Disrupting the VC Industry: a VC investment Market

The discussion about disrupting the VC business hit the blogsphere late last week. Primarily driven the posts by Rick Segal and Doc Searls. A pause of a few days and Dave Winer has proposed User Internet Capital Corp to disrupt the VC business. Doc Searls has thrown support behind the idea as well. When the conversation was first begun, I thought about how the industry could be distrupted. I must admit that I am disappointed by what has been proposed. In a sense the User Internet Capital Corp is simply a VC fund open to all and sundry.

A more disruptive idea is to create a VC market. A market where people (users included) can invest in high risk/high growth businesses from an early stage. A market for Venture Capital would be far more disruptive than simply creating another form of the VC.

So how would the market work? A company would register with the market. The registration process would include the necessary due dilligence process that provides the basis for trust within the market. The company would then place a certain number of shares up for auction.

The auction process would work like this. Bidders bid not only a price but also an amount of shares they wish to buy at that price. At the close of the auction, the highest bidder pays the amount they bid and receives the corresponding number of shares that they bid for. If the highest bidder did not buy all the shares then the remain shares are offered at the final bid price to the other bidders.

An option is available where the total amount of a final bid (bid price for shares x the number of shares wanted) of losing bidders will be divided by wining bid price and they receive that number of shares. The shares that people purchase can then be traded within the market. The last traded price for a company's shares becomes the starting price if a company decides to do another round of funding.

Anyone can register to bid. The registration process for bidders is again a due dillegence process that provides the bid side trust for the market. There is no minium amount or number of shares that a registered bidder can bid for. If all they want is one share , then that is all the need to bid for.

A VC investment market opens up investment in high risk/high growth to anyone (Doc Searls and Dave Winer's users) businesses. A far greater number of businesses will be able to seek and receive VC funding than through the current method. The risk of any individual investor can be spread even further. It also brings competitive bidding to the process which will bring their own improvements to VC investment. Finally, it opens VC investment to the wisdom of the crowds which brings with it the possibility of better selection of great ideas.

I really think that a VC market will produce far greater disruption of the VC investment industry than the creation of a publicly traded VC fund as Dave Winer has proposed.

Links to Conversation:
Michael Parekh, Paul Kedrosky, Mathew Ingram, Michael Arrington, Mark Evans, Robert Scoble



Technorati Tags: VC, Venture Capital, Markets, Disruption, Doc Searls, Dave Winer

Healthcare and Education Spending

[Ed note: I wrote the post a while ago
but I never got round to posting it. After reading two articles
in the Economist, I was motivated to post it. Although it is
about Australian education and healthcare it is applicable to other
countries.]

Spending on healthcare and education is tied in
with poverty traps, reforming the tax system and welfare.
Currently, Australia has a complicated system that creates poverty
traps as benefits are means tested, disrupts the effective delivery
of services and complicates the tax system even further.


Reforming the way education and healthcare are paid for will
make significant in-roads to improving these community services.
This isn't about who should paid which has largely been settled in
favour a joint payment by both the individual and the state.
Rather it is about how the state money is provided to fund the
services.

Education and healthcare are currently funded in a
top down approach. The money slowly trickles down until
eventually some very small amount reaches the front-line where the
service is actually delivered. The money gets eaten up by
salary increases, administration expenses and pet projects.
This all leads to waste and increased costs in delivering the
service.

The funding needs to injected into the bottom, at the
point of service delivery. The funding is then delivered to
where it is needed by those who need the service. It also
brings in the possibility of competition as service providers now
half to provide a service that the consumer wants to use.

The
best way to inject the funding at the point of delivery is to create
non-means tested education and health accounts. The federal
government recurring spending would go into each person's education
and health accounts to be spent as the individual determines.

The
accounts would come with a left and right of arc. An education
account can only be spent on providing education and health accounts
only on health. The health accounts would have further
restrictions on the type of health services it can be spent on i.e.
most cosmetic surgery would be out. If you want that save up
and pay for it yourself. If the individual chooses services
that cost more than what is placed into the accounts yearly then the
individual has to pay the difference. For example, you send
your child to the most expensive private school then you will need to
pay the difference between what the account provides and what the
school charges.

