Posts from April 2009

Ben Straley left the comment that inspired my initial post on this topic. And last night, he left another comment that is a blog post in its own right. So here it is in its entirety. I hope you find it as useful as I do.

The following are a few more data points and comments I want to add to the discussion:

1.    Recap of a Hitwise study published on DMNews – Visits from Facebook are greater than visits from Google on a few major sites across several verticals. Are sharing and “social discovery” more important sources of traffic than search in certain verticals?  Is this a harbinger of things to come across a larger swath of Web sites?

2.    The average % of traffic from passed links varies considerably by vertical.  We suspect some of this is due to the demographics of the audience on a given site.  Also, the content found in some verticals is just much more likely to get passed along than in others.  For example, we see % of traffic from shared links on games sites well into the 25-40% range.  Sites/campaigns that promote strong offers also receive a significant % of their traffic from shared links – in the 20-30% range.  In contrast, B2B sites with more static content receive a far lesser benefit from shared links – somewhere in the 3-7% range.

3.    This is closely related to point 2 above.  Content matters most of all.  If you’ve got good content and make it easy for people to link to it, it will be shared and attract a lot of visitors.  We’ve seen this work over and over.  We tracked the pass-along of links pointing to two campaigns running concurrently for the same product (different micro-sites).  One of them had a good offer but so-so content while the other campaign had great (funny) content with no offer.  The % of unique visitors generated by the pass-along of links to the good offer was under 10%  while the traffic from the pass-along of the links to the good content was over 40%.  The campaign with good content also got significantly more traffic overall.  What data like this suggests is that the prediction you make in your deck about dollars shifting from media to content is a really good one in my opinion.  As marketers compete for the attention and interest of their audience, the best way to do this is through content that’s delivered to them via their social graph.  This already happens if the content’s good.  There just isn’t enough of it.

4.    We haven’t looked at this yet but I’m extremely curious to know what ,if any, correlation there is between the number (or %) of visitors from passed links and the number (or %) of visitors from organic search 30-60 days later or however long it takes for the search bots to update their indices.  It stands to reason there’s a positive correlation between the two metrics but we haven’t done the number crunching yet.  Could traffic from shared links be an early indicator of improved SEO performance given the proliferation of back links?

5.    The strawman you’ve built above is a good stab at an analytical framework for estimating the absolute value of shared links.  I think it makes sense to take it a few steps further.  If I’m an online marketer paying an eCPM/eCPC/eCPA for some % of traffic to my site and conversions (if I’m doing direct response), then I’m probably also encouraging people to pass-along links via Twitter, Facebook, Digg, etc.  While the reach of the latter set of activities is no doubt lower than what I can reasonably expect to obtain from a paid media campaign, I should also expect that the eCPC/eCPA for shared links is much, much lower due to consistently higher click-through and conversion rates for these links.  So, as I think about how to optimize the performance of my campaign, I need to be thinking about how I should be shifting dollars within as well as across these very different but complementary sets of activities.  Also, my paid media can stimulate pass-along which should be factored into my calculations of the true ROI of my advertising campaign.  We’re still pulling the data on this which I’ll share as soon as we have it.

6.    In most cases where traffic and conversions from shared links are high, we see a HUGE amount of activity driven initially by vertically-oriented blogs and community forums before it goes “mass social” by making its way up to Facebook for example.  In calculating true value of shared links, it’s important to factor in the niche sites and communities in your vertical.  The numbers might be relatively small but their significance huge.  In one case, we saw a niche site send several hundred visitors to a marketer’s campaign micro-site in a 2-week period.  This placed that referring site well down the list of top-referrers (something like #25).  Not very interesting.  But using our sharing tracking and measurement technology, our customer watched as the visitors from that niche site drove well over fourteen thousand additional visitors to the campaign micro-site via links shared in email, IM, on blogs, forums, and, of course, Facebook etc.  Niche sites matter.

7.    Meteor Solutions hasn’t been in business long enough to have longitudinal data to do trend analysis yet.  However, we do see sites/campaigns that cater to a younger audience receive a higher percentage of their traffic from shared links.  (See my comment about games sites above)  When I take a step back and look at my own behavior, I also have a hard time denying the fact that my media consumption habits and behaviors have changed in the last 18-24 months.  I’m getting more and more of my information from the people I’m connected to through email, IM, RSS, Facebook, and Twitter.  Also, the nature of the searching I’m doing now is much more targeted and specific.  I won’t search as much for content or something that’s happening now because I’ve probably already received the link from someone I know or follow.  The links that are relevant to me and timely find their way to me these days with remarkable efficiency.

