Report from the Oct. VC Outlook Meeting

by Alan Brody

[This was one of the most insightful events we have had on the art and mindset of early
and middle stage investors. So we have included extra long videos of the speakers
and an in-depth report on the event.]

Way Too Early vs. Last Money In

The heart of the October iBreakfast was the interaction between Howard Morgan whose
lament is that he invests too early (and way too early) vs. Robert Hoffer an investment
bank advisor. The early stage investor goes through many twists and turns before seeing a
return on their relatively modest investment. Oftentimes they see nothing. The late stage
investor, the last money in, on the other hand, gets the most money and often sees the
payout a lot sooner. The investor who participated in Facebook at a $500 million
valuation, saw a 20x return - and much sooner than the typical Angel, who sees his
investment flounder at the same time that he gets diluted with each round.

So what makes an Angel tick? A big part of it is love - they just love to be at the cutting
edge of the next big thing. Or realistically, putting together a few bets that anticipate
it. On the other hand, they also need to make a big return. Forget 10x, think more in terms
of 30x. This is what pays for all the failures. So how does a true Angel Investor -
a unique combination of compassion and greed - think?

According to David S. Rose who, like most Angels, wears many hats (Investor, Software
Entrepreneur etc.), the most important piece in the start-up puzzle is you the
entrepreneur. You plan comes next but they expect that to change anyway. It's you and
your team, expertise and willingness to adapt and endure that really counts. If they feel
you have it, they will work with you until your plan is investible.

In David's case, he has committed to a true in-house incubator of entrepreneurs, just
like that. Indeed, many investors have Entrepreneurs-in-Residence whose purpose is
to wait around until they have developed the right idea. So incubators, of one kind or
another aren't entirely dead. In fact, whole regions like Silicon Valley, according to
Robert Hoffer of Newforth Partners, an Investment Bank for early- to mid-stage
companies, are really large incubators. Rose is building one in New York while using the
overall experience to attract, anticipate and gather deals for his own funds or the NY
Angels group of early stage investors that he chairs. While some cynics may argue that New
York's idea of incubation is simply to leave the air conditioning off, in fact, this is
generating plenty of interesting deals. At the top of his list are a Fishing Community
website and Comic Book Portal. Fishing, as we learn, is one of the biggest recreational
communities in the country, while the demographics of Comic book fans are
surprisingly mature and well-heeled (25-35 year old males with decent jobs).

Howard Morgan's view is more of the jockey over the horse. He partners with idealab, one
of the great in-house incubators of all time. Aside from investing in big ideas on the edge
of a breakout like a hybrid vehicle that does 300 miles a gallon and a company that
provides all the solar energy roofs for Google, he looks at the 6 P's before
investing:

1. People - are you really the person for this company? Can an investor really work
with you?

2. Product - they have to flexible enough to position it where the investors think it
should go.

3. Profits - a monetization strategy.

4. Passion - can you fire up other investors, workers and customers .

5. Persistence - can you really stick with it.

As an investor, he is currently involved with VideoEgg, a web video hosting platform along
with other ventures in the online advertising category.

Robert Hoffer's, Newforth Partners looks for companies that can become fodder for M&A and
they like to bet on the technology and markets rather than the people. The people
running the company can change, he says, but we can predict where the technology is going.
His hot spots are any technology related to MPEG 4 and the digital distribution system
that accompanies it.

See the TechConfidential article on Howard Morgan and the iBreakfast

Report from the August Start-Up iEvening

According to this popular blog, our Start-Up iEvening event went to the dogs - well not exactly, its just that the winner was MyHound, an artists/entertainers newstracking site.

According to Dorian Benkoil "it was no Always On Summit, but a gathering of startups, VCs, angel investors and others interested in it all gathered for a New York version of PowerPoint-meets-VC on Wednesday. About 60 people crammed into a large boardroom for an "Innovator Evening" hosted by event entrepreneur Alan Brody of iBreakfast. Brody says these events have already gotten some $40 million in funding for new ventures......"

Click for the rest of the article

Report from the July Search iBreakfast

If you want to know where Search is headed, what Semantic Nets and Human-powered search are all about and, most of all, what Google has up its sleeve ,you need to read these reports on this milestone iBreakfast.

