Thursday, November 29, 2007

Ad Revenue Models

Question: (1) How do Web 2.0 companies like Feedburner make money?  (2) What makes a blogger or content provider select one network or blog community over another (i.e., are the bloggers themselves being paid or are they essentially working for free)?  (3) How is online media advertising different now than during the internet boom?
The most popular Web 2.0 revenue model is based on advertising. Publishers (blogs, media sites, etc) get paid by advertisers who advertise on their site. FeedBurner is an ad network and while it made some money off of licensing its platform to large publishers, most revenue came from the ads inserted into the feeds. This ad inventory comes from either the company's own direct ad sales force or from ad networks. Some of the ads are CPM based (impressions viewed) while others are CPC ($ per click...a la Google). The publisher generally keeps 60-70% of the ad dollars and the ad network gets 30-40%. So, if Motorola runs an ad campaign through an ad network like FeedBurner, they might pay $5-10/CPM (cost per thousand impressions). The ad network then takes that ad and serves it up on the various websites it has deals with. If the ads are viewed 1,000,000 times, Motorola would pay the network $5-10,000. The network would keep $2-4,000 and the publishers would get the rest. In the case of bloggers, they first pick which ad networks to go with (usually based on which drive the most revenue for the space given) and then approve different ad campaigns. They get a cut of those ad dollars.
More advertisers understand the benefit of online advertising and so, there are more ad dollars flowing into this space than during the Bubble. More importantly, Google has created an entire ecosystem based upon its CPC model where advertisers only pay when ads are clicked on. They feel there is more accountability since they only pay when an action is taken. Also, there is very little cost associated with running many of these publisher sites, so it doesn't take much to get to break even.
That said, the economy is likely sliding into recession and ad budgets will get slashed. CPC and CPA (cost per action) based revenue should hold up better than CPM based ones since there is a clearer ROI. In  2000, Yahoo saw its revenue plunge 40% in one year. When the cycle corrects, there will be quite a lot of carnage in the ad supported publisher world. Smart operators will get their costs inline and focus on driving the best possible results for advertisers.
Via Ask the VC

Monday, November 26, 2007

Ask The VC on Early Stage Board of Directors

Dick Costolo (aka Mr. Ask the Wizard) - the founder/CEO of FeedBurner (now a Googler) has another outstanding post up titled Early Stage Board of DirectorsIn his delicious way, Dick talks through how he thinks about the potential composition of a Series A board and gives entrepreneurs some ammunition for their potential investors when they say "let's have a board with five Series A investors and no founders."
via Ask the VС

Friday, November 16, 2007

Van Gogh on personal productivity

Van Gogh's philosophy for producing good work:
"You have to eat well, be well housed, have a screw from time to time, smoke your pipe and drink your coffee in peace."
Via pmarca blog Via Reuters

Thursday, November 15, 2007

PayPal Mafia

a great story of a great company with great people....

angels enjoy better returns than VCs?

Angel Returns Outpace VCs'
At a time when many venture capitalists are retreating from early-round deals, a new study has found that angels, the earliest investors, are wearing solid-gold halos.
The study, sponsored by the Ewing Marion Kauffman Foundation and the Angel Capital Education Foundation, found that members of organized angel investing groups had an average 27 percent internal rate of return, or the annualized compounded rate of return. That compares with VC returns for all investing stages, which historically average in the mid-teens, said Robert Wiltbank of Willamette University,  one of the study's authors.
Overall, the angel groups investors posted a return of 2.6 times their original investment after 3.5 years. While 7 percent of the exits were home runs with returns of more than 10 times the investment, more than 52 percent of exits came at a loss. More than 60 percent of the angel investors at least broke even on their overall portfolio.
The study, conducted last spring and summer by Mr. Wiltbank, an assistant professor of strategic management, and Warren Boeker, professor of management at the University of Washington, asked the 539 participating angel investors to detail their investments as far back as they could. Sixty-two percent of the exits occurred after 2004, while only 8 percent happened before 2000.
Though other studies focus on angel investment activity, Professor Wiltbank said this is the largest to look at investment returns.
Professor Wiltbank said the study found that angels who took a more active roll with their portfolio companies fared better.
"You can see strong effects when investors do a little extra due diligence; and if they keep in touch with the ventures a couple times a month, the numbers are stronger," he said.

