VentureBlog

Big Data 2.0 -- Data as a Platform

Ever since Splunk went public I have been inundated with "Big Data" requests. Splunk is now the poster child for Big Data. And Big Data is all the rage. I'm getting Big Data business plans. I'm being asked to speak at Big Data conferences. I'm being called by reporters to opine on Big Data. Despite the fact that when I funded Splunk there was no such thing as Big Data, I now get to opine broadly on Big Data. Given that, I might as well do so here on VentureBlog.

As far as I am concerned, Big Data is not a thing in and of itself. Big Data is an enabler. Big Data is the realization that our world is now full of lots of data that can not be ignored. Machines produce massive amounts of data (thus the utility of Splunk). Browsing the Web produces massive amounts of data (thus the utility of Gravity or StumbleUpon). Tracking ads on the Web produces massive amounts of data (thus the utility of Adchemy or Adara Media). Every car on the road produces massive amounts of data (thus the utility of Inrix). [1] Online shopping behavior produces massive amounts of data (thus the utility of Performance Marketing Brands). Offline shopping behavior in retail stores produces massive amounts of data (thus the utility of RetailNext). The financial services industry produces massive amounts of data (thus the utility of Nomis Solutions). Medical diagnostics produce massive amounts of data (we're looking -- let us know if you're building that company). And on and on.

Understanding and utilizing the underlying data of your business is no longer a strategy, it is a requirement. I wrote years ago that social was not a business in and of itself -- it was an enabler of all online business. In the same way, Big Data is not a business in and of itself -- it is an enabler of all business, online and offline. The current data explosion will only accelerate as technology does an increasingly good job of capturing a larger number of data points with greater and greater granularity. The result will be massive opportunities for technology to solve real problems using this plethora of data. And I look forward to funding many of those solutions for years to come. But they will not likely be "Big Data" solutions -- they'll be advertising or price optimization or travel or loyalty or genomic solutions….

I am thrilled to have invested in Splunk when Erik Swan, Rob Das and Michael Baum first hatched the brilliant idea. It is an unbelievably powerful data platform. And it enables companies to measure and manage their businesses in ways never before possible. But the real opportunity for investment these days is largely not in Big Data in and of itself. [2] The most interesting Big Data opportunities today will take advantage of Big Data as a platform. The next generation of billion dollar applications and services will necessarily be data aware and will be differentiated based upon their ability to extract insight and value from the massive amounts of data upon which they are built. By those standards I've been a Big Data investor for the last decade and I look forward to continuing to be a Big Data investor for decades to come.

[1] Inrix is a great example of a company that uses data as a platform. Inrix collects massive amounts of data to produce from hundreds of thousands of vehicles on the roads at any give time to produce a differentiated service. Using information about vehicle location, speed, temperature, wiper speed, etc., Inrix is able to provide traffic data that is more accurate, more predictive and more valuable. I recently spoke about Inrix's use of data at the Web 2.0 Summit. You can find a video of that talk here.

[2] There will likely be some interesting opportunities in enabling technologies -- tools that help companies collect, store, manage, de-dupe, etc. data across the enterprise.

The Wisdom of Jeff Bezos, Part 1

On a plane flight the other day I was catching up on an issue of Wired Magazine that had sat in my backpack for several weeks (as an aside, Wired continues to be my go-to airplane reading -- it is so well written, well designed, well researched, always entertaining -- I definitely qualify as a Wired fan boy). In December's issue there was a great article on Bitcoin. What an amazing story of markets run amuck (reminded me a bit of our current gold and oil markets). There were a dozen Steve Jobs tributes, as interesting for what they said about Mr. Jobs as what they said about those lionizing him (George Lucas, Penn Jillette, David Kelley…). But the article that really sucked me in was an interview with Jeff Bezos.

The cover of the December issue of Wired is adorned with the better part of Jeff Bezos' head (I think that 2/3rds of Jeff's head looks even more like Andre Agassi than his full head). The cover reads "Jeff Bezos started with books. Now his company dominates the web in more ways than you think." The cover may not be giving us the credit we deserve. I can think of lots of ways in which Amazon dominates the Web. Every book, DVD, CD, Lego set, remote control car, electric razor, electric toothbrush, obscure french soap, Kinder chocolate bar, etc. etc. that I buy online comes from Amazon. Every time I pay for a great project on Kickstarter (most recently this important documentary on William Kamkwamba), I do so using Amazon payment services. And practically every startup that pitches me is running some part of its infrastructure on Amazon Web Services. The world we live in would be a very different -- and much worse -- place without Amazon.

