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My partner Brad has a good post up on the Union Square Ventures blog this morning. He's been thinking about why a lot of the innovation in information technology is happening in consumer facing web services. He notes that:

Dave McClure runs a very cool conference called Startonomics. It's unlike anything else I've ever seen done in the conference business.

Startonomics is all about instrumenting your startup business and using measurable metrics to determine how you are doing. It's about using numbers to improve your marketing, your product, and your business.

It's happening this Thursday, Oct 2nd, in San Francisco. I'd encourage anyone who is based in the bay area and doing a startup to attend. It's affordable (students for $195, entrepreneurs for $295). Register here.

Dave has graciously offered 2 free passes to AVC community members. I'll give one each to the two best comments with a quick (twitter size) comment about how you use startonomics to run your business. Comments have to be in by 5pm eastern today.

For those readers who are in NYC and wish they could attend one of these, Dave has promised us he's going to try real hard to do one here next year. I can't wait.

UPDATE: Chachra and Khawk are the two winners. It wasn't easy but I liked the brevity with which each of them outlined their approach to startonomics. Chachra said "Use startonomics to build what people need, measure what they want andand deliver what they don't know they need! Iterate & $profit :)". I love iterate and profit. It's right on. And Khawk introduced a new c-level position, the CBO - Chief Burnrate Officer. Very nice! I also think both of them are in SF (a guess) and hope they'll actually use the free passes. Thanks again to Dave for providing them.

I received a bunch of requests yesterday to address Jason Calacanis' "startup depression" email that was sent out over the weekend. Alley Insider had the full text of it online but they took it down yesterday, apparently at Jason's request. Fortunately Jason also chose to put it up on his blog so we can all read his thoughts. Thanks Jason.

I think Jason's email is a great "wakeup call" for everyone in the startup business. Life is going to get tougher for everyone in the US and possibly in all parts of the world that are tightly linked to the US economy. I think startups fall into that description no matter where they are based.

I particularly like Jason's "10 specific things you can do" section. In that section he urges entrepreneurs to get focused, get better, get leaner, and ultimately to get profitable. That's spot on.

But I do think Jason's missing one important point in his email. It's not the venture backed startups that are going to struggle the most. Jason wrote:

All startups are going to have to batten down the hatches, get leaner, and work to get profitable, but the venture backed startups are going to get more time to get through this process than those that are not venture backed. Here's why.

Venture capital firms are largely flush with capital from sources that are mostly rock solid. If you look back at the last market downturn, most venture capital firms did not lose their funding sources (we did at Flatiron but that's a different story). If you are an entrepreneur that is backed by a well established venture capital firm, or ideally a syndicate of well established venture capital firms, then you have investors who have the capacity to support your business for at least 3-5 years (for most companies).

Venture capital firms will get more conservative and they will urge their portfolio companies to do everything Jason suggests (and more), but they will also be there with additional capital infusions when and if the companies are making good progress toward a growing profitable business.

If you go back and look at the 2000-2003 period (the nuclear winter in startup speak), you'll see that venture firms continued to support most of their companies that were supportable. The companies that were clearly not working, or were burning too much money to be supportable in a down market, got shut down. But my observation of that time tells me that at least half and possibly as much as two/thirds of all venture backed companies that were funded pre-market bust got additional funding rounds done post bust.

So if you run or work in a startup company that is backed by well established venture capital firms, take a brief sigh of relief and then immediately get working on the "leaner, focused, profitable" mantra and drive toward those goals relentlessly.

If, on the other hand, you are just starting a company, or have angels backing you, or are backed by first time venture firms that are not funded by traditional sources, then I think you've got a bigger problem on your hands. It's not an impossible problem to solve, but you have to start thinking about how you are going to get where you want to go without venture funding.

I say that because in down market cycles, it's the seed and startup stage investing that dries up first. It happens every time. Seed/startup investing is most profitable early in a venture cycle and late stage investing is most profitable late in a venture cycle. It makes sense if you think of venture capital as a cyclical business and it is very cyclical. Early in a cycle you want to back young companies at bargain prices and enjoy the demand for those companies as the cycle takes hold. Late in a cycle you want to back established companies that need a "last round" to get to breakeven and you can get that at a bargain price compared to what others paid before you. I've been in the venture capital business since 1986 (that was a down cycle) and I've seen this happen at least three times, probably four times now.

