Technology Archives

Bubble Thoughts

I have been tweeting about some unease I have about the local economy, not out of any great wisdom or experience, but just noticing some random signals. Since then, of course, a conversation has exploded around bubbles, burn rates, and every investor transforming into an armchair economist on Twitter. Offline, this topic comes up so much in conversation, i wanted to briefly outline my point of view on the matter. I thought about doing a Tweetstorm, but I tweet so much that I thought if I do a Tweetstorm, my followers would kill me. So, here are my thoughts on the matter:

1/ Difficulty In Defining Terms: It’s hard to have a discussion about “bubbles” because different people define them differently. For me, I define a bubble as having two characteristics — one, an environment where overpriced assets have no buyers; two, where people take on debt to buy those assets; and three, where the pain associated with the bubble popping is widespread among a population.

2/ Bubbles As Geometric Shapes In Motion: Additionally, it’s not quite right to ask “Are we in a bubble?” The answer to that is “yes.” The more pertinent question is: “In the bubble we are in, how big is the sphere and how fast is it expanding?” The shape, size, and speed is important.

3/ Current Mood Of Public Markets: It’s not totally easy to go IPO right now. A few handful of tech companies have tried and been rebuffed. The public markets are accepting IPOs with certain fundamentals but rejecting others, and are especially harsh on ones with high sales and marketing engines.

4/ Private Market Slices: The private market is so big now as a result of stricter IPO requirements and more patient capital. Crudely, I slice it into three sub-markets: Amateurs, Pros, and Greed. The amateurs (where I sit) consist of the crowdfunding platforms, the accelerators and incubators, and people like me who invest very early. The Pros outsource this risk to the amateurs, and both sides are happy. The Greed (not stated in a bad way) are there to provide growth, patient, and leveraged capital cheaply to companies which want to stay private longer. (The late-stage greed rounds is where many think a mini-bubble has formed or is forming.)

So, therefore, I believe…

5/ Mini-Bubbles Will Concentrate Pain: My belief is that between the companies funded by the amateurs and the greed rounds, many of those will not live on. Many will be subsumed through M&A or go away. The pros are looking for more and more proof points, willing to pay more for more de-risked opportunities, and the public markets have welcomed a good number of companies with open arms, but also given the Heisman to a few, as well. This time around, folks may be hunting for the small acqui-hire exits or the big M&A exits, and some of those may come at prices below what the cost of capital in the previous rounds.

And, so here we are…what to do? For most people in the early-stage, it’s just the same. Maybe we all should be even more sober about the realities of what’s needed for real institutional financing? Maybe we’re about to hit a zone where AngelList backers and newly minted tech millionaires who dabbled in angel investing start putting up big zeroes on the board? But, we all knew that going in to it. For the later stage folks, tech is still hot — and there’s a vibrant secondary market, so maybe the really expensive shares purchased at $10bn can still find a buy tomorrow at $20bn. It all seems plausible until there’s no one left to buy a share.

People won’t say this publicly, but I hear it all the time — many folks across companies, investment firms, and media properties sort of want a bit of a correction. Talent is very fragmented across companies. Consumers are running out of time in the day to try new apps. Today’s exciting new platforms will take time to bake and get market-ready. That doesn’t mean folks should stop trying — but just a little fear might turn out to be a gift for the ecosystem at large.

Comment Re: On-Demand Economy Workforce

A few days ago, my friend @KevinRoose (a reporter for New York Magazine) emailed me for some comments and quotes for an article he published today investigating the use of contract workers by on-demand startups. If you are in this space, it’s worth reading Kevin’s article. He is a good reporter. My quotes didn’t make it in, but as someone who has invested in this space (and uses many of these services as a consumer, too), I asked Kevin if I could post the email I sent to him on my blog. He said, “Sure!.” So, here they are:

Link to Kevin’s article in New York Magazine [link]

My quote to Kevin:

I can’t speak for various startups’ experiences, but I’d imagine (1) [hiring contract workers] makes it easier to start and get things off the ground and (2) many of these jobs may have been contracted out or one-offed prior to the startup matching them.

I am personally not aware of any abuse [of contract workers], and knowing many of the CEOs in this space personally, I am certain this is on their minds. Scale matters, of course. The bigger and more important a company gets, that is likely to come with all sorts of responsibilities. I am not a lawyer, but I’d imagine the recent FedEx ruling is being examined – The Information wrote a good piece on this. (I believe the courts ruled that FedEx had to make those people employees because they were working full time and wearing a uniform, etc. Right now, I’d imagine drivers, delivery-people, and other on-demand labor use different marketplaces to find jobs.)

