Strategies for a discontinuous future.

Consulting & advisory, research notes, in the press, about bubblegen,
next wednesdays.

Thursday, November 09, 2006

Deal Note: Accel, Index, NewMedia Spark vs Mind Candy

OK. By now you know that Mind Candy, the guys behind Perplex City, have taken $7m from Accel Partners, Index Ventures, and NewMedia Spark.

Let's deconstruct the rationale behind the deal a bit, as well as it's implications.

1) First, kudos to these funds for doing this deal. It's a great deal. Not because Mind Candy will be the next Google.

Like any other industry, venture has to learn - to shift down a learning curve. Yesterday, it was software. Once most funds had mastered what it takes to make software investing in software successful - relationships, deal sizes, marketing, etc - the pickings were rich.

Today, venture guys need to learn to invest in new spaces - media, cleantech, transport possibly (there are plenty more).

But most funds have little idea about just what it is - relationships, capital, management - that makes media investments succesful. The slow but sure amplification of churn (and, in some cases, outright implosion) on Sand Hill Road is a testament to this.

In large part, the success of today's vintage of funds depends on building this learning - especially in media, where near-term returns promise to be the greatest (relative, to, for example, cleantech).

2) What's the play being made? This is perhaps the most interesting part of this deal.

Though Index might be, Accel (especially) isn't known for huge insight in this space. Though they've done a few notable deals recently, imho, they've struggled for the last couple of years to figure out where/why/how value can be created and captured in new media.

The first point to note is that this is a bet on content. Yes, the content is user-gen, interactive, hypersocial etc - but so is, for example (geek out) D&D or Magic: The Gathering. Point being - historically, it's justifiably difficult for venture guys to invest in content, because idiosyncratic risk dominates such investments.

The Mind Candy deal is a nice datapoint that this idiosyncratic risk is beginning to evaporate (the others being deals like Lionhead and Habbo).

The risk is evaporating for three reasons. First, content players in certain spaces are less and less at the mercy of publishers and retailers (hi games industry, hi record labels). Second, and the deeper economic rationale behind point 1, is that being creative is iteslf becoming less and less risky, as marketing investment shrinks, distribution channels become circuits, etc.

But third, most powerfully - and this is likely Accel's rationale - new revenue streams are coming online. Branding is going to be revolutionized (this year and next). It should be intuitive just what a powerful platform for doing exactly that a company like Mind Candy/a service like Perplex City offers.

Now, beyond that, it should be intuitively clear that the economics behind this investment - if we can vaporize the idiosyncratic - are very compelling indeed.

Of course, there's a big danger here too. Mind Candy is pioneering a new category of gaming. This will take not just money - but freedom.

The danger is that the investors LinkedIn/Friendster them - when near term revenues fail to materialize, advise (force) management to sacrifice the economics of the underlying innovation for immediate gains.

At Friendster, for example, the CEO shuffle began as the search for revenue streams viable in the short run became the only priority.

Of course, this was a huge strategic error - if Friendster had focused on economics (instead of simply chasing more and more elusive profits), they could have crafted the same social value proposition and strategy that Myspace did, only 1-2 years earlier.

So Mind Candy's success depends, to a greater degree than most other plays in these spaces, on the team having the freedom to do what they do best, especially when things get turbulent (double esp since beancounter VCs, no matter how much they claim to love playing World of Warcraft, really have no idea about what makes games cool, and what makes consumers connect).

In this scenario, the most likely outcome is that Mind Candy ends up basically being another D&D or Magic: the Gathering; investors cash in on the brand and IP, multiplying revenues across very traditional retail channels.

Now, you might think there's nothing wrong with that - except that it's not going to make anyone the kind of returns which justify the existence of venture capital in the first place.

-- umair // 1:25 PM //

Wednesday, November 08, 2006

Innovation Wednesdays

On tonight - same time, same place, Coco Momo, 79 Marylebone High St, between Bond St and Baker St tubes, 7-9pm.

Tonight, we will be discussing the madness of crowds, who it helps/hurts, reviewing the key deals of the week, and, of course, celebrating the results of the election in the States.

Everyone is welcome, bring a friend, etc.

NB - Due to very nice clients and friends who have got me hammered for the last 5 nights in a row, and given the alarming rise in the number of drinks consumed at the last 3 Innovation Wednesdays, I have to warn you guys - I will be drinking (very) lightly :)

NB (2) - There's a big pic of me here, in case you have no idea what I look like, and you don't wanna stumble around a bar with zero information (thanks to Seamus for the tip).

-- umair // 1:31 PM //


The Day After Election Day

My predictions were (thankfully) wrong. Democracy won.

It makes me almost sick with pleasure to watch a corrupt, theocratic thug like Rick "man on dog" Santorum concede.

No, not because he's a Republican, but because he's a corrupt, theocratic thug who has no business, in a rational world, governing a republic.

Perhaps it's the guys at Redstate who put it best, if somewhat bitterly:

"...So much for Karl's permanent majority."

Which, is more simply (and perfectly) put:

"...Hehe were in yr base killing yuor doods!1!!"

(Alt version: "...Dear GOP: How Are You Gentlemen?")

For the first time in a very long time, America's cool. Yesssssssssssssssssssss finally.

-- umair // 1:25 PM //

Tuesday, November 07, 2006

Election Day Open Thread

It should go without saying, but if you're voting today (be it blue or red), be prepared for a bit of pain.

I'm already reading about (and getting plenty of emails about) long lines, machines not working, etc, etc.

I'm sure this will get much uglier as the day goes on.

Here's an almost real-time map of voting irregularities/problems nationwide (this really should have been mashed up...).

Feel free to comment away about your experiences.

-- umair // 1:09 PM //

Monday, November 06, 2006

Does Democracy Work?

A few weeks back, I posted my election predictions.

Sadly, it looks like I was right on. There was no big October Surprise - because the Republicans don't really, from a strategic point of view, need one.

All they needed to do was raise the costs of voting ever so slightly for the 10% of marginal voters who will decide the outcome of the election.

How will they do that? Two words: voter suppression (don't miss either of those links).

Impersonation and misinformation - seriously dirty tricks which absolutely sabotage the very essence of a democracy.

By now, you know that phone calls are the weapon of choice in this dirty war. It costs between 6-10 cents a call. So when you read reports of hundreds of voters being robo called - multiply that by at least 3-6 orders of magnitude. The real numbers are gonna be at least in the mid hundred thousands (statewide, not nationwide).

Now, there's a double whammy here. Marginal voters are often undecided because they're...shall we say...less effective at processing information than the rest of way.

Put another way, their expectations and preferences are far more malleable than everyone else's.

More simple: they're easier to reach with lowest common denonimator tactics...like robo calls pretending to be from the other candidate.

This is a big problem with democracy. Economists and psychologists haven't talked about it yet, but they will do...especially after tomorrow.

In a nutshell: What happens when the democratic game devolves to a bad equilbrium - one where the outcome of elections is always in the hands of the margin - but the margin is marginal exactly because it's dumb?

Note, I'm not trying to be "anti-American" etc. I'm just trying to point out the logic behind my election predictions.

-- umair // 11:55 AM //



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