Union Square Ventures: A New York Venture Capital Fund Focused on Early Stage & Startup Investing

Why The Flow Of Innovation Has Reversed

I had a beer recently with Dave McClure of 500 Hats. As is always the case when I get together with Dave, we had a long, rambling and enjoyable conversation about how the Web is changing the way businesses get built.

At some point, I said that the vector of innovation has changed. It used to be that innovation started with NASA, flowed to the military, then to the enterprise, and finally to the consumer. Today, it is the reverse. All of the most interesting stuff is being built first for consumers and is tricking back to the enterprise. I suggested that one reason this is happening is that the success of a web service is more often determined by its social engineering than its electrical engineering.

Dave immediately said he’d give me three months to blog that before he did. I thought that was generous even for me who doesn’t blog easily or often. But just to be sure I make the deadline, here is the post.

The basic insight that the flow of innovation has reversed has been out there as a meme for a while. Fred wrote about it and referenced Esther Dyson’s Release 1.0 article. I took a shot at why it was happening; I focused on changes in the way services are built and their complexity. The conversation that Dave and I had was more about how critical the user interface is in consumer facing web services and how that might influence the flow of innovation.

We have marveled more than once on this blog about the remarkable efficiency of Craigslist. That service is essentially a very lightweight governance system that manages an enormous collection of users who contribute all of the content and much of the oversight that makes the service work. It is because Craig and Jim focus on managing the efforts of their users instead of doing the work of those users that Craigslist is so phenomenally efficient. Many of the most interesting web services are like Craigslist, at their core, lightweight governance systems. Facebook and Twitter come to mind.

Even services that do more than mediate communications among their users often depend on users contributing data through their engagement with the service before they can provide value back to those users. Wesabe can only help users understand their spending and suggest ways to do more with less because users share their spending data with the service. Del.icio.us depends on users tagging the Web in order to be able to help users discover sites, services and memes on the web. Last.fm only works because users share their listening behavior with the service.

In the old days, electrical engineers focused on getting computers to work not on getting people to engage with the systems built on top of those computers. The folks that built enterprise software were vaguely aware that their systems had to be accessible to the humans that used them but they had a huge advantage. The people who used them did so as part of their job, they were trained to use them and fired if they could not figure them out.

Today, no one tells you to use Facebook. There are no employer sponsored training sessions on the use of del.icio.us. The burden is on the designer of the system to meet a need, entertain, or inform their users. They also have to seduce those users, hiding complexity, revealing one layer at time, always enticing, never intimidating, until the user one day finds they are intimately familiar with power and the pleasures of the service.

Designing a system that does that is not an electrical engineering problem. It is a social engineering problem. The best social engineers are working today on consumer facing web services. They understand that there is enormous potential leverage in those services. The creators of these services recognize that services like theirs will ultimately disrupt the economics of many, if not most, parts of the global economy in much the same way that Craigslist collapsed the multi-billion dollar classified industry into a fabulously profitable multi-million dollar web service.

So that, it seems to me, is one more reason the flow of innovation has reversed.

Power to the People

We encourage our portfolio companies to make sure they take time out from the operational demands of their business to think about the bigger strategic picture. We do the same for USV and a couple of weeks ago took a day off to discuss how we think the web itself is changing, how the web is changing industries and society, and as a result how opportunities for startups are changing. One of the best ways we have found to think about change is to identify those principles that appear to drive the change and that themselves can provide a bit of a constant. In other words to understand what’s changing, you need to understand what is staying the same.

To that end we first looked at the characteristics of opportunities that we had set out as far back as 2004: technology leverage, disruption of markets, no gatekeepers, capital efficiency, data asset/network effect defensibility. We believe that all of these still apply and they are all still things that we look for in opportunities. But these also point to important changes. It used to be that mobile was a walled garden environment with the carriers as gatekeepers. Apple’s AppStore and the response to this by other device manufacturers has forced the carriers to reevaluate their role as strict gatekeepers and give more choice to consumers and more opportunity to developers. If Google's Android succeeds it will take that shift toward developers a big step further (in Android the phone applications, such as the dialer, are completely accessible and can even be replaced).