In Search of Inexperience

Great post from Guy Kawassaki's blog about fresh vs. serial entrepreneurs. Not that I agree with everything said (mind Martin Varsavsky, a founder of FON and tons of other companies before), it does give some bonus to the fresh startupers.
hpgarage.jpg TechCrunch published a great guest post by Glenn Kelman, the CEO of Redfin, called "Entrepreneur 2.0." It inspired me to piggyback on his idea that investing in "serial entrepeneurs" who have already been successful might not be all that it's cracked up to be and write this post.

Both our posts run counter to the theory that many entrepreneurs, wealthy from their previous smashing success but restless and too young to die (or become venture capitalists, which is roughly the same thing) are the best bets for the next big thing.

Superficially, it's hard to fault this "back the proven entrepreneur" theory. For one thing, from a venture capitalist's point of view, if you fund a serial entrepreneur and she succeeds, you "knew" that she was proven. If she fails, at least you backed someone for a good reason—that is, she was proven—so your limited partners shouldn't get too bent out of shape.

That's a lot better than backing a first-time entrepreneur who fails—then you are just stupid. (Also, if you back a first-time entrepeneur, and she's successful, you take the credit: "It's because of my hands-on coaching and guidance.") But, just as Glenn wrote, if you think about it, great, world-changing companies such as Hewlett-Packard, Apple, eBay, Microsoft, Google, Yahoo!, and YouTube were zero for three according to the official venture-capitalist spec sheet: Proven team, proven technology, and proven business model.

Hence, I would like to declare my support for Glenn's perspective and help him make the case that second-time entrepreneurs are not necessarily the be-alls and end-alls.

  • Serial entrepreneurs try to prove that their first success wasn't a fluke. Rather than starting from the basis of technology ("isn't this cool?") or customers ("there must be a better way"), the reason for existence is "I'm going to prove that I'm talented." This is a bull shiitake reason for starting company compared to solving people's problems or changing the world.

  • Serial entrepreneurs cannot distinguish between causation and correlation. The root cause of earlier success may have simply been blind, dumb luck, but few people realize this and even fewer will admit. Thus, they have the hollow arrogance of people who just go lucky instead of people who have been truly tested, and arrogance is a bad thing in entrepreneurs.

  • Serial entrepreneurs are likely to use the same methods again. How can you fault them for using the same methods that made the successful the first time? For example, if they built a high-end computer the first time, they build a high-end computer the NeXt time. If they used dealers the first time, they use dealers the second time. If they gave everything away to get eyeballs and sold the company to a bigger, dumber, richer company, they try try that "business model again."

  • Serial entrepreneurs don't (or can't) work as hard. When you have a 5,000 square foot house, a second house in Montana, a car made by a company whose name ends in "i," a spouse, and kids, attitudes change. Indeed, attitudes should change or people never grow up. However, it's one thing to work to survive and another to work for fulfillment. They can say they're just as hungry this time, but the point is that no one had to ask if they were hungry the first time.

  • Serial entrepreneurs don't get smacked around enough. Life is good as a serial entrepreneur: they walk in, tell people that their last company was sold for a bazillion dollars, and now they're starting another one, and it's a privilege and honor to invest. Who's going to poke holes in their strategy when Sequioia, Kleiner Perkins, et al are issuing term sheets and ever lesser venture capitalist is sucking up? No one. And that's too bad because they won't get anyone checking their sanity.

  • Serial entrepreneurs fill new, unfamiliar roles in their next companies. For example, in the first company the person was an engineer who became the vice-president of engineering who became the CTO. Just because you were good at writing designing chips doesn't mean you're CEO material in your next fabulous fabless chip company. As Glenn says in his post, "This means that what I used to be really good at — designing software — I don't do as much of anymore, and what I never had to learn how to do — manage people – I now do all the time."

  • Serial entrepreneurs hire their buddies who were with them the first time. Thus, the entire founding team suffers from all the problems listed above. People who don't know what they don't know are few and far between, but a startup needs this kind of people to push the boundaries of what's possible in what ways. Ignorance is not only bliss; it's also empowering.

I once heard Mike Moritz of Sequoia explain what kind of entrepreneurs he wanted to invest in. I'm paraphrasing: "Guys under thirty who are building a product that they themselves want to use." Amen, baby! I vote for two guys or gals in a garage who are an unproven team, unproven technology, and unproven market.

Sunday, November 11, 2007

Generic Range of Equity Desired By a VC for Round 1 or 2

Question: What's a completely generic range of equity a VC typically
wants for a round 1 or round 2 investment?

