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Archive for April, 2008

Google’s Paid Click Rates: Google Needs the Best Clicks

Posted by Bob Warfield on April 16, 2008

More gnashing and moaning about Google’s paid clicks says Larry Dignan.  This is one of the factors that’s hammered Google’s stock prices as the world worries that Google is slowing down suddenly.  There’s been a lot of back and forth, and Google for its part say they triggered some of this by changing how things work to improve the quality of the click throughs for advertisers.  Tim Armstrong, Google’s president of advertising and commerce in North America has said:

“We have a clear drive that a consumer should see really good ads,” said Armstrong, speaking at a Bear Stearns media conference in Palm Beach, Fla. “The outside world looked at that change as not healthy for Google, (but) advertisers got increased conversion. For us we looked at that as a positive change.”

Google has also said they would compensate elsewhere, for instance by “dialing up” advertising on YouTube.  The latter remark is interesting in the wake of Marshall Kirkpatrick’s article that suggests YouTube dominates video even more than Google dominates search.

I’m not here to predict what results Google will turn in very shortly, but I am here to say that Google’s focus on increased conversion of the click-throughs is worthwhile. 

Why has Google been so successful?  As I noted in another post, MySpace reports $10M profit on $500M in revenues.  Google, by contrast, got there on $80M in revenues.  It was wildly more profitable in other words.

Profit is a sign of market inefficiency somewhere.  In this case, the inefficiency is the gap between how well advertising with Google works versus advertising on MySpace.  In fact, Google was onto a far better mousetrap almost from their beginning.  Being able to eliminate an inefficiency in the markets let’s a company play the spread between the status quo and the new higher level of efficiency that they can offer.

Google’s move here is aimed at preserving or perhaps even widening that gap in how well their advertising works versus how well other’s ads work.  It’s an interesting chess move.  There could be several outcomes:

-  The market doesn’t care.  Google just gave up a bunch of click throughs for no gain.

-  It is a competitive response.  We’re not privy to how big the efficiency “gap” still is.  Ohers may have made progress closing the gap and this is a defensive move by Google to keep it open.

-  It is a prelude to price increases.  If Google has made the gap even wider, they have earned the right to raise prices because the ads are more effective.  With a tough economy, the volume may be down, so it may be important to be able to increase prices.

Profitability is hugely important, and becomes the primary factor in many endgames (the other being strategic value if you are not profitable).  Being unreasonably profitable has always been a Google strength.  We shouldn’t be surprised if they try to manage for continued profitability even perhaps at some expense to raw growth.

Related Articles

Andrew Chen wants to know what it means when services like Alexa and Compete can be so wrong about Google and, “these same, somewhat flawed approaches are driving the decisions of media buyers in a $40B+ global advertising industry?”

As I told Andrew in a comment to the post, it means the quality of clicks really does matter.  Hence Google’s great results.  Hence their continued dominance.  Hence it’s hard to sell advertising if you don’t have an unfair click quality advantage.


Posted in Marketing, strategy, Web 2.0 | 2 Comments »

How To Fix Venture Capital, Part 2: The Opening is As Important as the Endgame

Posted by Bob Warfield on April 15, 2008

Umair Haque has a post getting a fair amount of attention on “How to Fix Venture Capital.”  It is in response to Fred Wilson’s post about needing a New Path to Liquidity.

I don’t mean to be too annoying to our esteemed colleagues in VC, but isn’t it just like a VC to worry about the endgame rather than the beginning?  I suppose they would say of me that it’s just like an entrepreneur to look at the beginning rather than the endgame.  Let’s look at the two, but I think the beginning is the more important phase than staying the course later and Google provides a perfect example.

The VC liquidity complaint is that you can’t take a company public and the M&A game is no great shakes either.  Why can’t you take a company public?  Two reasons.  First, the economy has closed the IPO window for the time being.  Underwriters like it to be frothy so the stock goes up from wherever they price it.  It also helps if the newly public company can make its numbers in a good economy.  The window has not really been open very wide for some time, but there were at least some IPO’s in recent years (I was fortunate to participate in one such at Callidus).  The IPO Window is a temporary problem though, and can’t be viewed as symptomatic of the whole industry. 

The second problem is that companies have to be a lot larger, a lot more predictable, and a lot more profitable to go public.  Figure circa $100M per year, very profitable (or growing like a Google in its heyday), and there needs to be reason to believe the first public year’s numbers are almost a mathematical certainty.

For some types of companies, the mathematical certainty thing is extremely hard.  You either need a tremendous number of small transactions (the Web 2.0 model) or you need a SaaS model that will average your transactions over a broader window than a quarter.  For others, profitability is problematic. 

But there is another problem here.  That $100M revenue number is a very high bar for a small company.  It means they have to run for a lot more years.  In the old model, it worked something like this:

- Build a product first year.

- Get to $1M and fine tune the second year.

- Double every year after until you go public or get bought.

