Posts from Pandora

In Defense Of Free

I have written so much about free here at AVC that it should be called AVFree. In fact, I've even written a post with this exact same title (almost exactly seven years ago, the summer we invested in twitter, zynga, and tumblr).

I haven't touched this subject much in the past few years but given that the topic has been in the air in the tech blogosphere, I thought I'd address it again.

First, let me say this is specifically not about Twitter. Folks should be encouraged to compete with Twitter. Competition is good for everyone as we talked about here a week or so ago.

This post is in reaction to the idea that services should be paid to ensure that they are appropriately focused on the consumer/user as opposed to the marketer/advertiser/sponsor.

Let's start with advertising. I do not believe it is evil. In fact, I believe it is a fantastic way to support services that want the broadest adoption and want to be free. Think about the Super Bowl, the World Cup, the Olympics, the Oscars, the Presidential Debates, the news coverage of important events. These things are ad supported and free for anyone to watch who has a TV and an antenna. It is good for society for these things to be available to the broadest audience.

There is a paid TV business and it is flourishing. The fact that at its base level TV is free does not mean that all TV has to be free. Free TV does not commoditize paid TV. They co-exist nicely. But we had free TV well before we had paid TV. Free is the foundation that creates a paid tier. That's what Freemium (a term that was coined here at AVC) is all about.

Now let's examine services that have a free and paid tier. Spotify is a good one to look at. Spotify's core business model is a subscription music service. All you can eat music for a fixed price every month. And yet this is what they show you when you land at Spotify.com for the first time.

Spotify

Why do they show you that? Because most people prefer free to paid. I don't have the exact numbers but I would suspect less than 10% of Spotify's users pay for music. Why is Pandora so successful? Because it is free. Why is over the air radio still the most popular way to listen to music? Because it is free.

Now let's look at servces where the users provide all the value. Wikipedia, Craigslist, YouTube, Flickr, Instagram, Facebook, Twitter, Tumblr, WordPress, etc, etc. There is no value to any of these platforms if the users don't create the content. The users create the service, curate it, and make it what it is. I do not believe it makes sense to charge users to create the value. We've seen folks try this model. Typepad (where this blog is hosted) charges to host a blog. How well did they do? Phanfare charged to host photos. How well did they do? The list could go on and on but I don't want to focus on failed services.

When scale matters, when network effects matter, when your users are creating the content and the value, free is the business model of choice. And I don't think anything has changed to make that less true today. If anything, it is more true.

I understand the frustration of certain folks about the commercialization of Twitter, Facebook, Tumblr, and a host of other services. I understand the frustration over the increasing lock down of the APIs and the control these platforms are exercising on their ecosystems. I would encourage folks to compete with them to keep the web, the mobile web, and the Internet free and open. But I would not encourage those same folks to build paid services. I think their goals will be undermined by that choice.

#mobile#VC & Technology#Web/Tech

Some Thoughts On The IPO Market For Web Companies

We have an IPO market for web companies again. I don't have all the names in front of me, but this year has brought IPOs for Pandora, LinkedIn, Groupon, Zynga, and TripAdvisor. These five companies are all trading for north of $1bn market cap. Pandora is at ~$1.5bn. LinkedIn is at ~$6bn. Groupon is at ~$15bn, Zynga is at ~$7bn, and TripAdvisor is at ~$3.5bn.

We can (and surely will in the comments) argue about these valuations. Some will say they are too high. Some will say they are too low. That's what makes a market. But in the aggregate, these valuations do not seem ridiculous to me. The public market investors are valuing these companies at prices that have some rationality to them.

What is possibly more interesting is that the public markets are valuing these companies at less than the late stage private market might value them at. Again, I don't have the data in front of me (I'm on vacation), but I believe that some of these companies had private financings at our above these current market caps.

The past decade (post Internet bubble, post Sarbox) brought a new normal to the late stage venture capital market. Companies are staying private longer. They are doing multiple rounds of growth financing privately. And they are doing multiple rounds of secondary liquidity for the founders, angels, and early investors. Mike Moritz calls these financings the "new IPOs".

