Posts from 2012

NY Enterprise Technology Meetup

Next tuesday evening, I am giving at talk at the NY Enterprise Technology Meetup. I will talk about networks in the enteprise. I plan to use USV investments like WorkMarket and Pollenware to discuss how entrepreneurs can use networks to build powerful enterprise oriented businesses.

If you plan to attend that meetup or if you are interested in networks and enterprises, I have created a hackpad where you can introduce suggested topics for me to touch on in my talk. This hackpad is totally open and anyone can contribute to it.

I know that the meetup is almost completely sold out and that many of you who might want to attend will not be able to. I hope the meetup organizers will record the talk so I can post it here for everyone to see after the fact.

#enterprise#VC & Technology#Web/Tech

MBA Mondays: Revenue Models - Advertising

My friend Darren Herman helped me think about this post. He sent me this deck along with some thoughts. This slide from Darren's deck is a good place to start this discussion:

Monetizing with ads
It is true that the vast majority of consumer web apps have been and continue to be monetized with advertising. On mobile that is less true, but becoming more true every day.

Mobile app revenue

There are all sorts of ways to generate advertising revenue online. Here are the entries under the advertising category in our revenue model hackpad:

Various ad models
This list is most certainly not exhaustive but it does cover the most common advertising approaches and you can see how many there are on the Internet. There has been a lot of innovation in this sector in the past 18 years since the first banner ads were created and sold.

The famous Luma Partners slide shows just how complex the online ad market has become over time.

Luma partners slide

And this market map is by no means exhaustive either. Online advertising is a big and complicated business.

I would break up advertising into two big buckets; ads that are sold and ads that are bought. The first is a relationship business, requires a direct salesforce or a salesforce that you can tap into, and will bring a higher revenue per impression in most cases. The latter is a data business, automated by machines and software, is a volume game and will bring a lower revenue per impression in most cases. Much of the online advertising market is moving inexorably toward the latter category, for good and bad.

The reaction to this move away from high value "brand" advertising to commoditized and programmatic advertising is native ad formats and advertising models. I have written about native advertising at AVC before and am a big fan of this approach. Examples of native advertising are promoted tweets on twitter and radar and spotlight on tumblr. In both examples, the ad unit is the same atomic unit of content as the users create in the service. I think we will see more and more of this as the value of the impression is driven lower and lower in the programmatic model.

When you think about an advertising revenue model, you need to think about one of two things; scale or niche. Scale means hundreds of millions of impressions a month or more. Niche means a valuable audience that advertisers will pay a premium for. But even if you are going for the niche approach, you will still need to have a lot of impressions. Here is why:

Advertising is sold many ways, including:

CPM: Cost per thousand impressions

CPE:  Cost per engagement

CPA:  Cost per acquisition

CPC:  Cost per click

Sponsorship:  Fixed cost for a fixed program

[thanks to Darren for that list. I took it directly from his email to me]

With the possible exception of Sponsorship, all of these methods will converge to the same number. For example if you sell a click for $1/click, and one out of every hundred page views turns into a click then you are selling a page view for $1/100 (1 cent), and that turns into a $10 CPM (10/1000).

CPMs have been in decline for years on the Internet. That's because the Internet keeps on creating more and more inventory. There is no scarcity. And as a result the supply/demand clearing price just keeps going lower and lower. Ten years ago, a $10 CPM was acheivable. Today, you will be lucky to get a $1 CPM. A $1 CPM means that 10 million impressions will generate $10,000. That's enough revenue to sustain a one or possibly two person business but not much more. You will need at least 100 million impressions and ideally more than 1bn impressions per month to have an interesting advertising supported business at scale. 1bn impressions is a lot of users using your service a lot.

Niche will work at slightly less scale. If you have a unique and valuable audience, you might be able to get a $5 to $10 CPM. So you will need 100 million impressions per month instead of 1bn impressions. That's still a lot of super valuable users engaging a lot.

If you are going with a scale model and you have a service that has that level of inventory to sell, then you have the choice of building a sales force inside your company or using a third party to sell your inventory. You don't need just one third party. You can use many of them. That's where the Luma slide (above) comes into effect. There is an entire industry built to take the inventory you give to a third party and put it through endless machines and algorithms before it is shown to an end user. I will not get into this in more detail here but Darren's slide deck, which I linked to above, has some good information on that. When you use a third party to sell your advertising you can give away anywhere from 50% of ad revenue to 20% of ad revenue. Most commonly it is somewhere in between.

