good for 10 minutes.  I can reply and lock that rate in if I like it, and then wire them the money the next day.  Because they have my credit card, if I never send the money, they would then unwind their position in the currency, and charge the delta between my rate and what they ended up unwinding at to my credit card – likely only a few basis points, so you can do this for wires up to $150K with any credit card.

So I wire them the money, and they convert it to Euros and wire it on to the destination.  In this case, I was able to send $42,000 into 28,000 Euros, for just $373 in exchange losses from the spot rate, and a $30 wire.  Which would have costs thousands if I let my bank do it.  Hopefully when Neil and Danny are done with it, it will come back in multiples (and if only I could crush their management fee down proportionally!)

I’ve always learned by doing things. Trial-and-error may not be the best way to learn a known answer, but when you’re inventing (as entrepreneurs must do), you gain insights as you go and change the plan accordingly. One of the tough challenges in moving from entrepreneurship to VC is that my actual operating and market experience decays over time. You get a lot of new knowledge from seeing hundreds of presentations from entrepreneurs, and to some extent from the investments you have made, but you don’t accrue a lot of experience from hands-on activity. And there is no pivot in VC: I have to commit upfront to an investment, and back that entrepreneur come what may.

Nevertheless, I think you can learn from experimentation in this job. So I’m going to deliberately try ... Read More »]]>

eHow circa March 2004

I’ve always learned by doing things. Trial-and-error may not be the best way to learn a known answer, but when you’re inventing (as entrepreneurs must do), you gain insights as you go and change the plan accordingly. One of the tough challenges in moving from entrepreneurship to VC is that my actual operating and market experience decays over time. You get a lot of new knowledge from seeing hundreds of presentations from entrepreneurs, and to some extent from the investments you have made, but you don’t accrue a lot of experience from hands-on activity. And there is no pivot in VC: I have to commit upfront to an investment, and back that entrepreneur come what may.

Nevertheless, I think you can learn from experimentation in this job. So I’m going to deliberately try more of it, and try to share some of the things I learn here.

My best example of experimentation leading to insight this is buying eHow, one of the two biggest decisions in my career to date. Jack Herrick and I were able to buy the largely defunct site for a low price in April of 2004, and sell it for a significantly higher price two years later. The reason we were able to turn the value of that property over so quickly is we were able to increase traffic to the site 30-fold in a matter of less than a year, and probably 10x the monetization of the pages shown in a matter of months. As an entrepreneur, if you can find this kind of market disruption, you’ve found gold. Here’s how we found it:

In 2001, my good friend Rich Chen was working at Google, and tipped me to the launch of AdWords, telling me it was a great product and I should check it out. It’s hard to take a mental trip back to 2001, but the idea of a self-service ad platform where you could have a campaign running just minutes after signup was extraordinary and revolutionary. I signed up, deposited the $5 minimum, and was immediately impressed. Of course, I had nothing to advertise at the time, so I bought an ad for the keyword search of my friend’s name, and the title of the ad was “Rich Chen is a dork.” (yeah, pretty lame joke.) I bid $0.05.

With $4.95 left in my account after Rich clicked on the ad (“har har”), what to do with my remaining funds? I decided to open an Amazon Associates account. I bought an ad with the title “Amazon: Books, Music and More”, and bought the keyword Amazon. (back then, you could do this.) I bid $0.05. And for the next three months, I printed $0.22 of profit for every $0.05 click, and made $30,000 of net profit that Christmas season for a couple of hours work a week. This arbitrage then went away due to a variety of factors, but I was super impressed.

In late 2003, Rich sent me another email: Google has released a product called AdSense, and I should give this one a try. Having made $30,000 on his last tip, I was inclined to give this one a try, though here you had to actually build a website to try it out, and that was a real test of my skills. What should have taken an hour took me most of a day, but I built and launched this beauty: DataRecoveryFAQ.

I knew nothing about recovering your lost hard drive, but I summarized some generic advice I could find on the web, tilted up this site, and bought some traffic from AdWords to it. Viola, I was making $100 a day!

What I’d discovered through this experimentation was a trend that was nearly invisible at the time, but was a seismic shift in the web that would play out over the next 7 years: content was now valuable again. I see three eras of internet advertising:

1996-2000: You could make money from ads but it was all recycled VC and IPO dollars, and the ads were not economic by any traditional definition
2000-2004: There was no internet ad market to speak of. Consequently, no content was created exclusively for the web, by pretty much anybody.
2004-today: Rich variety of reviews sites, blog networks, content farms all fueled by ad money

We bought eHow right on the precipice of the second era. And we realized the opportunity by being lucky, with a mindset towards experimentation and seizing the opportunity aggressively once we spotted it. Venture Capitalists, by and large, did not recognize and invest behind this trend for another 18-24 months — if you waited for it to walk in your door, or one of your portfolio companies to share the insight, it was largely too late.