Given the incredible impact that Jeff Bezos has had on the digital landscape, it isn't surprising that his interview is filled with smart observations and valuable insights into company building. In particular, I was thrilled to read Bezos' articulation of the value of maintaining a longterm outlook. I have often warned would-be entrepreneurs that company building is a marathon, not a sprint. It seems to me that there has been a fair amount of near-term optimization going on in recent years at the expense of long-term thinking. Bezos takes the opposite tack. In his words, "If everything you do needs to work on a three-year time horizon, then you are competing against a lot of people. But if you're willing to invest on a seven-year time horizon, you're now competing against a fraction of those people, because very few companies are willing to do that." He's right. Very few companies take a long-term approach. At August Capital, our goal is to fund those entrepreneurs -- entrepreneurs who think big, or maybe more appropriately, who think long.

Great companies are built over decades, not years. And great CEO's think in decade long time horizons. If you look at the evolution of Facebook and Facebook Connect, it isn't happenstance that Facebook's tentacles are now so far-reaching. Those close to Mark Zuckerberg tell me that his vision of Facebook as the social graph to everything dates back to the early days of the company. Mark's goal has always been to build an important company, not just to make a bunch of money. And building important companies takes time. Mark could have learned that philosophy from Bill Gates (who's vision for Windows emerged and blossomed over decades) or Steve Jobs (who's understanding of the interrelatedness of software and hardware drove a product strategy that over two decades captured the worlds imagination) or Scott Cook (who's maniacal focus on the needs of small business owners -- who are always fighting for resources, visibility and time -- has changed how practically every mom and pop in America does business). But he would be just as well served to study at the side of Jeff Bezos. Jeff describes Amazon as "stubborn on vision and flexible on details." In the vein of "good things come to those who wait," Jeff tells Wired, "you don't know how long it might take, but you know it will happen if you are patient." That patience, combined with persistence, is a testimony to Jeff and is a big part of Amazon's recipe for success.

New entrepreneurs would be well served to learn by Jeff Bezos' example. Smart. Thoughtful. Patient. Jeff has demonstrated over two decades that he has the vision and leadership to create one of the most important companies in the world. And he has the stubborn genius and unworldly stamina to be a powerful force for decades to come. I missed the opportunity to fund Jeff when he came around Sand Hill Road (I handn't yet snuck my way into the venture business). But I sure hope I don't miss the next Jeff Bezos. It is the rare entrepreneur who has the capacity to build a great business day in and day out, while planning a decade ahead.

Aardvark: Answering the Tough Questions

When Google was out pitching their business to VCs, the reaction of many was "search? isn't that problem already solved?" And, in many ways, it was. Yahoo was well established. AltaVista and HotBot had all the geek cred. And there were plenty of other search options out there. So why in the world would you fund another search engine? (answer: to get really really rich.)

Today, more than a decade after Google got started, one once again could reasonably make the assumption that search is a solved problem. Why would a VC invest in search when Google has virtually cornered the market? The short answer is that many VCs are deeply afraid of missing the next Google (and who can blame them -- Google was the best venture investment EVER). But that's a crappy reason to invest in search. (In fact, it is a crappy reason to invest in anything.) There are plenty of other reasons to look for yet another paradigm shift in search.

I believe that the best reason to continue to invest in search is that search engines are getting worse by the day. Why is that? For one, the amount of content on the Web continues to grow at a staggering rate. While there may once have been a mere handful of definitive sources for any given search, there are now thousands of relevant results for virtually any topic. That problem is exacerbated by the explosion of user generated content.

Far more problematic for search, however, are the economic incentives around the whole search eco-system. There is huge money to be made in search and all savvy online businesses are acutely aware of that fact. Because so much money is at stake, herculean efforts are put into gaming the system. Search Engine Optimization (SEO) has become an economic imperative for all businesses. And the object of SEO is not to get people the most relevant search results to their queries. The object of SEO is to drive the greatest amount of traffic possible to the optimized websites. In other words, the economic incentives of the search business assure that huge efforts are put into making search results less relevant, not more so.

