Ooga Labs

SF Chronicle Article

james-keaka-evan-upside-down.JPEG

Yesterday there was a great article by Jessica Guynn in the Chron. She did extensive research and jammed a lot into it, and it ended up on the front page, which was really cool. It’s our first public announcement of what we’re up to. My favorite parts were when she compared James to “Timothy Leary the 60’s icon”, and then called the rest of us a “merry band” and an “eclectic clan of nerds.” Heh heh. Story link.

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Analysis

Signs the boom is entering the 3rd quarter

3rd-quater-graph

The tech industry cycles very predictably, and somehow it always feels as if it’s for the first time.  Very refreshing in a way.  Eating lunch at the picnic table in the office, we were talking about what would be some signs that the tech boom is getting into the 3rd quarter…

1) high number of new G.P.’s being hired at VC firms, just in time for their investments to crater in 3 years.
2) more people with British accents around Silicon Valley
3) increasingly attractive people, both men and women, around Silicon Valley
4) VC’s you’ve never heard of, backing companies you think, eh? What the hell is that?
5) new HBS grads joining startups
6) guys in their late 20’s breaking up with their girlfriends rather than getting married and getting distracted from work
7) married couples delaying having babies so they can focus on work
8) pretty large and pretty swanky company parties
9) oversized marketing departments
10) PR companies growing
11)  decoupling of earnings from valuations (e.g. Aqantive, You Tube)

Another thought we had was that if a viable business model emerges for YouTube, justifying the acquisition cost and calming the IP lawsuits, the boom might extend because the markets might assume it means that the ad dollars from TV will continue to migrate online, and perhaps subsequently, the online companies could inherit the viewership from the TV companies, NBC, ABC, etc.  If a good business model cannot be found for YouTube… then maybe the party in our little corner of the IT world will end more or less on schedule in 18-24 months.

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Ooga Labs

RailsConf 2007 summary

So a couple of us engineers and our CEO went up to Portland, OR for RailsConf 2007. Overall, it was a good conference and the whole list of “Who’s Who?” was there. We attended many sessions, but I liked JRuby and Solr the most.

RailsConf 2007 had over 1600 in attendance, so its pretty clear that the Ruby/Rails community is growing leaps and bounds. This is great news for us as we’re big proponents of the Rails platform.  All of the energy and community behind Rails offers a lot of credence to the platform, and this was very evident with all of the many interesting sessions at RailsConf.

It was also clear that the number of Rails jobs is growing faster than the number of available engineers. In the foyer of the conference was a big message board and there was easily a ratio of 25:1 the number of “we’re hiring” to “looking for work” posts.   We are  looking to hire developers too, and we will teach you Rails and Ruby if you’re a great programmer in another language.

But onto the cool stuff! Adobe Apollo, and to a lesser degree Flex, was a common topic. Its very clear that the Adobe Flex/Flash platform is going to be a major player. Some engineers from Adobe did a session and showed how easy it is to connect an Apollo app to a Rails backend. Super cool!

We went to so many sessions that they are all blurring together. Here is a link to all of the RailsConf 2007 presentations.

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Analysis, Cool companies

Twitter, a great investment for someone

Twitter has tapped a new pleasure center in the human brain at the intersection of cell phones and the Web.  That’s a big deal, I think.  Instant Messaging was an interface that tapped a new pleasure center in the human brain when all the computers got connected.  Social networking was an interface that tapped a new pleasure center in the human brain when digital photography hit.  Now it’s happening again, perhaps.  Twitter is first with the application, growing fast, and they NAILED the name, which can be a brand and a verb.  Investors get in if you can.

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Ooga Labs

Starter Stock

stock-certificate-for-starter-stock

We’re starting several companies simultaneously at Ooga Labs, and we are trying to be careful and creative about the financial and corporate structures we’re putting in place. It can end up mattering a lot in terms of how much value you can create and capture over the life of an enterprise. My last company, Tickle, founded in 1999, was a Delaware C-Corp, which is the most familiar structure to the VC community, and some of the Ooga Labs companies are also C-Corps.

The C-Corp structure served Tickle well until 2004, when we were trying to do a $20 million round of financing with new VC investors. It made no sense for the company Starters (which we define as the founders as well as early employees) who were still renting apartments, driving old Toyota Corolla’s and starting to have children, to keep going without taking some money off the table. The traditional equity structure prevented it from being easy without raising the strike price of the common shares. As is typical in most C-Corp’s, the Starters held common while the VC’s held the preferred, senior shares. The main reason a Board wants to keep the common share price down is because it’s hard to hire sophisticated new employees (including existing management’s replacements, potentially) when the strike price of the options in their equity package is high. The Board fears really good people will do the math and see they have far less upside for coming to your start up vs another start up with a lower strike price. It’s a point VC’s will often not relent on, certainly ours wouldn’t.