Note that to reach $100M, the progression is 1,2,4, 6, 16, 32, 64, 128.  Figure on 6 or 7 years of selling after 1 year of building and you have 7 or 8 years.  That’s too long for an industry (VC) built on 5 to 6 years until liquidity.  The extra years can drag the firm’s IRR down and make it less attractive versus just buying the old S&P500 index fund for the limiteds.

It gets worse: not every company is a $100M a year business.  Umair says the biggest issue is companies selling too soon because they were pushed by VC’s to do so.  Given my IRR remarks, maybe.  Umair lists Myspace, Skype,,, and Right Media as examples of companies that sold too soon.  I have to bring up Pointcast in counterpoint:  a deal that didn’t get sold soon enough.  They didn’t take a News Corp offer for $450 million and were bankrupt 2 years later.

Deal or no deal?  What of Umair’s examples?

Well, MySpace reported $10M in profit on $550M for fiscal 2007.  It was founded in 2003, so it definitely blew past the growth hockey stick I gave above.  How did it compare to Google?  It was incorporated in 1998 and they raised a little over $1M for their initial capital, and they started selling ads in 2000 and their S1 was filed in 2004.  FWIW, Google’s progression was $86M in 2001, $347M in 2002, and $961M in 2003.  But, the profit went from $11M to $186M to $342M during the same period. 

Therein lies the rub:  Google was ridiculously profitable from the beginning.  MySpace is just getting to Google’s earliest profit level as they are 5x larger.  That tells us it would take ridiculously more capital to get there with MySpace than a Google.  Even today it is unclear for many whether Social Networks have really discovered their business model and hence ultimately what their value might be.  All companies are not Googles, and no amount of stumping about resolve to stay the course and not sell out will change that.  When you’re bleeding capital out every pore and your eyeballs, you sell. 

Why was Google so much more successful?  The answer to that lies in the beginning, and not in the endgame, for it is clear that Google was extremely successful right from the start.  When you’re tripling every year and wildly profitable, it’s easier to sit back and let it ride, or at least, as Paul Graham puts it, to have the balls to ask for an extremely high valuation.  But how do you get into that position to start with?

Let’s ask another question:  Is Google just a total fluke and not repeatable?  One prominent VC said to me, “We’ve built our business on the idea that we can have a Google in every fund but it seems clear the entire industry gets one Google per decade.”  He went on to say that many of his colleagues felt the answer was to wait longer before getting involved.  If Google was so successful so early, maybe the answer is to conserve cash and wait for small companies to demonstrate traction before investing.  Apparently they were almost flirting with the LBO end of the spectrum.

Hence we have a model today where “pro” VC’s largely don’t invest in a guy and slideshow, or even perhaps a kid and class project as the Google guys had.  They want product and some customers.  Let the Angels worry about investing before that stage.  I’ve written before about how the decline of VC fund returns tracks pretty closely their decision not to play in seed funding.  Is there a cause and effect, or is it all just a function of how the economy is behaving?  Returns are still under a lot of pressure, so it behooves us to figure it out.

Something else to think about:  Google had significant technology, and hence significant competitive advantage and barriers to entry.  After their initial $1M’ish investment, which got the original product together, Google followed up just a year later with John Doerr at Kleiner and Michael Moritz at Sequoia splitting a $25M equity financing for Google.  That’s quite an early round of investment and it put Google in the driver’s seat in terms of pressing home the advantage of their technology as rapidly as possible.  Note that this investment came before the company had any revenue whatsoever–they didn’t start seeling ads until 2000!

What’s changed?


In 1998, when Google got their first $1M, VC’s were making twice as many seed investments in software as they do today.  See my post for the data.  Note that even in 1998, seed investments were half what they had been and Google started out with Ram Shriram’s money before they could get to KPCB and Sequoia.

Google raised $25M before they had a dime in revenue at a time when they were the 5th or 6th search engine into the game.

Although Google seemed “me-too” as a late comer to the Search game, in fact they were highly differentiated.  It looked different from the start to users, and it had some radical technology innovation behind the scenes.


Entrepreneurs today have to go Angel.  I read recently that the average Angel investment is $250K.  Certainly the sweet spot is under a million and probably $500K or less.  Given that Google spent $1M to get to their same place in the world, what does having half as much capital in a later (more expensive) time do to the startup world?  It means you’re going to build something much easier than Google.  There is even some thought of trying to get results for 1/10 that in the Y Combinator model.  What can you build for $25K?  What if the market is actually efficient enough to figure out that means it isn’t worth as much?  DOH!  I hate when that happens!

Worse, Angels are often much higher maintenance than professional VC’s.  This anecdote from Stowe Boyd is not atypical among entrepreneurs I talk to:

“Today I had lunch with a smart, seasoned entrepreneur who told me about a 4-inch deal binder he had been forced to create for angel diligence. As I said to him: Run. Hide. Any angel who wants that much security in an early-stage deal is to be avoided like a banker.” Ugh.

