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Twitter's opportunity

on 2 February 2016

I’m sure there’s lots of opportunity for Twitter. Real-time is its current strength. Here’s what I see:

Twitter is for connecting with people you don’t know in real life. But discovering, commenting and creating content on Twitter is far from good. It has seriously user experience problems.

Facebook lets people connect with their friends and family. Strangers aren’t welcome. It’s a personal space. Using Facebook is an outstanding experience. The interface and design encourages content consumption, interaction and creation. Liking, sharing and reading are all very high.

LinkedIn is oriented around work. Bullshit is high here, but connecting with strangers is between Facebook and Twitter on the acceptability scale. Everyone has an agenda.

LinkedIn is never going to become more personal. It’s entire userbase is focused around business.

Facebook has tried (with its mysterious ‘Follow’ option) to become less personal, but I’d argue it’s failed and will struggle to do so.

Twitter has the chance to be Facebook for people you don’t know (which is, by definition, most people). It just needs to sort out its UI so that it’s as inviting to browse and share as Facebook. It’s possible that they already see this with the change from ‘Favoriting’ to ‘Liking’ of Tweets, and the rumoured move to long-form content.

My focus at Twitter would be to move away from cliquey bullshit like Tweetstorms, .@ mentions, shortened URLs and the 140 character limit. I’d be heading towards thumbnail previews of links, inline comments, and a clear, untechnical user interface.

The Essays of Warren Buffett

on 24 January 2016

Every year since 1978 Warren Buffet has penned a letter to shareholders in Berkshire Hathaway, his investment vehicle and conglomerate. These letters go far beyond the statutory requirements of a Chairman’s Report, and set out the philosophies and strategies of Buffett and his longtime business partner Charlie Munger.

I’ve just finished reading The Essays of Warren Buffett; a collection of excerpts from the letters, rearranged into topics and lightly abridged in places.

I’m not enormously familiar with Buffett. His business interests are highly US-centric, and in fact I had to research some of the businesses mentioned in the book. He holds stakes in some international brands (American Express, Coca Cola, IBM, and Heinz being the most recognisable) but for me the more interesting areas are the operating companies that are 100% owned by Berkshire. These include:

  • Clayton Homes, a manufacturer of pre-fab homes (I guess trailer parks)
  • GEICO, an insurer
  • General Re, a reinsurer
  • The Buffalo News, a local newspaper and online publisher
  • NetJets, a fractional ownership business for private jets.
  • See’s Candys, a chocolate and confectionary brand.
  • Fruit of the Loom, a clothing manufacturer that supplies primarily workwear.
  • And dozens of others.

With the exception of NetJets I’d never heard of any of these businesses.

In any event, Buffett is well known for his soundbites and quotes (at least one of which I had printed on my business card at one time.) He’s also a skilled writer, with a unique style and a sharp wit. Some of these essays are highly technical (I skipped Federal Taxation…)

Making investments

Buffet repeats almost verbatim in most chapters his approach to making investments. He looks for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. He seeks to buy outstanding businesses at a sensible price, rather than mediocre businesses at a bargain price. Having spent 20 years buying ‘bargain’ businesses, Buffett discovered that “making silk purses out of silk is the best we can do; with sow’s ears, we fail.”

Having found these outstanding businesses Berkshire’s intention is to hold them forever.

Buffett is generally against diversification in equities for a know-something investor, as opposed to a know-nothing investor. He advocates finding and holding five to ten sensibly priced companies with long-term competitive advantages.

In many industries, Charlie and I can’t determine whether we are dealing with a “pet rock” or a “Barbie.” We’ll stick instead with the easy cases.

Fluctuating prices

Given the above criteria and the intent to buy into a business as a long-term investment, rather than speculation, Buffett isn’t afraid of declining stock prices.

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

[…] If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

I particularly like this point, and it is equally applicable to house prices.

On goodwill

See’s Candies is prominently featured in the book - Charlie Munger has said it was the first ‘good’ business that Berkshire bought. Buffett rails against the accounting treatment of goodwill, and contrasts it with the increasingly value of goodwill resulting from a well-run company in the ‘real world.’

It’s hard to think what else I learned from this book. Much of it was too technical for bed-time reading. But I greatly enjoyed the general writing, and particularly the storytelling.

Buy it or build it: Etsy

on 19 January 2016

I’ve been contemplating whether Amazon or eBay would acquire Etsy given that it’s now trading at around a $1bn valuation. This is down 75% from the $4bn it was was valued at when it floated last year.

I’m going to break out a few numbers and take a run at calculating whether Amazon, for an easy example, could just build a new Etsy rather than buy the one that’s there.

Technical

Building the Etsy site and infrastructure is going to take a team of 20 outstanding developers less than a year. Not many top developers would turn down $200k per year for a greenfield project for Amazon. We’ll add $50k to fully load this. So let’s say that’s $5m in salaries. Add another $2m for some product managers and recruiters.

And let’s give everyone a 100% salary bonus if they get this thing shipped by year end. So we’re at $14m for staffing.

