Boxee, which is still in private beta testing, is a media center solution that allows you to play back content from third-party providers like Hulu, CBS, Comedy Central, or Last.fm through a very slick interface.

Open-Source on the Apple TV

Most of the hype around Boxee right now is due to the fact that it can be installed on an Apple TV, which greatly extends the functionality of these devices.

As Boxee is an open-source program, developers can easily extend the functionality of the application and develop plugins for it. Boxee's back-end is based on the open-source xbmc media center project.

The Firefox of Media Centers

Fred Wilson calls Boxee the "Firefox of the media center software sector," and judging from what we have seen of it so far, we would have to agree.

According to Boxee's announcement, the company will use the additional funding to extend its user base and to extend the feature set of the software. Hopefully, this additional funding will also mean that we can soon see hardware with pre-installed versions of Boxee.

quick intro to boxee from boxee on Vimeo

The first big question that jumps out is: where are the profitable VC funded web ventures?

We heard from lots of gritty entrepreneurs building business the old fashioned way, keeping costs low and funding from revenue. I have done that and know how hard it is to do, so here is a big cheer of recognition for all who are going that route. I hope we can profile some in the future.

When you make it to profitability via bootstrapping, you have a wonderful independence and freedom. You have to keep clients happy every day, but you really do get to call the shots. You don't have a money guy in the boardroom. This is why many people become entrepreneurs.

But what we want to focus on here are VC funded web 2.0 ventures that got to profitability as standalone ventures.

Surely Jigsaw is not the only one?!

We chose Jigsaw to kick off this series because they were VC funded and profitable. (Many people don't like Jigsaw, it seems like a tool for spammers, but that is another story and a bit out of date from what we can see). The point here is, what other Web 2.0 companies have been funded by VC and have reached profitability? Surely there must be some more? Did all the 2003/2004 era Series A funded ventures either exit or fail? Or are some on the cusp of profitability, with enough investor cash to get them there? Even with revenue forecasts that may need to be to brought down as a result of a slowing economy?

Please tell us about any VC funded web 2.0 ventures that are profitable today standalone. Here are the hurdles:

1. "VC Funded". A minimum $3m Series A from a recognized VC fund.
2. "Web 2.0 venture". We will be as loose as possible in this definition. In fact, any web venture funded after 2002 is OK as any venture after that date is likely to have some features of user generated content, social media, SaaS or other 2.0ish characteristics. "Web 2.0" is like the definition of art "I cannot define it, but I know it when I see it and I know what I like".
3. "Profitable". On this criteria we will be tight. We mean the Warren Buffet definition of profitable, which means "free cash flow", otherwise known as "owner earnings". It is really simple and you cannot fake it. You either get more cash from operations (cash from investors does NOT count) than you spend, or you don't. Accounting conventions like EBITDA don't count. More on this later.
4. "Today". That means this quarter. Even better last quarter. Or more than a few quarters.
5. "Standalone". Skype maybe profitable within EBay or YouTube within Google. That is a separate subject. We are looking for standalone ventures that have not exited. They made it to profitability on their own.

Why Free Cash Flow Is The Measure

EBITDA (Earnings Before Interest Taxation Depreciation and Amortization) is an accounting convention that is used a lot in the private equity business. "Private Equity" used to be known as "Leveraged Buyout". The L word is not in vogue today (Ed, using understatement as humor seldom works). Seriously, Private Equity deals have been based on their ability to raise debt at low cost. That game is over for a while.

EBITDA is supposed to be a measure of how much debt you can put on a company. It is usually applicable to well established businesses in traditional industries. Recently it has been used in relation to Facebook and other large web ventures. This is where it gets interesting for web entrepreneurs and their investors.

Is Facebook Profitable?

According to a report in BoomTown in January 2008, based on an interview with Mark Zuckerberg:

"Revenue for Facebook for 2007 will be $150 million, as has been widely reported. But for 2008, Zuckerberg projected revenue to be increased to $300 million to $350 million.

More interesting was the news that Facebook would spend $200 million next year on capital expenditures, which is a whole lot of servers.

