What We Must Learn from Asia

I run a monthly meeting called the VCA that represents the majority of Southern California venture capital firms.  My goal is to bring in informative speakers who stretch our collectively thinking on topics that will influence our investment strategies and use it as a way for us to share our experiences in ways that I hope benefit the Southern California technology ecosystem.

In the past 6 months we’ve heard from Dmitry Shapiro on the future of online video, Ian Rogers on the future music model, David Sacks on the future of social networking and Michael Crandell on where Cloud Computing is headed.

All have been fascinating.  This month’s presentation was truly mind boggling so I wanted to be sure to share the entire presentation with all of you.  This was one of the most fascinating presentations I’ve seen in a long time and a must read – although you’ll see clearly better in person with commentary.  Benjamin Joffe (the author), a Frenchman who runs a consultancy in China that tries to help non-Asian investors understand the innovation occurring in Asia as a way to bring ideas to their local markets.  He also consults companies in Asia.

I lived in Europe for 11 years and in Tokyo for 6 months so the idea that innovation is happening outside of our 50 states in not new to me.  I’m sometimes surprised how little people here in the US want to try to learn from what is happening elsewhere.  I find that a shame.  When I reached out to Benjamin at the suggestion of Dave McClure who told me what a great guy he was I was fascinated.

To see the deck click —->  HERE (sorry, I can’t do embeds yet, I’m migrating from WordPress.com to WordPress.org in the next few weeks).  As I mentioned, some pages unintelligible without commentary but well worth a read to get to the nuggets.

My take aways are below:

1. Wacky, weird and low cost: Before diving into what I learned in the deck I want to share something crazy.  Motorola gave us in the US the RAZR (before they stopped innovating).  But China literally gave us the Cell Razor.  Benjamin brought in a cell phone where the bottom pulls out and you have an electric razor.  No joke.

2. Film innovation – If Benjamin’s analysis is right – even many of our most successful films have been adaptations from Asian films.  I knew some were but the scope was surprising.  Especially Star Wars & The Matrix.

3. Internet users in US – 225 million, mobile 260MM.  China Internet: 340MM, Mobile a staggering 650MM.  Don’t bet that China won’t innovate in mobile. (slide 29)

4. 70% of Korean population has Internet speeds > 5mbps (and avg = 15 mbps) – don’t bet that the Koreans won’t innovate on online content (slide 30).  Larger online game market ($1 billion) than Japan despite 1/3 population and 1/2 GDP per capital (slide 99).  Way ahead of the US on mobile gifting.

5. More than 90% of Japanese mobile subscribers are on 3G networks (vs. 20% in the US) (slide 30), More than 50% have mobile TV & NFC chipsets (slide 87). Mobile ARPU = a staggering $110 / month for content and commerce alone (slide 88).  Massive fall-off in ringtone and massive uptick in full songs (slide 89) —> still think we shouldn’t be watching what’s happening in Asia?  Sales of avatars in social games nearly 50% of total revenue eclipsing revenue from affiliate transaction, ads or paid games (slide 97).  Mobile game content revenue > PC game revenue (slide 98)

6. China’s leading social network (Tencent, who’s product is QQ) already does more than $1 billion in revenue.  That’s 2x Facebook estimates.  Tencent market cap on public market is $21 billion, Facebook’s is a theoretical $3-15bn (slide 52). China is innovating in many of the categories that the US is trying to solve now including mobile

couponing, vertical social networks, Internet TV, etc.

7. Free-to-play gaming with micro transactions has become huge in Asia with very nice profit margins. EA and others in the US are copying this success (slide 71)

When I lived in Europe in the 90’s we all texted people on mobile phones.  I was surprised when I came back to the US and the only people texting were 13 year olds.  When I worked in Japan it was crazy how much people were using mobile content on the i-mode phones.  Now they have TV & NFC chips.  I have been looking at a South Korean online start-up and am blown away by the innovation in this company relative to the online models I see in the US.  It is a global world – I plan to make sure I’m tapped into Europe, Israel and increasingly Asia to know what trends I can look for here in California.

