Formula, Not Spreadsheets

Andreessen Tweet Stream: 4/16/14

1/A few common fallacies about valuation of public and private technology companies:

2/First, ask any MBA how to value tech companies, she’ll say “discounted cash flow, just like any other company”

3/Problem: For new & rapidly growing tech co’s, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses.

4/You can run as many DCF spreadsheets as you want and may get nothing that will help you make good tech investment decisions.

5/Related to fact that tech co’s don’t have stable products like soup or brick companies; future cash flows will come from future products.

6/Instead, smart tech investor thinks about: A future product roadmap/opp’y, B bottoms-up market size & growth, C talent and skill of team.

7/Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen.

8/Finance people find this appalling, but investors who do this well can make a lot of money, but spreadsheet investing is often disastrous.

9/Doesn’t mean cash flow doesn’t matter, in fact opposite: this is the path to find tech companies that will generate tons of future cash.

10/Corollary: For tech companies, current cash flow is usually useless for forecasting future cash flow–lagging not leading indicator.

11/This trips up value investors (Prem Watsa!) all the time; tech companies with high cash flows often about to fall off a cliff.

12/Because current cash flows are based on past products not future products. And profitability often breeds complacence and bureaucracy.

13/Always, always, always, the substance is what matters: WHO and WHAT. WHO’s building the products, and WHAT products are they building.

14/Brand will not save you, marketing will not save you, channels will not save you, account control will not save you. It’s the products.

15/Which goes right back to the start: Who are the people, what are the products, and how big is the market. That’s the formula.

Turning The Tide

From Barron’s:

THE GAME CHANGERS on the supply side are the three new types of oil production that have not been counted as part of the oil supply until recently: deepwater oil, shale oil, and oil sands. Each of these sources of oil has been estimated at more than 300 billion barrels, totaling more than one trillion barrels in all. That’s a huge addition to previously estimated reserves of some 1.5 trillion barrels. According to Citigroup energy analyst Eric Lee, a good proportion of the extra trillion barrels could be recoverable at $75 a barrel or less. In fact, he notes that a $75 cost estimate could even be on the high side, as production costs for shale and even deepwater can continue to fall over time.

Business 2.0 2001

Instant Cliques
February 06, 2001
Business 2.0

Jessica M. Scully

Eight years after moving to San Francisco, Alexandria Ducheneaux still sometimes feels socially isolated. “You go to a bar, and everybody is in their own social circles,” says the 30-year-old acupuncturist. “Everybody in the city goes out for lunch on [their] own,” she says. “You look around and you never know anybody.”

Ducheneaux is one of more than 1,000 people who have joinedfreefor, a Website that offers to help people meet one another nationwide. Neither a dating service nor just a virtual community, freefor helps people with similar interests living in the same area link up via the Web, then meet in person for lunch, hiking, biking, book reading, or other activities.

Four friends from Harvard Law School hatched the idea after scattering to separate internship assignments in New York, San Francisco, and Washington, D.C. They thought they could use the Internet to meet new people and help those people meet one another. “A group of us who founded the company were thinking about how rich Internet action was, but as that increased the real-world connection decreased,” says Shahed Amanullah, freefor’s CEO.

His words echo research conducted during the past several years linking time spent on the Web to a decline in face-to-face “real-life” interactions. About a quarter of people who spend five or more hours per week online say they spent less time with family and friends as a result, according to a study by the Stanford Institute for the Quantitative Study of Society.

The situation could get worse, Amanullah says, as Web shopping further erodes people’s chances for serendipitous interactions at book stores, libraries, even grocery stores. So the company’s founders say they simply want to move these chance meetings online as well.

New freefor members fill out a questionnaire on the site regarding their hobbies, interests, and experience level at each. Once registered, they can suggest an activity–say, a game of tennis or a hike. Then the site matches all members likely to be interested in that activity, and emails them a link to a password-protected page where they can post messages to one another to work out details.

Amanullah stresses that freefor is not a dating service; activities require a minimum of three people. And unlike patrons of dating sites, freefor users can’t search for partners based on age, gender, or physical characteristics. “If you’re going to see a movie, and you have the same interests, what does it matter if there’s an 80-year-old grandmother and a teenager?” he says.

Still, who’s to stop romance from crossing a member’s mind? Wendy Lingo of San Jose, Calif., was searching for a beau when she first signed up. But even though the 31-year-old corporate accounts manager met her current boyfriend in a park, she says she still uses freefor to network and to meet new friends. The best thing about freefor, she says, is that it’s a casual, stress-free way to meet people. No photos or vital statistics are required.

