And this last bit worries me greatly.

There are already “last round” calls being made to get to the funding bar before it closes. More bloggers than I care to count are driving home the message that valuations are nearing their apex. If you’re new to this game you’ll think that’s good – just wait a little bit longer and hungry investors will give you an even higher valuation.

I’m not so new to this game. I know that while high valuations beget even higher valuations, the inflection point (when valuations start to go down) is not so much a smooth curve as it is a stomach-churning drop off a cliff. And just as the rising tide floats all boats, so too do all boats sink when the tide goes out.

I’m not a pessimist, I’m actually a horribly misguided optimist – I wouldn’t be an entrepreneur if this wasn’t so. But I’m also fairly good at seeing situations for what they really are.

Go on, take the money and run
Groupon should have taken the Google Money and run. It is clear with even minimal understanding of the situation that Groupon’s business model is unsustainable in the long run, both for Groupon and for the participating retailers.

Some businesses use loss-leaders to bring in new customers, but many of the Groupons sold are one-time affairs, with the companies incurring the loss, but rarely getting the longer-term benefit of the leads.

Groupon has to keep on taking money from new clients in order to pay existing clients (this is starting to sound oddly like some public-sector pension funds), which some have called a Ponzi Scheme. Others are less biting in their analysis but making more or less the same point.

As in previous funding rounds, the current shareholders may want to take a lot of money off the table.

Dream On
As I said above, I’ve been in this game for a while. There are founders who build companies because it’s their dream; if they get rich along the way then so much the better. And then there are entrepreneurs who view the market as a purely speculative opportunity, a way to make money for some at the expense of others. You can guess to which group I think Groupon belongs.

Fortunately the SEC is eyeing the S-1 application with caution, sending Groupon back to do its homework and make clarifications about its financial statements.

Clearly I won’t be putting my money down on this company. When the whole thing eventually goes bust, as I think it will, it won’t be my money evaporating. VCs who put their money into Groupon may not be able to get it out as the company’s valuation sinks like a stone (remember, this is pure speculation on my part).

So, you say, all the VCs who don’t have Groupon in their portfolio have nothing to lose. This is the part that’s most troublesome. Given all the noise and high expectations surrounding Groupon, if its IPO fails or the company’s market value – once public – implodes, it will kill the IPO market for everyone. That, combined with the weak and threatened US economy will not just cause the tide to go out, it will be more like someone pulled the plug in the bathtub and all the startup rubber-duckies are getting sucked down.

My fear is that this will be another Microsoft Moment. It was the DOJ filing against Microsoft that sparked the burst of the “Dotcom Bubble”. It may not have been the actual metaphorical pin that popped the balloon, but it certainly was the catalyst.

I think this may be a lose-lose situation for venture capital. If the SEC denies Groupon’s IPO, obviously the current shareholders lose. $6B Google acquisition? Forget about it.

The larger picture has to do with the expectations being built into the market regarding a Groupon IPO. If Groupon can not file, or must seriously amend its offering, it will have a deleterious effect on other venture-backed firms now standing in the IPO queue.

If Groupon does go public only to fall through the floor (as I think it will), it will set the IPO market back significantly, not to mention the carry-over effect it will have on other (newish) high-tech stocks.

So what can VCs do to minimize the damage (I dunno, I’m not a VC. But I’ll give it a go)? In their place the first thing I would do is have the conversation at the weekly partners’ meeting. Do they agree with the thesis or not?

If yes – how is their portfolio affected? Who is currently in the pipeline? Can we push them forward or should we hold them back? How would a Groupon crash affect our portfolio? Will it make it harder to for them to raise new rounds in the year or so to come? Do they have enough cash now?

How do we handle the PR aspect vis-à-vis the rest of the world? What message can we send to relay our preparedness for this event to our Limited Partners, without the blasé business-as-usual, everything’s fine, you-can-relax-now whitewash (which they won’t buy anyways)?