Twiistup 6 Highlights

ExpenseBay Wins Showoff

Twiistup 6 has come to an end.  It proved to be a great transitional year.  Out is the “cocktail only” Twiistup and in is the new format of a conference that should take its rightful place on the national technology calendar.  I believe that Twiistup is now a platform from which to grow and highlight what is uniquely LA.  We are a city unique in merging the world’s best content with digital media and technology expertise.  Much of this was highlighted at Twiistup.

LA not only produced the obvious – MySpace – but also created the whole category of sponsored search (Overture), AdSense (Applied Semantics), Local Search (City Search), comparison shopping (PriceGrabber, Shopzilla) and lead generation (LowerMyBills).  In SoCal we are also leaders in affiliate marketing (Commission Junction), Internet video (Hulu) and bringing local businesses online (ReachLocal).  We are also home to DemandMedia (Richard Rosenblatt) and Mahalo (Jason Calacanis).

We have accomplished much yet have much work to do.  There are now a second generation of entrepreneurs and companies that have learned from their last successes and are producing great new companies like TopSpin Media, Sometrics and GumGum.

For highlighting what is uniquely LA, for adhering to a strict quality standard for speakers and for building this great platform for the future Francisco Dao (aka “The Man”) should feel proud of what he has accomplished.  As should Eric Sikola and ExpenseBay who won the “Showoff” judges competition (Photos featured here taken by (cc) Kenneth Yeung – http://www.thelettertwo.com).  Twiistup 6 featured 12 showoff companies as the opening act of a 2-day conference.  From this crowd of 12 I believe you’ll see 4-5 companies with the potential to rise to prominence.

Andy Sack, Dave McClure, Brad Feld & Jason Nazar (photo by Jolie Odell)

We had an excellent opening panel on early-stage investing with Dave McClure (Founders Fund – NorCal), Brad Feld (Foundry Group, Boulder) and Andy Sack (Founders Co-Op, Seattle).  The panel was hosted by Jason Nazar who brought his usual frenetic energy.   My favorite line from this panel: Feld, “If LA companies still have a chip on your shoulders about not being in Silicon Valley, I have one message for you – get over it!” And of course there was the F-bomb count that Cathy Brooks and I were keeping on Dave … by the end of the panel we had counted 8.

There was the usual cogent presentation by Brian Solis on the future of PR in which he implored us to get beyond the echo chamber of Silicon Valley and Techmeme and focus on staying on the radar screen of real America.  In today’s “attention deficit” economy you need PR more than ever and this doesn’t come through press releases but rather a continued, authentic conversation.”

In the afternoon we had a corker of panel.  Quincy Jones III, Ian Rogers and Chamillionaire were all on the same panel facilitated by Brian Zisk.  I have seen Ian Rogers speak before and when he does he usually has the audience on the edge of their seats.  Ian is so knowledgeable about the evolution of the digital music business and speaks with a Howard Roark like truth about where it needs to go.  My favorite Rogers line was, “musicians of the future will be entrepreneurs and not employees [of labels].”  He obviously believes this since he has become CEO of TopSpin Media – a firm designed to do just that.

Mark Suster, QD3, Brian Solis, Chamillionaire, Ian Rogers, Brian Zisk

But in this case Chamillionaire stole the show.  He displayed a deep mastering of the power of the Internet, direct marketing and Twitter to manage his business.  He talked about the need to give personal access to fans and remain authentic while still leaving some room for mystique.  He talked about artists needing to retain rights for their website and digital content like ringtones.  He got this VC talking so effusively about his entrepreneurial instincts that my wife accused me of having a “man crush.”  (I don’t) I think this guy has the chance to be the Digital Puffy if he can amass a team to help young artists own & manage their digital careers. [photo credit to Brian Solis]

