From Istanbul To Sand Hill Road

The Price Immigrants Pay

Last week the president of the NVCA Mark Heesen wrote an article in Venturebeat about the positive impact immigrants have had in silicon valley and the US economy.  My friend, Aydin Senkut, in his new and promising blog, mentioned how it wasn't easy for Europeans to grasp this fact.  How can I disagree, having started as a software engineer with an H1-B myself?  Now, as a VC, the majority of the entrepreneurs I've backed have been immigrants themselves.  They all have a story that's different and unique, but their stories are all similar in one way that's little known.

What's generally known about immigrants is that they start from zero and work hard to carve out both a living and a name for themselves.  What's little known is the sacrifice it takes to uproot from one place to another.  Few people have written about this sacrifice as powerfully as Pulitzer Prize winner Jhumpa Lahiri. 

One of her books, The Namesake, is the story of an Indian couple, Ashoke and Ashima, moving to the US after Ashok gets a job as a professor at MIT.  I read the book a few years ago, but this recent discussion on immigration made me want to dig up the book and quote you these powerful lines I remembered that describe what it's like to be an foreign immigrant in another country.  In her own words:

"...being a foreigner, Ashima is beginning to realize, is a sort of lifelong pregnancy - a perpetual wait, a constant burden, a continuous feeling out of sorts.  It is an ongoing responsibility, a parenthesis in what had once been ordinary life, only to discover that that previous life has vanished, replaced by something more complicated and demanding.  Like pregnancy, being a foreigner, Ashima believes, is something that elicits the same curiosity from strangers, the same combination of pity and respect"

This is no doubt Pulitzer material.  The book is filled with such insight.  One I couldn't find, says that each time they go back to India there are fewer and fewer people at the airport waiting to greet them.  Finally, she depicts in her penetrating style the way that bad news comes to them as they live abroad:

"As their lives in New England swell with fellow Bengali friends, the members of that other, former life...slowly dwindle.  More deaths come, more telephone calls startle them in the middle of the night, more letters arrive in the mailbox informing them of aunts and uncles no longer with them...Gogol and Sonia (their children) are woken by these deaths in the early mornings, their parents screaming on the other side of thin bedroom walls.  They stumble into their parents' room, uncomprehending, embarrassed at the sight of their parents' tears, feeling only slightly sad.  In some senses Ashoke and Ashima live the lives of the extremely aged, those of whom everyone they once knew and loved is lost, those who survive and are consoled by memory alone."

This point of this post is to let you know of this great novelist that wrote a great book about immigrants.  The point is not do depress you.  These days the world is so flat and connected that one can follow any TV show or football league in any country if they wanted to.  Phone calls are nearly free.  So it's a lot better than how Ashoke and Ashima had it.  Nonetheless the book is well worth reading.  You can buy it from the link below.

Amazon.com and the Fabless Semiconductor Industry

I originally wrote this article for Venturebeat.  You can follow the thread there or just continue reading.

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A key theme at the Web 2.0 conference was infrastructure, centered around Amazon’s big announcement to offer start-ups all their infrastructure needs.

Amazon wants to give start-ups bandwidth, storage, server software and even fulfillment of physical goods — all at a reasonable price. This is all the boring stuff you need to go from your great idea to a product. Google and Salesforce.com call this infrastructure “the cloud,” Microsoft calls it “a million pounds of batteries,” and Amazon.com calls it “muck.”

The idea goes like this. Getting your web application to scale globally and serve hundreds of millions of users is expensive. You need to build big data centers and buy software and fat pipes. Google spends more than one billion dollars per year on this (and their ability to do this is a key competitive advantage over others; see here).

Startups can’t afford that kind of capex. We VC’s don’t see Series A opportunities that say “we are thinking of raising $500K to launch our web site and about $700M to build a global data center.” These startups go to hosting providers and buy computing and storage by the drink. This is what Amazon wants to provide startups, everything; the software, the hardware, the bandwidth and even physical fulfillment.

