It's Rishi

I’m lucky to have many friends who are entrepreneurs. Some are starting companies for the first time, while others are successful serial entrepreneurs. Here’s a quick run down of some of their latest endeavors:

Voyij is the creation of Nick Atkins and Paul Kim, friends and former co-workers of mine at SideStep. Voyij is the best search engine for travel deals on the Web. The great thing about Voyij is that you don’t need to know exactly where you want to go. If you have some ideas about what you want to do on your vacation (e.g. skiing, gambling, beaches, etc..), Voyij will find you deals based on that criteria. The team has still got some wrinkles to iron out but the site is absolutely worth checking out next time you book travel.

If it’s just a hotel that you need then check out DealBase. My former manager, Sam Shank, continues his reign on the hotel deals & reviews space after he sold TravelPost.com to SideStep (now Kayak). Like TravelPost, DealBase offers consumers honest, comprehensive hotel information. This is in contrast to some of the market-leading travel sites which may encourage you to book the wrong hotel because it earns them the most commission.

If you play the guitar, then you need to check out FretBase. (The *Base.com thing is a coincidence..) The site is the brainchild of another of my former managers at SideStep, Brian Stolte. Recently launched, FretBase has already grown to include an impressive amount of information on everything guitar-related, from music to artists to the guitars themselves. With the passion that Brian and the rest of his founding team has, I’m very excited to see what they do with the site.

Finally, my long-time buddy, Rob Poitras has just embarked on a new project called FashionLuvr. Rob has proven himself to be an online marketing expert in the fashion world. He’s leveraging that expertise to create the defacto website for the latest sales at online clothing boutiques. Rob’s got an intriguing strategy to grow FashionLuvr and particularly given the lull in demand for high-priced clothing, he may just have exactly what the market needs.

Btw, come on guys, make proper linkable logos!!

After about a year of dismissing Twitter as a fad, I realized that it seemed to be gaining more and more momentum. I am receiving more “X is now following you..” emails than ever before and Twitter is finding its way into more of my conversations — both online and offline. While I appreciate the value of Twitter as a communication medium, I recently found a Twitter-based service named StockTwits that revolutionized how I think about Twitter.

StockTwits is a community of people who follow the equity markets and exchange thoughts, via Twitter, about both single names as well as overall market movements. On StockTwits.com, any user can browse all the latest Tweets amongst the community members. Here’s the StockTwits AAPL page:

Now, this concept in and of itself is interesting but not really thought-provoking. However, what I found sort of fascinating is the mechanics of StockTwits. StockTwits users include $[Ticker] in their tweets to let StockTwits know what ticker they are microblogging about. So, for example, “long $RIMM short $AAPL has been a heck of a trade in 09″ indicates to StockTwits that the tweet is relevant to RIMM and AAPL. Because all tweets follow this convention, it is easy for StockTwits to organize the massive number of tweets into channels. In this case, the channel is a single equity name.

Let’s say you started a baseball twittering community. You might create conventions like $[LastName][Jersey#] or $[FirstName][LastName] or whatever.. in fact by applying a bit of intelligence when processing tweets, the system can probably be quite flexible and still correctly resolve player names. The bottom line is that as long as users are OK with including these inline tags in their tweets, systems can then make meaning. Sort of like tagging a post on one’s blog, but the difference being that everyone agrees to use the same set of tags.

In today’s blogosphere, tags are arbitrary. That’s the way it’s always been and this behavior is unlikely to change. The result is that the blogosphere is difficult to aggregate. The only way to create a structure out of related blog posts is through links and trackbacks. While this kind of works (Techmeme is certainly a shining example), there are tons and tons of unlinked posts about the same topic everyday in the blogosphere that, while related, cannot be aggregated.

In contrast, I think there’s a real chance for these twittering tag domains (for lack of a better name for this) to catch on. Tweets don’t really live anywhere per se. Blog posts do…they live on your blog (a web page). Thus, there’s a tendency for people to want to express their blog posts in their own individual way. That means categorizing and tagging the post in their own preferred way. However, for Twitter users to join a conversation on a specific topic, they will need to tag their tweets with a common folksonomy, like we see with StockTwits. Without this concept, a community like StockTwits would be utter chaos.

There’s definitely something interesting about structuring conversations in Twitter. Both for the purpose of making richer experiences for those involved in the same conversation and for the purpose of search/aggregation.

I had heard of the search fund concept, but beyond the obvious challenges, was always curious about how one would get started and what exactly the process entails. Luckily, HBS posted videos from panels that took place at last year’s Search Fund Entrepreneurs Conference.

For those that aren’t familiar with what a search fund is. It’s essentially entrepreneurship through acquisition. The basic steps are:

1) Small “search” team of entrepreneurs rounds up a dozen investors who will front some cash (about $25k each give or take) to cover the cost of the search team finding a great business to acquire.
2) Once the search team finds such an investment (this can take a couple of years) the original investors can invest at a discount.
3) Assuming the deal closes, the search team then takes over the operations of the company and grows it.
4) PROFIT.. =)

If you have a couple of hours, these videos are definitely worth watching even if you have no desire to be involved in a search fund. I learned countless practical lessons on how to create and manage proprietary deal flow, negotiate, deal with accountants and lawyers, obtain debt financing, and even how to successfully lead and manage a growing organization.