The evening cocktail party was an 80’s theme and lived up to the traditional Twiistup fame with an open bar, elaborate costumes, Hollywood lighting and poker games until 4 in the morning.  Having been out until 3am at the cocktail party the night before I called it quits at 12:30am or as Neil Patel told me, “OK, married men should go home now” though something tells me he may not remember this quote ;-)  … (Percival cocktail photo by (cc) Kenneth Yeung – http://www.thelettertwo.com)

The late night didn’t make for a productive start to the morning but by the time Sean Percival got on stage to host the panel with Chris Brogan, Micah Baldwin (who started #FollowFriday) and Ben Huh (ICanHazCheeseburger) there was a great discussion on what it takes to be an Uber-blogger and social networker.  I think I could summarize the hour by saying, “don’t be a douche.”  And we heard Sean’s rant of the moment about how he hates being shaken down for DM’s by friends asking for RT’s and how he’s tired of DM Spam in general.

After this was my panel (co-hosted by Christian Gammill who had to leave mid-way to race off to Hawaii to get engaged and by Tony Adam), with Mike Jones (COO of MySpace), David Sacks (founder of Geni and Yammer) and Jamie Montgomery (CEO of tech investment bank Montgomery & Co).  The tone of the panel was set by David’s announcement that he was relocating to Silicon Valley (and dragging Geni & Yammer with him).  A debate ensued in which the consensus was, “to build the next Google or Salesforce.com you probably need to be in Silicon Valley but that SoCal had produced many great companies that made a tremendous amount of money and that would likely continue.”

The closing event was the filming of a live version of Jason Calacanis’ “This Week in Start-Ups” (appropriately named TWiST – episode is here).  He started off the session of breaking news of the most important product announcement of his life to date – the pregnancy of his wife with his baby daughter.  He then led us through a series of discussions about the most relevant topics of the day along with Chris Tolles, the CEO of Topix.  Jason’s cutting wit and insightful commentary made for entertaining listening on topics ranging from the Microsoft / Yahoo! search deal (“will go down as one of the worst deals in history”) to the skewering Jason gave to his competitor Nick Denton (of Gawker fame) when he stole his most productive employee.

Anyway, to close my Twiistup 6 Summary post I will borrow from the wisdom of my forefathers, “next year in … Santa Monica.”  No doubt the platform that Francisco built will take Twiistup 7 to a whole different level.  Now back to work – we’ve got a venue to get booked.

Building Apps in a Cloud World

I run a monthly meeting called the SoCal VCA (Venture Capital Alliance) in which we have great technology leaders present to the best VC’s in Southern California so that we can better understand the trends and develop tighter relationships with our local technology leaders.  In recent sessions we have had Dmitry Shapiro (founder of Veoh), Ian Rogers (CEO of TopSpin Media) and David Sacks (founder of Geni and Yammer, former COO of PayPal).  I hadn’t yet restarted my blog so notes from those meetings are still scratched in my yellow notepads.

This month we had an equally impressive speaker in Michael Crandell, founder and CEO of RightScale, a Santa Barbara based company that helps manage cloud computing infrastructure.  The company has raised more than $20 million from prominent investors including Kevin Harvey of Benchmark Capital and Danny Rimer of Index Ventures.

Michael’s entire presentation is here on Docstoc but I wanted to highlight a couple of slides below from his session and offer some thoughts about cloud computing.

1. Cloud continues to accelerate

When I first started experimenting with cloud computing it was 2005/06 and I had just launched my second company, Koral.  Amazon had just launched its S3 storage (EC2 for cloud processing didn’t exist yet).  It seemed that over night every start-up I knew was using S3 and the logic was simple.  In my first company we had to buy very expensive EMC storage ($500k), high-end UNIX servers from Sun ($40k / pop), load balancers, Sun Solaris operating system and an Oracle DB ($80k).  We were $750k into the hole before we ever had a single customer.  Such was life building a SaaS company in 1999.

Fast forward to 2005 and we were building with $4k PC’s, LINUX operating systems, cheap storage devices and a PostGres database.  But it was still $60k when you consider 5 servers, load balancers, storage, hosting, bandwidth commitments, etc.  Enter Amazon Web Services (AWS) who would charge us for storage only as we used it (e.g. scalable with our business).  We initially only used it for back-up storage and test processing.

