How Jason Fried Whiffed On the Mint Acquisition and the Role of VCs
Jason Fried of 37 Signals stirred up a bunch of controversy on Friday with his blog posted titled “The Next Generation Bends Over”. Jason suggested that evil VCs forced Mint-founder Aaron Patzer to sell his company prematurely. And while I have a lot of respect for Jason, his “my way or the highway” approach to entrepreneurship (and blogging) rubs some folks the wrong way. And so when he falsely accused some very honorable and accomplished investors of acting out of sheer greed and at the expense of the Founder(s), Fried was appropriately taken to task.
Alexander Muse at Texas Startup Blog gave the most reasoned, thoughtful response noting that The Founders Fund and DAG Ventures, who led a $14M Series C round of funding last month, certainly are not happy with their return. Those firms spent more time doing diligence than as shareholders of preferred stock. But Muse didn’t go the extra step and spell out the real reason why Fried’s post was so far from the mark.
The truth is that Mint’s willingness to be acquired for $170M is actually an unmitigated disaster for the venture capital industry. Sure, DAG and Founders Fund are unhappy with their investments, but its a good bet that Patzer, Mint’s early employees and earlier investors are all pretty happy with their outcomes. First Round Capital claims to have done better than the 14X return they got when Ebay acquired Stumbleupon. That means Mint’s other Angel and Series A investors are likely to be pretty happy with their outcome (including Felicis Ventures, Shasta Ventures, Ron Conway, Dave McClure and other Angels).
Benchmark Capital led a $12M Series B round in March of 2008 and there’s no way they are happy with the outcome. For arguments sake, let’s assume they put in $6M of the $12M round and the Company was valued at $60M post money (both are somewhat arbitrary guesses and likely inaccurate but this is a ballpark placeholder. Valuations were falling at the time but Mint was a hot deal). Even then, Benchmark would have gotten about 3X or about $18M of the $170M. For a firm that just raised a $500M fund, $18M doesn’t move the needle very much. Needless to say, Benchmark was expecting needing a much bigger return.
But Fried was very much on point when he wrote:
Here’s a fresh new company that was gunning for an aging incumbent. And not only gunning, but gaining. They had a great product, great design, and great potential. They were growing rapidly and figured out the revenue game. They were on their way to redefining an industry — one that was left for dead by the current custodians.
There is no doubt that Mint is/was one of the more promising Web 2.0 startups yet Benchmark didn’t come close to making enough money to make their LPs happy. So what does this say for $500M funds and their ability to invest in Web startups?
I’m in no way picking on Benchmark- they are a fantastic firm with a hugely successful track record and all entrepreneurs should be so lucky to work with them - but funds of that size are will have a very tough time investing in capital efficient Web startups. Simply put, they can’t put enough money in to make it work. Web based startups just don’t need that kind of capital anymore to provide great outcomes for Founders and early, early stage investors. As Ron Conway noted recently, the Real-Time Web is going to create $5B in market opportunities, but given that these companies are certain to leverage Web economics it will be very difficult for firms managing large funds will be able to invest in most of those opportunities.
This is a great, great sign for smaller, more nimble firms like First Round, Alsop-Louie Partners and True Ventures. But the percentage of the global Venture Capital asset class that can actually make these economics work remains pretty small and serves as a great illustration of the Venture Capital Math Problem.
Early Thoughts on the Microsoft/Yahoo Deal….Yahoo Did Better Than People Think
Lots of early takes on the MSFT/Y! deal so far and most seem to think Yahoo got fleeced. The post getting the most attention so far is Jason Calacanis take that Yahoo committed “seppuku” while Mike Arrington thinks Yahoo “gutted itself”.
I want to take the other side of this and say that this was a good move for Yahoo (even if the implementation is overly complicated and holds plenty of execution risk.) The only opinions that I have seen that think Yahoo did ok with this are Bill Gurley and John Furrier.
