Go Big, Go Bold

None of These Companies are Making Any Money!

One of the things I have come to realize since moving to Silicon Valley is that 95+% of tech companies aren’t making any money. That’s $0. Zip. Nada. Of the VC backed companies some are making money but nothing close to even $10MM/yr. Forget about the ~$100MM you need to go public.

Some observations:

1. Social is the hardest to monetize. Social widgets/apps can grab significant page views but the CPM (amount advertisers are willing to pay to reach those viewers) is unbelievably low.

2. Any company that plans to make money off of “advertising” (usually meaning display or text based CPM) isn’t making any.

3. Most people in the valley are like sheep. Everyone jumps on the latest trend and creates a [insert buzzword #1, buzzword #2] startup. Currently that’s social anything.

Industries that do make money:

1. Search.

Good luck against Google but if you get any sort of a hit here you’re golden. Still plenty of innovation to be done.

2. Shopping/E-commerce.

Especially CPC comparison shopping and other lead generation.

3. Advertising.

As in you either built a network or are targeting ads better.

4. Travel.

Similar affiliate based or CPC model to comparison shopping.

That’s about it! The only page view advertising companies that make it are ones that just have an ungodly amount of page views (YouTube, MySpace, Facebook). They are really hard to build and everyone is going after them. High failure rate.

To win here you need to be contrarian and right. You need to be the shepherd, not a sheep.

Why the PayPal Guys Have been so Successful

Resilience.

PayPal went through A LOT of "there may not be a tomorrow" situations before they ultimately exited to eBay.

Some highlights: in the beginning very few people were interested in their original plan of transferring $ via palm pilots. They decided to ditch Confinity and switched to providing payment solutions under the brand PayPal on eBay only to be quickly followed by a competitor backed by Sequoia founded by a ruthless Elon Musk. The companies merged which caused big headaches, people leaving, tech problems etc. Their business model of making money off the float wasn't working. They were hemorrhaging money and needed to raise $10s of millions of dollars in a few short months to stay alive. Hackers meanwhile were defrauding them of $10s of millions of dollars. Finally their host company eBay was constantly trying to extinguish and replace them with their PayPal clone service Billpoint. WHEW! And that's not the half of it.

Thankfully PayPal survived. But it wasn't easy. Lesser companies would have folded at any of the above challenges but not these guys. In many ways being a successful entrepreneur is about overcoming and learning from a series of failures. Max Levchin's "never never never surrender" attitude, borrowed from Winston Churchill, helped him and his colleagues push through the madness.

What's the takeaway? VCs should invest in people who are used to emerging victoriously from consistent setbacks and trying times. Entrepreneurs should never give up, always keep an open mind and approach road blocks as surmountable challenges. It's your choice. Sink or swim.

Thank God for the Fed/Ben Bernanke

This economy is scary. Very, very scary. If it weren't for the fed's swift and innovative policy measures last month I'm convinced that we would be well on our way to a depression by now.

The one thing that really ticked me off were members of the media like Lou Dobbs criticizing the government for "bailing out" Bear Stearns and providing necessary liquidity to other big banks. People like Lou have no idea what they're talking about and should not offer commentary on such issues. The fact of the matter is that our entire capitalist economy depends on these institutions and if the Fed were to let them fail the cost to our society would be unbearable. Furthermore the Fed was not "bailing anybody out", they were simply facilitating a transaction that was both necessary and in everyone's best interest. It was entertaining to see Jeremy Seigel, a professor I had for my FNCE 101 Monetary Economics class at Wharton, explain this to Lou who quickly got red in the face and angry that someone was actually challenging him. How arrogant.

Ben Bernanke and the Fed may have saved you and those you care about from very hard times. We should all be thankful that we have them working for us.

