Sunday, July 29, 2007

10X

In the early '00s I spent some (too much) time transiting on I-280 between Menlo Park and San Francisco. On any given day, my 80-mile-an-hour rumbling VW Eurovan would be nudged to the middle lane by a sailing German sedan. Twas life in the fast lane for folks managing hundreds of millions in private equity; twas life, too, in the middle lane for folks like me who sought to pimp fast lane VCs.

One day I was less than politely pushed to the right (most likely by a Republican). The BMW/Mercedes’ license plate caught my eye: 10X, 10XMAKR or some analog. It was the days of 10X in the land of 10X; private equity returns generated via acquisitions and IPOs were plentiful. The cavalier license plate was, to quote the Cal Aggie Marching Band-uh!, bold, bitchin and bodacious in a bodacious, bitchin and bold time.

One of the catalysts of the late-90s/early-00s boom was Marc Andreessen, creator of the first Web browser (Mosaic). As Jobs and Wozniak and Gates and Allen had germinated a generation prior, Andreessen epitomized the coolness and potential of being a geek and striking it rich. He did it, and many followed. And, he generated far greater than a 10X ROI for his investors when Netscape went public in 1995.

I discovered Andreessen’s blog the other day. It’s good (check that: great), devoid of Valley pom-pom waving and jargon babbling. One of his posts, Bubbles on the brain, percolated. Therein Andreessen pricked a few bubble theories and then proffered a 10X theory about Internet businesses. Here’s an excerpt:

It is far cheaper to start an Internet business today than it was in the late 90's.

The market for Internet businesses today is much larger than it was in the late 90's.

And business models for Internet businesses today are much more solid than they were in the late 90's.

This is a logical consequence of time passing, technology getting more broadly adopted, and the Internet going mainstream as a consumer phenomenon.

People smarter than me have written about these factors at length elsewhere, so I won't dwell on them, unless there is specific interest.

But my back of the envelope calculation is that it is about 10x cheaper to start an Internet business today than it was in the late 90's -- due to commodity hardware, open source software, modern programming technologies, cheap bandwidth, the rise of third-party ad networks, and other infrastructure factors.

And the market size for a new Internet business today is about 10x bigger than it was in the late 90's -- there are about 10x more people online (really!), and they are far more used to doing things on the Internet today than they were in 1999.
Well said, and that’s a valid 10X ripe with opportunities for middle-land cruising entrepreneurs.

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Post-script (8/3/07): Quick "10x" addition from a different Andreessen post (The Truth About Venture Capitalists, Part 1):
"Out of ten swings at the bat, you [a VC] get maybe seven strikeouts, two base hits, and if you are lucky, one home run. The base hits and the home runs pay for all the strikeouts."

They don't get seven strikeouts because they're stupid; they get seven strikeouts because most startups fail, most startups have always failed, and most startups will always fail.

So logically their investment selection strategy has to be, and is, to require a credible potential of a 10x gain within 4 to 6 years on any individual investment -- so that the winners will pay for the losers and in the timeframe that their investors expect.

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Post-script (06 Feb 08): Great post from Andreessen earlier this week, Silicon Valley after a Microsoft/Yahoo merger: a contrarian view. A snippet:

The formula for success in startups is the same today as it's always been, and it will be the same post-Microsoft/Yahoo:

Build something of value -- something that people want, and something that will be profitable at the appropriate point -- and the world is yours.

Successful companies -- companies that have built something of value -- have many options. They can stay private and throw off dividends. They can go public. They can get acquired by big companies who suddenly decide, hey, that looks really valuable, let's buy that. They can sell minority stakes to big investors or strategic partners at very high valuations. All options that are typically not open to the startup that started with the goal of getting bought and didn't build something of independent value.

Or, reduced to a phrase: the best way to get bought is to not be for sale.

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Post-script (14 Feb 08): Terrific analog to Andreessen's post from Ask the Wizard ... a taste:

The old adage “great companies are bought, not sold” is sometimes taken to mean that if you’re out there hawking your wares to M&A teams, your product/service must be second rate, but I think the more salient takeaway from this adage is that great companies are pretty focused on what they need to do in order to grow the business, execute on the strategy, and hit the revenue/operations targets.

The bottom line is that you have to take something of a zen approach to what the “result” of your company will be. Your business will either be successful or it won’t. If it’s successful, then the outcome will take care of itself. How will it take care of itself? It’s impossible to predict.

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