betaworks 2012 Shareholder Letter from CEO John Borthwick

I came across a tweet the other day linking to the betaworks 2012 shareholder letter from their CEO, John Borthwick. I had never heard of betaworks (who calls themselves a “company that builds companies”) and didn’t know that I was about to spend 30 minutes reading a never ending, but incredibly articulate and exciting reflection of their 2012 year and outlook on 2013. Definitely read it.

Highlights

Their model (seed stage investing + a builder of companies creating a powerful, close-knit network)… “Our formula appears to be sufficiently potent that the betaworks holding company model has emerged as a recognized new asset class. We think the betaworks model is getting recognition not only for its ability to capitalize on the big, disruptive opportunities emerging from real-time, social, mobile, data, contextual computing, and so forth, but also for its disruptive effects on the incumbent players in the building and financing of innovative start-ups.”

On the network effect they’ve created and are benefiting from… “In starting betaworks in 2007, we made a bet that the media business would become more social and more data driven. We made two other unusual bets: we created an operating company (instead of an investment fund), we chose to both build companies and do seed-stage investing from the same vehicle, and we chose to build betaworks as a network. Five years on, they are turning out to be great bets. As I mentioned in the introduction, betaworks is a different kind of asset class. We run betaworks as a network. Inside of most organizations transaction costs aren’t transparent, which drives enormous inefficiencies. Technology and the market is pulling apart many businesses into their component parts so that these transaction costs become apparent and each can be run more effectively. Organizing betaworks as a network ensures that each part — each product — stands on its own, set up as a separate company. Yet each part, each product, is connected into the network. Connections can be API based exchanges of data, or simple, arms-length business agreements. I believe the returns we have achieved for you, our investors, are because of this network structure. Returning invested capital, an 7-8x equity appreciation, a 5.6x realized and unrealized gain on our investment portfolio: all of this is happening as the compounding is just starting to yield returns. As greater minds than us have proven, compounding is a wonderful thing.”

The focus of early stage companies has to change to account for monetization instead of just growth… “Monetization is no longer something you can think about once you have tons of users — it is something to think about as soon as you have any users…Had the market been willing to support a massive forward-looking valuation for Facebook based essentially on a faith in its eventual ability to to build a solid business in a mobile world, a raft of companies would have sprinted to go public behind them.”

How rapidly things are evolving. As an example… In January of 2012, an executive at Facebook told me that it would be the first company worth a trillion dollars. He said that Mark Zuckerberg and the team had the next five years figured out, though beyond five years they had some open questions. I pressed him on mobile, OS stacks, monetization, and other flanks that in my mind appeared vulnerable. A year later things don’t look so clear. The market fully absorbed the mobile execution risk and the lack of clarity around monetization, and has even developed some enthusiasm for the company in recent weeks. At the same time, Facebook did a remarkable job of transforming itself into a mobile company. The lesson here isn’t that Facebook was right all along, the lesson is that there is fundamentally a new dynamic at play: Value creation — and destruction — is happening at an unprecedented rate, and the value being created is increasingly being pulled to the edge. For example, Facebook last year looked vulnerable on mobile stacks; now, it looks to have transformed itself into a mobile company. As builders, we are seeking to master these new dynamics: we are building companies in a networked world, for a networked world, and on a network that is expanding at an exponential rate. The companies and incumbents that adopt a hacker culture, adapting and building fast, embracing openness and co-dependence, will thrive. Others will struggle to figure out where to go next.”

The rise and maturation of additional interfaces including but not limited to voice recognition, gestural, and contextual. Some neat initiatives and companies in the space like Highlight, Google Now, Leap Motion, Pinokio, Nest, Capri and Twine.

The simple idea that we’re lacking serious innovation when it comes to a platform or layer for alerting and notifications… “Another example: Do you have any friends who send you texts instead of an email? They likely do this because they get an immediate answer, by pushing themselves to the top of your notification stack. Same for iOS or other badge-based visual notifications.In fact, once upon a time, it was true for faxes! This has to change, we can’t keep re-inventing new messaging layers to supersede the others; instead we need effective, multi-platform filtering along with smart passive alert management. Messages and content need to be accessible but also decay gracefully.This is hard but necessary, and in 2013 I believe we will see a better layer of alert management and notification infrastructures start to emerge.”

Monetization models and mobile advertising… “Yet despite all this, the most effective monetization models that are scaling in this world are commerce- or subscription-based. In 2013 we will see significant progress on mobile advertising. Facebook first and foremost has to demonstrate the breadth and scale it can achieve in its mobile advertising model. If Facebook can make it work and integrate its Open Graph so that the ~70% of auth’d-in users on iOS, and ~48% on Android get better-quality advertising than everyone else, then it could unlock a huge opportunity for itself, for publishers and for application creators.”

The rise and importance of storytelling and their large stake in several companies in the space including Digg, Svbtle, Medium, Branch, Quartz, and tapestry.

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