April 30, 2008
The Swinging Pendulum Between Distribution and Monetization
After the crash at the end of the last decade, web startups clamped down to focus on their core value proposition and were forced out of necessity for survival to hone their revenue models. However, for the past couple years, the metrics of “success” with early-stage digital media startups (especially consumer-facing ones) have clearly focused on distribution, as opposed to monetization. The stories of tremendous growth in adoption with the promise of revenue later on has been enough to excite both entrepreneurs alike. Yet, with the current economic climate driven by the looming recession, it’s been interesting to see the pendulum swing the other way in the past couple months.
If the notion has reached the popular business press, then it’s indeed a pervasive story. A few weeks ago Businessweek’s article Widget’s Worth talked about “cracking the monetization code,” wondering how social widget applications are going to make money.
The old playbook six years ago was that the web distribution could be bought for a price with Google Adwords. Now the new plan for distribution is facilitation through low-cost viral strategies via Facebook and other social media. In fact, Facebook literally published a playbook just over a week ago on marketing virally through their platform. I am not arguing that distribution has been commoditized, but it does point to the fact that the bar has certainly been raised for what meaningful traffic/distribution means without a business model behind it. Not all traffic is created equal, and that is certainly more the case than it was five years ago before the mass proliferation of social media pages (and a new floor for pricing of remnant inventory).
But it goes beyond just widgets and social networks. Of course, with the numerous notable acquisitions in the advertising network space has resulted in a proliferation of companies looking to help publishers monetize their content through new technologies and packagings. And even beyond the media front, there’s a renewed sense of optimism that the Enterprise2.0 could be the next big thing, especially given that there’s real potential customers willing to pay real dollars in that domain.
Of course, with any trend, there are notable exceptions. And there should be – the true high flyers command tremendous network effects which create value well beyond an immediate revenue base. But for the typical web startup, thinking about a business from the mindset not of “how do we get big fast?” to “how do we get big fast and monetize it?” is a progression in thinking.
I found it notable that just in the past week, I’ve seen a handful startups of startups seeking Series A financing – all with significant traction on the adoption front - with pitch decks touting phrases like “projects profitability”, “roadmap to profitability… [with] high margins [to] enable positive cash flow”, and “path to profitability.” Those terms were largely out of place in most plans a year ago.
Theoretically-speaking, entrepreneurs raise capital (whether it venture or otherwise) to accelerate growth ahead of cash flows because of the opportunity-cost of time involved in self-financing organically. So in reality profitability isn’t the first order step in creating real enterprise value. As it was put by Keith Richman on a panel at the EconSM conference on Tuesday, “profitability… is a choice.” Or at least the goal is to work towards having that choice. Starting without a revenue model in mind, even if it will change a few times along the way, leaves that choice to chance. It’s always possible to get lucky, of course, but less likely so in an economic climate which is less forgiving. So it isn’t surprising to me to see startups realizing these facts and incorporate this thinking into their pitch, and more importantly, their plans. The pendulum has begun to swing back the other way...
March 3, 2008
It's Always Sunny on the Web
Ben Kunz wrote an interesting article in this week’s BusinessWeek, but it wasn’t the controversial and inaptly-named title (“Why Widgets Don’t Work”) which caught my attention. Rather, it was his framework for the “history of the web” which did. He outlined a transition among three distinct phases of consumers’ primary activity online from receiving, to hunting, and now doing. While the web started with people passively receiving content from AOL, it soon transitioned to people hunting for information with Google. He says “’do’ is where the web is headed in 2008,” citing social networks and other social services (e.g. editing spreadsheets on Google docs, watching bank account with credit card balances, twittering). While the shift towards doing has been already well-underway for some time, I think the construct of understanding people’s mindset as they’re using the web, and how it is changing, is useful in discerning where it’s going and where the pockets of innovation (and corresponding startup opportunity) will be.
There is certainly a natural progression of the web as a media outlet and how we use it – we first learned to receive information with this new medium, then we learned to look for it proactively. We are now so comfortable with the platform that we now are at ease spending time on it “doing”, acting, and performing endeavors in and of themselves. I would say doing is really comprised of two activities: true point-to-point person-to-person communication and performing other real stand-alone activities which are further enhanced with point-to-point communication. (Online casual gaming is a good example of the latter – we’re seeing a trend towards incorporating social functionality into gaming activity, but the services themselves are primarily about the games which are then supplemented with communication).