Frankly, this deal is complicated and may end up hurting both companies, but I think this deal was better for Yahoo than people think.
Let me bring up a few points.
Getting out of the search market: Calacanis and Robin Wauters at Techcrunch both write that Yahoo has given up on the search market….How do they know that for sure? Certainly Yahoo is no longer developing an algorithmic keyword search engine and will no longer play in the crowded search marketing game, but is that really the entire search market? For two people with ties to Techcrunch, which recently put on a conference devoted to the opportunity presented by real-time, they certainly seem to be missing the opportunity for real, not incremental, innovation in search. There is certainly no guarantee that Yahoo will go down that path but it would seem a smarter path rather than chasing Google in a game that Google is dominating.
Company Focus: The critics of this deal seem to miss the fact that Yahoo will emerge a much more focused, streamlined company. As the deal stipulates, Yahoo will maintain the ad salesforce force for premium search advertising. So rather than addressing every piece of the search marketing ecosystem, Yahoo will focus on cultivating premium, high-margin search deals and pair that with their numerous content properties that rank #1 in the world (finance, sports, etc). Search seemed like a distraction when viewed through the lens of Yahoo’s strengths. Even if this move simply gets Yahoo to focus on its strengths rather than weaknesses, it seems like a step in the right direction.
Whither, MSFT?: This is a 10 year deal? Really, what will MSFT look like in 10 years? I have been thinking about a blog post about the future of Microsoft. Given Microsoft’s announcement that quarterly revenue fell 17% year/year and with the threat of Google’s ChromeOS and the emerging Netbook market possibly making the bleeding worse in the years to come, what will MSFT look like in 5 years? Forget about 10.
But 5 years is an interesting period of time because Yahoo will keep 88% of the search revenue for those 5 years. MSFT is making an enormous monetary bet on search (on top of what they’ve already spent)…which is a game they can’t win. What will the search market look like in 5 years? What kind of growth in social media marketing, breakthroughs in social search or real-time search and any innovation or any comeback in display advertising affect the market or marketshare? Five years is a long time in the Internet business, and doubly so at this particular moment. By the time any meaningful revenue, not just marketshare, goes to Microsoft, what will being #2 in the search market really mean?
One last point where I would like to vehemently disagree with Jason Calacanis…betting on a space because Microsoft is betting on a space is NOT a good strategy. John Dvorak and MG Siegler have both penned eloquent responses that suggest as much so I won’t add anything to their analyses. 5 or 10 years from now, maybe Carol Bartz will be seen as having fleeced a directionless dinosaur who was still throwing money around at a declining opportunity.
Justin Timberlake’s “I Love Sports” steals the show at the ESPYs
Despite the fact that this video combines two things I truly dislike, overhyped award shows and Justin Timberlake, this musical number is fantastic.
A Social Media Success Story: Mike Arrington punks the NYT and AP
It’s telling that the New York Times and Associated Press, two companies at the top of the traditional media pyramid with unlimited resources, have erred embarrassingly in the recent AP quote policy brouhaha. This mess has cost them not only credibility but also clearly demonstrates that they don’t understand the social media phenomenon at its most fundamental level.
These two traditional media titans, recognizing they are in deep trouble, resorted to citing an “Association” that no one has ever heard of to try to lend credence to whatever crap they invented to save their hides. And in a pre-social media world they would have gotten away with it.
The difference now is that Mike Arrington is big enough to have become an insider to the traditional media’s inner circle. And Mike has the understanding of the benefits of truth and transparency that underlie social media, to let folks know what’s going on. And the balls.
Never before did the masses have immediate and widespread access to an insider looking two media titans in the face and calling “Bullshit”.
How could the NYT/AP think a “Media Bloggers Association” that didn’t already include Arrington be credible? Arrington got most of the major Presidential candidates for interviews and broke the YouTube acquisition among other journalistic successes. It would be fair to consider him the top media blogger/web journalist in the blogosphere. (Who knew coming from an unaccomplished lawyer and failed entrepreneur?) Simply put, a “Media Bloggers Association” that doesn’t include Arrington, or more specifically one that he’s never heard of, doesn’t matter.