There's another important reason why seed and startup investing dries up in down cycles. Venture firms don't need to spend as much time on their existing portfolio companies when things are going well. A rising market hides a lot of problems. But when things go south, they tend to become inwardly focused. I believe we are headed into a period where venture firms will spend more time on their existing portfolio and less time adding new names to it.

This has gone on longer than I generally like in a post. So I'll end by saying that I don't think we are in a "depression" in startup land. We are in a down cycle driven by a bad global economy. I think the web and information technology is one of the few bright spots in an overall gloomy economic outlook. So if you are working on a web technology company, be happy that you aren't working for a bank, a brokerage firm, an automobile company, or in many other industries. The tools and services that are made in the web technology business are only going to increase in demand over the next five years. But we are going to have to service that growing demand with leaner and more focused businesses and it's time to start thinking more about profitability and how you are going to get there.

Last October this community here at AVC raised almost $20,000 for classroom projects in needy schools around the country. We fully funded 43 separate projects and partially funded another 7. Almost 100 different readers participated. We won the technology category of the blogger's challenge, beating out TechCrunch, Engadget, All Things D, and many others.

So it's time to defend that victory. I have a feeling the competition is going to be tougher this year. Scoble and Julia Allison have joined the fray according to Fortune. But I am up for the challenge if you are.

I've kicked things off by giving $200 to this great project in Greensboro, NC where we are going to buy a music class 30 Xilopipes. But please do not give directly on that page.

The way we win this is by doing all of our giving via the AVC giving page. I will add some more projects to the giving page and if you have projects you'd like to see on the giving page, send me the links to them and I'll add them. I am emphasizing technology and music learning projects on the giving page but I am happy to feature other great projects for all of us to give to.

IMPORTANT: Donor's Choose, which runs this whole thing, is a great organization. When you give to a classroom project via Donor's Choose, you are not giving your money to anyone. Donor's Choose actually purchases the items the classroom needs and sends it right to the teacher. So those Xilophones will get bought by Donor's Choose and sent to the classroom in Greensboro, NC. There's a ton of technology automation involved. This is a "fraud free" way to give to needy classrooms and I love that.

I am going to add another widget to this blog for the month of October, it will look like this, but it will be a skyscraper instead of a rectangle.

So every time you visit this blog, you'll see the Donor's Choose widget and hopefully will be inspired to give some more.

That's the story. It's up to all of us now to defend the technology blog title and maybe we can even make a run at Sarah Bunting/Tomato Nation which raised over $100,000 last year. Now that's amazing.

I just hate the word "killer" in a headline. It means the author is sensationalizing the potential outcome of a new product launch. Friend Feed was going to kill Twitter, Facebook was going to kill MySpace, Google Base was going to kill Craigslist. None of these things happened. Facebook's a juggernaut. Friend Feed might be. And Google Base is probably not. But new web services don't often kill existing web services, certainly not nearly as much as bloggers like to assert that they will.

Here's what I think. Blog post aggregators are great. I use them every day, at least several times a day. I use them instead of a feed reader. And I like to read at least three or four of them, a couple for tech, one for politics, one for music, and so on and so forth.

In the tech sector, I like techmeme, hacker news, and Tim O'Reilly's retweets on twitter. Those three links sources really cover the bases for me. And behind each of them is a voice. In Hacker News' case, it's Paul Graham and the Y Combinator community. In Techmeme's case, it's Gabe. And in Tim's case, it's Tim.

The new Google Blog Search is very nice. It's a big improvement to the old one. But it's like a lot of Google's services. All algorithm and no "voice". It may attract a mainstream audience the way Google News has and that's fine. But for me, it's not close to the value that I get from aggregators with an angle. It's like a mainstream newspaper versus a blog. On one you get the news and on the other you get insight.

Obamaâ€檚 mantra of change, since adopted also by McCain, is not enough for me. We need more than change. We need a full-blown turnaround plan and a leader capable of executing it. Iâ€檝e moved beyond the splurge because like it or not, we are going to get some legislation out of Washington that allows the government to purchase and/or backstop the â€渃rap assetsâ€� that are clogging up the arteries of the financial system. My head is around whatâ€檚 next.