Given those realities, it has been clear to me for some time that important new search technologies would have to emerge to help solve the "decreasing quality of search results" problem. Enter Aardvark. The Aardvark founders -- a group of entrepreneurs hailing largely from none other than the Google mother ship -- pitched me on the power of injecting human knowledge and relationships into the search process. By drawing upon the knowledge of your friends and their friends, the Aardvark founders surmised that you would be able to get more accurate, more relevant, better tailored answers to a huge range of subjective questions (e.g., "Where's the best place to eat sushi in Palo Alto?" "How can I best convert my VHS tapes to a digital format?" "I love The Decemberists -- any other bands out there that I should be listening to?" etc. etc.) Thus, the Aardvark team went about building the necessary technology to solve that problem, and I had the good fortune to fund them in that quest.

This week the Aardvark team is launching the fruits of that labor at South By Southwest (SXSW). They have built a "social search engine" that lives inside your IM and email. It allows you to ask questions of Aardvark, which then goes about determining who among your friends and friends of friends is most qualified to answer those questions. As the Aardvark team point out in their blog, Social Search is particularly well suited to answer subjective questions where "context" is important. Aardvark allows you to gather that context, both implicitly through the relationships you have with the answerers, and explicitly through the conversations between questioners and answerers. The resulting answers prove stunningly well-tailored to the person asking the question. And they avoid the pitfalls of the current search engines -- they are not subject to the vagaries of the proliferating user generated content, nor of the economic manipulation of search results.

I'm certain that there will be ongoing innovation in and around search. Getting the best possible answer to any question -- objective or subjective -- that can be arbitrarily posed, is a monumentally challenging problem. Aardvark goes a long way to addressing the shortcomings of search today and I am excited to see it roll out to a larger group of people.

Splunk: A Software Enabled Platform for Data Search

When I first met with the team at Splunk, they were working away on building a system that could accurately track a transaction as it traversed the entire enterprise stack. If the transaction broke somewhere along the way, their software could help IT discover the cause of that failure. While it was clearly a pain point for some businesses, there was no clear customer and the value proposition was a relatively hard one to articulate. But the technology they were building created a whole lot of intelligence built on the fumes of the data center (namely the log files). I was interested in what they were doing, but not interested enough to fund them. One day I got a call from Michael Baum, CEO of Splunk. He told me that they had "figured it out" and that we should meet up. I was certainly game to hear what they had figured out and we got together again a short time later.

So what had Splunk figured out? They had figured out that if they could track, manage and correlate log files across the entire data center in near real time, that they could create the killer IT Search Engine that would allow an end user to see into their enterprise stack in a way never before possible. The Splunk guys showed me a very simple example using Voip data and how one could track all systems that touched a particular extension by simply searching for that extension in the Splunk engine. I was an instant believer -- it was clearly a better way to manage the massive amounts of IT data that exist in enterprises today. I invested in the Series A and the Splunk team got to building the software that they had envisioned.

A short time after investing in Splunk, I was meeting with a group of managers from one of August Capital's biggest Limited Partners (the folks who invest in our fund). I was describing for them what Splunk was planning to build and they asked me "so what's the market size for that?" I quickly answered as best I could -- "I have no idea." Needless to say, this was not the most satisfying answer they had ever received and they stared back at me with a look that suggested perhaps I should come up with a better answer. But the reality was that I didn't have a better answer. Not because it was unclear if there was any market for what Splunk was building. But, more importantly, because once Splunk had built their search engine, it was unclear what market they would go after. I explained to my investors that Splunk had a number of multi-billion dollar markets in which they might play (management, compliance, BI, security, capacity planning, development, etc.) and the only question was which ones they would choose to go after first.

That conversation with my Limited Partners was over two and a half years ago. And since that time, the Splunk team has built precisely what they promised -- a large-scale, high-speed search technology for your data center. But despite the fact that Splunk's software has been downloaded by over 100,000 users and despite the fact that there are now more than 350 paying enterprise customers (including 21st Century Insurance, BEA, British Telecom, Catholic Healthcare West, Chicago Mercantile Exchange, Comcast, Dow Jones, FedEx, Fiserv, GE Consumer Finance, LinkedIn, Mantech, Mozilla.org, NASA, Shopzilla, Telstra, U.S. Department of Energy, U.S. Department of Justice, U.S. Department of State, Vodafone and Yahoo!), I would still have a tough time answering the question posed by my Limited Partner.