The accounts would replace most if not all the
federal funding of health and education. The introduction of
the accounts would see any restrictions on price and price caps
removed. This will introduce price signals into the delivery of
the services and increasing the scope of competition in the delivery
of services. In this time of population movement, travelling
and globalisation the money in the accounts can be spend with
overseas providers of healthcare and education.

To
ensure the functioning of the accounts a minimum capitalisation of
the accounts will be mandatory. Just as financial institutions
are required to do. Continuing the theme of choice, the
individual will have the choice of who manages the accounts: their
bank or building society, insurance organisation or the RBA for the
government.

The health and education accounts strike a balance
between effective delivery and competition in service delivery while
ensuring a fair level of access to these services for all
Australians. The accounts also empowers Australians to take
responsibility and control of their lives. These accounts take
what is best of the Canadian, UK public funded systems with the best
of the US funding at point of delivery.

Technorati Tags: Australia, Policy, Education, Healthcare

Digital Media Marketplaces

A marketplace for digital media has intrigue me for a while. A place where digital media price is set by the value placed on the media by the market. Google Video Store with its variable pricing is a pale immitation of the a marketplace and will remain that way until the price of the digtial media is set by the marketplace and not by the seller. Variable pricing a market does not make. It is however, a step in the right direction.

One question that has bugged me is how would a marketplace determine the value of digital media. The pricing mechanism lies at the heart of any marketplace. For the marketplace to function properly the market needs to method to effectively set the value (and consequently price) of digital media. If the pricing mechanism is faulty then the market wont operate smoothly.

Stockmarkets prices are set by the interaction of the amount of a company's shares available for sale and the demand for the shares. The price is primarily determined by the scarcity of supply. Digital media doesn't have a finite supply. It has an inifinite supply of perfect copies. Scarcity of supply is not going to work in a digital media market as a pricing mechanism.

The Logistics Equation could be used to provide "pricing" variability that is determined by the market. Not really a very good system. Artifical constraints are placed on the market and prices only go up and never down. Not really a dynamic market with variable pricing.

A better pricing mechanism is to use demand per unit time. The price is then determined by the scarcity of demand. As the demand per unit time goes up the price rises, as the demand per unit time goes down the price falls. The beauty of this system is that the price is set by the operation of the market. It also produces a dynamic market with variable pricing with little or not artifical constraints.

Technorati Tags: digitalmedia, markets

Technorati Tags: digitalmedia, markets

Net Neutrality and IPTV

In much of the discussion (Michael Parekh, Om Malik, Jeff Pulver and Lawerence Lessig to name but a few) about net neutrality few seemed to have spotted the primary underlying reason for the determination of the US telcos/cable companies to implement tired Internet access. Besides greed that is.

As I see the primary driving force between the Telcos/Cable Companies (shall they become the new Evil Empire?) is to make their wonderful, investor friendly IPTV plans economical. As I have discussed in a previous post IPTV has significant disadvantages to Broadband TV to the point of IPTV being uneconomical when competing against Broadband TV. Unless the Evil Empire (aka telco/cable companies) can implement two tiered Internet.

The telcos/cable companies are frantically seeking to raise revenue and ARPU (the CEO's bonuses depend on it remember?) in the face of the on-slaught of the IP world. They see IPTV as their salvation and are consequently desperate to make their IPTV plans work. Unfortunetly, Broadband TV makes destroys the economics of their plans. The only way to make IPTV economical is to make it impossible for Broadband TV to be delivered at reasonable resolution and speed (downgrading Broadband TV packets or tiered Internet) without paying. The price the Broadband TV provider has to pay would at the very least make the IPTV competitive but more likely be set to price Broadband TV out of the market (wouldn't want to compete, now would we?)