Yesterday, I was visited by a reporter named Nathan Lipson from The Marker, an online financial publication owned by Haaretz, the WSJ of Israel. As an aside, I was somewhat involved in the creation of The Marker about ten years ago, but thatâ€檚 another story. Yesterday we sat in our conference room at Union Square Ventures and Nathan turned his phone to record and started asking me some hard questions. Questions that I had not prepared to be asked and that frankly I am not qualified to answer. But that didnâ€檛 stop him and it didnâ€檛 stop me either. These are unusual times and Iâ€檝e got opinions to share.

He asked me where America was going to get the $700bn needed for the splurge. I reminded him that the legislation (at least last I looked) only authorized $350bn upfront and only $250bn of that would be funded initially. I pointed out to Nathan that if we up and left Irag this month and walked away from all of our financial commitments to Iraq and itâ€檚 security, weâ€檇 save $250bn over the next two years. We could use that money buying the crap assets, holding them through the downturn, and then flip them when things get better, hopefully for a profit. Thatâ€檚 a hell of a lot better than spending $250bn providing a police force for Iraq while they assemble an oil-funded surplus for their own account, not ours.

Nathan also wanted to know if the US needed loans from foreign governments to finance the splurge and our ongoing budget deficits. And he wondered if Americaâ€檚 government was still AAA credit. Iâ€檝e been wondering that myself. But it was eye opening to be asked that from a journalist from one of Americaâ€檚 strongest allies. If the Israeliâ€檚 are wondering if our countryâ€檚 credit is any good, what are the Chinese and the Sultans thinking?

I pointed out to Nathan that America still has the largest economy in the world, that more money flows through our homes, banks, and businesses than anywhere else. And that our government, unlike a business, can raise revenues instantly by increasing taxes. Nathan asked if raising taxes at a time like this would be possible. I answered that itâ€檚 like Mike Bloomberg raising real estate taxes 7% to close the budget gap in NYC next year. You have to bite the bullet and do it. You have to tax the people who have the most vested in your government and the most ability to pay. Thatâ€檚 why we have no choice but to repeal the Bush tax cuts and take our rates back to where they were under Clinton (when the economy was doing just fine by the way). That move alone will plug a sizeable chunk of our federal budget deficit.

Leaving Iraq and getting rid of the Bush tax cuts are not the only things we need to do to fix the financial mess we are in but they are the obvious first two things we need to do. When you are doing a turnaround, you need some early wins and those are low hanging fruit that must be grabbed quickly.

My friend Bryce posted this thought to VC Tips yesterday:

Tough times call for tough calls

Thatâ€檚 what turnarounds are all about. You must make the tough calls.

Last night Gwen Ifill asked both Joe Biden and Sarah Palin the same question that Jim Lehrer asked Obama and McCain, â€渉ow will the splurge affect your spending plans?â€� (Gwen didnâ€檛 use the word splurge unfortunately)

That is a good question. Sarah Palin dodged the question not once, but twice, and the only financial plan she could muster was tax and spending cuts. Which is the only financial plan John McCain can muster as well. I can assure you that the governments, institutions, and individuals who have loaned America trillions of dollars are not going to buy a financial plan that starts with bringing in less revenue and promises to spend less. Thatâ€檚 the plan that every Republican president has laid out since Reagan. And with the exception of George Bush seniorâ€檚 decision to increase taxes late in his presidency, the whole lot of them have simply led America down a path of budget deficits, increasing indebtedness to foreign governments and institutions, and to this day of reckoning that we are now facing.

Joe Bidenâ€檚 response was better but not good enough. I understand that Obama, McCain, Biden, and Palin are all trying to win an election and a tough, honest, turnaround plan probably is political suicide. But at least Biden was honest enough to admit that a lot of the things he and Obama want to do will have to wait or be scrapped entirely.

When you are doing a turnaround, the number one thing you need to do is get everyoneâ€檚 confidence back. You need to get the employeesâ€� confidence back, you need to get your customersâ€� confidence back, and you need to get your shareholdersâ€� and your lendersâ€� confidence back. You have to be honest about the mess you are in and be credible about what itâ€檚 going to take to get out of it.

