Throwing Your Weight Around

Back in the good old dot-com days, companies runtinely uses its balance sheet (more specifically its ability to raise money and put it in the balance sheet) as an competitive advantage to acquire companies that has either better traction or revenue but not the access to cash. This strategy is often used by buyout shops to roll up companies without the sophistication to know how much they are worth or the ability to put together a business plan and financial model to pitch to PE shops. As much as we would like to believe capitalism is without friction, the VC or buyout circle is small and requires specific language, behavior, and access.

A classic example of “tail wagging the dog”, by virtue of raising a ton of cashing, the cash rich venture has essentially “sucked up” all the cash that VCs are willing to dump into a space. Even if a competitor comes along and achieve better traction, VCs are loath to invest because of the cash hoard that the original company has amassed. (its like competing against MSFT vaporware in the early nineties)

Well today, Obopay acquired BillMonk. A cool little app that seemed to have gathered a small but loyal group of users. Not to take anything away from obopay, (its succesfull in its own right), this is a case book study on “throwing your weight around” to gain (additional?) traction.

Irrational Exuberance Proves to be a Myth, Web 2.0 Bubble Not so Bad

Ran across a timely academic research on the first internet boom/bust - aka the “dot com” era. Goldfarb, Kirsch, and Miller has published a huge amount of material on the era. Furthermore, they are widely considered the leading business historian on the time between 1998-2004 (really between Netscape IPO and the rise of web 2.0). In fact, they are major contributors and curators to the Business Plan Archive. The 50 page report is titled Was There Too Little Entry During the Dot Com Era?.

Seems like deja vu lately with a very public discourse on the simultaneous rise of web 2.0. bubble and bust (so which is it?) between Arrington and Fred Wilson. With commentary from NYT and Zoli.

Perhaps its because the paper is 50 pages of equations, regression, and bayesian analysis; no one picked up on its live sex chat publication. But I do find that it provides a eye openning analysis of the era and how we have learned (perhaps not individually but as an institution) and applied it to web 2.0.

Before I jump in, I’ll have to say that I’m biased. I had a Flatiron partner as my board member during the dot-com era. And I myself was roasted by the Fucked Company mob (sometime deservingly but other times not). I dont feel so bad now, as the Pud’s company, Adbrite, is now run by a CEO who was also tarred and feather by Pud’s creation :) I believe studying failure is important, but even more importantly, it needs to be constructive (like Goldfarb, Kirsch, and Miller). The Techcrunch Deadpool serves an important purpose but it has the potential to degenerate into useless personal attacks and rumor mongering. Either way, Arrington is like a hedge fund manager, he likes volatility and profits from it ... the Deadpool is his hedge or even an instrument to profit from the web 2.0 cycle. (dont get me wrong, there is nothing wrong with it, I would be doing the same if I’m a jounalist ... no he is not a blogger, not anymore)

The paper tries to prove a few points

1. “Get Big Fast” was the predominate strategy for venture startups and it created a cascading effect commonly called house of cards or greater fools theory in which assumptions build on top of other assumptions driving irrational behavior.

2. Ironically, the GBF strategy created a huge concentration of investments in a few large companies - belief that first mover + funding amount is a barrier to entry which prevented more startup in any space from getting funded or even started.

3. As a result, eventhough the AMOUNT of venture investment might have been irrational, the number of startups was actually lower than ideal.

Well, you know where I’m going with this ... we are smarter than we thought! Look at the current web 2.0 modus operandi ...

- small investment is not neccesarily bad (as large funding round does not equate success)

- VCs are not the pre-dominant source of equity capital

- GBF is not the preferred strategy

- double or triple the # of competitors in any space compared to dot-com

- re-cycling or old 1.0 ideas (cause ideas failed for reasons other than the concept itself)

In short, failures are the REQUIRED by product of needed experimentation to exploit an opportunity as big and important as the Internet. Bubble or not, deadpool or not - the opportunity justifies irrationality as the rational thing to do.