Daniel Cravens of Albany, Calif., says freefor events help him indulge his interest in the arts, politics, and history. The 32-year-old lawyer, who recently graduated from Boalt Hall at the University of California at Berkeley, says the “real world” can be a lonely place. “In school, there’s kind of an assumption that everyone’s willing to talk with you,” he says. But in San Francisco’s financial district, where he works, “I don’t necessarily feel that I can be at lunch and just start talking to people sitting at the table next to me.”

Despite raves from users, freefor has a long way to go before reaching a critical mass of members nationwide. The site has been operating only since August, and events have been lunches, mostly in and around San Francisco, the company’s launch pad. The site’s creators are in talks with Internet service providers, wireless companies, and several other large organizations to see if they’ll pay to make the service available to their employees or customers, Amanullah says.

So, if that tennis racket has been sitting idle in your closet, or if you’ve been dying to discuss your favorite sci-fi novel with someone, log on. A whole new social life could be freefor the clicking.

Evolution to FreeFor

Fast Forward: Buddy Listings
by Anthony Zurcher
Washington Post
October 13, 2000

“If your golfing buddy just moved across country or you can’t find anyone to go to the movies with, maybe you should look to your computer instead. That is, by using it, go online and find people with similar interests. Many sites try to do this, but Freefor is one of the more flexible and user-friendly. After joining, you answer a handful of personality questions and sign up for activities that interest you–sports, books, dining and so on. Then, whenever someone with a similar personality organizes an event in your area, you’re automatically invited; you can also plan events of your own. Throughout, personal information is kept confidential; users communicate only through the site instead of via direct e-mail or phone. Note that Freefor emphasizes group social life over pairing off; it’s not a dating service and sets up only more-than-two-person events.”


Students Launch Web Networking Service
By Klaus Hamm
Harvard Law Record
Friday, April 30, 1999

For Samir Bukhari ’99, working at a New York City law firm last summer
was a bit like the visit Ebenezer Scrooge once received from the ghost
of Christmas future.

Seeing lawyers working under so much pressure and in such an alienating
environment that it strained their personal lives, Bukhari saw a vision
of what he did not want to become. And like Scrooge, Bukhari has
decided to do something about it.

His answer is – a Web site founded by Bukhari and three
classmates at HLS. Designed to link professionals with similar
interstes, the third-year students see the often informal culture of
e-mail as a way to make the corporate world they are about to enter a
more pleasant place.

“The idea is to give professionals a flexible tool to join communities
where none existed.” Bukhari said.

Schedule to launch at the end of May, will ask users to
describe their personal and professional interests and to select
preferences. The Web will use matching technology to find
similar-minded people and then send the professionals and e-mail
notifying them that there people are free for lunch. From there, making
the contact is up to the professionals.

It may sound like a computer-assisted dating service, but Bukhari
insists the service is designed to focus on professional connections,
rather than purely personal ones.

Generally, the question we’re most frequently asked is whether or not
this is just a dating service and the answer to that is absolutely not,”
he said.

Eventually, the four founders hope the Web site will take on a life of
its own and become a center for various professional communities.
Co-founder Paul Oostburg Sanz ’99 sees it as a way for minorities to
increase their Web presence and build professional communities more
easily. The third-year students also envision the service fertilizing
cross-professional connections, for example linking lawyers with

The overarching vision, though, will be to combat workplace alienation
and isolation, a phenomenon co-founder Ketan Jhaveri ’99 noticed soon
after starting work as a summer associate last year.

“As soon as you walked into a law firm, you communicated very, very
differently with the same people,” he said. “There was something not
very personal and inhumane about it. There’s something very dishonest
about it.”

In the face of this environment, Jhaveri and Bukhari found their e-mail
communcations taking on the qualities their professional communications

“We realized that one way a lot of us tended to communicate with each
other was through e-mail,” Bukhari said. “In fact, people’s e-mail
lives were really bursting with the richness of new acquaintances.”

“We think people just talk different on e-mail then they do in the
office,” Jhaveri said.

This realization, of course, led to the creation of
The goal is to have the liveliness of e-mail communications cross over
into real life communciations.