Splunk has not built an application. Nor is Splunk merely selling software. Splunk has created a software enabled platform that continues to be extremely broadly applicable. Is Splunk mission critical when it comes to maintaining availability of large scale enterprise systems? Yes. Is Splunk invaluable in the fight to maintain the security of your data center? Yes. Does Splunk uniquely simplify the process of data compliance? Yes. Can Splunk help you dig into your data and analyze it like no other solution? Yes. But, frankly, that's just the tip of the iceberg -- once you are able to query individual pieces of data across your entire data center in real time, the applicability of the platform is limited only by the creativity of its end users. And those end users are driving value back into the platform, creating applications we hadn't thought of before.

So what is the market for Splunk? i still couldn't say for certain. But I can tell you one thing -- it is awfully big. And in the venture business, that's big enough.

DoneRight: Pay For Performance for Service Professionals

It appears that Shameless Self-Promotion Week has become Shameless Self-Promotion Month. Not that I am promoting any more companies than I had originally planned. I am still only talking about those businesses in which I have invested on behalf of August Capital. But, it turns out, it takes more time than I had anticipated to sing the praises of such a fantastic group of companies.

Just this past Friday, Craig Syverson and I recorded the latest installment of VentureCast at University Cafe in downtown Palo Alto. I had recently been discussing with a friend the fact that University Cafe has very much become a part of the startup economy again. Folks like Rajeev Motwani and Ron Conway spend a fair bit of time meeting with companies at University Cafe. Practically any time you're there you can look around a see deals getting done. In fact, shortly before Craig and I started recording VentureCast, the guys at the table next to ours were banging out the details of some sort of financing. Unfortunately, they had finished their negotiations before we started recording, or we might have captured the blow by blow on tape.

A couple years ago I was meeting with an executive from one of my portfolio companies at University Cafe. While we were talking, Rajeev wandered by and told me to come say "hi" before I headed out. Rajeev was talking with a smart group of guys about their new company in the local advertising space. Those folks were the founding team from DoneRight (at the time called Perform Local). I was intrigued by their business, impressed with the team, and a short time later I ended up funding their company.

The CEO of DoneRight was -- and is -- Paul Ryan. Paul is a phenomenal technologist. He had most recently been the CTO at Overture and, thus, had been part of the team that had pioneered the very concept of pay for performance. The idea at DoneRight was to create a pay for performance local advertising network that would allow local service providers to purchase valuable leads through DoneRight. By aggregating demand through on and off-line lead generation techniques, service providers could use DoneRight as their marketing arm, paying only for the leads they received. On behalf of the consumer, DoneRight would screen service providers for professional licenses, BBB complaints and the like, and only accept professionals onto the service that DoneRight was comfortable guarantying. Given this data-intensive, data-driven service, there was no one better to build DoneRight than Paul.

Because local services are . . . well . . . local, DoneRight has been rolling out their network on a city by city basis. With each new city, DoneRight gains more insight into how best to provide consumers with the information they need to make informed buying decisions, while providing service professionals with the channel they need to scale their businesses. The service launched in San Diego, and has rolled out to Denver, Chicago, Houston and Dallas over the course of this year. In 2008, DoneRight will expand considerably, using what they've learned in their first five metropolitan areas to optimize the DoneRight experience on a nationwide basis. To date, over 1,000 home improvement professionals have entered into prepaid performance agreements with DoneRight. While other online services have failed to gain meaningful sales traction with local businesses, DoneRight has been able to sign up its first thousand paying customers in record time, because it is providing real, measurable results for its business customers -- In the short time that it has been doing business in these few metropolitan areas, DoneRight has processed nearly 500,000 consumer requests for referral to a DoneRight certified service professional. And that number will scale dramatically as DoneRight expands nationwide.