And that makes this a great example of how social media is taking a sledgehammer to existing media practices and principles.
This is also a little analog to the “early adopter” meme and further serves to illustrate just how early we are in the adoption curve. If the NYT and AP, two large companies whose future success is directly impacted by their ability to understand and make the transition into social media can screw up this badly, just how many people really understand social media today?
DMX Will Never Use Twitter or Friendfeed
I’ve been collecting my thoughts for my eventual conclusions (and subsequent blog post) regarding whether or not I think services like Twitter and Friendfeed will ever be adopted by the other 89%. While I find both services to be continually more useful and interesting, I’ve yet to be convinced that these tools will be adopted by the mainstream in a meaningful way in their current form. (Italicized for emphasis)
As I noted in a recent post, those who are currently avid users of these services, the 1%, have some shared characteristics most of which can be traced back to some variation of “smart”. And amongst the 89%, there are a whole lot of people who are….not so smart, to put it lightly.
To that point, I saw this interview with DMX earlier today and thought to myself, “Here’s someone who will never use Twitter or Friendfeed.” While I don’t think DMX represents any majority, I don’t think Scoble represents any majority either. To further make a comparison, DMX has sold 20 million records, which represents a lot more paying customers than Scoble and Arrington have non-paying readers combined.
Additionally, I found this interview to be not only a relevant, if not sad, cultural datapoint, but also amusing in that “can’t look away from the trainwreck” kind of way. Consider the following recent interview with rapper DMX at XXL (for those with virgin ears, look away):
Are you following the presidential race?
Not at all.You’re not? You know there’s a Black guy running, Barack Obama and then there’s Hillary Clinton.
His name is Barack?!Barack Obama, yeah.
Barack?!Barack.
What the fuck is a Barack?! Barack Obama. Where he from, Africa?Yeah, his dad is from Kenya.
Barack Obama?Yeah.
What the fuck?! That ain’t no fuckin’ name, yo. That ain’t that nigga’s name. You can’t be serious. Barack Obama. Get the fuck outta here.You’re telling me you haven’t heard about him before.
I ain’t really paying much attention.I mean, it’s pretty big if a Black…
Wow, Barack! The nigga’s name is Barack. Barack? Nigga named Barack Obama. What the fuck, man?! Is he serious? That ain’t his fuckin’ name. Ima tell this nigga when I see him, “Stop that bullshit. Stop that bullshit” [laughs] “That ain’t your fuckin’ name.” Your momma ain’t name you no damn Barack.So you’re not following the race. You can’t vote right?
Nope.
On Mixx, Plurk, Creators and the Adoption of Social Media
The A-list digerati has been all atwitter, pun intended, over a number of topics recently. And a number of them seem to be related in a roundabout way.
What these folks seem to be missing in these discussions is that the gap between social media’s “early adopters” and mainstream America is actually widening for now.
As Fred Wilson pointed out succinctly, Social media means “every single human being posting their thoughts and experiences in any number of ways to the Internet”. And to date, about 1% of Internet users are actively creating content. Don Dodge (w/ a nod to Bradley Horowitz’ illustration) calls it the “social network 1% rule”.
Well some of that 1% are doing this…compulsively. Others among that 1% are merely doing this a lot. This has created plenty of noise in the system and there are a few very, extremely premature tools for culling the signal from the noise so far.
These hyper-active social media early adopters are the ones consuming, analyzing, processing and drawing conclusions on this content in rapidly condensing time frames. The social media echo chamber consists mostly of the intelligent and hyper-curious, but the lack of perspective being regurgitated in the echo chamber is starting to get unhealthy. The early adopters are passing judgement on social media 3.0 when a good chunk of the other 89% of folks don’t know what social media 1.0 is yet.
