I continue to wonder how opportunities are going to develop for startups in this space in the US.  Outside the US, most of the companies that have been built have pretty much been an online representation of what takes place offline.  (Betfair being one of few exceptions).  Consequently, most of the spoils have gone to pre-existing (pre-internet) companies who leverage their brand and presence to build an audience.  If all everyone does is put blackjack online, it boils down to a game of  customer acquisition and those with big brands have an unfair advantage.

Which bring me to the question of: what, if any, is the opportunity for startups in the USA if gambling gets legalized?

First, an aside for ... Read More »]]> For those who don’t know, I co-founded the company that became Betfair, and have a keen interest in the space of online gambling.

I continue to wonder how opportunities are going to develop for startups in this space in the US.  Outside the US, most of the companies that have been built have pretty much been an online representation of what takes place offline.  (Betfair being one of few exceptions).  Consequently, most of the spoils have gone to pre-existing (pre-internet) companies who leverage their brand and presence to build an audience.  If all everyone does is put blackjack online, it boils down to a game of  customer acquisition and those with big brands have an unfair advantage.

Which bring me to the question of: what, if any, is the opportunity for startups in the USA if gambling gets legalized?

First, an aside for entrepreneurs looking at this space: I failed to appreciate the tax on productivity, earnings, and multiples that working in a highly regulated sector would exert on my startup.  I seriously think this is a 50-75% haircut on the value of your work, or said differently, you need a 2x-4x better business to yield the same result in gaming.  So enter only with caution (or passion).

Now, to the notion: where is the opportunity?

I think Peter Thiel captured an insight well when he said (I’m paraphrasing) great business exist in the intersection set of “sounds like a really bad idea” and “is a really good idea”.

That’s my general problem with the opportunity in legalization of gambling in the USA: it’s lost on no one.  When the gates are unlocked, you will see all the major gambling players (Wynn, Harrah’s, MGM), the Indian Casinos, plus big gaming players (Zynga most notably) investing heavily in product and customer acquisition.  There’s no way for a startup to sneak up on this, and that’s usually how startups succeed.

The big gaming houses are terrible at tech and web, but I don’t believe building a business that licenses games to them is a big opportunity.  Ultimately the own the customers and that’s where the value is.

It is also a bad idea, by the way, to do a startup predicated on legalization before it occurs.  Startups can’t wait around for the government to act, and even though you may think that legalization is inevitable, it is harder than you’d think to predict timing or account for surprising twists and turns in the process.

The type of opportunities I think are interesting, and I would consider investing in, are novel ideas that couldn’t exist in an analog world, and that are somehow inherently protectable.  Betfair is like this: an exchange for betting needed the internet to connect consumers directly, and the marketplace dynamics have let them continue to hold onto a high market share.

Of these, there hasn’t been much, or much that has worked.  Certainly in the USA, where the laws are still not set.  Nigel Eccles (who started out on my team) has built an interesting and fun take on daily fantasy gaming (Fanduel), which may be legal due to the exceptions laid out for fantasy gaming — that is one of the few I’ve seen in this area.

Anybody have other gaming innovations that can only exist in a digital world?

Another area I’ve considered would be the picks and shovels of online gaming — maybe payments, KYC (know your customer) checks, age verification, fraud control, geographic control.  Most of those feel like smaller, cash-flow businesses to me, but fragmented across markets and hard to get escape velocity and build really big businesses — but I’d be open to being surprised here.

I think of this as the “bad news call” — when the CEO sends me an email and says he just wants to catch up on something before the meeting, but gives no indication of what it is, I’m left speculating:  who’s quitting?  who did we fire?  how badly did we miss the quarter?

It’s borne of a good impulse: if you have bad news, you should absolutely get out in front of it, and diffuse it 1-on-1 with individual board members.  If you don’t, you risk the conversation going in a way you didn’t expect, or the group getting in a downward spiral.  It’s absolutely best practice to handle it this way.

But ... Read More »]]> One of my CEOs just surprised me!  I just did a pre-board meeting call, scheduled at the last minute.  Actually, I just did two of these in two days.

