Distribution is King: A Personal Story

No matter what business they're in, the first and hardest problem for any early-stage Web company is distribution. Everything else about doing business online gets cheaper and easier every day, but with an ever-accelerating proliferation of new sites and services, it only becomes more difficult for each new offering to acquire an audience of loyal repeat customers. The power of proven "purchase intent aggregators" like Google (and the hype surrounding unproven next-gen candidates like Facebook) is rooted in their gatekeeper role as trusted personal shoppers in a market of infinite choices.

I was recently reminded of the inverse relationship between the accelerating ease of doing business online and the corresponding difficulty of acquiring an audience by a personal project that I decided to turn into an experiment in online marketing. It's kind of a long story, but I'll try to focus only on the part relevant to the topic at hand...

Setup: What Were We Thinking?

A few years ago my wife and I bought an investment property in Whitefish, Montana. We knew we wouldn't get out there much in the short term (work, kids, etc.), but we love the area and wanted another reason to visit. So we offered the house as a long-term rental through a local property management company and more or less forgot about it.

Fast forward to this spring, when a local friend emailed to ask what was up with the big pile of trash in front of our place. Only after repeated calls to the management company did I learn that the tenant had skipped town, leaving us with the mess our friend had spotted, a long list of bizarre repairs and serious questions about how well our interests were being served by the manager.

Despite the fact that we were already up to our eyeballs in personal and professional to-do lists, my wife and I decided to take on direct management of the property as a furnished seasonal rental. Our gamble was that almost every aspect of the project could be managed more effectively, and with greater transparency for us as owners, via the Web.

Furnishing by Remote Control

The house is a modern design so it was easy to shop for furniture online at places like West Elm, Room & Board, CB2 and Ikea. We bought most of our small appliances, kitchenware and home electronics from Amazon and NewEgg, and bed and bath linens came from places like The Company Store and Restoration Hardware. Because we weren't on site to receive packages, we had everything delivered to a local moving and storage company, and then worked with a local contractor to bring everything over once all the shipments were complete. So far, so easy.

Free Marketing, Inventory Management and Payment Tools, All Courtesy of Google

I'd been looking for a reason to try Google Sites (Google's free Web-page building and publishing tool), so I set up an account and put together a simple landing page, adding a slideshow (via Picasa), a custom map of the area (using Google Maps), an availability calendar (Google Calendar), and an inquiry form (using the forms feature in Google Spreadsheets). I even set up a free merchant account with Google Checkout so I could process rental payments.

(Google's free web publishing tools may be the most complete and integrated, but I could have accomplished many of the same goals via a free blogging platform like WordPress, or one of the many free Website creators like Weebly, Synthasite or the venerable Homestead.com).

OK, How About Some Customers?

On the first two tasks (furnishing and marketing), the Web offers a virtually unlimited array of good options, most of them easily accessible to a (basically) non-technical user like me, and many of them entirely free. But when it came time to offer the house for rent, my universe of good possibilities shrank dramatically. In ascending order of cost and effectiveness, the available options include:

• craigslist. The power of this platform continues to blow me away. Free customer acquisition with high content quality and transaction liquidity is one of the most compelling value propositions on the Web. The downside for the advertiser is a tight geographic focus (duplicate ads in multiple locations are policed out), and a high maintenance burden (the newest ads are displayed first and older ads expire out automatically, requiring constant refreshing of your ad to stay above the fold).

• VRBO. Hands-down the best paid lead generation platform in the vacation rental vertical, Vacation Rental By Owner is like a global craigslist strictly for rental properties. Pricing is predictable and fair ($229 a year for a standard listing), quality is carefully policed, and transaction liquidity is (reportedly) the strongest in the industry by an order of magnitude (it helps that the site is now controlled by the #2 player in the industry, HomeAway.com, itself a rollup of vacation-rental sites backed by Austin Ventures).
  

• Google AdWords. The 800-pound gorilla in online customer acquisition, Google sits on top of 70% of global search activity and sells inventory alongside as many of those searches as it can according to an increasingly complex menu of keywords, geographies, time slots and formats. No matter what you're selling, as long as it's legal and you're willing to pay the auction-based price, Google can deliver the leads like no one else.

NB - Not wanting to leave them out, I did run a brief experiment in Facebook's Marketplace, but apart from one friend who emailed to tell me he'd noticed it, the ad delivered exactly zero leads. I admit I'm a Facebook skeptic, but as compared to an intent-driven marketplace like the ones described above their offering is a distant also-ran.