Picture how much eye-off-ball time is needed when you’re preparing 4-inch binders to raise $256K every 6 months to keep your deal going.   Compare and contrast that to raising 18 months of runway in the old model.  A good friend who helps entrepreneurs raise money and is herself a former VC said her husand had to call on 60 different investors before he got funded.  In the old days 12 or 15 meant you had the wrong idea and should move on.  Not hard to guess who got more done that mattered to the business:  it was the entrepreneurs in the older time.

With so little capital to build a product, we see endless simple me-too plays.  It’s not that hard to build a Web 2.0 property.  Yay!  It’s not that hard to rip-off a Web 2.0 property.  Boo!  Did you see how easily Google copied 37Signals with Huddletalk?  Get ready for a big steaming cup of FAIL if you think building trivial products for no money down is going to be a winning model.  You’re going to pay for it in the noise and confusion when 10 others copy your idea or variations of it in no time flat.  Fast Follower strategy is now going to be Fast Pillaging Horde on your Trail.  Yikes!

So we get a lot of vitamins, because it costs too much to build painkillers.  Software for business, where an ROI is easier to measure than with Twitter, is almost by definition going to cost 2-3x more to build.  The IT gatekeepers will simply insist that more of the basics are covered before they’ll look at it.

How To Fix Venture Capital?

Umair writes that it’s just a matter of conviction.  As he says, “rediscovering the purpose to put true, durable, meaningful conviction behind investments.”  Aw, come on, though.  Given Google’s numbers, conviction was easy once they got rolling.  Profitable and $80M in 2001?  Tripling every year and even more wildly profitable?  Sure we’ll stay in with those results.  I’m with Paul Graham in saying that Umair is wrong, although I love his passion.

The real conviction came at the beginning, when Doerr and Maritz put $25M to work before a dime of revenue was visible, and when Sriram gave some kids $1m to build a prototype.  Real conviction is building out a big expensive technology vision.  That’s right, a technology vision.  Google’s 2001 financials tell an interesting story.  In 2001, they spent as follows:

Cost of Revenues (Data Center Ops):   16% of revenue

Research and Development:  19% of revenue

Sales and Marketing:  23% of revenue

General and Administrative:  14% of revenue

When was the last time you saw a company with $86M in revenue spending so much on R&D?  For comparison, here are’s numbers when they were doing $94M in revenue, a similar size:

Cost of Revenues:  15% (SaaS can be delivered at a similar cost to Search, it seems)

R&D:  10% (half what Google was spending and more what the world thinks is in line)

Sales & Marketing:  60%  (clearly hugely inefficient, hence the whole “Sales 2.0″ and Freemium movements)

G&A:  22% (also much less efficient than Google.  Perhaps this is a function of SOX.)

What if the problem today is that there is not enough capital available to invest in difficult technology?  What if you need to build a product that will cost $2M to get to an interesting level of traction?  Worse, what if it costs $5M?  What if you need $25M like Google did?  You simply can’t get there on Angel financing and the VC’s aren’t there either.  So the deals never get started.

Think of it this way:  If you had a chance to spend 2x on innovation versus 2x on sales and marketing versus the competition, which one do you think provides the more lasting advantage?  Which one is strategy and which one is merely tactics?  If you’re a VC, which one do you prefer to spend your capital on and does your current investment strategy really reflect that thinking?

This is not an excuse to ignore profitability, BTW.  We started out looking at how unprofitable MySpace is compared to Google.  Part of finding your product/market fit is profitability.  Too much emphasis on growth without regard to profit may be questionable.  People are fond of talking about how far Google got before a profit, but it doesn’t look that way to me at all compared to MySpace.

To fix VC, start at the beginning.  With portfolios, you want some counter-correlation anyway.  If everyone follows the same model, you are prone to the same risks.  Put seed back on the table.  Look for those big ideas that are worth a more expensive seed.  Revel in the idea that not many are getting funded that way so perhaps there will be little competition.  That lowers your cost to sell dramatically when there is less noise.  It also speeds adoption when customers find out you have the only game in town.  At the same time, consider Paul Graham’s advice.  Spread the net with smaller investments to cover more bases until you get the breakout.  It seems to me that VC’s today are stuck in the unhappy middle ground.  If they’re all there, their deals are all highly correlated, and they going to regress t the mean.  Not a happy place.

Fred, you’re right, VC’s need to reinvent the game.  But consider the beginning as much as the end. 

You just might find another Google.

Related Articles

Prototype Invest is a new firm R/W Web is talking about whose mission is to take equity and create the initial prototype for startups.  Sounds like others are having a problem finding seed money to build their prototype.

Posted in saas, strategy, Web 2.0 | 5 Comments »

Are Entrepreneurs Happier Than Others?

