Investing in the Misunderstood

Fred Wilson has some words of advice for people looking for places to invest their money:

When people ask me, "how do you know which companies and services are going to be the biggest successes?", I usually tell them to look for the companies and services that are mocked and misunderstood. For some reason, that correlates highly with the biggest breakout successes.

That seems reasonable, to a point. If you see momentum toward a product or technology that "doesn't make sense to me", odds are you're missing something. And the more investors who say, "That doesn't make sense, so I'm not going to invest in it," the more opportunity there is for those who see its virtues, or don't see its virtues but trust in the wisdom of the crowd, to become early investors in a technology that may turn out to be the next big thing.

As a VC, Wilson has experience investing money in ventures that fail. So I don't want to read too much into his defense of Twitter, a phenomenal social success that has had great difficulty translating traffic into revenue.

For years, every post, column, or article written about Twitter would have comment after comment making fun of a service where people "told the world what they had for lunch." Of course, people were doing that on Twitter and people still do that on Twitter. But what those mocking Twitter were missing is that in between the tweets about pizza and pita were posts about politics and poetry. There was substance in the midst of nonsense.

I've commented on what I believe to be the primary attraction of Twitter, the illusion of close contact or relationships with other Twitter members, including celebrities. But whatever you make of Twitter, and even if you filter the wheat from the chaff so as to read about "politics and poetry" rather than "pizza and pita", it's difficult to see how that distinguishes Twitter from other technologies or starts it down the path toward profitability. Before the public's attention shifted to Twitter feeds and walls, the blogosphere was ridiculed for its superficiality - despite being full of good political commentary, poetry, and information of substance that in a Twitter feed would appear only as a link. Twitter is not a unique, stand-alone phenomenon, but is part of a progression of technologies that facilitate the public exchange of information. But is that enough to make it viable in the longer-term? It's an open question. The dot-com graveyard is full of good ideas that attracted traffic but made no money, as well as companies who did not find a way to monetize their ideas before they were copied and commoditized by others, and even of companies that briefly made money before being supplaced by something "newer and shinier" or swallowed by and incorporated into a larger company.

If I were investing millions in startups, and expected that only one in three of my investments would succeed, a company like Twitter might look like a good bet. Get in early enough and there's a possibility of making serious money when the company finds a way to turn its traffic into cash. Even if the company never figures out how to turn a profit, it may still be possible for it to go public and provide a huge return on my investment at that time. But as an individual, investing on a very different scale and with very different expectations, my first real chance to get in on a company like Twitter is after the IPO - and if you look at recent IPO's for similar companies, if you join the early rush to buy their stock on the promise or expectation that they'll eventually figure out a path to profitability you're apt to lose some money.

The Lifespan of Dot Coms

A while back I read an editorial that argued,

It appears to take about 10 to 15 years for technology to improve enough to make a new idea powerful enough to dislodge the incumbent money maker on the Web. To date, no one has been successful at turning around an Internet company that is past its peak.

I agree with that in part - it has proved to be very difficult to turn around a failing Internet company. But I disagree with the author's concept of the 10-15 year lifespan, or her reasoning behind asserting such a lifespan.

Consumer-oriented Internet companies are brought to life through the application of a new technology and then unseated about 10 years later by a newer technology. Yahoo had an incumbent advertising platform (display ads) that couldn't do advertising as well as Google search. Google today has an incumbent platform that can't do better than Facebook because Facebook began with a clean sheet of paper and an extra 10 years of technology.

But take a look at MySpace, "unable to turn itself around despite its first-mover advantage", and ask yourself whether that had more to do with outdated technology, or its acquisition by a company that didn't know what to do with it. For an example from much earlier in the life of the Internet, Yahoo! and Excite ran neck-in-neck until Excite was acquired by @Home Networks, and its subsequent tanking seemed to have a lot more to do with post-acquisition management decisions than with technology. I similarly find no merit in the notion that Facebook has an a technological advantage over Google - I suspect the opposite, particularly in relation to its core service of social networking - or that it's nascent advertising platform is going to be Google's undoing.

But as I see another dot com bubble emerge, with our being urged to believe that perennial money-losers like Angie's List, companies with no clear path to significant earnings like LinkedIn, or companies like Groupon and Facebook that respectively claim that their brand is so powerful that we can ignore their unprofitability or that their valuation is justified by their potential to develop new revenue streams from a large user base, I can't help but be reminded of the first dot com bubble.

First, the thing that makes Internet companies so attractive to investors or buyers (and here I'm speaking of VC's, angels and corporate acquisitions, not ordinary investors) seems to be the same thing that makes them vulnerable to collapse. You can start a dot com with a good idea, a tiny core staff, and a seven figure investment. You can create a company ostensibly worth billions that has (or rents) a server farm, and has a few hundred to a couple of thousand employees. But if what the company does is not special, or does not remain special, a competitor will have the opportunity to take most of its market share. When a genuine competitor is available, minor missteps by management can have serious consequences for the company's long-term viability.

Although it's an imperfect test, one interesting thing about companies like LinkedIn, Groupon, Facebook, Twitter and the like is how little disruption there would be if they dropped off the face of the planet. If you woke up tomorrow morning and you weren't an employee of Zynga, how much would your life change if you found that Facebook was gone? Minutes? Hours? If it would take you days, odds are you're either a major online marketer or you simply aren't invested enough in Facebook to take the time to set up, say, a Google Plus account.

Second, no company can survive in the long-term unless it has a path to profitability. If you want to roll the dice on the IPO of an unprofitable or barely profitable Internet company and you're not an insider, recent IPO's confirm that you should wait for the dust to settle as the share price is likely to drop significantly within days to weeks. Even then, you're evoking the expectations of the first dot com bubble - that "eyeballs" will translate to massive profits before the company burns through its cash and investor confidence wanes.

