Felicis Ventures Blog

Vkontakte.ru - Russian Facebook Clone Growing By Leaps & Bounds

If you've never heard of Vkontakte.ru before - you're not alone. It was shocking to discover that it rose all the way to Alexa #34 in very short order. The site is growing so fast and is so popular in Russia that the country's secret service FSB got concerned that it might become a security risk because the Russian soldiers are signing up in droves. Social networking keeps demonstrating phenomal international growth. This shouldn't be a surprise: according to comScore's "State of the Internet" report from March of this year, Social Networks are the fastest growing vertical on the internet globally (60% annual growth) with under 40% penetration rate (versus 90% for portals).

What's even more amazing is that as far as I can tell, the site seems to be a carbon copy of Facebook - but localized in Russian and cyrillic alphabet. According to third party sources, the company has a team of only 20 people. It ranks among the top ten sites (based on Alexa stats) in Russia, Ukraine, Belarus, Kazakhstan and Tajikistan.

Russia is the country in Europe with the lowest market share for Google at 32% (versus Portugal's 94%) and its top 3 sites are all homegrown: Yandex, Mail.ru and Rambler. Facebook might find itself fighting an equally uphill battle in this important BRIC internet market.

Too Much Money Chasing Too Few Exits ?

  Fundraising by VCs hit a crescendo in 2007 according to NVCA, jumping almost 10% from 2006, totaling to about $34.7 billion. What's even more impressive is that number is almost 9 times (!) the amount of money raised in 2002, merely 5 years back. Contrast that with recent statistics on exits: first quarter of 2008 saw just 5 IPOs amounting to just over $280 million according to research by NVCA and Thompson Financial. The IPOs hit a low not seen since 5 years ago. Similarly the number of M&A deals totaled 56, the lowest in a decade.

While it's incredibly difficult to reconcile the exits with the investments, since most of the former transactions occur years after the latter, it's clear that the venture industry will face tremendous pressure this year.

It will be interesting to watch this space in the next months. Without a doubt, this trend is likely to bring a lot more attention to early stage investing, as well as force funds to move up on the funding cycle chasing lower risk deals, and acting more like PE funds.

BRICs Make an Increasingly Large Impact on the Internet

BRICs (Brazil, Russia, India, and China), the group of 4 countries, first coined by Goldman Sachs, are exerting a much greater influence on the global state of the internet: While in 2004 only China and India were in the top 10 countries for TMT (Tehcnology / Media / Telecom), in 2006 Brazil and Russia replaced South Korea and Canada on that list (source: Morgan Stanley Research, 2008). China has recently become the global leader in the following key TMT categories: population (1.3B), credit cards (1.1M), mobile subs (446M), telephone lines (368M), cable / satellite subs (155M) - [source: Morgan Stanley Research, 2008]. Only less than 1% of world's internet users were in China in 1995, but in 2007, 16% of the Internet users originated in China (~210M).

The importance of the BRIC countries like China have an ever growing consequence for the top US sites as well. The top 5 global properties, consisting of Google, Microsoft, Yahoo, YouTube and eBay derived virtually three quarters of their traffic from non-US users (source: comScore 2008). The ratio is as high as 78% for Microsoft and Google.

While the BRIC countries already established themselves among the top 10 countries in the world with the highest number of internet users, the penetration rate of internet usage is still incredibly low in these countries. In my opinion, it is exactly this contrast that makes these 4 countries highly interesting to watch.

Usability, Likability, Utility + Speed = Success

I was recently on a panel covering seed investments for start-ups at the Israel Web Tour. While my fellow panelists and I talked about the importance of massive traction and distribution when making investment decisions,  we didn't elaborate much on what causes traction or affects distribution despite the fact we most often make investment decisions on start-ups prior to massive traction or distribution.

[Image courtesy of: Website Optimization LLC, 2008]

While there's no such thing as a guaranteed formula for success on the web, Shackel's Acceptability Paradigm offers the following elements: usability, likability, utility, and speed (as measured in response time). Fonding teams that are unable to translate their technical prowess into a site which is extremely easy to use, offers solid value to the end users, charms them in a unique way and do all of this reasonably fast, are likely to hit a wall when it comes to trying to improve their traffic numbers or seek distribution.