These reports capture the news and drama of this very important Search iBreakfast.

Red Herring iBreakfast Report

Silicon Alley Insider on the iBreakfast

Search Blogger

REPORT FROM WEB 2.0 NY - Madison Ave. 2.0

REPORT FROM WEB 2.0 NY - Madison Ave. 2.0
Web 2.0 NY Makes a Business Case for Media Executives.

Whatever Web 2.0 has meant to hundreds of start-ups, its business applications made an impression on 350 Media, Investment, Advertising & Digital Executives on Thursday, June 14 in conjunction with the Fordham School of Education at the Web 2.0 & Madison Ave. 2.0 Summit.

While many of the ideas have filtered up from students and youth generation, the key issues are likely to change the way media and advertising is conceived and delivered, how companies present themselves to their customers and even how they organize themselves internally.

Citing the rise of the "personal brand" both keynoters, Esther Dyson and MySpace¹s Shawn Gold talked about a generation¹s interest in evolving and promoting their personal brand and how that has become both a development platform but also a new advertising paradigm where brands may reach out in trusted way through consumer-to-consumer advertising. Both Adidas and in a negative way, Dell were cited as examples of how this works as part of MySpace¹s 8 rules of consumer-to-consumer marketing.

On the Madison Ave. 2.0 side, a series of companies ranging from Live Technology to Spot Runner, Spotzer and Visible World talked about local delivery of national brands, a micro-focusing of brand messages by demographics, locality and even the weather and news conditions. In addition, just-in-time and highly targeted delivery of over 30 kinds of media in auction, spot and electronic delivery fashion were all discussed.

The key idea in Web 2.0 is collaboration and models of how ideas and power is distributed will be affected in numerous ways. MySpace thinks of this as relationship management, Motionbox sees a world of many electronic video capture devices and Social Network pioneer, Andrew Weinreich of MeetMoi.com sees it going mobile.

In our Start-Up forum many new companies with web 2.0 ideas debuted before a panel of angel Investors under David Rose of NY Angels, Allan Grafman of All Media Ventures and Paul Goodman or Cyruli Shanks. The winner was pond5.com, a broadcast-quality video and stock media exchange. Special mentions went to Collector¹sQuest.com, CollegeWikis and LiveLook.com, a webcam portal. (Video highlights to come)

OTHER ARTICLES:
THE DEAL.COM - TECH CONFIDENTIAL
THE DEAL 2
INSIDER CHATTER

The 27 Year Old Rule - Where Big Ideas Come From

There is a lot more than a grain of truth to Steve Levey’s assertion in Newsweek that the biggest ideas come from people under 27. Psychologists have long noted that most professionals and artists and not few revolutionaries develop their big ideas in their 20s (think Einstein,Marx and Picasso) or began incubating them in those days (think Freud & Darwin). On top of that many investors like Fred Wilson of Union Square Ventures have mulled over it, realizing they're not that thrilled about dealing with entrepreneurs under 30.

In the past 10 years, the iBreakfast has hosted thousands of new business idea presentations and we have developed our own classification system for handicapping the investiblity of entrepreneurs by age group.

(Note that true serial entrepreneurs, especially ones that succeeded early are in a class of their own to be discussed separately.)

THE YOUNG ONES: START-UPS 27 and UNDER
Moonshots: Big on concept but usually lacking in key details. Young entrepreneurs, unencumbered by mortgages and howling bambinos are free and hungry enough to go for broke. Too often though, bean counters get in their way. Their young egos are unpredictable and investors, seeking bargains, tend to offer low valuations or onerous term sheets. The young ‘uns tend to be strong-headed and yet.....they start Google, Paypal, YouTube, Federal Express, Yahoo, Virgin Records, Microsoft, Apple…..

The bubble years may have opened up the purses of many a stingy investor but that has changed and investors have largely reverted to type. That is why, in the long run, New York tends to lose the best ideas Silicon Valley because they are either more nurturing over there or because, a hot head who rejects a tough termsheet in NY turns to jelly when an even tougher one comes from an industry rock star in the Valley.

