the vc in me....

The Not-for-Profits Strike Back

I believe Not for profits (non-profits) are disrupting for-profits on the internet.  These organizations - often started by a community-oriented founder - create a simple application or database, grow their user base thru word of mouth and community  and eventually use the community to crush all the for-profits trying to provide a similar product.   Large companies try to compete but the power of the community is too powerful vs a monolithic "borg-like" competitor with a top down, control-driven approach to content/software creation.  

Examples of success include:

Craigslist - classifieds

Wikipedia - encyclopedia/biographies

Firefox - internet browsers

Openstreetmap - world maps

Linux

Various Distributed Computing projects

What's most interesting is how the not for profit structure innocently makes it VERY hard to compete with them.  They usually start out with very low overhead as its a labor of love from a founder that is cash strapped.   

They have such a low cost infrastructure (most of these orgs have less than 40 employees at scale and many volunteers) and the marginal cost of delivery of their service is so low, that they can offer much of it for free or very low cost without worry of profit maximization.  This brings in more users, which strengthens the content or application, which then provides even more value - a virtuous cycle hard to break (the "network effect") - even when the resources of large companies are turned on these areas.  

Its also interesting that most of these organizations eventually turn into for-profits or start a for-profit arm.  This hasn't changed the dynamic for the companies as most (like Mozilla) reinvest the profits back into the product/community (e.g. Mozilla likely earned $150M in 2008 revenue and $100M in pre tax profits that they put back into the foundation).   Craigslist is expected to achieve $100M in revenue in 2009 and although its for profit, remains very lean and mean.

I expect this community-driven, not-for-profit approach to start overtaking other verticals on the internet - it will be a fascinating trend to watch.

 

Prediction: Social Nets Will Make More Money Off Site vs On their Website

Social networks are here to stay...100s of millions of consumers now use them as an indispensible tool to stay current with friends and interests.   There has been a lot of debate on how they can make money.  Let's keep in mind that they ARE making money today (facebook over $300M annual revenue and LinkedIn well over $100M) - more than most internet sites - but just not a lot on a per user basis. 

I believe this is because the traditional ad model doesn't work well here - social networks are a communications platform at the core.  People log on daily to check messages, photos, and videos that were added by interesting people for them to view.  They are not coming to view content as much as people would have hoped nor are they using it as their main portal or launching point for all web activities (Google won that so far...)   Communications sites have never monetized well because the consumer is focused on communication and not going to be diverted by ads.  I experienced this firsthand running Snapfish and trying ad sales for 6 years against online personal photo pages.  We got advertising up to 10% of revenue but that was about it - why? - lack of performance and attention from users - they were too busy viewing photos vs clicking on ads.  Many social networks suffer the same issues as shown by their dismal click thru rates.

That said, I do believe there is a big opportunity - its in the Data that is captured explicitly (entering info on yourself in your profile) and implicitly (the groups you join, the content of the messages you send each other).   In some social nets like Facebook and LinkedIn, the data is very deep and for the most part true.  The profile page itself is a treasure trove of information on age, gender, location, interests, work experience, favorite movies, tv, etc - all the attributes a great brand marketer wants to target when reaching an audience.   The advertiser may not have measurable success reaching the user in the social network, but if they had access to the data when the user is on other sites  - more conducive to engagement with ads - the advertiser would be in nirvana.  

The data economy is developing fast where data is decoupled from ad inventory and used to target audiences where ever they are (Mayfield companies Audience Science, Adchemy, and Rubicon Project are leading the charge here).   I think the big social networks are aware of this but are treading carefully given the privacy concerns.  I do believe when they find the right mix of user privacy and sharing of this data, they can provide it to advertisers, networks, and publishers and profit handsomely from it.  They can make more money on a user by charging a tax for the data each time its used vs the pageviews from that user on their site. 