By the way, more expenses, noted chatty Mark, those employee levels would rise to more than 1,000 in 2008 from 450 now.

And Zuckerberg also said the company's EBITDA-earnings before interest, taxes, depreciation and amortization and a number widely used by Wall Street as an indication of operating performance-would be $50 million in 2008.

That means the company would have a negative cash flow of about $150 million (EBITDA minus CapEx), rather than break even, as it does now."

Is Facebook profitable today, in the last quarter of 2008? Well it is almost certainly EBITDA positive, butthat is not the true measure. The answer is "maybe". If Facebook is hitting $300m to $350m this year (2008) and their operating costs have doubled from $50m to $100m (which is reasonable assumption as they said they would more than double employees from 450 to 1,000), they would have EBITDA of $200m to $250m. That sounds pretty good. But after $200m in Capex for servers, they are only breaking even on free cash flow at the bottom of their revenue forecast range. And, given the failure of Beacon and declining CPM rates on social networks, my guess (it is only a guess) is that Facebook revenues will be at the lower end of their forecast or even below.

But enough about Faceboom. The more generally interesting business issue highlighted by their story is that Capital Expenditure ("Capex") does matter for web ventures. In fact, it is a mission critical issue, with good software design at the heart of the issue.

Servers Are An Operating Expense For Web 2.0 Ventures

With user generated content, you don't pay people to create content that you use to generate advertising revenues. So your operating costs are R&D (developers), advertising sales and all those senior management overhead lumped into the General & Administrative (G&A) cost bucket. I don't really understand what 1,000 people do at Facebook, but that is another story.

As you scale, people costs should not scale. Servers do need to scale. That is where Facebook must be suffering from some sloppy early software design. That is fine, the initial win is all about user traction and a scalable design is secondary. But today it is a critical issue for Facebook. It is also a critical issue for any venture starting out today. Spending a few bucks early on to get a scalable architecture seems sensible. This is not rocket science, any competent software architect knows how to do this.

Should Servers Be Outsourced Or Leased?

Capex sounds old-fashioned. Why buy servers when you can lease or rent? If Facebook leased rather than bought servers, they could have positive free cash flow even at the lower end of their revenue forecast. The credit crisis will make leasing a bit tougher. Renting via Hardware As A Service (HaaS) is the ideal route for startups you benefit from the scale of the HaaS vendor. But it is unclear how the economics scale for the buyer? It is unclear whether Amazon AWS or any other HaaS is a serious option at Facebook's scale (or the scale of any VC funded venture that is nudging profitability).

Scale Or Profits - The New Choice?

It seems that ventures that can see a fairly quick way to profitability, simply ignore the VC route. The feeling seems to be mutual. VC look at a lot of the businesses that got to profitability and say "too small".

So, you have to choose either big and unprofitable or small and profitable? That does not make sense. If that is true, is this an issue with Web 2.0 models? Some VCs have seen this as a failure of IPO markets, meaning that public market investors won't trust unprofitable ventures promising they will be profitable in future. This "won't get fooled again" view is natural after the Web 1.0 bubble burst.

Trade sales for unprofitable ventures are unlikely to be the solution in the next few years. Not good trade sales at any rate (fire sales are technically trade sales, but they are not a good result). The buyer will be much less willing to fund losses because their investors will be less willing to fund losses for an uncertain period of time. If the venture is close to profitability it does not need to exit and nobody wants to exit in a down market unless they have to. VC have plenty of cash so this is not a financing issue, if the path to profitability is clear.

Maybe profitability for a lot of Web 2.0 ventures is really close? Maybe it just takes longer for Web 2.0 ventures to get to profitable - but that they will be fantastic cash cows when they get there?

Image: mlitty

First a bit of scope. This post is NOT about politics or what to do with your investments. Please do not comment on that, go to a site that deals with those subjects. This is about getting enough mental clarity to get back to the real job of building your business.

