Redeye VC

In and Out...

2007-06-13T01:00:00-04:00

Some portfolio company news today.

First, today we announced our investment in OpenAds, the developer of the leading free, open source adserving platform. Already used by more than 20,000 publishers across 140 countries in 20 languages, Openads powers more publishers than all competing solutions combined. What really excites me about OpenAds is that they are in a wonderful position to shrink the adserving market. By removing the adserving costs, publishers can now focus on raising their effective CPM. This is especially important for small and mid-sized publishers, who previously had a limited choice of adserving technologies – and no real ability to impact pricing. I look forward to working with Scott and his team, along with our co-investors (Index Ventures, Mangrove Capital Partners and O'Reilly AlphaTech Ventures) on this deal…

Second, as Techcrunch has reported, Cuts.com has been acquired by Rifftrax. Although Cuts.com’s product has been praised for its ease of use and fun, the market for a stand-alone video editing site has quickly become very crowded and competitive. And while this transaction was not the huge win we were playing for, I’m happy that Evan and his team were able to find a home for their business. As I wrote back in March, the goal of a seed-stage investment is to validate (or disprove) a venture's hypothesis – and successful entrepreneurs will do so using as little time and capital as possible. Evan Krauss and his Cuts.com team did just that.

Some website upgrades...

2007-06-11T20:39:24-04:00

As First Round Capital's portfolio has grown over the last few years, our firm's website has not grown with it. That's why we recently decided that an overhaul of our website was necessary. So, in addition to the traditional alphabetical listing of portfolio companies, we decided to try something new. To help people better navigate our portfolio, we recently launched a tag cloud. This provides an interesting perspective on where we’ve concentrated our investments. We also improved the portfolio company detail pages – providing both company news and job openings…

In addition, we also just launched an experiment. For the last several weeks, I have been an active member of Ycombinator’s Startup News site. Like Digg, their site allows any member of their community to submit news items – with the best rising to the top. At First Round Capital, my partners and I have historically shared news stories using a common del.icio.us tag. Inspired by Ycombinator’s site, we’ve decided to experiment with allowing members of our community to submit stories on our site as well. I invite you to visit http://news.firstround.com to submit, share, and vote on stories and websites. We look forward to seeing the stories you find interesting.

Finally, I just wanted to thank my partner, Rob Hayes, and our west-coast office manager, Carly Spoljaric, for organizing a wonderful cocktail party last week. Pictures of the party available here.

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Everything old is new again...

2007-05-30T21:11:39-04:00

I'm at the WSJ D Conference this week, and just saw Jason Calacanis launch Mahalo.com. Mahalo is intended to be a "human powered" search engine. Apparently, the top 20,000 queries to Google represent almost a third of all their traffic -- and with the rise in SEO and search-engine spam, many of the top results are of little value to their users. Mahalo believes that humans can help make search results better and has hired 40 human editors to hand-craft the results pages for the top queries. They've done 4,000 pages to date and hope to have 10,000 pages by year-end. A big, bold bet.

It also sounds similar to the old McKinely Magellan Internet Guide of 1995 (see Internet Archive's copy of the site here). From an old Magellan press release:

Magellan is the product of a marriage between McKinley's proprietary search technology and its unique editorial process. Sites in the Magellan guide are reviewed and rated by a highly informed editorial staff, with expertise in topical areas. The resulting site evaluations not only provide users with in-depth information, but also a human voice.

Hopefully Jason's bet will turn out better than Magellan's did.

More on Mahalo available on Techcrunch and Webware.

Bunch of stuff today...

2007-05-30T17:25:58-04:00

Congrats to Garrett, Justin, Geoff, David and the rest of the StumbleUpon team on their sale to eBay. (A bottle of Dom is on it's way). I've thoroughly enjoyed my association and involvement with the company - and look forward to seeing how eBay harnesses the power of StumbleUpon's discovery engine. They guys blog about the sale here, Michael Arrington and Om Malik share their thoughts here and here. I'd like to thank fellow StumbleUpon board member Ariel Poler, Brad O'Neill, and Ted Wang for their hands-on involvement - the company could not have had better advisors...