And you entrepreneurs out there – how would this affect you?

For one thing, if you’re in the social-commerce-daily deal space, lock down your business model and differentiation now, put money in the bank (don’t try to optimize for valuation – but don’t give the farm away either), and if you can’t do that and have some money left, consider a pivot that makes sense.

Well, if there was a Buzzcylopedia (I’m starting to think this is a catchy name) it would be chock full of the little words entrepreneurs throw in to get an investor’s attention:

• “disruptive”
• “we’re the Facebook of <some niche where they think Facebook isn’t dominant (hah!)>”
• “revolutionary”
• “social network”
• “formerly of Google”
• “once sat next to Dave McClure on a plane” (fine, I meant he was on the other side of the aisle, 3 rows up)
• “we’re on Angel List”
• “Angry Birds” (I just threw that in here to get your attention)

However, the most overused buzzword I’ve seen and heard in presentations over the last few years has been “platform”.  “We’re a platform for…”, “Using our platform…”, “We intend to become a platform…”. You get the idea.

My reaction usually is: MS Windows is a platform. Salesforce.com is a platform. WordPress is a platform. Are you Windows/Salesforce/WordPress? Typically they then casually retreat to figure out some far more oblique buzzword that would be harder to attack.

“Platform” has waned, “Utility” is in.

Now everyone wants to be a utility. Utilities are great. If you own both the Electric Company and the Water Works, not to mention the B&O, Reading, and Pennsylvania lines, you’ll make a killing.

Except that web sites aren’t utilities. ISPs, for that matter, aren’t considered utilities (yet), although the idea of Internet access as a universal human right has been put forth. (Personally I think that water, food and shelter should come first, but I’m just a small, occasional, high-tech blogger.)

But seriously, the electric company – the real one – is a utility. So is the water company, sewage service, phone company, and natural gas provider. To be somewhat pedantic, and accurate, they are all Public Utilities (Wikipedia: an organization that maintains the infrastructure for a public service, or the services themselves). In other words, utilities are big-league things on which many people rely upon for an essential service.

Your baseball-trivia website is not a utility, no matter how many hits it gets. (Oops, didn’t realize there was a pun in there. Too bad my Backspace key doesn’t work)

I do, however, think that there are a very few true Internet Utilities. Among them: Facebook, Twitter, and Google. Each of them does one thing and does it very well. The exception, perhaps, is Google, which does one thing very well (although not as well as it used to), while trying to reach out in many other directions and is doing, well, not so good.

Now repeat after me “I’m not a utility, I’m a _______”

(I have a personal 2-page-down rule*. If an online article requires me to page down more than twice I probably won’t finish or even read it. I have no empirical evidence to support this, but I think that it may be the same for many other people. In that vein I didn’t read the whole NYT piece, I skimmed it and learned all that I needed to know.)

Does this come as a surprise to anyone? The truth is that people write less and don’t need to write page after page to express their thoughts. Often a few paragraphs suffices, sometimes a sentence, and even 140 characters or less is useful in conveying information. Let’s call this the Economy of Messaging: using the proper medium (based on economy – meaning value vs. cost (in your time) – of the service) to transmit your message in the most efficient means possible and to your intended audience.

Or could it be that quite simply people are less eloquent? Or could it be that many people have become just, well, dull? Not much of anything to say, but they’ll say it anyways.

Purely by coincidence this morning (are there really any coincidences? Nah.) I read an opinion piece by Roger Ehrenberg of IA Ventures titled Preparing for and adapting to tomorrow’s world (where has the capitalization convention in titles gone? But I digress…). He laments that our education system is still rooted in rote, whereas it should be moving more towards an analytical thinking model where facts are a commodity. He, of course, uses more words to say that than I have here, but then again, I don’t get published in Business Insider. He also managed to use the word “sclerotic” creatively.