Posted by Bob Warfield on April 15, 2008

From Fred Wilson’s great post “Ten Questions About Entrepreneurs” comes one that invites comment:

Are Entrepreneurs Happier Than Others?

Having founded 3 startups, I am generally a happy person.  I am happiest when my day is entirely entrepreneurial: doing what entrepreneurs do best.  I agree with Fred’s definition of what they do, BTW, which is turning ideas into businesses.  The act of creation, in general, is something I really enjoy.

Inevitably, there are also days that are decidely not entrepreneurial.  This happens more frequently as a company grows, although having been at Borland in the hey days, I can tell you a $500M a year company can still feel very entrepreneurial.

What is that feeling?  Well, having said what it is that entrepreneurs do, the feeling is one of momentum on that trajectory. 

Do you have momentum towards converting your organization’s ideas to businesses?  Does your organization even think about creating new businesses, or are  you mired in survival mode?  Does your team think about creating new businesses, or are they more internally focused on some other issue?

Political infighting, expense cutting, post-acquisition transitions, these are all decidely non-entrepreneurial focuses.  Sometimes they’re essential to the health of the business, but they’re anathema to the entrepreneurs.  I’ve said for a long time that a large company’s ability to keep growing is a function of how well it cares for its entrepreneurs.  After all, every product peaks.  If you can’t start new businesses, how do you get beyond your plateau?  You’d better either be able to nurture your entrepreneurs, or you’d better get good at the acquisition game.

Oracle, when I was there, was lousy at nurturing entrepreneurs.  They, including me, couldn’t wait to move on.  Google, OTOH, seems to have a remarkably entrepreneurial flair.  It will be interesting to see if they have the management and organizational chops to take their herd of small businesses and get them to the next stage before the core plateaus.

As for me, I’m on the lookout for my next opportunity to translate ideas into businesses.

Posted in saas, venture | 1 Comment »

Salesforce + Google = Goal Over Task/Document Orientation

Posted by Bob Warfield on April 14, 2008 and Google have just announced integration between Google Apps and  It’s a moderately interesting story, a poorly kept secret, and many have written about it since it was expertly seeded to the blogosphere, so the news value here is limited.  I’ll stick to giving an overview on the reporting so far and finish with my take on a major user interface opportunity with this kind of mashup/partnership.

First, coverage so far:

  • TechCrunch were the first I follow to break the news.  They’re playing the “enemy of my enemy” card.  The integration involves Docs, Calendar, Gmail, and Gtalk with Salesforce’s Enterprise apps.  Supposedly this makes Salesforce Google’s “productivity suite”.  This caused me to wonder, “But why did they need a productivity suite?”  They didn’t, but Benioff got where he is surfing the winds of controversy and this is a good way to keep that act going given that SaaS is no longer controversial.  Benioff told Techcrunch he sees it as a way to undercut Microsoft.  It is cool to be able to integrate the objects from Google, documents, calendars/appointments/dates, email, and chat throughout Salesforce with just a few clicks.  The service is free, unless you want to pay $5 a month for better security and manageability.  Salesforce themselves will resell it to you for $10 with phone support being the added feature.  I continue to wonder about SFDC’s pricing acumen in light of that news.  Of course this all leads to the speculation that Google should just buy Salesforce.  More on that in a moment.


  • Next up on my feed was the WSJ with Ben Worthen.  Worthen acknowledges that a lot of what can be done with this mashup was possible before using Microsoft apps, just requiring more manual effort.  This is very true.  I’ve opened many a Word document or Excel spreadsheet from inside  But it is a hassle to get them in there and not nearly as seamless as this new approach. 


  • Appirio’s Ryan Nichols was an interesting read.  Appirio announced they could put attachments stored in Amazon’s S3 into Salesforce not that long ago.  It would seem like this latest announcement is competitive, or at least makes Appirio’s stuff less important.  But, Nichols waxes poetic about the marriage and almost manages to convince us Appirio is part of the whole thing.  They are playing nicely around the edges.


  • Scoble picks up a refrain I’ve been following for a long time.  He pits Googles partner strategy to get into the Enterprise versus Microsoft’s go-it-alone.  He likens the Google strategy to being Open Source, at least by analogy.  Shades of my musing on Microsoft’s Rift With the Web.


  • The New York Times, like others, has picked up on the idea that SaaS no longer has to be a series of islands.  The islands can actually work together.  Golly guys, mashups have been out there for quite a while.  SaaS companies have been partnering with other SaaS companies for quite a while.  But, I guess you need some kind of spin for the story.


  • Larry Dignan wants to know why these two companies don’t merge?  The two may very well, mergers often happen for all the wrong reasons.  However, as a shareholder in both companies I sure hope not.  Their cultures are off-the-charts different.  The two would kill each other, or at least drive most of the value out of the deal before it was over.  Sorry guys,  I love you both, but you are not made for each other.  SFDC is actually much more Oracle-like and Google has a lot to learn about being an Enterprise company.  Even fan boy Phil Wainewright says, “I’m also doubtful whether Google has yet accepted how much it needs to learn to sell effectively in the enterprise — it may even be arrogant enough to believe that it doesn’t have to, because it’s changing the rules of the game.”


