Innovation in Software

I like Twitter. I like it enough that over there to the right of this blog under top posts is an import of the Vagueware Twitter feed where I mostly share articles I’ve just read on the Web. I have a personal twitter account as well, and find it invaluable to keep up with friends, peers and colleagues. I do not ask inane questions like “what is Twitter for?” or “is it any good?” like some commentators. I love the platform. It’s great.

I am however completely confused by their business strategy, and the news that they’re raising more capital from VC funds. This quite frankly makes me mildly angry that they’re screwing things up for themselves – and perhaps for the rest of us too.

Here’s a couple of facts to mull over:

• They are hitting the mainstream in a big way. In the UK, celebrities like Stephen Fry and Charlie Brooker are in on it, and Fry even discussed it on Johnathan Ross’ show, the most watched chat show in the country. Even the nefarious money-grabbing sweatbags that promote Britney Spears have advised their client to get in on the act.
• Despite the fact their UK user base was prepared to hand over cash to buy credits to support it, Twitter withdrew outbound SMS notification (direct messages and replies sent to your phone) in 2008. People screamed about this. I’m amazed somebody hasn’t monetised the demand for the service already and built a tool via the API that does all this – perhaps everybody who has thought of doing it is incredulous that Twitter aren’t doing it themselves.
• They have no business model right now. They generate zero revenue. They are burning cash.

So, they’re talked about in the mainstream press, people love them, people want to give them money, they’re not taking it, and now they’re taking VC funding to stay alive.

Think about that for a minute.

It’s not just me, right? They are insane, yeah?

This is the time to build monetisation options onto the platform. SMS credit packs, extra features in ‘pro’ accounts, heck put some fricking advertising in everybody’s feeds if you think it’s 1994, we don’t mind! Here, I have a tenner in my wallet, just take it! Take another next month, I don’t mind!!

To turn down a $500m acquisition bid, seek VC investment at a $250m valuation and do nothing – absolutely zero – to build revenue is the sign of a company run by people who don’t realise they’re running a company. They seem to think this is a hobby and somehow the money will just keep on coming.

This is dangerous for all of us interested in twitter or the web industry in general.

It’s bad for users because they are increasingly loving the platform, and this strategy puts the availability of the platform at significant risk. Servers cost money to keep turned on. Eventually the money will run out. Users will not be happy.

For those of us in the industry, it’s even worse: when Twitter goes to the ultimate fail whale, it will completely destroy any chance for us to open up liquidity in the VC or loan markets any time soon. It will be so high profile a failure due to its “success” there won’t be an investor on the planet who doesn’t hear about it and think “well, if they failed, what chance anybody else in the web industry?”. They are effectively playing Russian roulette on behalf of the entire industry. Thanks Twitter, you $!**&@!! morons!

I’m really hoping whoever is on this round of funding is going to insist on a clear revenue plan soon. Companies exist to make money, and right now Twitter only seems to exist to see how much investment they can take. This is bad news all round.

Fellow Mancunian geek Simon Wheatley had a little tweet this morning that made me think about a few things.

Best start thinking of things to make with the remnants of a banking system I guess… when the wind blows, build windmills.

Over the last few weeks I’ve been looking around the scene locally, nationally and further afield and tried to work out what is going to happen next. Here’s my general gut feeling:

1. A lot of firms are going to go bust. During boom times, mediocrity, a lack of professionalism, no real need to sell and develop sales skills, all bound up with something shiny and slightly interesting can actually pay its own way. No longer. A lot of people have lucked out with poor business skills and zero-thought business plans. That is now going to bite them hard. If you’re running a business without a real business plan, cashflow forecast and a way forward in times of recession, you’re in trouble. If you don’t have sales skills, you need to find them.
2. What survives, thrives. Those who work out how to serve needs of users – and more importantly right now, the needs of their own cashflow – will actually grow at paces that will leave many people boggling. This won’t turn into an investment bubble though, because there won’t be much in the way of investment going on for a little while. When the market liquidity improves and money starts to become cheaply accessible again I doubt people will make the same mistake of investing in just an idea – execution is going to be more important than ever before.
3. You don’t need investment to survive – in fact, you never did. You just need sales. Whatever it is you think you’re about to do, it has to be focused on sales. Right now is a bad time to set up a property website. It’s also a bad time to get into loan websites or sites that offer credit card deals. If you have the capital to buy an existing site that does those things, right now might be a cheap time to buy though.