Combining the two thoughts it seems that people are being successful at getting their messages across even by giving less information, but our collective education systems haven’t yet made the pedagogical leap to teach kids to steer their thinking away from information processing and towards ideas processing.

What do you think – are we communicating in shorter chunks because we can or because we don’t need to elaborate? Or that there really isn’t much to say? Or too much to say – TMI Syndrome? Perhaps TLA Syndrome?

I have spent a good chunk of the last few years learning how people use messaging for a project that I can’t quite discuss yet. I encounter many articles that announce the “death of e-mail” and the one thing that always strikes me is that I’ll betcha that all of these articles were submitted by their writers to their editors – by e-mail.

One of the guiding concepts in this project is the Economy of Messaging. Another one is that it’s all about the message and less about the medium. Yet another is about what’s hidden in the message.

*I’ll try to finish this post with that rule in mind.

So sayeth Christopher Mims (“a journalist who covers technology and science for just about everybody”) in “Are ‘Patent Trolls’ the Secret Heroes of the Tech World?”. He’s spot on with some of his points

The … more vexing problem is that even if [a company] gets a patent on its technology, no big company even has to pay it a licensing fee. That’s because the bigger company can just bury the little one in patent litigation – outspending the small fry in the courtroom and tying up licensing fees for a decade.

 and

That’s a flaw in the patent system, argues [Ted] Shelton, because the technology world moves so quickly that by the time a patent is issued, the technology it covers could already be on its way out.

So far, so good. And he also makes the point that once smaller companies have been granted the necessary patent(s), the cost of litigation is often too great for these companies to afford.

Enter the ‘Patent Trolls’, who will selflessly come to the company’s rescue and litigate on their behalf. Now obviously there is money in this, but I wonder how much of it actually makes it into the pockets of the inventor.

I’m not so thrilled with Patent Trolls.

It may be a fine line between someone with the intellectual capacity to describe their invention and the technical inability to produce it, and those who have absolutely no technical means, or will, to bring the invention to fruition, yet want to prosecute others for not being as quick to paper as they were, or those from whom they bought the patent.

 Prosecuting patents is not a cheap business. Estimates range wildly from $250,000 all the way up to $10,000,000, but most of the estimates fall in the $2-3 Million range. Not exactly ‘out-of-pocket’. There is also the success factor: 75%. AGAINST.

If you’re in the troll business you would need to invest $8-12 million on average to achieve one success. Obviously you would need to recoup your investment, so you would want to have first claim from the proceeds of litigation, and even make some money. Let’s say that you’ve decided that 100% is the proper multiple considering the risk profile of these cases (I don’t know if the litigation costs cited also include for the provision of counter suits or being assessed legal fees to be paid to the defendant in the event of a loss, but beware). Ideally you would be swinging away on cases where there would be at least $25 million in potential damages. That’s a big number. Again, how much of this would the inventor see?

There are many flaws in the patent ecosystem from the amount of time it takes for an examiner to review the patent application through the expenses of litigation. Patent reform is certainly in order, so that inventors (who should also need to prove that they can build their thing, not just describe it, and intend to commercialise it) will benefit and receive appropriate protections. Things move quickly in the software world, and by the time the inventor receives a patent their technology may already be obsolete. Software – and high-tech – patents should get a Fast Track at the USPTO. A business plan that is based on patent then litigate (with OPM*) is not a good business plan. Trolls are in business because they are in business for themselves, not out of altruism.

*Other People’s Money

The blogosphere has been abuzz, a part of it anyways, about journoblogger Michael Arrington’s expose of an invitation-only meeting of angels, where apparently some collusion may have been going on. Or not. ‘Collusion’ is a big, scary go-directly-to-jail-do-not-pass-go-do-not-collect-$200 kind of word.

Ron Conway, the Super Super Angel, weighed in with a keep-this-confidential (nudge, nudge, wink, wink) e-mail in which he tsk-tsk-tsks those who were at the meetings, even including a light scolding for his partner at SV Angels, David Lee.