DoneRight is another business in which I invested because of my love of data. Ultimately, the lead generation business is a numbers game. How much does it cost to acquire a lead? What will a service provider pay for it? Does it scale? Those were the questions that needed answering. And given Paul Ryan's background, I invested, confident that Paul would be able to produce the necessary infrastructure to answer those questions and create a scalable business. And he has. Better yet, as Paul and the company learn more about lead generation on a local level, they are able to apply that knowledge to each of their metropolitan areas, making each city more efficient and the overall business decidedly more profitable. If you live in San Diego, Denver, Chicago, Houston or Dallas and are looking for a guaranteed service professional, DoneRight.com is the place to go. And if you are living elsewhere, stay tuned. DoneRight will be coming to your neighborhood soon.

LiveOps: Why Maynard Webb Wants to Run Your Call Center

When I first met with LiveOps' CEO Maynard Webb, I asked him what it was about LiveOps that would get him back to work. After all, Maynard had just recently retired from Ebay where he had served as COO. While head of technology at Ebay he was credited with stabilizing a platform that, at the time, was on the verge or implosion. His reward for fixing the technology mess was a license to fix everything else as COO, which he did with great aplomb. Maynard had a well earned reputation as a tireless worker. Clearly he had earned himself a summer or two (or ten) off. But when Maynard heard the LiveOps story, he found himself back in the saddle.

So what was it about LiveOps that Maynard found so exciting? In his words it was the ability to do well while doing good. That may seem surprising when you consider that LiveOps is a call center software and services platform. At its core, LiveOps is an incredibly sophisticated VOIP software platform that allows a customer to route, track and manage calls in ways that none of the traditional systems allow. And one of the most important byproducts of LiveOps' all-IP system is that agents can be located anywhere that there's a web connection. They may all be located in a call center in Ohio, or they may be scattered throughout the country in their homes.

LiveOps is the biggest customer of its own call center software. Along with selling its platform to big corporate clients who are looking to better manage the performance of their agents (wherever they may sit), LiveOps uses its own software to manage the LiveOps distributed call center that now encompasses 13,000 active agents and growing rapidly. LiveOps agents on the whole tend to be stay-at-home moms and home-bound individuals who are looking for a way to make money while maintaining the flexibility to work where and when they choose, as may be dictated by their own personal circumstances. Which is precisely what appealed to Maynard. As he told me, one of the things he was most proud of with Ebay was that it empowers a whole host of entrepreneurs to create businesses that best suit their particular life circumstances. The same is true of LiveOps. Rather than outsourcing jobs to other countries, LiveOps insources opportunities to underemployed, but well-educated, individuals who need the flexibility to control their own work environment. And, as Maynard pointed out, the more successful LiveOps is at serving its customers with the most efficient and most effective call center available, the greater the number of individuals the company can empower to take control of their own circumstances.

There is another byproduct of this massive distributed phone force; LiveOps is the only call center in the world that can massively scale in short order to suit the needs of virtually any customers. One great example of this capacity to scale came immediately after the Hurricane Katrina disaster. The American Red Cross was inundated with requests to donate on behalf of the victims of the hurricane. In an effort to support the generosity of the country, the Red Cross went out looking for a call center that could field the enormous volume of calls for donations. Ultimately, only one company could deliver the necessary scale to support the overwhelming call volume, and that was LiveOps. In a matter of hours, LiveOps was able to route the Red Cross's 800 number to thousands of agents throughout the country, who immediately were able to service the generosity of hundreds of thousands of donors.

LiveOps recently put that capacity to good use again when American Idol had its Idol Gives Back campaign. During two separate American Idol shows, the stars of the show promoted a charitable giving program that included an 800 number on the screen and on their website. While the producers of American Idol suspected that the volume of giving would be quite large, they could not scope the scale of the participation with any specificity. That was no problem for LiveOps. They were able to scale the size of their phone force with demand, continuing to take pledges long into the night, and were unencumbered by the limitations of traditional call centers. What's more, they were able to give the American Idol producers instant feedback as to the scale and velocity of the program. In the end, LiveOps deployed over 3,400 agents who answered approximately 200,000 calls and collected more than $6 Million for charity. That's the sort of thing that makes Maynard Webb excited to come in in the morning. And it is the sort of thing that makes me thrilled to be an investor in LiveOps.