Had I been a VC at the time, there would have been many investments I could have made on this hypothesis. For example, About.com was a neglected asset within Primedia, which we considered pursing more than six months before the New York Times acquired it, and had we pounced in May/June 2004, the price would have likely been significantly lower. Even at the price the New York Times paid, I think it was a bargain, and I think we could have done a lot more with it.

So how do I find another eHow? I think experimentation is still the way. If you wait for an entrepreneur to come tell me about it, I risk waiting too long.

My first experiment is going back to advertising: with new social channels emerging, how will these transform businesses on the web today? I’ve seen a few businesses leveraging Facebook advertising to build big customer bases (Zynga being the obvious leader), fewer still on Twitter. I’m curious how readers think these ad platforms will create disruptions (and opportunity) in both new and existing markets. And, I’m going to try them out. Look out for me (both Matrix and portfolio co’s) on Twitter promoted tweets and accounts, and Facebook Ads — I’m going to see what this is all about. I’ll report back with what I learn.

Craigslist has fewer unique visitors today than it did at this time in 2009.

Bad sites with network effects show much slower decay in use than they should based on their absolute quality. (think eBay.) Bad sites who price most of their product at free show incredibly slow decay in use. (think Craigslist). But make no mistake, it is happening.

The evidence of their poor quality is so obvious it’s hardly worth stating. Suffice it to say, if I’m looking to rent an apartment, it would be nice not to see the same listing reposted every day, and having to re-read it and figure out if I’ve called them before. It might be even nicer to view them on a map, ... Read More »]]> Craiglist has been disrupted, it’s just not obvious yet. And the world will be a better place for it.

Craigslist has fewer unique visitors today than it did at this time in 2009.

Bad sites with network effects show much slower decay in use than they should based on their absolute quality. (think eBay.) Bad sites who price most of their product at free show incredibly slow decay in use. (think Craigslist). But make no mistake, it is happening.

The evidence of their poor quality is so obvious it’s hardly worth stating. Suffice it to say, if I’m looking to rent an apartment, it would be nice not to see the same listing reposted every day, and having to re-read it and figure out if I’ve called them before. It might be even nicer to view them on a map, or god forbid have new and relevant listing emailed to me.

Sites like Oodle have tried to take it head on with a superior interface but have been unable to displace them. Sites like Kagigi have been launched by eBay, or OLX, which is distributed on other people’s platforms with large traffic, have tried to leverage other sources of traffic to combat the critical mass.

Generally speaking, Craigslist has been “good enough” to not be disrupted head-on. Nevertheless, the world moves on, and the gaps in their product (due to a stubborn obstinate refusal to invest in technology) grow wider and wider. As tablets, smartphones, etc disrupt, and craigslist doesn’t invest in those platforms, the feature gap grows wider.

The disruption that has happened has occurred on a category-by-category bases, as this graphic by Andrew Parker shows:

Stubhub, Airbnb, Etsy have built big businesses in some of these categories, and floods of new startups try to pry off pieces (Taskrabbit, many others).

I have derived a lot of utility out of Craigslist over the years, and it has all come free, so I am grateful for that. But the site reportedly pulls in more than $100M in revenue a year, has only a few dozen employees, continually under-invests in technology and does not innovate. I don’t think Craig’s a bad guy, but he’s harvesting $50M a year into his pockets and not improving the site. In ten years I think Craigslist will be an afterthought, whereas if he reinvested half of those profits into technology and product, it would have a real shot to be a category leader.

This post taken from an answer I posted on Quora.

Historically (i.e. before ~2006) this was the explicit role of angel investors in the startup financing ecosystem. Rarely, in fact, would angel investors have an opportunity to invest after a product and revenue were in place.

For consumer internet and SaaS enterprise deals, a lot has changed in the last few years. Technology has moved on, and for a host of reasons a lot more can be accomplished with 1-2 engineers and little or no cash. Now angel investors expect to see product and customers before writing a check, and to an extent, founders expect to own more of the company after that first money comes in. Everybody wins.

As a general rule today, angel investors are expecting to see a product, and customers (or at least users) in place before they invest.

However, there is still a role for angel ... Read More »]]> All the time!

Historically (i.e. before ~2006) this was the explicit role of angel investors in the startup financing ecosystem. Rarely, in fact, would angel investors have an opportunity to invest after a product and revenue were in place.

For consumer internet and SaaS enterprise deals, a lot has changed in the last few years. Technology has moved on, and for a host of reasons a lot more can be accomplished with 1-2 engineers and little or no cash. Now angel investors expect to see product and customers before writing a check, and to an extent, founders expect to own more of the company after that first money comes in. Everybody wins.