So now the cat is out of the bag (or the genie out of the bottle, depending on your cultural metaphorical background). Angels get together and talk about the companies they are thinking of investing in. This is real news! Stop the presses! Oh, wait, there are no presses any more. Then someone please stop the Internet! We have something important to say.

The original article sounded to me like just so much sour grapes – “hey guys, what, you havin’ a party without me?” Varying opinions, ones I very much respect by the way, either took the angels to task, or explained the content of the meetings away with a wave of the hand and a “pffffft”.

I don’t think any of this really matters to entrepreneurs. Angels, I’ll let you in on one of our little secrets: we know you talk about us – we expect you to, that’s how other angels get into the deal. We know that you discuss deal terms – supermarkets routinely send scouts into other supermarkets to record prices, it keeps the market competitive, and that’s good for consumers.

Valuations are rising, and that’s good for entrepreneurs – to a point. Here’s what I mean: if you go back to my post on the “seed bubble”, you’ll see that I say that there is no bubble as long as the next class of investor is able to invest at the next (higher) round. As early-round valuations get pushed to the next valuation level seed investors won’t be able to do follow-on investments to stave off major dilution. The entrepreneur who pats himself on the back at doing an early raise at a high valuation is probably doing a disservice to his company and investors when it comes time for A or B rounds as institutional investors most likely won’t be able to, or want to, invest at the valuations which would then be required.

There is a sweet spot for valuations at each stop along the funding path – I won’t even try to suggest numbers, but this is something each CEO should already have in mind when negotiating any round. A number that keeps the investors interested and keeps their attention. Investors – the same applies to the founders: if their stake in the company post several rounds of dilution is not going to be large enough, they will also lose interest or start to look at other opportunities (although, and this is pure supposition, I think that this may be true more of the first or second management layer of companies who are watching their options sink underwater).

I’ll admit that I don’t get the little jab at seed accelerators Y Combinator and Tech Stars. With each iteration these programs should be able to put out better and better companies for angels to invest in, and therefore valuations should be going up (see limitations above). I’m not tuned into the backroom dealings around the seed accelerators, but if the angels are feeling that they are being left out of quality deals, perhaps they should be asking themselves why.

Funny that all this happened around the Day of Atonement. Angels – introspect. Founders – be careful out there, but you already know that.

I am not one of them. Nothing to do with Apple, or any other company, you see, it’s just that I’m not about to jump into the waters unless others have done it before me. Typically version 1 of anything has just enough features to get it into the market, or for it to be viable in the market, with a few rough edges here and there. The Minimally Viable Product is not the goal, but more of a step on the marketing path to get product out to customers in a way that (often) makes it more affordable for them and to create some sort of market awareness.

Case in point – a few months ago I switched to a different cellular carrier, one of the reasons being that I was finally ready to get an iPhone. With versions 1-3G I felt that the product wasn’t mature enough (a phone should, y’know, work as a phone), have enough toys, or enough processing power. With the 3GS I felt that the product was finally ready for me to plunk down my cash and buy it – in other words, my personal Minimum Viable Product.

But wait – did I make a mistake? Because shortly thereafter Apple announced the iPhone 4. My new toy was rendered obsolete by rounding up to the nearest integer. Apple has done it once again with the introduction of the next generation iPod Touch. It’s thinner, faster, has a better screen, and more memory. And it costs the same. (Actually it costs less due to the depreciation of currency over time, but I digress.) But I can’t buy it – yet. Whereas I may have wanted to go out and get the then-current one last week, I will now wait until the new batch comes out. In fact, I’ll probably even wait longer than that so that the kinks inherent in early production models can be worked out. For proof: I waited until iOS v. 4.0.2 came out before I upgraded my iPhone. Far be it from to take the glory away from others in finding device-crashing bugs…

Another example – I bought some development software. Three days later the company announced a new version for the same price. So here I was holding version 3, when the lovely new version 4 was available for the same price. Had I only waited the three days – and I couldn’t have known this, since the company did not pre-announce a release date – I could have had the new version (notwithstanding my generous nature re: bug catchers, see above). In the end, after quite a few frustrating phone calls and e-mails, I convinced them to upgrade me for free to the new version.

