Benjamin Kuo’s Blog

Marc Averitt over at OCVC posted yesterday about his experience with Twitter, the fashionable “what am I doing now” service which lets everyone see what you’re doing at any point in time, which made me think about the lag adoption of technology by the mainstream public. I was standing at the airport this weekend checking in for a flight on Southwest Airlines, and thinking about how alien services likeTwitter are to the mainstream public.

As any frequent traveler knows, with Southwest Airlines you are encouraged to check in using an electronic reservation, either online or at their ubiquitous electronic kiosks at the airport. I usually check in and print my boarding pass online, however this time had some luggage I had to check. Anyway, I was standing in from of three different people who all had various “user interface” issues with the electronic kiosks. The first, a woman, just couldn’t figure out how to check in with luggage. She stood in front of a kiosk forever, kept looking through the printouts of her airplane reservation, stared at the kiosk for a long while, then tried to talk to the agent handing out baggage tags (who eventually steered her over two lines to a customer service line); the second was equally clueless, a set of people who didn’t understand that they needed to print out their own boarding passes, and just needed to type in their confirmation number or put in a credit card. Finally, there was a man who just stood blankly in front of the kiosk waiting for someone to come help him. Eventually, the same gate agent told him to use the machine to check in, and he managed to bungle his way through.

Southwest’s user interfaces are pretty self explanatory, and very well designed, but I see this all the time with self-checkout counters at the grocery store or hardware store. I can’t count the number of times I’ve been standing in a (very short) line waiting for a kiosk, or using self checkout when I see someone look over suspiciously at the electronic checkout, mutter something about “I can’t figure those things out” or “what are those things?”, and go over across the store to another line, with about twenty people waiting for a human checker. It’s all sorts of people too–old and young, ethnically diverse–and I see this almost everywhere I go.

It’s interesting to try to gauge “potential impact” (at least for consumer-focused services) , to figure out how much of an impact a company’s services might have on the general public. From the current crop of startups out there, I wonder how many products/services will actually make it to the mainstream public? (or, will Grandma ever Twitter?)

It seems like a day doesn’t go by that I don’t read about a new thin-film solar panel firm, solar concentrator, carbon credit, or other clean technology firm being funded. There seems to be astronomical interest in almost anything, and everything clean technology related, with a rush to fund anything that might possibly relate to the sector. I’m all for solar power and alternative energy, however, it seems to me that a huge number of these companies are very early, very technology (and not market) focused, and it will take either quite a few years, or some consolidation and working through the many different companies in the sector, before this will truly impact the market. I think a huge amount of focus needs to go into market-driven (not technology driven) firms before consumers can see the impact of all this venture investment.

With all of the hype in the industry about clean technology firms, I recently started looking (personally) at solar power to see just how feasible it would be to convert to solar power right now. I went and contacted six different companies, three of which responded, for a photovoltaic system for my house. I got a range of quotes, using a few different manufacturers of photovoltaic modules, but all in the range of $25K - $30K (after a pile of California rebates) for a system that would handle our household needs. Interestingly enough, most of the installers in the area only do a few dozen installs a year to personal residences; some I talked to had only done one or two installations in my area. It’s really currently a big ticket item; running the numbers it’s not cost effective for the average homeowner.

One of the big areas that companies seem to be looking at right now with solar are reducing the costs of photovoltaic modules. Interestingly enough, based on the quotes I received on modules, they made up only about half the cost of the install; the remainder are things like an inverter, mounting brackets, permits, and labor (where I received wildly differing quotes). Even assuming the dozens of firms developing thin film or other more affordable photovoltaic panels can cut the cost of modules in half, it’s not a huge dent in what is still a large ticket item with a long payback time (>10 years+). I think the challenge for companies in the solar space is actually figuring out how to make the overall system cost more palatable to homeowners, and growing the market demand beyond the “green” consumer to mass acceptance. This might not be so much of a technology fix, as a financial or distribution model which reduces the risk to homeowners. Right now, even with the number of firms looking to reduce solar costs, there’s still only a small market of “green” consumers willing to fork over a fairly substantial amount which will only see a payback over the long term. It seems to me that solar power firms have their work cut out for them, and that investors in the space ought to have a fairly long time horizon in mind when they make bets in this industry.

Jared Reitzin, founder and CEO over at email marketing firm mobileStorm, has launched a blog at www.jaredreitzin.com covering bootstrapping your business and other entrepreneurial topics. He recently covered the importance of branding, and hopefully will be adding to the Southern California entrepreneurial knowledge pool. I spoke with Jared on his firm back in May.

A couple of quick links for today: an article on a link between Los Angeles-based Stickam and the porn industry and cell phone billionaire Craig McCaw apparently has purchased property in Santa Barbara.

Luis Villalobos (founder of the Tech Coast Angels) had a great article on the Kauffman Foundation’s web site posted last week, which covers the thought processes behind valuing a company (from an angel’s point of view).

I was amused to see this post on Valleywag about Google’s Susan Wojcicki improperly taking credit for AdSense, and the fact that AdSense came from Santa Monica-based Applied Semantics.

