Google, for example, is apparently hiring about 10 people a day. To do so, the company has increased the size of its recruiting team to about 300 (compared to the 355 recruiters working for Microsoft) and now doles out restricted stock units (which, unlike options, retain value even if stock price tanks). Since the beginning of 2005, according to the article, Google has awarded about 500,000 such shares with a total value of about $200 million.

My sense is that the talent wars will continue for some time. Market growth in many sectors is strong, and there are plenty of untapped opportunities.

Many people ask what the impact of all this will be for startups. While there are obvious challenges (how can a small company compete for a great engineer when she has a million dollar offer from Google?), I think the talent wars will be an eventual boon for startups for a few reasons.

First, GAMEY (Google, Amazon, Microsoft, eBay, Yahoo, etc) provides a great platform for learning how to build a successful technology company. Many current GAMEY employees will eventually leave and either join existing startups or launch their own; either way, these employees will bring valuable networks and lessons learned. Second, GAMEY’s tremendous and well-known success has, to a large degree, reduced the stigma of working for a technology startup. Immediately post-bubble, this was often no small problem. Many talented, but risk averse, people chose to find employment at “safe” (ie non-technology based) companies.

Also, I think the talent wars will be good for cities outside of the Valley, as companies look elsewhere to find smart people. It’s already possible to stay connected and contribute from almost anywhere in the world. On a small scale, this is already very clear in the blogging world–some of the best commentary comes from places far from California. For example, Andrew Carton’s Treonaut.com is based in London, Richard MacManus’s Read/Write Web is based in New Zealand, etc. Similarly, I think we’ll see an increasing number of important startups based outside of the Valley over the coming few years.

• Google’s influence was almost everywhere. On the positive side, as Mary Meeker pointed out, Google has given many startups an advertising-based business model: while the company generated $1.4B in Q2 revenue, Google also paid out $494M in the same time period to thousands of partners (though programs like AdSense, which lets publishers easily serve ads; Google and the publisher split the proceeds)–more than enough, in many cases, to pay the bills. On the negative side, Joe Kraus noted that Google’s habit of leaving products in “beta” may work for them, but it’s often a dangerous example for others to copy. Basically, thanks to Google’s core advertising business, the company has sufficient surplus cash flow to finance dozens of internal quasi-startups, even if all are eventually shut down. Typical startups, on the other hand, don’t have the luxury of a padded bank account. Therefore, they need to immediately think hard about measuring the right metrics and quickly getting to market with revenue-generating products–startups can’t stay in beta forever.
• Google also released an RSS reader. It’s pretty, but I won’t use it as my regular reader until it’s usable when I’m offline. For now, then, I’m sticking with NewsGator.
• Yahoo had a few intriguing developments, also. I liked their Tech Buzz Game–”a fantasy prediction market for high-tech products, concepts, and trends.” I doubt I’ll actively participate, but it’s interesting to see what others are betting on. For example, the Rumor Mill says the (hopefully) smart money is betting that Apple will soon release a video iPod. Separately, Yahoo also demonstrated a novel search system that sorts based on whether you are looking for commercial or informational results. Give it a try.
• I had a very favorable impression of Macromedia’s new Flex 2 development platform (click here to find out about the pending alpha release). While there was a lot of talk about Ajax’s potential to enable web applications, Flash is still useful and, in any case, the two aren’t mutually exclusive. Certain applications, like MeasureMap, use both to very good effect.
• On the startup front, I had two favorites. First, Zimbra, a messaging and collaboration platform I wrote about earlier. Nice functionality (mouse over an address and a corresponding Google Map pops up, mouse over a date and Zimbra pulls up your calendar appointments for that day, etc), and looks like the team thoughtfully architected the server, as well (one small example: only one copy of a particular attachment gets stored per server; certain other email servers store one copy per user). It’s being marketed as a Microsoft Exchange competitor. Second, I liked Zvents, a local events search and events web service. For now, though, Zvents only covers the San Francisco area.

