Twitter: Monetize the Apps, not the Platform

I have spent a lot of time thinking about Twitter, and trying to figure out how it fits into the communications landscape. I've also given some thought to how it should best be monetized, and attempted to decompose the value stack associated with its presence. My conclusion: Twitter is akin to an open source utility, not dissimilar from Lucene, Linux and Apache. It is a platform, a base off which value-added services can be built. I am working on one, Stocktwits, but there are countless others that are built on top of Twitter by leveraging its API. I believe the real value of Twitter is in the applications, in the aggregation and monetization of vertical audiences that happen to use the platform as a medium of communication. But the question is: how can Twitter benefit from this innovation? Clearly there are analogies out there providing some guidance of what can be done, e.g., Facebook, but Twitter is a unique animal and requires its own analysis.

I wasn't an early adopter of Twitter. In fact, I was pretty cynical and dismissive at first. But since I joined, it has rapidly become a fixture of my communication process. I sometimes substitute email with Twitter, if I need a quick answer from a friend whom I know is constantly watching their Twitter feed. I find it useful for monitoring the banter around a particular thread, and for discovering interesting links shared by people I follow.

Starting out on Twitter can be hard, however, because unless you know lots of people using it how do you know who to  follow? And how do people become aware of you? I was lucky because I knew lots of active Twitterers to ping once I got on, and between that and blogging I built a rich community pretty quickly. Not everybody is so fortunate, however.

I love Twitter because of its immediacy, the "one to many" concept and the fact that culturally, so many of those on Twitter monitor and manage their messages with a vigilance far exceeding that of email. This is its power at the most basic level. But when you think of creating communities around Twitter, be they related to companies, brands, entertainers, common interests, politics, etc., it is easy to see the massive power that can be harnessed pretty quickly.

So what do you need? Groups. Perhaps human-curated groups. With hierarchies and sub-hierarchies to help people best search and discover pockets of people they want to follow. Much as AOL, iVillage and the other major portals did to help organize and target their massive horizontal audiences. This easily helps new users get engaged and get busy, as they can simply wade in and find relevant groups with a few clicks. Further, groups are great targets for future advertising and lead generation, as they've self-selected into particular areas of interest.

You also need vertical applications. Investing. Shopping - cars, music, etc. Travel. And on and on. With a sufficiently robust API, the developer community can innovate in much the same way as they have for the iPhone. Create a Twitter App Store? Maybe. But the main goal should be providing the environment for developers to come up with great stuff that will be used, that ultimtely people will be willing to pay for.

But the big question in all of this is how will Twitter get paid? Should it be the one to organize the user base, or will that put it in direct competition with those who would develop apps for the platform? And what about advertising? Ads in the Tweets seems pretty far-fetched, but ads targeted at specific users within specific applications seems much more acceptable. Should Twitter take a piece of the major vertical applications that emerge, letting competing apps duke it out until a clear victor emerges and then co-opting the winners in each key vertical? These are questions Twitter management and its investors will have to answer in due course.

I never really got the monetary value of del.icio.us. But I get Twitter. The problem is that when looking at the value stack, it seems that the stuff people might be willing to pay for resides largely on top, and not inside, of Twitter. In short, I believe Twitter needs a robust and well-resourced business development function to cut deals with leading applications and to get into the flow of the revenue. I can also see Twitter setting up its own Red Hat equivalent, offering institutional-grade service and support to corporate users - for a price. Because without these steps, I don't see what has become a viral and powerful service generating a return for its investors.

Some Observations on Quantitative Trading

I had breakfast with a friend who happens to be a quant. A very good quant, in fact. As he began sharing his thoughts concerning his own strategies in light of today's environment, I found that they squared pretty much with my own.

Clearly, a massive de-leveraging had taken place, and quants were running far less levered strategies than they had previously. Further, quants are beginning to place greater emphasis on high-frequency trading, strategies that place far less capital at risk and require much less balance sheet than approaches with longer signal horizons. Problem is, of course, that when quants pile into the high-frequency, statistical arbitrage, quasi-market making space, it becomes very crowded very quickly. This style of trading is far less scalable than more systematic, longer-term strategies, and returns get crushed much faster as new capital enters.

So what will happen? Before long high-frequency trading will become too crowded, placing downward pressure on returns. Returns can either be bolstered one of three ways, either by (1) introducing better returning, but riskier and more capital intensive longer-dated strategies, (2) increasing leverage, or (3) extracting value from completely new and untested data sets. With many quant funds getting killed in 2007 due to leverage and crowded trades, I find it hard to believe that they will choose option 2. But given current (and expected) high levels of volatility, will quants (and their risk managers) have the stomach for longer-dated strategies? Maybe more calories will be spent on alternative data and approaches, trying to find new ways to capture edge in a busy landscape.