Server costs are basically zero. We own AWS already but even if we didn’t, I doubt we could push beyond $1m in the first year (especially given we take a year to get a product up.)

iOS and Android apps - $1m each is a huge budget for outsourcing them. So $2m for both apps.

(I’ll say right now that I’d agree a fixed price to clone Etsy’s site for $2m and I’d have it done in six months.)

So a total for technical of $15m. Let’s double it for no real reason: $30m for a team of c.25 top people.

Office space

We’ll need an office. SF rents are the most expensive in the country at $80 sq ft so let’s base ourselves there. Our team is going to need some luxury digs so let’s give everyone 300 sq ft of desk space. We’ll need 7,500 sq ft of office space, doubled to make room for our ping-pong, fussball tables, Lego kanban boards and more. 15,000 sq ft @ $80 = $1.2m annual rent.

We’ll take a five year lease and pay it up front: $6m. Plus an outrageous $4m of agents’ and legal fees, and fit-out costs. $10m

Business development

We’re going to need to absolutely nail our sales. We need to attract both sellers and buyers - let’s take them separately:

Sellers

At its IPO, Etsy claimed 1.4m active sellers. Rather than debate the merits of this number, we’ll just take it at face value. (Their definition: An active seller is an Etsy seller who has incurred at least one charge from us in the last 12 months.)

Total sales through the platform were $2bn ($1,400 per active seller, per year).

To launch our new marketplace we want Etsy’s biggest sellers to join. So let’s apply the 80/20 principle and pursue the top 20% of their sellers, that’s 280,000 sellers. We’ll just give them all $1,000 in cash for signing up: an irresistible offer. And to get the word out we’ll hire 5 home-based salespeople in every state to pound the streets and visit every craft show and market. We can get these guys for under $100k, including a car. So that’s a salesforce of 250 people at an annual cost of $25m.

So our sales costs for attracting these sellers will be $25m ongoing and an exceptional $280m in cash payments to get them onboard. We’ve got six months to build this sales team while the product team get something built.

Marketing to buyers

We also need buyers. That means building a brand for the general public. So we need to go insane on the advertising.

We’ll pump $50m into developing a brand.

I was surprised to find that 36 US companies spend over $1bn annually on advertising. We’ll be competing with McDonalds, Apple (a recent entrant), and Coca Cola. Going the traditional route is probably not for us but let’s put $200m aside for general TV and print advertising. We need to think a little outside the box.

Some ideas: It’s probably going to work out cheaper to just buy the top 25 craft magazines at $5m each rather than pay for their advertising space. So let’s do that. $125m spent - we’re now the biggest publisher of craft magazines. Some of these mags might even be profitable! But let’s just assume we have to write the whole sum off after a year, and give everything to the staff for $1.

So, at the end of a year, we’ve spent:

  • $30m on building the site.
  • $10m on office space. (prepaid for five years)
  • $25m on a sales team
  • $280m in cash given away to get sellers on board
  • $50m on brand identity and development.
  • $200m on TV and print advertising.
  • $125m on the top 25 craft magazines in the US

A sum total of: $970m

Basically it’s going to come down to a cointoss.

Some notes: Etsy made a loss of $15m last year, so we don’t even have to consider that we’re losing profits by taking a year to do this ourselves - we’re actually saving money!

It’s clear that the value in Etsy is the brand. I don’t know how far into the minds of Americans our $375m annual marketing budget is going to take us.

Etsy’s current annual operating costs are c. $140m

The impending tech slowdown

on 17 January 2016

There’s been talk of a bubble for at least two years, and so far there’s little sign of it bursting (or perhaps even existing). That said, it feels like a few unrelated circumstances are aligning and some sort of downturn this year is now likely.

Public market sentiment

Almost every startup that floated in the past two years is massively down on its IPO price.

Union Square Ventures’ is one of the best regarded funds. Their entire post-IPO portfolio is down over 50%. This worries me.

  • Etsy is down 75% from its float price,
  • Twitter is down 50%.
  • Zynga is down 75% from float.
  • Lending Club is down nearly 80% from float.

And Andreessen Horowitz:

  • Box. Down 65%
  • Groupon. Down almost 90% from float. (although it traded this low in late 2012 before recovering somewhat).

Kleiner Perkins:

  • Square. Down 17% from IPO two months ago. Not as bad as I expected.
  • Teladoc. Down 40% from float.
  • Invuity. Down 50% from floating less than a year ago.
  • Chegg. Down 30%

(I’ve skipped quite a few for Kleiner Perkins because I’d never heard of them…so this might not be representative)

Others recently IPOed:

  • Shopify. Down 30%.
  • Atlassian. Marginally down 10% on its float last month.
  • GoPro. Down 70% from float.
  • Fitbit. Down 48% from float.
  • New Relic. Performing (relatively) well, down around 12% after a stable year on the market.

Having actually researched these prices it’s clearly a bloodbath at the moment. No-one is heading into the public markets in these conditions. An investor looking at these numbers and comparing them with late-stage private market valuations is going to suspect that VCs have been offloading turds while hanging onto the diamonds. I doubt this is the case.

Interest rates are rising

Large amounts of capital have been put into tech startups during this recent period of near-zero interest rates. This is obvious and easily measured for late-stage private companies - those which would, in a normal environment, be pushed into the public markets by the amount of capital they need.