Most VC's will generally say they target 20-30% ownership in a company
to "make it worth their time". This means that if they invest $3m
early on, they expect the post-money to be around $10-15m and if, in
later rounds, they are investing $10m, they expect to have a $30-$50m

Often, however, VC's will use the "percentage" threshold as a means by
which to increase money into a round or to get the valuation down. I
have seen a given VC say they need 25% ownership for deal (to get
valuation down) and do a more competitively sought deal at 15% two
weeks later. In the end, two things drive all of this. First, there
are legitimate minimum investment amounts a firm needs to have per
deal. A $500 million fund will never get its capital deployed by doing
$2m and $3m deals. They need to put $7-10m to play early and $20m+
over the life of the investment. Second, the valuation (and hence %
ownership) will be driven by attractiveness and competitiveness of the
deal. In the end, it is really about valuation (assuming their
investment appetite remains in a set range).

via Ask the VC

Thursday, November 08, 2007

Sorry to talk so long...

Good point from Seth Godin's blog

I was at a gala a few weeks ago (featuring no less than ten speakers). At least 80% of them began their talk by saying, "I know you're hungry, but..." or "I know it's late, but..." or "I know you want to go home, but..." and then apologized for giving a speech.

If your speech needs to be prefaced by an apology...

don't give it.

That's why they call it giving a speech. It's a gift. If you have to apologize, it's no longer a gift, is it?

Our collective fear of public speaking has created a host of awkward situations and events. It's pretty simple: Be brief. Or don't come at all. Don't do anything you need to apologize for.

(and brief means sixty seconds, usually. That's enough to say hi, to say thanks and to move on.)

Tuesday, November 06, 2007

Top 10 Slide tips

1. Keep it simple
2. Limit bulet points & Text
3. Limit animations
4. Use high-quality graphics
5. Have a visual theme, but avoid templates
6. Use appropriate chars
7. Use color well
8. Chose your font well
9. Use video and audio [well]
10. Spend time is slide sorter
basically, its all easy..... make it right! :)
Just practice and keep on looking at the best presentations so far.... more great stuff to come!.... may be by you!!!

product innovation by Steve Jobs

Innovation is not about saying yes to everything. It's about saying NO to all but the most crucial features.
from Steve Jobs's private presentation about the iTunes Music Store to some independent record label people in June of 2003

7 lies that prevent Your Great Idea from becoming a Real Business

great motivation article from LifeRemix
Here is an executive summary:
7 common excuses for not starting a Real Business
1. I'm too busy right now. I'll start when I have more time.
2. After I get an MBA, I'll be ready to start up.
3. I hate sales.
4. I'll do some research after watching a TV show.
5. I don't know anything about business.
6. I don't have startup capital.
7. Before doing anything else, I need to write a business plan.
the full article will expand on all all those FUD (Fears, Uncertainties & Doubts) and will suggest strategies for overcoming those.

Monday, November 05, 2007

"Free is more complicated than you think"

a very insightful article from O'Reilly Radar

Peter Brantley sent a link to a great summary of Scott Adams' nuanced discussion of the tradeoffs in making Dilbert freely available on the web . The punchline: "Free is more complicated than you think."

Adams reports that putting Dilbert online for free

"gave a huge boost to the newspaper sales and licensing. The ad income was good too. Giving away the Dilbert comic for free continues to work well, although it cannibalizes my reprint book sales to some extent, and a fast-growing percentage of readers bypass the online ads with widgets, unauthorized RSS feeds and other workarounds."

This sense of tradeoffs in making content freely available is consistent with our experience at O'Reilly. We find that making a book freely available can help visibility and sales of a book on a little-known topic, but for a well-known topic or author, who benefits little from the additional exposure (like Scott Adams), it can have a slight cannibalization effect on print sales. So, as a beginning science fiction author, Cory Doctorow used "free" to build his career, while Stephen King found the results of his experiments with free to be disappointing. (I explored these tradeoffs in my article Piracy is Progressive Taxation.)

The point is that we need more than one model. There is no one-size-fits-all answer. Advertising is a great model for people who can create or collect content that will generate sufficient traffic to pay for itself on the limited revenue per view provided by advertising. But that takes far more traffic than most people realize. Asking people to pay works well when the potential audience is smaller, and the cost of creating the content greater than can be recouped by advertising. But even then, you need to use "free" to some extent to make sure people find your content. If content is locked up too tightly, it drops out of the internet conversation.

read the full article here

via O'Reilly Radar

Saturday, November 03, 2007

back of the envelope valuation for start-ups

  • Sound idea = $1 million
  • Prototype = $1 million
  • Quality management team = $1 – 2 million
  • Quality board = $1 million
  • Product rollout or sales = $1 million
  • TOTAL potential value: $1 – 6 million

via Found+Read