Benjamin Kuo’s Blog

Having lived both here in Southern California as well as in Palo Alto and the heart of Silicon Valley, I have a story I like to tell people about what I sometimes think of as the “Starbucks Effect” and how it exists in places like Palo Alto (and I’d argue, places like Boulder and Seattle) — but hasn’t really existed much in Southern California. It’s been both a strength and weakness of Southern California companies.

The “Starbucks Effect” is what happens in a place like Palo Alto–which is so dense in startups and venture capital, you can’t help running into partners/employees/competitors/customers/venture capitalists/service providers/etc. in any public place. Going to your local coffee shop, deli, child care center, soccer game, library, etc. you invariably run into someone — or many people — you know in your industry, who are competing against you, who could help fund you (or who funded your competitor), etc.

The advantage of the “Starbucks Effect” is that if you are trying to get your startup funded, find employees, figure out what your competitors are doing, know what kinds of companies are being created, and need to get a sense of what is going on in your industry, you can often do so just hanging out at Starbucks, trading chitchat on the soccer field, listening in at your workout club, etc.

The disadvantage of the effect is that if you have to be really, really careful about what you talk about, you can’t conduct business meetings in Starbucks without potentially giving away the farm to your competitor also in the shop, it’s very tough to work on something without everyone in town knowing about it, and it’s really, really easy to fall into the “echo chamber” of Silicon Valley and not listen to your customers and the market.

This doesn’t–usually–happen in Southern California, because it’s a really, really big place geographically (ie, we have big pockets here and there of tech companies, not one single city with a big presence); we have millions of people NOT in the tech industry hanging out even in high density cities like Santa Monica; and there’s such a broad range of industries that even if you’re in the same place it’s not as likely you’d connect.

However, it’s interesting to hear that the “Starbucks Effect” has been happening here, albeit on a limited basis. In particular, I’ve heard about Starbucks where there are enough executives/service providers/etc. all living in the same neighborhood that it could be considered an industry hangout; soccer teams in the OC made up of the children of executives from all the notable public tech firms there; and other similar stories elsewhere in SoCal.Heck, there are a few folks I know in the industry who I run into more at Trader Joe’s than anywhere else.

Have you seen the “Starbucks Effect” in your neighborhood?

We posted an interview today with Sherry Gunther, CEO and founder of Masher Media, which is developing a virtual world for kids, MyMiniPeeps.com. The firm is not the first–nor will it be the last–virtual world to surface out of Southern California’s technology landscape. Does Southern California have something which seems to encourage virtual world companies? Or it is just by chance that many of these virtual worlds show up based down here? Sherry told me, “What I truly feel is absolutely paramount to any successful entertainment project, is the content itself. It’s never about technology.”

Have virtual worlds stepped beyond the initial phases of technology development to where content–a strong industry in Southern California–now becoming a more important factor? Is the strong history of video game development here also giving Southern California  a good position in this field?

I think it might. Some of the biggest “virtual worlds”–and I’d argue that massively multiplayer, online games also fit this category–include Irvine-based Blizzard Entertainment’s World of Warcraft, and Sony Online Entertainment’s EverQuest. Other virtual worlds here: Neopets, which started in Glendale, Pasadena-based Whyville, San Diego’s Metaplace, Action All Stars in Marina Del Rey, and kids-focused virtual worlds from Torrance-based Knowledge Adventure. Not to mention, Disney–with its headquarters here–with Club Penguin and other similar efforts, as well as Mattel, with Barbie Girls. I’m sure I’m missing many, but it does seem that the influence of entertainment and content, and video game development means there is a pool of people here with the right background in this industry.

One of the big joys of helping the Southern California technology community is the wide range and level of support we get from the community at large for our efforts. Because of that, we’ve always had broad support from companies serving startups and the local high tech industry, which makes it possible for us to continue our coverage.

We’re happy to announce our newest sponsor is Deloitte, which most of you will know as one of the top auditing, accounting, and consulting firms in the world. Thanks to Deloitte for their support!

Coincidentally, Deloitte is sponsoring a IPO Workshop in Los Angeles next month, on September 30th, covering market trends and what it takes to have a successful IPO, as well as an assessment of the IPO market (which seems to have awaken in the last couple of months, finally). Email them at USPSWDeloitteIPOWorkshop@deloitte.com if you want more information.

Mark Suster, a venture capitalist at GRP, has been (very) busy providing useful information and advice to entrepreneurs in his blog, Both Sides of the Table recently, and comments today on how to best gain the interest of an angel.

Among the many tidbits of advice he gives, is that a company needs to not only have a good idea and a plan, but they need a team, a product, and market validation (or what I think of as proof). Mark has hit the nail on the head with that advice.

One of the dynamics of the Southern California startup market is you run across quite a few wanna-be entrepreneurs who–I think–get bogged down in step one of the process, finding a good idea and writing a business plan–but never go on to the rest before looking for funding. This might also be true in other markets, but the case here is often that there is experience on the business development/sales side, but not on the technical side.  The problem is,  I have yet to meet an angel or VC that funds an idea without at least a prototype (with one notable exception, which is funding an entrepreneur who just sold their last company for a huge pricetag, and has already proven that they can build a successfull exit and products).

Regardless of what you’ve heard from your MBA class, the latest best selling entrepreneurship book, or late night infomercial, no one funds just an idea and a PowerPoint nowadays. Yes, you need a PowerPoint, but given the importance of funding not the “great idea” but the “team with a great idea” bringing some proof to the table is really the only way to go. There seems to be a false belief in the marketplace that a business plan and enthusiasm is the way to a VC’s heart. It’s just like that (often exploited on late-night TV) belief that if you develop the next big mousetrap/automotive widget/kitchen gadget/etc. the big corporation is going to give you a million dollars and make you rich. Neither is going to happen. In this business, execution is the key to success, with or without venture funding. Angels and VCs are not looking to provide you funding so you can go try out an idea; they’re going to give you funding so you can take that prototype/product, improve it and ultimately scale out your product/service/offering to hopefully conquer a market.