Because products do not tend to disrupt themselves (although Cannibalization is a legitimate, if not risky, market strategy), quick product iterations prompt a ‘wait-and-see’ attitude, something that I’m going to call “purchase latency”. This affects purchasing decisions across almost every large market segment I can think of: electronics (maybe the new printer in the series will be faster? cheaper?), automotive (brand new model? let’s see if the brakes are better on this model first), houseware (I’ll wait for the super-green frying pans to come out), appliances (new features! Unless the fridge dies…), computers (more memory, better screen, faster processor for the same money), and so on.

Even being “Greener” has an effect, I still have to throw away my old fridge in order to get the one that is more energy efficient – but what is the cost to the environment in disposing of a perfectly good, if old, fridge?

We shouldn’t think that the Web is immune from this. While you may not have to physically upgrade your software, changes will affect you. Google Buzz is a wonderful example: even a small change to privacy settings may have unintended consequences for millions of people. Are you ready to commit your data until a service hits critical mass?

Think about it. Until then, think twice about buying.

Today I think that fresh entrepreneurs know that they don’t know, although they don’t necessarily don’t know what it is they don’t know. They don’t need much except a place to lay their hat, some dineros, and a helpful word or two. And so the seed accelerator was born.

Accelerators are not incubators (and if they are, they should just call themselves that). Incubators are like they sound – nice warm, cozy, coddling environments where you can spend a couple of years spending government grant money.

(As an aside, I realise that I have been using far too many chicken similies in these last posts, but since I tend to write in the morning, it has absolutely nothing to do with me being the least bit hungry. Although I did have eggs for dinner last night. Hmm.)

Accelerators are like they sound – high-octane, intensive full-on programs that end before you realise it. You go from the start line to the finish line and you don’t look back. And just as in car racing there is a support team to coach you, guide you, and even help search for the bucks.

Although there are many, the three best known programs are Y Combinator, Tech Stars, and Seedcamp. Nominally these are seed funds, but their real value comes from the professional mentoring, networking, feedback, and exposure that the founders acquire.

Does this complicate the angel/seed space? Super-angels on one side, seed accelerators on the other, VCs catching up – what’s a poor multi-millionaire to do?

What is clear from this picture is that there is a lot of seed money out there, chasing not enough startups – i.e. the market favours (good) entrepreneurs. Angels who have sufficiently rich networks will be able to preview and participate in preferred deals (or they could just sign up for Angel List and let the deals come to them).

This begs a question – with all this seed money (supply) outstripping good companies to invest in (demand), is there a seed bubble? This has been asked more than once, so let me give you my answer up front: no.

Let’s start with: what’s a bubble? (Here is the educated answer.) In short, when the asking price of an asset – or worse, when buyers bid up the price of the asset as a class – far exceeds its real (“intrinsic”) value to the extent that there are no more buyers who can afford to purchase that asset, a bubble is created. This is true for situations where the market sustains only one order-of-magnitude of purchasing power (residential real estate, dot.com stocks, cocoa beans, uranium, tulips (you have to go way back to find a tulip bubble)). But is this true for markets where the price/value of the asset can increase by several orders of magnitude (think art) and the class of purchasers changes as well (think really rich people)? I suggest you find somebody who knows what they are talking about to answer that one. My guess: it doesn’t hold true.

Startup valuations don’t scale linearly, each step of the way we expect there to be a logarithmic increase in the valuation of the company – hundreds of thousands, millions, tens of millions, hundreds of millions. Angels, who play in the millions-valuation arena, typically don’t play in the leagues above. It is precisely this ecosystem of buyers with greater purchasing power that makes the whole seed scene possible.