I’m still working out my next moves. I have the opportunity to take on some more public sector work which feels sheltered from the storm for the time being, but I’m also trying to work out what the current “windmills” look like in the software space. Low-cost, high-yield projects are hard to come by so it could take me some time to work it out. Watch this space.

On the back of my business cards I have 10 quotes which on discovering them the first time, I found to be something that resonated with me, and that I hope might resonate with potential clients, business partners and friends.

The first of those is a famous quote by E.W. Dijkstra that for me sums up the reason I got into the industry in the first place:

“Computer Science is no more about computers than astronomy is about telescopes”

I also recall Ted Nelson’s talk about Transliterature at OpenTech 2005, where he also summed up why computers fascinated me as an 11-year old learning to program the first time:

“I studied Computer Science to help change the World, not to automate trivial crap”

There is something bigger here in our industry we refuse to acknowledge. There is something deeper beneath the surface that all the talk of social networks, long tails and user-generated content doesn’t get anywhere near.

This ember of a notion has been inside me for a while now, and it’s starting to turn into a small fire. I don’t know where it’s going, but what I do know is that I’m now getting more and more passionate for “big picture” stuff. The kind of things that need investment and great people.

I’m rather pleased then, with all this “big picture stuff” going on in my head, that this year’s Turing Lecture is being held again at Manchester University and that it has just been announced as being given by James Martin, producer of the film Target Earth – note, not the 1950s B-Movie, alas! However, it’s big in its approach, and I’m looking forward to watching it just before Dr Martin gives his talk.

I still haven’t decided what 2008 is going to be about for me professionally, but I do know it’s going to be less about me and finding ways to reconnect to that Dijkstra quote in my work. The Turing lecture will be a timely reminder of some of the issues facing us – and maybe sometime this year those of us in Manchester can start thinking about how to work out some of the solutions. Maybe.

I’ve just decided “Maybe” is my new favourite word.

Happy New Year.

If you need any proof that we’re in a bubble around Web companies, the valuation of Facebook at $15 billion thanks to the $240 million Microsoft just paid for a 1.6% share, must be it. Even the TechCrunch guys seem a little flummoxed by it – the comments are worth a scan.

To put that into perspective, if we assume $150 million in revenues next year is solid we’re talking about 100:1 price-to-earnings ratio there. If you’re the kind of person who normally yawns when hearing about P/E, here’s why it’s important.

There are lots of reasons a company might be valued with a high P/E. The six most common are:

• The market expects earnings to rise rapidly in the near future. This is normally the case with oil or gold companies who have little in the way of earnings right now, but who have secured income in terms of drilling/mining rights
• The company makes piles of cash normally but has had to take a one-time hit on something showing earnings being lower for this year
• The company has a business advantage that guarantees revenue for low risk. Think “monopoly”.
• Investors need to shove a large amount of money into the market to get it out of other vehicles, so the law of supply and demand means prices go up
• High demand for a particular share for some reason, for example a takeover bid
• The company is hyped, and we’re in a bubble

Going through each of these in the case of Facebook:

• Facebook’s revenues are not going to rise dramatically any time soon. They have not suddenly secured a huge pot of advertising revenue they have yet to “mine”, and my P/E is based on next year’s optimistic revenue figures, not past figures.
• They’re not making a lot of cash at all, and they’re not taking any major hits in terms of infrastructure, so that’s not it.
• Whilst everybody is raving about them, they don’t have a monopoly. It would be relatively easy to replicate the Facebook platform in open source (in fact, that’s an idea going onto the site tomorrow – unless you now put it up first and claim credit), so it’s hard to see how this sticks. The value is in the user base, but talk to MySpace if you want to hear about how fleeting they can be.
• Microsoft are in no hurry to diversify risk or in need to get money out of other “vehicles” – they might need to show their shareholders they’re hitting hard with their new advertising-driven model, but that doesn’t justify the expense
• 1.6% is no basis for an immediate takeover bid

That leaves us with…

• We’re in a bubble

It’s not like Microsoft are going to miss $240 million. It’s not that we’re in big trouble if this doesn’t hold up when Facebook floats in a couple of years.