A notable insight here occurs if we layer the do’er construct on top two other key internet trends - the deportalization of the web and the rise of online video – from which we can gleen some interesting areas for disruptive opportunity. With traffic proliferating towards the far reaches of the net (way down the long tail, if you will), advertisers are having a more difficult time reaching these corners. Widgets are certainly one way to do this, but it isn’t necessarily always a personalized experience. The true challenge is how to identify what advertising messages a user will be receptive to (not using personally identifiable information) in the absence of the contextual relevance afforded by “receiving” and “hunting”-based content. That is essentially the prime challenge that social networks are facing; it’s hard to monetize their content because it's difficult to know what people want when they’re doing and not receiving/hunting. Behavioral ad networks are beginning to solve this problem, but only partially. And of course we’re seeing experimentation play out (with difficulty) with Facebook’s recent Beacon episode. It’s still going to take a few years and numerous innovations by startups (not just the large social networks and other social services) to figure out how ads should effectively reach the “doers” on every corner of the net.
The other intersection of this construct, with the online video adoption trend, indicates we’re still just in the early stages of being comfortable with the video format. Almost all of the video we watch online is in receiving mode. People fire up YouTube and watch the latest most popular clip forwarded to them, or you turn to Hulu to catch an episode of “It’s Always Sunny in Philadelphia” that was missed last week on FX. We are just beginning to hunt for video, but it’s really right around the corner as a mainstream use-case. Soon users and producers will be creating more informational-based content in addition to the entertainment-based video content which is the current norm. The web’s freeing from the binds of 500 cable channels will have the same effect on video that unshackling from physical printed materials had on text. The shift to universal search by Google (i.e. incorporating video segments in addition to text pages into search results) will really facilitate this change. Many VCs have anticipated this shift to hunting video with numerous fundings of how-to sites over the past few months, but there are many opportunities for informational-based video content for hunting consumers beyond the how-to. And in following this schema, the intersection of doing and video is one step further off, but it will come much sooner than it did with text+image content. YouTube just this past week hinted towards incorporating live video onto the site, which is potentially just one manifestation.
Kunz concludes his article essentially acknowledging widgets do actually work, just that some widgets are going to be more effective than others - it depends if and how it engages the right audience. At the end of the day, widgets are merely one arrow in an online advertisers’ quiver, not the only shotgun. They’re just one piece of the ever evolving puzzle of the web, which is “doing” more now than ever.
January 29, 2008
Our Second Rotation Investment
Do you have a drawer or closet full of old cell phones, iPods, and digital cameras?
You know that you’re not supposed to throw them away because it’s not good for the environment. Plus, they still work. You could sell them on eBay or Craigslist, but that’s such a pain. And who knows how much you could get for them?
I am happy to share that we at Venrock have made an investment in a startup which directly addresses this problem. Second Rotation is an online service which allows consumers to easily sell all of their electronic gadgets. You go to the site, enter or find the name of their product, and rate its condition. Then you’ll immediately find out how much the item is worth and receive a free shipping label to mail it into the company without charge. Once the company receives the item, it’s only a short amount of time before they send out a check or credit your Paypal account. It’s that simple - using Second Rotation an easy way to take both the uncertainty and hassle out of trading in old used electronic goods.
From an investment perspective, Second Rotation stands at the intersection of many trends. As I noted in my post last fall about “Seven Coming Digital Uber-trends which Are Ripe for Startup Opportunities,” consumers have an progressively heightened awareness around living green, and the web provides a natural vehicle for connecting people to resources and services which lessen impact of individuals on environment. e-Waste in particular is becoming an increasingly more important issue – for example, electronic waste is estimated to already constitute between 2% to 5% of US municipal solid waste and is rising three times faster than other streams. Currently the average citizen is responsible for 35lbs. of waste from appliances, IT equipment, and electronic goods per year. Meanwhile, the number of gadgets each consumer owns continues to grow and proliferate, while the upgrade cycle to new goods shortens as fuller-featured next-generation devices are released more frequently.