KP’s Investment Thesis

Randy Komisar of KP said this at a Venture Beat Interview.

I couldnt agree more ... and you can gleam lots into what type of internet companies KP wants to invest in

1. Companies that does not rely on search engines for more then 20% of its jasminlive traffic in the long run. Otherwise you are just asking google to come and eat away at your margins through adword (notice I mean organic and paid traffic)... (translation, B2C e-commerce is a tough place to play unless you have the secret sauce)

2. Companies that does not rely on an “ad network” (read adsense) to monetize its traffic (even if its completely type-in, self generated). This could mean that the company can achieve enough scale to build its own ad network or ad sales force. BUT more likely it means the company has figured out a way to make money outside of begging user to click on Livejasmin ads.

In short, stay away from Google, beat it where it aint (and there are many places it aint). Ofcourse, I’m not sure staying away from the INTERNET completely is a good idea

Right to Change One’s Mind

Yesterday, Amazon launched endless.com (coverage at techcrunch and techbeat). Obstensibly its an obvious response to the $1B that Zappos.com is taking in a year (close to 35% of the total shoe market) . But even more strategically, its an increasing sign that the first generation internet giants has reached some sort maturity and limits to scale that traditional marketing techniques like brand extensions (ie, Coke -> Diet Coke) are beginning to become popular if not standard strategic growth options.

Furthermore, as much as the web 2.0 crowd (we? me?) would like to believe, mashups are not invented by the internet generation. Using internal assets and re-aligning them to create new products our services was invented when Henry Ford (finally) launched Model A.. And continutes today, the Chrysler Crossfire uses the same chasis as the Mercedes SLK, another example. (What is interesting is that mashups has moved form assembling internal assets to mixing external and internal assets through loose couplings and arms length relationships). For endless and ebayexpress, the main assets that are being leveraged are the inventory (both share a subset of inventory from the mother site).

I blogged about this a few month back and it appears to me that Amazon is hitting the same scalability issues.

It further amazes me how the mentalities of a startup can blind someone from making the right business decisions (better, faster, cheaper /= better for the customer). For some reason, the “why’s” of endless and ebayexpress were not obvious to the pundits of the tech world... but for someone that works at Gap, P&G, or a HomeDepot it must seem very obvious.

Every brand has its limits, even Amazon and ebay. Ofcourse, Amazon decided to completely remove itself from the endless brand while ebay tried an extension to target new segments of users.

One size fits all is only true for baseball caps (and even that is questionable). Beyond the brand, the flexibility to create custom search/discovery experience within a category can create a significantly better conversion rate AS WELL AS re-enforce the brand itself. In the physical world, the Apple Stores and its shopping experience are a clear extention of the Apple brand.

“Enhancements” are not always better. Ajax might be cool, you might love all the drag and drop functionality of the latest website profiled on TechCrunch. But you and I are a sample size of one. For incumbent companies, by definition through the size of its userbase, late adoptors are the largest segment. In the end, the feature needs to be rigorously tested with a large enough sample size to really know if “enhancements” are good for the bottom line... not just kinda cool.

Honing the Pitch

As many people already know, one of the original bloggers in the tech blogosphere (no its not Arrington of Techcrunch ... earlier by 2 years atleast ) Jeff Nolan has left SAP Ventures and joined Teqlo as the CEO. Jeff’s latest post is about honing the “positioning” statement for VC’s. The comment section is really interesting with everyone constructively helping to improve the statement.

Truth be told, it was quite ironic to see Jeff having to struggle through this :) having been on the other side for quite a while as a VC ... ( one of my VC’s in fact) ... This is a very hard task especially for Teqlo because they are not an application company, but a enabling infratructure with a end user utility (wow, a hybrid) . The so called “killer app” or killer mashup borne out of Teqlo is probably something that has yet to be imagined (but that too is the upside of the Teqlo, that its value proposition is only limited by the imagination of the community it builts). Jotspot (not competitive but structurally similar company) tried to solve this problem by building a few example applications along with the launch of its infrastructure ... to not only stir the imagination but provide value at launch.