I don’t believe that the startups we all associate with this are in the crosshairs, but with success comes a spotlight, so if imagine the best companies will address this head-on versus waiting to react.

Regarding a potential backlash to the model – it’s no secret that the American economy is pretty uneven overall. That can create a tense atmosphere. In the on-demand world, there will be some workers who benefit from this shift (more income, higher rates, flexible hours, etc) and some will not like how these changes affected their business.

George Zachary On Silicon Valley Bubbles (Recorded June 2012)

Back in 2012, right before the Facebook IPO, CRV’s George Zachary sat down with me to discuss the history of bubbles in economic history, including Silicon Valley. Zachary has been through a few tech cycles and he’s studied the history of bubbles, so this is an interesting time to revisit his thoughts. Video above, transcript below. Again, bear in mind this conversation happened in June of 2012.

@semil: We’re in the TechCrunch studio today with George Zachary, partner at Charles River Ventures and an early investor in Twitter, Yammer and Millennial Media. George, welcome to the studio.

George: Thanks for having me here.

@semil: Very soon, Facebook is going to go public. There’s a lot of talk about bubble talk in Silicon Valley and the tech world. You’ve been around the block a number of times. How do you view the world right now in terms of technology and the whole scene?

George: I’ve been in tech personally since ’77. In venture capital, I’ve been an investor since 1995. The plus side is, I’ve studied the history of bubbles. There’s actually 600 years of human history with bubbles. It’s actually a human phenomenon. It’s not just a short-term thing over the last 20 years.

@semil: Tell us a little about that. I didn’t know that you studied bubbles.

George: There’s some great books to read if people are interested, such as Manias, Panics, and Crashes. It reads like a description of a bipolar person. It also talks a little bit about a bipolar society. The tensions that get created are basically socioeconomic in nature, where people feel like they’re missing out and that fuels the end of the bubble.

We’re not quite there. We’re getting there, but there are just some fantastic books about how bubbles start. There’s the South Sea bubble, where people give money to the adventurers on boats, and then you get this bubble of people over-funding the boats. There’s also the tulip bubble. There are plenty of bubbles, and it’s just driven by the fact that people are seeking treasure.

@semil: Walk us through an earlier bubble that the Valley went through and what that looked like. Start to explain where you think we are now.

George: To preface this, if you look at the last 150 years of stock market history, you see an annualized return of 6.7 per year. That’s on a real basis. Without dividends, it’s closer to five-ish.

One of the things you’ll see is that the bubbles come in waves. You see 15 years of sideways appear in the stock market with this up and down volatility, and then 15 years of up, with up and down volatility. In the year 2000, I told my partners, “We are in it for another 13 to 15 years, where the market’s going to be tough.”

We can talk about that later, but we’re nearing the end of this bearish period. We’re starting to see a bubble emerge. For me, this Facebook IPO has a lot of similarities with the Netscape IPO of 1994, and a lot of differences.

At that time, no one was saying it was a bubble. People weren’t going around saying, “Oh, my God. Netscape is going to go public. It’s a bubble.” Actually, people were looking forward to it. People didn’t know how it would price. It went out. It priced. The price jump was astronomical. That started people talking about that there might be a bubble.

The real bubble in the ’90s really didn’t start until the late ’90s. While people call it a dot-com bubble, it was actually a bubble fueled by the Fed. The Fed pumped a ton of liquidity into the system towards basically the guarding of the catastrophic meltdown of the United States due to the year 2000 problems, in terms of people’s clocks resetting.

It pumped the market full of liquidity and that came out into the market in 2000-2001. It actually caused a catalyst for the final part of the bubble up and then, it’s basically popping. It always pops when there are no more buyers. Boom and bubble is basically that last phase where it starts to become unsustainable. You see exponential and ballistic rises in stock prices. You see it across the entire landscape, from the leaders in industry to the seed-stage company.

We’re not quite there yet. To me, there’s a Netscape feeling about it because people feel like it’s a brand new era. Back then, people weren’t talking about a bubble. People now are talking about a bubble. I think the question is, “How do you define a bubble?” That something is over-valued? Value in monetary systems is only really relative. There’s no idea of an absolute wealth. Bubble value is really relative value.