Let's do the math and make some assumptions to illustrate:

I used the following estimates on ad impressions/user/mo on top social networks:

Facebook  356

Tagged  387

Myspace  452

Avg  403

...and I assume $.50 as the assumption for eCPM (which I believe maybe high).  Thus, on average a social network makes $.20 per user per month on ads on their site.   Now, let's look at how many ad impressions the typical internet user encounters in a month - I've found it to be about 1,650 per month.  Le's also assume the following:

- 50% of these impressions could be targeted using the vast amounts of profile and friend data from SNS

- $2 eCPM for such a data targeted ad

- the social network keeps 15% of this revenue for its data (which seems like the going rate talking to data players).  

That's about $.25 per user per month.  So, if my assumptions hold true, then a social network can monetize their users $.25 offsite vs $.20 onsite....

Social networks will make money on their site - thru ads, virtual goods, etc - but the real big opportunity is freeing all the user data and enabling it to target them wherever they are on the web.  

Professional Marketplaces - Web Based Platforms to Help You Make Money

The current economic crisis and looming recession is going to unfortunately result in a lot of unemployment.  It's estimated that the US already shed 1.2M jobs so far this year -- and the worse may yet come in 2009....

The silver lining in all this for the smart, skilled yet unemployed folks are that it allows a new beginning in their life.  Perhaps they want to change jobs from the mundane corporate life to the teaching profession.  Or maybe they simply want to take their skill/craft and work for themselves - the only boss they know that can't lay them off ; )

Now more than ever, the web facilitates the lone entrepreneur or professional to make money on their own.  The tools exist to market themselves online, take orders, and even deliver services alone or collaboratively like education, coding, design, etc - all online thru platforms.  This brings efficiency (e.g. lower costs), disintermediation of brands (e.g. individual tutors build their brands vs brands like Sylvan or Kaplan), and leverage/scalability to all participants.  

The earliest web based platform to help you make money may have been ebay - helping the masses sell their beanie babies for profit.  Now there are platforms for the service economy in education, software development, translation services, broadcasting, writing, etc.  In this new world, web companies do all the "grunt" work for the professional and allow them to focus on what they are good at.  They go beyond online marketing and order taking into business process outsourcing and sharing best practices among the community.  Some call them "professional marketplaces"...

Examples include:

- Mechanical Turk - this cool marketplace from our friends at Amazon enable anyone to do human tasks and make some cash.  Several of my startups are using this for simple yet fundamentally human tasks such as image classification, reviewing content, etc.

- Etsy - online bazaar for individuals that create handcrafted goods.  This is as much about community as it is about shopping for hard to find goods.  The community shares tips with each other on how to market themselves best online.  Etsy organizes it all in one place and provides all the tools.

- Fixya (note: I'm an investor) - the Q&A marketplace for tech support for any consumer product.  If you can't wait, you can get live support for a fee which we share with the experts. About half of our experts do it for the money vs just the glory.

- Edufire. Wiziq - marketplaces out of the US and India connecting tutors anywhere in the world to students - focused initially on test prep and language instruction.  Not only do they help you connect with students but they also provide the tools for delivering online lessons - a full interactive chat with blackboard and even video.

- Cafepress, Minted, Threadless - online storefronts and communities for designers to sell their wares - in t-shirt, printed form, or any object you can put a design or photo on (reminds me of my snapfish days!)

- elance, odesk - connecting programmers, designers, and other professionals with jobs online.  I've heard many stories of entrepreneurs finding great worker bees on these services.

- ustream, mogulus, qik - It doesn't all have to be about learning and coding.  These platforms enable consumers to have fun and become video hosts or programmers to broadcast live video and generate a following (and hopefully advertising revenue!)

- reverbnation - sites like this help you manage the un-business of playing music in a band.  

- about.com, mahalo - these seem like great reference sites on the outside but they are really a super-powered community of writers that are doing it for a living - and thriving!

I think this an increasingly important area as more people out of necessity fall into the land of "SMB" and are looking for a quick way to get started.  The web is not just about marketing or entertainment - its now about earning a living...

Let me know if you came across any great startups in this sector.