As a general rule today, angel investors are expecting to see a product, and customers (or at least users) in place before they invest.

However, there is still a role for angel (and, in fact, VC) pre-product:

If superstar proven entrepreneurs want to raise money before building product, they can and will.
First-time entrepreneurs who literally have no money — can’t afford to go 6 months without salary or even pay for EC2 — will raise angel money as it was classically done, from FFF (friends, family & fools).
People who dream big and take on really hard, complex problems that require a lot of intellectual property to be built. (Ideally combined with category 1 above)
Outside SaaS/consumer internet, sectors such as hardware/communications equipment obviously require investment pre-product.

I personally find the third category super interesting. Today we are seeing a ton of new companies that want to build something pretty simple, where the venture risk is all about whether consumers will like it, and whether you can shout loud enough above the noise for anybody to even know that your new product exists. While there are some great businesses in that, it’s fun also to invest in some companies trying to do things that are technically difficult and solve a big customer pain point, and will surely get adopted if they are successful.

—–

This question was asked to me directly on Quora, and I thought I would copy my answer here on the blog. You can view the thread on Quora as well here.

Check out this letter from concerned scientists to the government urging more testing.

Some key points they make: – people compare the level of radiation to exposure in a chest x-ray or cosmic rays. But this is a totally different radiation. By design it doesn’t penetrate the skin — so while a chest x-ray just flies through you, this all just stops in the skin. – all the analysis compares the dosage ... Read More »]]> I thought the internet panic over the new TSA pat-downs and body images was a bit of an overreaction. It turns out that the pat-down may be much better than the alternative, going through the back scatter imaging system. It seems the science is very untested on the risks of this system, and those risks could be quite real.

Check out this letter from concerned scientists to the government urging more testing.

Some key points they make:
– people compare the level of radiation to exposure in a chest x-ray or cosmic rays. But this is a totally different radiation. By design it doesn’t penetrate the skin — so while a chest x-ray just flies through you, this all just stops in the skin.
– all the analysis compares the dosage to your whole body mass — but that’s not relevant. It may all stop and stay in a thin outer layer of your skin, and be a very high dose for that mass. We don’t know, because it has not been tested.
– there is one key piece of data to measure the risk: Flux (photons per unit of area and time). That data is not available and may not have been measured!
– if you are in any of these groups you should be especially concerned: over 65, female, a child, HIV+, pregnant, or have testicles. At least 18-64 year old eunuchs are low risk.

Consider this: the dose level of radiation in the system is controlled by software. How often, in your experience, does software contain bugs? Knowing how hard it is to hire great software engineers, how good do you think the programmers are at Rapiscan Systems in Woodland Hills, CA? Have you ever been using a computer and had it unexpectedly hang up for a second? Better hope this hardware and software doesn’t hang for a second while scanning you. Since it scans your whole body with a high energy beam in a few seconds, if it hung for a second mid-scan, it would deliver a very intense dose to one small area of your body.

If ATMs can fail, can an X-ray scanner?

But hey, they probably got the software and hardware all right on the first release, that happens a lot. Not really worth the hassle of extensively testing these systems before rolling them out.

Of course we are constantly risking our lives on the reliability of software systems — in your car, flying a plane, chest X-rays… but most of those systems are pretty thoroughly tested and cautiously rolled out. And deliver a lot more benefit to you for the risk you are taking than going through a back scatter scan.

Consider that you know for sure that you are not a terrorist about to hijack a plane: so a more accurate security screening delivers absolutely no value to you. I think I’ll probably opt for the pat-down experience instead, and let them beta test this technology on others.

Thanks to Bryan Cantrill for educating me on this and saving me some radiation.

The benefit of keeping the founder title accrues more notably to more junior founders: if the company grows and over time people are hired above you, it offers ego compensation to keep that founder tag on your business card alongside “product manager”, if you’ve effectively been demoted from VP of Product. This seems less relevant for a CEO, who should get sufficient ego out of that title alone.

The reason I think it was a mistake to emphasize founder status is that I was essentially implicitly trying to say I was better than the other, non-founder employees. That I was special, and ... Read More »]]> When I founded my first company, I referred to myself as “founder and CEO”, and in retrospect, I believe it was a mistake. Were I to do it over again, I would de-emphasize my founder status.

The benefit of keeping the founder title accrues more notably to more junior founders: if the company grows and over time people are hired above you, it offers ego compensation to keep that founder tag on your business card alongside “product manager”, if you’ve effectively been demoted from VP of Product. This seems less relevant for a CEO, who should get sufficient ego out of that title alone.