Our analyst, Mazen Araabi, has just started a new blog. He's off to a good start with his post on The Most Common Mistake Entrepreneurs Make.

Congratulations to my friend Jeff Jordan on his new role at OpenTable. This is a big win for OpenTable. In addition to being a great guy, Jeff is one of the smartest, execution-focused executives I know. I reported to Jeff for two years after eBay purchased Half.com -- and I learned an unbelievable amount from him. While I was a big fan (and user) of OpenTable before, I'm an even bigger fan now. Congrats to both Jeff and OpenTable!

I really enjoyed Mashery CEO, Oren Michels, blog post on Sixth Sense Companies describing companies that "are already dead, but they just don't know it yet." I thought it was dead on.

Myspace - the next Prodigy?

2007-05-27T17:01:50-04:00

Over the last year, there’s been a tremendous amount of focus on the “Widget economy”. Newsweek has even dubbed 2007 as the “Year of the Widget.” While the concept of a “widget” might seem trivial to many outside of Silicon Valley, the ability to automatically embed a rich flash application inside another site is very powerful. It has become a new vehicle for massively gaining viral distribution. One well-known example is Youtube, as their growth was significantly driven by Myspace -- with Myspace quickly becoming Youtube’s largest source of traffic.

And this new opportunity has not gone unnoticed by the VC community. I'd estimate that over $250 million dollars has been invested in widget companies during the last 18 months. And just as every consumer-facing Internet company has developed a strategy to leverage Google (via organic or paid search), they have also developed strategies to “widgitize” a portion of their application for distribution via Myspace. While there are other sites which allow widget embedding, the vast majority of the growth has been on Myspace. In fact, I would argue that until last week, the term “widget” has been synonymous with “embedded Myspace application.”

However, every widget company has been afraid of the uncertain rules of the road for operating on Myspace. Myspace does not have a formal developers program and has blocked several widgets before, built their own widgets to compete in certain areas, making it pretty clear that they don’t view the relationship with the widget ecosystem as symbiotic. Myspace also has a policy against commercial activity in widgets, including placing advertising in a widget – leading some to wonder whether Myspace would ultimately erect a “tollbooth” for the widget providers.

This uncertain playing field provides a high degree of risk for the widget companies and their investors. In fact, I’d think it safe to say that the #1 priority of virtually every widget company has been to “diversify our traffic away from Myspace.” Rather than recognizing the symbiotic nature of their relationship with widget companies (as David Hornik wrote about a few weeks ago), Myspace’s lack of a clear “widget roadmap” created a big opportunity for their #1 competitor, Facebook.

Just last week, Facebook took advantage of that opportunity in a huge way. Specifically, Facebook announced their new development platform, F8. I won’t spend a lot of time describing their announcement (I'll leave that to others), but I agree with Paul Allen’s summary of the three key points:

Applications can be deeply integrated with Facebook
Distribution of the applications will occur through the network, and
The business opportunity Facebook is providing will give 100% of advertising revenue (for third party applications) and 100% of transaction revenue to the application developers.

By providing a clear roadmap – and business opportunity – for the widget makers, Facebook has just increased its virtual R&D budget by over $250 million dollars. By welcoming third-party innovation, Facebook will reap the benefit of hundreds of millions of dollars of venture investment – and the Facebook user will have a much richer experience. I'd wager that every widget maker who has previously relied on Myspace for traffic is hard at work this holiday weekend on migrating their application to support the Facebook API.

Think about it. If you ran a venture-backed company and had to decide whether you wanted to focus your effort on: (a) a property that welcomed you in and let you keep 100% of the revenue you generate or (b) a company with a vague policy that doesn’t let you generate any revenue, which would you choose? I don’t think it’s even a decision. It’s an IQ test.

