This past weekend Fred Wilson wrote a timely post on VC and systemic risk. Aside from the topic, one comment particularly struck an accord with me. He said:

I believe entrepreneurs will use technology to reinvent the way financial services are provided to consumers this decade.

I agree and here’s why. First, if anything, the crisis has taught us that our nation’s financial system is utterly broken. From real estate to insurance to credit cards to banking to Wall Street, no area has been immune. It all needs a radical makeover. Second, consumer pain is incredibly high. Take financial advice as one example. Do you have a financial advisor? Most people don’t. Chances are unless you have minimum level of investable assets say $50K or $100K you will have a tough time finding one or at least a good one. Most brokers will turn you away because you are an unprofitable customer. Companies like FiLife and Financial Engines have recognized this gap. Last, the market opportunity is enormous. There are many billion dollar market opportunities in the sector. Online payments alone is pegged at $600B and PayPal has less than a tenth of the market.

Change is coming, but I think it’s going to require major disruption. Historically, companies in the sector have seemed to follow the adage: “He who has the gold, makes the rules.” Maybe a bit of an exaggeration, but the general principle applies. Banks get your deposits so they decide on fees and interest and can do whatever they like with your money (e.g. lend it out at a higher interest than they pay you). Legacy business models were set up to protect revenue streams. Monopolies are rampant. Look at the investment banks and credit card companies. The list goes on and on.

With all that being said, I’m optimistic and believe now is great time to be a tech entrepreneur in financial services. Incumbents aren’t going to change any time soon and many have massive cost structures to maintain. Their cash cows have plenty of milk left (look at inter-dealer brokers). That’s opportunity and a significant advantage for nimble startups. It’s up to entrepreneurs to re-define the rules and how we think about our finances. While it’s impossible to predict the future, I can guarantee you this: it will look very different than it does today.

I’m dedicating a series to this topic and we’ll take a closer look at new business models and startups in Payments, Banking, Capital Markets (Trading, Wealth Management, etc) and others like Insurance or Real Estate. Stay tuned.

Google launched its new social experiment called Buzz yesterday. It has been labeled a Twitter and Foursquare killer by some, and lame and boring by others. Most of the launch was media hype, but it got me thinking about how startups must feel when they see new product announcements by Google. Google is one of the few companies that’s constantly acquiring (59 companies) and launching new products. So, what do you do if you are a startup and Google releases a product that goes after your core business?

This sounds silly, but first try not to freak out. It’s doubtful that Google is targeting your business specifically and it’s not a zero sum game. Now, if you are Twitter or Foursquare that’s a different story. Twitter in particular is an interesting case to look at. There are low technology barriers to entry in its market, but Twitter has significant demand competitive advantages (one of the 3 sustainable according to Greenwald) in the form of customer captivity and network effects. I came across recent research that put Twitter at the 1B tweets per month level, 16X growth over the prior year, in January 2010. That’s a great head start against Buzz, but with Google’s distribution engine it’s going to be worth watching how this plays out.

In general, startups should play to their strengths so here are a few things to think about:

Be nimble. Google is a large corporation with thousands of employees across the globe. With that size comes processes, procedures and other “big company-isms.” Some would argue Google is even on Microsoft’s path to creative destruction. As a startup, you don’t have the resources (e.g. R&D, sales/marketing) and associated cost structure that Google has. You are lean and mean. You can innovate at the drop of a dime and release new code many times in a single day. You can get customer feedback early and often. You can also change direction or pivot if you need to. That’s a huge advantage in itself. Big companies have an incredibly hard time shifting direction after sinking considerable time and money into something — trust me I know, I started my career off at one.

Intense focus. Last time I checked I didn’t find many companies with as grand a plan as Google’s — search, email, smb, maps, video, shopping, blogging and mobile. It’s incredibly hard to be number one in all of your markets when you have such a broad focus. Be the opposite of Google. Focus on your core business and be the best at what you do. Hopefully, your market is big enough to build a sustainable business. Build credibility in your niche and then expand.