8.    The most popular mode of sharing we see is email (25% of visits from passed links come from links shared through email), followed by blogs (18% of visits from passed links come from links shared through blogs), video sharing sites (14% of visits from passed links come from links shared through video sharing sites like YouTube), and forums/message boards (11% of visits from passed links come from links shared through forums and message boards).  Social networks account for around 9% of the traffic from shared links.  I pulled these stats from our Meteor Tracker data which does not yet contain a representative sample of sites of varying sizes across all verticals.  It isn’t yet representative of the Web as a whole

Claire Cain Miller wrote a story in Friday's New York Times about the "Money Tree Report" that is published every quarter by the National Venture Capital Association and Pricewaterhouse Coopers. The picture in the first quarter is not pretty. As Claire explains:

Venture capital firms invested only $3 billion in 549 young
companies in the first quarter, the lowest investment level since 1997,
according to the analysis, done by the National Venture Capital
Association and PricewaterhouseCoopers.

But the numbers don't jive with my own experience and so I took a deep dive into them this morning. There are detailed reports available on the NVCA website that provide a lot of underlying detail.

I decided to look at the numbers by region and focused on the three regions I know best, Silicon Valley, New England, and the NY Metro area. I went back to 2004, when we started Union Square Ventures, and charted total amount raised in each region and total number of deals in each region.

What you see when you do that is that the decline is largely happening in Silicon Valley and it not nearly as pronounced in other regions.

Here's the chart of total amount raised since 2004 by region. The 2009 number is the first quarter annualized.

What you see is that the total amount raised in Silicon Valley which was running between $8bn and $10bn per year dropped to an annualized rate of less than $5bn, a 50% reduction. At the same time, the total amount raised in New England, which was running between $3bn and $4bn, dropped to an annualized rate of below $2bn, a drop of 1/3. And in the NY Metro market, we saw a small decline, but nothing to get excited about.

The same thing is true of total deals, which are shown here:

What I think is happening is certain sectors, particularly capital intensive sectors like clean tech, are seeing very significant declines in investment activity. Claire points out that clean tech saw an 84% decline in investment activity in the first quarter of 2009. On the other hand, Internet which is much more capital efficient, saw a 31% decline.

The NY Metro market has always seen lower investments per deal than Silicon Valley and New England. In 2008, the average amount invested in a Silicon Valley deal was $10mm, the average amount invested in a New England deal was $7mm, and the average amount invested in a NY Metro deal was $6mm. That's largely a reflection of the kinds of deals that get done in each market. When money gets tighter, the sectors that are the most capital intensive take the biggest hit and that is what we are seeing in this data.

We are not seeing a significant decline in investment activity in our portfolio. And we are not cutting back on our investment activity. Since we started investing our new fund, Union Square Ventures 2008, last summer, we have closed six investments and we have one signed term sheet that has not closed. That's seven new investments in the past 10 months, a bit of an increase over our typical investment pace. And the firms that we invest with the most often seem to be equally busy.

So while the data doesn't lie, it also doesn't tell the full story. There is money out there for good ideas, particularly ones that are capital efficient and located somewhere other than Silicon Valley.

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Links are the currency of the web. That's the reason that Google is the king of the web right now. Google generates more click thrus to more websites than any other web service out there.

But I've been ruminating on a comment that was left on my earned media post a few weeks ago by Ben Straley.

We are working our connections to get a copy of that "Circuits of Cool" study but in the meantime, I've been studying refer logs of every website I can get a look at and digging deep on this search links vs passed links distinction. I want to understand if the 2-4x bump in conversion better. I also want to look at this 14-24 year old demo a bit more closely. My kids are in that demo and they start and end their day at Facebook so it is not entirely surprising to me that for that demo, a passed link is more powerful than one found on search.

