December 31, 2010

Why Social Matters

I've been tracking the growth of social networks and social apps from the time online groups were the most social thing going. Facebook's explosion is of course notable; 25% of the web's traffic is generated from links shared on Facebook.

The following image reflects the impact of social vs utility sites:

[caption id="attachment_235" align="alignnone" width="500" caption="Facebook, Twitter, Digg"]Facebook, Twitter, Digg[/caption]

Both Twitter and Facebook are social. Digg is a utility, and much less social, meaning sharing news links is not really an activity between friends on Digg, it's among Digg users.

Twitter's traffic is impressive, but it feels too techie to become a serious challenger to Facebook. The UI isn't great, and it's not a place where I think about inviting friends to join. In fact, I can't recall if Twitter even has an invite function.

So social matters, even though we discount its importance to us personally. We don't take Facebook seriously, but we use it, and a lot of people use that as their only entry into the web. No wonder Google's running scared: it's an aggregation of utilities, and hasn't  developed a compelling social story. Why search if your network has fed you enough to sate you?

Facebook, Microsoft, and Employee Stock Options=Fraud?

Like a lot of people, I've dismissed the Twins case against Zuckerberg and Facebook as sour grapes; yes, they had a bit of a claim, but the real work is in building a compelling app and getting people to use it. Not knowing the details, the settlement seemed fair; connecting people through a website was not a new idea.

But today's NYTimes article about the twins' effort to challenge the settlement is eye-opening--not in terms of who came up with the idea, but at least one example of poor corporate behavior by Facebook. (On a side note, the Times put the substantive info 80% into a long article).

As soon as I read this, I knew what happened (I think, anyway):
But according to court documents, the parties agreed to settle for a sum of $65 million. The Winklevosses then asked whether they could receive part of it in Facebook shares and agreed to a price of $35.90 for each share, based on an investment Microsoft made nearly five months earlier that pegged Facebook’s total value at $15 billion. Under that valuation, they received 1.25 million shares, putting the stock portion of the agreement at $45 million.

Yet days before the settlement, Facebook’s board signed off on an expert’s valuation that put a price of $8.88 on its shares. Facebook did not disclose that valuation, which would have given the shares a worth of $11 million. The ConnectU founders contend that Facebook’s omission was deceptive and amounted to securities fraud.

Well, yes, that would be fraud if they failed to disclose a board decision that set the valuation 75% lower. Here's what likely happened--it's about Microsoft's strategic, and Facebook employee stock options.

Microsoft invested in Facebook at a very high valuation for strategic reasons; it understood Facebook's trajectory, and wanted to have a special right to work more closely with them in the future. So they overpaid for the stock--that's typical of a strategic corporate investment, though there are other ways to structure such a deal that are more advantageous for both parties.

At the same time, Facebook had a 409a (SEC/IRS) obligation to accurately price employee stock options. It's in the employees' interest to price the options as low as possible, and the "independent" (read: bullshit) valuation helps serve that purpose.

But as any investor in shares with no public market will tell you, the price of the shares is at least as low as whatever the most recent valuation is. Facebook failed to disclose a 75% discount given to employees from the MSFT investment. And that's where the Twins have a legitimate case.

I don't like the 409a regulations, but that's another story (it's so poorly worded and deliberately ambiguous). The salient point here is that Facebook effectively sold shares to the Twins in exchange for a release from claims on the basis of a price paid by MSFT 5 months before, but just days before had repriced 75% lower.

Ouch.

Sucks to be Facebook. Kind of--this is easily remedied. They should simply adjust the deal and get on with it.

Of course, the details of the article are slight compared to the overall evidence, so maybe I'm wrong.

 

December 8, 2010

Train Time, Plane Time

It's amazing how you can get blown out of the water--the fun, amazing startup water--by external forces. I haven't coded much in the past five days because of  a variety things, from family to the school district, and I'm feeling way behind schedule.

This week I'm meeting with investors on the West Coast. Everyone asked for the summary or plan, which I've sketched out but haven't finished. I've relied on the ChiliSoft headline, which I think has a half-life of 5 years, which means were entering the phase of diminishing efficacy.

Today I take the train to NY and fly to the Bay. The idea was to stack the day today with meetings in NY, but the timing didn't work out, so it's only two, with the possibility of a few more Monday.

I use the 2.5 hrs of train time to work on business models and plans. I really value the time, because it's largely disconnected from the web, so I allow fewer distractions.