I do not think we’re in a ’99 kind of bubble time period this way.

@semil: It’s a different beast.

George: It’s a different beast. The end of all bubbles is always marked by people borrowing money and taking on debt to buy equity or to buy assets. The last time we saw this was 2007-8 with the end of the real-estate bubble. We just ran out of buyers. The last ones of those buyers were people who were faking their liar loans and making unsustainable commitments. There were no more buyers after that so it just ended.

To me, there’s a little bit of talk about that going on, but I don’t see founders, I don’t see investors, I don’t see landlords or service providers basically borrowing money to buy equity.

@semil: They’re using their own.

George: They’re using their own capital, which they have, to put into equity. I don’t see the individual investor increasing their margin account at stock brokerages. In the last week, we had a reduction in terms of the investor sentiment to the lowest suggested amounts of holdings of NASDAQ tech companies.

There’s enough fear in the market that it tells me that we’re not at a bubble yet. When there’s no fear, that’s when we’re near the end of the bubble.

@semil: Here in mid-May 2012, at what phase or at what point in the curve are we in your mind?

George: If you look at the phases of tech bubbles, the first phase is when a leader in the space does something breakthrough and gets an extraordinarily high valuation. That was Facebook in one of its first rounds, when they decided to not take the buyout offer and raise money at a higher price.

It wasn’t the Greylock offer when Greylock offered $500 million valuation, because that was high but it wasn’t ridiculous. It was when Yuri Milner and DST invested and everyone said, “Whoa, it’s a bubble.” It’s when Microsoft invested in Facebook and people said, “Whoa, that’s a bubble.” How can this ever be worth $10-15 billion?

Now that characterizes the first phase,where the first leader has this very high valuation and people say, “Oh, it’s a bubble.” It’s not really an indicator that the bubble is about to break. Usually when the bubble is about to break is in the second or third phases.

The second and third phases look like the following. In the second phase you have the competitor companies. I’m an investor in one, which is Twitter, where people apply a high valuation to Twitter and they say, “Well, relative to Facebook, it should have this valuation.”

You have this set of leading companies. They have good metrics, they have good users, they have real engagement, and they carry a mark-to-Facebook, a mark-to-leader kind of valuation. That’s when you know you’re in the second phase. At the end of the second phase, you start to see that a couple companies get bought.

The one that’s very obvious to me that defines this delineation between the second and third phase is the Instagram purchase. It wasn’t an irrational purchase. It looks irrational. Why is it worth $1 billion? It’s worth one percent of Facebook, which is different from it being worth $1 billion.

You’re starting to see some mark-to-market of the companies that were not the leaders but became the leaders, and then you saw this transaction that happened. The ideal point to being an investor, is still now, and actually still is for awhile. The reason why, is that there a set of follow-along companies, the HootSuites of the world and other people that are saying, “Hey, we’re going to raise money at a $500 million price tag.”

Why? Because these other companies which aren’t Facebook or Twitter but may be right underneath them in terms of leadership, they have valuations. You see this cascading multiple that goes to the leader, to the second tier, to the third tier, then to the fourth.

@semil: So, you’re saying that there are a number of companies underneath layers above the leaders and since they’re not having real revenues, or you can’t really price, select and value the user, you’re marking it to the market leader, which in and of itself, isn’t being priced according to the public markets.

George: That’s right.

The Instagram purchase really reminds me of the same feeling I had when Microsoft acquired Hotmail, in I think January of 1998. People said, “Microsoft, the leading software company, bought this webmail thing for $400 million?” A lot of people were astounded.

They thought, “It has no revenue. It just sends messages to people. People use it to communicate with one other…” People were astounded. People said, “Oh, that’s a bubble. I’m so pissed off that Hotmail got bought for $400, my message being…” I heard the exact same things with Instagram.

Instagram is interesting because the leading web company, Facebook, is now trended by the leading mobile app player. You can debate whether it’s the leading mobile app player. I see that it’s incredibly parallel.

Back in 1998, we were still not in this full-fledged bubble. We were still in this boundary between second phase and third phase. That Hotmail transaction is what started it. When you look back at it, Microsoft doesn’t complain that it bought Hotmail for $400 million because it was a great customer acquisition tool for them.

@semil: Now, the Facebook IPO is going to happen very soon.