To make this simple for me, I've been exclusively focusing on four kinds of links;

1) Google – search (organic and paid), driven by intent
2) Email – a passed link sent via email from one friend to another
3) Facebook – a passed link sent from one friend to many friends
4) Twitter – a passed link sent out for anyone who cares to see it

Here's a "STRAWMAN" of what a typical website (typical of the ones I've been looking at) would see from these four sources:

I capitalized the word "strawman" because I am not saying this is the typical traffic patterns all websites are seeing. I just wanted to frame the discussion so we can talk about these various links and why each is important.

From my unscientific survey, I don't see the 2-4x bump in passed link conversion. The "value per visit" column in my strawman is the conversion metric I've been focused on. I do see that email passed links convert 2-4x search. I do see that Facebook links do convert better than search but only slightly. And from what I can tell, Twitter links don't convert quite as well as search.

I don't yet have a framework yet to think about Twitter links vs search links, but the fact that email and Facebook links convert better than search makes sense to me. An email link is a direct suggestion from one friend to another. A Facebook link is a suggestion passed from one friend to a group of friends. I get that those links would be more potent than a search link. And I understand why a Facebook is a more potent link than a Twitter link since Facebook is friends following friends, and Twitter is more like blogging where people follow other people who aren't necessarily friends.

But the other important metric to look at is growth rates. That's where the power of earned media is really showing up. I am seeing links from Facebook and Twitter growing rapidly relative to search links in every refer log I look at. Right now, I am seeing Twitter and Facebook combined at roughly 20% of Google in the average refer log. Six months, that number was less than 10%. Presumably that ratio will continue to grow.

Email is also growing as more people are passing links and clicking on links in email. But it doesn't have the scale of the social media platforms because its one to one and does not take advantage of the one to many nature of most social media platforms.

This is really preliminary thinking I am presenting here. It is not based on a fully representative sample. It is anecdotal at best. But this is an important discussion. I'd love to hear from all of you, many of whom are working in search and social media marketing. If you can, I'd love to see more data like this posted on the web. If you can share data, please post it on your blog and leave a link in the comments, or a simple comment with whatever data you can share would be great too.

I suspect there will be at least one and probably several follow-up posts on this topic in the coming weeks.

This happened a bit with Google early this decade and it was certainly part of their decision to go public (reluctantly). Now it is happening to Facebook, and has been happening for some time.

There has been an active secondary market in employee shares in Facebook for the past year or two. Though I've never bought in that market (contrary to some comments on Techcrunch's post last night), I know a few people who have. That market has been in the $9/share to $11/share range which equates to something like a $4bn to $5bn valuation.

And Facebook's numbers have become public as well, partly because Mark Zuckerberg has made them public and partly because Facebook is a leaky company. Eric Eldon wrote this last night:

And Zuckerberg wrote this in his letter to employees announcing that Gideon Yu was leaving:

So while it is not quite like preparing and sending a 10Q or 10K to the SEC every quarter, Facebook is letting the world know the basics of their financial situation. We also know, apparently, that Facebook has over $200mm in cash on its balance sheet.

And now comes the news that Facebook is finally receiving offers for more funding (they have been seeking to raise additional capital for some time). And we are getting to see that play out right in the public. Arrington says the price offered is $2bn. Eldon says the price offered is $4bn.

Who knows if either of these stories is correct. I've learned from personal experience that you cannot believe much of what is written in the tech blogs, particularly about deals. When you are in the middle of these deals and you read some of the stuff that is written about them, you just have to wonder sometimes.

But when there is smoke, there is usually fire. I suspect that Facebook is getting offers to invest and they are coming in at prices that the Board doesn't like. And they are coming in at prices that are substantially below Microsoft's $15bn. That should not be surprising to anyone. First, the public markets are down 40-50% since then. Second, we all knew that $15bn price was a premium based on the strategic relationship the two companies have.

Is $4bn (the more credible number) the right price for Facebook? I don't know. It's in the ballpark. I suspect if they are EBITDA profitable now and if they will be cash flow positive next year, it's a reasonable call to wait for a better price.

Say what you will about Facebook, and a lot of people are trashing the company these days, it has 200mm users worldwide. It is building the social graph of the world. It is a very valuable and important asset. And apparently it is profitable.

It is also essentially a public company now. There is a market in their shares. The company's basic financial information is available for our consumption and analysis. And we even are getting to see it's financing play out publicly.

I suspect that Facebook is seriously considering doing what Google did and biting the bullet and going public. The IPO market is coming back (that's my gut). And at this point, there isn't much cost (other than finacial costs of being public) that Facebook isn't already paying.