Elias Bizannes (“Frequent thinker, occasional writer, constant smart-arse”) takes the seed accelerators to task as “a terrible loss making business in the medium term”. He has been answered in the comments by no less than the Daves McClure and Cohen that he really has no fiscal basis for his assertion.

Let’s come back to what seed accelerators are and where they fit into the scheme of things. On a pure investment basis accelerators invest little cash and take little equity, i.e. they have a small stake. Instead, the accelerators are “investment multipliers” who enable angels to get in on deals they otherwise would not be able to (the so-called “Demo Days” which are open to the investment community at large) and groom companies to be sufficiently mature and polished to be worthwhile candidates for super-angels and some VCs. The accelerators see returns that make sense given the size and stage of their investment (Bizannes used this spreadsheet to support his claims, I interpret the (minimal) data somewhat differently) and the number of companies in their portfolio each cycle.

If you look at accelerators only in terms of their net financial return on investment, you don’t see the real picture. The primary beneficiaries are, of course, the entrepreneurs, but the circle of secondary and tertiary beneficiaries is much larger: employees, service providers, users, investors, and communities as a whole. Building better, smarter and funded startups benefits us all, so keep the pedal to the metal.

About those super-angels – next time.

It’s true that the VC community now needs to “find itself”. The traditional 1-4-5 model (one home run, 4 base hits, 5 strikeouts for each 10 portfolio companies) that fed the VC machine struggles to find its relevance with high-tech IPOs effectively being zero. The tail end of many pitches that I have heard over the last 5 or so years is “and Google will buy us”. Well, that’s just a tad presumptuous, no?

Maybe not so no.

Just as the world was dazzled by the Netscape IPO, it was again dazzled by Google’s acquisition of YouTube. Buying an intangible asset for a lot of money came into vogue. Large exits became the starry-eyed dream of many an entrepreneur, replacing IPO-mania. Think about it: an IPO gives the founders the added responsibility of running a company to the standards required of the SEC (or your local regulatory commission), while an acquisition exit is an EXIT – you get to leave at some point, often of your own choosing.

Acquisitions come in 3 flavours: offensive, defensive, and talent – although an acquisition can encompass more than one. If you’re curious about Google’s appetite for companies, just see here. While the billion dollar exit is the new black, most exits are much smaller, in the sub-million to $10MM range.

VC economics don’t favour these exits, sometimes the Series A legal fees alone are more than a startup needs to launch a product. The “lean startup” movement towards building fast, lightweight companies, is a seismic shift both in the software and venture capital industries. They are capital-efficient on the one hand, and fairly uni-dimensional on the other. Many of them are FNACs (“Feature, not a company”, and I can’t find the original source for the acronym, although I think it might be Mark Suster) a little light on the revenue side, whose only hope of returning investment is to be bought for more than was put in.

Cue the Angel investor. True to the moniker he sweeps down from heaven, full of faith and a fat checking account. Many are former entrepreneurs who dun good, and want to share the wealth. Without Andy Bechtolsheim would Google have been? While our backs have been turned, they’ve been busy getting organised. There are some pay-to-pitch angel groups (Run away! Run away!), and then there are the less notorious ones such as the “PayPal mafia” and the Founder Collective, offering not only cash, but their expertise and network, which I consider to be of at least of equal value to their monetary investment.

However, they are somewhat of an old-boys-and-girls network where being an insider is your best bet to get investment. So what’s a bright young – and not so young – lad got to do to get some insider credentials?

Cue the seed accelerator. While there are many, the better known amongst them are Y Combinator, TechStars, and Seedcamp. In a somewhat more democratic process, anyone can apply to be accepted to the programs which typically run for several months. Along the way the teams are mentored by industry insiders and potential investors.  (In a future posting I’ll take a closer look at seed accelerators.)