Technorati Tags: NetNeutrality, IPTV, BroadbandTV

Technorati Tags: NetNeutrality, IPTV, BroadbandTV

Strategy of Microsft and Apple

Both Steve Jobs' and Bill Gates' keynote addresses showed that both companies are pursuing a stategy of empowering the edge of the network. A strategy that places users front and centre of the companies' focus.

How they pursuing this empowerment differs. Microsoft's strategy is to create seemless connectivity between all the devices at the edge of the network in order for users to be more productive. While Microsoft sees a growing importance for other devices, they still see the PC remaining an important part of the edge of the network. Why centeralise the PC's functions when you are trying to push power to the edge? No thin clients for them.

Apple's strategy differs as they are pursuing a strategy of seemless creation, publishing and distribution of content at the edge of the network. Their focus is less on productivity and more on creativity. Again the idea is to push as much power and functionality to the edge of the network, not to centeralise it.

Both Apple and Microsoft see the edge of the network as becoming the dominate paradigm for the future. Centeralise services and products will still exist but only as the support or compliment edge services and products. A good example is Steve Jobs' demonstration of Photocasting. All the creativity was done on the iMac and distribution was accomplished by a RSS feed mediated across .Mac. The centeralised service, .Mac, support the creativity by providing the user the means to distribute their creativity. Expect to see the same for music and video through iTunes and .Mac in the future.

Noteworthy, is that both strategies of the companies are not mutually exculsive. Both strategies while competing are still complementary. How Microsoft and Apple manage the competitive/coperative relationship between the two companies will be interesting.

THe keynote addresses signaled a shift to the edge of the network. They also signalled that both the telco industry and content industries are now facing two companies that thrive on rapid innovation. Few companies in these industries are up to the pace of change. Perhaps even more worringly for the telcos and content companies is the shift in power balance to Microsoft and Apple.

Links: Steve Jobs' Keynote Address
Bill Gates' Keynote Address


Technorati Tags: Apple, Microsoft, Strategy, Edge, Keynote

Technorati Tags: Apple, Microsoft, Strategy, Edge, Keynote

Variable Pricing on iTMS

The Labels are demanding that Apple loosen the reins and allow variable music pricing. And there are sound economic reasons for this to happen. Others in the blogsphere have explained the reasoning behind variable pricing in more detailed than I will go here. The labels though, want variable pricing which would put new releases at a price well above what is currently charged.

I personally find this hard to justify. To me it smacks of monopolistic pricing brought on by a lack of competition and waste in the labels operations. But back to the case of variable pricing.

EMI's boss has publicly stated that he expects Apple to institute variable pricing. Many bloggers expect Apple will expect implement variable pricing. Elliot Spitzer's investigation of the US music industry could easily force greater price competition.

So will Apple implement variable pricing? Quite likely. It was bound to happen and Apple will need to maintain "freshness" in the service or risk losing large numbers of users to other download stores. Already this is happening.

But Apple isn't likely to give the Label's exactly what they want. They will implement variable pricing but the upper price is going to be 99 cents. That will be the maximum price and prices for songs will descend from there.

Tags: Apple, iTunes, iTMS, Bubblegeneration, music

Paying for Fibre Networks

Capital. The requirement for any major infrastructure project and one of the hardest things to get. Capital remains the major stumbling block to the roll out of fibre optic to provide the last mile. Verizon is reported to be winding back the company's rollout of FTTP. Telstra, Australia's incumbent telcommuincations company, has stated that it will not rollout FTTN without regulatory gurantee to be able to lock out competitors. Clearly fibre last mile systems are expensive, particularly for companies whom stock prices are going down and not up.

Governments can fund the roll out of fibre last mile systems. This is what Amsterdam City council has decide to do. But government funding is not the only means for funding fibre last mile network rollout outside of a large telecommunications company paying for fibre rollout.

The fibre last mile network is an asset with a relatively predicatable income stream. Funding a rollout can be done by creating an income or royalty trust that will own the last mile network. Investors would buy units in the trust and this money would be used to fund the rollout of the fibre. The trust would not lay the fibre themselves but pay a third party company (or companies) to do the construction work. Once the network is rolled out then the trust simply charges telecommunications providers for access to their last mile connection. All telecommunications operators then have equal opportunity for network access.

