By Georges van Hoegaerden

Not for a second do I buy into the doom-and-gloom spread by early stage investors citing the state of the economy as the reason for cutbacks. While the economic situation is worrisome, much of it is generated by supposed financial and business experts that are not. To say the least.

Sounds familiar? We have a few of those in Silicon Valley too. When money is involved, some people just can’t help themselves (or rather the opposite).

Investors still have plenty of overhang to invest with and their portfolio companies are on a 5-7 year trajectory to exit, meaning the viability of their choices is determined by the value at the end, not the value in the middle or the trajectory. The macro-economic value of a startup should remain intact in an economic downturn. So, the behavior of your investor will tell you whether you “married” well.

Very few startups should be materially impacted by the state of the economy, because:

1/ Their early stage market penetration is immaterial to the overall addressable “market”, leaving enough room for growth in any economy.

2/ The majority of (consumer focused) startups generate income through indirect monetization such as click-thru advertising, which is somewhat resilient to economic aberrations (even though purchasing may not).

3/ In early stage development, monetization is secondary to land-grab, and smart operating plans have very conservative and immaterial income projections built-in.

So, the fact that investors strike fear in the minds of entrepreneurs is the same as a president of a country at war expressing similar fear; not productive. Sure you need to be cautious and count your chickens, but great investors see this as a fantastic opportunity to double-down on their investments and amplify the market differentiation rather than restrict it.

Access to capital is a serious barrier to entry that can keep competitors out. So, if you are being restricted by your investor at this point it means he’s just not that into you and is doing you more harm than good.

Tags: VC, Markets, Investment, Economy, Consumer, Subprime, Startup

By Georges van Hoegaerden

I recently watched an interview on Charlie Rose with Nassim Nicholas Taleb and decided his “Black Swan” theory accurately describes the fundamental problem in early-stage technology investing (and innovation in general).

To paraphrase Taleb; the cultural assumption is that all swans are white (and therefor black swans could not exist). So you think.

Taleb (a partner at an investment firm) believes that scientists, economists, historians, policymakers, businessmen, and financiers are victims of an illusion of pattern; they overestimate the value of rational explanations of past data, and underestimate the prevalence of unexplainable randomness in that data.

The proof that Silicon Valley suffers from the white swan syndrome lies amongst many in the foolish behavior of investors, the predetermined investment allocations based on the tagging with ambiguous acronyms (such as web2.0, SOA, Cloud computing, CRM etc.) and the mindless herding of primarily unsuccessful ideas (or copies of a few successes) at the many popular technology conferences.

I am inclined to take Taleb’s theory a bit further: I believe the majority of people are victims of an illusion of pattern, established by years of (often irrelevant) education infused with the technology Kool-Aid that confined their thinking to a predetermined direction and scope. It prevented entrepreneurs and investors from ever being able to identify true innovation until it had become part of their past. Hence the rampant number of false positives and false negatives.

Taleb further adds that black swans are actually the ones that change the industry, and that the so-called “unexplainable” events (that have no single precedent in time) redefine the future of the whole industry. And so, the search is on, not just for the investor with the right macro-economic views, morals and personality, but also the vision to spot innovation that has no precedent - the black swan.

The noise in our industry is still drowning out the music. We need to change the way we invest and improve our ability to spot black swans or otherwise we will lose the entrepreneurs that can build them. Our excuse today is not the economy but our own performance in producing truly disruptive value that can withstand the test of time. We need to put real entrepreneurs on a pedestal and throw the copycats to the curb, quickly.

Albert Einstein was right all along: imagination is more important than knowledge. That applies to investors too.

Tags: VC, Innovation, Macro-economics, Einstein, Subprime, Startup

By Georges van Hoegaerden

Silicon Valley is not dissimilar from the politics in Washington DC in the sense that its existence today is regulated by aristocratic people (investors) who are not up for re-election for another 7-10 years and have created an ecosystem that spawns more false positives and false negatives than any politician could ever get away with.

So, it is not without a smile on my face (as I have been preaching and practicing for years) that I quote Barack Obama’s innovative approach to politics that we in Silicon Valley could learn from:

Strong personalities and strong opinions
Obama looks for strong personalities and strong opinions, while the venture business is often afraid to hire people who challenge its popular opinion. Many technology companies over the years have been invaded by managers who akin to the gold-rush are looking for the gold that is no longer easy to find. We need to change too and cultivate managers that have real experience, strong vision and strong abilities to rally a team around achievable results. Let’s get rid of managers that just like politicians prefer to feed their sex drive (my first boss in the US spent his days watching porn-videos as we prepared feverishly for a major launch) and their 401K with the least resistance possible.

Think anew and act anew
Obama is shaking things up. We should too. The really new ideas in technology are few and far between. We need to build and feel responsible for an ecosystem of new financiers that fund technology ideas that do not fit the mold, rather than continue to create clubs that mindlessly perpetuate businesses that copy few successes or popular acronyms.

Extreme transparency
Obama teaches us how the disclosure of governmental documents is the floor and not the ceiling. Compared to that metric, early-stage performance disclosure is probably more than 6 feet under, or in the cellar. We have no transparency in the venture business to discover who has integrity, and who is poisoning the technology ecosystem. We need to deliver transparency in order to improve the trust in technology companies that keeps private and public investor interested.

High integrity and moral
Obama, when moving back to Chicago, took a job doing what he believed in, not what made him the most money. We need to stimulate people in Silicon Valley with a passionate desire to fundamentally improve technology adoption, rather than continue to feed people who hone their skills just to get rich.

Use it or lose it
Obama evaluates and then commits quickly. And then, when the money is forked over, you are expected to make things happen. That’s how real savvy businessmen run their companies, quite different from the puppet role many startup CEOs play to appease their boards, the source of perpetual mediocrity. We need to grow a culture of buy-in and commit, risk and reward that holds people accountable for the results.

Either we regulate the early-stage technology ecosystem ourselves or the market will do it for us - with much less grace. Already, it is predicted that 25% of the VCs will go out of business soon, freeing up LP overhang for a new crop or reallocation to a new segment. Other countries (such as China) are not sitting still, the performance of our technology ecosystem will now be challenged on a global basis.

The only way not to lose grip globally is to hold the values, that made our country vote for Obama high, and aggressively reward integrity, passion and sincerity over greed. Real capitalism rewards the good and punishes the bad. And the American dream flourishes again.

Tags: Innovation, Eco-systems, Economy, Limited Partners, CEO, VC, Startup

By Georges van Hoegaerden

We spend a lot of time with consumer technology companies and developed the following rules for success:

1/ Undeniable benefit.
The majority of companies accept the path of evolution developed by the first entrant in that segment and use manufacturing optimization to drive down cost and price as the basis for greater customer adoption. While that is a viable business strategy for some, real disruptive innovation is less price sensitive as it triggers new behavior. New behavior in turn, taps into new allocation of disposable income.

So, rather than looking at the competition, technology companies need to have a sound strategy as to how they will reach 30% adoption rates of the total-addressable-market that the current vendors have not. Macro-economics, the buying decisions and experience beyond just the scope of technology are important to assess.

2/ Impeccable product quality and user experience.
Consumers are both demanding and often uninformed about the technology language that many vendors impose on the use of their products. The combination is a battleground from which only well developed products emerge. Simplicity is key (and too many usability options are NOT good).

Many technology companies develop products with an engineering centric view of the world, insufficiently realizing that no consumer wants to learn a new language to understand how to use a technology product. Consumer centric interfaces and methods are just as important as product intelligence.

3/ Great support experience.
Support is no longer just a painful cost center to a business, great support can be an asset that recovers the mounting cost of product returns and prevent market adoption issues from spiraling out of control. So, great support helps perfect product quality, but only if it provides a direct closed-loop back into development. Great consumer companies engage with their customers directly and get better at defining what a market-ready product really means.

Technology companies with thousands of entries in their support and third-party forums are ignoring free research that will make their product better. Support cost should be captured in the product P&L and managed by a single manager, responsible for R&D and support. Runaway support cost is often the result of a product that simply isn’t ready for prime-time.

So, macro-economics, product quality and product experience are the main ingredients to create success for consumer technology companies and in turn will provide incredible loyalty for the next version.

Tags: Consumer, Disruption, Markets

By Georges van Hoegaerden

For over 10 years I’ve built and managed growth for early stage innovation in Silicon Valley and more than ever do I believe that building real disruptive customer value is more important than trying to time an acquisition opportunity. You may too, unless of course you are a gambler and firmly believe that the $3 red-white-blue slot machines in Vegas consistently yield the greatest returns. I will not argue the outcome.

Acquisitions remain nothing more than a welcome diversion on your way to building the largest technology empire. And even now when IPOs have dried up any focus away from building your empire is damaging. Real disruptive innovation is resistant to economic aberrations and a consistent focus on customer value remains your only rescue.

I believe that IPOs for technology companies will return (and subsequently spur more pre-IPO acquisitions), albeit not with the same players. Real companies can only be built by real entrepreneurs, with real disruptive products supported by real investors. New participants (on both sides) with higher moral values will be the ones to restore trust in the technology industry and subsequently public stock markets that want a piece of it.

Today, the VCs are stuck with a product of their own aristocratic making. Commoditization of investment philosophies since the 1990s has generated technologies that can best be described as sexy-cool rather than disruptive and meaningful (with a few exceptions). It paved the way for get-rich-quick entrepreneurs that are skilled in feeding the dogs the dog-food, rather than support the real entrepreneurs that have a dissenting view of the world.

So, assuming you as an entrepreneur are for real, how would you recognize an investor that is not. Here are some of my anecdotal recommendations:

1/ Avoid an investor who blames his quick response on ADD
Attention Deficit Disorder is an illness, not a skill. Recommend the investor to consult a doctor.

2/ Avoid an investor who does not carry (or seriously considers) an iPhone
The iPhone is the biggest innovation in consumer electronics in my lifetime (so far) and if your potential investor does not understand its ramification to the technology ecosystem as a whole, it is unlikely he will get yours.

3/ Avoid an investor who cannot price your company ahead of you.
Any technology investor should be able to price the value of your disruption. Ask the investor for the valuation and if he is close to your target, you can share with him your cost model and where you are today on the trajectory. Cost model and stage (the risk) are a discount to the disruptive value, the ability to build the technology is merely a commodity. In Silicon Valley technology is not the risk, but market entry with sufficient disruption is. Walk away from investors that incorrectly evaluate the risk model.

4/ Avoid an investor whose partners you can’t stand
Investors in a fund make decisions collectively, they need partner consensus before they can invest - just like in politics (more on that later). A firm with a partner you don’t like should be taken off your VC prospect list, as you cannot risk the influence of the bad apple to your company’s future. Develop your personal blacklist (as we did) based on fundamental people principles.

5/ Avoid an investor who wears his education on his sleeve
Wearing a Super Bowl ring means you made it in the real world, wearing an Ivy League ring does not. I wholeheartedly agree with Craig Venter that later stage education (without operating experience) in general is a deterrent to creativity and innovation or the ability to spot and spawn it. The majority of Silicon Valley investors are remnants from a bull market, echoing beliefs that are founded on skewed business principles.

6/ Avoid an investor who asks really dumb questions and is proud of it.
I never thought dumb questions existed until I ran into one investor who proudly blogged about how other entrepreneurs simply walked away from him, making his life easier. We walked away from him too.

7/ Avoid an investor who thinks he knows your industry better.
Even in the unlikely scenario he does, you should still walk away. Investors that know industries better than the entrepreneur should have become one. So either the investor is better informed (which should send you back to the drawing board) or he thinks he does (which becomes a pain in board meetings). Investors see a lot of things that don’t work, rather than discover the opportunities that do.

The bottom line is that we recommend entrepreneurs not to squander their great ideas with the first investor that waves money in their face. Real disruption does not become extinct quickly and so you literally have years to find a great investor out of the 790 firms that exist in the United States.

Thankfully the get-rich-quick money schemes in technology are drying up, so make sure you, as the entrepreneur, also have the integrity to build real disruption that spawns real and lasting customer value for years to come.

I look forward to helping develop new investor 2.0 and entrepreneur 2.0 strategies with you.

Tags: IPhone, VC, Investment, Commodity, Entrepreneurs, Subprime, Startup

By Georges van Hoegaerden

I recently ran into a great new application called cooliris (funded by Kleiner Perkins) from a similar named company in Palo Alto. But much more than just a cool application cooliris is the pre-cursor to a new way of accessing the internet, if the company plays its cards right.

I ran into cooliris when it first launched because of its initial focus on photography, and since then the company continued to dramatically improve its scope and has quickly become an appealing application to get news presented visually.

Stronger put, I predict that in 5 years from now the browser (like Safari, Firefox, Chrome, Internet Explorer) will not be the predominant way we access the internet. But that perhaps is an easy prediction. The majority of applications on an iPhone already use non-browser access (Facebook, Plaxo, eBay etc) and so do a few others on the PC (such as iTunes).

The browser is a very technological way of accessing data on the Internet, with poor navigational attributes. The URL language is certainly not one everyone understands and that relegates the dependency on search, which is still the primary way to navigate the Internet. And as the internet continues to grow in size, search will yield ever diminishing navigational success.

Clearly more companies are looking to improve Internet navigation. AT&T’s new Pogo browser, Google Chrome and enhancements to Firefox are an indication of the awareness of the pain. We will see more examples of improved navigational capabilities, some of which I can’t divulge at this point. But until then - enjoy cooliris.

