Push-Ringer : Emotive Communication gets $7.7M investment from Warner and Bertelsmann

The ringtone sales in US were about $600M last year and are expected to be about $550M this year. It is not uncommon for a song to sell more copies as a ringtones for $2.99 a pop then as a digital download for $0.99 from iTune.

The mobile phone industry has tried introducing several new products to enlarge this space. Ringback Tone - instead of the ringing sound, this is the tone that a caller hears while the call is being connected; End Tone - this is the snippet that is played to let you know that the call has ended, but these have not been as successful.

Now comes the Push-Ringer. It reverses the common ringtone model. It pushes the caller’s choice of tone to your phone, temporarily overriding your own ringtone settings. It enables a caller to specify an outgoing ringtone to the receiving phone, allowing the caller, not the called person, to set the tone. The ringers can comprise of audio, video, animations, avatars or flash files.

Emotive communication have demonstrated their push-Ringer technology for VOIP and for 3G and 4G phones. The product has already gained significant traction with consumers. Emotive has a flagship product for Skyp (a VOIP network) called RingJacker, which has been installed 800,000 times and has shown a great peer to peer adoption potential.

I am not sure about the ringtones being pushed, but I think there is some value to a picture being pushed when a person calls. Almost all modern mobile phones allow associating a picture to a contact but this feature is grossly underused. However, if the system allowed for “pushing” of a picture along with the tone, I can see that the service might be useful and go beyond the novelty feature.

The D. E. Shaw group, Bertelsmann Digital Media Investments, Warner Music Group and other angel investors have invested $7.7 million in Emotive Communications.

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The New Venture Capitalist: Not your Dad’s VC

The paradigm is shifting in VC land. In his blog post Deal flow is dead, Bill Burnham draws the funny and highly apt parallel with VCs being akin to bears fishing in a salmon run. In the old days, there were few VCs and many entrepreneurs looking for cash, and finding deals was like standing in the middle of a salmon run, and swatting a few of the best picks, at will.

Deal flow is becoming passe. Not that deals don’t still flow. Some do. But there are a whole lot more bears fishing in the stream. Pickings are getting slim - or so you would hear if you talked to VCs.

Now change phase to the entrepreneurs. They are still complaining that it is hard to fund a company. So where is the big disconnect?

Talking to VCs at small funds reveals a deal acceptance ratio of about 1:50. The ratio goes up to about 100 for mid to large funds and about 150 at the top tier. While these numbers are not exactly small, the quality of deals does not seem to be up to the expectation of most investors.

The mid tier funds face a double whammy. They not only see fewer business plans for each company that they fund, they are not privy to the best deals, which tend to go to the top tier funds.

In time, we will see a cycle where the smaller or lesser known funds will see fewer of the good deals, and have a harder time returning a decent ROI to their investors. This will make it even more difficult to raise their next fund, and might ultimately result in an even larger chasm separating the smaller funds, and the monolithic ones at the top.

So is there anything that VCs can do to reverse this trend?

1. Start a hatchery: The best way to spur innovation is to seed it at a formative stage. Recently, Mark Stevens at Sequoia Capital, gave a generous $22M gift to the University of Southern California, to establish the Stevens Institute for Innovation. Creating the right enviroment is a great head start towards ensuring that more and better ideas will get to the marketplace, to create the next wave of successful companies.

2. Find new rivers and streams: Many VCs of small funds are doing this already. They realize that it is no longer possible to sit still and wait for the deals to come to them. Several have found non traditional ways of finding new deals before they come to the market and bidding between funds makes them unattractive investments. Some firms such as Venture Farm in Irvine, CA are finding companies while they are still in the idea stage, and carrying them into the next stage in their life cycle where they will become investable companies.

3. Grow a stronger run: Mentorship is absolutely critical in carrying a company from its idea stage, into one that is ready for success. The Tech Coast Angels has set up mentorship programs with Universities, to help spur not only the commercialization of technology into viable companies, but also to support budding entrepreneurs so that they are able to take their companies to the next level. In order to generate future successes, VC firms might find it worth their while to take on and mentor would-be entrepreneurs (in the same way attorneys are expected to spend a certain amount of their time doing pro-bono cases), so that for every deal that they invest in today, there are 5 more that will form viable companies for them to invest in tomorrow.

4. Support the environment: Surprisingly, many entrepreneurs whose companies were passed up for investment by the top VC firms said that the partners at these firms were very good at keeping in touch with them. Smart VCs know that entrepreneurs are very resillient; The same person who presented a half baked idea today, will be back in a year’s time with a better idea and a better plan. Continuing to support the ecosystem is not just a good idea, it makes great business sense.

Perhaps we should heed the wisdom of the American Indians: Whenever you take from nature, put something back in its place.

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Web 2.0 Expo : The web 2.0 pyramid and the lower price of failure

Two notable observations from Web 2.0 Expo.