George: Next week. No, this week?

@semil: Yes. I am going to ask you a two-part question. What does the rest of 2012 look like to you as an investor? Then, what does 2013 look like?

George: What does 2012 look like? We’re in this eye of the hurricane period, where everyone right now is just battening down the hatches, and wondering what’s going to happen the day of the IPO and what’s going to happen after the IPO. How are people going to price this? That’s going to be the second part of the hurricane.

I don’t know how people are going to act. But looking at the public market, you can see that the small cap stocks have started to lose some relative power, relative to the whole market. That’s usually a sign that you’re in an aging bull market. But it’s not always a sign, statistically.

I think what we’re seeing is that there is still reluctance on the part of the public to believe that everything in the world is fine. We’re climbing that wall of worry. The wall of worry is not over. People still have worries. As long as there are worries, you’re not at the end of the bubble.

My belief is that the Facebook IPO will do well. I don’t know if it is going to go to a $200 billion valuation. I know lots of people I know, and myself, we all have biases wanting to believe that because then, cash will be raining from the sky.

@semil: Let’s rephrase the question a little bit differently. For other startups out there, other people with companies that have gained some traction, how should they be thinking about 2012? Some of them are going to be going for financing, some of them are going to be looking at M and A. How do you think that leaders should be thinking about that?

George: It matters what stage you’re at.

@semil: Let’s say early stage.

George: Early stage, so past seed stage.

@semil: Yes.

George: But they might have a million users or 10 million users.

@semil: I’m going to assume that for the best founders and best companies, seed capital is always going to be available.

George: That’s right.

@semil: Let’s say between A and C.

George: I think what you’re going to see is that financings are still going to be strong, they’re still going to be taking place. There are lots of public market investors and limited partner investors that will invest into venture capital. That’s going to continue. You’re seeing a winnowing of the amount of firms that are profitable.

Out of 800 firms in technology venture capital, 30 are profitable over the last 10 years. But remember, in Hollywood, there are lots of movie production studios that are unprofitable for a long period of time, but they don’t go out of business because people still want the dream of funding the next big movie.

This phenomenon is going to continue for a while. People are chasing these legends and myths. Not even myths, they’re the realities of “this could be the next humongous thing.”

@semil: Maybe the players will change, but the money will always be there.

George: That’s what I think.

I think the rest of the year, if you have any traction, you should be able to be financed. But people are looking for growth on growth transaction. People are looking for the exponential curves because the exponential curve is a strong indicator that you have product market fit. If you have product market fit, you should be able to monetize it in a certain way. If you don’t have an exponential curve, either you won’t get a valuation, or it’s not going to be good.

@semil: Understood. Here’s the final question. With the last breakout social application, let’s say Pinterest or some of the communication apps or what’s going on with Vox or things like that, do you think the next one will be mobile?

George: Yes. Mobile is the platform that we will be with for quite a long time. Whether it is going to be a mobile phone or a Google Glasses kind of thing, it’s still going to be mobile because it goes with you wherever you are. You don’t have to be chained to your desk.

@semil: But I’m talking about the next exponential breakout, where you see the user growth kind of go like this.

George: Yes, it will be mobile. We’re going to have more people come online in the next 10 years than are online right now. That’s a huge opportunity.

I think we’ll see Twitter have a billion users in the next couple of years. That’s the ratchet of how many users you have and what’s successful. When I got in this business in 1995, there wasn’t Web 2.0 or even, really, Web 1.0; it was like Web 0.1. If you had 50,000 users, that was considered awesome.

Now, to be considered awesome, you have to have some amount of millions of active, engaged users. Not downloads or registrations, but people who love the product and are engaging in it. You look at the ratio of DAUs, daily active users, to monthly active users, you get a sense of that excitement.

You also look at the churn rate. We’ve done some work, and we see that there’s a correlation between churn rate and exits.

@semil: Actually, this is an interesting question. Do you think that some of the companies right now, let’s say on the communications side or on the social video side, that’s what everyone is talking about right now in terms of applications? Do you think that growth is organic or sustainable? Or, are they piggybacking off of Open Graph and Twitter?

George: I’m inclined to believe more of the latter, which is, you’re likely to have these impulse waves up and another competitor can come by with a slightly better product and you can have an impulse wave down. Founders should be looking for how to implement switching costs into the product, how to build network effects into the products that shut down the users’ desire to switch out.