Tags: FaceBook, Firefox, Browser, EBay, AT&T, Google

By Georges van Hoegaerden

As any economist will tell you, a dollar bill is not worth a dollar. And so the real value of that paper bill is defined by the trust we put in it. The trust that you will receive a certain (yet fluctuating; some days a dollar is worth more than others) amount of goods and services in exchange. Simple right?

So given that, trust is the most important denomination in determining the value of a product or a service. And trust builds from consistent delivery on stated promises, which - in turn - requires the unwavering commitment from people with integrity and honesty....do you feel the slide coming?

So:
1/ Why do many companies make promises they don’t keep?
I evaluate a lot of technology companies (about 60 this year alone, public and private) and most are simply lying about, or overstating (decibel marketing) the benefits of their proposition. Because the majority of potential customers and investors are ill-informed about the pros and cons of this specialized industry, technology companies can often get away with sneaky monetization strategies that take advantage of a lesser informed audience.

In Silicon Valley, “success” is often defined by how skilled you are in fooling customers and sucking up to aristocratic investors (to which few have access), rather than the authenticity of your proposition. A mediocre ecosystem is what still remains after the technology bust from 2001 in which self proclaimed “serial entrepreneurs” and investors have been able to dodge real value creation and sell out short.

Not the VC model is broken, but many of the participants are. That noise is severely eroding the trust in an inherently sound technology industry. We need to enforce more transparency and hold ourselves to higher standards to restore the integrity and trust.

2/ Why do we allow short-selling on public company stock?
First, the performance of public stock says nothing about the actual value or outlook of a company, in the same way the dollar offers no guarantee of what you get for it. Public stocks are already a lousy interpretation of the actual performance of a company, as it merely echos popular opinion (and not the company facts).

So, selling short is really a bet on performance of popular opinion and does nothing but undermine the trust in the longevity of a business and cannibalizes shareholder value. Quarterly earnings reports are an absolute joke as many companies move profits around, claim leadership in a market that is defined by themselves and reduce cost rather than improve their marketplace position in order to make quarterly earnings look good. They also force healthy companies to focus on often unpredictable economic aberrations rather than on their long term and macro-economic leadership position.

The ability to sell short creates unrest and undue fear in a system that requires the opposite. Can you imagine holding the president of the United States accountable on a quarterly basis? That would be bad for our country (in most cases).

We should implement a predetermined holding period for the sale of stock, the expiration determined by the company and regulated by the SEC (which can also prevent some nasty insider trader deals) to build back trust.

3/ Why are some allowed to resell securities?
Reselling securities (which was illegal a few years back) based on finagled credit scores are perhaps the double whammy in the erosion of trust in public companies. Company credit scores that are maintained (and marketed) by commercial companies create profit driven scores and unrealistic prices (up and down) for securities. We simply need to stop the resale of securities and regulate the process of maintaining credit scores (both business and personal) vigorously and immediately.

Regulations do not turn us into a socialistic society, but the reality is that no economy operates without rules to protect trust. Free-markets require a basic set of rules to prevent a few bad apples to create insurmountable fear for the rest of us.

For the technologists amongst us: eBay deploys no less than seven dedicated servers to detect suspicious transactions that could challenge the trust in its free-market model.

In the same way we deploy rigid traffic laws to drive a car, should we deploy rules of engagement to protect our economic serenity. As long as we don’t dictate the destination of our travels or where we place our individual economic bets, we should be just fine in our support of a blossoming capitalistic society.

Trust comes from transparency, integrity and authenticity that builds real value, not from taking advantage of the ill-informed. So, building a successful company does not start with a new product strategy but with a leader who has the drive to win that is larger than his greed. Building disruptive products that truly improve people’s lives will yield personal satisfaction and trust that will keep customers coming back for more.

Trust is the only currency that matters, so stop squandering it.

Tags: EBay, Economy, Eco-systems, Free-market, VC, Stock, Transparency, Securities, Capitalism, Macro-economics, Economy

By Georges van Hoegaerden

I was flattered last week by a visit from Rick Smolan, the creator of some very creative photo-projects, such as From Alice to Ocean, America 24/7, Blue Planet Run and his latest America At Home. Since the early 90s, From Alice to Ocean stuck with me when it was first introduced and distributed with Apple computers and the clever use of multimedia capabilities built into the Mac early on. But the great thing about these projects is not just the stunning imagery but rather what they evoke. Again, the value of photography is in the eye of the beholder.

Rick approaches photography in the same way I look at business; by simply surfacing the facts. So much in our lives is influenced by mountains of politics and rhetoric that reduce the chance of quick resolution and success. How do you think we can ensure a vibrant global economy and peace if 1.1 Billion people - 1 in every 6 - worldwide have no access to clean water. The book Blue Planet Run displays that with chilling accuracy.

But Rick Smolans projects shed light on reality, good and bad. America at Home is a compelling compilation of how American families live at home, rich and poor, photographed by the families themselves and complemented by photographs from professional photographers. The pictures and their captions are so inspiring that a country decided to buy more than 200,000 books to educate their children on who Americans really are. Transparency works both ways.

I would like to see Rick do a book of “The World at Home”, so I can continue to sit down with my daughter and give her a peek into the living rooms across the world.

Our welfare greatly depends on our ability to become a citizen of this world. To achieve that every school should at least purchase one of Ricks books so our children receive an objective view of the opportunities and problems in our global eco-system and thrive.

Update: For readers of my blog, Rick has graciously offered a discount of $10 off his book America At Home, which you can customize with your own image on the cover. Just enter the code GEORGES at checkout.

Tags: Photography, Mac, Photographers, Apple, Economy, Transparency

By Georges van Hoegaerden

With that title I just pulled the pacifier out of the mouths of many marketers...and many of them will start crying.

But smart business people know better. Compartmentalization is very fundamental human behavior, in our personal life and business. In business the definition of “The Market” is the currency that aims to provide quick answers to everyday questions. The problem with market categorizations is that they are often incorrect, irrelevant, stale and frankly, the antagonist of innovation.

Here is why:

1/ People buy products, markets don’t.
No matter what the scenario, in the end people (not businesses) make purchasing decisions. And since people are unique, so are their complex reasons to buy. A unique mix of psychographics and demographics aided by free-market access to the Internet further emphasizes the power of “You” over the power of “The Market”.

2/ Markets are bad type-castings.
Customer surveys show that the compelling-reasons-to-buy rarely match up with the predetermined definition of “The Market”. And since many purchasing decisions rely on factors unrelated to the product (such as budgets, approvals, personal relationships, operational planning, risk mitigation etc.) a prospect qualification or disqualification within that market means absolutely nothing.

3/ Market definitions are bad currencies.
Since there are no rules for defining markets and everyone gets to dream up their own, the value of that market definition is meaningless. Imagine the value of the dollar if everyone gets to define how much it is worth and print theirs at home. Market segmentation and negotiations on market positions with analysts further deflate the significance and trust in traditional market definitions.

4/ Time changes everything (but markets).
Market definitions (in technology) change slowly yet products that attract new buyers change quickly. That means the definition of “The Market” (to which much decision-making is attached) is always far behind the adoption rate of new products and therefor far behind the identification of a new set of buyers. The minute “The Market” is defined, it has become irrelevant and ripe for disruption.

So, where does that leave marketing? Is marketing dead?

No, but it is time for technology marketers to grow up. The pacifier is being replaced by something else. Something more substantial and meaningful. Food becomes the new pacifier and customers will be feeding it to you.

1/ Listen before you speak.
Literally. Forget about what you as the marketer think of the product, early-adopter purchasing decisions are much more valuable in determining how the product is perceived and received. The credibility of new customers counts, more so than the ability of a marketer to spin a story. Spend time with your VP of Sales, in online forums, setup a Google Alert and figure out how to market customer perception.

2/ Manage the promise.
Crucial to the impact of marketing is the credibility of the company promise. Marketing, and specifically Product Marketing is vital in establishing that the promise is fulfilled to the satisfaction of the customer. A few bad words from customers on the internet can cost the company millions of dollars to repair, if it can recover from it at all. So, it is important that the promise to customers does not consist of blatant lies, leads to frustration or bleeds hundreds of support calls. Manage the critical success factors of your promise.

3/ Enable the dialog.
Orchestrate the interaction between customers and prospects and be sure to listen in. They will give you the marketing messages that truly resonate - on a silver platter.

4/ Manage the conversion rate.
Getting crowds to listen or visit the company website is rather simple, getting them to buy the product is more difficult. The company is only measured on the latter and since marketing is usually the scape goat and the first to be questioned when results are down, implementing a mechanism that detects, manages and reports on conversion rates yields invaluable metrics for improvement.

As long as there is macro-economic benefit to using your product, marketing is a very straightforward process. It requires a new class of people that are not afraid to throw the old-class of market definitions overboard and focus on the extrapolation of existing sales success, by simply listening for and consistently reverberating an honest and effective marketing message.

As Don Draper, the biggest ad man at the Sterling Cooper Advertising Agency of the TV series Mad Men explains; I don’t tell stories - I sell product.

Tags: Markets, Marketing, Performance, Promise, Analysts, Google, Psychographics, Demographics

By Georges van Hoegaerden

Jupiter-Images finally sold to Getty-Images after a similar attempt in February of 2007. With estimated revenues of around $79M (when last tracked) and con-jointed debt of $95M with other Jupiter Media properties, Jupiter-Images sold to Getty-Images for only $96M in cash. Sounds like a fire-sale to me.

Imaging super stores make no economic sense, as described in this blog before.

1/ Images are like art. Taking preferences of buyer and seller into account, they preferably sell only once (or as few times as possible). No buyer wants that image to appear in similar publications and so every transaction is unique. Super-stores, however, are modeled to provide one-to-many sales transactions and are therefor NOT suited to support the image exchange marketplace.

2/ Except when images are produced on a commissioned photography basis (for example by Getty-Images staff photographers), the image super store actually does not own the image, it merely has a right to operate as a reseller. Nothing would stop a photographer from trading his images somewhere else, dramatically deflating the value of the super-store.

Fact remains that $22B of images are exchanged every year, most of it (90%) not through online transactions or the sum of all super-stores. This represents a big opportunity not many Venture Capitalists understand, as it is a market-play rather than a pure technology-play. But established companies may be able to build an iTunes of images to feed their ecosystem of products.

In the meantime, Getty-Images (now private again) keeps on puffing itself up like a puffer-fish. The question is: how long will it be able to hold its breath.

Tags: Photography, Getty-Images, VC, ITunes, Jupiter-images, Revenues, Private Equity

By Georges van Hoegaerden

Apparently Digital Railroad, another storage provider of the digital photography market is in trouble. No surprise again, because the company never supported a free-market model for photographers and buyers. We blogged about that topic many times, and recently Dan Heller adds to that fundamental thinking (even though I remain in disagreement with the artificial classification of stock photography).

Since its founding, Digital Railroad primarily supported supply-side photographic capabilities, which if not seamlessly connected to the buy-side provides really nothing more than storage space and website make-up for photographers. A nice service, but similar services from Smugmug or Photobucket already exist to do just that. All these technologies fail to solve the most pressing issue for every commercial photographer: sell, sell, sell.

Photographers are not empowered by a storage service or nice looking web pages, they are empowered when they sell. Photography is an expensive job and if it does not yield $70,000 in yearly revenues (based on 2006 PDA numbers), you will not be able to make a living from it. We have yet to find a true marketplace that connects any seller with any buyer, using free-market principles that truly empowers photographers.

Free-markets are more than a fashion statement or a label you suddenly slap on the website. The implications of free-market principles (as listed in this blog) change a company, its execution and its funding strategy to the core. The devil is in the detail.

Digital Railroad’s and Photoshelter’s demise are examples of why investing in technology, without macro-economic impact - no longer works. The 150-year old photography marketplace, with the introduction of digital photography and the internet, has moved from a premium market model (with many walled gardens) to a free-market model.

Akin to Ratatouille (the movie), where a five-star chef, Anton Gusteau, declares that “Anyone Can Cook”, the photography market and its technology providers need to get used to the fact that in this new age, “rats” will take and purchase great photographs ($22B of them).

The irate response to my recent blog about Photoshelter from a Vice President of the American Society of Media Photographers reminded me of the angry cook in Ratatouille that hires Linguini, a clumsy youth hired as a garbage boy, who can still not accept that great taste in food is like the beauty of photography - in the eye of the buyer.

We should embrace all photography that move people to buy, regardless of who shot it and build a real marketplace to facilitate that exchange.

Tags: Photography, Consumer, Content, Marketplace, Startup

By Georges van Hoegaerden

I received a lot of feedback and questions on my previous blog posting named Building efficiencies in tough times and the embedded presentation posted there. The danger of attaching a presentation is, that as a reader you may miss the rational that built the words.

Because of that I want to explain my sometimes condensed thinking a little further.



It may have appeared that I only care about the product, but nothing is farther from the truth. The diagram on the left of the chart is what I see a lot in technology companies, early and late stage - across the board. The diagram on the right is what I tried to convey with the words in my presentation. Let me clarify:

Many companies develop incremental innovation (to leapfrog their competitors) without a diligent (re-)assessment of the opportunity to change the battle field. Not surprisingly. Real disruptive innovation requires a certain amount of vision, faith and a compass combined with larger commitments and investments, all seemingly based on untested values.