In Jerry Yang I Trust

I know that I just started Shameless Self-Promotion Week yesterday but I need to briefly interrupt SSPW to comment on today's huge news. As I am sure all of you know by now, Terry Semel has stepped down as Yahoo's Chief Executive Officer and Jerry Yang has taken his place. What many of you may not know is that Jerry and I have been friends for two decades. Jerry and I were dorm mates at Stanford our freshman year and have been friends since. So I think that it is perfectly fair to assume that I am completely biased when it comes to Jerry and to Yahoo. That said, I am thrilled to hear that Jerry has taken the reigns at Yahoo.

Jerry Yang is one of the smartest guys you'll ever have the good fortune to meet. He is also one of the most ethical and decent executives out there. But, more important still, Jerry is profoundly motivated and motivational. He has the capacity to reenergize the company that he started twelve years ago and helped grow into the leading new media property on the web. At a time when it is very much in vogue to dump on Yahoo, I remain extremely bullish on the future of the company.

Congratulations Jerry! I look forward to seeing the great stuff you do with Yahoo in the coming weeks and months.

The Widget Economy

As I sit on a plane today flying back from Spain where I spoke at Chris Shipley's Innovate Europe conference, I find myself fixated, once again, with widgets. There's all sorts of activity in the widget world. The biggest widget news, of course, is the sale of PhotoBucket to MySpace. Meanwhile Slide and RockYou are battling it out for "Biggest Widget Company in the World." And new widget companies/experiences are emerging each week. This universe of web services is what Fred Wilson has long been espousing as the cornerstone to Web 2.0, and it continues to evolve rapidly. And that evolution has been a fascinating one to watch (a bit like watching your character evolve in Will Wright's Spore -- some choice, some interaction, some happenstance, then real tangible change).

As I wandered the pavilion floor of the DEMO conference earlier this year, the challenges posed by the "widget economy" became pretty clear. I talked with lots of companies, and in particular found myself gravitating towards the various widget providers. But what struck me as I talked with the latest generation of media platforms -- be they for photo sharing or video sharing or animation -- was that these companies are going to face a serious challenge when it comes to monetizing their traffic. That challenge is a byproduct of their precarious relationship with the "host" services to which they attach. To the extent those relationships are symbiotic, the combined organism will thrive. However, to the extent those relationships are, in fact, parasitic, the host will need to shed the parasite in the name of survival.

When determining if a widget relationship is symbiotic or parasitic, it makes sense to look at a few different factors. The most widely acknowledged, of course, is monetization. If a widget is doing nothing to monetize its host's traffic (e.g., when Flickr photos are served into MySpace), it might be viewed as neutral or perhaps symbiotic for freely increasing the functionality of the hosts site. If a widget is seeking to monetize the host's viewers (e.g., ads or branding on a voicemail widget), the host may view that widget as parasitic. This relationship, of course, assuming there is a zero sum game of monetizable attention on any given host service, therefore the fact that a widget is monetizing some of that attention means the host has lost that revenue opportunity in return. While I think that a number of hosts may view it that way (there is every indication that MySpace and Facebook do), my view is that if a service's functionality is significantly enhanced as a result of the various widgets that attach to it (e.g., the MySpace experience was massively enhanced early on by the work of both Photobucket and YouTube), one might argue that the widget experience is always symbiotic -- enhanced functionality in exchange for traffic, monetized or not.

Herein lies the tricky dance that is going on in the widget space right now. And the first episode of Dancing with the Widget Stars appears to have ended with MySpace taking home Photobucket after a winning run on the dance floor. MySpace and Photobucket weren't always the well honed dancing machine they appear to have become. Only a few short weeks ago, Photobucket attempted to assert its ability to monetize its traffic on MySpace by serving up branded slideshows. MySpace's reaction was to refuse to dance with Photobucket at all -- shutting off all 15 million of Photobucket's users in MySpace. The question remains who that move hurt more, Photobucket or MySpace? Was it a purely parasitic relationship that MySpace could shed at will without its user base revolting. Or was it a symbiotic relationship, in which both MySpace and Photobucket were hurt by the efforts to shed Photobucket slideshows from the MySpace service? To the outside observer, it would appear that both parties determined the relationship was much more symbiotic than MySpace might have originally hoped and, as a result, MySpace is buying Photobucket to both enhance the user experience and better monetize its own traffic. That feels like a win-win.

