graylightning

Widgets! And the Distributed Web

I added several things to my blog this weekend in keeping with the increasing trend of distributed content and applications, the simplest version of which being widgets, which I think will continue to define how people use the web and how advertisers find their targets. In the future, which website you are on may not matter as much as which content or application you are engaging with, because any piece of content or application might be spread seamlessly across the web so that you can find it, or it can find you, no matter where you are.

To make it easier to find blog posts with specific topics there is now a category bubble-list at the top of the page, where you can click on specific categories with which I've tagged individual posts. The larger categories have received more clicks from readers.

I've also included a search bar from Lijit so you can search my site instantly, along with links to my StumbleUpon content, my del.icio.us tags, and my facebook profile.

I've added an updated map so readers can see how many people are visiting each day and where they're coming from.

And finally, I've republished the posts from my bankerInIndia blog here on the graylightning site under archives, so now you can click on the months from before January 2008 to find and read those old posts, rather than having to go to the bankerinindia page.

I hope it's easier to enjoy the content now, scattered as it may be across this domain. And feel free to give suggestions on how to make it better or easier to find.

Is Microfinance a Hedge to the Credit Crunch?

So one of the interesting arguments made in favor of microfinance as an asset class has been how decoupled it is from mainstream economic  trends and traditional financial markets.

The argument goes, Microfinance borrowers are typically so far outside of the financial mainsystem that, save for inflation, borrowers (at least rural ones) often do not see or feel the impacts, positive or negative, of economic swings.

The logical conclusion is that investors seeking new forms of hedging can look to microfinance to shield their money from prevailing economic fluctuations.

But is this true? I recall from my own experience talking with Indian bankers last year that as the bigger microfinance organizations in India (SKS, Spandana, BASIX) started raising larger and larger debt tranches ($5M or more), they started bumping into ICICI's risk management policies limiting the firm's exposure to sub-prime and unsecured borrowers. But is microfinance really sub-prime? Or is such a designation a gross oversight of the historically high repayment rates that microfinance borrowers have shown globally through the Grameen model?

First of all, Microfinance lending is not without risks. As the March 2006 crisis in Andhra Pradesh and the Bangladesh floods of 1998 showed, political moodswings and natural disasters create enough uncertainty in MF lending to necessitate that banks demand a significant premium on their microfinance debt investments, particularly because when write-offs do occur, there are no assets left to repossess. In 2007 that premium in India was been between 7.5-8.5% over 10-year US Treasuries (which were at 4.75% most of the year).

But these microfinance risks (political corruption or overwhelming floods) are very different from the risks faced by US sub-prime mortgage holders. Nonetheless, when interest rates rise as a whole, and credit becomes more expensive for borrowers in rural North Carolina, it also becomes more expensive in rural India. That is systemic risk, and when your microfinance organization is big enough, a 1% increase in US treasuries will translate into at least a 1% increase in your microfinance org's cost of borrowing.

So is microfinance indeed decoupled from the world economy?

Maybe the answer is yes and no.

Microfinance is subject to the same systemic risk that pervades the mainstream credit (and equity) markets, so to suggest that it provides a natural, or perfect hedge to mainstream equity or debt securities (in the way that gold is a hedge to the U.S. dollar) is not entirely accurate.

But investing in the debt or equity of microfinance institutions does allow investors to further diversify their holdings and shed incremental unsystematic risk. It's just that the market isn't exactly liquid right now. It's limited by size and international controls on investment flows. But if you could create this kind of liquidity, wouldn't that be interesting to investors? That's just what funds like GreyGhost Antares are attempting to do by creating a secondary market for microfinance securities...

Okay, Lots of news in Microfinance these last few months:

There was another investment in SKS ($37.5M!!) this time led by Silicon Valley Bank, Reliance is getting into Microfinance (it was only a matter of time), mobile-payment vendor Eko has launched its 5,000 person pilot in New Delhi, SKS's CFO S. Dilliraj thinks MFIs and moneylenders can get along, Intellecap is hosting its next Srijan MF business plan competition, and a new report by CGAP states that the recent boom in microfinance investment has been driven by social investors (but avid readers of my bankerinindia blog knew that already).