THE MIDDLE YEARS 27-50
These are the most investible. Fewer home runs but a lot of triples and of course, base hits. But there is an almost mathematical certainty that an industry pro with 10 years experience in a growth industry and a plan based on an actual market need or a genuine domain innovation, a briefcase full of warm leads and a bit of skin in the game is going to get funded. These are consistently the most investible entrepreneurs in the game – entrepreneurship’s true middle to upper-middle class. If you, as an entrepreneur fit this profile…..the check’s in the mail.

These are the kinds of people who start Salesforce.com, eBay, eTrade and other businesses with actual substance (but also Craiglist and Wikipedia, whose business models mystifies most investors). While a lot of middling, unknown companies come out of this field - your base hits that never quite progress - these people do really well when their idea coincides with a dramatic growth in their sector. They tend to know what they are doing and are less likely to drop the ball.

THE GRAYBEARDS 50-75
Like an old wine, when it comes to the geezer group, the bottle is usually in better shape than the content. The tannins may have softened but so has their oomph and they may not be ready for a 24/7 lifestyle with madcap deadlines. On the other hand, if they have had entrepreneurial experience or bring a good team with them they could do it.

They are best if they are an evolved version of the Middle Players but with more experience, a better team, more potent connections and a better understanding of the need they’re filling.

The Dubious but Always Interesting Graybeards Are:

1. The Immortality Seeker. Like a graying Indiana Jones they are on a quest to make meaning of their careers. Usually, it’s the Temple of Doom and, like the Pharoah’s attendants who built it, you, the investor will probably get buried with him.

2. May-December Team
You tend to see these at big money events for the same reason that you see old lotharios with young babes. The old manager finds a smart kid and backs him with resources, contacts and of course, adult supervision. But generally, the geezer’s ego gets in the way. The kid bridles or just gets diaper rash and shops his even bigger idea at a business hangout on line or at the iBreakfast (sure, why not?). Unless there’s a special dynamic, like these two really worked together in a previous life or the kid married the geezer’s daughter and has 7 years to work off his debt, watch out!

3. The Geezer just has to Do it.
While this looks like a quest for immortality the main difference is the motivation is tied to a genuinely good idea, the entrepreneur is prepared to do what it takes and the business flows from his past experience. Plus he may have a really experienced team (hopefully, with just enough tannins to keep the wine flowing) and extra skin in the game. This could be a thumbs up! Just don’t expect a home run, but ya never know! Plus, you won't have worry about them being lost to nightclubbing.

SOME THOUGHTS ABOUT SERIAL ENTREPRENEURS
If yo are lucky enough to have an idea take off while you’re still at college (think Bo Peabody of Tripod, Dean Kamen of Segway or Kevin O’Connell of DoubleClick), you truly are the landed gentry of the community. However, things can go wrong. Even Spielberg produced 1941, Edison’s talking dolls (the ones with little phonographs in their bellies) were all returned and so on. Generally though, as long as they stop reading their PR, they rule!

Conquering Madison Ave. 2.0: Zulu Marketing (P. 2)

Madison Ave 2.0: Conquering Madison Ave. (Part 2)

EXPLAINING THE REALLY BIG CHANGE – ZULU MARKETING

There is another, more historically - and for you war buffs, more militarily - explicable way to understand the changes afoot: we’ll call this The New Way for Media Companies to take Over the World. I could also have called this Nazi Marketing but Shaka was more charming and probably more creatively responsible for building his empire than his evil European counterpart.

STEP 1: NEW TOOLS FOR OLD PROBLEMS

In each case these leaders devastated their enemies by leapfrogging the gradual changes already taking place. They did this by understanding how new developments are initially used to solve old problems (often referred to as paving the cowpath) and then looking at the picture in a whole new way. They put the tools to do the work in ways more true to the new tools than ones they replace and the results can be devastating – until the rest catch up (think Google and link-based rankings, think the Civil War and new rifles whose reach put entire regiments in the line of fire).