Cut back to the angel investors. This is a place where they can play nicely. Depending on their nest egg, and the angel’s appetite for more chicken, angel investments can be as little as $5000 and topping 100 times that amount. A typical angel round would be in the $25-250k range, with several participating angels. There may be a “lead angel” (would these then be “archangels”? But I digress…) and the rounds are surprisingly unstructured and rather open-ended – fundraising continues over a period of time until the company has raised the money it wanted. Angels will bring other angels who are making many small investments instead of a few large ones. Here the economics do play in their favour if they are investing in companies where growth of the asset is the main mover, and not control of the asset.*

Sniffing around the edges of a lot of these deals are “super-angels” (aka mini-VCs). While still being institutional investors, super-angels are unencumbered by the 1-4-5 mantra, don’t require board seats, might not even be taking management fees from the fund, make fast decisions, and can do small deals. Since managing portfolio companies is generally not an issue, they can have very large and diverse portfolios. Will the super-angels at once push your average angel out of the market and kill off venture capital as we know it?

Stay tuned for our next episode…

*If you don’t believe me you can always ask Y Combinator’s Paul Graham.

Well, if I’m already here, I might as well right <backspace> <backspace> <backspace> <backspace> <backspace> write something.

In May of last year Google outed a product they had been keeping hush-hush developing in secret using internally, called, for reasons that I still don’t understand, “Wave”. It was a real-time keystroke-by-keystroke collaborative document chat email-killer entirely-virtual product that you could use if you invited other people to watch as you typed poorly and erased your mistakes.

It did find some fans among the academic crowd, for example when collaborating on papers or writing a college newspaper, but for the most part the sentiment was “Google Wave – what is it good for?” (for example here and here). Ah, maybe this

is what it’s good for.

However, Google has announced that they don’t “plan to continue developing Wave as a standalone product”. They will, thankfully, 

maintain the site at least through the end of the year and extend the technology for use in other Google projects. The central parts of the code, as well as the protocols that have driven many of Wave’s innovations, like drag-and-drop and character-by-character live typing, are already available as open source, so customers and partners can continue the innovation we began. In addition, we will work on tools so that users can easily “liberate” their content from Wave.

Phew. Now I can breathe easy.

Wave is an absolute technical tour-de-force. The creativity that went into the real-time group aspect of the service is mind-boggling. Terrific concepts such as third-party service extensibility and automation show great thinking. Even managing to implement the system quietly (did nobody think to ask what a bunch of Danes were doing Australia? But I digress.) was a wonderful management achievement.

But.

From Day 1 what was missing for me was the product-market fit, and I’m assuming that I’m not alone on that one. Google’s reasoning for releasing the product seemed to be a little clearer. Back in those days GENO (Google Enemy Number One) was Microsoft, and Google was trying to attack it on as many fronts as possible, to wit: Gmail and the Google Apps suite. Microsoft, for its part, started striking back with Azure and cloud-hosted versions of Office. This could go on as a tactical battle for a very long time: features, price, storage. I feel, though, that the brain trust at Google

realised that in order to gain the upper hand, they needed to fight the GENO on a different battlefield. They weren’t about to kill off Exchange (hosted or otherwise) with Gmail, but what if they could make Exchange obsolete? This is, after all, something they have a bit of experience with, namely ousting the hand-curated search engines of the day (Alta Vista, Yahoo, Lycos) with their algorithm-based automated systems.

Wave presented just such an opportunity: a messaging system that is not e-mail. Once again, the business model was “free”, so free that they open-sourced the system, thus opening other fronts against the GENO (* yes, I’m going to insist on using my new acronym, just live with it) by encouraging other players to create their own Wave servers. “Here, it’s so easy, let us show you how to do it.”

Not that this is without precedent. It’s called the Web, a small Tim Berners-Lee project (that he started on a NeXT machine!!!) that was actually quite useless until another web server came online. And then another, and another. A free distributed publishing platform. And similar to the Web, Google Wave is a rather useless free distributed collaboration platform. It’s useless as long as only Google runs it, but (UX issues aside) could have been a contenda’ if only Google Biz Dev had pushed to get wider adoption. Much wider adoption.