It’s the mindset that bothers me.

People are no longer looking at figures. They’re thinking irrationally. They’re buying shares because they want to hold a chip. I’m not an IFA or your banker, but I suggest you make sure you don’t pay too much for any chip you want to hold on to yourself.

Manoj points me this morning to SeedCamp an almost-clone of Y-Combinator. If you’re a technology start-up the deal is this:

• You apply online with your idea for a technology start-up
• 20 teams get picked to spend a week in London where “there will be a diverse mentor network of serial entrepreneurs, corporates, product designers, venture capitalists, recruiters, marketing specialists, lawyers and accountants that will help the selected teams put together the foundations of a viable business”
• At the end of the week up to 5 ‘winners’ are picked. They’re each given €50,000 for a 10% stake in their businesses
• Those 5 teams move to London for 3 months and burn the €50,000 working on the business.
• 10 weeks in, you’re sat down with investors looking to get to the next level

Sound good? This is a disaster waiting to happen.

The Y-Combinator model which SeedCamp seeks to “be close to” is flawed on many levels. Mike Taber discusses this around Y-Combinator better than I could but all his points apply to SeedCamp, with just a few extra flaws in this model:

• The week-long programme at the start with all the experts almost sounds like a Hack Day format. It’s not. Those experts are not there to help you with your business – they’re there to help SeedCamp’s. It will be a grueling week, and the whole purpose is getting you used to toning down the passion and framing things in a way that makes accountants and lawyers happy. I’m not convinced that’s a good thing.
• Whilst Y-Combinator want 6%, SeedCamp want 10%. It doesn’t matter that before you apply it means you think your idea is worth exactly €500k and not a penny more (or that SeedCamp think it’s worth not a penny less), you’re already in a weak position. Be aware right now, the moment you go into this and you take the money, it’s not your idea any more. It’s the same with any investor, but you’re jumping in with these guys pretty quick: they grill you for a week, but there’s no clue about what they’re going to do for you other than give you €50k. Trust me on this if you never trust me on anything else: your smallest worry as a start up is going to be money. Your biggest problems are going to be around how to do things you’ve never done before – you need to be sure when you take investment, the guys with the cash actually know what they’re doing with start-ups and are going to give you dedicated support beyond bank transfers.
• I can’t imagine any EU-based investor getting into a technology start-up after 10 weeks of solid development. I have no idea what happens on the tail end of this, but the SeedCamp model seems to be thinking that their investment is going to make you fly quickly, and if it doesn’t… well… hmmmm…

I’ve said this before, and I’ll say it again: you can start a business with a few hundred quid. You need a computer, you need to know how to code, you need to know how to sell, you need to be dedicated and you need to be able to listen. That’s it.

You don’t need: business cards; investors; €50k; marketing experts; product designers; lawyers; accountants; printed letter heads; offices; a secretary; a phone system; or in fact, any of the things people who take funding spend the money on. You need a big pile of cash like you need a bullet in your head.

One of the few books I’ve read with this as its message that really made sense for me was Bootstrapping your Business by Greg Gianforte and Marcus Gibson. I saw Gianforte speak at MMU Business School once, and his message that you just get started with selling and deal with the rest later was blunt, fresh and quite reassuring. He started several businesses with nothing and built them up to 9-figure businesses before exiting, so he clearly knows what he’s talking about. That’s my preferred route – it seems simpler.

The only real advantage I’ve seen to taking investment is that you can buy in expertise you wouldn’t get otherwise, but you run the risk of becoming nothing more than a talking shop – the SeedCamp route is the worst of all worlds: the talking shop with money to burn, but not quite enough to buy in quality expertise or time enough to absorb it.

SeedCamp might sound interesting, but I remain to be convinced we need it. If you’re going to take investment, take it properly. Otherwise my ethos is quite simple:

You just need a bit of soul and dedication.