If you are going with the niche or native approach, you will need your own sales force and you will need to hire a leader for that sales force (a VP Sales or Chief Revenue Officer) who can build and lead that team. The sales leader is a critical hire. There are people who do this for a living, who really understand how to put a team together and generate advertising revenue predictably and reliably, and they are highly compensated and are worth every penny. Do not skimp on this if you are building your own sales force. You may choose to build your own sales force if you are going with a scale model, but you don't need to do that right away.

In the interest of keeping this post a reasonable length, I will end here. I highly recommend diving into the comments where we will discuss and debate this post. I will conclude by saying that an advertising model is a viable revenue model option if you are building a service that has a lot of scale. But if you don't have millions of users a month, you should think hard before going in this direction. There is a limited amount of ad dollars out there (except CPA budgets which are in theory infinite) and more and more services trying to tap into them every day which is why advertising rates on the Internet seem to be in permanent and systemic decline.

#MBA Mondays

Arduino, 3D Printers, Kickstarter, and BitCoin

AVC regular Dan Ramsden posted a thougtful essay on GigaOM yesterday. After I read it, I sent Dan an email and I said "do you think big beats little in this phase we are in?" Dan replied that he did and asked me what I thought.

I think David beats Goliath all day long if you are focused on the right sectors. Clay Christensen has shaped my thinking on this. You just need to look for sectors where the incumbents can't and won't adapt to new emerging models and where the innovators look like and are being derided as "toys".

I told Dan that Arduino, 3D printers, Kickstarter, and Bitcoin are four "toys" that I think will radically reshape some big industries in this decade. Of course it may not be Arduino as we know it. Or it may not be Bitcoin as we know it. I will avoid commenting on Kickstarter since we are investors there.

The leaders in 3D printing today may not be the leaders in 3D printing tomorrow. All you have to do is look at the big guys suing the little guys to know that there is a lot of innovation and change afoot in 3D printing right now.

I have said this before. The more I hear people laughing at, deriding, and dismissing something the more I think it is likely to be a big deal. I remember when the common refrain about Twitter was that nobody wants to know what someone had for lunch. Well maybe they do. And maybe Bitcoin will be accepted in Starbucks someday. And maybe your phone will be made from Arduino components and the cover will be 3D printed. And maybe the movie you are going to see in the theater today will have been funded on Kickstarter.

Maybe is a powerful word. If maybe represents something big and powerful then it is worth chasing that maybe. And it is worth funding it too.

#VC & Technology

Feature Friday: Archive All

I just went and archived all the unread email in my inbox. I do this from time to time. It is the only way I can get to inbox zero. In the past I have called it email bankruptcy, but since I am archiving the email, it's not really bankruptcy. It is more like out of sight, out of mind. It's still there but just not begging to be opened.

Actually what I do is archive all mail in my priority inbox, keep all my starred emails, and permanently delete all mail in the rest of my email inbox.

I figure if I haven't replied in a week, I am never going to reply. So it's out of my inbox and into the archives or into the trash.

It's a great feeling to do this. But gmail doesn't make it easy to do. You can archive a page full of email (50 at a time). Or you can create a filter and archive all the filtered mail. I would love a button that says "archive all mail in your priority inbox" and another that says "delete everything else". But I don't expect google is going to give us those buttons any time soon. Maybe google labs will.

When you have archived all the mail in your priority email, you get this message:

Inbox zero

Woohoo! is exactly how I feel. And you can get that feeling without actually reading all the important messages in your inbox. Which is why Archive All is the feature of the week this friday

#Web/Tech

A Blog Post Written On The Mobile Web

That was a great discussion yesterday. It was everything that makes this blog and community so helpful to me.

Brandon’s comment which got up voted something like 100 times and is now permanently anchored at the top of the thread makes the excellent counterpoint that mobile is just a channel and suggests that desktop/web will remain the dominant UI for many things on the Internet.

I would like to challenge that notion mostly to think out of the box. Could and will mobile be good enough for everything we do on the web?

My gut tells me it will and I am trying to live a mobile first web second existence as much as possible to test that instinct.

I am writing this post in the chrome browser on my Nexus 4. It works fine for writing but as you can see hyperlinking is nearly impossible in typepad’s mobile web app. I would imagine WordPress has a native mobile app that works a lot better.

As Paul Graham says if you work in the startup world you should live in the future and see what is missing. I think that is great advice.

#mobile

Rethinking Mobile First

I wrote the Mobile First Web Second blog post a few years ago. In that post, I talked about apps that were designed to be used on mobile primarily with the web as a companion.

There have been a number of startups that have taken that approach and done well with it. Most notably Instagram, and also our portfolio company Foursquare. It has become a bit of a orthodoxy among the consumer social startup crowd to do mobile first and web second.