Facebook has recognized (and embraced) something that Myspace has not – that there is more value in owning a web platform then a web property. This brings back memories from the early days of the Internet, when companies like Prodigy and AOL were the only online services in town. Despite the launch of the web browser (which unleashed the creation of millions of web sites), AOL and Prodigy initially focused on maintaining their proprietary online environment and controlling everything on their site. It took a few years, but ultimately they saw that it is impossible for one company -- no matter how popular and well-funded -- to compete with an unlimited army of motivated (and funded) developers. Even Microsoft recognizes that the true strength of it's Windows platform comes from the volume of third-party developers building (and profiting from selling) Windows applications.

Will Myspace remain a semi-closed web-property? Or will it recognize that the power is in the platform? It wouldn't be hard for Myspace to retake the offensive by offering a clear developers program. All it requires is a realization that everyone benefits from third party investment of capital and creativity in the Myspace platform. The users get far better functionality than Myspace can develop on its own. Myspace would continue to receive hundreds of millions in "free product development". And the widget companies could finally feel secure in their decision to invest in Myspace. It will be interesting to see how this plays out…

Removing friction from the travel market...

2007-05-22T14:01:10-04:00

So this post fits more under the "Redeye" category than "VC" category. However, I recently came across two web-based travel services that I wanted to share. Both of these services do a great job at removing friction from the travel marketplace...

The first is a company called BoardFirst.com. They do one simple thing and do it well. Namely, they guarantee you an "A group" boarding pass for Southwest Airlines. If you've ever flown Southwest, you know that they don't have assigned seats. Instead, they board passengers by groups based on when they printed their boarding pass. This result has been that most sophisticated travellers now wait at their computer exactly 24 hours before their flight to beat the crowd for an "A group" boarding pass. With BoardFirst, you simply give them your flight information, and they will take care of this for you for a small charge. The difference between an aisle seat on an emergency exit row and a middle seat in the back of the plane is well worth the $5 charge.

The other service just launched from beta today and is from Yapta.com. As someone who books travel months in advance, its as if this service was made for me! I never realized it, but most major airlines will give you a refund if they reduce the price after you have bought a ticket. So if the price on your ticket drops by $372, you are entitled to a voucher for $372 for a future trip. So Yapta helps you by tracking fares (both before and) after you buy a ticket. For example, I'm writing this post from a hotel room in Vegas on my way to San Diego for the WSJ D Conference. And by using Yapta, I was able to learn that the fare for my ticket changed 19 times during a 13 day period. And because they lowered the price after I booked my ticket, I was entitled to receive a voucher from US Airways for $197.60-- effectively reducing my fare by 30%. It will be interesting to see how the airlines respond. At first I thought the airlines would hate this, but then I realized that if it (a) gave people the confidence to book a seat early, and (b) increased repeat purchases through the use of vouchers, it could be a net positive for the airline industry. There is some good coverage of Yapta in today's Wall Street Journal and Techcrunch.

I love how the web is removing friction and increasing our productivity in the travel space.

Achieving Profitability in 14 months

2007-05-03T14:55:05-04:00

Congratulations to Brett and the entire Bazaarvoice team for reaching profitability this month! Because we invest at such an early stage, it’s always extremely rewarding to see one of our portfolio companies reach that milestone, and in only 14 months no less. I’ve always said that one of the most important characteristics I looks for in an entrepreneur is their ability to execute. Well, Brett, Sam and the entire team over at Bazaarvoice have been veritable execution machines over the past few months – setting goals, developing good execution plans, and achieving (more often surpassing) their desired results. Here are just a few examples of what they’ve been able to accomplish to date:

More than 90 paying customers, representing such leaders of e-commerce as Dell, HP, Macy’s, Overstock.com, PETCO, QVC, Sears, and The Home Depot.
Serve 80% of the Internet Retailer Top 100 who outsource ratings and reviews.
Serving over 250 million reviews per month.

One of the favorite parts of my job is the ability to work with entrepreneurs such as those on Bazaarvoice’s team. I’m excited to watch their continued progress over the next 14 months.