@semil: All right, George. Thank you for coming in and sharing your knowledge.

George: Sure, thanks for having me.

Events I’ll Be Attending In October

Part of my “time-off” this fall is to travel and explore a bit. I’m still working a bunch but trying to take a few days here and there to catch up, unwind, and help with stuff around the apartment. In October, I’m lucky to be traveling to a few events I’m really excited about it. I’ve never done this before, and it’s rare for me to travel and speak like this (especially with a kid at home), so I figured I’d share the events/links in case any of you were attending or in the area. If there’s any video of the talks after the fact, I’ll try to post them here.

Oct 7-8 | Venture Alpha West, Half Moon Bay, CA [link] [I'll be on a panel about early-stage hardware investing on that Tuesday, in the afternoon. Interesting side note is that former 49ers Quarterback Steve Young will also be speaking there.]

Oct 13-15 | Marketplaces, by Silicon Valley Bank, New York, NY [link] [This is private event on marketplaces and investing in them. I'll be in NYC the day before hanging out.]

Oct 19-20 | Rutberg Mobile Influencers, Los Angeles, CA [link] [This one is about 30 minutes south of LAX, a more private event but I think lots of CEOs are going. I'm moderating a panel on on-demand services with Tri from Munchery, Kevin of Shyp, Basti of Postmates, and maybe one more guest TBD. It's gonna be good fun.]

Oct 26-28 | Stocktoberfest, San Diego, CA [link] [I am so pumped up for this. Have heard great things about Howard's event, and I'll be on a panel about mobile technology and also (potentially) giving a talk about using startup insights to play the public stock market -- something I like to dabble in. Mostly, I'm going to meet other folks in the Stocktwits community who live and breathe this stuff and learn from them. And have fun.]

And, for a more local event I’m helping organize…if you’re in the Bay Area, pay close attention to this one…

Dec 2 | The Post-Seed Conference, San Francisco, CA [link] [In my work with Bullpen, the firm is organizing a one-day conference on Tuesday, December 2 in San Francisco. The event will be solely focused on the changing landscape in early-stage funding and finance. You can read more about it on the site. There will be many draws to this, but in particular, our keynotes for this are amazing -- a16z's Chris Dixon will be interviewed by Bloomberg's Cory Johnson; Khosla Ventures' Keith Rabois will be a featured speaker 1:1;, and I will close out the day's events by hosting a fireside chat with AngelList's Naval Ravikant. If you're an early-stage founder, investor, or writer covering the area, you should definitely explore attending. Registration information is here.]

The Story Behind My Investment In Envoy

I wrote the first version of this months ago, but Larry (@lg) said to “put it on ice, baby.” Then, of course, Larry emailed me TODAY, while I’m traveling, to post it. So I cleaned it up a bit, and filing this one from the Denver airport. All for Larry and the team at Envoy.

###

This will be a short one. Years ago, while working at another startup, one of the engineers mentioned how they wanted to resume discussions with this one engineer named @lg. I remembered his twitter handle and recall running into him a few times (randomly) with a mutual friend. The last time I saw him, he was talking about leaving Twitter and going to Croatia or something Balkan like that.

Fast-forward to the Fall of 2013, a close friend of mine was helping Larry get the company off the ground. At first, I didn’t think to dig deeper, but that was foolish. I ran into my friend at an event in SF and casually remarked that I should invest, sort of as a joke, and he responded with “Actually, that’s going down right now.”

Whoa. OK. I got the intro on Thursday and round was closing on Monday. The product, deck, and business fundamentals were great for an early-stage company, so I was inclined to just go along for the ride. But @lg wanted to meet f2f. I couldn’t meet that weekend for some reason (I don’t live in SF proper), so I drove up to SF early Monday morning before work just to see @lg face to face and get on the same page. It was a great discussion and we synced up on mobile opportunities and challenges very well.

Outside of that roundabout story of reconnecting with @lg, there’s not much to share about the product, Envoy, other than if you’re in the Bay Area and visit other technology companies, you’ve probably already used Envoy’s software. Also, I would point to their product. You will see for yourself just how elegant and dead-simple this solution is, but also how deep the opportunities are as businesses and individuals adopt the platform (which they’re already doing), and as sensor advancements in the phones allow for beacons and other goodies.