New College Degree: Marketing Engineering

I believe consumer marketing has fundamentally changed – online has been the catalyst of this change as every user, intention, and action is trackable and hypotheses can be tested and validated in minutes.  This will move into other marketing channels – e.g.  TV as it goes more digital (note the Google-NBC announcement for the selling of broadcast TV in their online marketplace), print media (e-books), and of course outdoor (digital signage). Its not just change in customer acquisition either – it extends into the areas of customer retention and  loyalty as well.  Again, every action is trackable and hypotheses on why consumers buy at the right price points or become loyal can be tested and changed in real time.

Meanwhile, I feel the academic world of marketing education has not kept up with the change.    Marketing is often viewed as a “soft” and less rigorous major that one takes if they are more interested in boozing their way through college. The “brains” go for engineering, math, or medicine.  The reality is that in todays world technology innovation is increasingly commoditized and the marketing edge is what matters.   Marketing is more like applied math or engineering where the scientific method (hypotheses followed by testing followed by conclusions) yields the results -  with a twist of psychology thrown in…   The marketer has to use their understanding of human behavior, needs, wants via psychology and come up with hypotheses on the best way to get the consumer to an action – then test all these in real time (often multivariate testing as each text or image or color can and should change) and deploy – and then test all over again….

 

There is clearly strong demand for these type of people in every startup I’ve worked with.  There have been countless mistakes made in hiring a “brand marketer’ who doesn’t get “digital marketing”.  We are in need of more talent – even here in silicon valley.  I think schools should step up and help fill the long term void by teaching the new marketing.  Marketing engineering could be one of the most valuable professions and become what every smart bright-eyed college student aspires to conquer…

Lights, Camera Action - its the LIVE Web!

I've noticed an explosion of services around what is called the "live web".  This is about synchronous communication (e.g. chat vs email which is asynchronous) and live events.    This is happening more now because the web is more social, input devices are more common (webcams, microphones), communicating via IP is cheaper than using old telecom networks, broadband enables a better user experience with less latency, and the growing demand for the long tail of content.  Aside from these drivers, I think a key desire being fulfilled is the social nature of viewing a live event together.  This is why chat is integrated into many of these apps (MMOs, live video broadcasts) and has high usage.  It's not just the viewing of the event but the excitement of seeing it unfold live with other people - that can't be replaced by a PVR or on demand web video. 

This has been tried in the past but web-focused solutions seem to have caused a swell in usage - with low friction and an easy UI (e.g. meebo, tokbox).  Several companies are breaking new ground in this area:

- Meebo, Userplane, FB Chat - enabling live text communication (e.g. chat) embedded in websites

- Skype, Jaxtr, Rebtel, Jajah - enabling live voice communications on the web or via phone - cost is a big driver here.

-Ustream, Mogulus, Justin.tv - enabling live video broadcasting - whether you are a guy in a closet or a big broadcaster trying to reach a new internet audience.  This is enabling everyone to have their own broadcast channel - allowing the long tail to broadcast as spectrum is no longer a constraint.

- Tokbox, Woome - live video communications ranging from plain old video conferencing to video introductions (Woome's video speed dating)

- MMOGslike World of Warcraft, 2Moons (acclaim), etc - live massively multiplayer gameplay

Each of these areas has its own challenges. For example, while phone calls and chatting are relatively ubiquitous (which is why those services can have broad reach), how broad based will video broadcasting and video communication become?  Not everyone wants to be seen or see the other person when communicating...another challenge is monetization vs the cost of delivery - without fancy technologies like multicasting (which never took off), live requires lots of bandwidth and is harder to use cost saving measures like p2p distribution.

That said, this is a fertile area for investment - send me your ideas!

It's All About the Database...

The web is evolving fast from a simple web page/website destination model to one of distributed data (which is synonymous with content) and applications that appear wherever the user needs them the most - whether its on a social networking profile page or a merchant page where you are about to transact.

This may seem like a simple shift but the effects on the ecosystem are profound and new winners will be created.  A web publisher can no longer think in the paradigm of a website only and driving traffic to a destination.  Sure, you have to have a destination - but in many cases its becoming a showcase site vs where the real action is.  The extreme examples are widget businesses - and Mayfield has made several bets here from Gigya (providing widget distribution infrastructure to anyone with content or apps) to Slide (vertically integrated network of widgets - now the largest in the world).  Both have significant momentum (billions of impressions per month) which would not have been achieved in the old paradigm. 