To see just how insulated this early adopter set really is, one need look no farther than a FriendFeed search for “stats”. In what what reminded me of show-and-tell from when I was in the first grade, a number of early adopters added links to their “stats”, which FriendFeed provides to show “who you like” and “who likes you”. Some examples are here, here, here, here, here, here, here and here. A brief glance will show you very quickly that there is an unhealthy groupthink going on here, with tremendous overlap in who is interacting with whom. And some of these folks are losing their perspective.
For example, discussion about the Plurk beta made its way around the early adopters over the weekend. Plurk has an interesting visual take on microblogging and is worth a look for sure. Within hours, Robert Scoble declared it a “fail”, citing that they had better “stay up”. Never mind the fact that Plurk wasn’t even on their production server or just giving a social media application, goodness, a few days before passing judgement. What made this comment even more bizarre was the fact that Scoble is the biggest user of Twitter, a product that does the opposite of “stay up” and went so far as to blame him, its biggest user and evangelist, for their woes. (Which played out like an episode of Days of Our Lives in the early adopter scene).
Which brings me to today’s meme, Mixx’s publicity push regarding their recent traffic numbers. Erick Schonfeld at Techcrunch’s headline was “The CNN.com Effect: Mixx More Than Doubles Visitors In May To Nearly One Million”. But Marshall Kirkpatrick, a very smart analyst and a good writer, came to a different conclusion.
The title of Marshall’s post was “Mixx: One Year In, Someone’s Dropping the Ball”. Matthew Ingram’s headline was “Mixx: Growing, but is it enough?”
The critical data point is that Mixx’s traffic showed a 3x increase in visitors in May, thanks to partnerships with CNN.com and other mainstream media news sites. Marshall’s point was that Mixx has a far smaller crowd than Digg, and while that’s true, it’s another example of the shortsighted outlook in the echo chamber.
Mixx is approaching 1 million users in their first year and yet that’s “dropping the ball”? Even though Digg had 800,000 users well over a year after their launch?
As an entrepreneur working on a social media application, through some early user interaction testing, I’ve found out first hand just how far behind the other 89% really is. As Reddit founder Steve Huffman said in the Washington Post’s Mixx coverage:
“The vast majority of people don’t know what social news is; they still get their news from the mainstream media. This space and this industry still have a long, long way to go.”
Most appalling to me about the coverage is the fact that Mixx has a kick-ass product and seems to be executing well. From a pure technology standpoint, their application blows each of their competitors in the social news space clear out of the water. It’s has a better design, is more functional and has a set of APIs. From a business perspective, they have deep experience and connections in both the online and offline news worlds which has translated into key partnerships (which have had a dramatic affect in a short amount of time) and they’ve done all of this with 1/3 the cash and 1/3 the employees of Digg. The Mixx team should be very happy with where they are.
Both Sarah Perez and Colin Walker posted earlier today about taking a step back from the social media echo chamber. Both of their posts noted that it’s important to step back from this giant fire hose to gain the perspective necessary to see the big picture.
So back away from the mouse, go outside and smell the roses. Entrepreneurs need to start thinking about how these tools and applications will (or won’t) be adopted by that other 89% because without their adoption, critical mass cannot be reached.
Josh Koppelman contributed a now-famous post in May of 2006 about the Techcrunch 53,651. It referred to startups whose target market included those 53,651 early adopters who were subscribed to Techcrunch’s RSS feed at that time. It’s worth pointing out that number is close to 1 million two years later, but the point remains. We are at the very beginning of social media adoption and most, if not all, judgments now are premature.
Edit: Right after I posted this, I saw that Alexander van Elsas has posted a different take on the same topic. What I call the “Social Media Echo Chamber” he calls the “Social Media Circus”, but I think we both agree on some of the underlying themes. His post is very much worth a read.
Uh Oh. The Web 2.0 Sky is Falling!