It is a confusing time to be running money, especially using quantitative approaches, where recent events create statistical outcomes so out of step with the past that historical analysis is of limited value. It is not a question of analyzing and managing a handful of stocks in a long/short portfolio, but of coming up with models and frameworks that can be applied to hundreds and thousands of names, all at once, in real-time. So where do you hang your hat? What are the new paradigms that will enable market-beating quants to emerge? Is it new paradigms or new data sets that will lead quants forward to better times? I would bet that it will be a combination of the two. And if history is any guide, a handful of quant funds will emerge from the ashes as market-beaters for years to come.

Is Volatility Embedded in the System for a Generation?

I was having a conversation with my friend Paul Kedrosky today and, as usual, it got me thinking. Our banter is usually rapid-fire, centered around the markets and technology, and generally leave me with a quizzical look on my face, a look towards the heavens and an utterance of "hmm." Today was one of those days.

On the macroeconomic front, I continue to be very, very disturbed by several factors. The fact that anyone cares about third-quarter earnings is beyond me. They are, to my mind, approaching irrelevance. The real story, yet only the beginning of the story, will be what fourth-quarter earnings look like. And while I'm not a betting man, I am pretty confident that they will suck. Hard. It's not that earnings for durable goods manufacturers will fall by 5%, 10%. They could drop by 50% or more. We are in the early stages of a consumer slow-down that does not seem to be factored into current stock prices. My fear is that people will find this as a shock, and that the market will get absolutely massacred when the realization sets in that corporate earnings aren't merely down, but are falling off a cliff.

And this, my friends, will precipitate staff cuts that will make the recent downsizings look like child's play. Falling corporate earnings. Falling stock prices. Firms with limited access to capital and high fixed costs will cut the only thing they can: people. More out of work people means a drop in consumer spending, which means falling corporate earnings, and so on.

Because of the steep drop in consumption commodities prices will crater. This will cause energy and mining companies to sharply curtail exploration. New refineries will not be built. New mining equipment will not be purchased and proven mines will not be developed.

Through this, the Fed will push rates down to zero. They will do anything to try and stave off a Japan 1990s scenario. They will continue to print money like crazy to pay for the damaged financial sector, the dying auto and airline industries, and other high fixed-cost businesses that employ millions of people that "must be protected."

Eventually, we will hit a tipping point, a point where prices have gotten so cheap, banks will have rebuilt their balance sheets and the wheels of economic activity start to grind, even slowly, that we will find ourselves in the middle of a commodity and energy price inflation cycle the likes of which we've never witnessed. All slack will have been taken out of production during the nuclear economic winter, and the companies will be ill-prepared to gear up. It takes time. But people need stuff to buy! So prices will skyrocket - not up 40-50% but 400-500%. Maybe more. Finished goods prices will then shoot up, causing inflation to extend beyond energy and commodities and into the real economy. And with so much cheap money having been created, it won't take much to ignite an inflationary spiral.

What will the Fed do? Jack up rates from zero to whatever they feel will choke off spiraling inflation, because there is no greater fear in this country than hyper-inflation. But when the Fed jacks up rates, it will cause the nascent recovery to crash back down, pushing us right back into recession.

The Fed will then, of course, lower rates again, and it is hard to see how the cycle doesn't continue to play itself out several more times before things reach a more stable equilibrium. But in the meantime, we will see extreme levels of volatility and fear for a generation. I think if you plot the VIX in my scenario it is almost like a readout on an oscilloscope, one that goes up and down wildly for a period before moving within a much tighter band thereafter. But this "period" - is it 5 years, 10 years, or 20 years?

But I am fairly convinced that 40 on the VIX is the new 20. I think we're in for a prolonged period of uncertainty that we simply cannot innovate our way out of. Will innovation happen? Of course. But there is so much deadweight to lug around that it will still get drowned out among the larger problems of our economy. This is only one scenario, of course. But I think it is a scenario worth discussing.

Restoring Functioning Markets in a Broken World

Much of what has been written about the financial crisis has focused on the why, as opposed to the what now? This has led to the inevitable finger-pointing, posturing, grandstanding and the like. Personally, I'm sick of it. We're in trouble: the time has come for the conversation to shift from bad guys and witch hunts to what the hell are we going to do now? Greg Mankiw, in an Op-Ed in today's New York Times, summed up the key question when thinking about policies and actions to be taken to extricate us from this ongoing chaos: But Have We Learned Enough? Based upon the steps taken to date: probably not.