Why is this happening?  Very simply, because the user is pulling the web in this direction.  More deeply, because publishers want to take advantage of traffic and context on other sites and present relevant info when the user needs or wants it most - and both sides of the equation - publisher and data/app provider - are playing nicely.    A website is really nothing more than data and applications on a page so it makes sense that a publisher puts some structure around these items, makes them discrete, and "atomizes"/redistributes it everywhere.   Web services, APIs, and to some extent the standards set forth as part of the "semantic web" effort are making this possible - along wth an important general shift to openness in all businesses.  The destination owners (like facebook) are realizing they can't satisfy all their users needs but have great context (in their case a powerful social graph of people you care about) for others to use.   

What does this mean for investing?   Well, there are a lot of new infrastructure needs (like Gigya) but there are also new opportunities for disruptive content providers.   A content provider needs to think of themselves as a database provider now more than a text or media publisher.  I think there will be big companies created that own the most important databases in verticals - the new wave of publishers embracing concepts like crowdsourcing and UGC.  One example is an investment I made called Fixya - where users provide tech support and tips for consumer products to other users.  It's now the largest user generated tech support site in the world - with over 7M unique visitors and growing like a weed(thanks to Google SEO'ing all the solutions - kinda like wikipedia). 

What makes the Fixya database so valuable?  It can scale infinitely as more products are launched, old ones remain on our shelves, and users generate the content.  The data is categorized (by product SKU and category) and can be cut up in many different ways providing deep knowledge where the consumer needs it.  It is self policing (like wikipedia) as the expert community is rated and the best content rises to the top (like youtube).   Since it's treated like a database, this info can be presented to users where its most relevant - at a manufacturer site, in a shopping search engine, discussion forums or a merchant page.

I think every publisher of content or applications needs to change their mindset and think like a database provider  - it's no longer optional.  I'm looking for other "fixya"'s out there in large consumer and b2b categories - let me know if you have one!

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Short Term Pain for Long Term Gain? Not for Consumer Internet Users

In today's world, the largest risk in a consumer internet startup is typically consumer adoption.  VCs ask ourselves the question - how many users will the service attract, engage, and monetize and how quickly and easily can this occur?

One simple design factor I've noticed that can be influenced more than others is the position where the product requires user investment (in terms of time) to receive benefit.  The simple premise is that human nature is such that we are more willing to engage in products that require little upfront investment.  Even if the short term cost will produce 5x returns in future use, we are moving too fast around the net to make this tradeoff - we like to find the path of least resistance.  That said, we will tolerate increasing time investment as we use and get addicted to the product.   

Too many products require a significant investment of time upfront (e.g. long registration forms, entry of preferences, creation of a large profile, etc) before any value is received.   The consumer may be excited about the proposition (e.g. meet new friends, save time doing X with our service, find the lowest prices) but attention spans are increasingly tuned to short term benefits (e.g. search results from one query vs a multi-faceted advance search).  The "UI" was even worse in consumer products which required reading a 25 page manual before you can benefit - of course, now the smartest product manufacturers include a one page graphical quick start guide which I would bet is used far more often than any other manual.

One way to solve this problem is to collect only what's absolutely needed initially and then gradually ask for more information - even if the product won't be as flexible or sacrifices some of the long term benefits.   These changes seem easy but have huge implications on databases, customer tracking, etc.  For instance, at Snapfish, we first made the user do a lengthy registration process before uploading a photo to snapfish.  After we noticed the dropoff, we thought it would be easy to allow upload first and registration later once we have the user's photos and they take an action which requires registration (e.g. buy or share photos).  It seemed simple but it required us to rethink the way we store customer data as some users would have "orphan" accounts and this issue rippled thru all processes that involved customer data - needless to say it was very tough to even test this change.   With new services, its a lot easier to "do it right the first time" (we called it the DIRFT process) - which is advice I give all our startups.

