VentureBlog

A Hairy Market For China

I read a very interesting story in the Wall Street Journal on Wednesday called A Head Trip: Indian Hair Finds Parts in Hollywood. The story was about the human hair market. Apparently the United States imported $47 million in human hair last year. It's big business. Here's how the value chain works. Hair wholesalers pay $45 to $75 per pound for strands of human hair. They then sell that hair to hair "manufacturers" for approximately 30 cents a strand. Hair manufacturers then process the hair and sell it to international distributors for approximately $1.50 a strand. Hairstylists then buy that hair and sell a full hair weave for between $1,500 and $3,000 (sadly, I don't have the data on how many strands of hair are used in a typical weave). And thanks to all these participants in the hair market, Lisa Marie Presley is able to instantaneously have long luxuriant hair.

But here was the really interesting part of the article to me. It talked about the temple at Tirupati in India from which one of the leading international hair wholesales buys tens of thousands of pounds of human hair each year. Millions of visitors to the temple annually have their heads shaved in thanks to Lord Vishnu for good events that have occurred in their lives. The temple then collects up that hair and sells it in the international hair market. Some of those who are shorn in honor of Lord Vishnu have no idea that their hair is being sold, but regardless no one is paid for the hair. As a result, the proceeds from the sale of hair is essentially pure profit. The hair is a costless byproduct of prayer at the temple and the temple uses it to its full advantage.

Other than it just being a fascinating read, the thing that struck me in reading the article was the incredible advantage the temple has if it ever comes to price competition. With a zero cost structure, they can never be underbid. Other suppliers of human hair are at a disadvantage because they have to pay for it. Ironically, the market leader in the human hair market is China, which is for once at a price disadvantage. We often have the conversation with presenting companies about the difficulty of competing with Chinese manufacturers because their cost structure is so incredibly low. As can be seen with numerous consumer electronic devices, networking products, etc., once the technology behind those devices becomes commoditized, Chinese manufacturers are at an incredible advantage given their extremely low cost structure. Not only has the pervasion of Chinese manufacturing lowered the cost of numerous devices and sped the process of component commoditization, it has changed the way in which startups must look at sales and marketing strategy for device enabling technologies. But, hey, at least those startups can take some solace in the fact that China is at a disadvantage when it comes to producing human hair. Who would have guessed?

Can The Internet Stay Neutral?

The conversation at iLaw yesterday repeatedly came back to the danger of choke points on the Internet. The morning discussion led by Professor Yochai Benkler focused upon the broadband last mile. As Professor Benkler pointed out, given the high infrastructure costs involved in hardwired delivery of broadband to the home/business, the most price efficient way to solve the last mile problem would be to create a "perfectly regulated" monopoly. But since our government has proven a relative failure at creating "perfectly regulated" monopolies, we are left with the alternative method -- price competition. The government has gone to great lengths to promote an alternative to the incumbent RBOC monopoly (with, of course, the RBOCs kick and screaming) and, as a result, we now have a duopoly. The last mile broadband problem is now solved by Cable and DSL, to which Professor Benkler asks "do two pipelines a competitive market make?" The question implies the answer -- no.

Bad Laws Don't Make Good Technology

Andrew's recent post on Sarbanes-Oxley made me think back to all the pitches I've heard that have implicated legislation. There have been more than I care to remember. Certain legislation seems to garner more suggested startup advantage than others. I think the hands down winner has got to be HIPAA, the legislation concerning protection of medical information. For a period of time it felt like every third piece of technology I'd have pitched to me was practically mandated by HIPAA -- wireless security for hospital 802.11 networks, software to manage secure email communications with patients, provisioning and permissioning for network applications, etc. These days Sarbanes-Oxley has taken on a similar feel. And before that was e911.

With each new piece of legislation mandating a standard or requiring some service, a plethora of startups professing to solve those problems have followed. Yet, my reaction to each of these startups has been the same -- the solutions being proposed to address these governmental mandates are almost as artificial as the mandates themselves. In my mind, great technologies are often a reaction to pain-points felt by entrepreneurs in the context of their past roles. People who themselves have felt the pain are in the ideal position to assess the acuteness of that pain and find the best possible solutions. Despite that fact, individuals proposing to address new legislative mandates do not approach the problem from the same context because the pain being addressed (the legislative mandate) is being manufactured by the government and therefore has not been experienced directly by anyone. Given that, I find it very hard to get my hands around any of these solutions because they feel manufactured rather than evolved.