If an Internet company brings nothing special to the table, and barriers to entry remain low, and they lack either the vision or the capital to preempt a "new kid in town," it's reasonable to expect that they will eventually be replaced by a "cool new" alternative. And once your popularity tanks, no matter how cool you were the first time around, if you want to pull off a comeback you will probably need to rebrand.

The Narcissistic Side of Twitter

In thinking about Twitter, and the reason it lives on despite its core functionality being replicated by services like Facebook and Google Plus, two things occurred to me. First, Twitter achieved its initial rise due to an influx of celebrities. Second, Twitter allows ordinary people to follow, or even be followed by, celebrities, to engage in what seems like a conversation, and perhaps even to experience the excitement of having a celebrity respond to or re-tweet something that they have said. Second, it is the faux relationships that continue to drive Twitter. The sense that somebody you have seen on television "knows" you, cares about what you say, or is even reading and writing her own tweets. Yes, some celebrities manage their own feeds. Others have publicists or staff members who handle that for them, yet even when they're known to use proxies other Twitter members still seem to feel the thrill of contact.

Twitter serves celebrities, in that much of celebrity is built upon a false sense of communality or camaraderie, and now you can have "proof" that a celebrity likes you and cares what you have to say. It's an automation of the historically slow process of receiving fan mail, perhaps responding to it, perhaps dropping in a head shot. It's like being a member of a celebrity fan club, but where the celebrity actually "knows you you are" and "shows up". Twitter may be the virtual equivalent of the butler at the door or, for those who tweet through proxies, the virtual equivalent of the intercom between the butler at the door and you outside the locked exterior gate. But if you can't see all of that distancing, is it really there?

What brought this to mind today? A smart person who probably should know better than to care about Paris Hilton in the first place:

Paris Hilton is tweeting up a storm about how much she loves Bali. It's her first visit. She tweeted a few hours ago, "Make a wish. 11.1l.11"

Since I've stood up for Paris on TalkLeft so many times during her various legal difficulties, I thought I'd ask her a favor. I tweeted her in reply:

@ParisHilton I wish you'd visit Aussie Schapelle Corby, doing 20 years for pot in Kerobokan Prison in bli, Pls Google her name.

"I've blogged favorably about her," meets, "She's on Twitter", and somehow that seems to become, "She may listen to me and perhaps even share my outrage at Bali's legal system". Even if we assume Paris manages her own feed, and doesn't pass that task off to a publicist or intern, what about Paris would make you think that her trip to Bali and her raving about the wonders of the country is being driven by her amazement? Would it not be a safer bet that she has been comped or compensated to promote the nation or certain of its attractions, and won't be saying anything negative? (Call me cynical, but I believe Paris's raving is a thinly disguised sales pitch from a somewhat over-the-hill celebrity spokesmodel. Bali isn't under FTC jurisdiction.)

If a celebrity "friends" you on Facebook or, if we're to that point, adds you to a Google Plus circle, you can see (or search for) your face among the tens of thousands of others. Yes, if you want to browse the members somebody claims to follow or his list of followers, your account will be every bit as difficult to find. But Twitter puts the feed, not the faces, front and center. And due to occasional celebrity retweets or responses, people do get reinforced that their tweets are being heard.

I heard a celebrity being interviewed recently (it may have been Louis C.K.) and he mentioned both that he didn't like Twitter and that people got angry at him because he didn't follow anybody. (Solution: Hire an intern?) To me, this highlights the extent to which Twitter flourishes upon the false sense of "He likes me too". Even if you never look at the feed, you'll have a happier population of followers, and probably a much larger one, if you make them think you care what they say. Twitter makes that easy.

I don't mean to diminish Twitter's value as a communication tool. There are people who like it for following news, politics, business tips, etc. I just happen to be coming to the conclusion that the thing that allows Twitter to continue is the false sense of community it creates between its high profile members and their followers and that, absent that, it would be a shadow of its present self. A mere year ago, Justin Bieber was responsible for a full 3% of Twitter's traffic. What does that tell you?

The Dummies Are Real People!

I guess that's sort of a vindication for Newt.

Google Cash or Facebook "Stock"

What a bidding war:

Executives at both Facebook Inc. and Google Inc., among other companies, have held low-level talks with those at Twitter Inc. in recent months to explore the prospect of an acquisition of the messaging service, according to people familiar with the matter. The talks have so far gone nowhere, these people say.

But what's remarkable is the money that people familiar with the matter say frames the discussions with at least some potential suitors: an estimated valuation in the neighborhood of $8 billion to $10 billion.

I would take the cash.

Seriously, I understand why Google is willing to overpay for a company to gain a strong brand and advantage in the marketplace, particularly given its own faltering efforts to enter social networking, and I understand why Facebook would want to keep a significant potential competitor out of Google's hands, but until the Facebook IPO occurs its stock value is every bit as speculative as Twitter's - and it's very complicated to sell, even assuming that the terms of the sale don't require Twitter's investors to sit on the stock until after an IPO. So I would be grateful to Facebook for forcing Google into a bidding war, would sell to Google and, as they say, "Take the money and run."

Despite the high valuations, Twitter's executives and board are continuing to work on building a large, independent company. People familiar with the situation said the company believes it can grow into a $100 billion company.

Because you would expect them to be saying, "We hope we find a sucker to buy this place for vastly more than it's worth before it goes belly up?" Hey, guys, I think my company can grow into a $100 billion company as well. I'll let it go for a mere... let's say $5 billion. A bargain.