Envoy is a terrific, simple, business-minded product built for an age of low energy Bluetooth, context-aware beacons, and security protocols for building entry. It is also a business, and now the goal is to nail down the business model and figure out how to expand it, because I can’t see why businesses wouldn’t want to use this software. All of this has been done, it’s worth noting, with just 3-4 people with very little funding or fanfare. That, in and of itself, is remarkable.

Uber And Entrepreneurial Psychology

I’m working tonight on something where I had to catch up on a video clip. I watched Arrington’s interview of Uber’s CEO which kicked off last week’s TechCrunch conference. I didn’t attend that day so missed the talk and posts around it.  The entire discussion is excellent and shows many facets of Kalanick that are interesting (to me). But, I wanted to focus on the first five minutes of the talk. You can watch it here [video link].

If you’re a startup CEO or early-stage investor, I’d recommend watching these first five minutes, which expose a nuanced entrepreneurial psychology. In the case of Kalanick, I’d summarize it as follows — he has a certain public image that some don’t like (I don’t know the guy at all), but I do recall an interview he gave over three years ago where he talked about some of his previous companies and those associated struggles. Listening to Arrington, my memory was triggered, so I listened to this long interview [video link] while making dinner tonight. And, it was fascinating to hear Kalanick talk about himself and Uber way back in early 2011. Here’s what I took away from both discussions:

Uber is Kalanick’s 4th Company. He started an SAT prep company, then Scour, then Red Swoosh, and then Uber. He was a serial entrepreneur before starting Uber. I’d bet many folks in tech didn’t know that. I knew about Red Swoosh, but not the others. Interestingly, all but the SAT company were based on P2P relationships and technologies. One has to wonder how deep his intuition around P2P networks was before he started Uber.

An Edgy Chip On The Shoulder: Many folks have chips on their shoulders. Whatever the psychology, folks have to manage it in order to carry on. Kalanick’s chips come from having a failed startup which was sued, and then another where he didn’t pay himself for four years and was living in his parent’s house. (By the way, I’m taking this from the interview in 2011 and this past week.) I imagine it’s hard not to be so aggressive and competitive after having such experiences, and people respond differently to such pressures.

The Uber Killer Is Stress. Speaking of pressure, when Arrington asked Kalanick what could kill Uber, the CEO mentioned “Stress.” The company just hired David Plouffe who orchestrated one of the greatest political campaign in politics, and now has work cut out for him as he grooms a company and CEO to engage in global battles with car industries, city governments, organized labor, upstart companies, and even nations (laws in Germany, fierce competition in China). When I looked at the interview from 2011, I noticed Kalanick’s hair was jet black; today, he has some prominent grey streaks, just like a weathered politician in the klieg lights.

Benchmark’s Series A Call Is The Stuff Of Legends. In 2011, Kalanick retells how, after pitching the entire Benchmark partnership (his only meeting with them), the team asked him to wait and had one of their colleagues sit with him so he couldn’t leave. They deliberated and decided on the spot, and then invited Kalanick back in to do the deal. At the time, Uber was in only two (2) cities! Moreover, in this 2011 interview, Kalanick discusses other things Uber can do — a slew of “on-demand” services (his words) like food, jets, and whatever else people order. Even in this interview, Kalanick is thinking about Uber on a scale similar to Google.

The Traveling Salesman Problem In Computer Science. Kalanick refers to this toward the end of the 2011 interview, essentially explaining a routing optimization problem that has 15 or more nodes getting so complex, even computers couldn’t crack the code. In those types of discussions, you realize Kalanick is not kidding around when talking about math (1580 SAT) and his knowledge of how computers work (CS degree). He is a businessman and salesman on the outside, but within, something else lurks. You can start to see how this “Traveling Salesman” problem may apply itself as Uber experiments with services like UberRush, Corner Store, UberPool, and the extension of its API across the greatest technology market (mobile platforms) we have ever seen.

Most of all this is known already and has been covered fairly well. But, the dots connected for me in a different way this evening. Kalanick and Uber are already quite a powerful force, but when one digs deeper into the elegant simplicity of Uber’s model and the motivational drive of its CEO, you begin to wonder — just how big can this get? What can stop it? What other CEO is psychologically tuned this way and adept in so many interdisciplinary dimensions?