Google's 10 Design Principles

Found a link to Google's 10 design principles on Tumblr. According to Jon Wiley, Google's User Experience Designer for Google Apps, good design is:

1. Useful: focus on people - their lives, their work, their dreams.

2. Fast: every millisecond counts.

3. Simple: simplicity is powerful.

4. Engaging: engage beginners and attract experts.

5. Innovative: dare to be innovative.

6. Universal: design for the world.

7. Profitable: plan for today’s and tomorrow’s business.

8. Beautiful: delight the eye without distracting the mind.

9. Trustworthy: be worthy of people’s trust.

10. Personable: add a human touch.

It goes without saying that design is one of the hardest and most important aspects of a web business. These principles are a must.

Who's Building for Joe Kansas?

It's amazing how many companies here in the valley are building products without 1) a business model or 2) solving a real, existing need of your average American. There are plenty of companies solving pain points for very techy people but what about everyone else? What about Joe Kansas?

Who is Joe Kansas you ask? Well, he doesn't blog. Or digg. He's your average American. He's intimidated by technology. He uses the web to consume information (search, news), connect with friends (IM, email), entertain himself (music, video) and occasionally make purchases (products, tickets). If you can make something this guy 1) likes 2) will somehow find out about and 3) upon receiving it be able to understand/use, you may get meaningful adoption. If you can monetize that, you may have a business.

In general there are a lot of innovative things that have been/are being built in the valley. I think that there are opportunities for companies to de-tech this stuff, apply it to a pain, wrap a solid Joe Kansas compatible user experience around it, figure out the business model and distribute it to the masses. GreaseMonkey, for instance, is a good example of a web based innovation has the potential to be completely game changing but will never, at least in it's current state, leave techdom.

Just my two cents. I'm all about Joe Kansas. Build for him.

Facebook and YouTube Will Reduce Islamic Extremism

In many parts of the Middle East Islamic extremism is a problem. Hezbollah, Hamas and many mainstream mosques in Saudi Arabia indoctrinate their young from an early age. In many cases they teach hatred of the west and Israel, the “infidels” of the world. We are painted as heartless, unjust and immoral people.  Not knowing any better, many children in the Middle East believe what they are told. Think of it from their perspective, their teachers, religious and community leaders whom their parents and neighbors respect, surely wouldn’t lie to them.

Maybe, just maybe, Facebook and YouTube will encourage the offspring of Muslim extremists to dismiss the beliefs of their forefathers. An open, accessible web offers young Muslims the opportunity to peer into our society and examine it for themselves. YouTube is an easy, fun way to do this. Everyone loves videos, music and laughing which YouTube is great for. After observing our society through video and perhaps even watching some people their age in this country behaving in similar ways that they do, laughing, playing, enjoying life, they will likely begin developing a sense of empathy for our people and way of life.

Similarly, as Facebook spreads around the world and becomes the global social network it has the potential to become a shared experience upon which we can draw. Two things are particularly interesting:

1. Facebook can be a tool to communicate with and better understand people from other societies. One way this is playing out in my life is via Texas Hold’em Poker on which I play with people from all over the world. Being in a virtual room and interacting with Russians, Chinese, Iraqis, etc helps drive home the idea that we really aren’t that different from one another. I bet people from other countries are coming to similar realizations.
2. As everyone’s childhood friends travel through a global society, they take us with them. This gives each one of us a view into cities, countries and ways of life that we previously didn’t have access to. Seeing our friends in those societies helps us understand and develop empathy toward them.

In the case of Muslim extremism, Mark Zuckerberg during his keynote at SWSX gave an example of this already happening in Lebanon. Apparently some Lebanese Muslims are already getting a taste of the west through the experiences and development of their friends who move to Europe and the US.

The bottom line is that the internet is a powerful medium which is bringing the world closer together. The impact of services like YouTube and Facebook may be profound.

Free information. Believe it. Embrace it. Love it. It’s changing the world.

Barriers to Entry for Web Based Companies

I have been giving a lot of thought lately to what builds sustainable value in web based companies. Clearly you have to build a product which is very valuable to a large number of users and continuously innovate on it which is no easy task, but even if you've managed to do that and get adoption the game is far from over. Any firm can replicate what you have done and steal your user base.

