The story
1. Wild mutations and new species develop on the forest floor:
The Web 2.0 ecosystem is generating wildly mutating, fast-establishing,
pioneering “one server” businesses that are being sold to larger
players such as Yahoo or Google or Microsoft or News Corp.
The small Web 2.0 businesses are viable on their own.
2. Big animals who have learned how to graft small animals onto their skins:
But the small businesses are much more valuable to the big
players. This is because the big players have pooled advertisers
by the millions and have a powerful advertising payment system.
The small services add richness and stickiness to the big hairball Web
2.0 portal services who in turn reap vast profits from ad revenues. The
small businesses are purchased for a one-time fixed price, and add
little incremental cost to the large portal services.
3. Big animals need these
adding-small-animals-equals-extended-capability-grafts as they fight
each other for survival:
A battle royal of galactic proportions is raging among the big service portals.
The one-server businesses are key resources to the big players at
war. For a recent example, check out the aquisition of Trueo by AOL, announced today.
(For imagery, check out Warhammer 40K, the ultimate board game where species can grow weapons
from their hides, or for example add on a string of external adrenal glands in
order to get pumped up. My son likes Carnifex, for example.)
4. A funding process is needed that performs like the consumer mortgage loan system:
Mortages can be pre-approved and rapidly commited in a fast real estate
market, and can move with enough speed to participate in auctions if
necessary.
Like real estate, the funding cycle for the successful one-server
companies can now be a matter of weeks between first significant
funding and sale to a large or aspiring portal service. Examples
include de.licio.us, flickr, etc. etc.
5.
In order to participate in the Web 2.0 class of assets one must be able
to move quickly in at least two investment modes:
A. Rapidly invest in early-stage companies, in order to hold them and
possibly fix them up a bit before sales to larger companies.
Angels have the advantage in rapidly investing in small
companies.
Angel networks are becoming more and more effective by pooling
individual investments and doing centralized diligence, risk
management, and investment management.
B. Participate in rolling up smaller companies, in order to become a
larger portal company and give the current big companies
competition. Corporate investors have the advantage in rolling up
small companies, because they can move quickly and strategically to put
together clusters of companies into a larger organism, to buy a
foundation for a line of innovation (that is, a stem cell line), and to
buy access to customer communities, successful brands, and momentum.
6. There is a gap in the ecosystem between A and B:
There needs to be a class of institution that sits between the Angel
networks and the large companies. It would operate like the
lending department of a consumer bank.
The bank would do significant investments for buying technologies (i.e.
land), the bank would provide funds to build out a company (i.e.
construction financing), it would offer lines of credit for operations
i.e. (home equity and “cash out” financing to deal with temporary
financial shortages), and the bank would be able to provide temporary
bridge financing when a company is on the market to bigger players.
The bank would re-engineer the small company investment process to
emphasize speed (e.g. with pre-approved credit, rapid decisions,
streamlined closings).
Risk management would be built into a transparent and efficient systems
(think credit scores, property assessments, title search,
surveys). In part because of these systems, your banker would be
able to be customer focused.
7. Your banker would be customer focused:
Your banker would be a customer-focused facilitator to help you build
or buy your dream business (like new style mortgage bankers).
Your banker would not present himself as a harsh, macho evaluator
who seeks to convince you that you are an unrealistic fool and need his
very expensive “mentorship” (think 50s style mortgage bankers, 60s
style consumer bankers, 70s style business bankers–and current day
venture capitalists)
8. The bank would provide a number of other convenient services for members of the ecosystem:
In addition, the bank would provide a number of other services that
would make the market more efficient. It would provide research
coverage of the market for innovation and small companes, and potential
buyers. It would keep track of prices and trends.
It would maintain a rating system to keep track of the credit of entrepreneurs and backers.
The bank would invent new ways to charge for the funds it provides and for its services.
The bank would over time develop ways to deal with problem situations,
including helping faciltate sales of companies in trouble to white
knights on reasonable terms.
9. The bank would support an ethos of empowerment and open information:
Ethos is an asset for a modern consumer bank, which competes to be
friendly, efficient, and welcoming. To be honest, the ethos of
the modern venture capitalist is a problem for the entrepreneur
customer. The ethos is one of control, and it starts high up in
the great chain of funding, high above the individual venture
capitalist and his or her customer. This is what makes it so
pernicious. Most of the recent innovation in the industry has to
do with contractual control exercised by the funding limited partners
over the investing general partners, who in turn seek to establish
control over their preferred-stock-co-investors in any given
company. And of course the preferred investors have control over
management and the common stock holders.
In sharp contrast, the mortgage industry is made empowering from top to
bottom by pooling (Fanny Mae and securitization of large bundles of
mortgages at the top, and pooling of risks within bundles), extensive
rating systems for borrowers, properties, and financial
instruments. Pooling and systematic risk management and standard
contracts make control a function of the system, and empowerment a function of the organizations and especially the bankers.
The business model of venture capital exploits information
asymetries. The venture capital firm is valuable to its limited
partners because it provides access to an otherwise hidden ecosystem
jungle where value is created but suckers fleeced. It is in the
interest of the ventuer capitalist to keep the Web 2.0 and other
startup ecosystems part of a dark continent of mystery. The
venture capital firm exploits entrepreneurs by establishing a cartel
with other venture players, locking out new competing firms, and
locking in any given deal by the process of “lead” and
“syndication.” Finally, the venture capitalist insists on terms
the establish future control (”I only do 49% in the first round, no
less”) and financing mechanics (”full ratchet”) that have consequences
that are much better understood by the VC–based on living through and
discussing many many scenerios–than by the entrepreneur. Like
playing chess with Bobby Fischer, the entepreneur understands the game
but cannot model all of the relevant scenarious flowing from any given
term.
Entrepreneur and banker should have the same information in the new
Web 2.0 bank. Consider that the mortgage system operates based on
high levels of open
competition stimulated by open information available to all
participants. Very high transparency makes the process fast-moving and
honest, and limits compensation to players. We need the
same in Web 2.0.
10. The Web 2.0 bank will shift the basis of competition among funders to customer focus and customer service:
The locus of competition in banking has shifted to customer service,
brand, volume, and seamless processes to support the customer and the
transaction.
I think that a Web 2.0 bank could introduce this form of service to the
Web 2.0 ecosystem of ideas, innovation, entrepreneurs, teams.