Sound familiar? This is very much like what happened in the semiconductor industry as it went to the fabless model. The transistor was invented in 1947 and the first IC (integrated circuit) was built by TI in 1958. By 1978, the semiconductor industry reached $10B in sales. As chips got smaller, it became harder and more expensive to build the foundries to build the chips. While Intel and TI continued to own their own fabs (where you build chips), smaller companies could no longer afford the billions of dollars required to build them. As a result, in 1987, TSMC, the world’s first independent semiconductor foundry was established. It is still the largest. Now a startup no longer needed invest the capex to manufacture their chips, they could design it, and the foundry would build it for them. Since the foundries amortized the capex over a number of companies, the model worked. The foundries in the semiconductor world are the data centers of the Internet world.

In the Internet world, a few big players have emerged that have the wherewithal to build their own big data centers. Microsoft, Yahoo, Google and Amazon are what Intel and TI are in the semiconductor business. Now we are seeing that some of them, like Amazon are selling their capacity to startups, and some pure play data centers businesses are emerging. I suspect we’ll see more of them, establishing themselves and rolling up.

Now back to our story. After the large foundries established themselves, fabless semiconductor startups started showing up and growing their business to respectable sizes. They design the chips, TSMC built them. The two big fabless semi companies are Broadcom and Nvidia, which are both around $2.5B in annual revenues. So a healthy ecosystem formed with independent foundries building chips for fabless semiconductor companies which focus on applications and software.

So what can we learn from this analogy? Despite the fact that the fabless semiconductor revenues reached $41B in 2005, it is still merely 18% of the overall semiconductor industry. Intel, who owns its own fabs, has about $40B in sales, nearly the size of the entire fabless semiconductor industry. Those who were early and kept their infrastructure, got really really big. They delivered products faster and cheaper than their fabless competitors. Same will be true for Google and Amazon (and Yahoo if they can get their act together). Amazon could offer to take care of the “muck” for a small startup, but as soon as that startup gets big, Amazon will able to do the same faster and better because they control the critical piece, just like Intel.

So I applaud Amazon’s strategy. It’ll get an early look at the apps, and maintain control of a critical piece of know how. As data center complexity grows, it will be harder and harder for a newcomer to build their own datacenter, and will be more and more reliant on Amazon. What would be a nightmare for them is for an upstart to out-innovate the “muck.” So Amazon’s strategy to dominate early on prevents startups from going there and independent data centers from surviving, since few companies have Amazon’s scale. This has got to be Amazon’s biggest move so far to ensure its sustainability.

Yahoo Publisher Network : Woefully Bereft of Relevance

That means it sucks.

This summer I wrote about David Swensen's book, Unconventional Success.  The book is about asset allocation, investing, stocks, bonds & mutual funds.  The ads that I attracted to that posting was in the order of "Dating Large Women" and "Oversize Dating".  My partners had a nice laugh at that.  Maybe it was the words "alternative assets" or "real estate" that caused the problem.  Who knows?

One of my recent articles, Pitching to VCs is attracting ads of the same caliber.  The post is about how to build an effective pitch to VCs, and it's attracted these kinds of ads: "Black Dating Online", "LDS Dating Online" (that's latter day saints), "Senior Friend Finder - 40 an over" (by the way, that's got to be a great service to some).  See it yourself here.

What have I done to deseve this?  Is Yahoo trying to tell me that whoever reads my blog is hopeless in the dating scene.  I will buy a cup of coffee to the best guess as to what in that text may have caused these ads to show.

The State Of the Internet By Mary Meeker

Again at the Web 2.0 Conference, Mary Meeker gave her, now traditional, state of the Internet presentation.  It has the perfect kind of 'lagging indicator' data you want to put in your powerpoints.  You can download it here.

By far the most impressive stat in there is that by 2007, it is expected that only 20% of the Internet users will be in the US.  Now, there is something for startups to think when they are building their internet service.

More on The Science Of Immortality

My new best friend, Attila Csordas, left the following comment on this blog.

"I've posted Aubrey's answers to my questions: http://href.hu/x/1xdv "

I think it is an important comment that deserves its own post, because it points to another insightful interview with my new favorite biologist, Aubrey De Grey, about the science behind life extension .  You can read it here.