To us, this appears to be one of the great constants of the web. It is taking power away from existing large institutions and pushing it out to smaller entities and often all the way to individuals. In the process it is building up new institutions (such as Google), but the net result appears to be a distinct shift of “power to the people.” We see this at work in many of our existing investments: Etsy’s marketplace for handmade goods lets artists connect directly with buyers; Covestor enables investors to share their track records and discover each other; Wesabe puts folks in control of their finances; Tumblr facilitates sharing oneself; BugLabs lets anyone create a custom network-connected device. In each case, individuals are empowered in ways that simply were not possible prior to the web.

We believe that the same shift will become increasingly important in other areas of life that have longer standing and slower changing institutions. Take education, for example. For hundreds of years education has essentially been organized around schools and universities. To date, this has even been largely true in distance/online education (e.g., University of Phoenix). It may be difficult for us to conceive of alternatives because we are so used to the existing structures, but these are in no small part based on historical difficulties in disseminating information. Books at one point were super expensive and even the Sorbonne (the oldest still operating university) had only a few hundred in their library. With book digitization proceeding at a rapid pace and most new research publications available electronically, having a library will soon no longer be a reason to have a university. Lectures could historically only be heard at the time and place of the lecture. Now we can watch a video recording of a lecture over the web. A tutor had to be in the same place to look at the work of a student and provide feedback. All of this is of course slightly overstating the restrictions on the flow of information, as there were correspondence based courses even in the age of snail mail, but they accounted for a vanishing fraction of education. In recent years, however, we have seen a significant upswing in home schooling. While other social factors are at work, a key enabler for homeschooling has been the web. With access to course materials, ability to watch lectures and even tutor at a distance, we believe that we are only at the ning of the web’s impact on the fundamental structure of education. We expect much of that change to be away from the existing educational institutions and towards empowering individuals and newly-formed groups.

The environment is another area where the web can enable the kind of structural change that shifts power to individuals. Again much of this is due to the vastly reduced cost of moving information around and acting on it. For instance, the cost of producing electricity depends a lot on the load in the system and on the availability of various sources (e.g. if the wind is blowing). Prior to the web it was difficult, albeit not impossible, to disseminate a fluctuating electricity price to households and give them the ability to act on it. The web makes this almost trivial and can thus enable individuals to adjust their demand. With the web it is even possible for individuals to do this when they are not at home (this being an almost literal example of “power to the people”!). Similarly, it used to be difficult to gather and analyze all the data necessary to understand the environmental impact of a particular activity. The web allows for this to happen in a seamless manner. You book a flight online, the reservation site can query a database and tell you about the carbon footprint. The same could happen for any online purchase. Imagine going to Amazon and comparing two products and seeing not just their price and features, but also their lifecycle environmental impact in an easily comparable fashion.

The shift away from existing institutions in education, the environment and other areas up for change will not be brought about magically by the web alone, but by companies that use the web to create the right kind of platform. We believe that these represent tremendous startup opportunities over years to come and look forward to meeting with entrepreneurs and teams working to give "power to the people."

Zemanta

We've invested in a number of blogging related applications and services; Adaptive Blue, Delicious, Disqus, FeedBurner, Outside.in, Twitter, and Tumblr. We've been attracted to this sector for a number of reason; because an increasing amount of content is produced with these kinds of tools and services, because traditional media is increasingly adopting these tools and services themselves, and because our personal usage has given us a deep understanding of these tools and services.

Today we are announcing yet another investment in this sector, a small company in Slovenia and London called Zemanta. Zemanta is a service that's focused on helping the blogger/content creator make the process of creating their content simpler and easier. As you write, Zemanta processes all of your text (like a spell checker in a word processing program does) and suggests things to you. Currently, Zemanta suggests stories/posts/research you might want to read as you compose your post, images you might want to include in the post, words you might want to hyperlink out with, and tags for search engines and other services to use to discover your content.

A number of us at Union Square Ventures have been using the Zemanta service for several months and we universally like it and have found that we feel less equipped when we try to blog without it. Currently you can get the Zemanta service as a free plugin for the following applications and services; Firefox, Internet Explorer, Microsoft Live Writer, WordPress, Moveable Type, and Drupal.

Like many of the services we invest in, Zemanta's initial value proposition is significant and has allowed them to reach a critical mass of bloggers. But the potential for Zemanta goes way beyond recommending links, images, and tags. If you think about it, Zemanta is "adwords for content creators". And we are eager to see them open up this contextual recommendation engine to other web apps and services that content creators might like to add into their posts at the time of creation. The obvious things would be monetization services (affiliate links, text ads, and even graphical ads), widgets and badges, video, quotes, and music. But honestly the potential for this sort of thing is quite significant and we certainly cannot know for sure where it will ultimately lead.