While the vast majority of widgets companies have engaged in a strategy of achieving distribution first and monetization second, a few companies have attempted to strike that balance up front. The most notable company on that front is my own portfolio company, VideoEgg. Rather than go down the path of having millions of VideoEgg videos embedded on host sites before engaging in the conversation about monetization, VideoEgg established those relationships early. When VideoEgg monetizes a video on one of its partner's services, that revenue is shared. As a result, the hosts are happy to promote video on their services, and VideoEgg is able to monetize the over half a billion videos it is now serving each month into various host services (and the opportunity to share revenue grows each successive month as VideoEgg's traffic continues to grow rapidly). What's more, social networks, community sites, information services, etc. no longer need to expend the daunting resources necessary to create their own video service. Rather, they are able to leverage VideoEgg's significant development and hosting dollars to give their end users the best available video experience. That again feels like a win-win. Perhaps MySpace and others would come to similar agreements with photo hosts, avatar companies, SMS providers, etc.

One clear advantage to the VideoEgg approach is that it goes a long way to minimizing channel conflict. There is a general sense in online media today that a large and definable audience will necessarily draw advertisers. While as a general rule I think that is true, when it comes to widgets one challenge for advertisers is determining the right channel for their advertisements. Should they advertise on MySpace directly, or should they advertise on RockYou and Slide in order to get distribution on MySpace? Media buyers have a much easier time buying advertisements on a site when the source of that inventory is clear. Thus, when multiple parties sell advertisers inventory on a particular service, the sale becomes significantly harder for each of the parties involved. Given that, the large social networks feel the pain of channel conflict when there is "unsanctioned" selling of ad inventory on their sites by third parties. This necessarily makes their job of selling ad inventory on their own services more difficult and devalues the inventory that they have. So even if these hosts view the widget providers as generally symbiotic, they may find it hard to allow third party advertising on those widgets given the channel conflict that necessarily ensues.

There is one additional wrinkle to this evolving widget economy. In the wake of massive distribution for a number of successful widget companies (consumers are creating over 200K new widgets a day on both RockYou and Slide, resulting in tens of millions of page views a day), there are an emerging set of service providers that are seeking to act as widget aggregators. Companies like SplashCast, Magnify.net, MixerCast, etc. are working to produce a unified experience whereby consumers or producers can aggregate other widget services within a single experience. In other words, one might create a video channel that draws video from YouTube, Photobucket, etc., or a photo experience that draws from Flickr, Slide, and others, or, as is the case with MixerCast or SplashCast, you might intermingle media formats (video, photo, music) from any number of third party sources. The end result is a curated experience drawn from various other widget providers (and, perhaps, some content that is proprietary to the service doing the aggregating). The challenge these widget aggregators face is, again, one of monetization. If they become significant destination sites like a MySpace or Bebo, they will certainly control their economic fate. However, the strategy these aggregators appear to be pursuing is to have their experience embedded into the same hosts that the widgets are going after (MySpace being the gorilla, of course) -- so instead of embedding a widget into your MySpace page, now you are embedding a widget of widgets. If it is challenging to work out the economics for a dominant host and a single widget provider, imagine the challenge of working out the economics for a host, a widget aggregator and an arbitrary number of widget providers being aggregated.

Despite these challenges, I am extremely bullish on the widget economy. I believe that the vast majority of these relationships are indeed symbiotic -- great experiences being enjoyed by millions of consumers are enhanced by additional great experiences developed by third party widget companies. Unmonetized, these widgets are a gift to the hosts -- they allow for a more engaged consumer with a more engaging experience and cost the host nothing. Thus, it will be up to the hosts and widget companies to sort out the economics in the coming months and years. I expect significant progress on that front this year and look forward to being a part of that evolution as I continue to invest in hosts, widget services and content aggregators alike.

The Softwareless Software Company

In 1991, Andy Rappaport, my partner at August Capital, wrote an award winning Harvard Business Review article entitled, "The Computerless Computer Company." As described by HBR, Andy's paper argued that:

By the end of the century, the most successful computer companies will be buying computers rather than building them. Defining how computers are used, not how they are built, will create real value. Three new rules will guide the computer industry's strategic transformation: 1) compete on utility, not power; 2) monopolize the true sources of added value; and 3) maximize the sophistication of the value delivered, while minimizing the sophistication of the technology consumed.