In summary, think about the fastest path to user benefit with least cost/pain (time or data investment) - even if it sacrifices functionality or long term benefit.  Once you get a user hooked, you will have their attention to move them up the cost/benefit continuum.   

Reccomended Movie: The 11th Hour

As you know from previous posts, the social cause that I am spending time on these days is Climate Change (see the Critter Crisis post for why and what i'm doing about it).

I recently saw the screening of 11th Hour which is a new documentary from Leo DiCaprio and Directors Leila Conners Peterson and Nadia Conners.  I highly recommend the movie to those that are skeptical or simply interested in the issues facing our planet Earth.  Inconvenient Truth does a great job using the star power of Al Gore to lay out a compelling case for Climate Change.  11th Hour is different in two ways.  First, it provides the audience an overview of the many problems facing Earth - not just climate change (e.g. overpopulation, overuse of land, deforestation, etc) - the meta theme is overuse of our resources.  The second difference is that almost half the film is dedicated to the solutions that are being worked on to address these issues -  the audience leaves the theater with a sense of hope and motivation vs fear and helplessness. 

The downside of the film is that it is done in a documentary style that is very informative for the "intellectuals" of our world but is missing the story arc and characters resulting that's the hallmark of cinema to make it a mass market success.  That said, this is a good start in bringing it all together and perhaps will inspire more film makers to blend characters/storytelling to get the message to a wider audience.

I'll leave you with a great concept from the film -  we are wrong to say our planet is in crisis when its the human race which is at risk - the earth will do just fine in the long run without us....

Generational Disruption in Media

Venture capitalists and entrepreneurs believe the greatest opportunities are those disruptive to the current state of the art/market. This disruption typically happens with a major technological change (e.g. the PC, the internet, the mobile phone, broadband) and sometimes by the rise of a new geographical market (e.g. new startups in China that take advantage of innovation started in other countries). 

There is another type of disruption i've noticed that happens in the consumer space and its "generational".  The services that appealed to one generation (e.g. those of us in our 30s like Yahoo, hotmail, etc) tend not to appeal to a new generation (e.g. those in the 20s or teens like MySpace, AIM, etc). A generation shift used to be separated 30-40 years but now it occurs much faster.  The rate of change from one age group to the next is so fierce that even a difference of 5 years could mean a whol new pattern of consumption.

This "generational disruption" creates new opportunities at a faster pace than waiting for the next big technological wave - especially in internet media.  An example of a disruptive shift that has occured is in my old hunting grounds - online photos.

Consumers in their 30s were early adopters of online photo services because provided a secure and private area to share photos with friends and family which appealed to this generation and their lifestyle (family oriented, concerned about privacy, etc).  They didn't really care about "user generated content" and were limited in their "self expression".  They valued prints and gifts and businesses like Snapfish and Shutterfly were built to satisfy their needs.  Our assumption was that this would be our core demographic of users but we would also appeal to younger users as well since they were adopting digital photography and had the same basic need to share photos.  We would provide features that appeal to both of these groups of users.

Over time, we found it's really hard to build your service to appeal to two different age groups - especially when there is a generational shift in usage.  Younger users wanted open and public areas to host their photos and they wanted the world to see them and comment on them.  They care little about prints and more about showing the world what they are up to and how important they are.  One is a commerce model and the other a media model.  We frankly couldn't create a service to cater to both groups.

Thus, the rise of Photobucket and social networking photo sites such as Facebook, Tagged, and Myspace Photos.  These sites are media models which thrive on reach and page views.  Snapfish and others are commerce models where page views aren't a core metric.  These sites have all done well against their metrics and although its not clear if a billion dollar media business will come out of online photos, there is definitely demand - manifested quite differently depending on the generation.

Other examples of generational disruption include:

Classmates --> Facebook

Yahoo --> Myspace

Hotmail --> AIM --> Twitter (?)

World of Warcraft --> Club Pengun 

There's bound to be more interesting, "generationally disruptive" opportunities in the future happening faster than ever before - and i'll keep my eyes open - this time as a VC vs entrepreneur ; )