We were invited to join existing UK investors Eden Ventures and The Accelerator Group (TAG) as seed investors in Zemanta. Zemanta was the winner of last year's seedcamp program in London, which is kicking off again this week in London. We are very pleased to be joining a couple of top notch early stage investors in London in this deal and we are equally excited to add a seedcamp company to our portfolio.

This is our second investment in Europe and it is possibly the first investment in a Slovenian tech company by a US venture capital investor. So we are making a bit of history here and that's exciting too. The founders of Zemanta, Boštjan Špetič and Andraž Tori, are leading members of the Slovenian tech community and have built an amazing team of developers. Our investment will fund the development of a US-based business development team and we are looking for candidates in the bay area and metro NY to join the company. If you are interested, please let us know in the comments or via email.

Meetup - The Original Web Meets World Company

Something is changing on the web. We have lost some of the giddy enthusiasm that has surrounded the web since 2004. It was then that Tim O’Reilly defined Web 2.0 as a platform that leveraged collective intelligence. There is still a ton of interest this idea, but many of the recent conversations we have had about the web are colored by concern.

Though it is not often stated, I think insiders feel the web is coming of age, and they are wondering what’s next. It is not that they expect something new on the scale of the web, but they are worried that the insight that Tim defined – the leverage behind services like Flickr, del.icio.us, Digg, and Twitter – is now broadly understood. They are not surprised there has been a flood of new services trying to mine this vein. The problem is the technically savvy core community of users whose early embrace fueled the growth of these services is running up an attention deficit. Any new service that expects this group to invest time and energy will need to displace the attention those users invest in existing services that have already achieved substantial network effects. That is not going to be easy.

Two things will need to happen if the recent pace of innovation on the web is going to be sustained over the next few years. The next generation of services will need to have an impact on the real world and the real economy, not just an attention economy driven by self expression and discovery online. These new services will also need to reach real people, many of who use few if any web services today.

Tim makes the argument for using the web to attack real world problems in this post: What good is collective intelligence if it doesn’t make us smarter. Tim’s point is that the hive mind of the blogosphere is useless if the rubber never hits the road. We can post and comment and tweet and tag and follow all we want in cyberspace; but if it ultimately doesn’t change anything in real space, we haven’t really accomplished anything.

"I've argued all along that the real heart of Web 2.0 is the ability of networked applications to harness collective intelligence. Yes, you can harness collective intelligence to build amazing internet businesses, as the past five years have shown us.

But what good is collective intelligence if it doesn't make us smarter?

In an era of looming scarcities, economic disruption, and the possibility of catastrophic ecological change, it's time for us all to wake up, to take our new ‘superpowers’ seriously, and to use them to solve problems that really matter."

So in Tim’s view, what’s next is the intersection of cyberspace and real space. John Battelle calls it Web Meets World. We agree with Tim, John, Umair, and everyone else who argues that the real impact of the web will ultimately be in its ability to organize people online to make a difference offline.

But none of these folks make the related point that for the web to have a greater impact going forward it will not only have to touch the real world, it will have to reach real people.

At USV we have been thinking about this challenge for the past several months. Our most recent portfolio company, Meetup, has been thinking about this challenge since it was founded in 2002. Organizing people online to make a difference offline has been the central mission of Meetup since the ning. The team there has always understood that there was a difference between collective intelligence and collective action.

But the folks at Meetup were prescient in another way as well. They knew all along that the web would only reach its potential if it reached real people. Many readers of this blog will have been to tech Meetups. Most know of the political Meetups that powered Howard Deans 2004 campaign, and have informed every politician’s 2008 campaign. What may come as a surprise is that only 1% of Meetups are tech related, and only 5% are politically related. Most address the everyday needs of real people. Meetup, for example, organizes over 2300 moms Meetup groups in 1100 cities in 11 countries.

So we are thrilled to be an investor in a company that has been organized since its inception around the key insight that we believe will drive the next several years of innovation on the web – the need to solve real problems in the real world for real people. But we are pleased to be an investor for many other reasons as well. We have known the founder, Scott Heiferman since 1995. At the ripe old age of 36, he is a veteran of the New York start up scene, with four notches on his belt that I can count. The company he leads today so perfectly embodies our investment thesis that we have often used it as an example. It feels, in a way, like Meetup was always meant to be a Union Square Ventures portfolio company. Many of our other portfolio companies are aligned in spirit if not in practice. Check out these Etsy Meetups.