I think of this as the “bad news call” — when the CEO sends me an email and says he just wants to catch up on something before the meeting, but gives no indication of what it is, I’m left speculating:  who’s quitting?  who did we fire?  how badly did we miss the quarter?

It’s borne of a good impulse: if you have bad news, you should absolutely get out in front of it, and diffuse it 1-on-1 with individual board members.  If you don’t, you risk the conversation going in a way you didn’t expect, or the group getting in a downward spiral.  It’s absolutely best practice to handle it this way.

But I would suggest that when you schedule, you give an indication of the nature and the magnitude of the problem.

Rather than:

“I need to do a call with you ahead of the board meeting.”

try:

“I wanted to chat with you ahead of the board.  We had a modest miss on the sales target, and I want to bring you up to speed and address any questions”

or

“We have un expected departure of a senior member of the management team.  I wanted to grab ten minutes of your time ahead of the meeting to run you through it and get your advice on next steps.”

In today’s case, my CEO surprised me.  After stammering for about a minute and leading me to think the worst, it turns out there’s an opportunistic hire of a great exec he wants to consider, even though it’s not in the plan.  A pleasant surprise.

I’m a huge fan and avid user of the site, and I think it has the potential to be one of the cornerstone web properties, and help make the world a better place.

I’ve spent a ton of time in this shared knowledge category on the web over the last 8 years.  In 2003, when I was looking to start my next business, I came onto this idea of community shared knowledge.  In the post-bubble era, no one was investing in content for the web because there was no economic model to support it, but by 2003-04 a number of things were happening.  Wikipedia was just beginning to ... Read More »]]> Quora just announced its Series B fundraising, and I’m pleased to be a part of it, as Matrix is one of the large investors in the round.

I’m a huge fan and avid user of the site, and I think it has the potential to be one of the cornerstone web properties, and help make the world a better place.

I’ve spent a ton of time in this shared knowledge category on the web over the last 8 years.  In 2003, when I was looking to start my next business, I came onto this idea of community shared knowledge.  In the post-bubble era, no one was investing in content for the web because there was no economic model to support it, but by 2003-04 a number of things were happening.  Wikipedia was just beginning to emerge as an important site.  In 2004, Jack Herrick and I bought eHow, and rebuilt it out of the ashes of its first incarnation.

While at eHow, Jack conceived the idea for wikiHow — like wikipedia, but for all the topics of How To.  Inspired by that vision, of having a community work collectively to build the world’s largest how-to destination, we sold eHow to Demand Media, but spun out and kept wikiHow.  Jack and the community have built that into a mega destination with tens of millions of unique visitors, and eHow has flourished as well under a paid content model via Demand Media.

But still: there remains a enormous pile of information tied up in people’s heads, and a Google search fails to unlock it.  Quora is attacking that pile.  A lot of that information is stuff with multiple points of view — the wiki model, for all its strength, sucks for topics where people disagree.  The articles twist themselves in knots trying to balance everything.  Quora can handle that type of issue much more elegantly, because it is inherently built for that kind of content.  And it turns out, a huge portion of what you want to know and search for is that kind of content.

What’s audacious about Quora’s approach is that they aspire to be a primary destination, both for content discovery and creation.  There are many challenges to that — how do you get people to an empty party — but they’ve surmounted those initial barriers, and there is a very lively and growing userbase.  If they can achieve their vision, they can become a primary web destination alongside Google or Wikipedia — their control of the distribution of their content gives them great insight into what’s good and what you want to read, and a search inside Quora can yield very high quality results, much more so than if an outside party just indexes the text on their pages and tries to do it all on content without context.

They are also fanatical about quality, and unwilling to sacrifice it for short term user growth, and that’s lead to a community at scale with a high quality of discourse.  In my experience this is something only the highest quality communities can achieve — as an active member in many online forums, and an investor in Huddler which powers many of the highest quality communities online, I can say with confidence it’s an exception rather than the rule.  All other Q&A sites have been absolutely crushed under the weight of audience building — check out any Yahoo answers page, where you’ll find answers like “Good Question, I don’t know, hope you find it” because the answerer gets a “point” for every answer.  If I’m ever tempted by a Yahoo Answers result in Google, you know I’m desperate, and I bounce right back out.  In contrast, a Quora result is likely to suck me in for a half hour of reading inadvertently.