While I'm neither economist nor policy-maker, I've got a few thoughts on what I think has to be done before we can even entertain the possibility of a macroeconomic recovery.

#1: Rigorous application of mark-to-market accounting rules, with the further tightening of the rules enabling certain assets and liabilities to be carried off-balance sheet. Bottom line, without full financial statement transparency and integrity in financial reporting, investors will remain cynical and suspicious about the financial health of firms across all industries. This needs to be fixed immediately.

#2: Immediate push to list over-the-counter (OTC) derivatives transactions. Partially related to #1 above, the magnitude and lack of transparency around all manner of off-balance sheet contracts is creating fear among counterparties and investors alike. If we can put a man on the Moon, we can work rapidly to move OTC transactions - interest rate swaps, credit default swaps, etc. - to a listed medium where transparency and counterparty credit management are the hallmarks of its operation. This is where exchanges like the CME need to step up and lead us forward.

#3: Work with laser focus to keep credit-worthy people in their homes. This is absolutely critical. The decline in housing prices, spurred on by rising foreclosures and a rising inventory of unsold homes, will be the root cause of the next big leg down in economic activity. Debt will eventually overwhelm equity value in much of our housing stock, causing people to either walk away from their mortgages or to default. Without a brake in the decline of housing prices, consumption will plummet, unemployment will rise and a downward deflationary spiral will take hold. We are well beyond the issue of "fairness" (e.g., if somebody agreed to a poorly-structured mortgage that's their problem) and onto figuring out how to stop the negative loop in its tracks.

#4: Revamp corporate compensation structures. Leaders need to be aligned with shareholders. Current compensation strictures don't do this nearly well enough. Board of Directors and investors alike have failed miserably in supporting, and, in fact, insisting upon, rational and fair compensation regimes. What once used to be a PR issue is now an issue of survival. A lack of trust is one of the biggest problems facing investors today, and being able to believe in both the integrity of firm financial statements and firm management would go a long way to making companies far more investable than they are today.

#5: Rebuild core infrastructure. Forget about "bridges to nowhere." Our roads, airports, bridges, subways and sewers are in a state of staggering disrepair. We will have millions of hard-working, skilled employees out of jobs as soon as the U.S auto industry and several others pare back in order to have any chance of survival. These workers should be re-trained and re-deployed into projects that can benefit from their skills and experiences, and which can provide them with a fair wage to keep them in their homes and to hopefully keep them as able consumers. Because without the consumer, which still accounts for 2/3 of our economic output, we're screwed. I know we have a cataclysmic deficit. Believe me, I know. But the way we can pay off the deficit is by getting our economic engines going again, and investments in productive projects like these will help individuals, states and local governments through the difficult times, while laying the foundation for an economic boom when conditions turn back up.

#6: Maintain domestic control over our policies but coordinate closely with our global allies. Given the startling interconnectedness of our economies, unilateralism is simply an insufficient vehicle for addressing our deepest problems. It is akin to controlling pollution - if the U.S. sharply reduces emissions but India, China and Russia preserve current policies - the impact of our efforts will be sharply muted. Without having elements of 1-5 pursued by our Eastern and Western partners, who are suffering from many of the same problems we are, our actions will work with disappointing effect.

#7: Leverage cooperation with our allies around our economic welfare to bleed into social welfare. At times of economic unrest, seeds of social discontent are sewn that can have catastrophic effects. We need to be extremely attuned to this risk and to work together with our allies to ensure that we remain united and strong against hostile, divisive forces, be they terrorists, hate groups, or others that seek to capitalize upon people's fears by making them insular, angry and, ultimately, hostile. This also applies to governments that seek to use war as a vehicle for distracting an unhappy populous, harm innocent people and threaten ourselves and/or our allies.

The key problems are that of a weak economy and a lack of trust. Banks aren't motivated to lend because they don't see a risk/reward profile that warrants it. Why lend to businesses if consumption is collapsing? Why offer mortgages if housing prices are falling? Why lend to other banks if I don't believe their financial statements? What Messrs. Paulson et al didn't internalize is that simply giving banks capital doesn't mean they will offer it. They would rather sit back, be hyper conservative and ride the yield curve on their cash. Safe. Stable. Low returning, yes. But they won't go bust.

Without question, all policies should be geared towards getting our economic engines going again, and protecting against those forces that could threaten it. There are many more ideas beyond the seven listed above, but I believe these represent the least we can and should do to give ourselves the best shot of averting a truly ugly economic outcome over the next decade.