The reason I think it was a mistake to emphasize founder status is that I was essentially implicitly trying to say I was better than the other, non-founder employees. That I was special, and had something they would never had. But that benefit was right there in the cap table: I had the ownership of a founder, and that ought to be enough. And my naked self-interest was for every employee to act like an founder and work their ass off — so rather than feeding my ego with a founder title, I should have been giving everyone the founder title and hoping they’d stay all weekend to get the software release out.

—

Post prompted by this question on Quora.

But that doesn’t change the fact that the thesis of “entertainment commerce” is a compelling one – buying on eBay was once a thrilling experience where people ended up buying stuff they didn’t need just for the fun of the chase, or overpaying because they couldn’t stand to lose the bidding war. These days, buying on eBay seems a chore to me, and I suspect it does for most users. But the idea of making shopping fun – a mix ... Read More »]]> Anyone who knows me well always points me to new deals that look like Swoopo – I have a weakness for things that are clever. A lot of these new deals aren’t great venture investments, some might be good “lifestyle” businesses, but most of them prove to be neither great nor good. In the end, maybe a bit too clever.

But that doesn’t change the fact that the thesis of “entertainment commerce” is a compelling one – buying on eBay was once a thrilling experience where people ended up buying stuff they didn’t need just for the fun of the chase, or overpaying because they couldn’t stand to lose the bidding war. These days, buying on eBay seems a chore to me, and I suspect it does for most users. But the idea of making shopping fun – a mix of commerce and gaming – still seems a good one.

If we placed sites that incorporate elements of gaming and competition into the shopping experience along a continuum that stretched from Amazon (just shopping) to a casino (just gaming), we’re starting to see some success at the “mostly shopping” end – sites such as Gilt Groupe (a Matrix investment) generate excitement by offering great prices on desirable goods and an exhilarating race to purchase before those goods are gone.

Swoopo and its ilk are at the other end of the spectrum: mostly gaming with a little shopping element thrown in. One might characterize them as a stab at legal Internet gambling under the guise of ecommerce (though they would not define themselves this way). I think this is a clever idea (but note the caveat about clever ideas I mention above …).

Beware the churn out

Swoopo is a very innovative auction game that has generated significant revenue and uptake. While I have long known and respected Frank Han, now CEO of Swoopo, I have no inside information on how they are doing — but I hear that business is struggling a bit to control churn, and it doesn’t surprise me.

Swoopo acquires a lot of customers through adwords: “Buy an iPad for $100.” If you’re searching Google for an iPad, you’ll click through – who doesn’t want one for just $100? And you will see the results from a completed auction, where, sure enough, someone did buy (win?) one for $100. Maybe you’ll decide to join the game, buy some bids, and try to get it yourself.

The problem with this approach is churn. Swoopo can’t possibly afford to sell every customer an iPad for $100. When you play the game and lose, you get annoyed and churn out. Even worse, often you post (erroneously, in my view) on the Internet that Swoopo is a scam.  Swimming upstream through these negative customer reviews, Swoopo has to keep finding new, untainted fish to churn through this model, and at some point, the ocean gets fished out.

Swoopo could fix this through greater truth in advertising: “Join the game, have fun bidding against others, and have a chance to maybe win some great prizes at a big discount.” With this pitch, rather than “Buy an iPad for $100,” customers would presumably be more realistic about the game, less likely to churn, and less likely to flame Swoopo on the way out. The likely conundrum for Swoopo is that far fewer visitors would click through or sign up, perhaps not enough for an interesting business.

Despite this flaw, I think there is still potential for a great business that is on the “mostly gaming” end of the spectrum, and the lesson comes from Las Vegas. Customers come to gamble and are universally aware that it’s a losing proposition. Most people go to Vegas with a gambling budget – “I am willing to lose up to $200” (and then end up losing double that). When they go home a loser, they don’t flame Vegas to their friends and tell them what a scam it is – they blame themselves, or more likely blame no one because they got exactly what they expected.

The key for a great, new entertainment shopping business is to achieve what Vegas has: customers who arrive to the game with the attitude, “I am willing to lose up to $200.” Why do people have that attitude toward Vegas? First, because you might win. But just as important: because it’s fun! The game may be inherently interesting, it can be social, come with perks like free drinks, flashing lights, maybe a free room or meal. You’re buying entertainment.

That’s where this generation of entertainment-shopping sites fails: you might win, but if you don’t it’s really not very fun. By delivering little entertainment, there’s nothing but disappointment left when you lose. Of course, Vegas has huge advantages in delivering entertainment, given your physical presence at the game. But plenty of “virtual experiences” are super entertaining on the Internet.

Catch that fish, and you may just have a clever business that can scale up and retain its customers. And I’d love to hear about it!