While there are many sites that get one or more of those attributes right, Google is one of the few sites, that consistently outperforms across all of them:

• Nobody can debate the usefulness of search on the web. Technology is best when it's directed to solve specific problems users have or make it more convenient for them to do something they normally do in a different way. Utility is one of the most important aspects of a website. If it takes many slides to explain what value a site is expected to bring to users, half the battle is lost.
• Simplicity and advanced technology do not need to be mutually exclusive. At Google we always strived to make the site instantly usable, reduce the features to an absolute minimum and keep the clean, uncluttered look of the site at all costs which became one of its hallmarks.
• Likability is probably the most subjective success factor among the four I outlined above. Google's original "I'm Feeling Lucky" button next to its Search as well as its popular holiday logos were arguably among the cute design elements that gave it a more "human interface" and charmed its users, becoming an integral part of the brand in the process.
• Speed is one of the most important determinants of "perceived quality" of a site. Having a response time of a second or less gives users a sense of "immediate feedback" while a response time that lingers into several seconds persistently risks turning off users.

It's hard to say that even getting all four of these factors just right would guarantee success for a web site. But keeping a watchful eye and continuously improving on them should make a big difference.

DLD 08 Highlights - Change > Disruption > Opportunity

Short of going to Davos, one of the best ways to network with great minds from all around the world is to attend the DLD Conference in Munich, which is organized by publisher Hubert Burda, hosted by Stephanie Czerny and Marcel Reichart. Technology dominated majority of the great (& sometimes entertaining) panels. While it's a tough challenge trying to sum a conference which intended nothing less than uploading 21st century into its attendees' minds, I wanted to take a shot at highlighting some key observations here: [in no particular order]

• The way we communicate might change more than we expect in the near future and is likely to include tons more video
  
  • 3 Billion of World's 6.6 Billion people are 25 years or younger, there are 3 billion cell phones out there and the current the number of video cameras globally exceed current world population
• Facebook will become more aggressive to expand its reach globally with its translation initiative without precluding potential acquisitions to achieve that goal
• Emerging countries are on track to represent 50% of World's GNP again by around 2030 - G7 of the future might look almost completely different than today
• US witnessed huge productivity gains since the '90s - its share of world manufacturing stayed constant at about 35%, but it achieves that with only half the people today
• Project Better Place intends to make Israel completely independent of oil by 2020 with a bold plan involving electric cars, solar panels for energy production, 500,000 charging stations and applying the mobile phone business model to electric cars while using current tax incentives as reinforcement - all with private investment, designed in such a way intended to be replicated in other countries
  • 50% of world's oil is moved for transportation; Average car in Israel costs $15K, used for 8.1 years and is worth $2.3K at that point. However, average annual consumption of gas is $4.5K, totaling $36K, almost twice as much as the initial purchase value of the average car. So if people pay the same amount as a monthly service charge, they could own the electric car at the end of 4 years
  • The biggest investor in the Project is Israel Corp, the major oil refiner in the country
• Human powered search engines like Mahalo and Wikia Search are facing an uphill battle against Google
  • Great posts on this session on TechCrunch and ReadWriteWeb
• Geo-Information, virtual models of local geographies, freshly geo-tagged photos and custom maps overlaid with rich information from local users will significantly proliferate
  
  • Google Earth now covers half the world's population and a third of the world's mass. It now includes transit info for 80 of the world's top cities; users are creating tons of custom maps and discovering anomalies like a Roman ruin or a new Chinese sub-marine near real-time using these new tools & mashups on Google
• Expect more intelligence to be applied to make sense of exploding media
  • Yahoo's Flickr developed an algorithm for "interestingness" it's not only hard to trick but works very well - key point is every second of your life can be recorded, but you don't get a second life to review it
• TV is dead - long live the interactive mediums like internet and gaming
  