Be disruptive. Google is a strong company because it has disruptive roots. It’s business model was incredibly disruptive. It had great core search technology, but didn’t create a new market or category. There were plenty of other search engines before Google. If you create a disruptive technology and/or business model you can compete with anyone. Disruption changes the rules of the game. Easier said than done, but aim for it.

What would you do?

TechCrunch posted an article this past weekend on the startup Blippy and how Amazon is insisting that the company stop collecting user purchase data and erase all data that was previously collected. The article got me thinking about our personal data streams, the implicit web and ownership. Many investors and technorati have previously blogged and talked about the rise of platforms that capture data based on our implicit actions on the web, so no need to rehash that here.

A question worth discussing is who owns your data stream. Wait a minute, don’t I own my tweets on Twitter, status updates on Facebook, photos on Flickr, emails on Gmail, bookmarks on Delicious and reviews on Yelp? Not necessarily and define “own”. Well, does the ownership lie with the user who generated the data, the company that captured it or someone else? If it’s the company that captured it, does the user have rights to the data and can the user share the data without the company’s permission? These are all important questions that can affect future implicit web innovation and I’m not sure we have a good answer to any of them.

In the case of Blippy, if users gave permission to collect their data wouldn’t that suffice for Amazon? Well actually no, probably not. I haven’t read Amazon’s terms of service, but I could almost guarantee data generated by users is property of the company. This is particularly true of companies with advertising based revenue models. Google’s success shows how valuable data can be. Google is actually an interesting case to take a closer look at. In their terms of service, the company claims all content created by you is your property and not the company’s. Technically, Google is licensing the content from you. So, I own the videos that I upload to YouTube and emails that I send with Gmail, but Google monetizes my content, doesn’t share the revenue and restricts access to my data or some of my data?

I don’t see a good solution to this problem any time soon. Many would argue that data ownership isn’t a problem; it’s a byproduct of the implicit web. I disagree. It is a problem and with the proliferation of mobile devices, rise of the real-time web and explosion of implicit user data the problem will be exacerbated in years to come. As a user I can accept if I don’t own my data and companies are making money from it. My issue is when the playing field is not level and incumbents create walled gardens. My vote is open and free access to ALL of my data. I may not get to own my data in the long run, but I don’t have to support companies that are not open. Let innovation happen.

Boy has the financial services landscape changed over the past year. Collapse and utter failure are the first words that come to mind. AIG, Lehman, Merrill Lynch the list goes on and on. At the same time, a few survivors like Goldman are thriving in this environment and getting ready to payout record bonuses. What does this mean to entrepreneurs in the sector? Is FinTech dead? I don’t think so and here’s why:

Inefficiencies are rampant across the entire supply chain: Voice trading is prevalent in the OTC markets. Real-time risk management is almost non-existent. Real-time settlement/clearing is non-existent. Clients don’t understand and sometimes don’t know what securities they hold and their risk exposure. Managing skyrocketing market data volumes is getting tougher and tougher. I can go on and on, but you get the point.

Talent and risk have flip flopped: This is an important one and good for all startups in the NYC area. In the past, most (not all) good programmers went to work on Wall Street to make a lot of money, working for hedge funds and large financial services firms. Startups weren’t really on the radar. Maybe it was cultural here on the East Coast, but pay wasn’t comparable and the perceived risk was high (not saying I agree). That is changing. For one, there hasn’t been this much high quality technology talent available in quite a long time. Many of the large banks significantly cut their tech teams. Great programmers and software product folks with strong domain experience are available. These folks are getting hired by fast growing tech startups. Second, what I’ll call startup risk is down. I’m in no way implying startups are less risky than in the past, but merely pointing out that perceived risk is down. Lower salaries with equity stakes and options in exciting venture-backed startups are looking better and better. The staying power of large financial services firms is very much so in question.

Diverse Sectors: Capital Markets is one slice of the FinTech pie. There are vibrant opportunities in other sectors like Banking, Insurance and Real Estate (who would have thought). Most of these sectors have under invested in technology for many years and replacement cycles are coming up. The cost of maintaining legacy technology is increasing rapidly. There are also broad financial management plays like electronic billing and payments gaining traction in sectors like Government and Healthcare.