Zoli Erdos has very good advice ...

Of course your statement about describes what Teqlo is … i.e the statement is true, it fits the business … but …. does it describe Teqlo specifically?

To paraphrase ... start with the end user and the “why’s” and end with “how” the product can serve that end user UNIQUELY, SPECIFICALLY, and BETTER. (easier said than done ofcourse!)

A few other random things to think about when putting together the “positining statement”

1. Entrepreneurs and “intra-preneurs” faces similar hurdles in getting resources for a project/venture

2. First 3 minute of VC’s or a senior exec’s time (if you are pitching an internal project) is when you hook or fail to hook him/her. Make sure you have something catchy (and important) to say.

3. It is the external version of the internal mission statement (which aligns the company and helps with resources allocation ... ROI Metrics + Strategy + Mission = prioritization)

4. VC’s are not as technical as they claim to be ... dumb it down for the VC’s ... if they like the pitch they will find a “venture partner” to do more DD ... at which time you will have plenty of time to white board out EVERTHING ...

5. Investments pan or dont pan out usually in 3-5 years. In the mean time, VC’s needs your help bragging his latest pet investment to his country club buddies ... the positioning statement needs to be catchy enough to impress his foursome like a 325 yard drive off the first tee.

6. It serves as the first sentence of the boiler plate at the end of every press release. And believe me, most journalists will literally just copy and paste it into their writing. So this statement will end up EVERYWHERE.

7. Correlary to 6, many hyperlinks will be built off the words in the positioning statement from these articles to your website; as a result, these words will become your keywords for search engine ranking. If you want your website to surface when someone types in “best sausage in Indiana” in Google, make sure a variation of that appears in your positioning statement.

8. Its nice to have friends in high places that you can bounce the pitch too without worrying about an investment decision ... (VC’s preferably) ...

9. One of the hardest things about these statements is how to balance the short-term value proposition (we are a search engine) , long-term strategy (advertising is our business model), and vision (we want to organize the world’s information) ...

10. personally, I miss working on things like this ...

YHOO is a SCREAMING BUY!

(My initial title for this post was “Yahoo Panama Working?” I just changed it to “YHOO is a SCREAMING BUY!” after I did some quick number crunching.)

Ran across this press release from Comscore which claims Yahoo! Sponsored Search Ads

Click-Through Rate increase 5% and to 9% in the last few weeks.So the good news first... it appears that CRT for sponsored search results almost doubled WITHOUT take significant share away from algorithmic/natural search results.

Let me do some simple math to confirm...

PANAMA Week I

.106 = sponsored clicks / click

+.05 = sponsored clicks / search query

+.05/.106 = Incremental 0.49 total clicks per query

PANAMA Week II

.111 = sponsored clicks / click

+.04 = sponsored clicks / search query (.09-.05=.4)

+.0.4/.111 -> Incremental .36 total clicks per query

So in two weeks, the clicks per query has increase by a total .85 clicks.

To give some background, total clicks per query can approximate to quality of the results (not globally especially when the # is large it might actually point to having bad results, but its safe to assume that we are at a local optimal since Yahoo does have a decent search engine). Futhermore, the rule of thumb is that in general search engines generate 2 clicks per query. To increase clicks per query by close to 50% is freaking amazing.

Even more importantly, I was afraid that sponsored ads was taking click throughs AWAY from organic results which would mean that the effect is short lived and that the numbers would point to LONG TERM dissatisfaction with Yahoo’s organic search algorithm.

BUT to my amazement, the total # of clicks per query has increased showing that overall clicks per query has increased significantly thus organic search clickthrough has maintained (or even improved) because of the change in sponsored search algorithm (aka Panama).

These are all great news for Yahoo. I’m gonna put some money in YHOO now...

(CAVEAT, I’ve NEVER made ANY money in stock investments so dont listen to my ramblings)