Is 24/7 Media Impacting the Markets (and our sanity)?

Without question, we live in a society where we media plays a huge role in shaping our perceptions and tastes, whether we like it or not. We are constantly bombarded with explicit and implicit forms of marketing, branding and messaging, and it effects the way we feel about things and our decision-making. Now if one applies this effect to the current financial crisis, and the importance of consumer and business sentiment in driving financial markets, it may well be that the media is playing a larger role in fomenting the historic levels of market volatility we've witnessed over the past 30 days, more than anyone could have imagined.

Every day, whether you are watching CNBC, CNN, Fox Business News or the online equivalents, there are countless numbers of talking heads discussing their views with passion and intensity. "This is an historic buying opportunity; market value to replacement cost has never been lower in the (name the industry) sector." Or perhaps "The Apocalypse is upon us; Government debt will rise until it consumes us all, devaluing currencies and spurring the Second Coming of the Great Depression."

Media is motivated to evoke a reaction. A strong reaction. They want people to pay attention, right? So what do they do? Sew the seeds of conflict. Just having a bunch of bears makes no sense. A bunch of perma-bulls is even worse. Gotta add some of both to the mix. And keep doing it to fill the dead space, again and again and again. So by its nature, Big Media has created a kind of "volatility news cycle," one that is sufficiently exciting to get people to watch but which can cause people's emotions to run all over the map. And viewers are particularly vulnerable to this tacit manipulation as never before, mostly because they are scared that their financial well-beings are getting flushed down the toilet before their eyes.

I've had myriad discussions with money managers over the past several weeks. People whom I've always believed to be level-headed, stable, cool-handed money managers are acting truly bizarre. One day they're depressed. The next day they're hopeful. The following day I need to keep them away from the razor blades. Up, down, up, down. Is it the front page of the Wall Street Journal, CNBC or the markets themselves that are giving them fits? I really don't know. But I'm sure the news coverage isn't helping.

Maybe we should all be like Warren Buffett and put the papers down, turn the TVs and computers off and relax for a bit. Put your portfolio in a position you can live with and just chill out. Because few mortals can take advantage of today's wickedly uncertain markets. And if for no other reason, think of the savings on antacids, therapists, chiropractors and palm readers of just backing away from the news cycle. This could be reason enough to take a time out.

Bailed-out Banker Compensation: A PR Disaster in the Making?

A good friend of mine raised this very question, and I have to admit it gave me pause. Sure, we're all aware of certain limitations placed on executive compensation within the Economic Stabilization Act of 2008. The rules are specifically geared towards towards institutions that take advantage of the Troubled Asset Relief Program (TARP). But when you look at these rules they really lack teeth; you will still have bailed out executives making seven-figure sums. And when you juxtapose this against a backdrop of economic weakness, rising unemployment, and a population that is growing less fond of the bailout by the day, it could make for a toxic cocktail of disbelief, hostility and rage. TARP has created an odd situation where those doing the bailing out (the US taxpayer) may well be funding compensation 10x, 20x, 50x greater than their own, with an average employee at a bailed out firm making, say, 4-8x more than their ostensible sugar daddies. This math just doesn't seem to add up.

Remember how irked both media and the general public got when it came to light that AIG was funding a boondoggle for its top producers? And this totaled around $400,000. How about TARP-benefiting firms with bonus payments - in the billions! How are people going to feel then? Uh, I shudder to think. The backlash could be harsh and swift, encouraging Congress to attempt to show that they're on the case by imposing some ill-fated dictum with unintended consequences. Just what we need. Not.

The whole issue of executive compensation - both on and off Wall Street - needs a redo. I have a hard time with the concept of large single-year cash payouts. Senior executives should be paid for value creation over time. Just like hedge fund managers. If you want to be assessed on creating long-term value, which should be every Board's goal, than executive compensation needs to fit this mold. Same with hedge fund managers. With performance comes payout, and if performance is long-term then payout should be long-term as well. With hedge funds implementation would be easy; only pay management fees currently and pay performance fees either based upon P&L realization (as opposed to P&L realized and unrealized that is the model for most) or over a time horizon that approximately matches holding period (which could be 3-5 years for certain long-term value managers with concentrated positions).

WIth corporations it is somewhat harder, as the concepts of realization and holding period are difficult to apply. That said, long-term stock options with long-dated cliff vesting comes pretty close to achieving this objective. I like the idea of senior executives holding 10 year options with 5 year cliff vesting (meaning that they fully vest only after 5 years; if they resign or get fired before 5 years they leave it all behind). This, I believe, closely aligns senior management with stockholders, and specifically avoids quarterly maniupulation that is the hallmark of large option grants that vest on a short-dated schedule. But this only works if almost all of executive compensation is in these options, such that the cash portion isn't so large as to incentivize bad behavior and the quarterly earnings manipulation mentioned above.