Hitler saw tanks as more than protection for soldiers stuck in trenches (which is why they were developed) but rather as a way to quickly strike at the heart of the enemy with a motorized assault. When coordinated with the other assets of the wehrmacht - airplanes, mobile artillery and only then, followed by the infantry – it was unstoppable and got around silly little things like the maginot line the French spent years developing.

The doctrine we know of as blitzkreig was actually developed by Heinz Guderian and probably a few others including some Brits. But Heinz wrote the book, “Achtung...Panzer!” Hitler read it, took power, used it and, for a moment, ruled the world.

THE TIPPING POINT AT THE END OF A SPEAR

Shaka Zulu, had less science to work with but he saw that tribal warfare had become a ritual of sorts because, like TV advertising, their throwing spears were inaccurate. So the neighboring tribes had settled into a kind of Sunday sports warfare. The two sides would gather at opposite hills, families would come out with picnics and the young warriors would line up behind their small, round shields and hurl spears at each other. Eventually, someone would get hurt, the elders would meet and decide who won. The loser would give up some cattle and a bride or two and they would all go home for dinner.

Shaka was young, hungry and desperate to recover his family’s lost status as royal outcasts. He realized that if you really want to win you have to get really close to your target. So forget throwing spears. You need a new kind of up-close stabbing spear. He developed the iklwa, (often referred to as the assegai since who can pronounce it.)

By early 19^th Century Africa standards, that put him on a par with the tank developers - or the pay-per-click guys. The real change came when he realized that by changing his tactics, strategies and rules of war, he could conquer just about everything around him

So when he realized people weren’t going to let him get that close, he figured he needed to run fast enough to surprise them. So goodbye huarache sandles and, in the absence of Nikes, he developed the original running sole, the human foot hardened by dancing on thorns. (Pretty much how I feel about watching Dancing With the Stars.) Then he realized his blitzkrieg needed a tank of its own to stave off the spears which began to get accurate just as he got closer. So he developed a man-sized shield with a hardier coat of cowhide.

Now comes the hook shot. The enemy could still hide behind their shields, just like today’s advertising gatekeepers. So Shaka added a little do-hickey to his shield that, with training, would enable his warriors to hook on to the other guy's shield and just whip it out of the way. Then came the final problem, kind of like how do you get people to click, or should we say open up for business? Since spinning the opponent's shields revealed their sides and not their front torsos where you want to plunge the spear. Shaka came to realize you could reach the heart from other directions like from the underarm instead of the front. (In case you’re wondering, all testing was done on real people).

Today, the Internet guys have learned that beating people over the head is not always necessary. Indirect marketing works: putting paid results next to organic ones pays BIG. Affiliate marketing, cross-linking,a little word of mouth, the right endorsement, behavioral targeting - all of these get you to the heart without necessarily going through the front. And all are still worth more than the declining media placement fees eked out on Madison Ave.

Finally, Shaka, like the generals of the 3^rd Reich understood there were no set battle lines and so they embraced the concept of total warfare or in Zulu, mfecane. Expect Microsoft, Google and Yahoo to exercise something similar and refuse to accept the normal boundaries.

We can talk ad infinitum about all the possible responses – and we will – both online at Madison Ave 2.0 on June 14. We suggest you do what Shaka and Hitlers opponents did most effectively – create alliances and develop new strategies. That’s why Swaziland and Lesotho were never invaded by the Zulus. And you wouldn’t want to be a Pondo. The best place to sharpen your spears and make friends is, of course, at a conference, and the Chief conference in this field would be the Madison Ave. 2.0 – Web 2.0 NY Summit on June 14 at Fordham on 62^nd @ Columbus.

Madison Ave. 2.0: Conquering the New Mad Ave (P. 1)

There are a few ways to look at the mad rush of acquisitions on Madison Ave. but I can give a very simple guiding definition that will make it all luminously clear. It came out of our 2006 Local Ad World Conference (you can even watch the video highlights below).

Making AdSense of it All
The definition, which came from Nick Grouf, co-founder of Spot Runner, puts into focus all the significant changes portended by these acquisitions on Madison Ave: the Google, Yahoo, Microsoft and WPP acquisitions and the way the advertising will get done is the no. 1 topic of discussion at our June 14, Madison Ave 2.0 Summit, the sister conference to our Web 2.0 NY Summit (and new version of our very successful Local Ad World.)

