Brandon Mullins

Apple’s Search Engine Possibilities

Is it within the realm of possibility that Apple could release a self-branded search engine to jump into the ring with Google, Bing/Yahoo!, and Ask? Yes, but not in the form that most are thinking.

Brewing Battle
The battle between Apple and Google is heating up on various levels across various service platforms, namely with internet browsers (Chrome vs. Safari) currently, but in the near future the two will clash around the markets of mobile hardware, software, and applications. In a nutshell, Apple and its close wireless partner, carrier AT&T, envision a more closed, controlled system of tightly integrated devices (hardware), software and services. Google, on the other hand, sees a completely open Mobile Internet with open smartphone operating systems and communications networks that will allow any company to compete. The intense and brewing rivalry started to show when Google CEO, Eric Schmidt, resigned from (or was asked to leave) Apple’s Board of Directors in August. Another Apple director, Genentech CEO Arthur Levinson, left the Google board not long after. He did this, ostensibly, to avoid conflict of interest.

Apple Search Possibilities
Google is currently the default search engine on the iPhone’s Safari browser; surely Google pays Apple for this pleasure. Thus, if Apple chose to create its own search engine, as many have speculated may occur, it would forgo a nice source of revenue across its mobile devices, in addition to footing the massive R&D and Product Development bill to create its own engine from scratch.

If Apple were to produce a self-branded search tool on Macs, iPhones and iPods, they could bring in (mobile) advertising revenue directly, rather than indirectly through Google at a lower net income. However, rather than indulge in a massive undertaking of resources to create an also-ran search algorithm (not a core competency of the company, clearly), Apple’s best move may be to simply power the front-end, user experience of a mobile search tool (an obvious core talent & focus of Apple). The company could partner with Google (or Bing) to utilize their search algorithms to power the back-end results, while Apple focuses on the interaction on the front-end. A rev-share model between the two could be designed.

Apple’s Best Strategy
Then again, the real answer might be, Apple won’t monetize search. It can simply utilize search as a way to differentiate the iPhone. Let’s face it; mobile search in its present form is still very clunky with hard-to-read pages and lots of fumbling on touch-screen menus. One area where Apple has a clear advantage is development of innovative user interfaces that simplify complex tasks. This could be a draw for smartphone users who utilize the mobile internet extensively, but on other devices with less intuitive search interfaces.

If Apple made a truly great search engine for mobile devices that was only available on the iPhone, this could provide a serious sales boost and might help defend Apple’s franchise position as the top dog in the smartphone world.

It would be great to see Google and Apple collaborate on next generation search. Between Google’s immense respect for relevant information and data analytics, and Apple’s ability to weave it into a seamless and amazing experience, a truly next generation mobile search experience could occur.

Brandon Mullins

Do as Investors Do, Not as They Say

Do as investors do, not as they say.

As those who know me and my business philosophies can attest, I am a big proponent of niche strategies for start-up companies. This goes hand-in-hand with the need for start-ups to have singular focus in the beginning (and one can argue, perhaps throughout the company life); one market, one solution, one vision. While many investors will shy away from being pitched a niche business and niche solution, this is a very short-sighted strategy. Example below.

I’m an avid fan of Reid Hoffman (Founder of LinkedIn, Angel Investor of Facebook, Ning, Flickr, Last.FM, and many others). To hear him speak on the topic of the consumer internet market and its trends is a great learning experience. He’s got great vision, and incredible grasp on what is required to start, operate, and grow a successful consumer internet solution. However, from an angel investor angle, he too falls prey to the old “do as I do, not as I say” investor philosophy.

About a six months ago, on TechCrunch, Reid wrote this article on “My Rule of Three for Investing.” Read the post in full for more clarity, but as a summary, here were the three rules:

1. How will you reach a massive audience?
2. What is your unique value proposition?
3. Will your business be capital efficient?

While all three sound quite obvious and sound in theory, this framework is hardly ever adhered to in the real world. Using Facebook as a quick example…

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Xobni Turns Down Acquisition Offer (supposedly): Smart Move

This is slightly old news, but has been bothering me as I read more and more about it in the blogosphere. Here’s my view.

A few months ago, Techcrunch broke the news that Microsoft had placed an acquisition offer of $20 million on the table (in the form of a Letter of Intent) for Xobni, Inc., the email organizer, analytics, and social network tool currently designed as a plug-in for Microsoft Outlook. Xobni turned down the offer (or so the rumors go).

Many bloggers and commenters are heavily debating whether or not this was a sound decision, to essentially walk away from, what seems at first glance, a relatively large amount of money for a relatively short amount of development time. Another argument is that Xobni is simply an extension of Outlook, a mere add-on that Microsoft itself could now design, develop, and deploy with their next version release, essentially “squashing” Xobni’s product, model, and future. In fact, in a Techcrunch poll, 53% of readers voted that Xobni was crazy for walking away from that sum of money, especially since it’s Matt’s and Adam’s first venture.

But not so fast. How can anyone on the outside of this deal accurately assess whether this was a viable decision, with no where near enough inside knowledge to form an opinion? There are a host of reasons why turning down this offer may have occurred:

• not wanting to have Xobni become lost in the Redmond machine of bureaucracy
• Xobni has a much greater vision up their sleeves
• liquidation preference and ROI for everyone involved.
  

Sure, Xobni currently functions solely as as nice value-add to Outlook, but I highly doubt that Outlook is the only email application that Xobni aims to integrate its software into. This is way too short-sighted of a goal for such an intelligent team run by Matt Brezina and Adam Smith (have you read Adam’s blog posts? Incredible). Thus, if Xobni can successfully integrate into Yahoo!, gMail, and Thunderbird, then turning down this current offer may not look quite so terrible of a decision. In fact, it could play out to be a brilliant decision.

Also, look at this from a purely financially viable standpoint: Xobni had raised somewhere in the neighborhood of $5M from prominent VC firms, including Kohsla Ventures, Atomico, First Round Capital. They also raised a round of Angel funding prior, and preceding that, was a part of Paul Graham’s Y Combinator. Each of these funding events took sizable chunks out of the founders’ equity share. If we can safely assume that the institutional investors had included a 1x Liquidity Preference on the $5M investment, and we can safely assume that they invested on a $15M pre-money valuation (completely an estimate), then 25% went to the VCs alone. Of a $20M exit, the VCs would exercise their liquidity preference, taking $5M off of the top. They would then get 25% of the remaining $15M in the common pool, or $3.75M, leaving $11.25M for the remaining angels, founders, etc. Take out Y Combinators’s share, the Angels’ share, and misc. equity share (lawyers, advisors, board), and their really isn’t a whole lot of monetary value left for the original founding team. And if we look at this from a VC’s ROI perspective, an $8.75M payout ($5M from liquidation preference, $3.75M from particpation) on a $5M investment is only a 1.75x return, hardly a successful deal, or at least relative to what was expected when term sheets were signed.

Of course, this scenario could have been the result of the board’s resistance to see the exit opportunity through due to a thirst for much larger returns, even if the founding team was in favor of taking it. If so, it could serve as a lesson learned for entrepreneurs: with VC funding comes a “go big or go home” mentality, one in which acquisition opportunities that would result in satisfactory wealth for the founders are passed by because of the need for large returns by investors.

What Xobni is up to, we can’t be for certain. But given the intelligence of both Matt and Adam, all of their new hires, and the investors behind them, I trust that they have an intelligent strategy backing their decisions, and can reach the $100M+ company they originally set out to be.

Brandon Mullins