And I just found another great site for microfinance news, DripFin, how could I have missed this one for so long?!

And What about in India?

To get another look at the effects of the global economic slowdown, I think its interesting to see what's been happening in India over the last month.

The burgeoning PE industry in India has slowed a bit, with four deals pulled in the last month after lengthy negotiations.

Blackstone dropped its $275M bid for 26% of Ushodaya enterprises, ICICI's PE group backed off an $800M deal with Jaypee Infratech, a major builder of infrastructure, the Future Group walked out of a deal with DishTV, and General Atlantic ditched a deal with Essar Power after signing a term sheet.

At least one of these was because of tightening credit available to investors looking for leverage and in the Future Group's case, they walked away because of of a reduced valuation.

But the downturn hasn't stopped Canaan Partners from closing its next fund, 25% of which may go to India.

And ePlanet, the old DFJ affiliate is taking aim at growth stage investments in India. While other growth stage investors plan on gathering for the first ever Indian VC/PE Growth-Stage investor conference in Pune, Maharashtra next month.

So there continues to be fundraising activity, at least at the early and growth stages. And although the Bombay Stock Exchange had a rocky run last week, it seems to have stabilized in the last three days.

But it ain't easy being an Indian LevFin guy (leveraged finance) right now...

And what about my old flame, microfinance? I'll dig into the recent news in that sector tomorrow.

So What Does it Mean for the Valley?

The biggest concern I had as the Bear Stearns mess unfolded last week, was that we hadn't seen anything yet.

Financial analysts and journalists have said for months that this crisis could be the worst of the last several decades, worse than the Asian economic flu of 1997 and Longterm Capital Management meltdown of 1998, worse than the Black Monday of 1987, worse than the stagflation of the 1970s. But the turn of events last week and the continued rally yesterday did hint that such an outcome may have been avoided. It also looks like the final Bear Stearns price may end up closer to a still-crazy-but-at-least-not-highway-robbery $11.00 a share, or a $1.5B market value of equity.

So what does this mean for the Valley?

The IPO market is still turbulent to impervious, with only Titanic's (pardon the analogy) like Visa and other rule-breakers able set to sail.

But the woes of cigar-chomping bankers, first-time home-owners, and Washington D.C. fiscal policy wonks make little impression on a committed technology entrepreneur. His or her price expectations while coding up new programs in Silicon Valley seem unaffected at this point by the volatility in far-off Wall Street.  And since it's still too early for the average entrepreneur to think this economic crisis has anything to do with him, many startups continue to believe they can raise money at last year's prices. Nothing about their business model has changed, they think, and if anything has, it's been in the form of progress, so why should expectations weaken?

If Bebo's are still getting acquired for $850M, then there's a reason RockYou's and Slide's are still getting funded at $400 and $500 million.

But I think startups' fortunes must rise and fall with those of the rest of the market, even if delayed by six months or a year. Sober LPs must eventually start asking their VCs on Sand Hill about the valuations they're seeing in the context of the current market environment.

I think it will hold true that very few in the valley of technology are utterly immune from global economic viruses, even ones borne of something as un-technological as mortgages.

Fed Up with a Bear Market

So with a flurry of activity last week the Fed kept the markets from collapsing and in fact caused the week to end with a rally.

As Tom Raum from the AP summarized:

In a remarkable week, the Fed:

--Engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan.

--Offered emergency loans to other securities dealers under terms normally reserved for regulated banks, (specifically, the Fed will accept less liquid assets as collateral for loaned Treasury securities).

--Slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September.

These steps followed moves to lend $100 billion in cash to banks and $200 billion in Treasury bonds to cash-strapped investment banks. The goal was to keep the financial system from seizing up.

"I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist. "It looks like we turned the corner precisely because of what the Fed did."

So the general consensus seems to be that the markets lived to fight another day this week substantially because the Fed exercised its sweeping authority (granted under 1930 provisions that had not been used since) to keep banks and securities dealers liquid.

