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no more cash, please

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Interesting opinion piece in Wired about the disadvantages of cash – as in dollar bills and coins – and the general (albeit slow) trend of economies to move towards electronic forms of payment. It certainly makes sense, I think. Not only is cash inconvenient, but, as the article points out, it’s costly and not particularly eco-friendly:

The cost to taxpayers [in the US] in 2008 alone was $848 million, more than two-thirds of which was spent minting coins that many people regard as a nuisance. (The process also used up more than 14,823 tons of zinc, 23,879 tons of copper, and 2,514 tons of nickel.)

It strikes me as odd that e-payment devices had not gained much traction in North America. More specifically, devices that can be used in place of cash, without the hassle of credit card signatures or entering PINs for debit cards. Elsewhere in the world such devices seem to have been taken up quite rapidly. For example, in Hong Kong, the Octopus card, a contactless, stored value card originally designed as a payment mechanism for the Hong Kong subway system, has been a roaring success. Use of such cards has now expanded to stores, restaurants – even parking meters and vending machines. Similarly, I remember seeing a Coke machine in Singapore where one could buy a brink by dialing a short number and thinking, how cool is that? FTA:

“The cell phone is the best point-of-sale terminal ever,” says Mark Pickens, a microfinance analyst with the Consultative Group to Assist the Poor. Mobile phone penetration is 50 percent worldwide, and mobile money programs already enable millions of people to receive money from or “flash” it to other people, banks, and merchants. An added convenience is that cell phones can easily calculate exchange rates among the myriad currencies at play in our world.

In contrast, cash replacement systems in North America don’t seem to be faring all too well. I remember a few years back when Dexit made its debut in Toronto. It was a stored value chip that you could carry on your keychain and swipe to make payments. You could reload it easily through a website. Fees were quite reasonable. And it seemed to work quite well. I was quite a fan. That is, until Dexit was restructured in 2006 and more or less all the terminals at stores disappeared.

One survey has found that there is some resistance from consumers to the idea of using mobile phones, due primarily to security and identity theft concerns. Certainly an issue, but one I would have thought would be no more risky than the use of credit cards, e-commerce sites or even venturing on-line with a PC. I know this is a bit of a simplistic comparison, and that there are significant complexities involved in electronic security, particularly when it involves money, but I would have thought that both the development of a secure platform as well as the ability to properly market such a platform to consumers would not be beyond the capabilities of companies who have, for example, developed highly secure mobile e-mail devices, or set up nationwide, sophisticated 3G cell networks, particularly given the potentially lucrative market for such a service which as yet seems to be relatively free from much in the way of serious competition – at least here in North America.

In the meantime, I guess it’s off to the ATM again.

google ventures is up and running

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Announcement last night on the Official Google Blog:

Today we’re excited to announce Google Ventures, Google’s new venture capital fund.

…

At its core, Google Ventures is charged with finding and helping to develop exceptional start-ups. We’ll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven’t thought of yet.

Perhaps not a surprise, as there were reports (like this one in the WSJ) in mid-2008 that this was in the works. So far, it seems reactions are mixed – not necessarily to Google Ventures per se but to corporate VCs in general. The WSJ had this to say:

Their track records have been mixed. Corporate venture-capital arms have been hampered by challenges that traditional venture-capital businesses don’t face. Venture capitalists invest in private start-ups at an early stage, usually in hopes of a big payout if the company is sold or if its stock goes public.

Many start-ups fear that taking corporate money limits their options and comes with strings that could turn away other potential investors — such as a right to buy the company at a later date. Some funds with less competitive compensation have struggled to retain managers, and corporate venture funds often don’t allow senior employees to invest personal money in their funds, while other venture funds typically do.

This is also echoed by some traditional VCs, including Fred Wilson of Union Square Ventures (who by the way writes a great blog – highly recommended) who concluded in his post:

But I do think that venture investing is not the best use of a corporation’s capital and that it is inevitable that it will produce sub-par returns at best and significant losses at worst.

He cites the same reasons above in the WSJ article and also suggests that corporate VCs will have difficulty retaining talented fund management.

Corporate VCs, like strategic purchasers in M&A deals, may have longer term strategic objectives that, over a longer term, will result in benefits to them. In this regard, corporate VCs can be likened to some extent to strategic purchasers in an M&A context (while traditional VCs can be liked more to financial purchasers). In this regard, one of the advantages of corporate VCs to investees is that they will often have a longer term view of their investment than their traditional VC counterparts – they won’t be under the same constraints to book gains and make their LPs happy or to meet the horizon of their fund. In this case, the very thing that Fred suggests is a weakness of corporate VCs could well be an advantage to an investee company, depending of course on the objectives of the investee.

For the same reason, I’m not sure if it would be valid to say that corporate VCs are or are likelier to (as compared with traditional VCs) fail, because if the focus is on longer term objectives, realized profits as reported on the corporate VC’s income statement might not accurately reflect the actual benefit. At the simplest level, it could allow a company like Google, which has traditionally simply acquired companies that interest it outright, to hedge it’s bets. If the company is wildly successful, and Google wants to buy it outright, it will have saved a few dollars by having put in money at an earlier stage (and presumably much lower valuations). Depending on how things are structured and accounted for, I’m not sure whether the savings in that situation would necessarily be reflected in the measured earnings of the corporate VC. But apart from actual savings, VC investing will also allow Google to gain an insider’s perspective on its investees at an earlier stage and to better assess how things are coming along, and to help them along. This itself may be worthwhile relative to the costs associated with researching potential acquisition targets at a later stage.

I’m not suggesting that in all cases Google will be using Google Ventures as a farm team for potential acquisitions. But even if it isn’t, it may well develop better and deeper relationships with entrepreneurial companies that it could later partner with or enter into some sort of strategic relationship that will enable it to realize financial benefits going beyond those measured in the VC arm’s financials. And it will be better positioned to do so as an investor in the company.