Regulation and Reform: We all know regulation is coming at some point. The specific impact is unknown, but with that comes opportunity for nimble, disruptive startups. A few areas that I’m particularly excited about are risk management, real-time analytics, OTC derivatives automation, SaaS, settlement/clearing, anti-fraud, new marketplaces and consumer financial services.

FinTech is far from dead. I believe the crisis has strengthened the need for technology, automation and transparency and am confident entrepreneurs are the ones who can change things for the better.

Sequoia Capital recently made a presentation to its portfolio companies about how to try to survive an economic downturn. Definitely worth a read.

I’ve been thinking about Virtualization Management for a while so I thought it would be a good time for a blog post, especially since my blogging pace has steadily declined to a crawl.

Virtualization has been all the buzz these days in the enterprise. Gartner expects the number of virtual machines to grow from less than 5 million in 2007 to about 660 million by 2011. What’s the big driver behind this growth? Well, there are a bunch of reasons, but mainly virtualization lets companies stretch their hardware resources and ride the backs of increasing processor power. The days of having one machine running on one piece of hardware are over.

With the proliferation of virtualization comes significant management challenges. Virtual environments increase configuration, monitoring and deployment complexity for administrators. Traditional software for managing standalone machines comes up short in a virtualized environment. Combating “virtual sprawl” has turned into an overhead nightmare. The big platform players, namely Microsoft, VMware and XenSource (acquired by Citrix for $500M in ‘07) offer some built-in management capabilities, but can’t cut it as environment diversity increases. There are functionality gaps across patch, discovery and inventory management. I’ve included a chart from virtualization news site, virtualization.info, to give you an idea of the numerous market segments within virtualization management.

Several startups recognize the big opportunity. Companies like LeoStream, VKernel, Embotics, Enomaly , ManageIQ, Ceedo and Vizioncore are a few that come to mind.

As complexity increases, enterprises large and small will need better tools to manage virtual environments across storage, applications and the desktop. The big platform players have taken notice and the race is on.

Would you rather invest in or build a startup around a great team or a great market? Obviously, it would be advantageous to have both, but that’s usually the exception. It’s a question that’s been debated for quite some time in the Startup / VC world, and doesn’t have a clearcut answer. For this post, let’s take a look at pros and cons to both arguments. I’ll let you decide.

Great team

The famous Venture Capitalist Arthur Rock once said, “I invest in people, not ideas. If you can find good people, if they’re wrong about the product they’ll make a switch.” A good number of VC’s go along with this philosophy and bet on the team above all else. Most also prefer to invest in entrepreneurs that have successful track records. These entrepreneurs either have great teams or have built them in the past. The idea here is to minimize execution risk early on. To paraphrase Jim Collins of Good to Great: great teams understand that they need to first find the right people, get the wrong people out and then get the right people in the right roles. The hope is that the great team will be able to find the fast-growing market somewhere along the way.

Now for the cons. What if the team is too early for the market? That means no matter how good they execute it will be an uphill battle. The sales cycles will be long and ROI unclear. Customers and users won’t be convinced they need the solution at all. The ecosystem you are counting on won’t exist. This happened to a bunch of startups around ‘99/’00.

Great market

Markets are like waves in the ocean. They are unpredictable, change at the blink of an eye, can be much larger than anticipated or die as quick as they came. The hard part for the entrepreneur (and investor) is picking the right wave to bet on. It takes discipline and focus not to choose the wrong one, but if you pick the right one you are in for the ride of your life. A fast growing market will propel your company forward. Customers will be pounding down your door, investors will be pouring money into the segment (further validating it) and buzz will be in the air.

What if you have a great product in a great market, but bad or mediocre team? The product could be the best in the segment, but your team can’t sell or market it. That’s a problem. Opportunity lost. By the time your team figures this out, competitors are already hot on the trail.

While although great teams are *very* important, markets take precedent and are the most important factor to a company’s ultimate success. Inevitably, mistakes will be made along the way so near perfect execution is unlikely regardless, but markets aren’t.