Public Markets Drive Private Investment

I'm asked pretty frequently these days about the impact of the rising market on the venture business. People want to know if VCs are putting more money to work now that the market has stabilized a bit and it looks like there may be an IPO market some day soon. It's a perfectly reasonable question and the short answer is "yes." But the full answer is much more involved.

The Market For Money

I just read this on Scott Loftesness's blog and thought it was worth sharing. Scott was an EVP at Visa in the early 90's and his blog is an unbelievably comprehensive discussion of the payments space. Here is his discussion of Visa's recent announcement that the Visa system had reached $1 trillion in annual United States transaction volume. It is an amazing growth curve and reminds me of a comment Peter Thiel, the former CEO of PayPal, made to me one day when we were having lunch: when he was pitching PayPal to VCs he was tempted to describe his market opportunity as the "market for money." Visa's numbers prove that that is precisely their market. VCs are always looking for big markets to penetrate and the market for money certainly qualifies. Here are Scott's thoughts:

Visa USA announced this morning that, for the first time, its annual sales volume exceeded $1 trillion.

The record usage means that an average of $32,000 went through the Visa system every second of every day over the 12-month period that ended March 31 - or nearly 10 percent of the 2002 U.S. Gross Domestic Product.

"One trillion dollars is an almost incomprehensible number, but it represents clear evidence of the silent revolution we're witnessing in the way consumers pay for goods and services. It means $12 of every $100 consumers spent in the U.S. is spent using a Visa card," said Carl Pascarella, president and CEO of Visa USA. "This is an important milestone in the history of U.S. commerce. Clearly, more and more people rely upon the security and convenience of Visa credit, debit and other payment products. To put it into context, $1 trillion could buy 162,000 Harley-Davidson motorcycles every day for a year."

By comparison, $1 trillion is greater than the combined volume of all other U.S. payment organizations, a field that includes MasterCard, American Express, Discover and others.

Just before I left Visa in 1994, I remember having a discussion with a colleague about growth in sales volume. 1993 had just ended with $500 billion in annual Visa sales on an international basis. We were focused on that total growing to $1 trillion globally over the next five years. As I recall, the US in 1993 was about 40+% of the global total -- so the growth in US volume over the last nine years has been pretty amazing. Of course, this is also one of those statistics that has a nice built-in inflation hedge too (the numbers just keep growing!). $32,000 a second -- at a $50 average ticket that works out to an average of 640 Visa transactions per second.

Hire, Hire, Hire -- Fire, Fire, Fire

Here's an interesting snippet from the New York Times daily business newsletter.

Wall Street firms' bloodletting has killed more jobs in the last two years than any other comparable period in history. According to a report by the Securities Industry Association, 80,400 jobs -- or 10 percent of the total -- were lost between April 2001 and February 2003. In sheer size, the number of layoffs sets a record, the SIA said.

This strikes me as just another example of how the market pendulum is swinging violently. There is no question that the Internet bubble resulted in an astonishing and disproportionate stock run-up. But I think that there is equally no question that the reaction to the bubble has been a disproportionate depression of the stock market. And just as Wall Street's reaction to the bubble was to hire, hire, hire... its reaction to the correction has been to fire, fire, fire.

I look forward to the normalization of the market. Not because I feel sorry for all those Harvard B-School grads with no big firm to join. But rather, because only with a stable public market that rationally embraces companies that demonstrate product and sales leadership will exits appear more predictable and will start-ups find it easier to raise capital at all stages of their growth.

Do Good Work

I had lunch last week with Brooke Coleman and and Katherine Blum, a couple of great attorneys from Gunderson Dettmer. We were talking a bit about the absurd pace at which legal transactions (financings, partnerships, mergers) took place in the late 1990's. If you wanted to make your clients really happy back then, all you had to do was get your work done quickly -- really quickly. These days speed rarely holds the same importance. I shared with Brooke and Katherine what I believe is the key to being a successful lawyer in the Valley -- "do good work." That's it. If you want to make people happy, do good work for them. Not surprisingly, Brooke and Katherine were underwhelmed by my shared wisdom. But I think it points to the reason we find it hard to invest in service businesses. Service business are ultimately only as good as the people who provide the service. And if I learned anything in the years that I recruited for law firms, it's that it is really hard to scale a business that is dependent upon identifying and attracting great people. Technology businesses are far more leveraged than service businesses. A relatively small number of software developers can build a product with huge reach. Whereas a relatively small number of service providers can service a relatively small number of organizations. Don't get me wrong, service businesses can be great money makers. But as a general matter they are lousy early stage venture investments.