So we embarked on trying to figure out how to get the Starters some liquidity without killing the common share price. We spent 3 months and $350K of money with three prominent Silicon Valley law firms (one for us, one for our existing VC investors, and one for the new lead VC investor) to try to figure out how to make it work. What we found was that the ways of accomplishing our goal that had been acceptable to the IRS and SEC around 1999, had been eliminated by Sarbanes-Oxley by 2004. So we had to explore other back flips like re-capitalizing the company. In the end, we bailed on the financing for other reasons, but I had learned my lesson about the need for some sort of special stock for the Starters. I had also learned a lot more about how the SEC and IRS think about things, and we had come up with an idea for a new type of stock that would alleviate all the machinations to get Starters some liquidity along the path of growing their company. I vowed that when we started my next companies, we would fix this problem by implementing from the beginning, this separate kind of Starter Stock, which would represent some minority portion of the stock that each of the Starters received.

The basic idea of Starter Stock is that it 1) confers special voting rights to those who get the stock, and 2) it can be converted to any preferred equity stock at the time of a financing so it can be sold at that time without raising the strike price of the common stock. For instance, if the company is considering doing a $9 million Series B preferred round with a traditional venture capital firm, the Starters would first have to approve the deal due to their special voting rights, and second, Starters could sell some – say $1 million — of their Starter Stock as Series B stock bringing the total round to $10 million. $9 million goes to the company and $1 million to buy baby some new shoes. Whether this happens or not will be up to a negotiation among the investors, the board, and all the Starters, but at least you have the opportunity to legally and simply take some money off the table which then gives you the continued confidence to go for the big hit, which, in turn, aligns you more with the investors.

Every new C-Corp. at Ooga will have a Starter Stock class. We encourage everyone starting a company to look at this option if you are going to do a C-Corporation and you are planning on raising money. Two law firms that understand this new class of stock are Orrick and Perkins Coie and you should call them if you want to go this way.

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Analysis

Google should buy Facebook at any cost

Simplifying greatly, we might say the first wave of the Internet was search.  The one we’re in the middle of now is social networking (it comes in many forms: myspace, orkut, msn spaces, facebook, secondlife, yelp).  To me right now, Facebook looks like the clear winner of this phase.  First, every metric of their traffic and usage is formidable.  Second, they are truly excellent with their product.  I haven’t seen them make a significant product or strategic mistake in the last 2 years, as they have been inexorably migrating from their college market to a much broader market appeal. (some say they should stick to their college knitting, but I personally think their aims for world domination are a much better path.)  I think Yahoo made a big mistake not to offer Facebook whatever they wanted last summer. 

Their growth since Sept 06 shows they jumped to the mainstream, and there’s no looking back now.  Facebook has an open field.  They are the only social network that got big while keeping their interface clean, and the name/brand is universally appealing.  Their product reflects the understanding that they need to be a utility, just like Microsoft and Google, (I mean, look at Facebook’s new design and UI, including  their crappy little Microsoft icons and Microsoft pull down menus.  They’re emulating MS whether they know it consciously or not).  Once they get the interface which gets their people to search from Facebook instead of going to Google, they’ll be able to cut a deal with Google and capture the bulk of the value, say 80% of the revenue.

So what’s interesting about this social networking wave is that like the operating system wave of the 1980’s, there is an inherent, real network effect to the business.  That’s not true of Google.  They have a network effect in the number of advertisers bidding on their keywords, which makes them more profitable per query than #2 Yahoo, but that effect doesn’t translate into greater defensibility due to a fundamental network effect for Google users.  What Google has is a brand effect.  Very powerful, indeed.  But not a true “I get more out of using them because everyone else is using them.”  Facebook could achieve that true network effect in the next 24 months.

Further, like Microsoft was able to get into applications in the 1980’s with Word, Excel, PowerPoint, Outlook, Exchange, etc.,  Facebook can add a large number of social apps on top of their platform.  Classifieds, Music, search, digital goods, virtual worlds, currencies.  As Michael Birch of Bebo said a few months ago, “I think the next big thing is still social networking because it can morph into whatever is next.”  Very true.  And Facebook can do just that, just as Microsoft did.

If I were Yahoo, I would want to buy Facebook to stay relevant.  If I were Microsoft, I’d want to buy them so I can stay relevant and have another shot at the network effect operating system business.  If I were Google, I’d want to buy them for both those reasons, and also because I’d want to keep Microsoft from getting back in the ring.  But if I’m Facebook I’d want to stay independent, so I could build the next empire and maybe bring new ideas to how to make a difference in the world through technology.  Here’s hoping they stay independent.

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