In 2008 I invested in my good friend Stuart Lander’s new business called PublicSpend, whose long-term objective is to bring transparency to government spending on local vendors.  The architecture was designed by rock-star SaaS technologist Ryan Lissack , who is now with Salesforce.com.  He convinced me that we could build a company without buying any servers, load balancers or storage.  And simultaneously I noticed that a number of start-ups that were pitching me had done just that.  So it seems that the era of CAPEX is ended for a number of companies and Nicolas Carr got things mostly right in his book, “The Big Switch“.  And while the economy has slowed down and start-ups have curtailed spending I expected to see a slow down in Cloud spending by start-ups.  But if the graph below is any indication it seems things haven’t slowed down at all.  The red line is a good proxy for start-up spending with AWS. (note: there is more text after graph – some problems with WordPress.com don’t allow me to properly resize it)

2. Clouds are not inherently managed

What we were doing in building on AWS was buying “infrastructure-as-a-service”, a term I first heard from Michael Crandell.  We were buying storage and processing power but we still had a lot of technical work to monitor the services and be ready to provision as demand increased.  This is the problem that RightScale stepped in to fill as depicted by the graph below.

The blue line represents purchasing in a CAPEX world where you buy equipment before demand.  The dotted line represents predicted demand and the red line represents actual demand.  You’re either over-provisions or under-provisioned, leading to increased expenses or unhappy customers.  But what a truly “managed cloud” service offered was a feature called “auto scaling” that automatically monitors usage patterns and can provision new server instances if you get flash crowds as happened with this Free Chocolate website by Mars.  The beauty with auto-scaling is that  not only will new instances by provisioned for you for when TechCrunch writes that great article about you but you can also auto-scale down when the flash crowd leaves.

3. Everyone but Amazon seems to be asleep at the wheel

What has surprised me the most about Cloud Computing is just how asleep at the wheel everybody but Amazon seems to be.  Where are the great cloud services from Microsoft, Google, Sun, IBM or RackSpace?  I know that all have made announcements as have a host of other providers like GoGrid.  But literally every company that has pitched me who uses a cloud uses Amazon’s AWS.  Clearly that’s not great for the market and for innovation but it’s great if you hold AMZN stock.  And it’s probably not great for RightScale.  Ultimately Amazon will move up the stack with more management offerings and the most compelling feature of RightScale when that happens will be the ability to “abstract” from any individual cloud implementation so that you can more easily transfer across clouds.  But for now RightScale’s product offers significant enough value in offering a true “managed cloud” rather than just “infrastructure-as-a-service” that you get from Amazon.  Michael made it clear that he thought the competitors were making progress but the momentum feels as intractable as trying to supplant iPhone for mobile browsing.

4. Private Clouds on the horizon

One of the more interesting developments I noticed in the past 6 months was the evolution of the idea of private clouds.  When I first learned of the company Eucalyptus Systems I have admit I didn’t immediately get it.  Why would anybody want to manage an internal cloud?  But the more I learned about it I realized that there is a compelling case for large companies who have lots of excess server capacity or storage and want to be able to offer it out to other geographies or departments rather than have excess capacity.  And if you could do so in a way that allowed you to use some internal clouds and then also call external clouds with total abstraction and therefore one set of instructions to manage it would help to migrate to external clouds over time.  And now it seems that RightScale can also sit on top of these “hybrid” clouds and help manage their co-existence.

My conclusion is that Cloud Computing is not only here to stay but it is accelerating.  Today it seems to mostly be the domain of start-up companies or test projects for larger corporates.  But as we experienced with the success of Salesforce.com it was the small, nimble players that adopted it first.  And as we all learned when reading Clayton Christenson’s monumental book, The Innovator’s Dilemma, eventually the higher-end of the market will trade down given dramatically reduced costs and as Cloud Services continue to improve.

Built apps in the cloud?  Views on AWS or RightScale?  Views on AWS competitors?  Love to hear from you in the comments section.