But is it the right thing to do? Vibhu Norby, co-founder of Everyme and Origami, wrote one of the most thought provoking posts of the past month arguing that mobile first is a recipe for failure for most, if not all, startups.

Vibhu makes some excellent points:

All in all, mobile service apps turn out to be a horrible place to close viral loops and win at the retention game. Only a handful of apps have succeeded mobile-first: Instagram, Tango, Shazam, maybe 2 or 3 others.

and

You have an entirely different onboarding story on the web. You can test easily, cheaply, and fast enough to make a difference on the web. You can fix a critical bug that crashes your app on load 15 minutes after discovery (See Circa). You can show 10 different landing pages and decide in real-time which one is working the best for a particular user. You can also close a viral loop: A user can click an email and immediately be using your app with you. You can’t put parameters on a download link and people don’t download apps from their computer to their phone. Without the barrier of a download + opening the app to try your product, you can prove value to the user immediately upon their first impression, as is with Google. In addition, the experience of signing up for a service is superior in every way. Typing is easier. Sign-up with OAuth is faster. Tab to the next field. Provide marketing alongside sign-up as encouragement. Auto-fill information is a feature in every browser. The open eco-system of the web and 20 years of innovation has solved many of the most difficult parts of onboarding. With mobile, that kind of innovation is lagging significantly behind because we create apps at the leisure of two companies, neither of which have a great incentive to help free app makers succeed.

and

I use my phone more than anything else. I just don’t think that an entrepreneur who wants a real shot at success should start their business there. The Android and iOS platform set us up to fail by attracting us with the veneer of users, but in reality you are going to fight harder for them than is worthwhile to your business. You certainly need a mobile app to serve your customers and compete, but it should only be part of your strategy and not the whole thing.

Vibhu also takes a stance against the ad-supported, privacy challenged, free consumer app world. I respect that stance and every time I upgrade from a free ad supported app to a premium version (advertising free) via the in app upgrade on mobile, I express my solidarity with him on that one. But as a business person, I have and will continue to advocate for a free tier with a premium upgrade (or just entirely free) because as I have written many times on this blog, I think that is the value maximizing approach and it also allows the greatest number of users to access your product or service.

But I don't want to focus on business model in this post. We are at the start of what will be a long MBA Mondays series on business models and will be talking a lot about that.

What I want to focus on is the paradox that mobile is where the growth is right now and that mobile is very very hard to build a large user base on. Everything that Vibhu says in his post is right. Building an audience on mobile is a bitch. I talked about that in my what has changed post:

distribution is much harder on mobile than web and we see a lot of mobile first startups getting stuck in the transition from successful product to large user base. strong product market fit is no longer enough to get to a large user base. you need to master the "download app, use app, keep using app, put it on your home screen" flow and that is a hard one to master

But just because something is hard doesn't mean you shouldn't try to do it. I am convinced the next set of large and valuable consumer facing services will be built with mobile as the primary user interface. You can see it in the success of Uber and Etsy this holiday season. That's where you users are most of the time. And if you don't design your products and services for what is rapidly becoming the dominant UI, you will not maximize the success of your business in the long run.

So do I disagree with Vibhu? Not at all. I think he makes some great points on why you might not want to go mobile only unless you are in the games business. But I differ in two important areas. First, I think you can't abandon mobile. It is the future like it or not. And second, I think it is critical to design for mobile first and then build a web companion. If you design for the web and then port to mobile, you will find that it is really hard to fit your UI onto the small screen. Better to design for mobile first and then build a web companion. Mobile first, web second. But as Vibhu points out, the web can't and should not be ignored. It is valuable in many many ways.

#mobile#VC & Technology#Web/Tech

FinTech Innovation Lab: December 19th deadline

For the past two springs, a great program has run in NYC called the FinTech Innovation Lab. It's an accelerator program of a different sort. They accept a half dozen innovative financial technology companies into a twelve week program where the companies get direct access to top executives in the leading financial services companies in NYC. This program is all about validating your product or service with top customers. I have talked to entrepreneurs who have been through this program and I have heard universally that the access was incredible and the feedback was invaluable.

You don't have to be two entrepreneurs in a loft to be a good candidate for this program. You can be a two or three year old startup with a large team. What's important is the need for product market validation. If you have started a fintech company and have built a product or service and want direct access to the top customers in the market, this program may be for you.

If you want to apply for next summer, please do it before December 19th, when applications close. More details are here.

#VC & Technology

MBA Mondays: Revenue Models

A revenue model is "the system design by which a business monetizes its services". That comes from Wikipedia. I like that definition. Short, sweet, and to the point.