It’s a rare opportunity to be an investor in one of your favorite sites, and I’m thrilled to do it.  Congrats to the Adam, Charlie, Marc and the rest of the team.

As Jason says, no investor should begrudge entrepreneurs for a strong fundraise in an attractive early stage financing market — but keep some perspective, this is a long game, and you can’t win it today at your seed stage financing.

I wasn’t able to make the YCombinator demo day this time due to a board meeting.  But For context of what I’m talking about, let me anonymize and share a representative email exchange from the previous demo day:

On Wed, Aug 24, 2011 at 1:24 PM, Josh Hannah <jhannah@matrixpartners.com> wrote:

Impressive presentation and interesting business.  Would love to learn more, if you’d be up for a meeting? Josh

Hey Josh,

Seed investors generally have little information rights, and that’s as it should be — as CEO you shouldn’t be spending a bunch of time updating these guys.  However, I’d argue it’s in your best interest to make at least a minimum of effort in communicating with your early supporters.  You should do this on a regular basis, whether the ... Read More »]]> Before joining Matrix, I’ve had some experience with seed investors — I had a dozen or so of them at Betfair (Flutter), my first company, and then made a number of investments myself when my entrepreneurial investments began to bear fruit.  The following advice comes out of my experience, and while I was not terrible at it, I can’t claim I did this perfectly as a founder — you learn from what you do wrong as well as right.

Seed investors generally have little information rights, and that’s as it should be — as CEO you shouldn’t be spending a bunch of time updating these guys.  However, I’d argue it’s in your best interest to make at least a minimum of effort in communicating with your early supporters.  You should do this on a regular basis, whether the news is good or bad.

The benefits of this:

• First and foremost, it’s the right thing to do: these angels bet on you with their hard earned cash, and generally only hold you to a standard of doing your best to make it work — they’ll understand if you try hard and fail.  The least you could do is reward them with some psychic satisfaction via engagement with the progress of their bet
• It’s a leveraged activity: you can write one update for everybody.  By preempting inbound inquiries, you can write once for all rather than communicate bilaterally when the questions come in
• If your business doesn’t become Facebook (or even Betfair!), these early supporters will be important to your future career.  They will serve as potential future backers, and their endorsement will be critical to demonstrating your worth in the absence of financial returns from your current company
• If your business goes sideways and you need incremental cash, your investors will be more likely to offer additional support if the request for cash isn’t the first they’ve heard from you since the original check
• Most of these angels are well-connected, successful tech people — if you include “asks” in your update, you might be surprised the help you can get.  This could be introductions to a customer or partner, candidates for open job recs, or just promoting your product or service through their personal networks.

Now, if you’re not a early-stage CEO, you probably read this and think, “duh, this is obvious.  what moron wouldn’t do it.”  But if you are an early-stage CEO, you’re probably thinking, “yeah, I really should do that, have been meaning to but haven’t done in for the last 18 months”.  In my personal experience, a bit over half of the companies I have seed/angel invested in communicate proactively with me less than once a year.   As a founder, you have to make it a priority, and just bound the time you’re willing to put into it — I’ll spend 90 minutes writing an email and sending it, and then get back to my other work.

I have seen a number of formats for this.  The most common is a 1-page email sent once a year, and I think this is fine and sufficient.  Mariam Naficy of Minted is a great example of this.  Some do a bit more — Ross Weber of Dealbase sends out a 1-page update quarterly, and this definitely keeps the company top of mind for me.  Before being acquired, Max Ventilla of Aardvark would organize half-day summits with his angels to work through strategic issues.  Any of these meet the minimum standard.

A basic format for your update would be:

1. Short qualitative paragraph from CEO describing the progress since last update
2. High level financial and operational metrics for the business
3. Highlights and lowlights, performance vs. plan and competition
4. Key metrics for the coming year
5. “Asks” for things investors can help with immediately in the business
6. Cash position and any further fundraising plans
7. Thank for continued support, recognize any particular instances of investor assistance over last year to role model behavior for other investors

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.