This "new normal" is allowing these companies to stay private and develop into real businesses. With a lot of revenue. The five companies I mentioned at the top of this post will have close to $5bn in revenue this year. The company with the least amount of revenue is Pandora which, as of its last quarterly report, is operating at a $300mm annual revenue run rate.

These companies also have built sophisticated management teams that are highly capable of managing a business to meet the expectations of public market investors. They have strong operating executives, strong financial executives, and strong product and engineering leadership. They should be well run public companies.

The five companies I mentioned at the top of this post are carrying a combined market cap of $33bn. So they trade at an average of 6.6x revenues. And that is not including the cash they have on their balance sheets. I am not going to do the math, but I would bet if you back out the excess cash, you might see revenue multiples of less than 6x for this cohort. These are full valuations in a historical context, but these are not crazy valuations. If these companies can continue to grow at the rates they are currently growing, and if they can generate significant cash flow from their businesses (some of these companies already are doing that), then they should be more valuable in the next couple years, generating gains for the public market investors who hold the stock.

When Zynga was pricing its offering last week and getting ready to start trading its stock, I got a note from a friend who said "let's hope for a '99 style first day pop." I responded that was the last thing I wanted to see. And thankfully we did not get that.

It is not healthy for companies to trade at prices well beyond what they are worth. It puts incredible pressure on the team to deliver results that can't be delivered. And when the stock inevitably comes back to reality, the team feels like they somehow failed. Morale is impacted. The whole things is madness. And who benefits from that first day pop? Only the best customers of the banks who led the offerings. Why should they get a windfall when they did nothing to build the company and when they will be out of the stock so fast it will make your head spin?

The IPO market for web companies we have right now is rationale. We can argue whether it is pricing thse offerings correctly. But it feels about right to me. I believe we will see a bunch of IPOs next year, led by Facebook, which is the poster child of this whole "stay private longer" movement. If we as an industry can be patient, keep our companies private longer until they are truly IPO ready, then we should have a sustainable IPO market. That's where we seem to be headed. Let's not get greedy and screw it up.

Disclosure: USV has a significant holding in Zynga therefore I am long that stock through my interest in USV.

#stocks#VC & Technology

Mobile Audio

There's a reason why radio and outdoor (billboard) advertising together became a $30bn to $50bn annual domestic market. When people are mobile, like driving a car, they are not reading, they are not watching video, they are not opening email. At least they should not be doing those sorts of things while driving a car.

While radio and billboards will still be attractive advertising opportunities for some time to come, there is a new way to reach the mobile consumer – on his or her phone.

I'm not talking about calling you or text messaging you on your phone. I am talking about when you connect your android phone into your car's audio jack or when you put on your iPhone headphones and hop on the treadmill at the gym.

In these situations, you are likely listening to audio and increasingly streaming audio. That audio stream can contain commercial messaging if it is done right. And because the phone, as opposed to the car radio or the billboard, knows a lot about you, including where you are, the messaging can be targeted (ie made relevant).

This is the opportunity our portfolio company TargetSpot was built to go after. When the company was started, it decided to focus on terrestrial radio companies and help them monetize their internet streams. It is the leader in that market today. Then it added "pure play internet radio" providers like Yahoo! Music, MySpace Music, and AOL Radio to it's network and further solidified its lead.

And today, TargetSpot is rolling out its first mobile audio advertising service, in partnership with Slacker. If you want to reach people who are listening to streaming audio via their phones in their cars, in the gym, at work, and at home you now can do that via TargetSpot.

Slacker is one of several streaming audio companies focused on the mobile phone. Others include Pandora and Last.fm. I expect we'll see hundreds of providers over time.

And I expect that we'll find out that the audio format is one of the most powerful forms of mobile advertising. Just like it has been in the offline world for the past century.

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#VC & Technology