the vc in me....

Prediction: Social Nets Will Make More Money Off Site vs On their Website

Social networks are here to stay...100s of millions of consumers now use them as an indispensible tool to stay current with friends and interests.   There has been a lot of debate on how they can make money.  Let's keep in mind that they ARE making money today (facebook over $300M annual revenue and LinkedIn well over $100M) - more than most internet sites - but just not a lot on a per user basis. 

I believe this is because the traditional ad model doesn't work well here - social networks are a communications platform at the core.  People log on daily to check messages, photos, and videos that were added by interesting people for them to view.  They are not coming to view content as much as people would have hoped nor are they using it as their main portal or launching point for all web activities (Google won that so far...)   Communications sites have never monetized well because the consumer is focused on communication and not going to be diverted by ads.  I experienced this firsthand running Snapfish and trying ad sales for 6 years against online personal photo pages.  We got advertising up to 10% of revenue but that was about it - why? - lack of performance and attention from users - they were too busy viewing photos vs clicking on ads.  Many social networks suffer the same issues as shown by their dismal click thru rates.

That said, I do believe there is a big opportunity - its in the Data that is captured explicitly (entering info on yourself in your profile) and implicitly (the groups you join, the content of the messages you send each other).   In some social nets like Facebook and LinkedIn, the data is very deep and for the most part true.  The profile page itself is a treasure trove of information on age, gender, location, interests, work experience, favorite movies, tv, etc - all the attributes a great brand marketer wants to target when reaching an audience.   The advertiser may not have measurable success reaching the user in the social network, but if they had access to the data when the user is on other sites  - more conducive to engagement with ads - the advertiser would be in nirvana.  

The data economy is developing fast where data is decoupled from ad inventory and used to target audiences where ever they are (Mayfield companies Audience Science, Adchemy, and Rubicon Project are leading the charge here).   I think the big social networks are aware of this but are treading carefully given the privacy concerns.  I do believe when they find the right mix of user privacy and sharing of this data, they can provide it to advertisers, networks, and publishers and profit handsomely from it.  They can make more money on a user by charging a tax for the data each time its used vs the pageviews from that user on their site. 

Let's do the math and make some assumptions to illustrate:

I used the following estimates on ad impressions/user/mo on top social networks:

Facebook  356

Tagged  387

Myspace  452

Avg  403

...and I assume $.50 as the assumption for eCPM (which I believe maybe high).  Thus, on average a social network makes $.20 per user per month on ads on their site.   Now, let's look at how many ad impressions the typical internet user encounters in a month - I've found it to be about 1,650 per month.  Le's also assume the following:

- 50% of these impressions could be targeted using the vast amounts of profile and friend data from SNS

- $2 eCPM for such a data targeted ad

- the social network keeps 15% of this revenue for its data (which seems like the going rate talking to data players).  

That's about $.25 per user per month.  So, if my assumptions hold true, then a social network can monetize their users $.25 offsite vs $.20 onsite....

Social networks will make money on their site - thru ads, virtual goods, etc - but the real big opportunity is freeing all the user data and enabling it to target them wherever they are on the web.  

New College Degree: Marketing Engineering

I believe consumer marketing has fundamentally changed – online has been the catalyst of this change as every user, intention, and action is trackable and hypotheses can be tested and validated in minutes.  This will move into other marketing channels – e.g.  TV as it goes more digital (note the Google-NBC announcement for the selling of broadcast TV in their online marketplace), print media (e-books), and of course outdoor (digital signage). Its not just change in customer acquisition either – it extends into the areas of customer retention and  loyalty as well.  Again, every action is trackable and hypotheses on why consumers buy at the right price points or become loyal can be tested and changed in real time.

Meanwhile, I feel the academic world of marketing education has not kept up with the change.    Marketing is often viewed as a “soft” and less rigorous major that one takes if they are more interested in boozing their way through college. The “brains” go for engineering, math, or medicine.  The reality is that in todays world technology innovation is increasingly commoditized and the marketing edge is what matters.   Marketing is more like applied math or engineering where the scientific method (hypotheses followed by testing followed by conclusions) yields the results -  with a twist of psychology thrown in…   The marketer has to use their understanding of human behavior, needs, wants via psychology and come up with hypotheses on the best way to get the consumer to an action – then test all these in real time (often multivariate testing as each text or image or color can and should change) and deploy – and then test all over again….