One of the interesting things about Inc. Magazine’s “Inc 500″ list is it helps to identify all of those big, private companies — who, in another world, might have been public. It’s interesting to note the large number of Southern California firms with very big revenue numbers who are private — in fact, if you sort the Inc. 5000 California firms by revenue, it’s striking to see how much of the first page is almost entirely Southern California firms. Is there a tendency for So Cal companies to stay private longer (or, forever) instead of going IPO like their Northern California brethren?

Looking at the list of somewhat tech-related firms with greater than $100M in revenues, you see:

Can’t share your every thought with the world, because Twitter is down? You could always do what Justine Ezarik (iJustine) and Richard Rosenblatt (of Demand Media) –two of local Twitter users–did, and get quoted in the Wall Street Journal’s “middle column” this morning.

Just a quick note (since using Twitter is fairly difficult still today), our auto-tweeting of our news items to Twitter is still down (even though Twitter says the service is back up). So you’ll have to (gasp!) get your news via RSS, our web site, or email.

Also — even before the distributed denial-of-service attack on the service yesterday — not all of our tweets via the API were getting through, depending on the stability or non-stability of Twitter’s state of mind at any one particular minute. You get what you pay for?

Investors and advisors in the high tech business are very familiar with the idea of “me too” companies, but I find many entrepreneurs–particularly new ones–all too often fall into the trap of being the next-incremental-improvement-on-a-hot-company.

This is pitched as:

• We’re the “next YouTube”
• We’re the “next MySpace”
• We’re the “next Twitter”
• We’re the “next Facebook”

Rarely–very rarely–do companies who are incremental improvements on the hot company/service/product of the minute able to gain funding, and–even more rarely–do they turn out to be successful companies. Why is this? Usually, it’s because by the time that “me too” company shows up, the original version of that app/company is already on its way to dominance and success–that’ usually what triggered the imitator in the first place. There’s a huge market share headstart, and generally a more mature and funded firm. It’s also because, frankly, “me too” isn’t usually good enough. (Twitter + pictures, Twitter + fancy graphics, Twitter + comments, or Twitter + whatever isn’t going to move all those Twitter users over to you tomorrow, sorry.)

The other problem, as well, is often the entrepreneurs behind the “me too” company are coming from outside the industry, and without the knowledge and connections into the business. Entrepreneurs are great, but if you’ve been a heads-down engineer, without any exposure to the market, and suddenly see Facebook and say “hey, I program software to do that”–you’ve missed the point that a huge part (and probably a dominant part) of any success is marketing, partnerships, and getting that product to market. There are plenty of low cost offshore developers who could create you a Twitter/Youtube/whatever clone in a week, but that’s not going to get you very far.

My advice for aspiring entrepreneurs? Be original — really understand and figure out your own market, develop something that specifically serves customers who don’t have it or really want something else– and don’t go chasing the popular or hot companies. Don’t be a “me too” company!

What’s out, and what’s in as a theme for venture investments? From the sounds of things, social networking is out, and travel might be up. An article posted on the WSJ site talking about an increase in VC interest in travel quotes local venture capitalist Jim Armstrong, of Clearstone Ventures, who says:  “We’re excited about categories with a lot of money around them and there’s a lot of money in travel.”

Where are the travel startups in Southern California? There’s Pasadena-based LeisureLink (funded by Clearstone), Pasadena-based AdventureLink (funded by Mail Room Fund, Anthem, and Allegis Capital), Redondo Beach-based TravBuddy (bootstrapped), Los Angeles-based Placely, LuxuryLink, also in Los Angeles, plus Demand Media’s Trails.com. Internet Brands also has a large collection of travel-related sites, including BBOnline.com, Wikitravel, SlowTrav.com, VacationHomes.com, and World66 – just to name a few of the sites in their portfolio. Who have I missed?

I’ve noticed a renewed trend nowadays in companies pulling out those traffic numbers (and people asking about them) as a indicator of success of their startup. In fact, at Twiistup, I heard at least one audience member ask a panel “what kind of traffic should I be getting” as an indicator of success of their business.

The problem is, traffic is a “false indicator” of business success, as in it can imply success where they may not be any, at least in the perspective of “are you successful in building a business/making money.” Traffic numbers–for a business, maybe not for your personal branding–don’t mean anything, unless they’re converted into actual dollars somewhere down the line. That means, either converting that traffic into advertising dollars (CPM, CPC, CPA, etc.) or paying customers (ecommerce transactions, subscriptions, purchases).

Yes, traffic can be an indicator of success, and particularly for very large Internet sites you can do some basic math (pageviews multiplied by average CPM divided by 1000) to figure out advertising revenues. But, for smaller sites without dedicated advertising sales and very low, ad-network based CPM, that “average CPM” number is very, very small, and all those hits don’t add up, really, to much at all.

It’s also impossible to compare the traffic generated by a free, online user-generated video sharing site to a software-as-a-service provider who offers both free and premium accounts. There’s no math you can do to figure out how much of that traffic is generating revenue; which is why “recurring customers” is much more important than “user accounts”, “premium accounts” is more important than “number of users,” and why actual dollars are more important than unique visitors. In fact, with some companies, traffic has zero (yes, zero) correlation to business success. For example (this was the case with the Twiistup question) if you’re a professional service provider, there is no conversion of number of visitors to your web site and how many clients you have.

So, if you’re one of those folks pitching me with their brand new startup, who has told me “we have X bazillion unique visitors” and I’ve kinda shrugged, that’s why.