More Web 2.0 info via Richard McManus here and at TechCrunch here.

Update (10/12): Looks like the iPod Video bets at Yahoo paid off…

I’ve been captivated by Ajax, too. When well-implemented, Ajax-powered applications are undeniably impressive (see here); they seem to run fast, they look good, and no plug-ins are required.

However, there are at least three noteworthy problems with the use of Ajax in web application development.

First, Ajax introduces potential user interface issues. In particular, poorly designed Ajax applications work in ways that aren’t intuitive for the average user. For example:

• The back, stop, and refresh buttons don’t always work.
• Since Ajax applications generate pages dynamically, there generally aren’t static links available for bookmarking or sharing with others.
• Pages don’t always print well.
• Applications don’t run offline.
• Clicks and actions generally don’t get included into a browser’s history table.

For more detail, see Adam and Alex Bosworth’s posts here and here. In any case, well-written Ajax applications minimize UI problems by providing meaningful visual feedback to users. Also, it’s worth noting that there are emerging solutions (often crude) to some of the above problems.

Second, Ajax requires JavaScript and, for Microsoft’s Internet Explorer, ActiveX must be enabled (though there is a workaround). I think this is a manageable issue as most browsers are sufficiently up to date–though some companies and individuals have disabled JavaScript or ActiveX by default for security or privacy related reasons (see here and here). The key is to design applications to degrade gracefully (which is a fancy way of saying that web pages should work for new and old browsers, even if the old browsers don’t support certain new capabilities). Interestingly, Google fails in this regard. Try running Google Maps with JavaScript disabled. It won’t work (they could have produced a Flash-version like this one here–in some ways, it’s better than the original).

Third, Ajax developers need to be especially mindful of perceived application performance. The goal, obviously, is to make applications seem fast. One way to make that happen is to preload data as an application starts; then, when a user clicks, there can be an instant response. However, it’s sometimes impossible to preload an entire dataset (think about the vast amount of data in Google Maps), so developers need to make smart design decisions about what data users will most likely want. A related issue is network latency, or the time between a user’s click and the system’s eventual response. If the wrong data was preloaded, there should be a visual cue indicating that the user may have to wait until the right data is collected from wherever it is stored.

Of course, some of these problems aren’t unique to Ajax-enabled applications. However, that doesn’t mean the issues aren’t real. Where some see problems, though, others see opportunity. For example, there is a market for new development platforms for quickly and cost-effectively writing, debugging, and managing complex, enterprise-scale applications. Also, there is a need for better browser standards, so that applications work consistently across different platforms.

My sense is that we’re just seeing the tip of the iceberg when it comes to browser-based applications–there are many more on the way, and we’ll be increasingly amazed with what can be done. To that point, we’ve recently invested in a very intriguing company in this area. I’ll blog about them when I can. Also, I’m always interested in learning about new startups, so email me if you have ideas.

I’m frequently asked if we have a specific web 2.0 investment strategy. Obviously, there isn’t an all-inclusive answer (as David Hornik jokes: “venture capitalists come in all shapes and sizes. I, for example, am short and fat”). However, there are a few key areas which I find particularly important:

• Management team. Two points here. First, the quality of early employees is particularly important (see Joel Spolsky’s insightful article on why a small core of outstanding developers is better than a larger group of less talented engineers—or read the Mythical Man Month). It’s obvious–until you recall that even just a few years ago companies were often valued based on the number of employed engineers. I don’t see that happening today. Second, the most effective teams have shared (and realistic) expectations. We’ve recently seen a few high-potential companies literally fall apart because certain founders wanted to stay small and move slowly while other employees wanted to ramp much more aggressively. At an early stage, such conflict can be fatal.
• Target markets. Part of the fun is that many–if not most–web 2.0 companies target consumers. The challenge for VCs is that many of us aren’t trained in understanding consumer behavior (which is a polite way of saying that we really don’t know what will work and what won’t; perhaps we can take solace in the fact that even industries filled with so-called consumer experts, like the movie or music businesses, still have plenty of flops). That notwithstanding, companies often to fit into one of two groups: faster, better, cheaper (FBC) or brave new world (BNW). Teams at FBC companies should deeply understand their target markets and the opportunity size should be large. BNW companies, on the other hand, may be pursuing markets that don’t yet exist. In that case, there are many relevant questions to explore, but my simplest rule of thumb is to look for two primary metrics: (1) rapid, low cost customer acquisition, and (2) data showing that existing users are spending more and more time and/or money consuming the product in question.
• Technology/product. There are a few technical layers I analyze. First, the the basics: the platform should be stable and scalable, and performance should be good (if the technology isn’t yet built out, there should be a credible plan describing architectural details). Google and other services conditioned people to expect nearly instant responses; for better or worse, that’s the world we now live in. The second layer I look at is design. The key here is to optimize the overall experience with an elegant combination of form and function (which is different and much harder than simply building a pretty GUI). Ajax is a useful platform for developing richly interactive applications (examples here), though other technologies are also good (check out Goowy, which is Flash-based). Regardless, the point it’s now possible to build browser-based, feature-rich, highly interactive applications in a way that wasn’t possible before without spending a lot of time and money. Doing so well is difficult, though, and can form a meaningful barrier to entry.
• Business model. There are a variety of viable options. Ads can drive a reasonable revenue stream, but it can be difficult to scale ad revenue without very significant traffic levels. Certain companies with stunning user growth, like MySpace, can make the math work. Most companies, though, may find it necessary to adopt an additional fee strategy to round out the business. A challenge here is that consumers have largely been conditioned to believe content is free. It will be interesting to see how NYTimes’ TimeSelect program fares (they are about to start charging $40/year for access to certain content and archives). Separately, transaction charges for product sales can work (see Connected Ventures, which manages CollegeHumor), but this can be challenging as consumer tastes change rapidly (creating inventory management issues). I probably prefer subscription-models. Once a company has exclusive access to a valuable asset, customers will often be willing to pay recurring fees, particularly if the asset improves over time. Zoominfo (we are investors) is a good example–they have a strong and growing business based on for-fee access to premium search tools and data.
• Capital requirements. It’s usually possible to build out an initial platform without spending much; I’ve talked with teams that built functional search engines with innovative features for less than $50K (there’s cheap talent at Rent A Coder!). It makes sense to spend slowly early on—especially if there are lingering business model questions. Flickr is a good case study; they successfully found a good home at Yahoo without raising any insitutional venture capital (for a related discussion, see Seth Godin’s post on how small is the new big). However, if the market is sufficiently large and well understood—and particularly if there is a short time frame to attack due to competitive pressures–raising a larger amount capital can be the right move. All that said, it’s hard to have an abstract discussion of investment levels without citing specific companies. Generally, though, web 2.0 companies are far more capital efficient than traditional enterprise software companies.

What else did I miss?

Turns out that Microsoft’s online gaming service, called Xbox Live, acquired 1 million subscribers faster than AOL, HBO, or Tivo did (today, about a year after hitting the 1 million mark, Xbox Live has about 2 million subscribers). Each player pays about $70 for a 12 month subscription starter kit, which includes a headset like those used at a Burger King drive through (this wouldn’t bother me–my office colleagues regularly mock me for the wireless headset I use for phone calls).

Slate has a great article describing the experience of two “greybeards,” or thirty-year-old men, who recently played Xbox Live for the first time. They were clearly out of their element–a few of their favorite moments:

1) I liked how—just so we could log on and play the shoot’em-up game Halo 2—I had to spend 10 minutes downloading ancillary programs, including something called the “Killtacular Map Pack.”

2) I liked how, when we finally started, I was killed within eight seconds. Then I came back to life in another part of the game … and was again killed within eight seconds. I don’t think I ever survived longer than 20 seconds. At one point I accidentally detonated something (maybe a plasma grenade) right next to myself. In that instance, I committed suicide before other players had a chance to kill me.