HBS – Search Fund Videos

Alpha, in the world of asset management, is the measure of the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by beta (beta is basically a measure of a portfolio’s volatility as compared to the market i.e. the S&P 500 index). For alternative investment funds, such as hedge funds, alpha is how one fund is compared to another. Furthermore, a significant chunk of the fees that a fund manager earns is dependent on the alpha that his fund returns. (Let’s ignore the fact that much of the “alpha” was probably unaccounted for beta and fund managers were likely overcompensated). Thus, alpha generation, is critical to a fund manager’s success.

So..where does alpha come from? Benjamin Graham, the father of value investing, found excess returns by buying attractive stocks that were very underpriced — priced far below their tangible book value with no warning signs to justify it. Back then (in the early to mid 20th century), analyzing securities was a challenge. Access to financial statements and timely market news was difficult. Thus for people like Graham — and his disciples — who 1) put in the effort to obtain the relevant data 2) crunched the numbers (remember no Excel!) 3) had the proper analytical framework (courtesy of Graham) and 4) were patient there were bonafide bargains to be had.

Over the course of the 20th century, access to market information improved substantially and the number of “sophisticated” investors skyrocketed. This trend continued until the point where toward the end of the century, all investors both big and small were essentially on an even playing field. Obvious bargains in the equity markets dried up. Given that classic Graham-esque bargains were sparse and that his assets under management was ever increasing, Buffett describes how his investing philosophy evolved over time to focus on concepts such as intrinsic value and economic goodwill.

Today, with ubiquitous access to real-time market information, markets are efficient. An important note here is that I define efficient to mean that the price of a security on the open market is an accurate, without-time-lag reflection of the collective sentiment of investors’ opinion on where the price should be based on news and forecasts as well as emotions/irrationalities. I am not using the word efficient to imply that market prices are always rational. Humans, for reasons that only some of which are scientifically understood, are susceptible to biases and irrational behavior. The bottom line here is that investing, even for the most disciplined strategies, has become difficult. Wouldn’t it be nice to rewind the clock a hundred years back to the Benjamin Graham’s day when access to information was difficult?

I think so.. and this leads me to wonder that maybe investors need to dig deeper to find new sources of information that aren’t obvious to other investors. As I’ve discussed many times before on this blog, there has been an explosion of news publishing because of the Web in many forms, the most obvious perhaps being blogs, both professional and personal, and the less obvious mediums such as twitter and message boards.

One concrete example that comes to mind is a blog post from January 2008 by Markus Frind (founder of plentyoffish.com, one of the largest dating web sites in the world). The post talked about how because of a subtle design change by Google, his AdSense CTR (click-thru rate) dropped by 60%. The change was that in late ‘07, Google changed AdSense so that only the link in the ad is clickable, not the whole ad area. Google had presumably done this to reduce accidental clicks. In the long term this is a good thing for everyone because it reduces click-fraud issues. However, near-term CTR drops a bit, thus # of clicks drops and thus ad revenue drops. Now, ultimately, advertisers should see a rise in their conversion rates (since the quality of clicks goes up) and thus be willing to pay more for each click, evening out the ad revenue. However, there is a lead time for that to happen. Near-term ad revenue drops and there should, in theory, be a negative impact on Google’s quarter. TechCrunch had actually reported on this change on November 11, 2007 but the post came and went without much drama.

Now, fast forward to February 26, 2008, comScore publishes a report indicating that Google’s CTR may be dropping and GOOG drops 4% to close at $471..down from the mid $600 range in January. On February 29, 2008, TechCrunch posts Google CTR Down Due to Click Area Changes referencing the ealrier post in January by Markus Frind.

I remember thinking in January that I should take a short position in GOOG. Of course, I didn’t really take myself seriously, but when the comScore report came out and GOOG dropped sharply, my jaw dropped. At that moment I realized that my idea of finding these nuggets of gold on the Web isn’t crazy. In fact, I’m not the only one with the idea. Roger Ehrenberg, a wall street veteran, had co-founded a company named Monitor110. The company has since went under, but here’s an excerpt from a TechCrunch article on the company:

Monitor110 gathers information from 40 million sources of various types (100 million by the end of next year they say), ranked by financial market knowledge through a proprietary algorithm that takes 50 factors into account – inbound links being just one reputation metric. Users can chose between top sources preselected for their market sector and subscribe to sources of their own. Static sites can be monitored for changes with good granularity. Premium subscription and other deep web sources, blogs, forums, news and regulatory filings are among the sources included.

Here’s an image that used to be on Monitor110’s homepage. It elucidates the concept very well:

Think about an engineer who blogs about how he’s working like crazy because his project at work is behind schedule. If we know that he works at THQ, this information could be valuable to an investor. That’s precisely what Monitor110’s business model was. Sell to hedge funds and other folks desperate for alpha. Is this scalable? I’m not sure. Probably? Maybe too early for it’s time?…it was for Monitor110.