The path of least resistance therefor is to start with an incremental product and throw inordinate amounts of marketing & sales at it, in order to push it beyond its competitors into the marketplace. That is a highly inefficient model (in any economy). But it is a model to which many companies are forced to comply because of risk adverse management and the stale investment criteria deployed by many Venture Capitalists (VCs).

So, it is somewhat ironic that the VCs are now telling their startups to be more efficient, right after they were pushed through the VC wringer of startup-commoditization.

I believe the market for cheap (bootstrap-to-market) technology companies, that yield a large early exit is gone. That model only worked in a bull market of technology (from the 90s that has not dissipated) and the investors that still cling to that model will get punished for it. The new opportunities are for companies that build real macro-economic value.

The starting point of the next wave of innovation, in my view, is to feed a macro-economic need, as depicted in the diagram on the right. That macro-economic need is directly attached to the way we behave as humans (which is relatively predictable). It is our need to express ourselves, live the life we want and be in control (rather than technology controlling us). Think free-market principles, think social, think benefits, think fundamentals.

The fundamental shift in thinking that needs to occur in Silicon Valley, is to develop technology with a fresh mind, looking from the outside in, and serve a larger, less specialized, constituent.

Apple comes to mind as a company that often completely ignores the current state of the technology industry and connects better to basic human needs than any other technology company. But Apple can improve/be beat at the macro level, but I digress.

We simply need to support human behavior with technology.

With “free” distribution of information through the Internet, psychographics - not demographics - matter. Four-hundred year old free-market principles, The Long Tail, and marketplaces like eBay prove that the traditional rules of marketing do no longer apply. In my thirty years in technology I have never met anyone who truly understands markets. And market definitions have changed, they comprise no longer of buyers that fit an artificial model (I cringe when I hear people debate for hours how many users delineates the SMB segment), but because they subscribe to the pain or gain from which subsequently, marketers can extrapolate a larger pool. Bottom-up.

We do not all need to be economists to create the next successful technology company, the material is all around us. All it takes is a healthy interest in the actual behavior of human beings, compare their offline and online behavior and fill in the gaps. So, stop supporting companies that just build nifty technologies, but focus on companies that create larger macro-economic differentiation. More impact to everyday people.

No company will be more efficient by simply cutting cost (as suggested by the recent doom-and-gloom VC messages), it will just take longer to die. The real efficiency comes from a more disruptive value that attaches more people to better technology. On top of that, macro-economic value is very resistant to economic downturns.

Tags: Performance, Commodity, Consumer, Marketing, Markets, Marketplace, VC, Macro-economics, Psychographics, Apple, Distribution

By Georges van Hoegaerden

With the Venture Capital high society dropping doom and gloom economic messages onto the CEOs of their portfolio companies, I wanted to help out and at least do my part to deliver some more operational substance.

Great companies and their resilience is defined by the quality of their products.

Great products make up for an endless amount of sales and marketing deficiencies, but in most cases sales and marketing spend too much time making up for lost product opportunity and becomes an endless money drain. Product definition (from a buyer’s perspective) and quality are the most important drivers for consistent business success, as Larry Ellison and Steve Jobs (both product gurus) have proven time and time again.

But when money is plentiful, yet guarded by aggressive milestones we tend to throw products over the fence early and have sales, marketing and support compensate tirelessly for its in-market deficiencies. Both startups and established companies (trust me, I’ve seen a few) make those same fundamental mistakes. The results are slow sales traction, excessive marketing expenses and runaway support costs. Not things any company can afford these days.

This morning I put together a presentation (in pdf, named TVC_building_efficiencies) that identifies some of the deficiency symptoms, emphasizes the benefits of great products to the cost model, and pulls together new ways to build amazing new products. Thus creating a more resilient company, no matter what the economic conditions.

So, to directly affect company efficiency, keep a close eye on the definition and implementation of the product, its macro-economic impact and how it grows and where it bleeds. Or simply contact us if you need some help.

Update: more on building efficiencies.

Tags: Performance, Consumer, Disruption, Free-market, Growth, Marketing, Markets, Quality, Resilience, Software, VC, Macro-economics

By Georges van Hoegaerden

I understand the need for a greener environment (and enjoyed the fantastic video presentation from Google CEO Eric Schmidt at Corporate EcoForum), creating more renewable energy and perhaps making us less dependent on foreign countries.

That promise sounds good, albeit I think it will just redefine what we as countries fight about. Today it is oil, tomorrow it is probably about green technology and resources. In the near future, green technology will also find its core competencies and attractive pricing in countries other than just ours. Yet if we don’t learn how to resolve our differences and respect each others cultures, the subject of our debates is irrelevant. New leadership is key, so go out and vote.

But the part I don’t get is why many investors, like Kleiner Perkins, “flee” from information technology at the shimmer of rising oil prices, financial instability and tax incentives and dive head first into a completely new, and may I add completely different line of business. A line of business that often has more similarities to farming (with all of its intrinsic risk factors) than effortlessly moving bits through thin air.

The reason why information technology remains an interesting investment category to me is:
1/ The innovation of information technology is cheap, a few smart people in a room behind a computer and voila, a new star is born.
2/ The distribution of technology is cheap and immediate, there are virtually no borders (except to China perhaps).
3/ The monetization of technology is well understood, and is either direct or indirect but almost always single source.
4/ The enormous left-over possibilities of information technology that has yet to percolate many other industries.

Contrast that with green technology where I see:
1/ The massive costs associated with early foundational development.
2/ The costly implementation and distribution that requires safety, governmental, social approval processes (literally lasting years).
3/ In most cases the requirement of multi-source monetization, involving grants and many regulatory constructs (requiring a longer sales cycle).
4/ A limited time-to-market benefit for early adopters and therefor lack of urgency to buy. The adoption of green technology is generally believed to lengthen the time-to-market, aiming to produce a return on investment spread out over many years.

Again, I do see an enormous need for green technology to save our planet and a justification for investments supporting it. I am just not confident that the current Venture Capital model (born out of the technology era, and driven by information technologists) will lend itself to that segment. I am very curious to see what vintages will produce viable returns for the Limited Partners in the green-tech funds.

I hope I am wrong, as carefully applied Venture Capital has the potential to change industries, countries and the people in them.

In the meantime I’ll stick to my core competency, creating and managing growth of innovative information technology companies.

Tags: Green Tech, Innovation, Investment, Distribution, VC, Limited Partners

By Georges van Hoegaerden

I still edit all my photographs (thousands) in LightZone, and have always vehemently made statements against Adobe Photoshop. Not because of the lack of photographic capabilities but primarily because of the proprietary language it forces you to understand before you can use Photoshop effectively.

Photoshop remains the “vi”- editor of photo editing, powerful yet very cumbersome to use. No secretary uses “vi” today, and the future of Photoshop is moving further and further away from the mass market Adobe should be trying to attract. Nothing new there.

But Photoshop CS4, after a long track record of rather meaningless innovation and UI revamps now includes some very nifty innovations worth looking at, as the videos demonstrate. Content aware scaling (from a company Adobe acquired last year), panoramas and the new 3D capabilities are very cool. So, if you’re interested in rudimentary 3D capabilities before you jump into Maya, check out Adobe’s website where the nifty new capabilities of Adobe’s Photoshop Extended are available for roughly $1,000. But, perhaps this time around, the premium price is worth it.

Credit where credit is due.

Tags: Photography, Photoshop, LightZone, Maya, Photographers, Adobe, Experience

By Georges van Hoegaerden


Facebook, one of the fastest growing social network sites has really screwed up User Interface (UI) design with its new look. Take a look at the screen capture above. Now you tell me in 5 seconds the intuitive difference between clicking on: [Facebook] and [home], [home] and [profile], [profile] and [Georges van Hoegaerden], [settings] and [profile], and [settings] and [Georges van Hoegaerden].

But more importantly, Facebook has clearly not read my blog on removing the technology language to appeal to consumers, an issue that prevents many consumer technology companies from maximizing their growth potential. But who’s counting at Facebook these days?

Facebook is a technology company that exposes social networking capabilities in a very technological fashion. The examples are plenty: the workings of the UI described above, the categorization of data optimized to suit their internal data-models and the very complicated way to add applications to the platform, and we can keep going on. But for now, they’ll get away with it. Other consumer technology companies won’t be that lucky.

A great user interface can never be an objective by itself as that just presents a pretty face, try living with a person that only has that. The ultimate user experience (and this is where I politically depart from the previous analogy), is defined by an ecosystem of capabilities, cost and ease-of-use that creates the real and sustainable appeal.

BMW figured out early on that the Ultimate Driving Experience™ is what sells cars albeit their engine capabilities and timing was their initial core strengths. Today they sell the sum of all parts, The Ultimate Driving experience: great engine capabilities, spiffy performance, practical design and excellent comfort - a thrilling way to drive from A to B.

Facebook currently has a horrible “Ultimate Social Experience”: good (but no longer unique) social networking, so-so performance, impractical design and pretty bad comfort. Those are probably the reasons why 90% of my Facebook friends never use any Facebook features but simply create an account.

Many of Facebook’s recent poor decisions (including ad network issues etc) are evidence that user growth is outpacing their ability to grow up. And that could be catastrophic. Facebook is a great social networking platform with a lot of potential that many people rely on.

Facebook better watch out and prevent that too many people will start hating it. Those same users may use Facebooks own social networking capability to turn it off as fast as they initially turned it on.

Tags: BMW, FaceBook, Performance, Platform, Consumer, Startup

By Georges van Hoegaerden

Two days ago we got word about the demise of the Photoshelter collection marketplace. Not surprising because Photoshelter was not a marketplace. Technologists have a tendency to slap the marketplace label on anything they build, without understanding what it truly means.

Marketplace models, criteria, funding and execution are fundamentally different from premium market models. Photoshelter was really nothing more than a replica of Getty Images without Getty’s money to buy inorganic growth.

Here is how Photoshelter failed to meet marketplace rules:

Marketplace violation 1: Photoshelter artificially arbitrated supply, through a lengthy subjective signup process in which Photoshelter arbitrators determine whether you get to play.

Marketplace violation 2: Photoshelter artificially arbitrated demand, as it aimed to sell it to “the industry’s top buyers”, not to everyone.

Marketplace violation 3: Photoshelter gave preference to images they liked, rather than simply connecting any supply with any demand.

Marketplace violation 4: Photoshelter deployed a sales-force (from Getty and other photo agencies) that promoted a premium market model, like any sales-force driven by quotas would.

But CEO Allen Murabayashi makes a few damaging statements in his blog on why they failed and tries to blame that on the market as a whole:

“Licensing photography is fraught with clearance issues”
150 Years of photography exchange has resolved the fundamental issues of rights management quite effectively. Getty-Images, Corbis and others have gone through a well defined process in order to clear rights in their move from analog to digital exchange. Photoshelter has relied too much on a model that requires people intervention, while the majority of rights and enforcement can be embedded in and enforced by technology and made the responsibility of the asset owner. In the same way eBay sellers are responsible for the fulfillment of transactions. That enforcement guarded by a true meritocracy will quickly weed out bad behavior (that plagues any marketplace).

“Stock photography is a slow growing market dominated by a single player”
Nonsense, the term stock photography is an artificial classification (made up by its current participants) that bares no value. Today $22B of photography is exchanged of which less than 10% is transacted electronically. Growth through the premium market model of Photoshelter is limited because the photography market requires a free-market.

“Research Requests move too quickly for individuals to react in a timely fashion”
Perhaps they do in the “top buyer” segment, but certainly not in all. Since Photoshelter artificially limited the demand characteristics, any assessment of market traction and behavior should be taken with a grain of salt.

“Buyers desire more diversity, but convenience (aka subscription deals) triumphs this desire”
Absolutely, buyers deserve diversity, and buyers should be presented with the ultimate experience (subscriptions are not the answer). What has fundamentally changed in a 150 year old analog photography market is that demand does not come from a few buyers, but a highly fragmented buyer market that will want to use an image for any purpose (not just for your average advertising purposes).

“A crowd-source model for stock will likely never work”
Absolutely disagree. Photoshelter deployed a premium market model on a market that requires free-market principles. It failed for the same reason Getty Images fails to become a market-leader in the un-arbitrated exchange of digital photography (identified by roughly 30% market ownership). Getty Images grew by inorganic growth and acquiring other photo agencies with staff photographers that create the majority of images it sells (less than 7% come out of third party supply according to a statement by its CEO in 2006).

Photoshelter, as lovers of photography, seemed to have their hearts in the right place but not their execution. And they neglected to respond to our offer for help one year ago, when we saw their demise coming.

Tags: Photographers, Photography, Getty-Images, Growth, Free-market, Marketplace

By Georges van Hoegaerden

From time-to-time I hear from investors: what if Google decides to build it?

My replies are as follows:

1/ Google is the king of web-based advertising derived from search, and it does so extremely well and profitably. Yet Google is a pretty monolithic animal. While the company is capable of building virtually any technology outside of its core competency and brings a bright sparkle of innovation to Silicon Valley, it is consistently unsuccessful in turning that innovation into great Billion dollar businesses (which reminds me of Oracle, before Chuck Phillips came on board).

2/ Google is not a true marketplace, nor does it seem to understand free-market principles as witnessed by their actions. Google is a premium market for search-based advertising placements and it will continue to drive premium market DNA to the adoption of technology. Nothing wrong with that, unless they portray a more liberal character. So, you’ve got little to fear if a free-market platform is what you are building.