I am going to spend the next couple months talking about revenue models for online businesses. We've started off this series by crowdsourcing a list of the various business models that online businesses use. I will use that list as an outline for this series:

Here is the outline:

– Advertising – the service is free to use, marketers pay to reach your users via advertising

– Commerce – sell something to your users, keep some or all of the proceeds

– Subscription – charge your users monhtly or annually for the opportunity to use your service

– Peer to Peer – connect people together in a network, take a small piece of the activity that ensues

– Transaction Processing – settle transactions and take a small piece of the transaction for doing so

– Licensing – charge users once upfront for the opportunity to use your technology

– Data – sell the data your service generates

– Mobile – Mobile is not a revenue model, but we will discuss how mobile presents some unique challenges and opportunities for monetization

– Gaming – Gaming is not a revenue model, but we will discuss how gaming presents some unique challenges and opportunities for monetization

Of course these categories are not mutually exclusive. Many web/mobile services will use multiple revenue models. Freemium, for example is a combination of advertising and subscription.

I will kick off this series by making an important point about focus. I strongly believe that entrepreneurs should pick one revenue model to start with and focus 100% on making that work before rolling out another one. It is very hard to execute two or more revenue models at the same time. Better to nail the first one before rolling out the second.

I am a fan of starting with the most native and easiest to execute revenue model first. Ideally it will be one that improves the user experience or at least in no way harms it.

I am looking forward to writing this series. We'll start next week with advertising.

#MBA Mondays

Nobody Is Crying For You When You Are Worth Billions

I did a talk with Bill Werde at Billboard's FutureSound conference a few weeks ago. The entire talk is online (in two parts) here. If you go to 7:45 minutes in on the first video (embedded below) you will get to a conversation about Pandora and Spotify and the royalty negotiations they have with the record labels.

The specific issue we discussed was how can you expect the music industry to feel like they need to improve the economics of a relationship that allows a company to be worth billions of dollars. It's a great point and one that came back to me when I read the Airbnb article in the New York Times yesterday. It was this comment by Janan New, executive director of the San Francisco Apartment Association, that struck me:

I believe that any company that claims that sort of worth [$2bn] should have the social responsibility to disclose what the laws are in the jurisdiction that they’re in. And if they’re not capable of that, then their worth isn’t that high.

This is the new angle of attack from incumbents who don't want to see upstarts change their game. And it is a powerful one. Nobody is crying for you when you are worth billions. So be careful what you wish for and what you disclose.

We have a few companies that have kept their fundraising valuations private, at great difficulty and effort. They have done it for reasons like this. They believe it is nobody's business, other than their own, how they have raised capital.

And that was part of my point in the Billboard talk. Spotify's $3bn valuation and Airbnb's $2bn valuation aren't real valuations. Nobody bought their company for billions in cash. They are simply financings in which money traded hands on terms that spit out those big numbers.

Please excuse a deep dive on something a bit technical here. But I think it is important. When an investor like Fidelity puts tens of millions of cash into Spotify at a $3bn valuation, they are not buying publicly traded common stock that will go up and down with the value of the company. They are most likely (I don't know the terms of the Spotify deal so I am guessing) buying a Preferred Stock that gives them a liquidation preference (their money back or possibly plus some guaranteed return) in the event the company is sold at or below the valuation of their investment. So they are buying a bond plus an option. They are highly confident they will get their money back and they are taking an out of the money option on the upside. And they are very long term holders so they can wait quite a while for the company to be worth a lot more than they paid. The $3bn valuation is nonsense. That's not what they are betting on. They are betting that the company is worth at least its total liquidation preference, which is likely an order of magnitude less, and that it might be worth more than $3bn some day and possibility a lot more.

But of course the record label executives don't care. And neither does a landlord association executive. They just look at the huge numbers and say "fuck that". And I don't blame them one bit. I would feel the same way if I were them.

Here's my point. We, the tech/startup/VC world, are not doing ourselves any favors by bragging about the big valuations we are raising money at. We are in fact doing ourselves great harm. Because it makes us look like spoiled brats who are being fed with a silver spoon. Those inside these companies (Spotify, Airbnb, Square, Twitter, etc, etc) know that is not what is really going on. We know how hard it is to build something really new and different. It is a struggle and nothing comes easy. But it is important to realize how the broader world sees it. And they just see billions. And then you get the attacks that I mentioned above.

Honestly, there isn't much we can do about it. The securities regulations make it almost impossible to hide the terms of financings. And the media pounces on these big financing valuations like a hyena on red meat. But it is worth taking the time to downplay the numbers around a financing and focus instead on what it means (more jobs, better products, financial stability). And maybe the media can help us out a bit too by being intellectually honest what a $3bn valuation really means. That would be really nice. But I am not counting on it.

#VC & Technology