The Search That Google Can't Do

A while ago, I wrote about how vertical search engines would have a really hard time fighting Google.  The crux of the argument went as follows:  new search engines pitch better algorithms for relevancy, but since the marginal cost of an additional search on Google is zero, users manually bring that relevancy by doing more searches with longer keywords.  So far I haven't seen one that bucks the trend, until Riya's new product www.like.com launched yesterday. 

Visual search, is something where users can't manually add relevancy.  When you see a picture of a handbag you like, you cannot spell out what you like about it easily.  Try putting "A white handbag with a long handle and zipper and buckle that's big and shiny" in Google and see what you get here.  It's very hard with Google, but easy with Like.

You can visually select images and parts of images as the "keyword" to find products like it.  Every woman I've shown this to has reacted with "holy sh..."  This is a product for them.  It's not for men.  Most men can indeed spell out what they want in clothing; "pants", "shirts", "shoes" are all that's needed.  I highly recommend trying out www.like.com.  This is the kind of innovation that keeps silicon valley going.  Congrats, Munjal, Burak, Azhar and team.

The Scarface of The Web 2.0

The highlight of day one at the Web 2.0 conference was without doubt, the interview with Jack Ma, the founder and CEO of Alibaba.com in China.  I knew who he was but this was the first time I heard him speak.  What a character; self-made, streetwise arrogant and aggressive.   Surely he is the Antonio Montana of the Internet.  That’s Scarface, for those of you who don’t remember; an immortal character played by Al Pacino, and I confess, an inspiration for all 1st generation immigrants in America.

He’s built China’s biggest ecommerce site and auction site and  sold 40% ownership to Yahoo last year for $1B, and took over Yahoo China.  He’s also beat Ebay in China owning 70% of the auction market.  He was asked “Is Ebay dead?”  His answer was “Ebay is not dead, Ebay China is half dead.  Ebay USA is not dead…yet”  He was asked “Do you really think you can take on Ebay USA” and the answer was inspiring “you have to believe you can otherwise its not worth it”  If that doesn’t sound like Antonio Montana I don’t know what does.

He was offered John Batelle’s book about Google and Jack said he refuses to read it.  “If I read it, I will be influenced by them and think like them.  I have to form my own opinions.  I want to be the influencer.  I want somebody to write the book about Alibaba”   We are not used to hearing people talk like this and it is refreshing.  Henry Kissinger was like this.  He would not read opinion articles, only facts.  He used to say, “I just want to get the facts, and I can form my own opinions myself.”  This is not arrogance, this is self-confidence in its finest.  But Jack is arrogant as well.

He is arrogant because he referred to himself in the third person a number of times.  He said “to beat Alibaba in China you need to find a tough guy like Jack”.  This is surprising because I thought Chinese people regarded humility is a virtue.  In any case, don’t be fooled, anybody who refers to himself in the third person is an egomaniac.  Baris is right on this, it takes one to know one :-)

The most interesting comment though, was one of the last.  He was asked “so will you invade the US?”  He said “invade?  That’s a big word.  We are coming to help you.”  This is probably what the Brits told the Chinese many years ago.

Pitching to VCs

The O'Reilly Web 2.0 Conference starts tomorrow, and I am looking forward to meeting entrepreneurs and getting new ideas.  The days following a conference like this is usually filled with meetings with startups that I've met at the conference.  The pitches I see have a few golden nuggets in them, but more often than not a few key elements are missing.  This time I am attaching what I call a 'great VC pitch'.  It's 14 slides and touches all the important aspects of any business that the entrepreneur needs to think of.

But I don't want to give these slides in a vacuum.  In each slide, I'll explain what needs to be described, an example right answer, and what a VC will be thinking when seeing the slide.  I am guessing that the latter is no commonly known among entrepreneurs.  When giving the right answer, I am thinking of a fictitious, online dating startup who is fundraising.

Slide 1:  Mission Statement

This is the one liner of the company that describes what it's doing.  It's best here if you relate to a past success.  A correct mission statement for our fictitious dating company would be "Skype for online dating" if it is free and distributes virally eliminated the subscriber acquisition cost that's a big cost item for telcos and online dating companies.

