Will You Shut Up About This Being Another Internet Bubble Already?

Another Internet Bubble is not about to collapse. We have a few more years still. So party like it's 1996.

Read my full post at Forbes here.

Sphere: Related Content

Twitter's Innovation Drought

Sure, it's growing like crazy. But growth and innovation needn't be either/or pursuits, especially when you've got Twitter's cash

By Eric Jackson

Viewpoint

June 5, 2009, 9:28PM EST

I love Twitter. I'm in the minority of users who check it and comment at least a couple of times each day. I even have two accounts—one personal (@ericjackson), and one for my company, activist investment firm Ironfire Capital (@ironfirecapital). I set up my personal account over two years ago and have watched in surprise and admiration at how widely the service has been adopted. Forget Oprah. When I finally saw some of my formerly not-very-tech-savvy friends signing up a few months ago, I knew Twitter had gone mainstream.

Twitter's three thirtysomething co-founders—Evan Williams, Biz Stone, and Jack Dorsey—have been on a media blitz of late. And how can you not be happy for these guys? They're all down-to-earth. No hint of arrogance or entitlement. It's a feel-good success story.

People who cover Twitter in the media often criticize it for its lack of revenue, even with its impressive growth. However, I have grown baffled and annoyed at one of Twitter's greater nonaccomplishments: Since I've been using the service, its functionality and offerings have barely improved.

It's virtually the same Twitter experience today as it was two years ago. The only difference is that there are more users. You update, follow, unfollow, reply, or send direct messages. That's it. I understand that part of Twitter's power is its simplicity. But there are still no ads, search isn't easily customizable or useful, and there's been no evident push into location-based services despite the talk.

Outside Innovations

To view the most creative innovations in Twitter from the last couple of years, you have to look outside the company, to related third-party applications or services that have cropped up using the Twitter platform. I use TweetDeck as my desktop client for checking on my Twitter stream during the day; it's infinitely more efficient than the company's own clunky site. I often check on stock news through StockTwits. I shorten links using bit.ly or another shortening service. Yet all these helpful innovations have emanated from outside Twitter's confines.

I'm all for opening up your service and getting other people to create apps and services that ride on top of your platform. Everyone wants to be open these days. Facebook's doing it. Yahoo!'s (YHOO) doing it. It makes sense to get others to work for free on tools that make more users dependent on your platform.

Yet I still have had this nagging question: What are employees inside Twitter working on to make the service better? At the recent D7 conference in Carlsbad, Calif., Williams and Stone confirmed that Twitter has 43 employees. This is a big increase over years past, when there were only about 20 people working at the company.

Venture capital friends have told me they usually estimate a company's cash-burn rate at the number of employees multiplied by $100,000 a year. This implies it would cost Twitter $4.3 million a year to keep going at its current size. Bump that up a little because of extra server needs compared with most tech startups. At that pace, with more than $55 million raised to date, the company likely has another 6 to 10 years with the current cash in the bank. And the truth is, Twitter could raise much more if it needed to—likely at pre-bubble valuations, judging from the $200 million Facebook recently raised from DST Ventures.

So my question remains: Why is this company being slow to seize the opportunity in front of it? Why are there not more features, services, or ads being tested? To be fair, Twitter has search, which it didn't two years ago.

It's useful if I quickly want to check who won the most recent NBA Final or see what other people thought of last night's Lost episode. But Twitter didn't even create its search—it bought Summize and integrated it. I'm not complaining. Summize has been great. But why hasn't Twitter extended it to be more interesting and useful?

Thinking Small

With good reason, the company has focused a lot of attention on simply keeping the service running. From its early days, Twitter's popularity has led to periodical crashes, epitomized by the now infamous "Fail Whale" graphic. The problem subsided but has returned in the last few months amid a traffic spike. CEO Williams recently acknowledged the internal focus on scalability: "For the entire history of the company, most of the resources have gone to managing growth, and that is still the case. … If it weren't growing nearly as fast, we would be building a lot more things."

I disagree with the assumption that growth precludes innovation. My hunch is that the real cause lies with the co-founders and their board: These guys are in uncharted territory managing a business of this size, and their directors haven't provided enough guidance. In the same story, Williams said: "I've started a bunch of companies but never run one of this size." When you run small companies, you think small. Managers of larger businesses are more accustomed to scope, complexity, and additional ambiguity. As Twitter has blossomed, the co-founders appear to have focused too much on only their biggest problem, the Fail Whale.