The concept, as Nick put it, also explains why he started Spot Runner - he liked Adsense so much, he thought all the advertising world should look like that. So, what we are looking at is an under-automated, underpaid industry (expect for a few creative stars) ripe for the picking.

With that in mind, here’s how we look at the changes on Madison Ave, which will come up at the Madison Ave 2.0 Summit on June 14.


THE NEW RAIDERS OF THE PAY-PER-CLICK PAGE

1. Cash-laden, mature tech/internet companies that have learned to prosper from highly measurable online marketing are buying up the relatively poorly paid gatekeepers to massive ad budgets. These budgets were once closed to online. Now they are ripe. It follows then, as any good lobbyist will tell you, “why woo when you can buy.”

2. Automating Media Placement.
Does every newspaper, magazine, radio and TV station need their own salesforce? Maybe, for the premium placements but not for the run-of-the-mill spots. Likewise, does every agency need scads of lit grads doing media planning on an entry-level paycheck?

3. Open Creative Market: Goodbye Donny Deutsch
Does every business need a custom ad? Can your agency be counted on to come up with a good idea every time? Why not trade in tested ideas from around the world that you can customize? Donny can still sell his ideas on the open market and keep his TV show instead of showing up to the office every day.

THE BIG PICTURE IDEAS

Now for some Big Ideas - the kind of thing that careers and great fortunes are made of:

(You’ll see more if these as our www.bigideajournal.com takes shape)

1. ADVERTISING IS MANUFACTURING
Advertising is no longer the sales lubricant of the Industrial Age. It IS the Industrial Age of our time. We have long gone from figuring how to sell what we already manufacture to finding what the customer really wants and then figuring out how to manufacture it.

This is just-in-time manufacturing and the factory now is really the commodity.(Remember fab-less chip companies etc. - similar idea.)

Since we will continue moving to Research and Development while outsourcing manufacturing, our ability to reach consumers, detect their tastes and meet their expectations is more valuable than the product itself. That’s really what Madison Ave is all about, except that it doesn’t really understand that or, more to the point, allow that. That’s because they were organized to serve the guy with the factory who says “go figure how to sell my junk.”

Internet companies on the other hand, not only understand this issue but they own the vehicle of idea manufacture and distribution so they actually fuse these two properties that has kept Madison Ave. in the support business - and they are moving in. The Internet guys just need gatekeeper access to corporate budgets and marketing creativity to move this up to the next level. They have piles of cash and more interestingly, will invest in the ideas they like, not just take a fee from a client.

To be fair, every ad guy I ever met has fantasized about advertising as incubator of new business ideas but manufacturing and distribution was their barrier. Now that the internet has made manufacturing a commodity and turned the UPS/FedEx into your distribution system, much is possible.

Bottom line: tech companies are NOT just buying themselves ad networks and ways to deliver ad dollars to their properties, they are buying the future of the economy.

2. TECH/INTERNET CO.’s – THE NEW ECONOMY CARPETBAGGERS?
Could this principle apply elsewhere? High tech companies taking on other industries stuck with declining growth that high tech could reverse. Energy, Autos, Transportation, Entertainment Studios, Real Estate, Banking, Rocketry. Actually, in each case, they already have or they are energizing a movement that’s already taking place. After all, who thought of Apple as a music company or Microsoft as an advertising company…eTrade as a bank, Paypal as a fund transfer system or their founders as racketeers. Then there’s Google’s quest for a new internal combustion engine and the Tesla, that battery powered sports car half of Silicon Valley seems to be betting on.

If you can dabble in HTML, Ajax, RSS, MySQL or sell the product thereof……or if you understand the use of social engines and “Collaboratition” (our admittedly unwieldy phrase to describe the state of competing while collaborating with just about everyone – customers, suppliers and actual competitors) - you have a future. Otherwise, Madison Ave. (and a few other industries we’ll discuss in the Big Idea Journal) will undergo dramatic change. 5 years from now, the ad world will not be recognizable to anyone in the business today..

You can see the Future at Madison Ave 2.0 on June 14 in NYC.