Takeaways So Far

I'm sure I'll regret adding 'property manager' to my list of to-dos, but the experience so far has been a great reminder that, in the hierarchy of online value creation, distribution is king. The more businesses that choose to set up shop online, the more opportunities there will be for specialist firms to deliver them paying customers. Google owns the broad market here, but there are hundreds of niche opportunities still to be tapped.

I'll plan to update this story in a few months, once I have more data to share on the relative effectiveness of the various lead gen platforms. In the meantime, if you're planning a trip to Whitefish and need a place to stay...

"Profitable Web Startup" is not an Oxymoron

A big chunk of my time goes to meeting with early-stage entrepreneurs. My goals for these meetings are: to get to know the founders as people, to learn about their product and business strategy, and to talk about whether and how we (Founders Co-op) might be able to help them.

At some point in these meetings, I always ask how the founders are thinking about getting to breakeven: how much money it will take, what has to happen, and how much of that plan is based on real numbers versus conjecture. Some teams have thoughtful and well-supported answers to the question, but a surprising number of entrepreneurs look at me like I have two heads, and then go on to say something like "we're focused on building our customer base right now and monetization isn't really a priority."

As soon as that happens, I know it's time to start winding up the meeting (at least as far as our investment is concerned). From a fund perspective, we don't see any reason why "startup" and "profitable" shouldn't appear in the same sentence, and we like to work with founders who feel the same way. We know this cuts against the grain of the traditional venture model, but in many ways that makes our job easier: founders that operate their companies with a scrappy, revenue-minded approach tend to get the same quizzical looks from venture investors that I give to the "go big or go home" guys.

I'm well aware that a lot of money has been made by founders and investors in companies that never turned a nickel of revenue. As with lottery winners, rock stars and best-selling authors, these spectacular-but-statistically-rare outcomes tend to obscure the fact that most businesses that create long-term value for their owners do so by creating value for customers, value that those customers are prepared to pay for. Maybe "early-stage value investing" is an oxymoron for most people, but it's a pretty fair description of what we're up to here at FC.

Open Startup: Askablogr's 6-month Birthday

Between summer season family commitments and some great new developments at Founders Co-op, I missed my 5-month Askablogr update, so I decided to run a little experiment. In previous months I took an active role as community manager, welcoming each new member with a personalized question and looking for ways to unblock members who seemed to be stuck (i.e., having trouble with the widget install, etc.). But for the past month or so I have left Askablogr more or less alone, aiming to discover what sort of organic momentum it had absent my efforts.

The good news (at least as far as my time is concerned) is that this hands-off approach had no obvious impact on either new customer adoption or usage. In fact, organic Q&A velocity actually picked up a little during the period. The bad news is that the run rates on both signups and usage are still very low, i.e., ~25 new members / month, and ~10 completed Q&A / month. (For the quantitatively-inclined, lifetime stats for the product are shown in the image above).

Given the results above my inclination is to let this experiment run a little longer. There's no obvious benefit to my community management efforts, and there's still (just) enough organic flow into the product to believe that it meets a need for some segment of the target audience. At the current $34/month burn rate it's not hard to be patient and see where the current customer base wants to take it.

That's it for now - as always, suggestions and feedback are both welcome and encouraged.

Signal, Noise and Twitter

I had lunch with a friend yesterday who's become a big fan of Twitter, and he asked me if my views of it had changed since I set up an account. My response was that, if anything, I'm even more of a skeptic than I was before, but that my reasons are really more personal than they are about Twitter.

On the same theme as my earlier Signal to Noise post, the problem we all have now isn't too little information, it's too much, w-a-a-a-a-y too much. As an investor and advisor to early-stage companies, my #1 job is to process lots of disparate information to spot themes and trends that the companies I work with can leverage to create advantage. Between my inbox and my feed reader, I have all the input velocity I need. My problem is carving out time for lower velocity activities like long-format reading (e.g., books, whitepapers), open-ended conversation and uninterrupted thought time to put it all together. Adding Twitter to my media mix takes me in the exact opposite direction from where I want to go.

(As a postscript to this post, it was funny to read the news today confirming Twitter's purchase of Summize, since their sole value prop is to help folks pick patterns and trends out of the Twitterstream. Since Twitter was launched in July 2006, it took just two years for this entirely new communications medium to require an abstraction layer - a nice example of the problem).