Well, that century has come and gone and Andy hit the nail on the head. The real value in computers was all about utility. Dinosaurs like Digital Equipment Corporation and Wang that were unable to evolve to deliver utility rather than compute power disappeared in the 1990's, while companies like Microsoft and Lotus thrived. Computers were no longer viewed as valuable independent of the software they ran. They became commodities, upon which value was created through applications.

In the context of Andy's description of the computer industry in the 1990's, I believe that a new era is upon us in the 2000's. I believe that we have progressed from the "Computerless Computer Company" to the "Softwareless Software Company." Taking the evolution of computer company one step further, "computer" companies are no longer about selling software, but rather about delivering services. Hosted services have the distinct advantage of meeting all three of the "new" rules suggested in the Computerless Computer Company: 1) they compete purely as a utility; 2) they monopolize the true sources of added value; and 3) they are designed to deliver the greatest possible sophistication with the simplest possible user experience.

Perhaps the best evidence that we are entering this era of Softwareless Software Companies is Microsoft's "Live" push. At a recent VC Summit, numerous Microsoft execs, including Steve Balmer himself, talked about Microsoft's focus on rolling out service offerings under the moniker of "Live." They are now offering LiveDesktop, LiveSearch, OfficeLive, LiveExpo, LiveMeeting, etc. And in support of their massive push into the services space, Microsoft has just opened a new datacenter that will ultimately span just shy of half a million square feet (I hope to write more specifics about this some time soon).

In the era of the Softwareless Software Company, in which value is measured by utility, simplicity and reliability, the greatest asset may ultimately be the near infinitely scaling data center. It will certainly be important that the new computer company deliver great utility through its software-delivered service. But the most significant differentiator may ultimately prove to be the capacity to scale with massive demand. And those companies best situated to deliver that scale will be the winners. Thus, it is no surprise that just up and down the river from Microsoft's new datacenter in Quincy Washington, both Yahoo and Google are contemplating building their own gargantuan datacenters. The Softwareless Software Company may have come full circle from the Computerless Computer Company and be more about hardware and infrastructure than about software after all.

VC, VCs, Tech VC, a VC, The VC, Sand Hill Road VC . . .

After reading a post by Nelson Minar about Google's Webmaster Tools, I ran on over to Google to see what I could learn about VentureBlog. The setup and verification process for the Webmaster Tools was really simple. After having demonstrated that I was the rightful owner of VentureBlog, I was able to see an interesting analysis of those searches and clicks on Google that point to VentureBlog.

Not surprising, four of the top six Google queries that include links to VentureBlog are "venture capital," "venture," "venture capitalist," and "venture capitalists." The Google tools also tell you the average top link position held by your site for any given search (in other words, what was the highest position held by a link to your site for that search). For all of these "venture capital" related terms, VentureBlog is in the top ten organic links. That makes perfectly good sense to me given my natural tendency to write about Venture Capital. In contrast, however, there is not a single search in my top twenty that includes the term "VC." Not "VC" or "VCs" or "What's a VC" or "Ninja VC" or "Sand Hill VC" or "Tech VC," and certainly not "A VC." Nary a single "VC" search term in the VentureBlog top twenty.

For the life of me, I can't figure out why that is. Admittedly, I don't have "VC" in the title of my blog, like Redeye VC or BeyondVC. But I certainly reference the term "VC" often enough, even occasionally in the titles of my posts. So what's keeping me down? Hopefully as I spend more time looking at the Google Webmaster Tools, I'll be able to better understand the dynamics of page rank.

I thoroughly enjoy writing VentureBlog. As I've said many times before, it gives me the opportunity to engage in a conversation with a really smart community of entrepreneurs. But it also affords me an incredible education. How else would I get an inside view of things like page rank, search dynamics, linking, referral traffic, viral growth, advertising dynamics, etc.? The understanding of each of these elements is invaluable when evaluating Internet businesses and VentureBlog has afforded me a front row seat to the show. I look forward to continuing to use services like Google's Webmaster Tools to make the most of that front row view.

Update: A commenter below writes "Couldn't you be a little less obvious for fucks sake?" Jeesh. Of course I could. In fact, I don't think that I could be any more obvious. That was the whole point. So much for irony.