What the VC is Thinking: "Why should I be interested in this?"

Slide 2:  Market

How big is it and how fast is it growing?  That's what you want to convey.  Our fictitious dating company would say there are 100M singles in the US and 150M in Europe.  Dating goes for about $20/mo and there are only 5M paying online daters.

What the VC is thinking:  "Can I build a billion dollar company?"

Slide 3: Problem

How big is the customer's problem that you are solving?  Finding a soulmate is hard, that's the problem online dating solves.  The harder the problem, the more value there is to capture by solving it.

What the VC is thinking:  "How good will my gross margins be?"

Slide 4: Solution to the Problem

What is your company's unique solution?  A good answer may be "we have a much better matching engine that determines who would be a good match for you"

What the VC is thinking: "Why hasn't anybody done this before?"

Slide 5: Team

Who is the team, what is their past experience?  Good answers here have team members with good startup and big company experience that's relevant

What the VC is thinking: "Would I bet my childrens' future on this team?"

Stop right here...These 5 slides are critical, and they have to be in this order.  If you follow this model, in 5 slides you've told, what you do, what market you are in, what the problem is, what your solution is and who you are.  This way you'll never come to the end of a pitch and hear "What is it that you do?"

Slide 6: Technology

What's your technology and why is it defensible?  A good answer would be a matching engine that's more accurate, and based on specific research done by the founders.

What the VC is thinking: "How long will it take to deliver this technology?  1 year, or 5 years?

Slide 7: Customers

Who is buying the product and why?  A good answer for an internet company is to show traction.  How many users do you have and how many sign up per day?

What the VC is thinking:  "Does the value proposition hold water?"

Slide 8: PER CUSTOMER ECONOMICS

The most important slide of the whole presentation.  A good answer here shows how well you've thought about your business.  Per user economics is how VC's reduce all business to the same units.  How much does it take for you to acquire a customer?  How much revenue do you get per customers?  What's your cost of goods per customer?  What does it cost you to service each customer?  What is churn?  What is the lifetime value of a customer and profit per lifetime of the customer? Any entrepreneur who doesn't have the answers or see the risks, doesn't yet understand his/her business.

What the VC is thinking: "What is a customer worth?"

Slide 9: Go To Market Strategy

OK, you have a great product, how do you get in front of a customer?  What channels will you use and how powerful are they.  A good answer would be to show that there is possibility for viral distribution.  If one customer brings more than 1 customer to you every month you have a viral business.

What the VC is thinking:  "How will the channel affect the company?"

Slide 10:  Milestones

When is alpha, when is beta, and when will the product be ready?  A good answer is, "the $x we raise will get us to 2M users"

What the VC is thinking:  "Will there be another financing necessary?  If so will I get a step up in valuation?"

Slide 11: Financials

Show the Income statement, balance sheet and, cash flow, preferably in one slide.  A good answer would one that implies that "even if we are off by 2x, this is still a good business."

What the VC is thinking:  "Are these numbers credible or just wishful thinking?"

Slide 12: Competition

Put a 2x2 matrix with the most important variables in the axes.  The exercise is for you to reduce your business to the two most important competitive variables.  Usually it is 1 or 2. 

What the VC is thinking: "Does this team understand their competition?"

Slide 13: Financing History

How much have you raised to date?  Who are your investors?  A great answer here is one that says "we've been frugal and will continue to be so"

What the VC is thinking: "Who are these co-investors and can I trust them?"

Slide 14:  Why This VC

This slide is optional.  But any team that says "We like your firm because you can help us with xyz relationships" shows that they've done their homework investigating the VC.  That's a good thing

What the VC is thinking: "Flattery will get you anywhere!"  ...and it is true.

I am also attaching the powerpoint if anyone wants to use the template

Download a_great_pitch.ppt

Independence Day In Turkey

I will write about high-tech and venture capital 95% of the time.  This is one for the other 5%.  Last week was independence day in Turkey.  Here is a nice loop of pictures taken during celebrations over the Bosphorous bridge; the bridge that ties Asia to Europe in the city that's given this blog its name.

Free tour guide advice to anybody who puts a comment on this post :-)  Enjoy