Each of the four students has made a small investment in the service.
To help with the technical aspects, they have engaged a programmer and a
Web site designer, both from California. The service will be free, and
although they haven’t ruled out eventually seeking venture capital, the
third-year studetns say their goal is not to crete a money-making

“Our guiding philosophy has been that the relationships in the office
need to be transformed, and we want to replace this sterility, we call
it boardroom sterility, into lunch-room civility,” Bukhari said.

Available May 24th.

Call Options and Chump Change

Fred’s post today is an interesting and related counterpart to Nabeel’s post (see my prior post) about being mission-driven.

“And all of these big tech companies are looking for the next thing to make sure they don’t miss it.. And they will pay real money (to you and me) for a call option on the next thing.

It isn’t clear if the next thing is virtual reality, the internet of things, drones, machine learning, or something else. Larry doesn’t know. Zuck doesn’t know. I don’t know. But the race is on to figure it out. Trillions of dollars of collective market capitalizations are on the line. So a couple billion here or there is chump change. Except for the people who collect that chump change for selling them an option on the next thing. It’s real money to us.

So for the next few years (I have no idea how long this search for what’s next will go on), a game to be playing is building a platform that can plausibly be the next big thing. It’s a risky game. But the payoff can be large. And you can even start by crowdfunding your first round. Man I love this business.”

Being Mission-Driven

Nabeel Hyatt has a thoughtful look back on his investment in Oculus.

The most important point IMHO is that being mission-driven gives you a lot of space with your various constituencies, including customers and partners.

For instance they don’t have a launch date because, simply, they don’t know when the consumer product will be good enough. They have been remarkably open and blunt about the technical hurdles needed to bring the product to market. And they initially started raising on Kickstarter because that was the stage of the business at that time even though some said it would send the wrong message.

If you spend all your time trying to be as polished as Apple or Sony then you are also setting expectations that you are going to execute your first product like them. And that, unfortunately, leaves absolutely no room for error.

The folks at Oculus were mission driven from the core, which let them have the courage to say you should believe in them not because they were the most polished company but because they cared more than anyone else and they were your best shot. That meant that even when an order page went down, or first developer units made some people nauseous, instead of complaining everyone was on their side. For all the press attention on Oculus every week, they have spent most of their life actually looking smaller than they really are.

Double Spending

Is the Bitcoin protocol like http or smtp or does one have to abstract up one level higher where Bitcoin is just one implementation of a http/smtp standard for digital money?  The passage below from Brian Armstrong illustrates the issue that such a protocol would solve:

Clearly open networks offer a number of benefits, so why hadn’t an open payment network existed previously? Until recently, many people thought it wasn’t possible to build a payment system on an open network. The core issue was around preventing duplicate spending without using a central company to verify each transaction. Nothing prevents you from sending duplicate emails multiple times, for example, if you wanted to do this.

This problem (the “double spending” problem) is what Bitcoin solves, and in this sense it truly was a technological breakthrough or invention (one that I think will be viewed as very important historically). If you’re someone in the business of verifying transactions on a proprietary network, the invention of Bitcoin cannot be safely ignored. It will change or disrupt the providers of most proprietary payment networks in the coming years.


The Bespoke Talent Equation

Premise: Christensen explains that the rate of technological improvement outpaces the customer demand/stress on the technology, leading to a recurring phenomenon where something seems like a toy in its inadequacy is soon more than adequate of meeting complex needs of customers.

Hypothesis: In the talent professions, if you can fund yourself by finding those pockets of customer demand in which technology is adequate to customer need, we will be surprised some day as to how the technology can supplant beyond just the pockets.

The More Appreciated Phone Graph

One thing the WhatsApp demonstrated – this week – is the power of the PSTN address graph, and its ability to threaten Facebook’s social graph that has taken ten years to build.  Lots of potential for those of us building different things.  Benedict Evans today:

What they almost all have in common, though, is that they use the PSTN numbering system but never connect to the PSTN. That is, they look at your phone book and use your phone number to identify you and see which of your friends have it, but they don’t actually make phone calls or deliver any SMS. So for these apps the PSTN is a social graph but not a piece of infrastructure. Add things like home-screen icons and push notifications and one sees that the smartphone is a social platform, in a way that the desktop web never was.

Moreover, why should it only be explicitly social apps that access the phone address book to find my friends? Why shouldn’t a retailer’s app tell me that I have 8 friends using it, and let me share products with them rather than emailing them dumb, untracked URLs or even, quite probably, screenshots of my smartphone with the app open?