For instance, consider a guy like Dick Fuld. In my scheme Dick would have been holding a portfolio of these 10 year maturity/5 year cliff-vesting options, meaning that he has 5 years of stock compensation cumulatively tied up in the company at all times. Now consider if this total compensation was weighted, say, 80-90% in these options, such that he got enough cash to live very, very well, but that almost all of his net worth was tied up in the stock. Tied up for 5 years. All the time. It is very hard to keep a fraud going for 5 years, to fool the market for 5 years. So Dick, in my example, would have lost almost everything when Lehman went down. Which is as it should be. Highly compensated traders should be paid the same way, specifically to avoid the kind of "swing for the fences" attitudes that permeated Wall Street and amplified risk to reckless levels. All in the name of current year compensation. This has been and will continue to be a recipe for disaster unless a wholesale revamping of executive and highly-compensated employee compensation is undertaken.

This then leaves us with hedge funds. Now is the time for LPs to push back on current pay for future value. Because most managers aren't going to volunteer a pay cut in order to better align their interests with those of their LPs. Few are masochists, and even fewer are pure enough such that they would choose intellectually honesty over cash. For the system to be truly revamped reform needs to cut across Wall Street, hedge funds and corporations alike. And Government regulation isn't the way to do it. But it may be well imposed if those in the positions of power and responsibility don't act with their brains.  Boards need to discharge their fiduciary responsibiltiies and wake up. LPs need to discharge their fiduciary responsibiltiies and wake up. Compensation is broken, and it is far beyond a PR issue. It is a value creation issue, and issue that will plague our economy until something is done about it. Now.

Climate Update: Early Stage Investing

I've been collecting a lot of data about attitudes and behaviors towards early stage investing in today's tumultuous and uncertain market environment. Whether you happen to be an investor or an entrepreneur, an angel or a venture capitalist, you are going through a disciplined re-assessment of what you should be doing and how you should be doing it. One thing is for certain: few people are operating in the ways they did only a few short months ago. Aside from dozens of meetings with entrepreneurs and VCs, I attended a NextNY event last night that was all about how young companies should be coping with today's uncertainty. David Kidder of Clickable and Matt Blumberg of Return Path both had some sage advice, from the perspective of business builders that have been around since well before the bubble and crash and have been challenged to adapt to hard times.

Venture Capitalists: Uniformly more conservative, but many are still in business

As seems to be the case with many industries, I am seeing a barbell emerge in early stage investing. Many of the larger funds ($100 million+) I know and work with are pulling in their horns, focusing largely on current portfolio companies and reserving cash for supporting those that warrant additional investment. I recently had a deal where a term sheet was pulled by a premier VC; this is not something I could have imagined back in the summer. There is definitely a sense of hunkering down and being all over their management teams, asking for stepped-up financial reporting, cost cutting plans and hiring freezes. But in general, there doesn't appear to be much of an appetite to do new early stage deals. They are preparing for a nuclear winter where exits are few and far between, the IPO market is closed and times to exit could be extended from 3-5 years to 8-10 years and beyond.

Smaller funds, while certainly applying the same discipline to their existing portfolio companies, in general appear more sanguine about the opportunities that exist. They have fewer companies to deal with than larger funds, often have plenty of dry powder (both financially and managerially) to both support existing companies and to deploy in new deals and are seeing more deal flow than ever. So while they are clearly raising the bar for investment and competition for VC capital is intensifying, many view the current malaise as a chance to invest in great businesses at attractive prices, such that 7-10 years down the road they will look back and say: "Vintage 2008/09 deals were some of the best deals we've ever done."

All VCs, whether large or small, are saying that current cash should be husbanded, with the goal that it should be sufficient to support the business until cash flow breakeven. One of the big dilemmas is how to best support successful, growing early stage businesses that are not yet cash flow breakeven. My friend Fred just shared some interesting thoughts on the topic, citing Tom Evslin's post where he utters a common sensical but important line for people in freak-out mode to remember: "In the end you will succeed because of what you DO spend your money on." Surely time is right.