The mess we are in right now in America is that we are spending too much and not taxing enough. We are an unprofitable business with a balance sheet that is starting to worry our creditors and investors. If you could short America, the sharks in the market would be all over that trade. We are not much better than Lehman, Bear, Merrill, Wachovia, and Wamu.

We have global ambitions that we cannot afford but we still pretend we can. We have tax revenues that do not cover our spending. And we donâ€檛 have the will to cut our spending. And in many cases, we cannot afford to cut our spending. We should not cut our spending on infrastructure, we should increase it. We should not cut our spending on finding cleaner and smarter forms of energy, we should increase it. We should not cut our spending on education, we should increase it. We should not live with the terrible health care system we currently have, we should fix it. And we continue to spend money on things like tax breaks for oil companies and subsidies for farmers that mystify me and most Americans. And we spend a lot of money fighting vices like drugs, prostitution, and gambling when we should simply legalize them, tax them, and regulate them and turn them into a profit center.

There are those who say you canâ€檛 cut spending and raise taxes in a recession - that doing that will lead to a depression like we had in the 1930s. I donâ€檛 think so. I think the global economy is in an expansionary period driven by expanding wealth in the developing world and the power of technology to drive commerce and communication. And our problem is we are stuck in the last century, fighting the last war when itâ€檚 long over. We need to get our house in order, play in this global economy with a stable and sustainable business model. And we donâ€檛 have that now. And we must get it in place soon.

I donâ€檛 know squat about government and Iâ€檇 be a terrible politician. I am not suggesting I could build the turnaround plan or execute it. But I am saying that is what we need. We need way more than change. We need our leaders to make some very hard and unpopular decisions that will get us to a place where we are once again in control of our own destiny. Because right now we are not in control of our destiny. And thatâ€檚 frightening to me and most Americans.

We've donated almost $3,000 in the first three days of the month. If we keep giving at this rate, we'll beat the $20k we donated last year. But unlike last year, we aren't going to run away with the tech category. We've got serious competition.

Need I say more? If you want to help some teachers and kids in needy schools, and help us win this thing, go visit the AVC giving page and donate.

I visited the New York Times today and saw this at the top of the front page:

For those of you with good eyes, that's my avatar on the upper left and that top banner is something that is called TimesPeople. It's a profile based service for sharing stories with friends and colleagues on the New York Times website. TimesPeople also has a facebook app which I installed today.

This is an important step for the Times to take. Back in March 2007, I wrote a post called "All Software Should Be Social" where I said:

I can barely use software that doesn't have other people in it. I wantprofiles and faces and connections. I want to see what others are doingwith the software. I want to connect and be connected.

While I am sure the people who work at the New York Times think of themselves as a content company first and foremost, what goes on at the New York TImes website is as much about software as it is about content. And slowly but surely the Times online is becoming social software. That's a big deal.

TimesPeople has been talked about a bit in the blog world since mid-June but honestly I had not used any of the tools until they magically appeared at the top of the home page this morning. My favorite of the tools is the "Live Feed" shown below:

Talk about the feedization of the web user interface, we've got one now running at the New York Times. I think it's great to see the Times embracing social software concepts like profiles and feeds. I hope they take it a step further and connect all of this to the social web, beyond Facebook, to blogs, comments, tweets, and so on and so forth.

If you want to give it a try, go to the home page of the New York Times, look for the bar a the top, sign up, and connect to me. I am fredwilson.

I spent 15 years in the States and left in 2006, precisely because I saw the horrifying decline of this great nation. Don't you think, though, that before a turnaround plan you need to do a SWOT analysis? Here's a quick stab at it:

Strengths:
Bar none, the most diligent, hard-working, dedicated, disciplined and focused people in the world. I've lived on three continents and know what I am talking about.

Weaknesses:
1. Decay of rationalism. Right there is your biggest problem. The War on Science; the ascend of bullshit artists and religious nutjobs; the contempt for reality, facts, numbers, data that has pervaded the business, financial and political elites.
2. Very poor lifestyle energy-efficiency, especially in transportation
3. Unsustainable military spending and engagements
4. Proliferation of a "heads I win, tails someone else loses" model in the economy and finance, also known as "Privatization of profits, socialization of losses" (And yes, many venture capitalists can be blamed for that, too.)