What does all this mean for entrepreneurs and those of us in Silicon Valley? Anything at all?
Thoughts on that tomorrow.

(Thanks to www.despair.com for the bear pic.)

The TV is On, but Who's Watching?

Another trend that's been obvious to most venture capitalists for over a year, but seems to be taking advertisers a long time to figure out, is just how many people (especially young people) are tuning in to the TV versus the Internet these days, relative to the ad dollars spent on each medium.

I write this of course while I'm sitting in front of my TV watching John Adams on HBO.

But that's just it, except to watch live sports and a few HBO shows, I never turn on the tube.

I estimate that I spend an average of 10 hours a day in front of my computer screen or mobile device, and 0-1 hours a day in front of my TV. And I'm apparently not the only one.

E-Marketer estimated US online ad spend at $21B last year, 7.5% of all US ad spend, and forecasts this year at $27.5B, or 9% of total US ad spend, and while this is significant growth, faster in fact than ad spend migrated to from traditional TV into Cable in its first ten years, its not fast enough!

Just take a look at the chart below...this is publicly available information, I might add.

One of the trends that's become obvious to most Americans, but seems to be taking advertisers a while to figure out, is just how few young people are watching TV these days.

Free-ness, Privacy, Ads and the Web

There are three separate themes that hit me today from three different news stories. These three themes are becoming interconnected on the web, as anyone who works in technology can tell you, but what I think most people don't know is that they will increasingly define the way in which we live our lives, beginning with the Internet.

But first, what were the three news items that caused me to write about this trend?

- A question posed to Mark Zuckerberg during his interview on Sunday,
- Chris Anderson's new column in Wired, "Free! Why $0.00 is the Future of Business"
- The MySpace page, and subsequent news stories, of the former NY Governor's high-priced call girl

The themes are: free services, personal expression and targeted advertising. And what they are doing on the web today looks a little something like this:

Not that a cycle like this is anything new - Free-to-air TV programs have always been given away in exchange for advertising, and Google gives away its search bar in exchange for contextual ads on the corners of your screen - so what's different about today's ad-supported services? Simply, the injection into the cycle of lots and lots of deeply personal information.

The first part of this pattern - the trend of companies giving free web-based software and services is well detailed in Chris Anderson's new Wired column, where he explains that the future of business is giving away the initial good for free, and paying for it by charging more for the premium good, or the services that enhance the enjoyment of the free good. The classic example? Gillete's initial handing out of free razor sticks in 1904 to get more people to buy the blades. And how does Anderson see that working in today's world? Give away free movie tickets, but charge extra for the pop-corn.

This is what every contextual ad-supported start-up today tries to achieve - give away the "crack" to get users hooked, and pay for it with advertising. And it's the same trend that Facebook tried to capitalize on with its Beacon launch last fall. People love Facebook, they pour their tastes and preferences into their FB profiles and allow it to drop cookies on their computers. But when Facebook started tracking their shopping behavior on other sites and reporting their purchases to all their friends via a newsfeed, users started to revolt.

What happened? Haven't people already made clear that they'll trade privacy for free stuff?

I'm not sure. My generation (the Post Gen-X crowd) is really the first to have the ability to share the intricate and intimate details of their lives immediately and globally with little or no effort. And until they reach a certain age - they also share this information with little or no consequences. In fact, the consequences they do incur are initially positive: making new friends, experiencing self-realization, and learning to use technology.  But what happens when your MySpace page turns into a goldmine for reporters tracking your involvement in a national political sex scandal?   Well - "Kristen" aka Ashley Alexandra Dupré found out today as the circus that has engulfed Elliot Spitzer for three days descended on and dissected her web-presence. I can only imagine what the political campaigns of tomorrow will look like - there are some incriminating college photos out there of a lot of aspiring young politicians I know.

Which is not to say that the web changes the notions of personal responsibility - people are still ultimately responsible for their actions - it's just that free ad-supported social networks, and other free web-services enable people to post much more about themselves, and when they do catch the public's eye, the resulting attention is overwhelming.

But even more important than the personal or political consequences of information sharing are the commercial ones.