Since launching the site last July, the response to Second Rotation from consumers has been tremendous. Many are excited about the prospect of a simple way to generate cash for stuff they’re not using any longer; others are enthusiastic about the opportunity to facilitate ecologically-minded reuse of what would otherwise become e-waste. It’s been gratifying for me to visit the Second Rotation facilities and see the multitude of products en route to new owners. And others are starting to recognize the value of the service, like CNET, MSN, and Ars Technica.
With any new venture investment, the caliber of the team is paramount, and Second Rotation is no exception. The CEO Rousseau Aurelien is a serial entrepreneur and former eBay PowerSeller. Before joining as President & COO, Israel Ganot spent six years at eBay, where he was instrumental in the company’s international expansion. And the CTO James McElhiney is also a seasoned entrepreneur (cofounder of Boston Compliance Systems, which he later sold to Thomson Financial), bringing over 20 years of large-scale development expertise to the company. In conjunction with this funding event, the board is expanding to include myself and Mike Tyrrell from Venrock, Austin Ligon (co-founder and former CEO of CarMax), Henry Vogel (Chief Revenue Officer at Quigo and a former eBay executive), and Ashton Peery (former CEO of Top Ten Media), along with both Rousseau Aurelien and Israel Ganot.
Today’s announcement of a $4.4M Series A funding from Venrock and other prominent angel investors is a milestone for the company and a significant step towards the expansion of its service. In the future, Second Rotation will be accepting other categories of electronic goods, offering additional services that complement the core business, and announcing some unique partnerships. I am excited about organization we’re building together with this investment and hope that you will try out the service firsthand for yourself.
November 27, 2007
Getting the Gang Back Together
Venture investors often find comfort when a team of entrepreneurs beginning a startup have previously worked together. If the prior endeavor was a wild success, then the prevailing thinking is that it makes sense to back a team who should know the playbook for victory. But even when the last go-round was a mild success or even a tremendous failure, there is signal value in the fact that these individuals deliberately choose to work together another time.
Getting the gang back together, so to speak, should show above all else that each individual truly wants and needs all of the others to participate. All of them realize that a company isn’t built with one individual alone. It’s a strong indicator that every person brings a certain set of skills, experiences, and mindset to the company that are complementary to the others on the team – otherwise given a blank slate they would choose otherwise.
Moreover, when a team decides to launch a startup together for a second (or third or fourth…) time, it’s a clear demonstration that they have been able work with each other. Despite differences in opinion that might (read: should) arise when building a new company, they all respect each other enough to work together in a de novo situation. And so the risk for personality conflict amongst the team is lessened.
Yet there are still issues and questions that arise in this situation which are a result. Who is missing from the group from the last time? Why wasn’t s/he included? Who will fill their shoes? Should we fill their shoes? Also, the dynamic of having a team with a history together can bring baggage from a previous situation into it – there’s potential for leftover touchy-feely issues which weren’t resolved and could remerge or be exasperated this time around.
Having a prior history with a founding or management team can also negatively impact those newcomers to the company who weren’t part of the old team. The beauty of a startup is that it’s an organization starting fresh - unencumbered to move quickly and dynamically. But when there’s a common outside shared experience with a significant set of folks, then it can potentially create a divided culture of those who were there the last time around and those who are new, which hurts morale and likely performance. Additionally, it can make others reluctant to join because they’re missing the set of experiences or worry about integrating into the team. (People don’t join a startup to hear about “the good old days.”) And finally, a common set of experiences can lead people to the same conclusions and inhibit fresh ideas or novel approaches.
On the face, having people in a startup who have worked together in the past is positive sign. Brining the team back together again? Good. Now it’s important to remember to leave the old baggage behind and sincerely open the team to new members. Having the old crew gives you a leg up, but it’s only a start.