Opportunities:
Given the long traditions of rational pragmatism in America and the nation-wide consensus that things need to be changed, there is a real opportunity here for bold and rational changes. In that regard your country is extremely lucky that it will have as a President someone who is universally acknowledged as the "deepest thinker to ever get in the Oval Office". I know this may sound crazy after the past eight years, but being smart and thinking is actually NOT a bad thing.
(And yes, Clinton was also amazingly brilliant, however, he was not really a "thinker". He would rely on his intelligence to mostly wing it and go by feel, instead of through a formal analytical thought process)

Threats:
Being too late to avoid a profound decline.

Finally, I am a bit ambivalent on the debt thing. Yes, I am worried that my children (all of them U.S. citizen) would have to pay it down, however, as pointed out, you would be crazy not to finance your country's prosperity at such low financing costs (3-4%).

Originally posted as a comment by Krassen Dimitrov on A VC using Disqus.

My friend Tom Watson has written a book on "peer to peer philanthropy" called CauseWired. It's not yet out but you can pre-order it at that link.

Tom gave me a preview of it and I am going to blog some quotes from it that relate to Donors Choose throughout the month of October as a cool way to remind readers of the Donors Choose Bloggers Challenge.

NOTE: We've fully funded nine out of the initial eleven projects on the AVC giving page. Thanks! I've added five new projects we can fund and they'll appear on the giving page shortly. Again, if there are projects you like the sound of, please alert me to them and I'll add them to the AVC giving page.

My friend Howard was visiting me a few weeks ago and he said to me "free is over, I am only investing in services that customers pay for". He said "freemium is dead". I reminded him that freemium is a paid model, but he wasn't buying it.

There's a movement afoot by investors to back web services with a real business model instead of the pervasive "give it away for free and hope for the best" approach that's been in favor for the past four years. Don't count me in that camp, but the movement is happening with or without me.

As I noted in the comments to Roger's post, we've struggled with early stage investments in enterprise oriented web services. Sales to enterprises often require expensive sales teams and it's much harder to know if you've nailed the product/service with feedback from a limited number of enterprise customers.

It's much better, in my opinion, to go with the freemium model, give a version of the service away for free to all comers, get a lot of users, get good market feedback, then develop a premium version of the product/service for sale to enterprise customers. If your free version is popular with a lot of users, your customer base is the target for the upsell and you might be able to live without an expensive sales force initially. And, of course, keep your costs really low until you start to get revenues.

In summary, freemium is far from dead, in fact it may be the business model de rigueur.

Image by Getty Images via Daylife

The Treasury, the Fed, and Warren Buffet have been the only buyers in this meltdown and have been largely focused on financial companies. Meanwhile the rest of the market has gone down 30% year to date and very few, if any, stocks have been spared.

What do we look for next? Does the market just keep going down endlessly? What will bring this to an end? Clearly not government intervention. While possibly necessary (we'll see), the splurge has clearly not put an end to selling in the markets.

We need to see more Warren Buffets stepping up. And my bet is they will eventually. And they will be corporations buying back their own stock, large private equity and buyout firms doing going private transactions with all equity cap structures, and possibly foreign companies seeking bargain acquisitions in the US.

What's interesting, as Howard pointed out repeatedly on twitter yesterday, is that corporations have not yet stepped up to stock buybacks.

Microsoft announced last month that they plan to buy back $40bn in stock over the next five years. They have $25bn in cash and short term investments and are currently earning about $20bn per year in operating cash flow. Microsoft's stock is trading at about 11x operating cash flow. It's market cap is $227bn and institutions own 60% of it, meaning there is about $130bn of $MSFT stock in the hands of institutions. If Microsoft wanted to, at the current price, it could purchase all $130bn of that stock from institutions with its current cash balance plus operating earnings over the next five years. If Microsoft is confident about its business prospects going forward, it should be an aggressive buyer of its own stock at these levels. And maybe it is. It's stock is only down 3% in the past month while the S&P has been down 15%.