Plane time is the best for coding if I have decent space; I'm still a big guy (slowly declining!) so it makes it tough on packed flights. But as an unabashed geek, I carry a keyboard with me which I can have on my lap, and put the notebook on the tray beside me if I can.

Airtime is perfect for coding and working on business models. This time I'll knock out the business model, summary, brief visual presentation, and then hopefully knock out some code. Late to bed, early rise, code some more and head to San Francisco to see my great friend and rising VC Christine Herron. Who will then tell me the error of my ways over lunch.

Flights are getting cheap again, to the point that I think it's worth it to make a trip twice a month. The best part of those trips? Plane time, and face time. I can do without the lines, the inevitable groping by TSA, the packed planes. But focused plane time--I really love it. Likely means we should cut off the web to our house...

 

December 3, 2010

WikiLeaks, Amazon, and My New Startup

I've been working on some stuff I really dig over the past year or so. This summer I shifted to something else, tried some new ideas, and discovered some things that just excite the hell out of me. For the first time since ChiliSoft, I'm incredibly excited about a startup. (Mission Research was heart work, not head).

And I think it will be big--certainly could be. People will be able to use the new stuff to reduce the time it takes them to find stuff on the web, and discover other things and people they might be interested in. Vauge, but it's still early and too soon to talk about.

To be big, we need to scale. We can do that by adding servers as the software takes over the world, but then we have to lease and maintain servers and manage the people who run them.

"To the cloud!"

The cloud has become cliche, and we've been forcefed the term, but the actuality of the cloud existed before the imperfect term was applied to it. For a very small amount of investment, we can get just the capacity and performance we need to serve the customers we have at any given time. It's elastic, it's highly affordable, and it's a lot easier than building your own data center.

So to Amazon we go, which turned its eCommerce system into a cloud hosting system, and it's very, very good. And cheap. It's literally in my plans.

Wikileaks ran on Amazon's cloud service. The site publishes state secrets leaked to it illegally, but its possession of them is legal (someone will debate that, but let's wait for the court decisions to take away freedom of the media). Was it damaging? Certainly. Was it wrong? Tasteless, but I'm fuzzy on the right/wrong thing, and smart people on both sides argue vigorously and intelligently about the merits of their positions. That's not why I'm writing today.

I suddenly don't feel like I can trust Amazon. It's their sandbox--they can shut it down for just about any reason, when it comes down to it. Read through their "agreement" (it's not really an agreement, it's what you accept if you are going to use their service, so there's really no discussion about it, which in my mind is key to an agreement) and you'll see they can do what they want.

So why would I trust Amazon to keep my incredible new startup rolling on their servers when they suddenly dislike or disagree with something my customers have to say?

Well, I wouldn't, I don't, and I think I'm going to pass on hosting there--at least until there's clarity beyond their actions that assures me they won't pull the plug on unpopular ideas or sharing of information that might hurt someone somewhere. Who are they to police that?

And exactly on what authority was Senator Lieberman speaking when he demanded they shut it down? He's got a vote, that's it. The difference between authority and power is that power is what you have when you get people to do things, including well beyond your authority.

So yeah, this stinks. It complicates things. Amazon is an easy choice for hosting. But it's not an easy choice for startups that care about surviving when their customers or users say something Amazon doesn't like.

December 2, 2010

Bad Demo Days

Yesterday I gave a bad demo of pretty good software that has a few rough edges. I made a classic mistake, after working on it for months: assuming the audience is as forgiving as we are, and that they'll see what isn't there.

We left out a number of subtle but absolutely key visual cues. I've know for some time that we need a designer to clean things up, and a UXpert to help shape the nav, paths, and presentation choices.

Yet I never got around to bringing someone in, and instead kept my head in the code. A faulty approach.

Over the next week we'll tighten it up, bring in the UXpert and take a design pass. Space, color, timing, proximity, context, semantics, metaphors. Critical stuff, noted in the spec, but not attacked. Tough to do for one full-time person, but it's time to put the code aside until we nail the user experience.

When you're very close to something, it's very hard to see the full picture. It's true in relationships, businesses, jobs, music--anything. That's the way it should be; you're passionate about something and close to it. But let someone else take a look at what you're doing and take their input to heart. It can really make the difference between something universally adopted and accepted and outright rejection.

 

December 1, 2010

Speech of Startups

The more excited I get about the new next big thing, the faster I talk. We're developing a lexicon--the semantics for describing what we're doing and trying to make it, well, understandable in simple terms. It's hard to do that with the brain running fast and the mouth just shy of that, but we're getting there.

Fun times.