3/ Google does not understand any software category that doesn’t derive its revenue from advertising. While there may be a great future for software (as a service) that no consumer ever pays for directly, today that is not the reality. Desktop software, proprietary enterprise applications, software-as-a-paid-service are examples of what Google is highly inexperienced and generally unsuccessful with.

4/ It would be a great sign if Google decides to build a similar product or service, as it would produce a rhetorical blessing of the proposition and an impromptu acquisition play by its competitors. Isn’t that what you want as an investor.

Google’s relatively young age, massive growth and company DNA are probably the best reasons why it hasn’t succeeded financially in many areas it operates in. But I greatly admire their drive to invest a large part of the difference between their (Wall-street) valuation and real value in new technology development.

Beyond search, Google is in essence a giant research institute with the limited financial successes that come with that model. But Google lays important development groundwork that has and will continue to do us all good. They also provide valuable incubation of new technology ideas a commoditizing VC market rarely picks up on.

My startups have a different charter; turning great technologies into great businesses, now!

Tags: Google, Wall-Street, Innovation, Markets, Marketplace

By Georges van Hoegaerden

Let’s look at photography (my hobby), arguably the most important purchasing-driver of computers (after the ability to access the internet) by consumers. Media management (yes, on the desktop) remains more than a Billion dollar market opportunity.

Case in point: new announcements of Adobe Lightroom and Apple Aperture tout enhanced interoperability with third party plugins to manage and edit your photographs. Don’t you feel good about that warm open-source-like karma of interoperability?

I don’t. Both vendors have deployed their next trick to customer imprisonment. And plenty of uninformed customers will fall for it. Here is why you shouldn’t:

1/ There is no need for an additional platform for photo management.
Photo editing capabilites of both applications are mediocre (no layer based editing, no advanced local editing etc.) and their asset management capabilities are little more than a replica of file system capabilities (even photographic attributes such as exposure, aperture and other attributes are maintained by the file-system metadata today). So, except for making nice photo albums and calendars, why else would you slug thousands of photographs in a proprietary asset management format that is less reliable than the underlying file-system and requires seperate backup and archiving strategies to maintain.

2/ Plugins have worked for years on file-system based photographs.
The announcement of the interoperability with plugins is really old news as those third party applications have been working with file-system based photographs for years. This is a platform on top of a platform, designed to milk more money out of customers and locks them into a proprietary technology stack. A prison with the windows open is still a prison.

3/ The operating system needs-to and will evolve faster.
The pace of meaningful innovation of the Personal Computer OS is deplorable. Microsoft has not made the PC operating system significantly smarter over the last ten years and that has opened the window of opportunity for Apple to surpass Microsoft in usability (rather than functionality). The ability to easily create and manage user-generated content such as, Photography and Video, has now become important adoption drivers to the platform, OS-vendors have yet to respond to. Photographic capabilities should be built-in (not priced-on). These days the unique media experience of the platform is the differentiation that sells the computer (since they all do internet quite well).

As a consumer, buying into seperate photography management siloes will cost you significant time and money (as the former CEO of a photo software company, researching the alternatives, I tried). My advice is to wait until an agile vendor steps up and turns media management into a core competency of the computing experience.

In the words of Ray Lane (partner at KPCB and former COO of Oracle) who once said customers are better off skipping some steps of innovation (in his case to skip client-server for three-tier internet architecture), I have just presented you with my reasoning to skip-over Adobe Lightroom and Apple Aperture. Not because I don’t like some of its functionality, but because it is strategically a dead-end street.

The next evolution of media management will soon eradicate the old one and deliver lasting differentiation to the vendor that owns it and provides a much, much better media experience to the consumer.

I am planning on having something to do with that.

Tags: Platform, Photography, Consumer, OS X, Operating System, Innovation, Integrity, Adobe, Microsoft, Apple

By Georges van Hoegaerden

When Facebook decided to integrate new application capabilities that were first available as a third-party application from a marketplace participant, they broke the cardinal rule of marketplace meritocracy. When Getty Images’ staff-photographers allegedly took new pictures similar to previously top-selling pictures from participants they too broke a fundamental marketplace rule. When Amazon.com optimized sales results based on margins requirements they too broke many of the free-market rules as described in “Look, but don’t touch”.

By calling themselves platforms or marketplaces those companies misled their participants and engaged in what I would characterize as false advertising. Not only did the suppliers expect to be treated equally and become successful based on a true meritocracy, buyers expected to get an untainted view of that meritocracy to make informed purchasing decisions.

Technology platforms need to obey to a simple macro-economic marketplace definition:

A marketplace connects unrestricted supply with unrestricted demand through an un-arbitrated and transparent exchange.

Marketplaces thrive because they support free-market principles, and as a result they level the playing field for all participants. No longer are unfair advantages for participants defined by geographic location, subscriptions, volume or other artificial boundaries, but simply by the value and the price of their products.

Here is what platform vendors, to maintain free-market principles and thrive, should stick to:

1/ Don’t employ sales people that sell marketplace content. Sales people give preference to specific content which violates the integrity of the marketplace. Sell the effectiveness of the marketplace mechanism instead.

2/ Don’t market specific content, but market the effectiveness of the exchange. Unfair advantage is an attribute of a premium market not a free-market.

3/ Don’t arbitrate. Anyone should be able to participate, participation fees (that anone in the target group can afford) are okay.

4/ Don’t hide sales results. Transparency of the effectiveness of the marketplace is crucial to invite new entrants on the supply and buy side.

5/ Don’t participate in the marketplace yourself. Clearly seperate yourself from the participants, platform vendors should just build the platform, not the content.

Technology companies that are building platforms should check out our cardinal marketplace rules and investors should measure their platform companies on the compliance to those rules. Investing in a premium market business is fundamentally different from investing in a free-market platform business. Funding requirements and use-of-proceeds differ dramatically.

I’ll make the point again that investors should understand macro-economics impact before they invest.

Marketplaces are not for-free and still support capitalism, but the money will be made by platform owners from a transparent margin on the exchange (and sometimes carefully applied advertising opportunities). Diligent consumer marketplaces achieve winner-takes-all participation levels and massive exchange volumes and revenues. eBay and the Apple AppStore are great examples of more disciplined marketplaces.

Because of the virtually unlimited global reach of the Internet we have an incredible opportunity and obligation to present the world with free-market platforms that treat all participants fairly and with respect.

Let’s stop whining about the authenticity of our presidents, and instead, as the creators of the technology industry show the world how we turn authenticity, embedded in our technology, into a massively sustainable advantage.

Tags: Platform, Amazon, FaceBook, Getty-Images, Photography, Macro-economics, Meritocracy, Marketplace, Markets, Premium

By Georges van Hoegaerden

With the proliferation of the new iPhone, Mobile Applications as a viable VC investment category is dead.

Companies like Digital Chocolate (founded by software gaming pioneer Trip Hawkins) are now painfully aware of that. Recenty switching gears, it is debatable whether they can compete with the endless supply of a new free-market.

The future of many companies like Aeroprise, still basking in the glory of a proprietary Blackberry environment and tucked away in the enterprise mobile markets, will be severely threatened by standards-based technlogy running on any internet capable device, very soon.

The premium market of mobile applications protected by walled gardens has been changed to a free-market by Apple’s iPhone and the App Store. Macro-economics, discussed in this blog many times before, at work again.

Rather than single minded companies being able to protect their turf with a collection of proprietary applications (usually aimed at businesses), now individuals will start to create applications for other users. By the people, for the people. N/N :the airplane code for Steve Jobs’ Gulfstream. Get it already?

User-generated-content (one of those awkward Silicon Valley attempts of describing content that resides in a free marketplace) has a brand new companion, it is called: applications.

But these applications are no longer mobile applications, they are internet applications - that happen to run on a great mobile internet device. And they will run on many other internet devices, hard-wired or mobile. Think of them as the big brother of widgets, task oriented applications that remove the need to use a browser to benefit from the Internet. They target regular consumers, not internet savvy technologists and they self-configure, based on location and other user preferences.

So the investment model for mobile has changed dramatically and the recently announced $100M iFund (by top investment firm KPCB) and a similar one by BlackBerry - the vehicle of purportedly investing $1M per application vendor - makes no sense at all. Here is why:

1/ User-generated content does not provide a great foundation for large upside - let alone an acquisition or IPO that is priced to produce interesting VC returns.

2/ The value to the VC is in the “winner-takes-all” platform, not the content (albeit that produces great value and choice to the consumer). Apple, with the App Store platform for distributing applications using free-market principles (although still not perfect, check out our marketplace rules) will again walk away with the same benefits it reaped from the iTunes store, direct and halo.

3/ Application development is a very high cost business, especially in a highly competitive marketplace. The gaming industry wrapped in a slower transition from premium to free-market is finding that out too.

4/ Mobile used to be a proprietary, and protectable, path to the internet. No longer. The intelligence of the backend service, accessed through a mobile of hard-wired computing device is where the value is.

So, i suggest to rename the iFund in Software-As- A-Service fund, agnostic to access paradigm.

Nokia and Blackberry (RIM) will have to follow quickly. But they would need to start hiring people that understand macro-economics, not just technologists that create poor copies of Apple’s implementation.

All phones need to have a real operating system inside, and Roger McNamee’s investment in Palm may make sense in that way, but they better step it up quickly. Nokia is off playing with Symbian, Microsoft has its own concotion. All of them pretty much asleep at the macro-economic wheel.

Yet for individuals, on the supply and buy side, all this disruption leads to new opportunities that are derived from a meritocracy. Fantastic applications are being developed and used in massive numbers. The world is indeed flat after all.

Tags: Apple, Nokia, Blackberry, Free-market, Marketplace, Meritocracy, SaaS, Proprietary, Gaming, Funds, Wall-Street, ITunes, Mobile

Finally the market is talking, and I knew it would have more impact than my blog:


(from VentureBeat)

By Georges van Hoegaerden

Years back we suggested the diminishing value of micro-economic innovation (or technology silos) and a stubborn VC club that still operates under old fashioned principles (see “In Search of the Economist VC” written in 2005, “10 Investment lessons learned” and “Invest different” in 2008) as the main reason for this decline.

Alex Haislip on PEHub agrees:
“The VC industry is laboring under a set of outdated assumptions, a structure optimized for conditions no longer applicable and an unwillingness or inability to embrace the tectonic change it is undergoing. The hand wringing about various short term shocks (such as skittish investors) that sunk the second quarter’s IPOs misses any serious discussion of the long-term systemic shifts that many VCs have failed to act on.”

What needs to change is:

1/ VCs need to start investing in businesses rather than technologies
No one outside of Silicon Valley cares about Web2.0, Mashups, UPnP etc unless it proves to deliver a unique experience, deliver substantial competitive advantage or significant cost savings to customers. Indeed, back to fundamentals.

2/ VCs need to embrace different investment models
We need a long-and-short and high-and-low in technology investments, and everything in-between. With a business centric view of the world comes an investment model that is tailored to that business. Every unique company ecosystem has unique financial requirements. History has shown not all businesses benefit from low-ball investments; the majority of seed stage deals go for less than half the price of a regular house in Palo Alto. The superficial categorization of businesses in technology categories is turning new business opportunities into (forced) commodities.

3/ VCs need to change how they find deals
The problem starts at first encounter. The Ivy League kids fresh out of business school that are the first point of contact for most entrepreneurs are just not capable and experienced enough to spot disruptive technologies that have macro-economic impact. A first time pilot right out of school is not allowed to take the helm of a commercial airliner, neither should an MBA graduate be allowed to veto an investment. False negatives are rampant and deflating overall market value. We need unconventonal companies, not more conventional ones.

But the great thing about the demise of the current VC model is the need to create a new one that, in turn, spawns a new more exciting asset class.

Tags: Investment, Eco-systems, VC, Limited Partners

By Georges van Hoegaerden

Photography is a fantastic craft to which now, with the introduction of digital photography, many more people have access. Great photography relies on an ecosystem of factors (technical: shutter-speed, exposure, aperture, depth of field, ISO etc. and non-technical) to turn a simple scene into a compelling vision. Just like in business.

The similarities between photography and business are remarkable:

1/ The Art of Seeing
Great photography starts with an ability to see in the same way great innovation starts with an ability to imagine. Spotting a scene and finding extraordinary simplicity in detail is what lays the foundation for a great photograph and business. More so than the ability to master the camera, time is of the essence. Shoot it - now - with whatever camera, as that scene may never come back. So do the great opportunities in business. Carpe diem.

2/ Establish Focus
Every photograph needs a clear focal point, just like a business. One, and not more than one. But focus is not always obvious and in the middle of the viewfinder. Focus in photography and business is achieved through experience of knowing what that focus yields. In business that defines how you are percieved by your customers. As a photographer, you determine where the focus is and set the right angle. As a CEO you establish the focus and direction.

3/ Set a Composition
Composition determines what you see beyond the focal point. Other objects in the viewfinder compete for attention with your focal point, but a great composition takes your eye on a journey to the focal point and strengthens its attraction. Lines, shapes, curves and contrast establish focal point supremacy. In the same way competition in business strengthens (not weakens) the unique appeal of your business.

4/ Evaluate Exposure
Exposure determines how much light you let in. Too much or too little light washes out great detail. Too much or too little exposure undervalues or overvalues the company, either one turns off customers. Use exposure to enhance great value, not to displace it. Use public relations and marketing wisely. So, locate the real business value before you expose it. Exposures can usually be fixed afterwards.