What about Google? $GOOG is down almost 50% year to date and the company is valued at $115bn. Institutions own roughly 60% of its stock, roughly $70bn of it. Google is earning about $7bn of operating cash per year and has $13bn of cash and short term investments on hand. So it would take Google longer to buy back all the stock institutions own, more like eight to ten years. But still, that's a lot of purchasing power and the market is asking the same question Howard did yesterday.

The silence of $goog into this meltdown is just as deafening with all their cash. I am not going to be run over.

In bad bear markets, like we are in, investors look to corporations to defend their stock and Google has not yet shown an interest in doing that. That's something to look for. When you net out Google's cash, it's trading at $100bn, a mere 12x operating cash flow. That's value territory.

Let's look at News Corp. Rupert Murdoch's company, the best managed media company out there, is down 56% in the past year and is now trading at a mere six times operating cash flow. News Corp is also about 60% institutionally owned. So that means Rupert could buy out his external investors with four years of his cash flow. But we have yet to see him do that.

I could go on and on. Apple is worth $67bn after you back out the $20bn of cash they have on hand. It earns over $5bn a year. That's another value stock right there.

And those are some of the best US companies right there. The list goes on and on. Starbucks trades at 7x cash flow, Walmart trades at 10x cash flow, AT&T trades at 4x cash flow, and Comcast trades at 6x cash flow.

You could buy all of America's best corporations for somewhere around eight to ten times cash flow. Someone is going to start doing this.

Maybe it will be the large private equity and buyout firms who have been stuck on the sidelines while the debt markets have been closed for the past year. If good companies get cheap enough, they can buy them with their cash, without debt, and own them for however long the markets take to work the issues out.

Or foreign companies will come in. I am particularly interested in the asian companies. Will a company like Dell be an attractive acquisition for an asian manufacturer flush with cash? It's only trading at 5x cash flow after you back out the cash on hand.

I read this history of the panic of 1873 yesterday after seeing a twitter post by Mary Hodder that referenced it. It's worth reading. There are two really interesting points in it. The first is that panic was precipitated in some measure by the US' emerging prowess as a player in the global economy and a lower cost one at that:

Wheat exporters from Russia and Central Europe faced a newinternational competitor who drastically undersold them. The19th-century version of containers manufactured in China and bound forWal-Mart consisted of produce from farmers in the American Midwest.They used grain elevators, conveyer belts, and massive steam ships toexport trainloads of wheat to abroad. Britain, the biggest importer ofwheat, shifted to the cheap stuff quite suddenly around 1871. By 1872kerosene and manufactured food were rocketing out of America'sheartland, undermining rapeseed, flour, and beef prices. The crash camein Central Europe in May 1873, as it became clear that the region'sassumptions about continual economic growth were too optimistic.Europeans faced what they came to call the American CommercialInvasion. A new industrial superpower had arrived, one whose low coststhreatened European trade and a European way of life.

But possibly even more interesting was who emerged as the winners of the panic of 1873:

The long-term effects of the Panic of 1873 were perverse. For thelargest manufacturing companies in the United States â€� those withguaranteed contracts and the ability to make rebate deals with therailroads â€� the Panic years were golden. Andrew Carnegie, CyrusMcCormick, and John D. Rockefeller had enough capital reserves tofinance their own continuing growth. For smaller industrial firms thatrelied on seasonal demand and outside capital, the situation was dire.As capital reserves dried up, so did their industries. Carnegie andRockefeller bought out their competitors at fire-sale prices. TheGilded Age in the United States, as far as industrial concentration wasconcerned, had begun.

We have yet to see the Carnegies, McCormicks, and Rockefellers of China, India, Russia, and the Middle East emerge as capitalists on a global scale. But with prime assets like I mentioned above on sale at bargain basement prices, it's just a matter of time until we will.

Eventually this market meltdown will be over and stability will return. But things will not be the same. There will be big winners and big losers. We have already seen many of the big losers emerge, but we have not yet seen the big winners emerge. I think we know where to look for them though.

My partner Albert calculated early last year that it takes about 1/10th the hardware, software, bandwidth, storage, and other expenses to build a web service compared to what it took in the 99/2000 time period. That was just as services like Amazon Web Services, Google AppEngine, 10Gen, and other "cloud computing" platforms emerged as real options. It's gotten even less expensive now. As Albert pointed out in his cloud computing talk at Web2NYC, the first 5mm page views on Google AppEngine are free. It doesn't get less expensive than free.