Though I've generally applied this concept to Wall Street it is certainly applicable to early stage companies: LIQUIDITY CREATES OPTIONALITY. That means having the chance to accelerate growth in the face of weakened competitors, to step up advertising and promotion when others can't afford such expenditures and to hire key talent at better prices to shorten release cycles or to sell more aggressively. The best VCs are helping their companies to balance the twin goals of liquidity preservation and growth, a balancing act that is not easy but essential for supporting the development of world-class businesses. VCs have got to be front-line risk managers. Risk managers aren't just for Wall Street any more.

Angels: Shaking out

The prevailing tone in the market is that angels who "dabble," e.g., aren't professional angels or "super angels" as I've referred to them in the past, are generally shell-shocked and backing away. They neither want to put capital in new deals nor likely have the stomach to participate in pay-to-play recapitalizations that will inevitably come about during 2009 as the cash crunch really takes its toll. We are in the early innings of what will be a very challenging time for companies funded in the past 1-3 years, those in need of capital that are not yet near cash flow breakeven but who have businesses worth supporting. Now I wasn't around in the 2001-2003 period doing early stage investing and don't have first-hand knowledge of the angel landscape that existed, but based upon conversations with Fred Wilson and others it seems that the super angel had not yet emerged.

Today, conversely, I know lots of people like me, refugees from big tech and big media with knowledge and cash or micro-cap funds (>$25 million) that are not only still in the game, but operating with much the same attitude as the smaller VCs discussed above. What this means for the entrepreneur is that it will surely be harder to put together those "friends and family" rounds, as the dad next door who was willing to toss in $50k in April is licking his wounds from his equity portfolio dropping by 30%. But while the competitive environment for capital has intensified the money is there, it just happens to be in fewer, more concentrated hands. And I'm not sure this capital was even available in the wake of the early 2000s downturn. So that is the good news.

Entrepreneurs: Be relevant, be focused, be a cash hog

David and Matt had some priceless lines last night that I will seek to recall, gems for the entrepreneur who is wondering how to best position their business both to the market and the investment community:

D. Kidder: Be in the jet stream; don't be at the edge. Get in the middle of "directional optimism."

What David was saying is to avoid being a feature, an add-on. Be right in the middle, be relevant. Be something that squarely addresses a client problem. Don't be afraid to go for it. Because if you don't, you will not succeed.

D. Kidder: Get your product into customers hands ASAP - NO SCIENCE PROJECTS - and with total transparency.

In essence, don't be afraid to look stupid, don't be afraid if it breaks. Be honest with a client as to where you are and what you are trying to accomplish. Take their feedback seriously. Rapidly iterate on the product. And get it back out in front of them. Use rapid iteration to FIND THAT CUSTOMER.

M. Blumberg: Overcommunicate with your team in times of turmoil. Whether the company is big or small, it doesn't matter. The leader needs to be a calming influence - and helps keep good employees in their seats.

Matt shared some stories of entrepreneurs he knows that did both very good and very bad jobs of communicating with their teams when times were tough. Those that did share a lot often found that team members came up with solutions better than the CEO, and were "pre-socialized," helping to allay a CEOs fear of having to fire people, cut salaries, etc.

D. Kidder: Listen to customers and data. They are the two keys.

While David acknowledged the value of his Board and other smart people in his orbit, at the end of the day the ultimate guideposts of progress are customer feedback and data around usage. Little else matters.

D. Kidder: Be and "AND" culture

In short, always be raising money until you never have to raise it again, and build product at the same time. Those who say raising money is a distraction to building product just don't get it. You have to do both AND do them well. It's all about the AND. 

The Key Take-aways

• Cash for start-ups is out there, but principally from the smaller VCs and super angels

• Fewer players actively doing early stage means greater competition for cash, so plans have to be sharp, relevant and highly cash efficient

• Cash is king, but you've got to spend cash to be king someday

• While the VC and economic weather is stormy and is likely to be so for quite some time, businesses are still being created, innovation is alive and well and businesses are getting funded. It is just that everybody is having a harder time. That's all.

StockTwits 2.0

As announced by Howard Lindzon on his blog, the latest version of StockTwits is out there and ready to be pounded on. It adds a host of new features, such as portfolio tracking, which represents a huge improvement in functionality over the last release. And as usage has risen and feedback has been provided, Soren Macbeth has a rich product development pipeline that reflects his closeness to the customer and a the discipline of a rapid release cycle. Mashable wrote a terrific piece on the new release and Fred Wilson wrote an insightful post as well. Here is part of a comment I posted on Fred's blog:

soren and howard have struck a chord with those who value real-time insight and commentary in a focused domain, specifically stocks. and the lightweight approach they've taken just highlights the power of delivering vertical value to a horizontal community, where both constituencies share a common passion: the desire to consume and share real-time information.