 

There is clearly strong demand for these type of people in every startup I’ve worked with.  There have been countless mistakes made in hiring a “brand marketer’ who doesn’t get “digital marketing”.  We are in need of more talent – even here in silicon valley.  I think schools should step up and help fill the long term void by teaching the new marketing.  Marketing engineering could be one of the most valuable professions and become what every smart bright-eyed college student aspires to conquer…

Lessons on Investing in China

I've recently made a few investments in internet companies in China with Mayfield's local partner, GSR Ventures.  Two of my deals are Baihe (the largest dating site in China that is focused on serious relationships - like eharmony) and Qunar (travel meta search in China).  Although I don't claim to be a China expert (nor do I speak the language), I have learned a thing or two about investing in the internet in China.  Check out the article in Business Week that I wrote about investing in China.

Advice for Internet Entrepreneurs

I found a good blog post discussing "suggestions for not being a dot-bomb" - it's a nice corrolary to my earlier post on criteria for a successful consumer internet investment.  Check it out

Getting a VC's Attention

It's hard to get a VC's attention - as much as i told myself I'd be diligent in reviewing all the great ideas coming my way, it's impossible when I get several new plans a day, work hard to help  existing companies, proactively evaluate new sectors, and keep up with my network of friends and associates.

Having been at this for a year now, I can tell you from experience what maximizes the chance of getting the ear of a VC.  The key is to present a crisp, clear, and importantly CONCISE view of your business in a snapshot that we can easily  digest.

I agree with David Cowan's post that the best way to pitch your business is a simple 10 or so page powerpoint.  Check his post out to get some great tips on what to include in the powerpoint.  It's not meant to be an exhaustive plan - just enough to get our attention and get us excited and establish your credibility. 

It may be a bit harder to generate a powerpoint (and some entrepreneurs like to pitch without ot seemingly just to be different) but its worth the effort to help you synthesize your thinking and help  attention-starved VCs focus on your opportunity.  I tend to lose focus and get impatient pretty quickly when wading thru text heavy plans or very hollow one page exec summaries (ideally provide both the powerpoint and one page summary so we can pass around the latter to our partners to get them quickly up to speed on the company).

I would also add the usual but important statement that sending us an email out of the ether doesn't get our attention as much as finding someone who knows us and having them introduce you.  Try a great social networking tool like LinkedIn if you are unsure who you know at a VC firm.

Good luck!

What Makes a Good Consumer Internet Investment....

Here's a checklist of sorts that I look for when considering a consumer internet investment opportunity.   Some of these criteria are plain old common sense and some are unique to lessons we've learned on the Internet 1.0:

1) Very Big Addressable Market

- Should be over $2B in revenues from addressable market

- Big market gives room for execution missteps

2) Some Sort of Competitive Advantage(s)

- Company should advantage of an innovator's dilemma of incumbents

- e.g. new revenue model that incumbents can't embrace

- Room for plenty of innovation in product to stay ahead of big players

- Proven distribution deals that give the company an edge (most don't work so we're skeptical)

3) Killer Team - Sharp and Knows the Product and Customer Cold

- Ideally has experience in internet 1.0 having learned the lessons

- Insight into customer segment needs

4) Solution should be simple for a problem hard to solve offline

- Ideally, works off existing user habits vs forcing a change in habits

5) Signs of Early Momentum before you raise VC Funding

- Angel or internal funds go a long way as it's a lot cheaper to launch internet services today than Internet 1.0

- Show the quality of the site/service via a live beta

- Show strong user growth with little marketing

- Early indications your customers "rave" about your service

6) Compelling Customer Acquisition Strategy

- Need some sort of "special sauce" like inherent viral nature of service (word of mouth alone rarely works)

- Partnerships can help but they've got to CARE and bring VOLUME

7) Convincing Revenue Model Options

- Should have lots of potential models (premium, ads, transactions) - any one or two of which can generate critical mass

- Not "once i get 10M users, I will sell ads"

8) Idea should be able to morph and provide major option value over time

- Should increase market size dramatically

- Opportunity should allow for strategic shifts if needed