Imagine if Yahoo's then-CEO Tim Koogle had told his troops in 1997 that they shouldn't do new-product work until they ensured that the business would be able to keep up with the explosive growth it was then experiencing. It's ludicrous.

Twitter's Board Needs to Step Up

I don't fault the co-founders entirely. None of us can know what we don't know. But that's what advisers and boards are for. This board knows that companies can walk and chew gum at the same time. It is possible to scale the business on an incredible upward trajectory while still building out new features. It's not either/or. They've also known the company has plenty of cash to try a lot of things.

I can't help but wonder if the Twitter directors have come down with a case of Silicon Valley rock star-itis. Etched in the brain of every tech VC are the baby faces of Yahoo co-founders Jerry Yang and David Filo, Google's (GOOG) Sergey Brin and Larry Page, and YouTube's Chad Hurley and Steve Chen. Twitter's funders have made it into the "club" of investing in the Next Big Thing, where it can be difficult to balance back pats with serious advice, debate, or disagreement. The cardinal rule of this club is: Don�t upset the founders. (For another example, see Mark Zuckerberg and the Facebook board.)

There's an appropriate amount of media and press to do to promote a company, but Twitter's co-founders and its board need to start building a better company with better products instead of going around talking about how it all started and how they're discussing lots of ideas for making money.

At the time of publication, Jackson did not hold shares in the companies mentioned.

Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund and Ironfire Capital International Fund.

Sphere: Related Content

Are Angels the New VCs?

This week brought the announcement that Charles River Ventures would launch Quick Start -- a more angel-oriented approach to funding start-ups than traditional VC.

Combined with the earlier announcement that Sevin Rosen Funds would be returning money to investors instead of putting it to work (and not raising a new fund), speculation has started that the traditional VC model is dead.

The argument goes:

1. Large amounts of capital are no longer needed to launch very successful start-ups. Joe Kraus famously opined that it only took $100K to start Jotspot, and $3MM to start Excite.com.

2. The IPO window doesn't exist today as it once did, thanks to Sarbanes-Oxley.

3. There's too much VC money chasing too few deals.

Fred Wilson disagrees with this view and correctly points out that people have been complaining about the too-much-money-too-few-deals for 25 years. He thinks VCs will just get leaner and meaner by (1) raising smaller funds, (2) going for $100 - $250MM exits, and (3) doing more M&A exits than IPOs.

However, Josh Kopelman of First Round thinks that CRV's announcement does portend of a major shift in the VC market. He points out that angel investing has better risk-adjusted returns over the last decade than any other stage of investing. Plus, a more conservative going-forward assumption would be average exits far south of $150MM. Therefore, there are likely to be more CRV-type announcement from "traditional" VCs over the coming years. Will they be able to do it well? That's less clear.

There are winners and losers from these confluence of trends.

Winners:

• The bluest of "blue-chip" VCs. The Sequoias and KPCBs of the world shine brighter when the maddening crowd is rushing to chase the latest trend of VC investing. They've been there and done that time-and-again.
• Existing Angel Investors who have a track-record. When a space gets hot (i.e., angel investing), those who have been there for a while are the old wise men. Josh Kopelman, Jeff Clavier, and others will see a rise for their services even as others rush in. There will be a flight to quality.
• Traditional VCs who are able to make the leap and really differentiate from other angel investors. Although CRV is a great firm, their success is not guaranteed. They need dealflow; their GPs needs to be seen as credible by non-nascent entrepreneurs; and they really need to be able to deliver value to their investments (beyond the simple "we love to roll up our shirtsleeves alongside our investee companies" platitudes).
• 2nd and 3rd Time Entrepreneurs: They're even more sought after following this news than they were before. We are heading for a Hollywood-type star system where Bill Nguyen announces his idea for his next start-up at lunch and the deal is done by dinner.

Losers:

• Stuck-in-the-middle VCs: Those VCs who do a little bit of angel investing and a little bit of traditional are likely to do neither well.
• Former Great VCs who don't adapt to changing times: Remember when Softbank was king of the hill? Hot VCs who have yet to reach the echelon of Sequoia and KPCB are not assured of long-term success. They are also likely to stick-to-what-they-(think-they-)know-best. Dangerous, when the rules of the game are changing
• Later-stage/Mezzanine Investors: They just got even less relevant.

These are interesting times. Enterpreneurs are more exposed than ever to demonstrate whether their ideas will succeed or not. The same goes for traditional VCs. May the truly value-added players win.

Sphere: Related Content