5/ Measure Depth-of-Field
Depth-of-field establishes what is in the foreground and what is not. What is important and what is less important. In business, razorsharp focus is required to establish a solid bottom-line. But a business without “depth-of-field” is a one trick pony. A great bokeh (a photography term for the background pattern established by an f-stop) determines its longevity and - ultimately - sustainability.

6/ Know Technology
Technology is becoming more relevant in photography and similar is the impact in the business world. Technology determines how the end product can be shared and organically find its massive appeal. Now, through the internet, great photographs and great businesses will find a new audience that was previously unreachable. New, more free, markets are opened up and new opportunities arise.

For me personally, photography is a way to relax, but in actuality it is an extension of what I do in business every day. I am always looking for unique moments in time, taking great pictures and building great businesses, that perhaps - others don’t see.

Tags: Photography, Markets, Free-market, Eco-systems, CEO, Marketing, Experience

By Georges van Hoegaerden

Is the question that was posed to me recently. My short answer is: macro-economics.

1/ Apple technology is proprietary, all the way
Apple is creating a premium computing platform, rather than an open and commoditized one. Premium markets precede open markets and dish up much higher profit margins. Proprietary environments also allows Apple to control the differentiated customer experience.

2/ Apple is focused on lifestyle computing
Apple is focused on creating solutions to support our lifestyle - a massive addressable market - that consists of music, photography, video etc., rather than esoteric office software for people with lots of technology expertise.

3/ Apple is building an ecosystem
Apple is focused on supporting a differentiated ecosystem, rather than building competitive technology silos. The sum of all lifestyle components interacting with each other make it unique. The iPod remains competitive because of the iTunes store that is accessible through a (Mac) computer and vice versa. Their capabilities are tied to each other.

4/ Apple is building an unique customer experience
The experience of purchasing, innovative design, great product quality, and unique (in-store) customer support provides the evidence of a company that wants to please you.

There are many other differences, some of which also lie in a fundamentally different product development strategy. But top-level differentiation drives micro-economics.

Other companies face an uphil battle if they don’t compete with Apple at the macro level first.

Tags: Apple, Margin, Mac, Eco-systems, Proprietary, Software, Platform

By Georges van Hoegaerden

The key to understanding customers is to observe them, rather than to listen to them. As in most life scenarios, what people do and what they say are quite different. And your product strategy better be focused on real purchasing behavior rather than yet another opinion - stated as a fact.

For that reason, the way large technology companies implement usability studies is useless, as these studies attempt to formulate an opinion from people who should be buying - but have not - and use the wrong method to derive their intent, verbal rather than behavioral. Unbridled wishes, promises and demands from prospects are worthless. Yet priceless is the behavior and satisfaction of buyers.

So, without the customer telling you what to do, how do you improve your chances of success:

1/ Focus on greenfield adoption
Many so-called markets have no real market leaders owning more than 30% market share. Technology adoption is still in its infancy and plenty of room exists to tap into greenfield markets. Even in a fast growing market like the mobile phone industry where Apple is resetting the rules of engagement, a large demographic still does not use a mobile phone. So, the trick is to come up with a new strategy for the ever changing greenfield, rather than stealing market share by building a better mouse trap.

2/ Define the macro-economic impact of your technology
Consumer technology should yield immediate personal benefit and become an indisposable asset to the daily tasks we perform. It should save considerable more time than it takes to learn. The iPhone is a portable lifestyle device, rather than just a better version of the old category mobile phone. Redefine the rules from the top.

3/ Build a unique customer experience
Style, performance and capability are important consumer product characteristics and so is the purchasing and support experience. Satisfactory life-cycle support of the product is crucial to secure brand loyalty. Ever noticed how almost half of the Apple Store is dedicated to improving customer experience?

4/ Remove the technology language from the equation
Adoption by a greenfield market demands the development of a user-experience, marketing messages, and support experience that is void of technology language and solely talks about usage benefit - rather than how it is achieved technologically. Notice how the marketing of the iPhone is fundamentally different from the Nokia N95 (same price range), full of references to technology protocols (like UPnP) a greenfield market should not have to know about.

The success of technology innovation is increasingly related to how well companies serve steady customer behavior. That behavior has extensively been studied by so many non-technology companies ahead of us.

That’s why I spend so much time listening to the wisdom of CEOs like A.G. Lafley (CEO of Procter & Gamble), Mickey Drexler (CEO of J. Crew, former CEO of GAP, Apple BoD), Jack Welch (former CEO GE) and many other consumer CEOs who put themselves constantly in the shoes of the customer and define what they would like the purchasing experience to be.

It is not hard to detect the patterns of success, but as a CEO you would need to be committed to keep looking at your company from the outside in (rather than from the inside out), and experience the company from a customer perspective.

Get ahead of change and tune in to Charlie Rose on NPR (KQED in the Bay Area) for some great lessons from the masters.

Tags: Entrepreneurs, Innovation, Consumer, Markets, Apple, IPhone, Nokia, Startup, Experience

By Georges van Hoegaerden

Nothing is sweeter than success, real success, hard earned success. That is what my grandfather achieved when he helped create the company (van Melle) that still makes the Mentos candy today and, in the early 1900s turned it into a worldwide company and brand. Every day, I strive to live up to his achievements. Not just to make a buck, but to fundamentally challenge the establishment and contribute to improving the world we live in. Albeit my sweet spot is technology.

Building a business is all about people; entrepreneurs and investors working hard together towards achieving the common goal. Too many times do I see or hear from investors how entrepreneurs finagle their way into the money pot, with damaging consequences.

While I do not consider myself in the league of Donald Trump in terms of inspirational speaking, I do want to emphasize how important the evaluation of personal skills are to support a great company. I learned some valuable lessons from my grandfather early on - not by asking him many questions (I was too young to do so intelligently) - but by watching him operate. My grandfather did not have access to the funds we have at our disposal in Silicon Valley, but the rules of success have not changed.

1/ Have an opinion.
Unless you are ill informed, having an opinion and expressing it is vital. Vital to you personally - in achieving what you want, and vital to the company you work for - to provide the best quality of service. If you can't see the flaws around you (and in yourself from time to time), you won't be able to detect or imagine true innovation.

2/ Have guts.
The world is full of artificial rules to keep us all in check. Throw them out from time to time, just to see what happens. I run a stoplight litmus test with most entrepreneurs, to demonstrate how tucked-in we still are. And you'll be amazed.

3/ Have integrity.
The goal of creating a lasting personal brand should outweigh the short-term obsession of making money. "Nice" people don't make great impressions, what they stand for does. I bet you'll make more money sticking to your personal brand, then you ever will chasing dollars.

4/ Be transparent.
Transparency is the fair assessment of capabilities, good and bad, combined with the ability to expose them. The companies we create together inherit our good and bad, yet no one will suffer if they are exposed properly. Quite the opposite, transparency builds fairness and trust.

5/ Find your passion.
You will not see me go-green anytime soon, even though there is a lot of money to be made there. My passion is technology, specifically consumer technology and has been since I was twelve years old. I was lucky in that way, but it hasn't been easy, extricating myself from common beliefs. Explore your own true passion (not that of someone else), and don't rest until you've found it.

Many times is the path to success cut short, not by the market, but by the entrepreneurs themselves. As a CEO I have left companies where major shareholders lack or infringe on those fundamental principles, and I killed investments for similar reasons.

The real sweet taste of success is being true to yourself. So, next time you knock on your investors' doors, pay a little more attention to yourself - rather than the business plan.

(In memory of my hero and grandfather Simon de Smit, I miss him in more ways than one)

Tags: Investment, Integrity, Transparency

By Georges van Hoegaerden

As an entrepreneur, getting to know your Venture Capitalist is important, especially because their life is not as cushy as you may think.

Just imagine the onslaught of business plans they get, and how much time it takes to find that rewarding investment. Eliminating the false positives and false negatives takes time, lots of it. We personally reviewed about 40 companies over the last 7 months, yielding 3 companies that have huge potential for our investors but they need work. Hard, fun work. But life of the VC doesn't end there. Knowing the goals of your VC (in terms of fund composition and exit requirements) will make you better understand why a VC firm behaves the way it does. Its fund needs to end up in the top quartile, with or without you.

Operating on both sides of the isle and getting to know the investors I work with better, I attended the AAMA-AAAIM session in San Francisco called "Fund Management As A Business" (presentation in pdf used with permission from AAMA), moderated by the skilled and jovial Robert Grady, Managing Director of The Carlyle Group with a fantastic group of fund managers (Hamilton Lane, SFERS) and a surprisingly honest VC (Altos Ventures). I wish everyone in the investment community was as transparent as this group so we can remove some of the stigma around VC.

Here are three reasons why VCs don't have it that easy:

1/ Many more VCs need to compete aggressively on a relative steady amount of fundable deals, hovering around 4,000 equity investments in venture backed companies per year. The number of VC firms has grown from 399 in 1990 with $31B under management, to 798 firms in 2006 driving $236B into the US venture marketplace.

2/ Joe Schoendorf (Partner at Accel Partners and board-member of World Economic Forum) confirms that less than 5% of the VCs deliver the goods that sustains technology as an investible asset class. That means 95% of the investors are probably stressed out. So don't take a lack of response or a no from a VC too personal. VCs deal with complicated and sometimes long drawn investment strategies (it took Altos Ventures 3 years to land their last fund). Investment allocations may be another reason why you don't always get a quick response for your technology venture.

3/ VCs are working hard. The exits of about 400 M&A plus IPO transactions per year account for less than 10% of total venture investments made. And in order to get a successful exit, VCs review more than 20 times (and that's a conservative assessment) the amount of business plans before they invest in one. So, south of 0.5% is where their - and your - statistical probability of producing a successful exit lies.

The same criteria that apply to the return of the collective technology investments made by a VC with a fund, applies to their Limited Partners (LPs) trying to find great collective VC returns for their Investors (Pension Funds, Insurance Companies, Endowments/Foundations etc). The VC is sandwiched smack in the middle between the entrepreneur and LPs breathing down their neck. Their only "luxury" is time: 5 years of investing and 5 years of harvesting.

As an entrepreneur you can't worry too much about the statistics, if you did you wouldn't be an entrepreneur. But that the amount of deals is slightly on the rise again, perhaps indirectly spurred by massive influx from sovereign funds, means access to money - to live out your dream is improving slightly.

But be prepared to talk to more VCs and saddle up for an extensive roadshow. Fact remains: the cost of doing business to entrepreneurs and investors has increased dramatically.

Tags: Investment, Innovation, VC, Funds, Limited Partners, CalPERS

By Georges van Hoegaerden

I just came back from a trip to Europe and let me tell you: Belgian chocolate, raw herring from Holland and ficelle from France - nothing is more authentic and delicious.

But few of these travel well or find a large deserving audience in the United States. Much like technology.

The state of the technology industry and the accompanying investment ecosystem in the US are quite a bit more developed than in Europe, 15 years at least.

In the US, roughly $30B per year is poured into early stage companies by some 300 investors in my backyard in Palo Alto, not including Private Equity deals. In contrast, only a handful European early stage VCs exist and the majority of all european investments are late stage investments done by Private Equity firms.

In Europe, early stage VC valuations hover around $1M, compared to $4-7M in the US. As a result desperate european entrepreneurs often default to Angels that show some flexibility, but those investors are often very inexperienced with the technology sector and early stage investing or the combination. They made their money somewhere else. Because of the young history of technology success in Europe, very few european investors (either VC or Angel) have actually had the personal experience of building an early stage technology company from scratch.

To sum it up, european investors (with a few exceptions) take large early equity stakes, provide limited relevant business insight and push those companies to early profitability (even at 250K euro investment levels). Selling a product or a service too hastily, before it is ready to enter a global marketplace delivers NO validation of the business, good or bad. But it is a sure way to slow down its innovation and differentiation.

So, underdeveloped access to quality early stage money makes life of entrepreneurs in Europe quite difficult.

But, let's assume you passed the bar on all the above and your company is on its way to the United States. No one can stop you in the pursuit of the great early exit opportunities only Silicon Valley can offer.

So here are some things to be aware of:

1/ A cherry, picked by an investor in Europe is not always a cherry in the US. Be sure you understand - or seek advice about the timing differences between continents that attract follow-on investors in the US. Some of that timing has to do with technology, but market timing is even more crucial.

2/ Plan ahead. Allocate a larger fundraising runway than you would in Europe. To US investors foreign companies are yet another risk they need to mitigate. By default you are less attractive than a US company.

3/ Modify your operating plan. Change it from a plan to profitability to a plan to market dominance (which could include profitability but can also have other primary denominations as drivers, such as owning a majority of eye-balls in the consumer space).

4/ Move your headquarters to the US. Without it you'll find very few US investors interested.

5/ Assuming you get this far, be open to a recap. US investors understand the equilibrium of shareholdings will provide the best business value, not exorbitant ownership of the initial investor achieved through a low initial valuation. But since the US valuation should increase significantly, the initial investors should not lose too much net value, if at all.

6/ Hire a local management team that understands how to perform in a petri-dish that is quite different from Europe.

My final recommendation is to be prepared before you come over and not put your head in the sand, I can give you a long (and still growing) list of foreign companies that were forced to move back.