Uncle Sam's Huge IT Budget

There was an article in the Business Section of Sunday's San Francisco Chronicle entitled "Selling to Uncle Sam." The basic gist of the article is that while startups used to be reluctant to sell to the United States Government, as the government has increased its technology spending it has become an attractive customer for all infotech companies, big and small alike. According to the Chronicle, the Department of Defense will spend $364 Billion on technology products and services in 2003 (going to $380 Billion in 2004) and the Department of Homeland Security will spend $28 Billion in 2003 (going to $36 Billion in 2004). That's a whole lot of technology products and services.

My experiences over the last year or so definitely reinforce what the article suggests. Particularly in the wake of 9/11 and the "war on terrorism," the Federal Government is working hard to integrate information gathering, sharing and analysis across and among each of the departments. That is a huge project. Add on top of that the security you need to protect that massive store of data, and you've got a whole lot of technology dollars being spent. I would say one thing, however. It remains infinitely easier to sell to the Federal Government as a subcontractor to one of their trusted suppliers than to try to sell direct. But for those startups that have managed to find the right channel into the US Government, the payoff is significant.

Update: For an alternative point of view, check out this article in today's San Jose Mercury News. The article argues that despite all the Federal money out there, it is still really tough for startups to tap it and lots of startups die trying. Which is precisely my point about partnering with entities that already have access.

You can also get lots of great info in Owen Thomas' "How to Sell Tech to the Feds."

A Porsche 911 For $750

I was reading my favorite travel publication on the plane today -- USA Today. What a great paper... where else do you get a half page on the war in Iraq, a half page on Tiger Woods' quest for a third straight Masters title and a half page on the three new reality-TV style movies coming out.

But along with those fine contributions to journalism was an interesting piece by Kevin Maney on the rebirth of Iridium. You may remember Iridium. Motorola poured $5 billion -- with a B -- into launching 66 satellites that would power a worldwide satellite phone network. Despite the $5 billion investment, the company went bankrupt and measured as one of the great business failures of our day. Until today -- perhaps.

It turns out the Iridium assets were bought out of bankruptcy for $25 million by a random collection of investors (Maney analogizes the acquisition price to paying $750 for a Porsche 911 or $2 for a night at the Ritz). The new owners cut out all the bureaucracy, stabilized the system and are now operating the company in the black, in no small part thanks to the many reporters and military personnel in the Gulf using Iridium satellite phones to communicate. Maney concludes "Once a joke, Iridium might turn out to be a leader."

I have no doubt that the excesses of the late 90's have led to a number of valuable assets being available for purchase for a song. That said, I find it a little hard to view the rebirth of Iridium as a business triumph. Iridium was a bad idea. There just wasn't sufficient business in the satellite phone market to justify $5 billion in capital costs to get it up and running. That the system is now making small amounts of money is a far cry from vindication for the initial supporters of the Iridium Project. It's great news for the new investors and more power to them -- good entrepreneurs can always spot an undervalued asset -- but the $5 billion Iridium Project remains a business mistake of pretty colossal proportions.

Selling Outside Korea

I've spent the last couple of days meeting with Korean entrepreneurs and learning about their businesses. I've seen a range of software companies: some are very early stage and others are publicly traded on the South Korean Stock Exchange. In practically every instance, I have been surprised by the amount of revenue the company is making. Companies that are selling "new" technology that has been well established in the United States for some time (e.g., voice recognition software, electronic billing solutions, content management systems) are selling millions of dollars worth of their software in South Korea. Not surprisingly, however, few are selling much software outside of Korea, and fewer still are selling software outside of Asia.

I believe that the level of revenue these companies are making in Korea for technologies that would not be competitive in the United States reflects the nature of Korea itself. South Korea remains an overwhelmingly homogenous place. And Korean business seems somewhat insular -- non-Korean technologies (products in general) face real resistance. As a result, Korean built products have an unfair advantage and can get traction inside Korea where they would not elsewhere. But it also seems clear that despite revenue traction for many companies, it is a major challenge for Korean companies to break out of the local market and build an international business. So these companies are perhaps getting the worst of both worlds -- an inflated sense of accomplishment with a diminished likelihood of long-term success.