Cash is King

A lawyer friend of mine just passed me a couple of interesting articles on the current tech business climate. While it doesn't look rosy for much of anyone, plenty of large tech firms have cash to spend. (I made this point back in October in my "Web Entrepreneurs Beware" post.)

The catch here is that the Googles and Microsofts of the world (namely Google and Microsoft) could become much more conservative with their valuations. Both companies have shed tens of billions in market cap and don't have the luxury of throwing high-flying stock at attractive start-ups. They'll have to dig deep into their piles of cash...but not that deep.

One of the few start-ups that seems to be flaunting a gaudy valuation is Twitter. Facebook offered $500 million for the micro-blogging website.

So, why didn't Twitter take the money and run? Well, because it wasn't money. Facebook offered $400 million of its seemingly sweet offer in Facebook stock. Over a year ago Microsoft's nominal investment (nominal to Microsoft) in Facebook gave the social networking site an implied valuation of $15 billion. This has since scared off a lot of potential investors and--in this case--Twitter.

For Twitter and Facebook, as well as for most other entrpreneurial web ventures, cash carries a huge premium. For the time being monetization will be a struggle because the online ad market--the by-default revenue stream for so many websites--is slowing down. Also, private equity funding is drying up quickly. The firms that are most proactive in getting investments and reinvestments will be the ones that survive the downturn. Those who sit on the sidelines will likely fall off the cliff (if they don't simply decide to close up shop now).

For Google and Microsoft, cash is still plentiful. However, they see the hoards of start-ups and smell their desperation. They will continue to seek attractive strategic acquisitions, but they'll begin to resemble financial buyers in their frugality.

For example, you might see Microsoft have another go at Yahoo--this time with a much lower offer. Microsoft might rather try its hand with Facebook again. However, this time around I don't see the software giant conceding such a lofty valuation for its investment.

You might also see Microsoft go after search technology to complement its Live Search. Just don't expect to see another $100 million acquisition like Powerset anytime soon. (I predicted the Powerset acquisition in "It's search, stupid".) 2008 was supposed to be the year when the start-up search technologies gained some major ground. Well, they haven't, and Microsoft knows that Google is now stronger than ever in search. While this obviously points to Microsoft's own shortcomings, it also signals an even greater weakness in start-ups like Mahalo, Cuil, Wikia, et al. They won't survive as stand-alone search engines. Microsoft will be able to offer decent--but not crazy--cash for the start-ups that have some real technology, and simply let the others fend for themselves.

So, cash is king. Hold onto it. Make sure you can last 12-15 months with your cash on hand. If not, seek investment now or take measures to reduce your burn rate.

The harsh fact is that web monetization--while not doomed--has become a bit trickier. Even the formidable Google machine has had to make some un-Googley concessions, such as putting ads on Google Finance and extending AdSense to parked domains. If Google has to be creative in these times, imagine what start-ups run by lesser mortals must do. Whether it be capturing more revenue, reducing costs--or both--start-ups need to protect themselves in this all-t00-common race against insolvency.

Google Chrome: Just the Beginning?

After 100 days of using Google's new OS, I have learned to love it. Everything about it screams efficiency. Most notably, navigating your most visited websites is quicker than ever. The default homepage is a mosaic of thumbnails for your most visited websites. Also, your bookmarked websites show up in the address bar as you type them. I know this doesn't sound like much, but it eliminates the scrolling you must do in other browsers--as in Firefox--that rely on a drop-down menu of your browsing history.

Chrome has also recently updated certain glitches that it suffered at its inception. I had some problems with certain features on the Facebook website and slow performance when using Flash or (oddly enough) watching Youtube videos. All of these problems have been fixed, and--to the best of my knowledge--is the best performing browser on the market.

Speaking of the market, Chrome still has a long way to go in terms of market share. The new browser has been hovering around the 1% share mark, still dominated by the incumbents IE, Firefox, and Safari.

With that said, Google doesn't plan on letting this get in its way. While the company's market share doesn't seem to be going anywhere, don't think it doesn't have something up its sleeve.