  • Last up was Phil Wainewright, who admits he got paid to write a white paper for the launch.  He calls it huge validation for Office 2.0, says it will spread faster than people expect, and says it is the viral key to spreading Google apps in the Enterprise.  The reason?  It just takes one or two people in a workgroup before others see how easy it is when you use the right Apps (Google’s) with Salesforce.

So what’s really new and interesting here if it isn’t the world’s first seamless connection between two SaaS offerings (it’s not!)?

As I said in my title, I think it opens the door to changing how we approach information and tasks on the computer.  Phil Wainewright is sort of right and sort of wrong.  He is right that this could be hugely viral.  The governing factor is to what extent the workgroups that Phil refers to view as their hub.

Many workers have that one application that is their bread and butter.  The show up, log into it (or bring it up), and it is there all day long for them.  Sometimes the application is about a particular kind of data.  Graphic Designers may live (primarily) in PhotoShop, for example.  This is task orientation.  PC operating systems saddle us with a task+document orientation.  You either double click on a document, or open a the task (application) and load the document.

But neither of these really reflects how people think.  We’re a level of abstraction above pure tasks or individual documents.  Those are low level tools.  I would say we are more goal-oriented.  I need to push my sales along today.  Or, I need to close the deal with Kimberly-Clark before the end of this quarter.

CRM wants to control these goals for salespeople.  In theory, if the app works well for this, pairing it up with Google Apps is very powerful.  It can serve as a model for many more domains which often have a similar workflow/business process hub associated with a particular goal.

However, the history of CRM is not 100% encouraging along these lines.  Many salespeople view it as a necessary evil while their management uses it mostly as a forecasting tool (how much will we sell this quarter) which it does a very poor job of.  This latter creates a huge misalignment between management and the users of the CRM/SFA (Sales Force Automation) tool.  Understandably, there is a lot of pressure to close deals.  Equally understandably, salespeople may not want management to have a total surveillance view of every bit of data associated with the deal.  Most of the time what’s in Salesforce and other CRM system is a pretty carefully prepared presentation of what the salesperson wants management to see as the current status of the sale.

So the potential is there, but the true nature of CRM system may mitigate how much of the potential is realized.

Posted in saas | 3 Comments »

Amazon Announces Persistent Storage for EC2

Posted by Bob Warfield on April 14, 2008

This is big, big news for Cloud Computing.  A whole new layer of robustness and convenience has been added to Amazon’s EC2 service.

One of the biggest obstacles users of Amazon’s EC2 cloud machine instances have to overcome is persistent storage.  Amazon refers to storage on EC2, at least in the past, as “ephemeral“.

If something happens to your EC2 instance, the data is lost.  You can’t simply reboot like a real physical machine and get back to where you were.  This is a real problem when hosting your MySQL or other database.  It’s a really bad thing if the EC2 instance goes down and you lose all your database data.  Developers have been working around it, and there is even a startup or two focused on such problems, but it has been a real thorny issue.

Now Amazon has announced that you can simply mount some S3 storage on your EC2 instance and run with that.  Simple.  To the point.  Powerful.

To quote Amazon:

These volumes can be thought of as raw, unformatted disk drives which can be formatted and then used as desired (or even used as raw storage if you’d like). Volumes can range in size from 1 GB on up to 1 TB; you can create and attach several of them to each EC2 instance. They are designed for low latency, high throughput access from Amazon EC2. Needless to say, you can use these volumes to host a relational database.

To quote one of the commenters:

“Needless to say, you can use these volumes to host a relational database.”

… and that’s the line we’ve been waiting for. w00t!

Needless to say, it is the line the vast community of AWS users have been waiting for.  Well done Amazon!

Also pay attention that this is a “low latency, high throughput” connection.  That’s also big.  S3 is wonderfully robust, but it has had latency and performance issues that somewhat slow its use for a high performance case like relational DB table space.  It appears that Amazon has opened up a special channel for this purpose that overcomes these issues.

So far this is just an announcement, and the service is not yet available for general consumption.  One wonders a bit whether the announcement isn’t a slight bit of response to Google’s AppEngine rollout, but who could blame Amazon?

One of the big back and forths in the Cloud Wars is going to be the use of standard relational databases like MySQL versus specialized “Cloud” databases like SimpleDB and BigTable.  Amazon just made it easier not to have to choose.  With AWS, you can go either way.

Posted in platforms, saas, Web 2.0 | Leave a Comment »

Who Hides Data From Search Engines And Why?

Posted by Bob Warfield on April 11, 2008

Fred Wilson just did an interesting post about delicious and its traffic after being acquired by Yahoo.  On the face of it, looking at Compete or other stats, it appeared delicious had gone into decline after being acquired.  Reality is a bit different as Joshu wrote back to Fred:

We continue to grow normally.