For larger US VC firms there is a fantastic opportunity to scout for technologists in Europe and fold them into their US investment model before they've taken in too much local money. I see technologists in Europe building innovation that is at least as good as the in the US. Remember the most delicious chocolates from Belgium?

But, the worlds largest chocolate factory is Hershey's located in the US. The name of the game remains matching sufficient technological capability to a fast growing market, in the same way Hershey's reaches a much larger audience than Belgian chocolates - with a quality that is good enough for most. Market timing, not technology, is key.

Tags: Investment, European, Private Equity, VC, Angels, Marketplace, Markets, Silicon Valley, Palo Alto

By Georges van Hoegaerden

We can look at Microsoft and Apple and compare them strategically: Microsoft is the plumbing for a commoditized desktop computing market where Apple delivers a unique computing experience based primarily on its proprietary technology stack. Microsoft as the complacent market leader, Apple as the wannabe - fighting hard to win share. Apple, in tune with today's computing lifestyle as the innovator, Microsoft as the raw execution machine, buying innovation where needed.

But for me, in the shoes of an end-user, all of that is summed up in a simple way:
Type in CNN in Safari (without url etc, just as we wrote it here) and then type in CNN (again without any internet "grammar") in Explorer. Here is what you get:

Microsoft (standard installation Windows XP):


Apple (standard installation OS10.4+):


Bottom line: with Apple you get what you expect, with Microsoft you get spun into their web, literally.

Maybe this is Microsoft's tactic to produce page hits to compete with Google: any user that doesn't know how to type in a URL will be rerouted by default to MSN search. I call that cheating, Microsoft. But even with those tricks, you still need Yahoo!

Getting and keeping customers is about integrity and authenticity, not sneaky monetization techniques to squeeze every cent out of every visitor - leading them down the endless path of search. I am glad Apple is around and here to stay. There is nothing better than getting what you want, quickly.

BTW: talking about Microsoft's complacency, does it still not have anti-aliasing sorted out - or is that the big improvement in Vista?

Tags: Apple, Microsoft, Experience, Yahoo

By Georges van Hoegaerden

We communicate with each other using a common language and we obviously become more effective when we all understand that language. However, technology complicates our lives as each piece of technology we interact with requires us to learn a new (proprietary) language; a set of rules, technology grammar and a unique user-interface experience.

Think about it, when Larry King on national TV stumbles over his own URL (yes, language) and messes up http, semicolon and slash (or was it backslash), I can't help but think about the hell we put users through to use the internet. Only if you understand that language do you get to benefit from its capabilities. That's like forcing anyone that wants to vacation in Mexico to speak Spanish first. The Mexican tourist industry would grind to a halt.

It gets worse, for example, to make photographs look better, Photoshop (and now with Photoshop Express) and many other photo-editing applications deploy a language that requires users to understand the intricacies of color and light and apply that language in the right order.

Here is a synopsis of the skill level my mother-in-law would need to master in order to make her photographs look better: first increase the dynamic range using a histogram, then use curves to change the tonal values to your liking, apply the right white balance and improve saturation and vibrance. Indeed, what I just described is the introduction of yet another language to solve a pretty mundane problem.

To create a web page, we introduce yet another language, a compilation of HTML, Perl, Ajax and Flash usually contained within a desktop product with its own proprietary language. To write a book we wrestle with 90% of Microsoft Word's functionality and language we seldom use, trying to figure out how to create a table of contents. In Excel we use another language consisting of non-intuitive formulas (like sum() ) to derive values from other cells. Should I go on?

So why is it that we seem to get away with it - or are we? For one, lots of people make money understanding a computing language that fewer others do. Web designers don't always create better design, but they understand the language of design, and can implement it. So, web designers don't want you to know there are better ways to do this. Adobe is probably not in a hurry to remove the language and erode its premium market, it could have created much more democratization in the website creation process. Many times have designers, with corporate marketeers in tow, abjected the use of Rapidweaver, a tool that attempts to democratize web design (this site is built with it).

But we are fooling ourselves. The democratization of the internet requires that we make technology more accessible and easier to understand and implement. Only then will it reach real mass adoption.

We could easily build technology that figures out how to make the majority of images look better, or design a web page by drawing it - rather than programming, or have Word make recommendations for a table of contents when it discovers one.

The iPhone is a great example of how packaging existing technologies in a different way, can make people feel that they don't need to learn a new language to communicate with it. My 3 year old daughter uses it. Each of the individual technologies in the iPhone had been around for a while, Apple "just" packaged it so the language became intuitive.

But Apple is not the only vendor that can remove the computing language from the equation, others just need to pay attention to it.

So when you design products, pay attention to the removal of the language, fewer yet intuitive options - rather than more. After all, for thousands of years, we ourselves, have communicated in many other ways than verbal, the majority of our communication remains behavioral.

Innovation has become the art of packaging a flawless user experience, rather than a race to add features. The latter quickly becomes commoditized anyway.

Tags: Apple, IPhone, Experience, Microsoft, Adobe, Photography, Internet, Democracy, Communication, Innovation

By Georges van Hoegaerden

Since a platform is the technology foundation for a marketplace, platforms - to achieve extraordinary growth - need to instill the rules of marketplaces as we laid them out in our previous post.

But not all platforms are created equal and some self-proclaimed platform vendors do not adhere to marketplace principles. That could mean you as a provider think you subscribed to a meritocracy - with equal opportunity exposure - yet other participants (your competitors) get pay-to-play advantages. Potential buyers in that tainted market are actually shopping in a premium market, not the free-market they expect to be most economic and trustworthy.

Other synonyms of the same phenomenon abused in the technology industry include: ecosystems, exchanges, communities and networks which all serve identical needs in connecting disparate supply with disparate demand, something a premium market is unable to do.

Consumer companies understand the freedom of choice customers demand. Enterprise software and services vendors have long basked in the glory of premium markets and have a long way to go in order to truly build winner-takes-all free-markets, which in total size are often larger in size than the total size of premium markets in that category.

In the Enterprise space the majority of customers (roughly 80%) buying products or services deviate from its intended design and want to add on, integrate or correlate those off-the-shelve configurations with other ones. Enterprise customers often spend more money on customization than they spend on licensing fees for say, Oracle products. Hence the requirement for a true marketplace of additional enterprise components (check out Serena, great concept but marketplace execution and marketplace compliance - yet to be developed - will be the tell-tale of their real success). Salesforce.com's Appexchange seems to provide the best proximity to a free-market of applications we've seen, although we have yet to verify its integrity against the marketplace rules.

Developer programs from companies like Oracle (with OTN), Microsoft (MSDN) and others use surrogate models of marketplaces to mimic, but not truly deliver on its powerful benefits. Go visit their websites and you'll notice no mention of third party products. There literally is no marketplace, although Microsoft has a link to "a library", if you can find it.

Apple (with the iPhone Developer Network) is experimenting with its rules but apart from compliance to the free-pricing rule, its overall compliance to a free-market is minimal. And, today, they don't need to. Apple still has time to deploy some premium market tricks as long as Google with Android doesn't deliver on a real marketplace for developers early.

As a software provider you may need to run on and comply to a major vendor's technology, just don't assume a developer network, exchange or community will make you rich - not until the marketplace supports a true meritocracy. And for that, again, real marketplace principles need to be deployed.

Tags: Marketplace, Oracle, Microsoft, Apple, Google, Android, Enterprise, Networks, Eco-systems, Meritocracy

By Georges van Hoegaerden

If you've read my previous blog on marketplace rules, you would agree. Amazon.com is a Super Store which, by expanding the relationship with other premium suppliers mimics the appearance of a marketplace. And because Jeff Bezos associates Amazon.com with a marketplace frequently, I stand to correct him:

Marketplace rules.
Rule #1: Failed. Amazon limits the supplier participation to their premium strategy.
Rule #2: Failed. Limited suppliers means limited transactions are available
Rule #3: Failed. Amazon regulates the process of how a transaction takes place, conforming to Amazon pricing models
Rule #4: Failed. Once you book an order from a different supplier than Amazon, all bets are off with regards to transparency, shipping, returns etc
Rule #5: Failed. There is no way for new buyers to see who bought what at what price and equally for sellers who sold what.
Rule #6: Failed. User opinions are irrelevant if they are not borne out of a transaction.
Rule #7: Perhaps not relevant here.
Rule #8: Failed. Amazon is "competing" in the "marketplace" with its suppliers

Amazon will have a much harder time to sustain growth and meet Wall Street expectations, as a lot of growth through premium suppliers will become non-organic (or sell through revenues). Amazon has plenty of opportunity to migrate to a real marketplace without losing its footing, but it better hurry. In the meantime, Jeff, please call Amazon what it is: earth's premium selection.

Tags: Marketplace, Amazon, Bezos

By Georges van Hoegaerden

There is a lot of misconception about marketplaces and I wanted to summarize my response to benefit more entrepreneurs.

Real marketplaces are much more powerful than just a collection of stores. Amazon, for example is a Super Store not a marketplace today. EBay, FaceBook and YouTube represent more fundamental marketplace principles - and as a result - fascinating growth.

Marketplaces are a favorite topic these days, perhaps spawned by sky high valuations for social-media platforms such as FaceBook and Bebo. A social-media platform, you know, is nothing more than a marketplace in which personal attributes are traded (through the use of social applications).

Marketplaces are interesting because, if implemented successfully, provide massive user adoption and winner-takes-all leadership positions. Great traits for any investment portfolio. A marketplace is highly disruptive in a market where the premium opportunity, the Super Store model has been exhausted - or simply does not exist. Some markets, because of their highly fragmented nature, cannot be captured by high margin and proprietary access and a marketplace is the only way to leverage its total size.

I have written extensively about marketplace criteria in specific markets and its origination about 600 years back, so I won't cover that specifically here. But so many other markets are ripe for marketplace macro-economics delivered by technology. Virtually any market characterized by unique transactions between large amounts of sellers and buyers is a candidate for free-market principles. The life-cycle of proprietary markets is dramatically shortened by the Internet, a distribution medium that instantly removes artificial boundaries such as geographic location and limited access.

Here are 8 rules that make a marketplace succeed:

1/ Un-arbitrated participation
No seller or buyer should be banned from participating in the marketplace. A key fundamental of a marketplace is that it grows itself and that the quality of the buyer and seller is a reflection of the market, not controlled by the market. After-all, the purpose is to connect The Long Tail of supply with The Long Tail of demand.

2/ Un-arbitrated transactions
Apart from exchanges that are illegal by law, no transactions should be banned. People come to a marketplace to perform a unique transaction, one they could not act on in a premium market.

3/ Free pricing mechanisms
Pricing models and terms are defined either by the seller or buyer or by both. Not by the marketplace. Pricing models can include such transactions as sell, auction, reverse auction or subscription - or even a combination of those. Pricing, including free, is completely and independently determined by or between seller and buyer, predetermined or negotiated. The marketplace takes a simple transaction fee off of the transaction value.

4/ Predictable behavior
Marketplaces need to establish trust in order to survive and thrive. Pricing models and behavior of the marketplace need to be predictable and follow (not dictate) the goals of buyers and sellers. The marketplace should follow the needs of the market not the other way around.

5/ Transparency of transactions
Marketplaces rely on a vast new influx of sellers and buyers to grow to massive size. That means the marketplace must operate with a transparency that shows new buyers or sellers how to become successful as most of its users are greenfield participants.

6/ Meritocracy builds reputation
Trading favors and segmentation can be established but only based on mechanisms that are derived from real transactions, not plainly from user opinions. Opinions are useless if not supported by a proven reputation within the marketplace. Transactions based reputations provides long-lasting stickiness to the marketplace.

7/ Support for intermediaries
For existing markets moving from premium to a free-market, its existing intermediaries need to be able to continue to represent their sellers or buyers. A new technology marketplace should not want to disintermediate or alienate those agents.

8/ Non-compete
The marketplace cannot itself participate in the marketplace by providing its own transactions or even participate in - or act on behalf of - transactions between sellers and buyers. Apart from the fact that the business models don't jive, a marketplace cannot be trusted when it simultaneously participates and facilitates an impartial exchange.

So, a simple method to determine whether a marketplace has massive market potential is to hold it up against the rules provided here. These rules are macro-economic principles that dictate how markets behave and grow, the technology implementation must support those principles to have a chance of making it big. It's a free world after all.

Tags: Marketplace, Startup, Social Media, Long Tail, EBay, FaceBook, YouTube, Amazon, Transparency, Free-market

By Georges van Hoegaerden

Over the last 10 years I've also been closely involved with early stage technology funding (advising VC firms and Angels) and have invested personal time and money in early stage ventures. That has given me a unique perspective of the challenges between entrepreneurs and investors.

I've written about my Top 10 fundraising lessons for entrepreneurs, and dare to follow up with my Top 10 investment strategies that may be useful to investors and entrepreneurs, here:

1) Invest in the founders, but be wary if the company consists of technologists only. The ones that come in without an operating plan clearly do not understand what you as an investor are looking for. Get a real operator in early.

2) Invest in the business, don't invest in technology. The statistics prove it: ninety-nine out of a hundred of the most innovative technologies never turn into successful businesses. Especially investors (both VC and Angels) that made their money in the hay-days of technology have a tendency to underfund the business side, providing a weak foundation for any technology to succeed.

3) Don't invest in an early stage company with more than one product or service. Let the company become the King-of-One, rather than the King-of-None. Multiple products or services require more money to support successfully and dramatically dilutes the focus of the company. Multiple products or services also "invite" a larger group of competitors, making it hard for customers to perceive true differentiation and unknowingly, slows down adoption.

