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Category: venture capital

Bill Hambrecht, Google & pricing an IPO with a social network

Published November 18, 2007 by cgerrish

The Google offering happened a while after I left WR Hambrecht + Co, but I can’t believe I never saw this Charlie Rose interview with Bill Hambrecht. It seems like ancient history viewing it now. Looking at the offering price and today’s price one might think the deal was underpriced by the modified dutch auction. As I recall, at the time, many thought the IPO offering price of $85 per share was too high.

Hambrecht’s modified Dutch auction method of pricing IPOs still isn’t understood very well. Basically it’s the idea of the wisdom of crowds (or markets) applied to determining the appropriate offering price for a company’s initial public offering. Think of it like Digg for pricing the initial stock price for a company. It’s a like asking the community of investors what the right price should be— a radical use for a social network.

The method works best when a broad range of people have an opinion on the proper initial price for a company’s stock (a high bid to cover ratio). It doesn’t work very well when the company isn’t well known. In cases like this investors (bidders in the auction) actually have to read the prospectus and attempt to determine a reasonable price. This, of course, is nearly impossible. It would be like trying to rate a new album from a band you’d never heard based on the tax returns of the musicians.

For those in the tech community looking for liquidity events through an IPO (as opposed to acquisition), you’d do well to at least take the time to understand how the Dutch auction works. Back in the day Joe Tennis and I put together a flash animation explaning how Hambrecht’s OpenIPO works. Check it out, it still holds up pretty well.

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Politics of Change • Economics of Change • Value of Change

Published November 13, 2007 by cgerrish

Al Gore

It’s an interesting question. Who has more power to affect climate change: the President of the United States or a new partner at Kleiner Perkins. One way to create change is to make new laws. Another way is to create economic incentives and fund creativity in the business world. Al Gore spent a lot of time trying to change things using the political system, now he’s trying another method. Political solutions always seem to involve sacrifice and high cost to the economy. When a new venture is funded, the expectation is that it’s going to be successful and make money. The fact that it’s a green venture doesn’t make a bit of difference.

It’s a different kind of grass roots politics that Gore’s practicing now. He’s building a constituency in the business world, and by creating value (doing well and doing good) he’ll change more minds than by fighting with politicians. That is, he will if he can show that his portfolio companies can make a buck or two. It’s a large bet, and a very optimistic bet, on the future of human endeavours.

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No matter. Try again. Fail again. Fail Better

Published November 4, 2007 by cgerrish

Samuel Beckett

A link tossed in to the stream by Joe Tennis on Twitter, stirred up thoughts about failure. Joe’s pointer was to a blog posting on the process of creating computer games, and the ideal of setting up an environment where failure can happen faster and isn’t punished. That’s a unique idea in this day and age.

It brought to mind a quote from a late Samuel Beckett novel called “Worstward Ho.”

Ever tried.
Ever failed.
No matter.
Try again.
Fail again.
Fail better.
Samuel Beckett

If you intend to participate in a creative profession, whether it’s writing fiction, making paintings or plays, creating companies, products or software— you’ll need to learn to live in, and with, failure. In a sense, success is the failure that we’ve made an accomodation with. We shoot for perfection, and we always fall short. Dave Winer summed it up in 1995 in his motto for Living VideoText — We make shitty software, with bugs. Software must ship prior to perfection, in that way it’s like life. We must live our lives prior to perfection. If we wait, we’ll miss everything.

Failure is tied to risk. If failure is not an option, risk is not an option. If risk isn’t an option, only a very small kind of success is possible. The principle is the same as an investment portfolio. You can banish risk, but you can’t expect a high level of return. Risk is a requirement of potential high return. The same is true in any creative pursuit, if you want a big success, you’ll need to learn to live with risk and failure.

And not just live with them, but to call them friends. Learning how to fail faster means learning how to succeed faster. Creating a safe environment for failure encourages risk taking and exploration. It gets you there faster. But just as with success, not all failure is equally successful. Failures need to be crafted just as carefully as successes. Just ask Samuel Beckett…

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The economics of user-generated content & attention

Published October 31, 2007 by cgerrish

Bubbles

The current set of Web app firms have valuations based on the generous contributions of users like you. The platforms, in and of themselves, aren’t worth the valuations that VCs, or acquiring firms, are attributing to them. It’s never about the software, it’s about the community, the audience, the users. In fact, the most interesting developments are the most simple. Think about blogging software, RSS, Twitter, podcatchers— it’s not the software it’s what is enabled for the users.

Audiences used to be aggregated so that you could sell their eyeballs to advertisers. Now, to a large extent, the audience creates the product. Jason Calacanis was criticized for wanting to pay the audience at Netscape. But if the user contributes to the value of a platform, shouldn’t the platform owner pass some of the revenue through? The economics of “user-generated” content will be similar to the economics of user attention data. The user will want to retain, or be compensated for, the value of both their raw attention and the content they’ve created.

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