Unique users is not a good measure of our growth, though.

Much of our traffic is through the firefox and other browser extensions, which is not measured by these systems.

Additionally, we cut off search indexing several months ago, which also hurts the UU numbers.

It is fascinating to consider just how much of the web is not measurable even today due to such things as running traffic through browser extensions.  What I really found interesting was the last line, though.

Why would delicious cut of search indexing?

As one commenter on the thread pointed out:

I would think Joshua would be delighted if the “funny-video” tag was the first search result at Google for the search team “funny video”… it would mean both greater distribution and influence.

Evidently not.  There is no good cost reason to turn away web crawlers.  For a property like delicious, crawling have to represent a tiny fraction of their traffic.  It seems to me the reasons would have to be strategic.

For the conspiracy theorists out there, consider this.  Perhaps Yahoo is doing this for a lot of their valuable properties and only letting Yahoo search engines index the data.  This means a Yahoo search can find delicious posts but Google can’t.

It seemed a great theory, but alas I could not verify it at all.  I tried half a dozen of the most popular posts on delicious and could not find them listed on searches for the title on either Google or Yahoo search.

So I’m stumped.  It would be fascinating to see a list of sites that exclude search engines sorted by popularity.  Even more fascinating would be understanding why they exclude the searchers.

Update:  It seems that Yahoo does do something special with delicious, but maybe it isn’t all in production yet based on my limited testing.  See TechCrunch for more.

Don’t you think this is a tacky way to compete?  By limiting availability of search results?  Search result integrity is essential, and here we have companies outright trying to sabotage the search results of their competition.  This will get worse if MSFT has anything to say: they don’t believe in a fair fight!

Posted in saas | 4 Comments »

Testing the General Theory of Relativity and Locating the Chasm

Posted by Bob Warfield on April 11, 2008

The physics world loves to test its theories to the furthest edges of the envelope.  One reads about elaborate experiments to push things out one more decimal place.

I’m no Einstein, but I did just see an opportunity to add insight to my theory that the Chasm Has Moved.  Briefly, that theory says that the old Early Adopter Market has been made much bigger by the Internet, but that a lot of the behaviour we see on our beloved ‘Net is just that: Early Adopter Behaviour.  The Chasm still exists, but it has moved further to the right.

Here is one opportunity to test, albeit one we won’t be able to apply until we know who our next President is.  Matt Pace of Compete writes of Obama v. Clinton that despite what the pundits say, the race isn’t even close, and TechCrunch picks up on that refrain.  By every measure the web offers, or at least by the measures of Face Time Compete can generate, it appears that Obama will win.

What does that have to do with the Chasm? 

Compete is measuring what it calls “Face Time” to make the prediction.  Face Time is the amount of time spent with each candidate across several leading social networks and media sites (Facebook, MySpace, Flickr, MeetUp, YouTube).   That measurement is going to be focused exactly on my broader Left given what web properties are being looked at.  If we had a broader measure, perhaps all searching on the net, it would be different.

Assuming no candidate does anything to catastrophically impact the results, and assuming McCain isn’t elected, there are a two outcomes:

-  Obama wins.  This would indicate that the web is a more accurate indicator than traditional measures.  I believe that means the Chasm moves right, and the early adopters are now a more powerful force than they once were.  These are the people Compete measures using the latest greatest web offerings.

-  Clinton wins.  This is the big upset.  The web says Obama, but the voters say Clinton.  That would say to me the web is primarily measuring to the left of the Chasm but the world is still run from the right.  The Chasm is right where it ever was and there aren’t enough to the left of it to make the difference.

As in so many of these experiments, much is subject to interpretation, but it will be interesting to watch!


Posted in saas | 3 Comments »

Entrepreneurs Need a Portfolio Effect Too

Posted by Bob Warfield on April 10, 2008

Fred Wilson has gotten me going today!

Startups involve tremendous uncertainty.  The financial world for a long time has realized that an important tool to use in controlling risk is diversification.  This is the so-called portfolio effect, and is the modern realization that you shouldn’t put all your eggs in one basket. 

I was recently having a conversation with a CEO coach.  He was helping out a CEO at a company I’m talking to.  He commented that at this stage he had simply seen too many failure modes for startups, and hence, it would be very hard for him to choose a single company to work for.  He was happy that he had created a portfolio effect for himself by serving as an advisor to multiple companies rather than focusing all his time on a single company.

Years ago, I worked on an idea I called the Enterpreneur’s Fund.  The idea was that Entrepreneurs need a portfolio effect too.  Most of the time, Enterpreneurs will have the ability to give away or sell a portion of their founder’s share.  My idea was to get company founders to join a fund where they would contribute these shares to create a portfolio.  Value of the shares would be determined by the last VC valuation with a proviso that it needed to be within the last 6 months and hence relatively current.  This new “Fund” would act just like a VC fund.  The participants would receive distributions as and if companies in the fund had liquidity events.