(i) A pyramid of Web 2.0 companies. The pyramid consists of three tiers; at the top are the few Web 2.0 breakouts: YouTube, MySpace and Wikipedia, which are worth more than $1 billion.

In the next tier, about 30 companies valued at $30 million or more, from big names like Facebook, Flickr, LinkedIn, Bebo and Digg to up-and-comers like Flixster, Pandora, Meebo and eSnips.

The last tier has 2,000 other companies, which may break out, but probably won’t.

Yael Elish, CEO of eSnip noted that:

“Web 2.0 is a lot of very, very, very small sites which are not managing to get above the techies and early adopter stage,” “You don’t get too many companies that have the potential for a breakthrough, to get big.”

This accurately describes the state of Web 2.0 Companies.

(ii) Lower Cost of Failure. Jeff Clavier of SoftTech VC noted that:

The cost of failure is lower than before, both for entrepreneurs and investors, encouraging everyone to take more risks. The seed round of funding allows entrepreneurs and investors “validate assumptions” before raising capital to “scale.”

At least we have learned something from the Web 1.0 and it is being applied to Web 2.0 Companies!

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Payonner : Prepaid Debitcard Issuer, gets $4M funding

The pre-paid card market is HUGE, about $2T worldwide. The debit card market is smaller but significant portion of it. In US, several companies, Greendot being the prime example, have offered pre-paid cards with Mastercard and Visa logos.

The prepaid card market is of particular interest to me, partly because last year I spent a few weeks investigating it; initially as a potential consumer and later as a potential provider of the debit cards.

From the providers point of view, the debit cards do not offer any revenue source other than the fees. A significant portion of the fees are mandated by the networks that are used to complete the transaction, generally referred to as “interchange fees”. In addition, the debit cards have limited “spoilage” (unused funds by the consumer) which accompanies a typical gift cards. The providers generally argue that the cost of using the debit card is competitive with the cost of using an unsubsidized bank account of third party check cashing services.

From the consumer’s point of view, the first issue that always comes up is the cost; the cost of using the card is not insignificant - about $150/year for average use. There is the activation fee, monthly fee, usage fee, re-charging fee, ATM fee, and the list seems unending; most card providers nickel and dime the user. Actually, nickel and dime charges would be fine, but the charges were a dollar or two for each “transaction.”

The purpose that I wanted to use the debit card was for a system that typically transferred about $1000/year to a service providers located in different countries. In the test cases, I found that the cost of $1000 transfer over 12 months was about $200. A 20% transaction cost was unacceptably high.

The Payoneer is trying to address the same market with somewhat lower fees. In March, the Debit card company Payoneer snared $4 million in venture funding.

The first round investment of $4M in Payoneer was led by Greylock Partners and included Crossbar Capital and several angel investors.

Payoneer was founded in 2005 and maintains a research and development facility in Tel Aviv, Israel. The co-branded MasterCards provided by Payoneer can be used anywhere whether it is in any store, online, or ATMs that MasterCards are accepted. There are some things Payoneer is doing right, it has partnered with several Web businesses likes Metacafe, Amie St., oDesk, and BitWine that need to transfer funds internationally on a regular basis.

The Payoneer business model revolves around enabling companies to use prepaid debit cards to pay their recipients. This goes contrary to the existing services like wire transfers or checks where funds can take few days at best to go through for international locations. Like for India it takes anywhere from 5-10 business days. So if companies need to make recurring payments to some of their service providers, they can be better off using Payoneer. They can even integrate the Payoneer payment processor into their payment platform that makes it easier and quicker to remit, reload, and manage online.

Payoneer claims that that most other forms of payments open to small Internet publishers are too complicated or costly. These publishers often need to make payments to companies that provide them with advertising, for example. A prepaid MasterCard, which does require a few set-up steps, is either cheaper or easier than using PayPal or normal credit card, the company says. Prepaid debit MasterCards are accepted at stores and ATMs worldwide.

As I noted earlier, this is yet to be proven. Payoneer charges about $3/month for the card and $2 per ATM withdrawal fee, in addition to the $10 initial fee. Assuming just one withdrawal per month, the cost is already at $60/year. There is 3.5% loading charge and there is probably about a 3% charge for currency conversion. We are back to $120/year to transfer $1000/year in a foreign account. So I am not sure if it makes sense for the segment of $1000/year transfers.

I am not convinced that in this day and age, one can’t construct a better way to transfer funds from one account to another without incurring 15% to 20% transaction cost. I wish Payoneer a success but I also hope that some new service or technology will offer an acceptable solution to the payment problem. In a way, this problem is similar to the micro-payment problem; how can one reduce the transaction cost? If you get down to it, the transfer of funds from one card to another is essentially an electronic change in an entry in some financial database; why should that cost as much?

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