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At the end of November last year, I wrote a post comparing the NASDAQ and the Dow and suggested that the NASDAQ was a much better place to be investing than the Dow. Of course, to some extent, I was talking my own game because the kinds of companies we invest in most often end up trading on the NASDAQ if they go public. The NASDAQ is full of venture backed success stories and the Dow is full of tired old multinational companies that are "too big to fail".

But this evening I decided to go back and look at how the two indices have fared since I wrote that post. Here's the chart:

In the four and a half months since I wrote that post, the NASDAQ has been up 6.2% and the Dow has been down 8%, for a net spread of 14.2%.

Now first I will say that I did not put on a trade to go long the NASDAQ and short the Dow when I wrote that post so shame on me. And further, this could all unwind in the coming months and not last.

But I think otherwise. I believe the NASDAQ has many companies that are worth investing in and owning and the Dow has many companies that aren't. If I had to bet, and like last November, it's unlikely that I will, I'd bet that the NASDAQ will continue to outperform the Dow for some time to come.

I also believe that we will see the return of an active IPO market this year. We've already seen one IPO, ChangeYou, a chinese online games company, and I think we'll see at least a few more in the coming months.

The NASDAQ is down 60% this decade and the Dow is only down 40% this decade. And yet, the NASDAQ has way more companies that are built for the 21st century than the Dow does. That's a recipe for outperformance in my book.

A few weeks ago I posted about some new features from Disqus that were rolled out on Mashable. They included reactions from around the web and the ability to "tweet this comment".

The "reactions" feature is now available in the comment section of this blog and I expect "tweet this comment" will be available shortly. As Disqus mentioned in their blog post on these features, they are slowly but surely being rolled out to all Disqus users.

You can see "reactions" in action at the bottom of the comments to my post the other day about Skype (which apparently is not being sold back to the founders but instead being spun off for an eventual IPO).

If you use Disqus on your blog or website, look in your Disqus settings for this and check the box to turn it on:

Mashable has had these features for about month now and Pete Cashmore has this to say about them:

Mashable posts reliably pull in Tweets and Digg comments, although of
course there’s a delay while all those comments are found and added to
the post – don’t expect it to be instant. It might also be nice to
enable replies to social media comments, treating external comments
much like those left directly on the blog.

Though it is not yet active on this blog, I am equally excited by "tweet this comment". There are some great comments left here that don't see enough eyeballs and I think if you all tweet your comments, we'll get more engagement in the comments, and even more discussion, and I am very much looking forward to that.

UPDATE: "Tweet this comment" is actually live on this blog. I didn't see the check box because I had not correctly set up my "services" on my Disqus profile (Account, Services in the Disqus admin panel). Now I have. If you are a frequent Disqus commenter, you can set up Twitter in your account the same way and tweet your comments now. Check it out and let me know what you think.

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We did a call today with our investors and one of the questions was about how the macroeconomic environment is impacting our portfolio companies. We explained that for most of our companies, there has not been much of an impact, but we are seeing several companies bring down aggressive numbers for 2009 to more realistic growth projections. It got me thinking about how those changes are communicated from the CEO to the board and investors.

Our portfolio companies experience both positive and negative changes to expectations on a regular basis. There's not a lot of art in communicating positive changes to expectations. Everyone loves good news and most people are happy to share it the first chance they get.

But there is an art to communicating negative news. Investors and board members can be spooked by negative changes to expectations if they are not handled correctly.

My first piece of advice is to share the news as soon as you have it. There is never a good reason to have information about your business that your board and major investors would want to know and not share it. You could argue that it's time consuming to communicate with investors and that it's more efficient to wait for the regular board meetings to do that. But whatever you gain in efficiency with that approach, you lose in trust and confidence building with an important group of stakeholders in the business. It's not worth it. There are efficient ways to communicate with the board and major investors. A quick email will normally do the trick.

My second piece of advice is to communicate frequently enough that you can gradually lower expectations. Let's say that you are now three and half months into the year and you now know that you aren't going to make your plan for 2009. Well that's not going to be a huge surprise to anyone given that we are in a very difficult economic environment. But if you ended the March board meeting on a high note and you start the April board meeting with "we have to take down our numbers", then you are giving your investors the feeling of being on a roller coaster and that's not what investors want to feel.