It's a lot less expensive to build, deploy, and scale a web service than it used to be. Open source software makes it less costly and easier to build an app. Tools like Get Satisfaction make it cheaper and easier to provide support for a web app. Blogging and Twittering makes it cheaper and easier to get the word out about your web app.

There's been plenty written about how all of this threatens the venture capital model. A two person team can go to Y Combinator, get a little bit of capital, work for three months, launch a web service, and be in business. It's not just Y Combinator, there's TechStars in Boulder, Seedcamp in London, and a bunch of other such programs.

I don't think this model threatens venture capital at all. I explained why in this post back in December 2006. We've embraced the "less expensive" model in a big way with investments like Delicious, Tumblr, Disqus (Y Combinator), Zemanta (SeedCamp), 10gen, Adaptive Blue, Etsy, Outside.in, and Pinch Media. That's about half of our current portfolio and in each case, our first investment was small, the team was small (less than 10), and the monthly burn was well below $100,000 per month. In some cases, the burn was (and still is) well below $50,000 per month.

On Tuesday we had our Union Square Ventures portfolio together for our annual portfolio summit. During that meeting I pointed out that a number of our portfolio companies have figured out how to build web services that reach 10mm to 20mm unique visitors per month with a total team of less than five people. Tumblr is probably the best example of this. David and Marco are still the only developers at Tumblr. They have a customer service person and several part time members of the team. Tumblr powered blogs reach about 20mm unique visitors per month. There are about 500,000 Tumblr users who collectively generate 150,000 new posts per day. Tumblr is a big web service with a tiny team. It is incredibly capital efficient.

My question to the rest of our portfolio was simple. What can the rest of you learn from this approach? How can you get more capital efficient? And I'll ask the same thing of all of you who read this blog. Can we harness this massive reduction in capital requirements to figure out how to survive and thrive in the coming downturn?

I received an email this week from the CEO of a company who I have known for a long time. He and his senior team made some adjustments this week. They let a few people go, closed all of their open hiring slots, cut off low ROI marketing programs, froze salaries, and made several other adjustments. All in all they cut between 5 and 10% of their annual operating expenses. And this is a profitable company that is growing and doing well. That's what good experienced managers do in times like this. That company will continue to grow, but they know growth will slow, the sales cycle will be longer, and they want to be sure that they will remain profitable.

Much has been written about how the "nuclear winter" of 2001-2003 led to many of the innovations we've been tapping into since. Clearly the capital efficiency revolution was fanned in the nuclear winter. When capital is scarce, smart people figure out how to do more with less. So first and foremost, let's all take advantage of this capital efficiency to get our costs down and build businesses with even more operating leverage. And hopefully there are new tricks out there that we can use to get even more capital efficient.

It's never pleasant to face the truth about darwinian capitalism. The bad companies die. But that harsh fact forces all of us who want to survive to evolve, adapt, and innovate. The time has come to leverage capital efficiency, not just to make it easy to do a startup, but to survive a downturn. Capital efficiency has found its moment and we must embrace and extend it.

Over the past week (eight plus days actually), I've been promoting this Donors Choose Giving Page on this blog and twitter. During that period, 26 people have given a total of $6055. We are basically on a path to raise about as much as last year when almost 100 people donated about $20,000 through the AVC giving page.

Given how much I've been promoting this contest, I started wondering how well my marketing efforts are converting.

I use bit.ly links for all my twitter posts so I can track them. The donors choose giving page has generated 422 clicks this month to date as follows:

So the posts I did on twitter using bit.ly generated a total of 422 clicks to the giving page.

I use mybloglog to track the outbound links on this blog and they tell me that there has been 145 clicks to donor's choose from this blog since Oct 1st.

So the posts I've written promoting the AVC Donors Choose Giving Page have produce a total of 567 clicks so far this month. And we've collectively made a total of 26 donations (I've made one and will certainly make more).

That's a 4.58% conversion rate. I think that's pretty good but I am not positive. I hope the e-commerce experts out there will know and weigh in via the comments and let us all know.