You’ve probably heard by now about Amazon’s new e-book reader the Kindle. While it’s not very aesthetically pleasing it does come with some great features. The free EVDO wireless connection is by far the best feature and sets the tone for other devices in the space. Some interesting tidbits include: E Ink display technology (600×800 resolution), e-book DRM (.AZW), web browser, lack of PDF support and fee-based newspaper/blog subscriptions (ridiculous in my mind). The device is pricey at $399, but can store about 200 books and last 1-2 days without requiring a recharge. The Kindle store on Amazon has 90,000 titles with new releases and best sellers starting around $9.99.

It’s refreshing to see Amazon turn the e-book space upside down. Although there’s much more work that needs to be done (topic for another post) this is definitely a good first step. As a book junkie attempting to reduce my household clutter I see the Kindle in my not-so-distant future.

Also, check out Wired’s e-book reader comparison post here.

This week I attended a meetup in Philadelphia that featured Jeff Barr from Amazon Web Services. Jeff talked about his personal experience and some exciting things that people are building using S3 and EC2. Most of us have heard of S3, Amazon’s scalable storage infrastructure. Pricing is $0.15 per gigabyte/month. Growth has been tremendous with S3. They don’t release revenues, but according to Jeff as of November they had 10 billion objects stored, up from 5 billion objects in April. EC2 is their other new web service. It stands for Elastic Compute Cloud and is essentially on-demand computing power. The idea is you can scale servers as you need them. All pricing is per instance per hour. The default is $0.10 per for a server with 1.7 GB of memory and 160 GB of storage. For cash-conscious startups EC2 is a godsend. You don’t need to make big ticket hardware purchases and spend only on what you use. EC2 becomes even more important as you begin to grow and need to scale fast (a problem for most startups).

Overall, there are a number of consumer-focused startups using Amazon Web Services, but I haven’t heard much from enterprise players. The lack of service level agreements and guaranteed uptimes are issues that will need to be addressed. Highly regulated industries such as Financial Services and Healthcare will also need to get comfortable with data security. Nevertheless, the cost savings is real. If you are an entrepreneur building a company that’s using AWS selling into the enterprise drop me a line. I’d love to hear your experience thus far and interview you for a follow-up post.

On a side note, it was great to see the local tech community in Philly. A lot of interesting people and ideas. Buzz is definitely in the air.

The NYT reported today that LinkedIn does indeed plan to open up its API – sort of. Any companies looking to build applications will have to get approved by LinkedIn first. Also, they are focusing on business applications with obviously some kind of revenue sharing. Nevertheless, this is great news and will help increase adoption in the long run. I don’t believe the hype. Myspace and Facebook have had incredible growth, but are by no means taking over business networking. LinkedIn is primed for growth moving forward, and from what I understand preparing for an IPO.

Here are my top 10 LinkedIn apps I’d like to see. If you are working on any of these drop me a line as I’d love to hear about it.

1. Personal CRM – Features for better managing interactions with my connections such as reminders and notes. Integration with SalesForce and other CRM systems is a must.
2. Advanced search – Let’s face it, right now search on LinkedIn is pitiful at best. We need to fix this.
3. Better communication tools – I have a good number of connections, but am not doing anything with them. Give me chat capabilities.
4. Recruiting Platform – Referrals and job board integration. If I’m looking at a job posting on the web I’d like to find out if any of my connections know someone at the company.
5. Location Intelligence – Integrate GIS and events with LinkedIn. What events are my connections going to? I’m at a conference, are any of my connections here?
6. Sales Lead Generation – Do any of my connections know someone at Company X? Does Company X have a new CEO?
7. Corporate Networks – Let companies enroll their employees and create semi-private social networks for key relationships such as service providers or suppliers.
8. Collaboration platform – How about sharing information and documents with your connections?
9. External data integration – Integrate OneSource, Hoovers, D&B and other data providers with LinkedIn.
10. Group, classify and rate connections – We have all types of connections with others. Some are very valuable from a business perspective and others more personal. As our networks grow over time they become more difficult to manage. Give me the ability to better organize them.

Have any other suggestions? Send them in.

Check out the original article here.