Obviously we think Meetup is perfectly positioned to lead the web to the world. It is, in many ways, the original Web Meets World company. It is also a great place to work and is, at the moment, looking for great people to work there.

Zynga Announces New Investment from Kleiner Perkins and IVP

Our portfolo company Zynga closed a $29mm round of financing last week which was led by Kleiner Perkins and IVP. We participated in the round, as did other investors Foundry Group and Avalon Ventures. Bing Gordon, co-founder of Electronic Arts and a games industry veteran, is now a partner at Kleiner Perkins and he will join Zynga's Board.

The Wall Street Journal and TechCrunch both wrote about the financing.

10gen

My love for computers and software started as a teenager growing up in Germany. I fondly remember my Apple II which followed my TI 59. I early on discovered that I could earn money with my programming skills and wound up doing some after school work for Siemens. While I mostly wrote code on a local machine, I got to do some mainframe stuff in Cobol. I was struck at the time by how incredibly cool and easy it was to have code running on a machine that was in a different city (Munich) over 100 miles away that reliably and rapidly provided access for thousands of Siemens endusers across the world. That was almost 25 years ago.

The last 10+ years many of us have struggled with how to create a similar experience for not thousands, but tens or hundreds of thousands or even millions of people over the Internet. By comparison to my mainframe experience, most of how we have done that has a Rube Goldberg-esque feel to it: Lots of machines running lots of different pieces of software strung together by tons of custom code and all of that is before you get to the application layer. Last year I wrote a post titled "I Want a New Platform” which describes in some detail what I believe is wrong with our present stack and what might replace it. A lot of exciting things have happened since the post in what is rapidly becoming known as “cloud computing.”

Cloud computing will fundamentally transform how software and services on the web are created. When the cloud is fully realized, developers will no longer have to worry about provisioning and monitoring machines (whether virtual or real) or whether they will be able to handle a 1000-fold increase in load on their service. A single individual will be able to create a site or service that can affect the lives of many millions or even billions of people.

The undoubted leader in the use of cloud computing is of course Google. In fact, it appears to be a crucial aspect of Google’s competitive advantage. Imagine coming up with a better webmail client a la gmail, but not being part of Google – leaving monetization aside for a moment, where would you have run the sucker and made it support millions of users? One might point to Amazon EC2. But while EC2 is a great platform for creating and managing machine instances, it does not by itself provide the kind of abstraction that is needed. Most people who use EC2 today still create instances that essentially contain the same stack that they might otherwise have on more expensive machines at a dedicated hosting provider.

Google has taken some steps of making their cloud computing platform accessible to developers through Google App Engine. But there are some serious issues with App Engine. Some of these Google will likely fix, such as having Python as the only available language. Others are harder to overcome. What if you are worried about Google competing with your business? What if you would like to run your code elsewhere? Given that cloud computing is part of Google’s competitive advantage it’s not clear that Google will want to ever make App Engine as fully fledged and portable as it might otherwise be.

Today we are excited to announce that we are backing a team working on an alternative, the amazingly talented folks at 10gen. They bring together experience in building Internet scale systems, such as DART and the Panther Express CDN, with extensive Open Source involvement, including the Apache Software Foundation. They are building an open source stack for cloud computing that includes an appserver and a database both written from scratch based on the capabilities of modern hardware and the many lessons learned in what it takes to build a web site or service. The appserver initially supports server side Javascript and (experimentally) Ruby. The database stores objects using an interesting design that balances fast random access with efficient scanning of collections.

10gen could be seen as a departure from the kind of investments that we have made. But in fact 10gen fits in well with many of our basic premises. First, 10gen is attempting to change the structure of a large market, the $20B+ a year hosting industry. Hosting providers running 10gen will be able to completely abstract away machines and instead provide developers with a platform a la Google App Engine. Second, it is doing so in a capital efficient manner. 10gen is not investing in physical hardware. Instead, 10gen is developing the software and services to run on existing hardware that has been built up and continues to accumulate. Third, 10gen is not looking to traditional sources of defensibility in the form of proprietary closed software or hardware. 10gen is opensourcing the key components of its stack and is actively recruiting contributors (if you are interested, check out the SDK and the contact page).