4) Don't invest in an early stage company with more than one business model. Keep it simple. Multiple revenue models sound good, but usually don't yield the projected outcome. The company should make all of its money in advertising or in subscriptions, not in both. Dilution of focus is costly and provides yet another reason for failure.

5) Don't invest in companies that rely heavily on partner support early on. This is the typical David and Goliath phenomenon. Partners sell once the company does in overwhelming numbers. The company should always have direct control of its own business model first, before they allow any partner to reduce its margins.

6) Invest money or time, don't do both. I very much relate to Carl Icahn in an interview with Dan Primack (on PEhub) with regards to CEOs responsibility to make the numbers work, and not to rely on investors to "add value". The CEO is in the driver seat, take him out if he doesn't produce.

7) Look for fundamental changes in customer experience. The Ultimate Driving Experience is what sets BMW apart, not just the timing in their engines. Customer experience is much more than a pretty user interface, it is an overall experience that spawns disruptive purchasing.

8) Watch how professional the team operates pre-funding as an indication of their interaction post-funding and with customers. Real professionals do everything with a purpose and I have mastered the art of detecting them. So well that I can tell from a visit to a trade-show floor whether a company is going places.

9) Don't categorize investment allocations based on past investments or trends. Every company is unique and requires an amount of money unique to their assets: people, timing, market and ecosystem. If you don't think you have a unique scenario, you probably don't have a valuable investment opportunity.

10) Invest with passion but don't fall in love with the company. Investing is the ultimate flirting game, but it is usually a bad idea to get really involved. Your asset value is the selection and performance of all the companies in your fund. Stick with what you do best.

From an investment perspective I see many "sub-optimizations" but not a lot of real great innovations these days. I do blame the current investment model for that sometimes. We, in Silicon Valley, have too many technology investors using the same rearview-mirror investment criteria. Although I have a lot of admiration for Apple, it is a bad sign when we need to leave real innovation in the hands of large companies like theirs.

The landscape for investors is about to change dramatically, no longer can they just continue to invest in proprietary technology silos at single digit valuations. They'll soon need to broaden their experience ("in search of the Economist VC") to understand the macro-economic impact of marketplaces, platforms and the impact of technology to other industries.

A wonderful long road for technology innovation and investing still lies ahead.

Tags: BMW, Experience, Disruption, Revenues, CEO, Timing, Markets, Investment, Startup, Apple

By Georges van Hoegaerden

I visited the entrepreneurs week at Stanford this week where many MBAs were walking around with new business ideas. Since we raised a fair amount of money ourselves in the last 10 years we've been focused on startups, I wanted to give some advice that may be helpful to any first time entrepreneur:

1) Define the end goal of the company in a newly defined market
The determination of pre-money valuation, even for the first round, should be based on the disruptiveness of the company when it grows up. The goal is to find the investor that understands the path to that goal, not an assessment of the current value of the company. The starting valuation then becomes a reverse calculation from that goal.

2) Don't set a valuation, but have one in mind
The valuation is usually suggested by the investor, but ofcourse, you don't have to take it. Ask your potential investor to value the company after you give them the pitch, the outcome of that tells you whether the investor really understands your unique proposition. If it is too low, it may be because the clarity of your pitch. If not: walk away.

3) Have an operating plan ready
An operating plan defines how you turn technology into a business, without it there is simply too much room for debate and depreciation. Show investors you know how to run the business. The more you do the easier it is to cement your use-of-proceeds.

4) Find an investor you truly like
Every entrepreneur deserves to be treated with respect. Waste no time talking to deep pockets with awful personalities, but don't be afraid to get some straight talk. Check TheFunded.com for war stories and ask around. Later, when business gets tough bad guys usually get a lot worse.

5) Define business disruptiveness
Building technology is one thing, but yielding a disruptive business value is even more relevant. The latter is defined by macro-economics, not just a more clever way to improve existing technology.

6) Take passion over domain expertise any-day
Find a lead investor that has passion for the business problem you are about to solve. An investor that claims to have domain expertise is usually the one that doesn't understand disruption within or across that domain.

7) Don't get squeezed
Investors like to put investments into past investment categories and make an assessment of how much it costs to build your business. Don't let them stray too much from what is in your operating plan, if you do you will get punished for it later, both on the execution side as well as in excessive dilution.

8) Know the investment allocation
Usually a little harder to do with angels but VCs should have a total investment amount allocated to the business. Ask them for the total allocation upfront, so you know when you need to go shopping somewhere else. Also, don't be afraid to ask who else needs to sign off on this deal within the VC firm, in most cases it is a very democratic process internally with a primary sponsor. After your first meeting you should get in front of a General Partner, talking terms.

9) Control your own eco-system
Investors like to wiggle around and determine how much money should go into R&D, Sales, Marketing, Business development, Support and G&A. Too much money in marketing is usually an indication the product or service lacks real viral adoption and that should be avoided. If the balance of this eco-system is not guarded heavily by the entrepreneurs the result is an excessive bleeding and further dilution in subsequent rounds.

10) Balance your board
A board without a balance of technical and business expertise can really bring a company down when the going gets tough. The technical board members will spend too much time validating deep technology progress without real affinity for the bottom-line. On the flip side a demand for too early revenues can have disastrous effects on product or service readiness and customer experience. Keep them both in check.

Be honest and transparent, too much talk without real interaction with a prospective investor is a bad sign. Paint a realistic risk-management picture, in which you describe both the pluses and minuses, not unlike the way a VC sells their risks in a Private Placement Memorandum (PPM) to its limited partners. Feel free to e-mail us if you need help.

Tags: Investment, VC, Angels, Markets, Eco-systems, Business Model, Startup, Innovation

By Georges van Hoegaerden

Getty-Images pulled it off as we indicated would happen, and sold itself to private equity group Hellman & Friedman LLC in San Francisco (and the "network of the private equity group" which apparently includes the Getty empire) for a little over 2x revenues, assuming also an additional $300M in debt. Someone clearly felt that was an accurate price for its organic growth business: "Wall Street was paying more attention to the stagnating core business than to its emerging segments."

Indeed, non-organic growth is hardly ever a sustainable endeavor, lacks core competency and focus and often hides many skeletons in the closet. Now the fun part of discovering its real value starts, although the company does not forecast a lot of changes according to this interview with Jonathan Klein, Getty-Images' CEO and PDN. We could suggest a few fundamental changes along the lines of my blogs and then some.

But anyway you cut it, this will turn out to be good for photographers and the market. New competitors will spring up and VCs will now perhaps see the value in supporting imaging marketplaces. So for that, we need to congratulate Getty-Images.

Tags: Getty-Images, Investment Banks, Revenues, Wall-Street, Debt, Organic growth

By Georges van Hoegaerden

I bought the Apple TV the moment it came out about 9 months or so ago. Initially surprised by the tethering requirement to a computer running iTunes, I used it quite a bit as a giant picture frame (showing off on a 50" plasma), playing music during parties and watching kids shows with my daughter. Now, with Take 2, Apple has stepped it up and provides HD quality movies (and 5.1 Dolby Digital audio) and, less talked about, removed the need for a separate Airport Express to stream any iTunes audio through your Entertainment center.

But very interesting to see is how a technology called Bonjour (formerly Rendezvous - 13 year old Apple technology, first available in AppleTalk) automatically finds and connects iTunes capable devices on the network and staving off the need for central media management. And it does so quite well and transparently. Movies, music purchased on the Apple TV show up on the iTunes on your laptop and vice versa. When Comcast showed off a central media server for the home at CES 2007 that could stream content to any of your cable connected devices, I thought it was going to give Apple a run for its money on the movie rental business. But more than one year past and still product from Comcast in sight. Don't even start about the current Comcast DVR mess, possibly the worst UI experience I've ever encountered (the Tivo deal may ease the pain a little, but the early news is not encouraging). With Apple TV, no more runs to Blockbuster, or mailing DVDs to and from Netflix, just sit at home and watch whatever you want.

What I admire most about Apple is its ability to not just create new products but that it adjust its business and operating model so those products can succeed. That is a gift bigger companies like Oracle (my former employer) and Microsoft can learn from. Media and content are the new Consumer Packaged Goods of this century and if technology vendors don't invest in the ecosystem around it their technology solutions will continue to yield mediocre user experiences and sub-par adoption.

In converging media markets, the new leaders are going to be the ones that build disruptive business models first and great technology products to support that, second.

Can't wait for Apple to strike a deal with Comcast and similar to the iPhone strategy, replace the Comcast DVR with an Apple TV capable of receiving regular broadcasts as well as tap into the power of iTunes. All Apple needs to do is use its cash war-chest to "threaten" ComCast to go at it alone, just like it "convinced" AT&T it would be better for AT&T not to let Apple become a Mobile Virtual Network Operator.

Tags: Apple, Broadcast, Comcast, Consumer Packaged Goods, DVR, Netflix, Media, Entertainment, ITunes, HD, Mobile

By Georges van Hoegaerden

We could debunk every statement Getty-Images made with regards to its recent earnings call but we've essentially done so in our extensive blogs about the company. Apart from the negative outcome of the call, we instead want to highlight the systemic attitudinal problem of the company.

First off, Getty's success is based on the fact that it believes it can predict how images (or other media assets) are going to be used by the buyer. It continuously re-purposes images and image rights to meet a supposed buying trends it is never going to be able to predict. With massive changes in photography Getty has frequently trailed trends rather than enabled them. The usage of the image should be determined between seller and buyer, with Getty's infrastructure merely supporting that transaction.

Second, the usage and type classification in the earnings call is the kind of double dipping I've seen many companies in trouble do. There is a dramatic overlap between editorial, creative, rights managed, royalty free, royalty ready and a myriad of other popular image definitions. The sole metric of success for the company is number of images sold at what ASP, and at what cost. No Wall-Street investor will be able to make sense of the fog Getty has put up in the conference call to hide the fact that organic growth is miserable.

Third, Getty arrogantly describes their (lackluster) performance as the market trend, as if they are the market. No, Getty, the market of image usage is actually growing faster than you are able to support. The real news is that Getty is losing market-share.

The lack of transparency makes Getty-Images an un-investable business, both from a market and acquisition perspective. The bottom line from the call simply confirms that, forget about everything in-between.

Tags: Getty-Images, Growth, ASP, Wall-Street, Content, Organic growth, Investment Banks, Images

By Georges van Hoegaerden

While there may be some value left in Getty-Images, remodeling an "old-house" in this case appears to be much more expensive than building a new one. We just completed a formal business plan to build a real photography marketplace for less than $5M first round (est. $13M total, less than 1 fiscal quarter of Getty's capital expenditures, to shed light on Getty's inefficient business model).

The "body" of the Total Addressable Market is $22B / year, ignoring the size of the Long Tail of photography Getty-Images has no penetration in, we will. So, a $13M investment would yield $600M in annual revenues based on 30% market-share (even if we were to cover "the body" only). A darn good business, and best of all, it will help great new photographers get "free" and transparent access to buyers. So good karma too. The walled gardens of the imaging marketplace will be torn down. Call or e-mail me if you want to play.

Tags: Getty-Images, Free-market, Funds, Photography, Long Tail, Marketplace, Markets, Revenues

By Georges van Hoegaerden

Apple has just released Aperture 2.0 today. A nice product to manage your photographs has gotten even nicer. But -- there should not be a need for Aperture.



Digital asset management, which is the predominant function of applications like Aperture and Adobe Lightroom, should not need to exist, especially not if you are Apple. If Steve Jobs were to take his own media hub strategy serious, advanced asset management capabilities should be available right in the file-system, as a function of the OS. Asset management for photographs is why people buy computers today, so why still does a separate application need to deal with our most precious assets. Incremental revenues perhaps?

Today's proprietary photo management systems eat disk space like nothing else. Non-destructive editing is supported by making superfluous copies of originals (especially when using an external editor). The derivatives are usually many times larger in size than their originals (especially when stored in TIFF or PSD), which forces you to stock up on hard disk space. I will keep using LightZone as my main photo editor and save precious disk space by leaving my photographs right where they are. Can't wait till the operating system innovates and supports photographs natively.

Tags: Adobe, Photography, LightZone, Aperture, OS X, Asset Management

By Georges van Hoegaerden

Getty-Images appears to be having trouble getting sold for $1.5B according to an article in The New York Times today. Perhaps the 40+ investment banks on Wall street and an equal amount of large private companies that visited our website really took our Puffer Fish analogy to heart.

So what could be done with Getty-Images? The problem with finding an acquisition partner is Getty-Images' hybrid business model. For a technology acquirer the services business with staff photographers is a burden they will not want to swallow. On the flip side, very few other services companies than perhaps the Associated Press can find solace in the photographer factory that is an integral part of Getty-Images.