October 12, 2007
Those Key Early Employees
Much is often said about the founders of a company, including on this blog. And they seem to receive a preponderance of the recognition for the ultimate success of an endeavor. Of course, it's obvious that these individuals are vital to a startup. However, I think that the people often overlooked are those key first hires. Yes, the management team has a great affect on an organization, regardless of its size or stage. But the first individual- and team- contributors brought into an organization help set the tone for the culture in a profound way. One single strong and vibrant personality can energize the office. Someone's quirkyness can add real character to the group. Those first five to ten non-management hires in a startup help set the tone for how things get done and how people behave while they’re doing it. Being an early hire at a startup gives an individual the ability to make tremendous impact on an organization as it grows – and both the founders and those hires should know it.
Posted by at 11:16 AM | Permalink | Comments (4) | TrackBacks (0)The Annual Marker of the Web2.0 Summit
The first Web2.0 conference which I attended was in 2005, and that one had a very authentic feel to it. It's interesting to look back at notes from those sessions and the conclusions like "tagging is a short word, but requires a long explanation." By last year, the conference had grown up to become an extravaganza, for lack of a better descriptive term. And this year's elevation of the moniker to a "Summit" should continue with that trend. Regardless, conferences are for conversations. The important business is about connecting with people, as opposed to the content in the sessions themselves. Along those lines, if you've been meaning to reach out or just want to ensure that we reconnect while we’re both at the show, drop me an e-mail at [david at genuinevc dot com].
Posted by at 11:13 AM | Permalink | Comments (0) | TrackBacks (0)October 3, 2007
The Shift Towards Universal Search
There has been a lot of coverage this past week about the recent upgrading of search engines' user experiences to include other content-type results. Yahoo unveiled new enhancements on Tuesday, Microsoft launched refined Live Search last week, and Ask upgraded to its "3D" user interface back in June. Of course, Google announced its "Universal Search" all the way back in May, touted by Marissa Mayer on their blog "to blend content from Images, Maps, Books, Video, and News into our web results."
Almost all of the analysis which I've read has been in the context of the search engine wars, and how these recent efforts are a last-ditch effort for the non-Google search engines to play catch up. That's a fine story, but I think that there’s another fundamental trend at play here. It's a natural evolution of search to include other content types other than links, and I think that the real story is centered around the ramifications of what content (especially video) will now get featured as results given the introduction of universal search. It's one thing to find video when you’re looking for it; it's another thing to find video when you don’t know you’re looking for it in the first place. Increasingly we're seeing video as included results for terms which a consumer wouldn't necessarily think to search for on at a dedicated site or search engine, but she will find incredibly useful nonetheless.
I've seen a number of conversations about universal search in the SEO trade circles (e.g. universal & blended vertical search was a hot topic at the Search Engine Strategies conference in San Jose last month), but I have heard a lot less buzz about it in startup circles. To me, there is potential underserved opportunity here. When people begin to find video and other content "serendipitously," it begs the question how the content got there in the first place. Many great internet businesses were built upon leveraging natural search as a distribution mechanism, and I see the shift towards universal search as opening a door for new players to enter what was a marketplace that previously gave unfair advantage to incumbents on a specific keyword term. Much like the situation for natural text search in the late 90's, there is a new land grab for top search placement for these new media formats (like images, podcast, and video). This return of the wild west scenario puts startups and established players alike on equal footing, because these algorithms are being established anew and don’t favor an incumbent authoritative source.
In fairness, the transition, at least for Google, has been a measured and calculated process. When Google launched universal search this spring, some commentators accurately reflected this move as a lengthy process as opposed to an overnight switch. "I don't expect we're going to see wholesale changes in the near future… I'd assume that whatever Google does, they'll do deliberately and cautiously," said Matt Greitzer, a national practice lead for search marketing at Avenue A/Razorfish, back in May. (As a demonstration of the lack of anywhere close to a full transition, ironically, currently a video of an interview about the future of search and universal search with guru Mike Grehan doesn’t show up as a video result in Google when searching for "seo universal search," but rather as a text link.)
Perhaps the buzz this week with the other search engines will facilitate a quicker transition towards integrated results on all engines, and the opportunity about placement in those results will become more salient. Whether it's in categories of travel, shopping, and other transaction-oriented content, video and other media types will be useful and important search results in the coming years. Startups and other fast-movers have a unique opportunity to participate in that shift beyond just text links.
(Special thanks to Daphne Kwon who helped me think through some of the issues in this post.)