Unpacking Microsoft’s Acquisition Of Minecraft (Mojang)

Rumors are that on Monday, Microsoft will announce the $2.5Bn acquisition of Mojang, the maker of Minecraft. This is a big, big deal and was sort of overshadowed by all the Apple news and tech media events last week. Let’s quickly unpack why this move is in and of itself a big deal, as well as a potential harbinger of what to expect from Microsoft in the near future:

First, some light but required background reading. I would guess many of you reading this either know Minecraft well or have at least heard of it. Either way, I’d strongly recommend reading this essay on Minecraft by Robin Sloan, it is just excellent [click here]. Additionally, a short post by John Lilly, who knows a thing or two about how folks interact with the web, summarizes some of the challenges and opportunities in this move.l

Second, let’s hope it remains independent as long as possible. In more and more M&A, absorbed companies are sometimes remaining independent a bit longer. Of course, those companies now have parents and eventually integrate in some way. With Minecraft, such a treasure of creativity and organic use, let us hope Microsoft views this first as an investment and empowers Mojang to keep doing what it’s doing.

Third, Minecraft is a kaleidoscopic network. By now, we all know about many of the users building servers, and how folks across the web and mobile are addicted to creating and playing in Minecraft worlds. What we all know a little less about is how those networks fracture a bit into folks who post and watch videos the game (like Twitch), folks who chat with others in vertical networks like Amino.

Fourth, I wonder why Facebook wouldn’t win this deal or compete for it. Maybe they did and felt the price was too high? I don’t know, but Minecraft is both a social network (like Facebook) and a playground for future developers (which Facebook values greatly). With Facebook stock soaring (it could hit $300Bn market cap by the time we have our next president in office), it would seem to be a good time for Zuck to absorb Mojang and be highest bidder.

Fifth, an amazing time for game absorption at The Big Five tech co’s. Twitch is now part of Amazon, Oculus is now at Facebook, and soon Minecraft will be a part of Microsoft. What will Apple and Google do, if anything at all? (Nintendo???)

And sixth, the big takeaway — get ready for Microsoft to get acquisitive. Many signals point to a new Microsoft that’s on the block, blessed with a new CEO, a new mandate, hoards of cash, forthcoming layoffs, and the appetite to acquire more and more small teams in the Bay Area along many fault lines (mobile, infrastructure, and new platforms), and potentially some bigger M&A coming down the pike. VCs are hoping for this, too, as having another big acquirer stalking portfolios is never a bad thing. I believe Nadella has a big mandate and we can therefore expect him to make some big moves.

If Android Is A Freight Train, iOS Is High-Speed Rail

On the eve of Tuesday’s Apple announcement, I wanted to dial the clock back a few years and make a simple yet powerful statement about the state of mobile platforms today.

Over three years ago, one of the world’s most eloquent investors penned what is, in my opinion, the finest essay on the root nature of the Android mobile operating system. If you have not yet read it, please do; if you have, it’s worth re-reading again. The key takeaway is that Android is defensive in nature, that it is not designed to capture the rents from the ecosystem it enables. The essay labels Android as a “freight train,” a traditional, big, lumbering locomotive that will pick up steam, grow in heft, and will be difficult to stop.

Now, three years later, on the eve of iPhone 6 and its corresponding iOS 8, we can revisit the freight train and see just how far apart the mobile operating systems are from each other. Put another way, if Android is a freight train, then the iPhone (and iOS) is a high-speed bullet train, powered by magnetic levitation, moving at rapid speeds and on a path to make up distance in a much-touted but ultimately useless metric (total market share).

Why is iPhone 6 with the latest iOS SDKs a high-speed bullet train? Consider the iPhone and iOS as a massive network effect which can enable the following: iBeacon rollouts; new APIs for CloudKit, HomeKit, HealthKit (via M7), and PhotoKit; reintroduction of NFC (for payments); your usual updates to Mac OS and iPad…oh…and a wristwatch computer that may shift the mobile computing and design conversation yet again.

For the past few years, we’ve heard people argue that “Android Is Better” and “Why Android Desperately Needs A Billion Dollar Success Story,” but the reality for startups (where the new products are built) is that “Android-First Is A Myth” and that developers would be most wise to build for “iOS First, And Android Much, Much Later.” And while many say that startups should build for “Android second,” maybe after iWatch (or basic wearable as 1st generation), it will shift to build for “Android third.”