Perhaps Google Biz Dev was smarter than that. They also didn’t see the product-market fit. New product release at Google seems to use the spaghetti test rule (maybe this is just a Canadian thing?). Let’s not do a lot of user testing (outside of the Googleplex) or market research. We shall cast our bread unto the water, and see what the fishies eat. Eric Shmidt confirms this: “We have a pretty strong view on this,” he said. “As a culture we don’t over-promote products…we tend to sort of release them and then see what happens.” 

Come again? Don’t over-promote products? Then what did you need an hour-and-a-half for?

Google may be casting too wide a net. Note the recent fails*:
Nexus One
Buzz
Wave

While Google might think it’s the tail wagging the dog, the truth is that the dog just doesn’t behave the way Google expects it to. In order for them to be ready for the next GENO (told ‘ya) – who is already out there – they need to be thinking more like us. And the next GENO knows very, very, very much about 500 million of us.

* for the lexically unchallenged: the proper word is ‘failure’, but ‘fail’ is just, y’know, so much more hip.

Software patents are bad, and here’s why: they stifle innovation.

Well, no they don’t. True innovation generally comes down to the work of a small group of 1, 2 or 3 people (yes, I realise that “1” is not a group). Even the largest of corporations generally cite 2-4 inventors for their software patents, granting them the privilege and esteem of invention, while retaining the beneficial assignment of the IP for the company. Contrast that with many academic papers which typically have a long list of authors, some of whom may or may not have actually worked on the project (can you say “thesis advisor”?). Monoliths such as Microsoft, Google, Apple, Cisco, and Intel have large patent portfolios, clearly showing their novel contributions to “the art”. So much for stifling innovation.

Now for the ugly. Where the USPTO erred, and this is only my opinion, is when they began granting patents for “business processes” and began to see code as copyrightable. While there are quite a few programming languages, there are just so many ways to code a function. Copyrighting code does exactly what? Protects your product because no one else can write the code precisely the way you did? If this is your biggest competitive advantage then I have some news for you: you don’t have a competitive advantage. One of the downsides of the proliferation of software patents is the rise and dominance of the patent troll. Their business process is to buy patents or represent patent holders, and then be on the prowl for companies who may be violating them.

You can look at patents in two ways: the patent trolls use them as an offensive measure, while the large patent holders – meaning the ones who actually patented their own inventions – keep them handy if they need to be on the defensive. In order to play this game you need but one attribute: deep pockets.

The good guys play a different game. The Open Source movement – the antithesis of the patent culture – protects the esteem of code jockeys, while letting others stand on their shoulders. And often this is a good start for a software-based startup.

Depending on who you ask, VCs don’t consider software patents to be all that important, although the U.S Dept. of Commerce and USPTO think they’re the cat’s pyjamas. But startups shouldn’t automatically pass up on patents. Trying to prosecute your patent is not a good business model, and don’t expect to raise venture capital on that basis, but registering your intellectual capital has value. There have been not a few “talent acquisitions” in the industry lately, and I think that patenting your technology ultimately does increase the valuation of your company. From the side of the purchaser patents are forever (ok, 17 years), but talent is somewhat more mobile.

There certainly are legitimate reasons for litigating a patent. A patent can easily take 5-7 years until it is granted. That is plenty of time for someone else to come up with roughly the same idea and implement it. One of the parameters that U.S. courts should be looking at – and you out there in Texas, yes, I’m talking to you – is the feasibility of the plaintiff producing the product described in the patent he is prosecuting. It may be a fine line between someone with the intellectual capacity to describe their invention and the technical inability to produce it, and those who have absolutely no technical means, or will, to bring the invention to fruition, yet want to prosecute others for not being as quick to paper as they were, or those from whom they bought the patent.