Second, a personal note. I came out of college in the UK in 1978 and that was a brutal downturn - there was a reason why the Sex Pistols sang "No Future!". I arrived in America bootstrapping a business in 1991, a relatively mild downturn. I helped a Korean software firm navigate the Asian Financial Crisis in 1998. I worked through the Technology Nuclear Winter of 2002 as an entrepreneur. Been there, done that as they say!

10 Point Executive Summary

1. Nobody knows what will happen next. If anybody tells you that they know, ask him if she or he also has a bridge to sell. Look at Paulson and Bernanke. You think they know?

2. None of the historical parallels work. This is not 1929, 1933, 1977, 1987, 1991, 1998 or 2001. This is 2008. You can find some parallels from many earlier crises and downturns, but a simplistic view that it is exactly like one of the earlier periods is usually accompanied by a sales pitch for a bridge.

3. Don't let Mr Market jerk you around. "Mr. Market" is a Warren Buffet term. He uses it to contrast the reality of a company's earning potential with the wild swings of the market. The two are totally unconnected. Don't go crazy trying to connect them. If you want to be a trader, understand the day to day mood swings of the market and bet on them. If you want to build a business, ignore them.

4. Avoid the obvious bomb craters. We don't know what will happen, but we do know that it is not a good time to sell stuff to banks or to consumers in the US. You may have a really good contrarian play to sell to these problem markets, but if your plan has any shred of "business as usual" then forget about it.

5. Focus on today and the big picture, ignore the rest. Today is about the immediate stuff you have to get done to stay in business, to deliver to clients, collect cash and so on. The big picture is looking at how the world might look like 10 years from now and build towards that. We cannot know what will happen next week, month or year. This medium term view is totally unknown. However it is extremely likely that what is happening today will change the world in fundamental ways. We might see the possibility for a very valuable business in that changed world. Most of these will be trends that were visible before the Great Credit Crisis, but which become massively amplified and accelerated by the crisis.

6. The normal startup failure rate will apply again. Yes 80% of start-ups will fail. They always do and always will. This rule is occasionally suspended during highly optimistic times, such as those we have just gone through. But it is only suspended temporarily during those times. Start-up failure is normal. That is the creative destruction that makes for a dynamic economy. If it is your start-up that fails, pick yourself up and try again (or decide that you really don't want to be an entrepreneur). If it is your competitors failing, stick with it and be the "last man standing".

7. This not a good time for new financing or exits. As an entrepreneur, raising money and selling are the two times when Mr. Market matters to you. Valuation does matter at these times and only at these times.The reality today is that nobody will raise money or sell out, who does not need to. So any deals are likely to be fire-sales. That may be your reality, in which case get it done and move on. If you don't have to raise money or sell, don't spend another nanosecond thinking about it.

8. Start your most audacious venture now. This is counter intuitive but real. No VC will back a small plan. They never have in the past and won't now. When the world changes in big and fundamental ways, big and fundamental opportunities arise. Ten years from now it will be obvious what those fundamental changes are. Great entrepreneurs spot one of those trends before it is obvious. The beauty of a big and audacious plan is the next few years won't matter to you. Build in tough times, launch when the worst is over, exit when it is boom time again.

9. There are fewer safe havens. The natural instinct is a flight to safety, but in a severe downturn many previously safe havens may vanish. The old line "this start-up looks too risky, I think I will stick with the safety of a big old bank that's been around for ages" has a hollow ring today. In this environment, betting on something you can actually see and understand - you, your partners and your plan - may be a lot less risky than getting onto that really safe ocean liner just before it hits an iceberg.

10. If you believed the 'fun and easy' myth, get out now. During the last few years, there have been many stories of apparently effortless success, with beaming young just-cashed-in entrepreneurs on the front cover. In some cases people are really lucky and luck may be on your side. But most businesses are a tough struggle followed by that "overnight sensation" period when you are suddenly "hot". Building a business can be fun and rewarding along the way, but they are almost never easy.

One final note of optimism. Tough times create great music. In boom times, music tends towards saccharine and bland blah. Delta Blues, Punk and Motown did not come out of easy times.

Image credit: tantegert