We look forward to working with Dwight, Eliot, Geir and the team they are building. 10gen has released an alpha SDK in time for OSCON 2008 this week.

Twitter Acquires Summize

Our portfolio company Twitter announced today that it has acquired a company called Summize.

We have known the Summize team and have followed their progress for the past year. Summize has developed a real time search engine for conversational media (i.e. blogs, twitter) and more recently has focused exclusively on Twitter search.

We are excited about the combination and believe that is an excellent pairing of teams and technology that will benefit the shareholders of both companies.

We have been eager to work with the Summize team and their investors and will now have the opportunity to do so through our investment in Twitter.

Twitter Raises A Second Round Of Funding

Our portfolio company Twitter announced today that they have closed a second round of financing, led by Spark Capital and including Jeff Bezos' investment entity Bezos Expeditions. Union Square Ventures and Digital Garage, another existing investor, also participated in the round.

We remain very excited by the power of marrying communications and social media in the form of small microblog messages shared between friends and followers. Twitter will use the financing to shore up its infrastructure which is the number one priority of the company right now.

Internet for Everyone

This morning Union Square Ventures endorsed an initiative called Internet for Everyone. This group does not sponsor specific policies or legislation. Rather, it hopes to build broad popular support for a few basic principles, that hopefully will guide policy choices over the next few years.

Internet for Everyone's principles are:

Access: We agree that every home and business in America must have access to a high-speed, world class communications infrastructure.

Choice: We agree that every consumer must enjoy real choice of high-speed Internet providers to achieve lower prices and higher speeds.

Openness: We agree that every Internet user should have the right to freedom of speech and commerce online in an open market without gatekeepers or discrimination.

Innovation: We agree that the Internet should continue to create good jobs, foster entrepreneurship, spread new ideas and serve as a leading engine of economic growth.

We support this initiative because we believe decentralized, open innovation is not only good social policy, it is critical to our business. We invest in the applications layer of the Internet. Every company in our portfolio depends on open access to consumers. Open access, the ability to put something out there on the Web without asking anyone for permission, is a key driver of innovation on the Web.

In the last five years, the United States has slipped from 4th to 15th place globally in broadband penetration. It should be no surprise that venture capitalists are studying South Korea, where 8 megabits is only an average connection, for insights into multi-player gaming, streaming video, or the digitization of the home. We also find ourselves looking to Japan and Europe, where the wireless networks are more open to innovation, for clues to what will be next in mobile computing.

The United States created the Internet. Our entrepreneurial culture is well suited to creating value at the applications layer on the Web. An infrastructure characterized by Access, Choice, Openness, and Innovation will help make sure we realize that potential.

Call for Topics

Charlie O'Donnell and I will be moderating a three hour startup workshop at NYC Web 2.0 Expo in September. There is a lot we could talk about from getting started to hiring to fundraising. But rather than just pick the topics ourselves based on what we think might be interesting, we figured we should find out ahead of time what folks really want to hear about. So please use the comments to suggest questions, topics and even guest speakers (three hours is a long time and we will vary the format including break out sessions).

And Then There Were Five

Back in February, we posted here that we were looking to hire an analyst. We asked anyone who was interested in the position to leave a comment. We received 164 comments and then worked through all of them to find a small group we could actually meet and interview. It was a long process that had a few fits and starts, but we are pleased to announce that we have finally hired our new analyst.

His name is Eric Friedman, and he may be known to many of you as the force behind the Marketing.FM blog. In addition to being an active and excellent blogger, Eric has spent the past couple years at Reprise Media as an Account Manager specializing in SEM, SEO, and Social Media services.

We know that search and social media marketing is the cheapest and best form of marketing for our portfolio companies that there is. And, we've never had an expert in house. Now we do.

So, now Union Square Ventures investment team is five people: Brad, Albert, Andrew, Eric, and me. It's still small enough to fit around the table in Brad's office which happens most mornings. But, big enough to handle the ton of interesting things that are coming at us every day. It feels just right.

Please welcome Eric to the Union Square Ventures team.

The Weird Economics of Information

Several months ago I ventured into the spooky economics of information with a post that suggested that data had an increasing marginal utility. A number of folks like Albert, who know a whole lot more about economics than I do, argue that it was not exactly an increasing marginal utility, but they acknowledged that there was something weird going on. Relying again on my naiveté, I thought I’d try another post on the weird economics of information. It is almost certain to be wrong. Hopefully it will be wrong in an interesting and useful way.