I’m very surprised by the number of people I run into who don’t even realize that Applied Semantics (which was purchased by Google a year before its IPO) was the “brains” behind Google AdSense. In fact, Google AdSense was at one time Applied Semantics AdSense, and the reason why Google opened a Southern California office in the first place. I’ve run into quite a few venture capitalists (who absolutely love backing employees from companies that have been successful in the past) who weren’t even aware of Applied Semantics and its success — probably because the employees have hung on at Google for a long time given the huge upside they saw on their options. Even if they’re out there, they probably wouldn’t need a venture capitalist to fund their own company…

There’s been some interesting coverage and bounce in Apple’s stock over the past few days over a report by El Segundo-based iSuppli on the bill of materials (BOM) cost of the iPhone.  iSuppli released a report which found that the cost of an iPhone was approximately $265.83 to manufacture, versus a $600 retail price for an 8GB model. There was widespread coverage looking at the numbers and talking about how profitable this is; however, I think there’s widespread confusion that hardware margin = profits, which is not the case. It’s worth looking at this analysis comparing the costs to other high end mobile phones, published in EETimes. In that analysis, they found that other smart phones at the same price point from other manufacturers come in around $130-$180 in BOM costs–meaning the iPhone is much more expensive than other competitors in the market, even without adding marketing and other overhead expenses.

As someone who has torn apart lots of hardware and determined pricing for hardware products (in previous lives working on hardware products, and from several years as a product manager at a hardware company), it’s surprising to me how the more significant costs of a product — for Apple, this would be marketing, in addition to software and hardware development costs–are ignored.  Your BOM cost does not have a one to one relationship to your profitability. Yes, BOM cost is important (in some industries this still makes the difference between the leaders and laggards), but it’s just one of the components.

Apple will probably pull in lots of dollars due to the hype, interest, and marketing of the iPhone, but the cost of the product is really more than bill of materials. An obvious example of an industry where this is absolutely true is the soft drink industry–the bill of materials for one soda versus another is probably fairly constant, the biggest expenses (and determination of profitability) of a soft drink firm is marketing and sales expenses per unit moved of the product. To a slightly lesser degree, this is the case for the personal computer industry, where branding, distribution, and marketing effectiveness is now almost more important than how much it costs you to manufacture a particular PC.

It  looks like the first move Google is making at Feedburner (which it acquired earlier this year), is making their PRO level services free to users. Which I think is really long due, and a smart move.

A year or two ago, VC Brad Feld had referred me to Dick Costello, the CEO of Feedburner, about using Feedburner.com for our web sites. I told Dick I’d pass, because I didn’t like the idea of using a Feedburner URL and giving ownership of the feed location to his company. For those not familiar with Feedburner, it’s a service that (in exchange for pointing all of your users to Feedburner’s version of your feed) provides deep statistics, advertising, and other services around your RSS feed. However, in order to use the service, you had to point all of your RSS users to Feedburner’s domains (ie instead of going to socaltech.com, you’d have to go to feedburner.com to see our RSS feeds).

Back when I first started socaltech.com (as a lowly hand-copied, email CC list to a dozen or so people), I initially started using a third party email message list service.  I quickly figured out I should host the mailing list myself, because of the issues of control–in this case, the company I was using wouldn’t allow you to place advertising in your mailing list, they got to insert their own advertising at the bottom of every email, and otherwise had a lock on your users. The issue I had with Feedburner was similar; what happened if the company were acquired? How about if they decided to suddenly charge per subscriber? Or if they went out of business? It’s never good when you’re running a business  (or even a personal project) where someone else “owns” your customer list.

Eventually, Feedburner added their PRO service, and specifically their MyBrand service, which allowed more sophisticated RSS feed owners to have your own domain as the feed you were pointing users at, i.e. instead of feeds.feedburner.com/yourfeedhere, feeds.socaltech.com/yourfeedhere. They used to charge a monthly fee to give “own” your own feed using MyBrand, but with this move it’s now free. It’s a really smart move; there are a lot of feed owners (myself include) who would NEVER move their feed pointers to someone else’s domain, no matter what kinds of services they offered.

Entrepreneurs  tell me they are often mystified by venture capitalists who seem to understand, and have enthusiasm for their companies, will highly recommend the firms to other venture capitalists, but seem to be taking forever to fund their deals. In many cases, I’ve found it’s not because of any lack of interest or fault of the companies, but because they’ve been talking with a venture capitalist that doesn’t actually have any capital to deploy.

It’s a natural part of the VC cycle; venture capital firms raise money for a fund from their limited partners, spend some amount of time disbursing those funds to various companies in their portfolio, and, when they are close to the end or at the end of their fund life will go back to their LPs for more investment money. If those funds have done well and made a decent (or hopefully, spectacular) return for their LPs, they will raise another fund and go through another VC cycle.

What does that mean for entrepreneurs?  It means that as an entrepeneur you should do your due diligence and ask the VC you are working with, or find out through other sources, if a specific venture capitalist has dollars to spend or if they’re in the midst of fundraising. Right now, it’s turning out to be particularly important as some of the more active funds here in Southern California have finished investments out of their current fund, and are in the midst of fundraising. A number of funds who would be natural candidates for approaching about an investment, just don’t have the dollars to invest in new companies, no matter how good of an opportunity it is and how good of a match it is to their profile. It’s no fault of the entrepreneur or company looking for funding, it’s just that (obviously) a venture capitalist isn’t going to fund a company if they can’t see the investment to completion. And, as an entrepreneur, you wouldn’t want to take an investment from a firm which doesn’t have additional “ammunition” in the form of follow on investments set-asides in their fund.

I recall hearing about at least three companies in the past year or two who have gone under, because they were Series A investment companies who were funded by VCs who hadn’t reserved additional capital in their fund for additional investments. Essentially, these companies were “orphaned” due to their major capital provider exhausting their store of venture capital. That’s not a good situation.

So, know thy VC, and figure out where the venture capitalist you are about to take money from is in their fundraising cycle!

Thanks to our blog sponsor:

Clearstone Venture Partners (http://www.clearstone.com)
Venture Capital for Technology Innovators.