It would be really neat if I could put a tracking code on the Donors Choose Giving Page and share that tag with bit.ly and mybloglog and find out which channel converts better. My gut says this blog should convert better but I really have no data to proove that.

The big point is blogs and microblogs are good vehicles to drive e-commerce. We need better ways to track thesse channels.

I've always felt that Sequoia was the best venture capital firm in the business and this slide show shows exactly why that is. It's chock full of data and charts and advice. Kudos to the team at Sequoia who put it together.

I've detected a bit of irritation, and even cynicism about the motives of Sequoia, Benchmark, Ron Conway, and others (including me perhaps) in the venture capital business who have been publicly and privately advising their portfolio companies and entrepreneurs everywhere to be cautious in light of the market meltdown and the potential for a long recession.

Alan's comments are actually very good and I agree with almost everything he says. But I think everyone is shooting the messenger (ie Sequoia and to a lesser extent the other Silicon Valley VCs) who are raising the caution flag.

To Kara and others' assertions that it was Sequoia who fanned the flames of the bubble, I call bullshit. I was on a panel with Mike Moritz in the summer of 2007 and he said then:

Here's the deal. Everyone, including Sequoia, Benchmark, Ron Conway, etc, are still planning on investing in startups. They've been at it a long time and know that VC is a cyclical business. In fact, Moritz understand that the best time to invest "is when people are cowering under their desks".

But we have a responsibility as investors, board members, fiduciaries, and advisors to our companies to tell them what we've seen before, that acting now decisively will make it easier to survive tough times.

This is not some coordinated cynical attempt by VCs to talk down valuations or put entrepreneurs on the defensive. We are not spreading the contagion of gloom and doom. It's all about acting responsibly and making sure we all survive to fight another day. Because in the end, survival is what darwinian capitalism is all about.

American Express is giving away $1.5mm to the winning project and $500k to the project that comes in second. This contest ends in less than 2 days. The number of projects still in the race is now five and Donors Choose is one of them and is currently in second. If you've been reading this blog, you know that Donors Choose is an amazing organization that allows us to give teaching materials directly to needy public school classrooms.

You have to be a member of American Express (which means you have a card) to vote. I just voted for Donors Choose. It took all of about two minutes, but I suggest you have your amex card handy when you do it.

If you want to see all five finalists, go here. This community has visited the Donors Choose Giving Page over 500 times in the past week and a half. If we can generate a similar amount of votes in the Members Project, it will likely make a big difference.

Alley Insider has posted a memo that John Borthwick, co-founder of NYC-based investor/incubator Betaworks sent to his portfolio companies. There are many gems in it so I suggest you all click on that link and read it. But here are some of my favorites:

It's counterintuitive, but during an up cycle people acceptconventional wisdom, and during a down cycle people challenge it.That's good. Very good. And the cycle will winnow competition.
And if you need to make cuts, make them now. Don't cut 10% now and thenanother 10% early next year -- make the change in one fell swoop.Piecemealing your way through change kills momentum, hurts culture andthe team and is a chickenshit way to run a business.
There will be a flight to quality; this always happens.But this time I think it's going to be more than that. For TV andprint this has been an unusual year: The shift to online has beenstemmed first by the Olympics and second by the election. Butyear-over-year growth in ad spend has been down across the board (seeslide 32 of the sequoia deck, linked below). Expect the next year to beugly and different. I think spend will move online, very fast, andprint may right downhill. And people will look for ROI -- realmeasurable results. Monetizing social media is hard. Much to do here,much money/share to make/take.
Openness
I think this cycle is going to driveanother significant shift in how open and interconnected the Web is.This is good news for you, and this is bad news for the Facebooks ofthe world, who tried to replicate the walled garden strategy of Web 1.0.
Think about what happened through the last cycle. Start with AWS. In the 1990s, Internet companies had to own everything top to tail.Today you can use Amazon and other services to pop up a new box forhundreds of dollars, if that. Thats a huge shift, and it's also a shifttowards interdependency.
We are all now dependent on the Amazon's of the world for parts ofour infrastructure. I think this turn of the cycle is going to drive alot more openness. This in turn ties to the market figuring out how torapidly establish bottoms-up standards. This is about working withothers and figuring out how to do things without having to do all thework.

Thanks to John and Alley Insider for sharing this.