It seemed to me then and now that this was a good idea for entrepreneurs.  I am not aware of anything like it in existence, though many entrepreneurs do get the opportunity to invest in their VC’s funds.  What became of it?  In essence, I don’t think most entrepreneurs understand diversification.  They wanted to focus on evaluating every company in the fund before agreeing to contribute shares.  Most all of them concluded that their own company was so much better that they would be carrying the fund and would get no value.  Of course, they couldn’t all be right, but nearly all the entrepreneurs I talked to thought that way, and I eventually gave up on the idea.  FWIW, the shares I would’ve contributed to the fund would have been quite valuable as my startup was acquired by Pure Atria.

The VC’s, OTOH, completely understand the value of a portfolio.  They live and die on it.  Very few of the deals they invest in succeed.  I’ll argue they don’t understand another important component of Modern Portfolio Theory, though, and that is correlation.  It isn’t enough to have a portfolio, it’s components must be as uncorrelated as possible.  If you invest entirely in Web 2.0 startups, your portfolio is highly correlated and you have more risk.  VC’s are well known for the Lemming tendencies.  As soon as one firm hires an executive recruiter to be a general partner (as happened some years ago), the rest all followed suit.

But maybe there is an answer.  Fred talks about being able to buy and sell stakes in companies before they are public.  He mentions Goldman Sachs’ GS Tradable Unregistered Equity OTC Market.  It’s a fascinating idea.  Wall Street does a good job of “securitizing” the unsecuritized to make markets more liquid.  Reducing the viscosity is often a good thing, and it would sure help here.  Carving the deals up and spreading them around can reduce everyone’s risk substantially as well as providing some liquidity.  It promotes scaling into and out of positions, another time honored Wall Street practice.  And, it would let smaller firms lucky enough to land a winner, trade some of that stake for exposure to other near-winners they don’t have access to.   In the end, it probably reduces returns a bit, but makes them less volatile.

Just don’t forget: Entrepreneurs need a portfolio effect too.  Let them play and you’ll keep them focused a lot longer on what they do best.

Related Articles

See also What if the Chasm Has Moved?  The discussion of conglomerates like Johnson and Johnson and GE is just another successful example of the portfolio effect. 

Jeff Jarvis is on a similar vein with this post.  In it, Jeff discusses Berkshire Hathaway-like conglomerates.  Shades of my Johnson and Johns thoughts above.

It seems there is an active and thriving version of the Entrepreneur’s fund as reported in TechCrunch.  It’s called the EB Exchange fund.  It works like a VC fund in that the folks running the fund have a carried interest and “management fees.”  Interesting.  I prefer the idea of running it not-for-profit among the limiteds who are founders contributing stock.  Still, it shows the idea is viable.

Posted in saas | 3 Comments »

What If The Chasm Has Moved?

Posted by Bob Warfield on April 10, 2008

The chasm I refer to is, of course, the one Geoffrey Moore invented to describe the idea that early adopters (the “left” side of the Chasm) may behave quite differently and even require a different offering than the “mainstream” market (the “right” side of the Chasm).

As I was thumbing through various blog entries this morning, this crazy idea about the Chasm moving popped into my head.  Let me see if I can retrace my steps and in so doing convey what I’m thinking.

First, there is a Jeff Jarvis piece on Yahoo (most of these articles are Yahoo motivated) where he says: 

I think a Microsoft-Yahoo combination made little sense. It was Microsoft’s attempt to buy audience — as if you can own audience today, as if we can be bought and sold. That is the old-media way of looking at the world: they controlled content, marketed to get people to come to you, showed them ads, then waved good-bye.

It has definitely become the accepted wisdom that audiences cannot be bought and sold.  But then, neither could the Early Adopters of the Moore world.  They were always on the lookout for the new-new thing, very fickle, and very hard to hold on to.  What if this New Think, that audiences cannot be bought and sold, still only applies to early adopters?  What if the Chasm moved to the right so that there are tremendously more Early Adopters around than there used to be, or so that we can more easily reach all of them than used to be the case?  What if the shape of the Long Tail has been changed in some fundamental way by the Internet? 

Hmmm, that’s an interesting thought.  It may mean that audiences can be bought and sold as they ever were, but just that they’ll be that “mainstream” crowd.  Frankly, when I look at the original analyses of the Microsoft Yahoo venture, and saw how they almost made sense when you look at the email share that would derive, it gives me pause to consider this new idea.  Why do these two have such commanding email share?

It works like this:


Look at all that share concentrated around Yahoo Mail and more interestingly Hotmail and (cough) AOL Email.  Are these really the mail platforms of choice for the hip “you can’t buy me” audiences?  No.  These are mail platforms that people got hooked up to a long time ago and stuck with.  This is mainstream.  This is not the Twitterati.  And guess what, if they’ve stuck with it so far, they will likely keep sticking too it until something turns out the lights on them, if that ever happens.