Now that rates are moving upwards this capital will likely dry up - and very quickly if sentiment turns against techs.

At the same time I believe a larger effect has been from the smaller amounts of seed-stage capital deployed into total dead-end ideas (basically 75% of Product Hunt’s front page), tying up anything from one to ten people, and increasing competition for talent. It’s at this end of the market that funding will disappear the quickest and have the most immediate effect. These companies generate zero revenue and have no cushion or scope for downsizing.

Paul Graham has stepped away from YC, the industry’s flagship incubator, and I think this might represent their high-watermark for a few years. But equally the reduction in early-stage funding may return to a situation where startups seek out YC because they need the money, and not because of the prestige and network. I think a lot of lower tier YC-clones will close or hibernate for a while.

Mobile is mature

The mobile operating systems are now clearly either Android or iOS. Blackberry, HP, and Samsung are dead on the software side.

The goldrush on app development is coming to an end. 10 of the 12 top mobile apps in the US are owned by Apple, Facebook and Google.

Gaming on mobile has failed to move beyond ephemeral puzzlers with a simple game mechanic - time-wasters rather than immersive experiences. In-app purchases are widely recognised for the poor value they offer. There will continue to be break-out successes but a lot of the money that flowed into app development, and into marketing and monetizing those apps, will evaporate. Small companies will shut down, large companies will take their write-offs and close divisions. The slack will not be taken up by VR immediately.

Advertising

Anecdotally I see a small drop in CPM rates for adspace on my own properties. Adblocking might become more mainstream. Big publishers with high costs are being greedy with display advertising and pissing off their audiences. I suspect we might see a viscious circle come into play where ad revenue drops, leading to more audacious popups, leading to more ad blocking.

There are also theories that considerable advertising spend is from startups advertising on other startups, and that this pyramid type situation will collapse. The most aggressive advertisers in the sector (Rackspace, Media Temple, InVision and New Relic for example) will all see material drops in their businesses and consequent reductions in spend. None of them is a profit powerhouse (to my knowledge).

Costs

The costs of technology and servers are at rock bottom (effectively zero if managed correctly). But the costs of staff are beyond absurd. Office space and hotels in San Francisco are at record levels - the highest in the US.

The good news

Awesome things are still being built and I think a slowdown is going to trim some fat off the industry. If anything it will increase innovation and we’ll see the huge numbers of bullshitters go back to peddling timeshares or spreadbets. Good startups should hopefully be more recogniseable.

I hope any downturn will free up talent from working on crap, and lower the costs of building products. The fully-loaded cost of a good developer is an absolute minimum of $100k per year in most places in the world now (cheap offshore talent is a myth in my experience.)

Apple, Google, Amazon and particularly Facebook, continue to outperform and I think they might be strong buys if they are pulled down by the rest of the market.

I predict huge growth from Facebook. Their advertising business is still in its infancy. They are attracting top developer talent, and their reputation is strong both among developers and the general public. Facebook have made very few mistakes over their ten years - Facebook Credits and Gifts are two that come to mind. These are petty cash compared to Google - Glass, Hotpot, Wave, Plus, Motorola, those barges…

Some strong companies might come into the public markets this year - Dropbox, Airbnb, Uber. This is probably the make-or-break situation - if they are well-received and sensibly priced then things could go well. But Uber in particular needs capital to sustain itself and may be forced into the market.

Virtual reality might be the next big thing. I don’t know. It will probably be a big thing for a few years and take the pressure off the collapse in mobile apps.

So that’s the end of my rambling thoughts with no real conclusion. I’m far from gloomy.

I own a small amount of stock in Facebook and Twitter.

The incredible slowness of Google indexing

on 15 December 2015

Three months ago I launched How a Car Works in Spanish - succinctly titled Cómo Funciona un Auto. It is the best designed, most accessible and most in-depth Spanish guide to car mechanics available. It’s free, without ads, and heavily optimized for mobile with a Pagespeed score of 95/100, which is exceptional.

And people love it - our Facebook page received 10,000 likes in less than a month. Even better, the Spanish audience is far more engaged with our content than the English. It’s really rewarding to see people sharing and tagging their friends.

But our site traffic comes almost exclusively from Facebook. After three months, Google sends us nothing, and we don’t rank on the first page even for the name of our own site.

I’m used to Google taking a long time to build up steam but this is absurd. We receive literally 20 visitors from Google results each day.

It’s bad for us, and it’s bad for people looking for information on cars. The number one result for “Cómo funciona un auto” for example, is a short blog post embedding a widely circulated infographic - IN ENGLISH.

It took approximately three years for completely unchanged content on How a Car Works to move up the rankings to our current strong position. How can it take three years to decide if content is original and high quality, or just badly written waffle plastered with adverts?

It’s incredibly frustrating. I know that our content is great. For the English site, Guy Kawasaki just tweeted it out, it front paged on Reddit last week. I’ve invested a fairly significant sum in having the content translated to Spanish and building our the backend to enable us to translate the 2,000+ illustrations. But this investment is going to be super slow to payback without any Google traffic.

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