The better approach in this situation is to say in the February board meeting something like "it's too early to know how things are going in the first quarter but given the economy, we are on full alert for any negative surprises." Then in the March board meeting say something like "we are starting to see signals that we may not be able to grow as much as we'd like this year, we'll have a recommendation in the April board meeting". Then when you show up with the recommendation in April to take down the numbers, everyone will be expecting it.

My third and final suggestion is when you make a substantial change to expectations, make sure to get that change right. There's nothing that is more of a confidence killer than "death by a thousand cuts." There are some companies where you don't have much visibility. I don't like investing in those kinds of companies and I imagine that most CEOs don't like running them. The truth is most companies have a decent degree of visibility and by the time you are into the second quarter of a year, you should be able to figure out where the year is headed. So if you choose to take down your numbers between now and June, take them down to where you know you can meet them. To do otherwise is just asking for problems.

Most of this is common sense actually. The hardest part for many CEOs is executing on it. Managing a board and investor group doesn't add value to the business on a daily basis. It doesn't make the product better. It doesn't generate more revenues. It doesn't recruit an amazing team. And so on and so forth. So many CEOs blow this off in favor of the things that do move the business forward. A good board will remind the CEO that he or she has to do these things and why.

One final thought. Taking down numbers this year is not likely to get many people fired. It's expected at some level. But mismanaging the process might. In a tough year, set reasonable expectations from the start, do your best to meet them, and be proactive in managing and changing expectations and you'll be better off and so will your team and your company.

Last monday night, I spent an hour talking to a group of Columbia and NYU MBA students who participate in a group called InSITE. I like to do this once a year. I talk for about 30 minutes about venture capital and startups, then I take about 30 minutes of Q&A, then we go out to a local bar and drink beer for another hour. It's a lot of fun and it works because InSITE is a small group of between 30-40 MBA students who all are focused on careers in VC and startups. So it's a small and high quality group who aren't shy and ask good questions, both at the event and at the bar.

This year, I decided to talk for the first 30 minutes about my early career in venture capital where I learned a lot of important lessons that have shaped the way I think about venture firms and venture deals. InSITE filmed the hour long talk, but not the fun later at the bar. They broke it up into nine videos which are all on YouTube.

Here's my favorite segment (#2) which is about 9 mins long where I talk about some things I learned about venture capital at Euclid Partners (including the fact that you can't solve problems with money), where I started my career, and also a bit about Flatiron Partners and Union Square Ventures.

If you have the time and the inclination, you can watch all nine segments here.

I read with interest the Brad Stone piece in the NY Times this morning suggesting that Niklas and Janus might buy Skype back from eBay. I think this is a wonderful idea and I hope it happens.

Back when eBay bought Skype in 2005, I was skeptical that eBay was the right home for Skype. I also thought the price was in the right ballpark. I got the first part right but the second part wrong. In hindsight, eBay paid too much and bought a non-strategic asset.

Now eBay is rumored to be thinking of unloading Skype for $1.7bn to $2bn and the Skype founders are trying to round up as much as $1bn of cash (including their cash I assume) to combine with seller financing from eBay to get the deal done.

Brad says in the Times that Skype did $145mm in revenues in the fourth quarter. If that's true, and I assume it is, then Skype could do as much as $700mm to $800mm in revenues in 2009 if it is growing at a reasonable rate. Is $1.7bn to $2bn a reasonable price for a business that is doing $800mm in revenues in the current year? I don't know, it really depends on how profitable that business is.

I do know that Skpe is a great freemium business model. Most of the conversations on Skype are free because they are between Skype users. But some of them are paid and according to TeleGeography, Skype now makes up 8% of all international calling minutes. If Skype can be a $800mm revenue business this year and capture more than 10% of the international calling market, I think $1.7bn to $2bn may well be a very good price.

But the best thing about this is getting the asset back into the hands of the entrepreneurs who created it and built it. We all saw what happened at Apple when Jobs took back the reins of the company and I suspect Niklas and Janus would not be thinking about this if they didn't have a strong strategic plan for Skype.

I've said this many times on this blog and I'll say it again. Big companies mostly mess up entrepreneurial companies when they buy them and it really is best that companies like Skype stay independant and run by their founders if that is possible. And it looks like that might be possible with Skype. That makes me happy.

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