This was yesterday’s reality. Tomorrow’s reality is that iOS 8 with the iPhone 6 and possibly a wrist-based computer with display will create a whole new set of experiences and computing paradigms for the best developers in the world to play with. For instance, rumors are flying around about how iWatch could act as a method for two-factor authorization for mobile payments. Who knows what will happen within iOS and all corresponding devices in this ecosystem? It will take years to figure out, but iOS has the exact right base of users to help Apple and the developers get through the initial stages, to improve the hardware and software, explore new behaviors through new streamlined APIs for a variety of environments and situations, and most importantly, to invent new mobile consumer experiences that couldn’t exist in any other technology ecosystem at scale…period.

Like an old SAT question, when two trains are traveling away from each other at different speeds, it’s always a critical test to try to calculate their distance apart — especially when one is a high-speed bullet and the other is a freight train.

An Open Letter To Twitter HQ

Dear Twitter Management:

I have some good news for you, and some bad news.

Let’s start with the bad news first: Twitter, no matter what you do to it, will no longer ever be a hyper-growth product. That time has passed. Yes, I know public investors expect this of you, and I know that’s what all other social network companies strive for, but it won’t happen. Twitter has hit a local maxima, and that’s nothing to be ashamed of — in fact, Twitter’s mainstream success to this point is quite incredible for such a geeky, complicated, niche product. But now, messing with the feed, degrading the design, and all those other copycat changes will not solve this core growth problem.

But, this is only bad news because Twitter is responding to the wants of the outside world. It is listening to others instead of itself. For success, all the answers are inside. Instead, Twitter should double-down on what does work and chart its own path.

This is the good news: Twitter’s hyper-addicted daily active users comprise of some of the most valuable minds and wallets on the planet today. Instead of trying to degrade their experience in favor of growth (which is, in my opinion, not attainable), why not turn that huge, active, valuable base of Twitter addicts into money? Right now, millions of smart Twitter users take actions on feeds like RTs and favorites — why not “Buy” or “Share” to other channels? Why not show me ads that are product endorsements from credible Twitter users? Why not open the API to developers again and have them experiment with new ways to monetize and grow? Why not make Tweetstorms part of the product and get more journalists and bloggers to write on the platform instead of linking (as we know clicks are down for many)?

I write this open letter out of concern and love. For over two years, I have used Twitter without touching native products. Twitter is the service I use the most, and I never go to www.twitter.com or use Twitter for iPhone. I understand I’m a power user, so this doesn’t apply to all, but I do believe it gives me the platform to share my views on the likelihood of success of Twitter in its current form. Twitter, you are now public, embedded into the fabric of society, both complex and simple at the same time. Now is the time to ignore the outsiders, and look within; now is the time to harvest your loyal user base to take the product to the next level. I’m happy to help any way I can.

Sincerely,

@Semil

Listener Effects Of Streaming vs Broadcast Media

Streaming media is the future, right? Broadcast is dead, right? Well, streaming dominates many forms today, and I don’t see that trend stopping. Streaming has many benefits. We don’t have to download media to a client. We can just search, select, and ingest. For audio, the data rates are quite cheap. By streaming from a server to a distributed base offers many benefits — the ability to leverage networks, personalize content to a recipient, and so forth.

Yet, there’s something I miss deeply about broadcast media. I haven’t had Cable TV anymore. Netflix and YouTube (and Twitter, as a filter) empower me to watch what I want, when I want. When Swell was around, I consumed media (streamed) at the tune of about 25 hours per week. No more traditional, terrestrial radio.

In theory, it all sounds great and more efficient, but I noticed something was missing: The feeling of being connected to my local surroundings. When I have local sports on TV or the radio in the background, moving around the house, I feel like I live in the Bay Area. I noticed this when I travel back to NYC for family events, I always leave the car radio on 880 AM, which if you know, is the same local news nonstop. It makes me feel connected to the area for a brief moment of time. Now, I realize that other personalized tools have come in to help us feel more connected, such as Twitter and Facebook, which can surface information in real time, but this doesn’t work in the car, and when at home, there’s no ambient service which can do this in the background.

So, with Twitter, I do feel more connected to the people that are relevant to me, and while I like that decentralized approach on many levels, there’s something about the non-personalized, centralized signature of old-style broadcast media as it pertains to location. It helps me connect to my physical surroundings, and I know that many people around me are also tuning in at the same time. I’d be curious if you ever felt the same?

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2014 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus