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The Timer

Posted on Thursday, Apr 13th 2006

Tech has been a notoriously complex business because of the Timer phenomenon. New opportunities open up, get attacked, problems get solved, companies get built, and market windows close. There is a Timer on most of the tech opportunities, because once a market window closes, and a market leader or two are established, the Timer goes off in that market. No more opportunity, no more investment, no more interest from VCs …

Going forward, however, the Timer phenomenon is going to be less of an issue because many of the tech businesses of the future will not be based on “problem solving”, but rather, on “emotional appeal”. Anyone who has ever been in Retail or Restaurants, knows, that success depends hugely on positioning, branding and user-experience. Consumers have low switching costs, are willing to try new brands, and new stores, cafes, restaurants get born every day.

The Internet will be no different. Today’s preferred Internet store may be RedEnvelope in shopping for gifts, but tomorrow there will be 50 to 500 other choices, each with their own appeal and merchandise uniqueness.

Same with Content. Movies get made every year. Books get published every year. Indeed, it is a “hits” business. Internet Content will be no different. Money will be lost and made. Hollywood’s film industry and New York’s Publishing Industry – both have much to learn from and teach the Silicon Valley investors on how to evaluate “hits” deals.

Another emerging “fad” business is social networking. Kids, Teens, Adults – all go to clubs. MySpace is a Club. It’s hot today. Tomorrow it may or may not be. And just because I go to one club does not mean I won’t go to fifteen others that I find attractive for different reasons. Again, no Timer. Clubs open all the time. Clubs also close all the time.

In summary, as the Silicon Valley venture business matures and gets increasingly into these “No Timer” businesses, how to evaluate an investment is changing fundamentally.

Remember that question all VCs used to ask once upon a time: “Is this a must have or a nice to have?” “Is this a pain-killer or a vitamin?”

Well, iPod was neither a must-have nor a pain-killer, until the oozing sex-appeal injected into the brand by Apple made it so.

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But even in the hits business, there is a lot of structure to the economy. Large enterprises produce blockbuster movies/TV/books, run large chains of restaurants, and develop clothing fads and fashions. Small businesses do pretty much the same things, but on a smaller scale, often with a lot less skill in management and production. What they all share is the difficulty in predicting the next “pet rock” craze. Is there really a place for VCs in the hits business? Would a VC really have wanted to invest in Starbucks when they had only a few stores? Or are we talking about a new kind of VC fund, that attracts a different kind of investor? It seems like such a fund would be playing the statistics of public opinion and as such would be investing very small amounts in larger numbers of small businesses hoping just a few would hit it big.

Sophos Sunday, April 23, 2006 at 5:20 AM PT

Another thought. It seems like a “hits” VC would provide the business expertise to market the ideas and manage the growth of hits that begin to catch on. Perhaps with the right support, a higher percentage of ideas could be turned into at least moderate hits. Clearly many potential hits today are lost to poor management, inadequate funding, and too little marketing.

Sophos Sunday, April 23, 2006 at 5:28 AM PT

There are firms that invest in Retail and Restaurant concepts. Oak Investment Partners is a case in Point. Jerry Gallagher has invested quite a bit in retail and restaurants, and has recently created a $200 Million retail fund for India.

Starbucks was also venture funded, as were Jamba Juice, P.F. Chang’s China Bistro, and some others.

I think we will see more of these in the times to come. Where you are right is that these businesses typically suffer from poor management and capital.

As we run out of things to invest in, in the traditional high tech model, all that capital will search for other ways of being invested, and I believe, will lead to a larger degree of investment in the “hits” businesses. As a bi-product of that phenomenon, I also hope / believe, there will be a movement of smart, competent business people into these segments, as well as an increased leverage of technology and efficiency.

The beneficiary segments that are today under-served are likely to be big gainers in the next 50 years.

Sramana Mitra Sunday, April 23, 2006 at 1:50 PM PT

[...] Starbucks needs visiting and revisiting ove and again at this stage of the game … “The Timer” makes it imperative that we understand how to build scalable businesses like Starbucks. [...]

Sramana Mitra on Strategy » Blog Archive » Howard Schultz From Sixty Minutes Monday, April 24, 2006 at 12:24 PM PT

I thought Starbucks started around 1971 and didn’t get any sort of investor funding until 1987. How long was Jamba Juice (or the Juice Club) around before it received venture funding? It seems like they both sought funding for a growth plan after they had already removed much of the risk in their hit status. Does a VC like Oak Investment Partners fund hits business proposals or growth of established businesses?

With many tech startups, initial funding is obtained before a viable business is established. Ventures play an exploratory role in both the technology and market. Are you saying that VC money today supports exploratory ventures in the hits business?

If a hits business is developed through several phases, exploration, expansion, standardization, and contraction (or whatever you want to call them), the safest phase to fund is expansion. But, if we want to create a hit business creation machine, we need to start earlier and drive the exploration phase as well.

Sophos Tuesday, April 25, 2006 at 1:11 AM PT

That’s right. When Schultz bought Starbucks with his new investors, they had 5-6 stores already. Upto that point, th growth was financed with money from alternative sources, presumably friends and family.

In general, it is always less risky to fund late stage expansion deals than seed or early stage deals. But, as we see, in the history of high tech venture capital, it all started haphazardly and then investing got organized, and people learned to evaluate deals, scale them, etc.

I think, the same needs to happen in the Hits businesses. The evaluation and managament needs to become more scientific. Harry Potter was a venture style outcome. Why? Da Vinci Code was a venture style outcome. Why? Danielle Steele. Agatha Christie.
Starbucks. Look up a Spanish Designer called Zara.

Each of these case studies are worth understanding.
Frameworks emerge. Based on those, industries emerge. Venture Capitalists have a responsibility in creating new industries.

That’s why they are not called Bankers. If all they needed to do was create good returns, they would be called Bankers.

My beef is that today’s VCs are all behaving like Bankers, and shirking this industry creation responsibiity. Steve Jobs did not “ask” consumers if they wanted an iPOD. He made them want it. This is the difference between a visionary entrepreneur/VC who can make markets, and a mere Banker.

Sramana Mitra Tuesday, April 25, 2006 at 12:48 PM PT

[...] Notice, George answers a bold YES to my question on funding HITS businesses, which most of Silicon Valley would say no to. For my own perspective on this topic, read the posts: The Timer and Twenty-First Century’s Best Venture I fully expect Silicon Valley to have to go in the direction of funding largely Hits businesses in the future. When it does, George is one of the people to call upon, because I do believe he has the right intuitive feel for such businesses, and is not a geek who has suddenly reinvented himself as a consumer VC. [...]

Sramana Mitra on Strategy » Blog Archive » Investment Thesis: George Zachary Tuesday, October 3, 2006 at 4:56 PM PT

[...] My Adventure with Amazon * The Timer * Twenty-First Century’s Best Venture * eBooks Future * Will Amazon Kindle Vertical [...]

Paid Content : Deal Radar 2008: Entrepreneur Journeys Wednesday, October 1, 2008 at 4:48 AM PT
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