Why might a user stay with you? Well, there are a few reasons:

1. You have a superior offering. This might be because:

A. You built a better mousetrap (Google Search, GMail, GMaps, iPod, iPhone, Macbook Air). There is still the risk that someone else will build a better one than you did which means you need to continuously innovate to beat them to it. This of course is very difficult.

B. Your service gets better with each additional user (eBay, Craigslist, StubHub, Facebook, MySpace, AIM, Skype). In B-school this is referred to as a "Network Effect" and works particularly well for marketplaces and communication products. IE in the classic case of eBay each additional listing attracts more buyers, which attracts more sellers, etc etc.

2. It's painful for a user to switch to another service (switching costs).

I think facebook is an example of a company with great switching costs. Think about it. How long would it take to re-add all of your friends, re-upload all of your pictures, re-do your wall posts, fill out another profile, etc etc to switch to some new social network? A long, long time... so you probably won't... especially if you've been on facebook for as long as the initial, core users have.

3. Here's one that I don't think many people focus on: your users trust you/love you more than your competition.

To me, this seems key for the web. Trust is everything. As long as your users are happy with your product and they trust you, why would they use some random new company's stuff? This is especially true in cases where there is some perceived risk on the part of the user when using the service you offer. For instance, people trust big brands like Amazon, Best Buy and Wal-Mart to provide quality service and safeguard their credit card information enough to be willing to pay an average premium of 15% over an unknown, low-priced merchant.

I am curious to hear any of your thoughts on the topic. It's very, very important stuff!

Stay Hungry, Stay Foolish

I recently discovered a treasure trove of videos of interviews with and talks given by technology leaders on Stanford's section of iTunesU. It's fantastic stuff. I highly recommend you check it out.

One video that has stuck with me was Steve Job's 2005 commencement speech. In his speech Steve explores passion, life and death. Deep stuff. And his advice for all of us? "Stay Hungry, Stay Foolish". I like it.

Invite Media is Making Big Moves

For the past 6 months my friends Nat, Zach, Scott, Provy (the Invite Media founders) and my startup have been working together to support each other in our endeavors. We’ve done everything from sharing office space, bouncing ideas off of each other, collaborating on work, etc. It’s been great to have such intelligent, supportive friends with me every step of the way.

A couple of days ago Invite Media officially became a portfolio company of First Round Capital, one of the best early stage tech VC funds in the world. Congratulations guys! You deserve this and I expect to hear nothing but great things over the coming year.

The Importance of Adventure in Entrepreneurship

Should I take the plunge? What if I fail? What will people think of me? These are all questions that plague anyone considering an entrepreneurial path.

I have been thinking about the role of risk and adventure in enterprise while reading Richard Branson's book Losing My Virginity: How I've Survived, Had Fun, and Made a Fortune Doing Business my Way. Its got me thinking a few things:

1. Richard Branson is absolutely nuts and I love it
2. I need to go on more adventures
3. Taking risks (or adventures) in business is very important

Virgin has been one giant adventure from start to finish. Many of its successes and failures can ultimately be traced to some adventure Richard wanted to go on. The most famous example of this was when he decided to give the airline business a go. His investors, managers and everyone else thought he was absolutely crazy, but he did it anyway. He succeeding in turning his small label and music retail business into a major international airline and ultimately building the enduring, much loved brand Virgin.

What caused him to take the jump and why did he ultimately succeed?

• He was passionate about the opportunity
• He was well aware of the risks, but equally aware of the potential reward
• He gave it his all
• Most importantly, the (ad)venture became just as much a part of him as anything else. In other words, it became personal.

My takeaway: don't be afraid to take risks and when you do be sure to put yourself fully behind your decisions. The day that you get comfortable is the day that you and your company stop growing. And while you're at it, have some fun!