I think what StockTwits represents is pretty profound. Is it about "wisdom of crowds?" Sort of. Finding the "expert?" Maybe. Keeping a finger on the pulse of a like-minded community? Sure. Tracking sentiment relative to my portfolio holdings? Absolutely. It is really all those things and more, but at its essence it helps the person interested in stocks to socialize their ideas and assist others with this process. Is this financial tidbit interesting and relevant? Do you think they'll hit their quarter if they lose this contract? I am watching this stock because the selling is overdone; keep an eye on it.

Some of this is valuable simply because it forces you to put your thoughts down in a "public" forum. This can help clarify one's thinking around an idea or a theme. It can also be helpful because of the feedback generated from other StockTwitters. You need news to help provide a measure of context and a baseline for sentiment. But news is flat. It doesn't talk back. It fails to dynamically challenge your thinking. Members of the StockTwits community get news, but want much, much more out of their efforts. And they want it NOW. Real time. Real insights. Real people.

Thanks to all those who are actively using the $ sign and engaging with StockTwits. While we've already come a long way, the best is yet to come.

Citigroup, Merrill and Citadel: Not So Pretty

I started the day bright and early at Fox Business News' studio, discussing Citigroup's earnings and its ramifications for the market. Around the same time as Citigroup's release Merrill reported, missing consensus by a mile. And then we had the news of Citadel's troubles. If I had more time on the show I could have blathered on for hours, but seeing as how I had about 60 seconds there is a whole lot more I wanted to say. Here are a few themes:

Citigroup's earnings - who knows, who cares?

Can anybody tell me - Bueller, Bueller? -  what their numbers really mean? In the absence of transparency around their illiquid asset portfolios, both on- and off-balance sheet liabilities and contingent commitments (bank revolvers, liqudity backstops, LBO debt, etc.), how can we really know? This was one thing I did get to say on FBN this morning. To this day I am mystified by the arguments over mark-to-market accounting in light of the current crisis. While can have a long, theoretical discussion about what should be (though I've argued quite strenuously that the treatment of asset values should be related to a firm's liability structure - if you can hold an asset for the long-term, hold it at cost less permanent impairment, otherwise, mark it to market), a meaningful contributor to the stock and credit markets' swoon is an utter lack of trust. Banks don't trust each other. Consumers don't trust banks. Banks don't trust the Government. This is a problem, people. Why would any rational investor buy Citigroup knowing what we know about their financial position, which isn't that much given the extent and complexity of their enterprise-wide exposures?

Bottom line, the sequencing of the bank-related elements of the rescue plan is all wrong. Here is a five-step plan for getting investors interested in and excited about investing in banks once again:

1. Tighten, don't loosen, accounting rules for financial institutions, making them mark-to-market financial asset portfolios that specifically cannot be held on a long-term basis. Also clarify rules around consolidation of off-balance sheet vehicles, forcing all but the most clearly dissociated entities to be recorded as on-balance sheet obligations.
2. Have banks mark-to-market illiquid assets that it cannot fund with term liabilities (core deposits, subordinated and senior unsecured debt, etc.). This will cause massive hits to equity that will render many banks insolvent from a regulatory capital perspective.
3. Have banks sell these assets at market value to an RTC-type vehicle, which will finance them and work them out over a long period of time. The expected return on the investment in the vehicle would be expected to be positive and perhaps quite attractive.
4. Have the Treasury provide the senior preferred stock investment that has been proposed, in amounts sufficient to top banks up to the point where they are in compliance with regulatory capital guidelines.
5. Watch private investors inject fresh capital in the banking sector now that balance sheets and off-balance sheet liabilities have been cleaned up and their financial positions are once again comprehensible.

Controversial? Yes. But who cares. Equity holders will moan. Bank managements will whine. Deal with it. The stakes are incredibly high. If we want the crisis to drag on indefinitely and the overhang on our financial services sector to persist (which means keeping a damper on the non-financial economy as well), then we're doing a great job. $25 billion into Citigroup? This could be burned through in one quarter. Why not find out what the right number is to support a stable, healthy franchise? This can only be gotten through transparency and clarity around bank financial statements.