3) I liked when I got in the driver’s seat of the “Warthog” assault vehicle and one of our remote Xbox Live teammates quickly hopped onboard and manned the turret gun, as though he expected me to drive us somewhere useful. I instead drove off a cliff and killed us both. Boy, was he surprised!

One of the more intriguing aspects about online gaming–and emerging media, in general–is the community of users, which varies according to a game’s genre. In Xbox Live’s case, many of the most popular games are “hardcore” action or strategy. The dominant personalities there tend to be 13 year-old-boys with seemingly little to do other than hone their already formidable skills. And why not? The better games are amazing: superb audio and video quality, epic stories, and performance (lag) generally isn’t bad. Plus, you can mock your friends (or strangers) via the Burger King headset while you play.

13 year-olds don’t run the show everywhere, though. The players on many “casual gaming” sites (which, like Games.com, usually feature card or word game titles like Boggle or Yahtzee) tend to be female and older (35+). Overall, according to this report from the International Game Developers Association, women actually play online games more than men (9 vs 6 hours per week). No matter how the numbers are sliced, it’s clear that there is a significant market opportunity: $7.3 billion of games were sold last year, according to the Entertainment Software Association.

From an investment perspective, the economics of casual gaming can be attractive: such titles can often be developed for $100,000 – $200,000. “Major” console titles, such as those played on Xbox Live, usually have a multi-million dollar budget–sometimes as much as $10 million. Casual games generally sell at retail for about 40% of what comparable “major” console games cost (often $50 vs $20).

Where are venture capitalists looking for the next gaming opportunity? From a business model perspective, companies with an existing title and a predictable, subscription-based revenue stream (Mythic, Turbine, Second Life, etc) have recently attracted serious interest. At a high level, I think two primary requirements must be met:

1. Rapid, low cost customer acquisition,
2. Metrics indicating existing users are spending more and more time playing.

There are other key factors, also, but getting these two right is generally very positive. The implication for my investment strategy, then, is that it’s difficult to fund developers–even if they are very talented–if they don’t yet have a published product (others firms have different strategies, and there are always exceptions, such as Digital Chocolate).

Despite the incredible market size numbers, gaming, as a category, hasn’t produced many significant wins for venture investors. I think this will change as the underlying technology continues to improve and as people–not just kids–spend an increasing amount of time and dollars playing games.

Update: You can play an Ajax-ified version of Boggle here (via Logan).

Why all the activity?

Growth.

A few statistics, courtesy of Foreign Affairs:

• Since 1978, China’s average GDP growth has been 9.4%.
• In 1978, China accounted for less than 1% of the world economy and its foreign trade was worth $20.6B. Today, it accounts for 4% of the world economy and its foreign trade is worth $851B (third largest in the world).
• In 1990, China had almost no mobile telecom infrastructure. Today, it has more than 300M cell phone subscribers (most in the world).
• As of mid last year, almost 100M Chinese citizens had internet access.

Growing pains are likely; Zheng Bijian, the article’s author, has concerns about scarce natural resources, pollution, and, in particular:

[the last] challenge is reflected in a series of tensions Beijing must confront: between high GDP growth and social progress, between upgrading technology and increasing job opportunities, between keeping development momentum in the coastal areas and speeding up development in the interior, between fostering urbanization and nurturing agricultural areas, between narrowing the gap between the rich and the poor and maintaining economic vitality and efficiency, between attracting more foreign investment and enhancing the competitiveness of indigenous enterprises, between deepening reform and preserving social stability, between opening domestic markets and solidifying independence, between promoting market-oriented competition and taking care of disadvantaged people.

Talk about management challenges. Still, risk and reward are generally tightly correlated. As a result, due to China’s strong recent economic performance–and massive potential–it’s likely that many more US venture investors will rack up frequent flier miles as they scout out opportunities there.