Imagine what better picture an advertiser has of you when you broadcast your likes and dislikes to the world, in all their subtleties. I do it right here in my blog - but it's not in an aggregated and standardized format. However, MySpace and Facebook are, and although all the news stories suggest Facebook is struggling to monetize their ad inventory, I would imagine that the real value in a platform like Facebook, is not the ad space on Facebook's own pages, but rather the ability for Facebook to take very specific combinations of user preferences and behavior and sell that information to behavioral advertisers who are capable of targeting at the individual level.

One of the best (and few) audience questions Mark Zuckerberg got asked during his infamous interview at South by South West last weekend was about user privacy and information sharing.

The questioner essentially asked, "What are you doing to empower users to better control their own information?" Zuckerberg's response suggested that he did indeed understand the issue, "We need to figure out how to give people as much granular control as possible" over "which information they share with which people," and, I would add, in what manner they do it.

I believe that Zuckerberg wants to do this - make advertising minimally intrusive and potentially beneficial to the user, and allow users to control their own information. But the potential value in platforms like FB and MySpace would seem to be diametrically opposed to that approach.

Can Facebook walk the fine line and figure out how much targeted advertising is too much?

Will Internet users continue to pour their personal lives on to the web as each new generation arises?

If so, will these trends make what we think of as privacy a thing of the past?

I once had someone tell me that what we're experiencing is a return from our urban and suburban environments to a village-like setting, where people give up expectations of real privacy because there is no true anonymity.

I think we might be headed towards something like that, and I'm curious what impacts, for better or worse, it will have on human society.

Tea? Coffee?

While I've never been addicted to hot beverages in the morning, protein shakes and RSS feeds are usually my breakfast these days, a post from famed tech blogger Om Malik on Indian chai from a year ago this date reminds me how much I miss the luxury of steamy hot Indian masala chai. I used to get this stuff made fresh for me whenever I wanted it by the office managers at my old place in Delhi. And now that I've got my brain on tea, I can't help but think of my other favorite kind, smoky Kashmiri Khawva tea, steeped with fruit and cinnamon and great for warming up after a day of dodging Indian soldiers on the ski slopes of Kashmir.

Here's Om's post on growing up with the hot, delicious beverage: Chai.

Back in San Francisco, my substitute has been ModernTea on the corner of Hayes and Laguna in Hayes Valley, pricey but rejuvenating...

For regular commentary on the subject, here's Chai Baby USA's blog.

Above, the tea fields of Munnar; Kerala, India.

The Man (or Woman) in the Middle

If you haven't heard yet about the Sarah Lacy interview-flop with Facebook's Mark Zuckerberg at South By Southwest Conference this weekend in Austin, here's the story, and here's a video of the event from Tech Crunch. I'll warn you, some of the user comments around the video are crude, to say the least.

In a nutshell, though, she flopped.

But I think the audience's eventual mutiny and apparent take-over of the Q&A portion of the event was the most interesting part. How often does an audience feel empowered enough (and capable enough through silent electronic communication - twitter and chat) to obviate its host?

At the risk of over-estimating the significance of the event, I think Sarah Lacy's angry retort of the audience's grumblings, "Let's go with the Digg model and let them have mob rule," is a telling indicator of the status of journalism today.

Why is a single generalist (or even tech/web-focused) journalist better suited to generating and asking questions than an informed and diverse crowd? Isn't the collective wisdom of the group, when appropriately channeled (as Lacey should have done) just as valuable as the professional curation of the moderator?

There's a reason I get my news online today - many sources, many mediums and many experts.

I don't need Dan Rather or Katie Couric to tell me what the news is over a 30 min, ad-interrupted show.
I'll skim my news feeds for the day's headlines, my favorite tech blogs for the latest buzz in Silicon Valley, and the comments section of an iTunes or iMeem page to figure out what an artist sounds like before I listen to the whole album. Sure there are places where anonymity allows posters/publishers to mis-behave, for example, the comments section of the video above. But a good community can police itself, Wikipedia and Meebo are shining examples.

From many to many. The dis-intermediation of the moderator is here to stay.