  • In multiple instances and panels, it became quikcly clear that, the young generation (people younger than 25), prefer interactive mediums like social networks and gaming to watching TV. If they have to, they prefer to watch TV on their computers.
• Web is an excellent medium to efficiently turn media to a site of action and achieve mass scale faster than ever before resulting in concrete changes
  • Examples include special blog collecting petitions which results in NY's "Passenger Bill of Rights" and Ukraine's government strategically being outmaneuvered by local flashmobs
• Sites like 23andme will have a huge impact on personalization of medicine and acceleration of medical research - It will also encourage people to submit more personal data in hopes of better understanding their ancestry and genetical predispositions to diseases which will then aid in fine-tuning cures to more precisely defined clusters of people and rare ailments.
• A combination of multiple disciplines including art, sound and visualization will aid us to better understand and conceptualize the physics of time-space warp, a multitude of dimensions way beyond 3 and how they interact.
• Seeing Krister Linder from Sweden perform live music on a panel, including a spur of the moment a capella rendition of Bob Marley's Redemption Song, and listening to 13 year old Tom Varsavsky talking about being targeted by Viagra ads in games, having 80 friends on Facebook, gaming 4-5 hours straight and referring to free wifi as "your wifi my wifi" was priceless.
• Google was mentioned in every context, usually in a positive light or as a leading example in almost every session by a multitude of speakers & panelists

Happy Holidays !

It's been an amazing year for me and Felicis Ventures. The portfolio now has over 30 companies. I'm proud of their incredible progress and wanted to highlight a few of their accomplishments:

- Voicestar was purchased by Marchex in August of this year

- Weebly & Yapta were named among the Time Magazine's 50 Best Websites of 2007

- Mint won TechCrunch40 Top Company Award
- Meraki Networks' Meraki Mini won Computing Grand Award of Popular Science, Best of What's New 07
- Melodis' Midomi won Computing Award of Popular Science, Best of What's New 07
- Meraki Networks was one of the 2 companies that won the World Economic Forum Award

In 2007, Felicis Ventures received hundreds of business plans from 12 countries and 15 US states. So I'm very humbled by the sheer amount and diversity of interest we continue to get.

Although I spent the last few weeks in China attending the Annual China Venture Capital Forum, meeting entrepreneurs and bloggers there, I was excited to support Stirr's Winter in Wonderland Holiday Event.

2008 promises to be an even bigger year: I'm really looking forward to attending the DLD 08 Conference in Munich in January and Dialog in April. Hope it will be just as exciting and prosperous for you ! Happy Holidays !

Highlights from 2007 China Venture Capital Annual Forum

This time last year, I was just returning from my first LeWeb 3 Conference in Paris, having enjoyed impromptu appearances by Shimon Peres and Nicholas Sarkozy, which made the event really memorable for me. This year however, I spent the same week in Shanghai, China attending the China Venture Capital Annual Forum. While this Conference was short on celebrity appearances by former or current Presidents, it was rich in terms of news from an impressive year in Chinese venture capital based on the first 11 months so far: 98 IPOs, $5.4B raised (55 new funds started this year), $3.2B invested in 428 deals according to the keynote address of Gavin Ni, CEO of Zero2Ipo Group. $3.2B invested reflects a six-fold growth in six years.

To get an idea of scale, I wanted to compare the numbers from China with US, India and Europe. Estimated annualized figures are as follows (based on first 3 quarters from Europe & India, first 2 quarters in the US):

These numbers of course only tell part of the story. Following the conference, I visited Chinese cities like Xi’an in the middle of the country whose population exceeded 7.5M, one of 100 cities in China with a population of more than 1M. The massive scale of growth is not without its cost however. In cities with a large industrial base like Xi’an, even on a sunny day, the weather looked foggy due to an intense haze. It’s not unusual for people to wait over an hour in lines at local banks.

The most eye opening experience for me was shopping at Gome, one of China’s most popular retail chain stores, focusing mostly on electronics. I could buy an iPod clone called She for less than $40 and was shocked to find a ski jacket in an attractive color with synthetic fur for a whopping $23. It wasn’t unusual to encounter restaurants with multiple floors with rows of private rooms (people dine out and entertain quite frequently here in China). Not surprisingly, at least one third of the total VC investment in China in 2007 was directed at the Traditional / Service industries. This is one of the few places in the world, Sequoia Capital invested in a fast food retail chain according to Fan Zhang, Founding Managing Partner of Sequoia Capital China.