Merrill - The Fed and Treasury are holding their breath

Merrill is cool because they're going to be taken over by BofA. Right? Well... Sure, as we stand today the deal is likely to happen, notwithstanding the 12% spread between Merrill stock price and the offer price. But today's horrid earnings report can only re-awaken Ken Lewis's fear and trepidation over the transaction. Like Citigroup, even in light of the steps John Thain has taken to shore up the balance sheet and offload troubled assets, there are still question marks over if and when another big hit is going to be taken.  And couple this with retail sales falling off a cliff, an indebted and morose consumer and sheer panic among retail investors towards the equity markets, that "golden goose" - the retail network - might not be as golden as once thought. So if retail is weak, banking is in the doldrums and the portfolio has lots of question marks, does this not pose an execution nightmare to BofA, which is still digesting the not-so-pretty Countrywide acquisition? That arbitrage spread is so wide for a reason. Because if BofA wakes up and walks and the stock craters, we are looking at a very ugly sequel: Lehman 2.

Citadel - Even the Smartest Men in the Room can be cowed

Make no mistake - Ken Griffin dropping 30% is big news. Huge news. Less because Citadel is going bust (which it's not), but because of what it says about the state of the hedge fund industry and the financial markets in general. Sure, I can see Phil Falcone and Harbinger being up 80%, down 40%, etc. because of the concentrated nature of his strategy (kind of like David Tepper and Appaloosa, which has had historically great compound annual returns but with vomit-inducing levels of volatility). But Ken Griffin? That is not his game. But clearly his credit positions, both stand-alone and as part of his convertible arbitrage strategies, had to have gotten hit, and hard. Equities as well. But being a man of math, I'm sure he also understood his factor exposures pretty well, and got clubbed over the head when historical correlations broke down and everything started to move in lock-step. So it's not surprising that we're seeing just awful returns across most hedge fund strategies, because so many of those purported "hedges" simply haven't worked. Mr. Griffin and several of his brethren have accumulated cash piles the likes of which haven't been witnessed in this generation, and are battening down the hatches against both renewed market volatility (which Mr. Griffin expects) and redemptions (which everyone expects). The bright side is that with all this cash having been accumulated, a significant amount of selling pressure has been taken off the market. That said, there is still plenty of fear, margin calls and unhappy unwinds to take place over the next 12-24 months. My friend Paul Kedrosky also penned an interesting piece on this topic, and it is worth checking out.

These next few months should tell us a lot about the next few years. Either we can take our medicine now and gag or we can take it later and perhaps be in ICU. While gagging is never fun, it might just be the best option we've got.

Bailouts, Nationalism and Diplomacy

Let's say, for the moment, that the US Treasury, the Fed and their European counterparts have fired a shot across the bow: we will not let our financial institutions go under without a fight. By stepping up with what is essentially an unlimited guarantee of broad swaths of the financial sector, Western governments are hoping that both consumer and inter-bank confidence will be rebuilt such that a complete market melt-down and economic ice age is abated. As noted earlier this morning, there remains many, many unanswered questions but at least our Administration has gotten off the dime and done something.

What really concerns me, beyond the specifics of the US plan and my deep belief in the necessity of a full Good Bank/Bad Bank restructuring, are the repercussions of a global economic slow-down. Russia has been crushed, and barring some miraculous surge in demand oil prices may well continue to trend lower. This would not bode well for a country that has pumped its way to solvency only to squander its valuable currency yet again. Such turmoil makes for a very restless, irritable populous and perhaps an even more volatile, centralized leadership structure.  An unstable Russia is good for nobody.

China, while licking its wounds after its markets have gotten shellacked, has multiple avenues for growth even in a weakened global economy. It could potentially turn inward in order to keep its economic engines going. It could, say, build a massive, 21st century nuclear-powered Navy. This could keep millions employed. It could continue to invest in large public-works projects in order to keep people employed during the global chill, to keep its citizenry peaceful and docile and to lay the foundation for an even more powerful position on the global stage during the next economic up-cycle. China has options, some of which can help the world while others could reinforce its expanded military desires at a time of global instability. This doesn't make me feel particularly well, either.

Are we looking at the 1930s all over again? Could economic turmoil sow the seeds of discontent and lead to the formation of a hostile regime that garners tremendous grass-roots support? I don't know, but the possibilities are scary. If there is one thing that both US leadership and their foreign counterparts should remember is that like it or not, we are more tightly coupled than ever. Economically. Socially. Culturally. The flattening of the world and the free-flowing of goods and services has really created a global citizenry, a group that may be suspicious of those from other locales but who also likes to wear their jeans, listen to their music and tap into their YouTube videos. Like it or not, we are all in this thing together and our motives have never been more aligned than they are today. Let's hope our leaders keep this in the forefront of their minds as the global unrest unfolds. Because the US, as a sovereign power, no longer has the ability to act unilaterally and get stuff done. We need help. As does everybody else. So lets help each other, for the good of our own countries and the planet.