From Signal to Noise and Back Again

Om Malik had a great quote yesterday in his post titled "Can Serendipity Make you Rich?":

"If someone can become the Dolby of the web — remove the noise and give us clear sound — then they are going to make a lot of money. And when I say sound, I mean data that is truly useful."

If the first generation of Web navigation was directory (think Yahoo or DMOZ), and the second (current) generation is search (a.k.a. Google), the third generation will likely be some version of what Om's talking about. Directory gave way to search when the sheer number and diversity of Web pages overwhelmed that highly structured approach. Search has dominated the discovery of text-centric Web publishing ever since. But continued geometric growth in content volume has added exponents thanks to new searchable media types (e.g., video, audio, images, animation), and new meta-data (especially location data, but also the social graph).

Luckily for Ray Dolby, he only had to figure out how to clean up audio signals for one "default" listener. To succed, the "Dolby" of the Web will have to filter each listener's signal individually. My money's on Google (their Personalized Search efforts are already down the chute in this direction), but the social vector is an interesting one to follow (we were big believers in this at Judy's Book and actually trademarked the term "Social Search" back in 2004), and it will be fun to see where new entrants like Delver head with this idea.

Early-Stage Financing, The 'Hail Mary' and the Role of BATNA

A little while back I posted on BATNA, one of the few useful concepts I took away from business school. The topic is on my mind again because I'm currently participating in several unrelated early-stage financings (acting variously as advisor, counterparty and peanut gallery), where a strong BATNA can be the difference between a full war chest and a speedy wind-down.

The big trick in seed financing is to guess correctly how much money you really need. This (hopefully) will be the most expensive money you ever take for your startup, so selling too much of the company now can be painful. At the same time, if you take too little you may find yourself without enough runway to create a more compelling BATNA for the next round, leaving you in essentially the same negotiating position the next time you go to the well.

Fundraising at any time is a huge distraction from building your business, and completing a round can take anywhere from three to six months, so your first raise needs to leave enough room for you to make material progress in the business at least three months (and ideally more like six) before your out-of-cash date. Once investors get the sense that you're running out of cash, the credibility of your BATNA starts to erode and the table inevitably tilts toward the money.

One startup I'm working with is running what amounts to a 'Hail Mary' on the financing front: they're building a compelling but complex product, and have raised enough money to get them to a first release, with only a few months of cash to spare post-launch. If the product is a wild success they'll have a great story and enough cash in the bank to sell and close a solid up round. If the launch flops they'll have a tough time raising fresh capital at any price. And, in the most likely scenario, if the product wins some early fans but clearly needs more time to find its market, they'll be entering negotiations with about the same BATNA they started with in the first round.

Another startup I'm close to is taking an entirely different tack. Their seed round gave them enough running room to validate the basic premise of their business model, but the revenue ramp has been slower than expected, and the cash needs somewhat greater than projected. After weighing the risks of seeking an up round based on the mixed (but largely positive) data, the founders instead returned to the seed funders to negotiate a small follow-on at (essentially) the post-money terms of the first raise. By seeking a smaller round from friendlies, the founders traded a lower share price for a radically shortened raise window, and are raising just enough new money to achieve breakeven, at which point their BATNA for any new raise should be radically different.

There's no tried and true formula for the "right" first raise, but a key question for the founding team is how and with what likelihood the cash you take is going to improve your BATNA for the next round.

Great Startup Quotes from Marty Pinchinson

Yesterday's PE Week Wire included an interview with Marty Pinchinson, a co-founder of Sherwood Partners (a.k.a. "the undertaker" for VC-backed companies). The whole interview is great, but a few quotes in particular stuck in my head:

"Everyone comes up with this cockapoo about startups. It’s not about being smart. It’s about being around long enough."

and...

"This is what people don’t understand: decades ago, when a VC put money into a Cisco or HP and sat there and worked with them, they were managing a $2 million fund. Now, with funds the sizes they are, do VCs really have the time to work with all these companies when they don’t know which will be the winner? No."

In the interview, Pinchinson disagrees with the idea that Venture Capital business is somehow "broken", but the second quote feels like an indictment of sorts. If the goal of VC is to apply just enough capital to create little companies that can stick around long enough to become big companies (i.e., because they have the customer traction, revenue velocity and cost-consciousness to stay in the game) the VC business is a victim of its own success. The VC asset pool is now radically overcapitalized, making this kind of hands-on investing all-but-impossible for traditional venture firms to pursue.