All in all, it has been an amazing experience to meet first hand with great entrepreneurs, bloggers, investors, VCs and angels in China. More on that to follow in the next few blogposts…

Top 20 Worst Venture Capital Investments of All Times

$1.7B is the total investment lost in just the first 4 of top 20 Worst Venture Capital Investments of All Times as compiled by InsideCRM. The common theme in all of these companies from what I can tell is that the majority of them burned through more than $100 million each in venture funding before closing the doors, being sold at a major loss or losing significant chunk of their market value in a short time. I think it should serve as a great reminder to all founders and investors, that throwing good money after bad, chasing "boil the ocean" kind of ideas, does not make a recipe for success.

Finally An Awesome Music Search: Songza

Clan of Xymox, Nena, Front 242, Sezen Aksu - no matter how obscure or ethnic the band or artist, Songza, a new music search (just covered by GigaOm) swiftly returns most of their songs. It then takes merely a click to play, share, rate or add any song to your playlist. What's even more intriguing is that all the songs seem to stream from Youtube. While I can't comment on the legality of the site, I can definitely say the user experience and response time are excellent. While the audio quality varies dramatically from song to song, you can really find pretty much any song or band (as far as I can tell). Songza demonstrates that even in an area as competitive as search, excellent/simple UI, fast response time and solid functionality makes for a great site.

South Korea - Harbinger of Internet Trends

For the future of Internet trends, look no further than South Korea. According to statistics released by OECD and ITIF on April 2007, Korea ranks #1 in broadband penetration [90%], #2 in average internet access  speed [45 mbs], and #2 lowest in internet access cost [$0.45 per 1mbs per month], among 30 OECD countries surveyed. Given its roster of Internet companies, one would guess that the US wouldn't be far behind. However, it merely ranked 12th on the list with 51% broadband penetration, 4.8 mbs average internet access speed and average internet access cost of $3.33.

Other interesting comparison points were in the following areas:

• Popularity of Virtual Worlds: Korea's CyWorld had 14.8 million subscribers versus Second Life's 3.1 million as of June 2007 based on comScore Media Metrix data [Source: eMarketer] - Contrast this with South Korea's population of 49 million versus US population of 301 million
• Popularity of Social Networking: 55% of Active Internet Users in South Korea visited a Social Networking site in the last 30 days versus 24% for the US [Source: eMarketer / Ipsos Insight, 2007]
• Newspaper Penetration in South Korea fell 17% between 2004 and 2006 from 48% to 40% [Source: eMarketer / Korea Press Foundation, 2006]
• South Korea's $ 14 billion B2C E-commerce sales represented more than 25% of all e-commerce activity in the Asia Pacific Region in 2006 (Japan and China were at  $33.5 billion and $2.5 billion respectively, for comparison) [Source: eMarketer, 2007]
• Internet retail sales grew fastest among all retail channels at 23.5% per year, twice as fast as second most popular channel: convenience stores [Source: eMarketer / Korea Times, 2006]
• Clothing, shoes and sporting goods were purchased by 62% of all active internet users in South Korea, ranking number one among all products and services. Music was a close second at 49.1% [Source: eMarketer / MIC, 2006]
• While Music was #1 content purchased online, with 75% of active internet users, Education was not far behind at #4 with 27%
• Mobile TV is a huge growth area with expected subscriber growth of more than 8X in 6 years - from 2.5 million subs in 2006 to 21 million subs in 2012 [Source: eMarketer / TU Media Group, 2006]

Personal Conclusions:

• Keep watching the social networking space for interesting vertical implementations (examples: Maya's Mom, Dogster)
• E-commerce volume will keep going up and personalized recommendations will keep playing an important role in that growth
• Online Education is an overlooked segment and should become much more visible in the next few years
• Mobile TV space should get a lot more exciting if the wireless carriers could improve their user experience and abysmal bandwidth faster