I started thinking about this particular problem when I noticed that, at least anecdotally, there was a correlation between how open entrepreneurs were with us and their ultimate success. Simply put the entrepreneurs who are aggressively open in describing their plans seem to do better than the ones who are cagey. There is absolutely no data underneath this observation. It is just my sense after meeting hundreds of entrepreneurs over 15 years as a VC. If it is true, it could be for lots of reasons. The more experienced an entrepreneur, the more likely they are to understand that ideas are rarely unique, but the ability to assemble a team and execute against that idea is rare. Perhaps they are just more confident, and it is confidence that is correlated with success. But recently, I have started to think that there might be something more going on.

Many of the better entrepreneurs we know engage anyone they come across about their ideas. On the surface, this seems kind of dumb. Every time you describe your plans, you are providing a blueprint for a competitor. So, why do they do it? My hypothesis is they do it because their experience has taught them that, on average, every time they describe their ideas, they learn more than they reveal, no matter how much they reveal. And, as a result, they are able to concentrate insight in a way that creates a defensible advantage for them.

Start with the assumption that, in most conversations, the entrepreneur comes into the conversation knowing more about the idea that the person they are talking to? They bring a context, a world view, a mental framework to the conversation that has been shaped by all of the work they have already done and all of the conversations they have already had. The person on the other side of the conversation may bring insights from other disciplines or fresh perspective, but they are unlikely to fully appreciate the importance of their contribution to the core idea. Perhaps when it comes to insight the rich do get richer.

But entrepreneurs don’t just have one conversation, they have hundreds. The more open they are in each of those conversations, the more the person on the other side is likely to engage. They may unconsciously see it is a fair trade, the entrepreneur’s ideas for theirs. The more detailed the conversation the more places for a counterparty to interact. The more they understand about the entrepreneur's plans, the more likely they are to come across other insights from other conversations that would be valuable to the entrepreneur and the more likely they are to pass them along. So an entrepreneur who is aggressively open with his or her ideas builds a very effective network that aggregates data, information, and insights that are immediately relevant to those ideas.

This brings us back to the weird economics of information. Would it be possible to model this mathematically? The image in my head is of network nodes arrayed in a series of concentric circles radiating out from the entrepreneur in the middle. The nodes on the inner circle are people who understand the opportunity and/or the necessary technology best. Nodes on each subsequent circle know the problem less well. As data and information pass from the edge to the middle, it is refined by the experience and/or knowledge of the nodes (people) on the inner circles, so that the ratio between raw data and useful insight moves more and more in favor of insight as you move from the outside in. In this model, the network becomes a very efficient idea refinery and the entrepreneur who is at the center the ultimate synthesizer of the idea. These networks would be very fluid. Different entrepreneurs pursuing different ideas could include many of the same nodes but they would be at the center of a different network defined by their ideas. The network around the original entrepreneur would also morph as the idea evolved.

All of this suggests that an entrepreneur should be open with everyone, and that they will get the most value out of being open with the people who are most knowledgeable about the particular problem they are trying to solve. The people most knowledgeable about a problem are also the ones best positioned to compete with the entrepreneur, so the entrepreneur has more to gain and more to lose by being open with these people. From one perspective, the risks and rewards of being open are perfectly balanced. Every insight comes at the cost of another potential competitor, but that calculus leaves out the whole problem of execution. If an entrepreneur is incrementally more prepared to execute on an idea that the person they are sharing it with, they should still gain even if they engage in an open (and equal) exchange with a potential competitor.

There is, of course, and embedded assumption here. The entrepreneur must be working in a market like the web that is rapidly evolving, where defensibility is based more on an organization’s ability to anticipate and adapt to change, than it is on its ability to defend a proprietary advantage. It makes a lot more sense for Peter to be open about what he is trying to do with Bug Labs, than for the folks at Coke to publish their secret formula. But in the markets we invest in, there seems to be a real advantage to being open. The best entrepreneurs in those markets cultivate huge networks of knowledgeable people and engage them actively to refine their ideas. The companies they build seem to share this characteristic, opening themselves by publishing source code and APIs: betting that they can thrive in an open ecosystem by being able to absorb, process, and capitalize on relevant information better than their competitors.