Next post was by Fred Wilson.  It’s an interesting post, and quite long by his standards as he admits at the end.  Fred says in this latest post:

The Internet is decomposing into a vast array of micro-services that we, the end user, stitches together to make our own unique web experience. It is the de-portalization of the Internet and it is very real. And yet, these large behemoths are trying to do their normal consolidation play on the Internet. First of all, it’s not going to work. They are destroying value with all of their M&A efforts and the bigger they get, the more value they will destroy, for them and their shareholders.

Shades of Jarvis:  you don’t own us, these services matter to us, and you’re just going to screw them up thinking you can buy and sell this stuff.  Of course many a founder has had the same view of VC’s, but let’s leave that tacky business aside.  Fred goes on to cite some examples of companies that were acquired and screwed up. 

BTW, one should just assume that most companies that are acquired will be “screwed up”.  In fact, all of them will be if the definition of “screwed up” is that their character will be radically changed in some way.  Despite all the M&A activity, and the great success of companies like Oracle doing this sort of thing, these companies all remain extremely centralized.  There are no Johnson and Johnson or GE analogs in our business.  The closest thing to it might be Cisco, but they’re a very isolated case.  Every other company is convinced that its management knows best, and usually knows best very high up (e.g. Jobs, Ellison, Balmer, Larry, or Sergei know best).  It’s a definite sign of immaturity in our world, and someone will figure out the virtues of decentralizing, but I digress.

Last related blog subject:  Twitter.  There’s a lot out on Twitter as usual.  The pendulum swings back and forth and today it is on the negative side.  This time around, mostly it is about how Blogger/Cartoonist/Ad Man Hugh McLeod has deleted his Twitter talks about whole cliches along these lines:  declaring email bankruptcy, deleting your Facebook account, and so forth.  Even Scoble, in an unguarded moment, candidly admits that if you actually have to get something done, you need to turn off the Internet.

So what does it all mean and what am I trying to say?  There is a case that the Chasm has moved.  Whereas the space to the left of mainstream once was too small to make much of a business of, today it is much much larger.  In fact, one could argue that an awful lot of the Web 2.0 revolution, maybe even all of it, is founded on this much larger Chasm audience. 

How did it get bigger?  I think it is a function of the Internet’s ability to let us deal with more if we choose.  We can have more friends, albeit most of them even more shallow.  We can get through more email, read more blog posts, and yes, throw off more Tweets than ever before.  That let’s us participate in a lot more.  The buying power, as measured in the currency of Attention, has dramatically increased.

But, there is still a Chasm to cross.  Fred Wilson’s post is all about that.  The new Chasm is liquidity.  You can be quite successful, but the Chasm still looms before you are successful enough to go public, because that bar has moved too.  And the waters are quite choppy to the left of the Chasm.  Things move pretty slowly over in the land of AOL and (though they wouldn’t like to admit it) Yahoo.  Over in Google, Twitter, Facebook land, they’re pretty darned choppy.  Google has managed to get a leg in both camps, and genuinely benefits.  So has Apple, BTW.  You can tell such companies by whether they’re successfully public and hip at the same time.  Tough gig, but hugely valuable if you can get it together.

Will the Chasm keep moving?  I think it will.  The nature of the Internet has been to broaden us, broaden markets, and in general promote more change.  Can it move far enough to produce profitability and predictability?  That’s really what’s needed to resolve this liquidity issue.  That’s what’s needed to remove the fear that Web 2.0 might be just an interesting fad.  And that’s what’s needed so your favorite services can remain independent and keep doing what you like best.

Time will tell, but we’re not there yet.

Related Articles

Jeff Jarvis and I are following each other around.  No sooner did I pen this and go to lunch than I went back to find this post.  In it, Jeff discusses Berkshire Hathaway-like conglomerates.  Shades of my Johnson and Johns thoughts above.

Posted in Marketing, strategy | 4 Comments »

Yahoo Seeks Any Port in a Storm

Posted by Bob Warfield on April 10, 2008

This just in from the WSJ:

Yahoo is closing in on a deal to tie up with AOL.  Supposedly, Time Warner would fold AOL into Yahoo, give Yahoo several billion dollars in cash, and get back a 20% stake in the combined entity.  Yahoo, for its part, would then spend some of it’s own money together with all the Time Warner cash repurchasing its own stock.  Such a deal values AOL at about $10 billion.

This deal, combined with the Google test that involves carrying Google AdSense advertising on Yahoo, is intended to thwart Microsoft’s takeover attempts.

Sounds like serious desperation on Yahoo’s part as they struggle to remain independent.  Personally, as a Microsoft shareholder, I hope it does discourage Microsoft. 

Posted in saas | Leave a Comment »


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