1/ Buy company at a decent value
2/ Separate content producer business from content distribution
3/ Privatize each
4/ Sell content production business
5/ Revamp content distribution

ad 1/ To establish a fair price I am eager to see the operating plan metrics separating content production from content distribution in order to find out to what extend both lines of businesses have suffered from being under one roof (there may be some opportunity hidden in there)

ad 2/ Content production is a business model that, in today's world, needs to be separated from distribution. With the internet in place as the conduit for distribution, very few company can still afford to compete with the content produced by a "free-market". There is some remaining value left in the production of "premium" content for a "premium" audience, in the same way the Associated Press is able to provide this service to a confederation or co-op of newspapers.

ad 3/ Build companies that focus on what they do best, one produces content - one distributes it. Not within a single company or P&L or board. Each with its own growth trajectory.

ad 4/ Just like in the "premium" production of news articles (where bloggers compete), the news media will require a "premium" production of editorial photographs that has some trust associated with it. Perhaps a deal can be struck with AP - or a new version of AP can be created with identical goals. Getty-Images already has established a large installed base of agencies who can lease resources on a subscription basis.

ad 5/ Long term, content distribution is where the money is. The Long Tail of photography is massive, much larger in total image exchange than any Super-Store will ever be. Thanks to the Internet. But to build an effective free-market, a core of premium supply is needed to create its initial pull, Getty-Images certainly has that. To make this new company a winner though, it needs to truly support free-market principles, something very few companies can pull off.

We'd be happy to assist in the assessment of the Getty-Images acquisition value along the lines of the aforementioned strategy and even more in the post-acquisition execution. Our passion for photography, the ever increasing reach of the internet, and the value produced by all photographers around the world creates a fantastic new opportunity.

Tags: Getty-Images, Wall-Street, Investment Banks, Associated Press, puffer fish, Hybrid, Business Model, Content, Premium, Bloggers, Free-market, Super-Store, Long Tail

By Georges van Hoegaerden

So, if you've read my blogs on the imaging market here .... why would you plunk down $1.5B to acquire an Image Super Store like Getty-Images (alias Getty).

Consider this:
1/ Non-agency images are always owned by photographers not by Getty
2/ Getty's assets can vaporize quickly, photographers can switch their assets to a better marketplace instantly
3/ The vast majority of images in the world are not transacted through Getty
4/ Getty qualifies premium photographers not premium images
5/ Getty needs to cannibalize its business model in order to meet the Long Tail market requirements
6/ Getty is diluting focus to higher margin media like film and music, fat chance
7/ Getty has the expensive overhead of an agency, with declining image ASPs
8/ Hundreds of new and competing sites indicate Getty's non-supremacy

There is value in Getty-Images, as an agency or as an image store, but I would not put two diametrically opposing business models on the same P&L. Neither one is worth $1.5B. The imaging Puffer Fish is about to deflate.

Tags: Getty-Images, Super-Store, ASP, Agency, Images, Photographers, Media, Margin

By Georges van Hoegaerden

The Puffer Fish of the imaging market, as described in my previous blog have large volumes of fleeting image assets. Yes, dear Wall-street analyst, they may have been experiencing double-digit growth temporarily but we believe that originates from non-organic growth and growth attributable to the incorporation of that non-organic supply into the global brand, in Getty-Images' case for example. If you keep buying stock photography companies you delight existing buyers with an ever increasing supply, but the novelty of that supply wears off real fast. In the end that apparent growth comes at a high cost. So witnessed by the most recent disappointing earnings reports.



Jupiter-images is literally pursueing an image super-store strategy, a copy of Getty-Images' strategy. They too have been buying stock companies. Stock companies strike deals with photographers to create a good looking selection. Yet most images have a value that is completely photographer agnostic. The value is in the photograph, not the photographer. So, a super-store of images by definition contains a small amount of sellable images.

But the real interesting fact about the imaging industry (and many related to it) is that all images have fleeting value, especially after they have been sold for the first time. Photography is the ultimate Long Tail market, with a very, very long tail and a tiny body. A great reason why any player with a "premium" imaging strategy is relegated to selling to very small and concentrated set of buyers.

Not unlike the music industry where we are used to buying music collections on CDs, a large part of the stock photography market still sells collections of photographs to artificially increase the number of images sold and the average sales price (ASP) per image. As a result, investors may think the ASP is somewhat stable and predictable and the value of the super-store may not be as grim as it seems. But Super-stores will never contain enough image variations to meet Long Tail demand. As a result, commissioned photography is still going strong.

Most photographers that produce sellable images still sell their images offline and commissioned. The ones that do sell online, literally use a total of hundreds of photo-sites today to tap into a Long Tail demand. All these factors are hardly evidence that Getty Images is indeed meeting the needs of the photography market.

On a side note: MacNN reported this week that Adobe has halted its stock photo library, perhaps it is getting ready to buy Getty-Images? I think they are smarter than that.

Tags: Getty-Images, Wall-Street, Non-organic, Stock, Earnings, Long Tail, Premium, Images, ASP, Adobe, Stock, Super-Store

By Georges van Hoegaerden

I have received a lot of inquiries from Wall-street personalities and companies due to the gracious blog posting in PE Week Wire on the imaging marketplace, so I wanted to dive deeper to clarify beyond just the financials.

1/ Getty-Images does not clearly distinguish between total addressable market and "market", probably to puff itself up as the owner of the imaging marketplace. More than 50% of (traceable corporate) images produced (by about 17,000 commercial Photography companies in the US) are generated by suppliers making less than $5M in revenues and have less than 10 employees. Very few of those (less than 1%) use Getty-Images as their distribution channel. In fact the majority of images sold in the world are traded offline, yes, offline (Getty-Images started its online presence in 2000, after going public on NASDAQ in July of 1996 and re-listing on NYSE in 1998). In addition, the peer-to-peer exchange of digital images, we estimate, is at least twice the size of the traceable exchange. It is quite irrelevant if Getty-Images is performing better than its peers, but Getty-Images by no means owns more than 10% of the addressable market. The risk for Getty is that a new kid on the block will be more successful in emptying out the market with a new business model, rather than outperform the existing players.

2/ Getty-Images is not a marketplace, it is a Super-Store in the economic sense of those definitions. A large part of the images in their store are produced by their own photographers (organic and non-organic) and sold to their existing, primarily agency customers. But the real definition of a "free-market" marketplace is that customer own their product which they sell, un-arbitrated and completely transparent, to buyers. Getty-Images charges exorbitant commissions (known to be in the range of 60%), which can't hardly be considered a marketplace transaction fee. It is suggested on the internet that Getty-Images plays unfair, even include changing photographs and forcing the original photographers to hand Getty-Images an additional 100% of the delta. True or not, that is not the kind of trust that makes anyone believe that Getty-Images will become a true marketplace.

3/ The photo acronyms are meaningless. Stock photography does not exist. It is an artificial definition, used mostly to identify a low priced photograph. But a "stock" photograph can be sold rights-managed, royalty free or exclusive and in the new world of publishing even be published as editorial. And therefor, being the leader in stock photography means absolutely NOTHING. Did you know an exclusive photograph is really not exclusive (it is only exclusive to a certain usage), that a buyer has no guarantee that the photo does not show up somewhere else. So, the only measure of success is how many photographs the company has sold and how many times over.

4/ Getty-Images has very restrictive policies to let users participate in their Super-Store, another sign it does not meet a true marketplace definition. WIth dSLR sales growing last year at 60% rate and 9B images produced on those cameras (18B cumulative dSLR images since 2003), Getty-Images is clearly not successful in monetizing the exchange of those images (even if you argue the majority of images have no re-sale value). The number of professional photographers is estimated to be around 36,000 according to PPA and D&B numbers. We believe Getty-Images falls short on counting the majority of those as their suppliers. We believe the unincorporated semi-pros that produce at least one sellable image to be much, much larger (cumulative roughly around 9M dSLR have been sold since 2003).

So, regardless from which angle you slice the business, Getty-Images by no means, has amassed critical penetration in the Total Addressable Market of image exchange. But if you artificially constrict the size of the market by calling it stock, rights-managed, royalty free, editorial or creative, perhaps you can swing it. Undoubtedly someone will buy into it.

Tags: Getty-Images, Corbis, Jupiter-images, PE Week, Wall-Street, PE Week, Images, Revenues, Stock, Super-Store, Cameras

By Georges van Hoegaerden

A Puffer Fish is a fish that blows itself up to dramatically change its appearance and size: not unlike Getty-Images (GYI), Corbis and Jupiter-Images (JUPM) in the imaging market. All three have hybrid business models that disguise the money they really make in the exchange of digital photography. But we know better, we've analyzed empirical data and studied their reports carefully.

That does not mean these "Three Bandits" are failures: Getty-Images is very successful as a photography agency (doing about $805M in revenues per year), Corbis is a very rich catalog of historic photographs stashed away in a bunker in Pennsylvania, slowly being digitized at a cost of about $25 per photograph (revenues around $250M). Jupiter-Images is the division of JupiterMedia, formerly a magazine publishing and events company, now morphing into a content acquisition company.

But they are not a successes either. Organic growth of these companies is well below the growth of the image exchange market and their combined market share is less than 10% of the image exchange addressable market. So, while the $1.5B asking price for Getty-Images doesn't sound outrageous (less than 2x revenues), what you're buying is an outsourced photography agency. Getty-Images is in essence a people factory with ever eroding profit margins.

Twenty years ago Getty-Images started with a $20M investment from grandpa Getty and has continued to purchased a wide array of photo agencies (hence the Puffer Fish) and large libraries of photographs that over time become stale rather than increase in value. The average sales price of those, primarily editorial, photographs is declining steadily (more so than creative photography), leaving the company with a large family of complacent celebrity photographers and mainstream content only the a select few publishing agencies are interested in.

With publishers (of all kind) looking for original content, the imaging Super Store approach (as described here) from the Three Bandits is fundamentally flawed. But the reason why we don't believe in the longevity of their business models (and their asking price) is that they ignore and suppress the massive influx of new digital photographers that create phenomenal high quality and original content most publishers would be dying to get their hands on.

So anyone buying these companies will soon find out how small Puffer Fish really are.

Tags: Getty-Images, Corbis, Jupiter-images, Photography, puffer fish, Photographers, Margin, Editorial, Super-Store

By Georges van Hoegaerden

I have received quite a few comments on my previous post (like this) on the imaging marketplace and I am making an attempt to clarify my condensed writing.

The market of selling photographs is fundamentally different than that of selling music, books or other goods. Rather than selling "premium" supply as defined by the number of people that buy the same product, the value of a photograph is defined by how little it sells (just like art). Fundamentally a photography superstore (like Getty Images, Corbis, Jupiter Images and even Digital Railroad) that sell the same image the way Amazon sells books yields the wrong value to the buyer.

A buyer doesn't want the photograph he is about to purchase see appear in deep circulation, yet a reader of a book makes a buying decision based on popular opinion (Oprah, iTunes) and purchases it too. Selling images (and art) requires an inverted superstore that derives its value from the massive distinctive images it sells. Coincidentally the imaging marketplace has changed dramatically from a monolithic market (between agency and pro-photographer) to a Long Tail of supply and demand (between anyone and anyone).

A fantastic opportunity lies ahead to create a new marketplace for photography that caters to new and high growth audiences. Don't get discouraged by the puffer fish of the imaging industry, that portray they own the market. They don't.

Tags: Getty-Images, Premium, Corbis, Jupiter-images, Digital Railroad, Amazon, Photographers, Monolithic, Free-market, Long Tail

By Georges van Hoegaerden

Two weeks ago Digital Railroad (a private digital photo aggregator, funded by Venrock and Morgenthaler) announced it was restructuring, cutting half of its employees and repositioning the company into a photo marketplace. Today Getty Images (GYI) is said to be looking for a buyer at around $1.5B, after its stock price is unable to recover for more than two years. And Corbis, well -- Corbis is being kept afloat by Bill Gates. Swallowing stock photography companies as fast as it can is Jupiter Images' attempt to boost its potential acquisition price, a strategy that didn't work so well for Getty Images. So, why are these companies not growing organically while the dSLR market that produces those images is growing 60% YTY and GMV of the image market is north of $22B.

Here is my take: the imaging markets consists of demi-cartels that produce "premium" supply that does not meet the requirements of an ever growing and changing market of buyers. No longer is the size of the buyer's market dictated by agencies nor is the new seller's market defined by the old definition of pro-photographers. As a result sell side content does not find enough buyers and the only way to make money is to make sellers believe that if their work is good enough, it will sell.....nice promise. Out of desperation most photographers post their images on multiple websites to get maximum visibility, a true testament of an inefficient market.

Getty Images is really a hybrid business, it has about 3,000 photographers on staff and does editorial projects for its main customers and in armored trucks if it needs to, providing news worthy photography on location. The side-business of Getty is the stock photography business which yields ever declining average sales prices for royalty free and rights managed photography. So, in essence, Getty Images was trying to become a "record" company with its own supply while on the side playing the independent party with a transparent image store; i.e. the "free-market" supply is competing with Getty's core business model. Over the years, many photographers have complained of unfair practices that gives better treatment to Getty's images than to the supply from individual photographers.

The Digital Photography market is in the same state as the music industry (albeit condensed in time) , premium supply doesn't turn out to be premium, demand has changed and the "record" companies in this space have no other option but to erode their premier status business model. I was right three years ago, let that be noted.

As for Digital Railroad, I doubt that they'll develop the macro-economic strategies that determine the success of any real "free-market" marketplace at this point. It would take a sizable investment in technology to turn a super-store into a "free-market". Adobe is rumored to be working on an image marketplace, but here too, the devil is in the details.

We don't need another Amazon.com of the photography business but a real free-market in which YOU the photographer and buyer make decisions on what transactions you want to engage in.

Tags: Digital Railroad, Getty-Images, Corbis, Startup, Jupiter-images, Premium, Photography, Amazon, Adobe, Stock