Getting Unlost...

2007-04-24T20:34:51-04:00

I've recently begun watching the first two seasons of Lost on DVD -- and have found some striking similarities between the TV show and launching an Internet site. The TV show tells the story of the survivors of Oceanic flight 815 -- and the bizarre island they land on. Gradually, over a period of weeks, the survivors learn about their environment and discover some of the secrets of the island and the mysterious Dharma initiative. This knowledge is not gathered easily -- their trial-and-error results in a lot of false conclusions and costly mistakes.

Most post-launch startups are also lost. They don't fully understand the environment they are operating in -- or how to improve/impact it. Things don't behave as the founders initially expected or logic might dictate. With all of the data exhaust a website can generate, it's very hard to differentiate the signal from the noise (ie, determine which metrics matter and which don't). Big functionality deployments can have no real impact on the numbers, yet sometimes small actions like pressing (or not pressing) a button at a specified time, have a major effect.

Munjal Shah, the CEO of Like.com (Riya), has resumed blogging about his startup's journey. And his current episode (Number 23) does a wonderful job of describing the lack of knowledge a company initially has about their site -- and the process they must go through to gain understanding. It brings back many vivid memories from my days at Half.com. Trying to isolate cause and effect in an online environment is not as easy as it might sound. It takes a lot of effort, testing and time to begin to understand the levers at your disposal -- and the impact each lever has on your key metrics.

Munjal and team have begun to build a core culture and competency around A/B testing (otherwise known as multivariate testing). I'm impressed to see them get A/B religion so early in their development - it takes many companies much longer to adopt this approach. I think that this type of disciplined, statistical approach towards site improvement is a critical component in metric improvement. Munjal's post is definitely worth the read...

"Catch And Release" Business Models

2007-04-22T20:59:09-04:00

As the success of sites such as MySpace, Facebook, LinkedIn, Classmates, and Geni have demonstrated, viral marketing can be a very effective tool to help build social networks that appeal to a wide range of people for a number of different reasons. Beyond the specific markets that they focus on, these sites have fundamental differences in how they acquire new users, generate revenue, and grow their business.

But what all of the most successful social networks have in common is that they’ve perfected what I like to call a "catch and keep" model. From the first time a user signs up for a MySpace, or a Facebook, they find themselves sucked into spending hours on the site, and feel compelled to both return on a regular basis, and drag their friends into their network. As recent data demonstrates, the top social networks are among the highest trafficked and stickiest sites on the web.

In sharp contrast, most social networks out there have what I call a "catch and release" model. They can generate buzz, get written up in the blogosphere, and even get 53,651 beta testers, but few of those initial users ever return to the site. There can be many reasons for this. The site may appeal to a group of people that just don’t need to communicate on a daily basis, for example old classmates, or distant relatives. They may have a cool feature set that presents data in some unique or surprising way, but is not enough to compel someone to come back on a daily basis. [Note - this phenomenon doesn't only apply to social networks -- I've visited Zillow once, but have not found a reason to return...]

The catch and release model often occurs because it’s much easier to get someone to your site with the promise of value -- and much, much tougher to offer those users a compelling reason to return and invite their friends.

A good example of a catch and release business model is Classmates.com. When it was acquired in 2004, Classmates had a reported 38 million registered users (1.4 million of which were paid). Despite adding 1.5 million new registered users per month, by 2006 the total registered user count had only gone up to 40 million members. Given the amount of money Classmates spends on online advertising ($12.6 million in February 2007 alone) that’s some churn rate!

Classmates User Acquisition Model

The effects of the catch and release business model show up in a company’s valuation. Classmates was acquired for $100 million by United Online in 2004. At the time the site had 38 million registered users, and was generating $72 million in annual revenue. This gives it a 1.4x revenue multiple, and a value of $2.63 per user.

