VC Confidential

How Effective Are LinkedIn and Facebook

I have been using LinkedIn for a couple of years now and Facebook for about 6 months. While I have found both interesting and have played with an array of Facebook applications, I haven't found either extremely useful from a business perspective. In comparing notes with others, most tell me that they use them but neither has led much to new sales, key introductions, etc. Why is this?

On the LinkedIn side, the issue seems to be that the benefits are asymetrical. When I contact someone, I am always asking for a favor. I am not building up goodwill through other interactions and then drawing down on this. No, I am simply pimping friends and one off relations for direct intros. While I can see six degrees away, I can really only access two degrees (maybe three if I work hard). It's awkward and doesn't usually lead to an effective intro when I ask a friend to solicit a favor with his/her friend for an intro. The third degree doesn't know me from Adam and, at best, takes an email as a courtesy. I am hesitant to hit the network hard (as are most of my friends) as I don't want to be the guy know as the favor "spam" guy.

Also, the chance of finding a nearby hit depends upon how many links I have. However, for those people with 10,000 friends, how close can those connections really be?

At least Facebook give me an array of reasons to interact with friends or people. I can get an updated view into what friends are doing and have several ways to engage ranging from books, travel and such. However, as I add friends, the noise in my feeds grows exponentially. There are so many applications and ways, one is at a loss on how to best interact. At least, I can pick my closer connections and use FB to tighten my bonds there. However, finding the intro to the head of Cisco's bus dev group is not so intuitive or easy. I need a full time associate whose job it is to figure out our business (and personal needs) and to figure out which apps help us get there.

So, as I click away on the various accept link or friend offers, I wonder if it is going anywhere or am I just adding more noise to my world. For now, I'll probably focus on bringing good friends and acquaintances into FB and use it to stay closer to them. Still not certain what I'll do with the growing LinkedIn web.

If anyone has figured out best practices that are common sense, low overhead (e.g. Not a second job) and effective, let me know...

On the LinkedIn side, the issue seems to be that the benefits are asymetrical. When I contact someone, I am always asking for a favor. I am not building up goodwill through other interactions and then drawing down on this. No, I am simply pimping friends and one off relations for direct intros. While I can see six degrees away, I can really only access two degrees (maybe three if I work hard). It's awkward and doesn't usually lead to an effective intro when I ask a friend to solicit a favor with his/her friend for an intro. The third degree doesn't know me from Adam and, at best, takes an email as a courtesy. I am hesitant to hit the network hard (as are most of my friends) as I don't want to be the guy know as the favor "spam" guy.

Also, the chance of finding a nearby hit depends upon how many links I have. However, for those people with 10,000 friends, how close can those connections really be?

At least Facebook give me an array of reasons to interact with friends or people. I can get an updated view into what friends are doing and have several ways to engage ranging from books, travel and such. However, as I add friends, the noise in my feeds grows exponentially. There are so many applications and ways, one is at a loss on how to best interact. At least, I can pick my closer connections and use FB to tighten my bonds there. However, finding the intro to the head of Cisco's bus dev group is not so intuitive or easy. I need a full time associate whose job it is to figure out our business (and personal needs) and to figure out which apps help us get there.

So, as I click away on the various accept link or friend offers, I wonder if it is going anywhere or am I just adding more noise to my world. For now, I'll probably focus on bringing good friends and acquaintances into FB and use it to stay closer to them. Still not certain what I'll do with the growing LinkedIn web.

If anyone has figured out best practices that are common sense, low overhead (e.g. Not a second job) and effective, let me know...

Ask the VC: Ad Revenue Models

One of the readers at Ask the VC posted the following question and I did a guest post on it for Brad and Seth:

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. There are three key players in the ecosystem: Publishers (owners of the sites like blogs, media sites, etc), Ad Networks (aggregate advertiser on behalf of the Publishers) and the Advertisers themselves. Publishers 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.

Goldman to Build $1B Philanthropy Fund

Whitney Tilson noted the following in his recent email newsletter. I think this is amazing and hope that our buyout and venture brethren follow suit. I have always believed that the philanthropy tsunami unleashed by Gates, Buffett & the Silicon Valley crew would lead to new era of giving equal in impact to the robber barons. The latest move by Goldman only adds momentum to this...

"Kudos to Goldman!  Goldman really is an exemplar in many, many ways.

On the back of record profit so far this year, Goldman Sachs, the global investment bank, is starting a donor-driven philanthropy fund that aims to reach $1 billion over the next few years.

The fund, GS Gives, is initially focused on the firm’s roughly 350 partners who will be strongly encouraged to donate a fixed amount of their compensation.

If each partner gives $250,000, the fund will begin with $87.5 million. Eventually the fund will be open to a larger group of Goldman employees. Goldman’s asset management group will manage the fund free.

The program comes at a time of tremendous wealth creation for Goldman employees. The firm is one of a few that has been largely untouched by the meltdown in the subprime mortgage market and it stands out among its peers in the amount of money it has been able to make so far this year. In 2006 Goldman made $9.4 billion in profit; for the first nine months of 2007, it earned $8.2 billion.

“We know we make a lot of money, and we know that we live in this world and we have a responsibility to give something back,” said Lloyd C. Blankfein, chairman and chief executive of Goldman Sachs.

The Art of the Start

Ironically, I drafted the following post at the same time my friend, Jim Stamos, sent me Marc Andreessen's recent post about the current writer's strike in Hollywood Rebuilding Hollywood in Silicon Valley's Image.