Pinch Media - Investing on a New Platform

New platforms create new opportunities. One would think that established vendors with big balance sheets, big investments in R&D, and established brands would quickly move onto a meaningful new platform, using their market power to prevent new entrants from creating a defensible beachhead there. But, that rarely seems to happen. More often, the winners are agile young companies who exploit the unique characteristics of that platform to create innovative and differentiated applications and services.

The iPhone is a new platform. On one hand it seems ridiculous to say that about a device that is so new and has such a small share of the mobile phone market. Earlier this week the New York Times quoted Edward Snyder, an equity analyst, saying that Nokia sells more phones every week than Apple has sold since the introduction of the iPhone. On the other hand, the New York Times was writing about the feverish speculation over the next version of the iPhone expected out next week, because everyone, at some level, understands that Apple has changed the game in the mobile space; subtly but significantly shifting the balance of power in the mobile space away from the carriers.

The release of the iPhone SDK (software development kit) will further open a market to innovation. The iPhone SDK is the first hint of a new, more open platform for the development of applications and services that people carry in their pocket. This is a big deal. It will open up a new market for innovative consumer services and will likely give rise to a slew of new companies architected from the outset to capitalize on the unique capabilities of this new platform.

We expect one of those companies to be Pinch Media. Greg Yardley and Jesse Rohland founded Pinch Media because they were convinced that the confluence of more capable smart phones, high quality mobile web browsers, and open mobile development environments with unique capabilities like location awareness, peer to peer networking, and lots of local storage would lead to an important tipping point. Greg and Jesse are convinced (and they convinced us) that within the next year, consumers who have become jaded by the hobbled capabilities of mobile services will start to see services that are actually more capable and more immediately useful than the ones they have come to know and love on the desktop.

Today, Pinch Media is launching an analytics service to help this new breed of application developer create and tune services for the iPhone market. The company’s services are designed from the ground up to effectively measure the usage characteristics of mobile services exploiting the unique capabilities of the iPhone SDK. Ultimately, the company will offer additional services to developers that will enable them to build profitable relationships with marketers, all without compromising the user’s experience.

We are excited to be working with Greg and Jesse in this new market and pleased to be co-investing with our friends at First Round Capital.

Losing Jason

Jason Knight stepped down from his role as the CEO of Wesabe yesterday in order to devote his full attention to a medical situation in his family. Chairman and co-founder Marc Hedlund, who previously served as the company’s chief product officer, will assume the role of CEO, effective immediately. Jason described his decision this way.

Last month, my family welcomed the birth of our second child. He was diagnosed with a respiratory condition that requires ongoing medical attention and care. The past several years with Wesabe have been the most exciting and rewarding of my career, but clearly, during this time, I need to focus my full attention on my family. Marc has been the visionary behind the Wesabe product, and I have every confidence in his ability to continue to lead the company on the growth path we set together.

We are sorry to lose Jason, but we respect his decision, wish him the best of luck, and hope for his son's speedy recovery.

Outside.in Steps It Up

Most companies grow in steps. They operate at one level for a while, make good progress, then take a step up, and start operating at a new level.

In the past month, our portfolio company has stepped it up on a number of levels. First and foremost, Mark Josephson joined as CEO and founder Steven Johnson became Executive Chairman. This step had been planned as far back as our original investment, as Steven is a wonderful author who really enjoys writing books, typically one every year. He took a break from that schedule last year but really didn’t want to do it again this year. With Mark in the CEO job, Steven will be able to continue to do the things for Outside.in that he does best; plot strategy, evangelize, and think of new products and services. Mark comes from Seevast/Kanoodle where he was President and before that About.com where he held a number of leadership roles. We think it’s a great fit for Mark and Outside.in and are excited by his decision to join and lead the Company to the next level.

In addition, Outside.in raised a third round of financing, the first of any magnitude as the first two were really seed style financings. This time the Company raised $3 million from the existing investors who have been eager to put more money in the Company as well as several newcomers, most notably the New York City Investment Fund.

The combination of a stronger management team and a full tank of gas takes Outside.in to a new level of operating capacity, just in time to roll out a series of new services that they have been working on for the past six months. Techcrunch and Alley Insider have the details on one of those services, called Radar, and are offering a limited number of alpha invites on their blogs.

If you can't get an invite to Radar from TechCrunch or AlleyInsider and want one, leave a comment on this blog and we'll try to get you one. We can't promise it though.