Contrast that with one of the leading catch and keep social networks, Facebook. By limiting its initial scope to a select group of universities, Facebook ensured that its first few members were likely to know a lot of other people on the site, and have a lot in common with them (through both shared friends and interests.) Facebook successfully leveraged the connections that were being developed through that initial community to virally expand into other schools, growing rapidly until it had captured 85% of the college market only a year after launching.

Since then Facebook has opened up its network to anyone. The numbers behind their success speak for themselves: 6th most trafficked site in the US, 16 million unique monthly visitors, and 30 billion monthly impressions, all without a penny spent on advertising. Perhaps most impressive is how loyal those users are – 60% access their Facebook accounts every day, and 90% every month. The average user visits the site 24 times a month.

Facebook User Acquisition Model

Their catch and keep model is reflected in their valuation. In 2006 it was confirmed that the company had received a $1 billion acquisition offer from Yahoo. At the time, Facebook had a reported 14 million registered users, and was generating an estimated $50 million in annual revenue. This gives it a 20x revenue multiple, and a value of $71.43 per user.

Which type of social network would you rather be? It's clear that if you’re building a social network or are planning on starting one, it’s important to know whether you have a catch & release business model, or a catch & keep business model. I’m looking forward to seeing how the different social networks will evolve over time.

First Round Capital associate, Mazen Araabi, helped with this blog post. Thanks Maz!

Google wants your voice...

2007-04-22T20:55:00-04:00

Is there really something for nothing? Almost all free services (whether it be network television, online search, or free directory assistance) offer something for free to consumers because it is being subsidized by third-party advertisers. That’s nothing new or surprising.

As an investor in Jingle Network’s 1-800-FREE411 service, I’ve spent a lot of time thinking about Google’s free directory assistance offering – and wondering why they are offering it without any advertising. Why would they take on that cost (including the toll free call + call completion + SMS cost) for nothing? Is it just to gain market share, or is there another reason? It was only after I read Tim O’Reilly’s recent blog post, that the answer hit me: Just like the witch Ursula in the Little Mermaid, Google wants your voice.

Take this quote from Mike McCue (CEO of TellMe) from February of 2007 (just two months before Microsoft bought TellMe):

“…our search index is better than Google's right now. The grammars that we have -- we do about 10 billion speech utterances a year. So what we are able to do is make the speech recognition system smarter and smarter. And that is something that Google can't get until they get that similar kind of traffic. How are they going to get that traffic? It's a chicken-and-egg problem.”

So is Google collecting our utterances? It appears they are – check out Google’s 411 Privacy Policy:

“We also collect and store a copy of the voice commands you make to the service, so we can audit, evaluate, and improve the voice recognition capabilities of the service.”

Assuming each call has four utterances – and costs 3 cents each on average – then it would cost Google about $8M for 1 billion utterances (or $80M to match TellMe’s 10 billion utterances). A bargain compared to buying Tellme for $800M. I agree with Tim O’Reilly’s conclusion that Google’s launch of a directory assistance product was accelerated (and is driven) by their desire to compete with Microsoft.

But one thing Tim didn’t discuss is the privacy implications of Google’s actions. Google is recording and storing voice prints of all users - and it's not a stretch to imagine that they are matching them up to caller-id numbers to build out user profiles. And this is very valuable data to have. Collect enough voice signatures and you can tell if a caller is a male or a female – and possibly even detect where they are from by their accent.

And Google’s privacy policy lets them save your recordings for an undisclosed period of time. Should Google own your voice? What privacy issues does that raise? All of the recent controversy about Google’s privacy policy doesn’t even contemplate them archiving your voice. Given the high level of concern about Google’s retention of text search logs, I imagine it won't be long until privacy advocates focus on this as well. [Insert shameless plug here -> If you don’t want your voice recordings saved, feel free to call 1-800-FREE411 -- they don’t store any voice recordings…]

I think it’s important for consumers to recognize what they are “paying” for a free service. With 1-800-FREE411, you’re “paying” by listening to their advertisements. With Google, you’re paying by giving them your voice. At least Ursula clearly disclosed her bargain to Ariel.