"Last week I posted a rather pointed polemic titled "Suicide by strike" in which I argued that the big entertainment companies were acting suicidally in picking a fight with the writers at precisely the wrong time.

In this post, I more dispassionately outline my theory of why that's the case, and what I think may happen next.

The writers' strike, and the studios' response to the strike, may radically accelerate a structural shift in the media industry -- a shift of power from studios and conglomerates towards creators and talent."

I would argue that the two businesses are eerily similar today and do hinge on the creative art, execution that "pierces the veil of disbelief" and branding/share of attention. I would also comment that the current B2C phase we are in has dropped the cost for start-ups and has shifted more of the power to the "creators". That said, most large successes require significant resources (e.g. more than a Digital Video camera or more than bootstrapping a start-up) and so, the "producers" have leverage vis-a-vis their capital and their connections (to talent, financial markets, strategic information, etc). However, venture requires much more of a cooperative approach while Hollywood has tended to use the buyout "iron fist approach". Here is my original post...

ART OF THE START

Many a time, I have heard entrepreneurs bemoan the fact that their company is just like a successful competitors and yet they are not getting the traction or attention.  I have often thought that the movie and venture businesses had a great deal in common. Both are “hit” driven with high failure rates and success is driven by detailed execution and the stars involved.  Venture capitalists act much like producers whose job it is to make certain that all of the key resources are tied in and the venture has sufficient capital.  Directors are like CEO’s and the key actors are like top managers. While certain talent helps improve the odds for success, the core fundamentals of the story (business or movie) can make or break.

Rishad Tobaccowala, the interactive marketing guru at Denu/Starcom, often says that memorable, impactful campaigns have a compelling story at their heart. In the movie business, it is how the plot holds and flows. In the venture business, it depends on the impression the elevator pitch makes on the investors, customers or strategic partners. Some resonate quickly and others get thrown into the generic bucket.

I wish I could layout what the formula is for success, but it is more art than science. That said, look at the persistence of certain producers (Bruckenheimer, Bay, etc), directors (Spielberg) and stars (Ford, Cruise, Smith, etc) in cranking out wins. Successful producers and VC’s have developed certain pattern recognition advantages and have built out an array of supporting resources (camera men & editors or board members & domain experts) that they can bring in at different phases of the effort.  Success, as in venture, begets success as the most promising scripts (or business plans) will often work their way to the star producers.

A successful company starts with a quality "script". Business model, market size and economics set the foundation for everything coming together. However, few businesses think enough about how the pieces hold together, what makes them compelling and where the “drama” is. Why do people “have to see” the movie and tell their friends. It’s only after this comes together that meticulous execution can drive it to the promised land. This is what the rapid, exponential success stories have in common. The story attracts talent, the talent leads to execution (initial talent obviously comes with the story) and execution leads to success. Without the heart of the story, companies can still be very successful, but it makes it more difficult to break out of the crowd (“aren’t you just like…”).

This may all sound superficial but I do believe that success in entrepreneurship and success in movies have a lot in common. Founders should look to script writers on the art of story, CEO’s to directors for how to motivate and direct people and VC’s to producers for how to pull it all together. The same goes in reverse.  Art is art and hit businesses are hit businesses for better or worse. That said, Hollywood does need to figure out a more cooperative model that aligns the interests of the various players as Marc states above.

Wisdoms of Sequoia's Don Valentine

Over the years, Don Valentine (founder of Sequoia Capital) has had quite a few memorable quotes. He was the original investor behind successes like Apple, Cisco, EA and Oracle and is known to never mince words.  After coming across one of his quotes the other day, I used Google to chase down an array of others as listed below:

"The trouble with the first time entrepreneur is that he doesn’t know what he doesn’t know. After a failure he does know what he doesn’t know and can beat the hell out of people who still have to learn."

"That's easy. I just follow Moore's Law and make a few guesses about its consequences." (on his success investing in semiconductor plays)

"I got to Silicon Valley in 1959. Nothing is revolutionary; it's evolutionary. Look the sequence of Intel microprocessors. It's all predictable. The nature of silicon and software and storage go hand in hand. In the case of software, you just have to be more clever about the nature of the application. So all these things kind of tick along, feeding off each other"

“All companies that go out of business do so for the same reason - they run out of money.”

"Why did you send me this renegade from the human race?" (comment after meeting Steve Jobs)

"Great markets make great companies."

"I like opportunities that are addressing markets so big that even the management team can't get in its way." 

“In 30 years we haven’t convinced ourselves to set up a presence in Boston. It’s a very difficult business to be good at consistently over a long period of time, and it requires a lot of thoughtful and integrated decision-making….”We make enough mistakes on investments we make here (in Silicon Valley), that we’re not comfortable we can (be successful) 3,000 miles away, never mind 8,000 miles away.”

"I am 100% behind my CEOs right up till the day I fire them."

"The world of technology thrives best when individuals are left alone to be different, creative, and disobedient."

"One of my jobs as a board member has been to counsel management to avoid distraction and to execute with constructive paranoia."

“I've always been mystified by the critically important disc drive industry, without which the PC is a useless device. You have to be brilliant in electronics, you have to be brilliant in magnetics and you have to be brilliant in mechanics to get all that memory capacity in a very little place and do it for next to nothing. That market has never been rewarded financially for its brilliance."

How VC's Determine % Ownership Thresholds

Jason and Brad at AsktheVC forwarded to me a question sent in by one of their readers. Their site is a great site for answering a broad array of questions regarding VC and entrepreneurship.

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-$50m post-$.

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).