Not to say that life with corporate VCs is all wine and roses. There are often thorny issues to deal with, particularly when it comes to commercial dealings between an investee and an investor, as Fred notes, and things like purchase options (which I’ve seen proposed a few times and for which the answer is a relatively consistent “no” from investees).

All that being said, an article in Wired suggests Google Ventures will act more like a traditional VC:

The fund, to be called Google Ventures, will be wholly owned by Google, but will operate as a separate entity and will seek investment opportunities to maximize returns rather than looking for investments that strictly fit with Google’s strategic vision.

…

Several high-tech companies have in-house venture capital arms, including Intel and Motorola, But Maris said that Google Ventures will have more in common with traditional venture capital firms.

“We’re making financial return our first lens,” said Maris. But he noted that a part of the appeal of Google Ventures for start-up firms is the relationship to Google and its 20,000 employees.

Interesting. I guess we’ll see. In the meantime, if you’re looking for financing, go to the Google Ventures site.

Giles Bowkett: A Tale of Two Startups

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Came across this article through reddit from Giles Bowkett, an entrepreneur type in the US. Interesting in the conclusion on VCs:

The irony is, the biggest disruptive innovation that ever came from the Internet could in fact be open source software, and the old industry it destroys will probably be venture capital.Think about it. Free software and cheap infrastructure basically eliminates the whole raison d’etre for venture capitalists. Companies are cheap to start. All the stuff you used to need millions for is now free. That means venture capitalists just don’t matter any more. It isn’t about being lucky enough to get $5 million in funding; it’s about starting something with the cash in your pocket. If you make something and it’s good enough, the guys with $5 million in funding will come to you, because those guys are basically just money in search of intelligence, and it’s a lot better to be intelligence in search of money. If you’re intelligence in search of money, you’ll choose the best way to get money. The best way to get money isn’t to find some VCs to beg, borrow, or steal from; the best way to get money is to make something people will pay for. So if you’re intelligence in search of money, you’ll make stuff people want to pay for, and you won’t even bother with the VCs, because they need you more than you need them.

My own, personal take? Fat chance. Yes yes, free software is nice and so is cheap bandwidth. But the world runs on money. People cost money. Development costs money. Money money money money. So fine, you’re a super ultratalented uber-geek that shows leadership skills, blah blah blah. Still need to create the thing that people will want to pay for. And unless you’re going to be coding everything yourself, you’ll need to hire people to help you. And you’ll need to pay the accountants to pay the bills. And the lawyers to draft the agreements. And the admin guys to, uh, do the admin. Its not as if a magic sprinkle of open source will all of a sudden obviate the need to invest to build a product – if that were the case, then absence of barriers to entry would quickly reduce what was otherwise a very profitable niche into one that looks less and less desirable – both to entrepreneurs as well as investors, be they VCs or others. And even in the case of two folks setting up shop – Company A who chooses the cheap route, builds a really neat widget (but of course doesn’t have the budget for marketing, promo, etc.) vs. Company B who gets a $10 million first round, uses to ramp up and gets to market in 1/2 the time, establishes critical mass, and basically kills off Company A. Hmmm.
I also don’t agree with the “they need you more than you need them” thing – VC money, as with most things in business, are driven by the market – more VCs chasing fewer opportunities just means the cost of their money will come down, not that they will disappear.

So, long story short, I doubt tech VCs will go away any time soon. Besides, they’re fun guys.

RIAA to AllOfMP3: Show Me the Money!!

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Interesting article in TechCrunch about how AllOfMP3 told the RIAA to get lost when it filed its $1,650,000,000,000 (yes, you did read that figure right – its in the trillions) claim in New York against AllOfMP3, even though AllOfMP3 operates out of Russia. From a legal perspective one would typically launch into the complexities of jurisdiction, judicial comity, real and substantial connection, forum non conveniens, blah, blah, blah.

But since this is a personal blog, let’s focus on the fun part, shall we? Let’s focus on the CASH. Woohoo! Fun with numbers. OK, so, let’s see. Accordingly to the CIA World Factbook, the current population of the world is 6,525,170,264. So, if the the damages sought by the RIAA were evenly divided amongst every man, woman and child, each one of them could go out and buy, oh, about twenty CDs, give or take. Wow. That’s a lot of CDs.

Another way to look at it? Its bigger than the GDP of every country in the world except for roughly the top ten. Yes yes, figures are few years old. Fine. Call it 15. You get the point. In any event, around the ballpark GDP for all of Russia. Yes, including the little nesting doll thingies.
From a more personal perspective, the interest on that amount, calculated at the low, low US fed rate for the shockingly painful period of time of two minutes is quite just a bit more than the combined annual incomes of me, my wife, my mom, stepmom, dad, sister, and her husband make in a year.
The point? Just that its a lot of money. A LOT of money. Not exactly googol or a googolplex

(which, as you probably know, is how Google got its name:

The Internet search engine Google was named after this number. Larry Page, one of the founders, was fascinated with mathematics and ‘Googol’, even during high school. They ended up with ‘Google’ due to a spelling mistake on a cheque that investors wrote to the founders.

(from Wikipedia)) but still a lot of money.

Update:  Further news from the INQ – apparently they calcuated damages at US$150,000 per song. Though the INQ correctly observes that AllOfMP3 hasn’t made that much money, damages could also be measured not by what an infringer has made (or an “accounting of profits”) but also the harm that they’ve cost you – so if AllOfMP3 sold each song for a penny, while the RIAA members would have otherwise sold the same song for a buck, multiply that by 150,000 downloads and you have your damages, as that is what they’ve lost out.