Using Income/Royalty Trusts to fund fibre rollout has several advantages. Governments don't need to get involved in funding the rollout nor providing regulation to provide equal access to an incumbents network (always a messy business). A single company is not burdened with a very large capital expenditure over a long period of time. The trusts would soak up a lot of the cash that is sloshing endless around the planet causing various problems. The trusts would also create a "steady" income stream for long term investment. I expect that the trusts would sit between bonds and equity in the risk/reward metric. This would provide the pension/super funds with third security for parking cash.

But the main advantage is that the trusts would see last mile fibre networks rolled out now rather than possibly maybe sometime in the future.

Tags: FFTH, FTTN, Telstra, Funding, Telecoms, Last mile, Broadband, Internet, Fiber Optics, Trusts

Predictions for 2006

As the new year starts, I thought I would jump on the bandwagon of "Predictions for 2006". In no particular order:

Wireless Internet will move mainstream. The Wild Wild Web will move onto the screens of mobile phones as it has already done with PCs. As the Wild Web takes over the screens of the mobile users the precious walled gardens of operators will die. The manicured lawns and delicate pansies of the flower beds succumb to the voracious growth of the Wild Web. This will open up hundreds of new opportunities and services to mobile users. It will further erode the boundaries between wired and wireless spheres.

The Attention Wars will begin in earnest. All though the first shots where fired in 2005, full scale battles will begin in 2006.

Web service operations will suffer. Web Service companies will face outages and problematic quality of service through out 2006 as these companies learn the hard way about operations. While individual companies will improve overall there isn't going to be drastic improvement in the quality of service of web services. It is likely that web service operations will see a increase in the use of Big Iron to do the heavy lifting and mission critical tasks leaving the server farms to serve pages.

Usability will become a competitive differentiator for services and applications. Apple has demonstrated (again) the power of usability. Other companies are going to seek to harness that power in differentiating their service or application in the crowded marketplace of the Internet. Getting the mix between features and usability right is going to give a company a strong competitive advantage. An obvious example is the metaphoric revolution that Office 12 is going to usher in.

Digital home entertainment will enter new phase. The roll out of Media Centres will pit companies molded and shaped by relentless competition against oligarchs shaped by monopoly agreements and captive audiences. Competition for the attention of audiences will become far more intense as Internet video moves from being an indirect threat to a direct threat to broadcasters.

Identity 2.0 will become the catch cry of 2006. The possibilities opened by what has been termed Identity 2.0 from attributing comments and posts across the blogsphere to banking to fighting fraud and e-crime will bring this squarely into the centre of attention of the Wild Web. But like its counterpart in the offline world, identity 2.0 is only going to be as strong as its weakest link. Which is usually the process and documentation for obtaining an id card. This is the problem of a "real id" obtained using fraudulent means. For example using someone else's birth certificate to get a driving license. This will need to be addressed as Identity 2.0 is rolled out across the web.

Broadband TV will continue to gain momentum at the expense of the telco's TV offerings. Broadband TV will continue to grow as experimental broadcasters, non-traditional broadcasters and content owners push more and more video to the consumer through the Internet. The lower cost broadband TV solutions will erode the economic viability of the telco's TV offerings. Something that many telcos seem aware of given their recent rantings on two tier Internet. Two tier Internet will have a much greater effect on Broadband TV than VoIP or Web Services.

Uplink speeds will become a competitive point as ISPs struggle for differentiation in the Speed Wars. As the download speeds escalate rapidly it will become harder and harder for ISPs to differentiate themselves on speed and for the smaller ISPs to remain in the game. At the same time the speed claims will face greater scrutinity from consumers and regulators. This will force ISPs to find alternative ways to differentiate themselves which they will do with uplink speeds. We won't see a sales pitch based on synchronous speeds but something like a 8-12 Mbps downlink with a 1-4 Mbps uplink.


Tags: Predictions, Web Services, Broadband TV, Wireless, Media Center, broadband, Identity 2.0, usability