Last week Net Applications reported that nearly 1/3 of all computers at Google were running on an unidentified operating system. This reignited rumors of a Google OS for the desktop. Google, of course, already has an operating system for mobile phones called Android. Many expect that the company will simply expand current efforts with Android to other devices, including TVs and PCs.

Whether these rumors of a Google OS are true or not, Google's recent expressed interest in pushing Chrome reaffirms its commitment to bringing more and more computing to web-hosted applications. Google's Docs applications are improving in quality and scope (now includes a pdf viewer) and are available offline through the Google Gears browser extension. Now, with a browser that is engineered to run a variety of different applications on the web, Google is using Chrome to delve deeper into the computing space.

In my opinion, it's only a matter of time before Google creates a rudimentary operating system to eventually push Microsoft products out of the PC altogether.

Of course, a Google victory would be no foregone conclusion. Still, the software industry would become much more compeititve. Finally Microsoft would have a viable competitor for its core product offerings, Windows and Office. Google has already shown its ability to strike distribution partnerships for its software products. Once Google has an OS, many OEMs will be licking their chops for a lean, economical software with a strong brand to back it up. Once Google strikes its first major distribution deal, that could be the point of no return that signals an all-out war between Microsoft and Google for desktop dominance.

I'll admit that I welcome the day that Microsoft has some more viable competition. Although I respect Microsoft for doing a great job so far in creating one-size-fits-all software for the masses, the time has come to break up what has largely been a monopoly. Greater compeition will be great for entrepreneurial firmst that require technology to not only drive productivity up, but to also drive costs down. A stripped down version of the PC with largely web-hosted applications could offer the cost savings that I envision...and it's an ad-supported company like Google that is most likely to supply it.

Scrabulous Lawsuit Dropped

Hasbro, the maker or Scrabble, has dropped the lawsuit against Kolkata-based RJ Software for its once-popular Scrabulous application on Facebook. The Hasbro statement cited RJ's compliance in making changes to "Wordscraper" and "Lexulous", which were launched after being forced to take down Scrabulous.

In Defense of (Web) Advertising

OK, we get it. The ad industry is going to suffer in 2009. Someone recently pointed me in the direction of this NY Times blog post on the bleak outlook for ad-supported start-ups. While it raises plenty of good points about Twitter's and Facebook's issues with cash, valuation, and monetization in a depressed ad market, it also tends to exaggerate a few points. Also, it brings up points--such as VCs skepticism of ad-supported websites--that aren't necessarily new. Here was my e-mail response to this blog post:

Thanks for the interesting article. It brings up a lot of interesting issues with Facebook and Twitter, both of which have some serious issues with cash, valuation, and monetization.

I think it exaggerates a few points, though. I'm sure ad-supported websites get rejected by VCs all the time, regardless of the ad market. The problem is that there are so many websites out there that adopt the ad model because of a lack of a better idea. The model gets a bad rap as a "default" business model for the ambitious hobbyist. Plus, it just so happens that the majority of Web 2.0 websites lack the content and the context to monetize well with ads.

The point about having diversified revenue streams is well taken. However, any comparison between now and the dot com bubble should be met with skepticism. The online ad market itself does not resemble a bubble at all--and certainly did not lead us to the mess we're in. (With that said, there might be a VC-backed Web 2.0 bubble--but this is still not the same thing as the ad market itself.) When people are pinching pennies as they are now, there's no reason to believe that current online ad spending is anything short of reasonable based on the most conservative ROI calculations. So, even though ad spending will come down a bit, even in the online space, I don't expect anything much more drastic in 2009 than what we're going to see in Q4 (crossing fingers). Furthermore, the fundamentals for the online ad market are still strong, as online continues to gain market share against traditional media channels. If you are only expecting monetization 3-5 years out, why should you dwell on short-term fluctuations in effective CPM rates? In fact, a shrewd VC might relish the opportunity to make equity investments at attractive valuations.

Of course, VCs will make up their own minds :)