The Financial Times just put out an article with the title “Web 2.0 Fails to Produce Cash“. The crux of the piece is contained in this quote:
The shortage of revenue among social networks, blogs and other “social media” sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in internet start-up circles.
Don Dodge takes the analysis a step further adding two noteworthy points:
Bubble Cycle - Bubbles go through predictable cycles. Bubbles emerge from the ashes of despair. It takes a while to gain momentum but eventually greed overtakes fear and we are off on another bubble adventure. Stage one of a bubble is when most smart money declares we are NOT in a bubble…it is different this time. Stage Two is more dangerous. Many people agree that we are in a bubble, but it will last another year or two, and there is still money to be made. The third stage is when the bubble has burst but most people are in denial and think it is a temporary set back. The fourth stage is when everyone agrees the bubble has burst and life will never be the same. My guess is that we are now well into Stage Two of the bubble cycle.
and…
Advertising Revenue Math - How much traffic is needed to generate $1M in ad revenue? It all depends on how well you can target your audience and how much you can charge for CPM rates. For social network sites let’s assume an average CPM of $0.40. You would need 2.5 Billion page views per month to earn $1M in ad revenues. That is 2,500,000,000 page views…how many sites generate that traffic?
Now Don’s a smart guy, but how on earth does any of this jive with Tim O’Reilly’s post on the Internet Operating System?
It doesn’t. Anyone talking about a “Web 2.0 bubble” is being comically myopic. This is the first inning of a big ball game here. While it’s fine to wonder aloud about huge valuations for companies that, despite building out large user bases, have no semblance of a business model (i.e. Slide, Twitter), it’s not otherwise productive to lump the rest of “web 2.0″ into a group that came, couldn’t figure out how to make money, and will be shortly exiting.
Don’s second point about advertising revenue math points out the fallacy. Don is correct in his math that at a $0.40 CPM that you would need 2.5B page views to get to $1M per month. But what happens at $4 CPMs? Or $40 CPMs?
Of course social networks, whose target markets include….everyone, can’t effectively monetize via advertising. Take the context of the Internet Operating System, where for each problem, or vertical market, there will be a service that best serves it’s needs, $4 CPMs are easily achievable and $40 CPMs are possible.
LinkedIn is a perfect example of a Web 2.0 business model that leverages advertising. LinkedIn targets a specific audience (professionals) that can be effectively monetized via advertising. Then leveraging the network effect, they build out capabilities to repackage the data and services for additional revenue. High CPMs plus some services can make for a billion dollar company.
Clearly LinkedIn is an exception so far, but this rule could hold true for any Web 2.0 company targeting a specific market (not the part about $1B, but the model). The irony is, most of the companies going forward with the “give it away” business models are the ones going after markets that have the $0.40 CPMs. There are lots and lots of vertical markets that need web 2.0 solutions that could produce significant returns for venture investors even at high valuations early in the process.
And this most salient point was quietly buried at the very end of the article.
“The capabilities that are coming with Web 2.0 are very profound,” Thomson Reuters exec Devin Wenig told FT. “The Valley is usually right, and it’s usually early.”
Edit: John Furrier makes a similar argument: Smaller, targeted audiences are worth more.
The Only Funny Coors Light Press Conference Commercial
Who green-lit the Coors Light coach’s press conference ad campaign? This ad campaign is way over played and wasn’t very funny to begin with and yet it seems as though it isn’t going anywhere anytime soon.
Leave it to some kids to mash up video of Mike Gundy’s recent press conference tirade to actually make a funny version. It probably took the kids 30 minutes to make the ad and it’s far better than the one’s Coors probably spent hundreds of thousands of dollars on.
Hilarious Take on Isiah Thomas’ Sexual Harrassment Lawsuit
What can Brown(e Sanders) do for you?
Oh the things you can find on Youtube…
Looking for some football stuff, I came across this gem. Too good not to share.